GAMCO Investors, Inc. (NYSE: GBL) reported revenues of
$66.2 million for the third quarter ended September 30, 2005, up 15.7% from the $57.2 million generated
in the prior year’s quarter. Operating income increased 2.9% to $22.6 million from the $22.0 million
reported in last year’s third quarter. Net income for the quarter was $19.4 million, or $0.64 per fully
diluted share, versus $13.0 million, or $0.43 per fully diluted share in the prior year’s quarter. The 2005
quarter was boosted by a $10.2 million swing in net investment income. In the short-run, our results
remain sensitive to changes in equity markets.
For the nine months ended September 30, 2005, revenues were $187.6 million, an increase of 3.7%
from the prior year’s comparable period revenues of $181.0 million. Operating income was $62.4
million, down 12.9% from $71.7 million in the first nine months of 2004. In 2005, operating income
was impacted by one-time charges totaling $4.4 million or $0.08 per fully diluted share related to costs
incurred for a new closed-end fund launch, a charge recorded for the impairment of goodwill, and
compensation costs related to the acceleration of the vesting of stock options. Net income for the first
nine months of 2005 was $45.1 million, or $1.48 per fully diluted share, versus $43.0 million, or $1.41
per fully diluted share, in the comparable 2004 period.
Assets under management (AUM) were $27.6 billion on September 30, 2005, unchanged from
June 30, 2005 AUM of $27.6 billion, and 1.4% ahead of the $27.2 billion in AUM on September 30,
- Assets Under Management (AUM)
- Our equity mutual funds had a record $12.8 billion in AUM on
September 30, 2005, 2.6% ahead of the $12.5 billion on June 30, 2005 and 13.8% ahead of the $11.3
billion on September 30, 2004. GAMCO Asset Management Inc., our institutional and high net worth
business, had AUM of $13.1 billion in separately managed equity accounts on September 30, 2005,
slightly below the $13.2 billion recorded on June 30, 2005 and September 30, 2004. Fixed income
AUM, primarily money market mutual funds, totaled $954 million on September 30, 2005, down 14.9%
from the June 30, 2005 assets of $1.1 billion and 48.9% lower than assets of $1.9 billion on September
30, 2004. AUM in our investment partnerships declined to $745 million versus $831 million on June
30, 2005 and $934 million on September 30, 2004.
GAMCO Investors, Inc.
- Investment advisory fees totaled $57.5 million during the third quarter of 2005, an increase
of $7.9 million or 15.8% from the third quarter of 2004. The higher revenues during the quarter were
driven primarily by our closed-end funds as revenues jumped 67.3% to $12.8 million from $7.6 million
in the prior year’s quarter. This increase was principally due to management fees of $2.9 million
recorded for preferred shares in the third quarter 2005 covering the first nine of months of 2005 versus a
reversal of $200,000 in revenue from preferred shares in the prior year’s quarter. In addition, we
recorded approximately $0.9 million of revenues from the inclusion of The Gabelli Global Gold, Natural
Resources & Income Trust (AMEX: GGN), our new closed-end fund, which started on March 29, 2005.
Unlike most money management firms, we do not earn a management fee on closed-end preferred
shares (approximately $875 million in total assets) unless the total return to common shareholders of the
closed-end fund at year-end exceeds the dividend rate of the preferred shares. As a result, management
fees accrued for preferred shares are affected by current weak market conditions and may be subject to
reversal in the fourth quarter.
Revenues from our other investment advisory businesses also included the following for the third
quarter of 2005:
- incentive fees from investment partnerships increased by $2.9 million from
the prior year as the 2004 quarter included a clawback in incentive fees that
- revenues of $20.4 million from open-end mutual funds were 3.9% higher than
the $19.6 million recorded in the 2004 quarter; and
- revenues from our institutional and high net worth separate accounts
declined by 2.3% to $19.9 million, down from $20.4 million in the 2004 quarter.
For the first nine months of 2005, investment advisory fees were $163.8 million, up 5.8% from the
$154.9 million recorded in the prior year period. Revenues from our closed-end funds increased 29.9%
to $30.7 million in the first nine months of 2005 up from $23.6 million in the prior year’s period. The
increase in revenues from closed-end funds for the first nine months of 2005 resulted principally from
an increase in management fees accrued on preferred shares, revenues from GGN, our new closed-end
fund, and the inclusion of The Gabelli Global Utility and Income Trust (AMEX: GLU), which launched
at the end of May 2004, for the entire 2005 period.
For the first nine months of 2005, our investment advisory revenues also included the following:
- investment partnership revenues rose $4.3 million versus the comparable
prior year period as an increase in incentive fees was only slightly offset by
a decrease in management fees;
- revenues of $60.0 million from open-end mutual funds were 2.2% lower than
the $61.3 million recorded in the 2004 period; and
- revenues from our institutional and high net worth separate accounts
business declined 1.8% to $62.3 million, down from the $63.5 million reported
during the first nine months of 2004.
Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., increased
10.0% in the third quarter 2005 to $3.3 million, but declined 26.6% to $8.3 million for the first nine
months of 2005, versus $3.0 million and $11.3 million in the prior year’s periods, respectively. Mutual
fund distribution fees of $5.4 million in the third quarter of 2005 were 18.3% higher than the $4.6
million recorded in the 2004 quarter, and were $15.5 million in the first nine months of 2005, 5.0%
higher than the $14.7 million recorded in the 2004 period. The increase in fees is principally from
higher average assets under management in open-end equity mutual funds in the 2005 periods compared
to the prior year.
In anticipation of results for the fourth quarter 2005, we note that we recorded revenue of
approximately $9.3 million in the fourth quarter 2004 from management fees on closed-end fund
preferred shares and fulcrum fees earned on certain institutional separate accounts. These revenues are
dependent on the equity markets and may not recur in the fourth quarter 2005.
- Operating Margin
- Variable compensation costs were 31.7% of revenues for the third quarter 2005
compared to 29.1% in 2004 quarter, and 31.3% versus 28.7% for the nine-month period. These
increases are principally the result of a shift in revenue mix within our mutual fund and investment
partnership businesses, as higher variable compensation costs were driven by an increase in revenues
from management fees of closed-end preferred shares and investment partnership incentive fees in the
2005 periods as compared to 2004.
Selling, general and administrative expenses increased 22.2% to $12.5 million in the third quarter
2005 from $10.2 million in the prior year’s quarter, and 29.9% to $39.1 million for the first nine months
of 2005 from $30.1 million in the prior year’s period. For the third quarter, this was principally the
result of an increase in accounting and legal costs of approximately $0.8 million related to Sarbanes-
Oxley compliance as well as other regulatory and corporate governance dynamics, higher total
compensation costs of approximately $0.5 million and approximately $0.3 million related to the
elimination of the use of soft dollars within our mutual fund business.
For the nine month period, the increase in selling, general and administrative expenses included
higher total compensation costs of approximately $2.5 million, which included a one-time charge of
$1.8 million relating to the accelerated vesting of stock options, a one-time charge of $1.1 million
recorded for the impairment of goodwill related to our fixed income business and one-time launch costs
of $1.5 million for our new closed-end fund, The Gabelli Global Gold, Natural Resources & Income
Trust (AMEX: GGN). In addition, a rise in accounting and legal costs of approximately $1.9 million
and higher costs related to the elimination of the use of soft dollars within our mutual fund business of
approximately $0.8 million contributed to the increase.
The effective tax rate for both the third quarter and first nine months of 2005 was adjusted to
37.5% versus 36.4% in the comparable 2004 periods to reflect our estimate of the current year-end tax
- Investment Income/Expense
- For the third quarter 2005, there was a $10.2 million positive swing in
other income from the 2004 quarter. The net return from our corporate investment portfolio improved to
$12.2 million in the 2005 third quarter from $2.6 million in the prior year’s quarter. For the first nine
months of 2005, investment income totaled $20.8 million versus $8.5 million in the comparable 2004
period. Our improved returns for 2005 included gains related to our $100,000 venture capital
investment in optionsXpress (NASDAQ: OXPS) made in 2001 through our 92% owned subsidiary,
Gabelli Securities, Inc. OXPS completed its initial public offering during the first quarter 2005. We
recorded a total gain of $2.7 million on OXPS during the third quarter of 2005, bringing gains to $4.8
million for the first nine months of 2005. In addition, we had previously recorded a gain of
approximately $900,000 related to this investment in the fourth quarter of 2003. The gains related to
OXPS in 2005 have been partially offset by a previously recorded $3.3 million loss for the write down
to fair value of certain securities held as available for sale.
Higher short-term interest rates lifted interest income for both the third quarter 2005 and first nine
months of 2005. Interest expense fell to $3.3 million and $10.5 million in the third quarter and first nine
months of 2005 compared to $4.0 million and $12.1 million in the prior year’s periods, respectively.
This decrease is principally due to the April 1, 2005 repurchase of $50 million of the $100 million 5%
Management fee was $3.5 million for the third quarter of 2005 versus $2.3 million for the
comparable 2004 period and $8.1 million for the first nine months of 2005 versus the $7.6 million in the
first nine months of 2004.
Growth Initiatives and Other Highlights
- Re-Branding - As part of our initiative to accelerate growth, our corporate name change
to GAMCO Investors, Inc. became effective August 29, 2005. Since the firm was founded in 1977, GAMCO
has been the name of our asset management business, representing our institutional and high net
worth effort. We believe changing our corporate name to GAMCO helps us achieve our vision for assets
entrusted to us, that is, to earn a superior return for our clients by providing various value-added
(alpha) products. GAMCO is a more inclusive parent company name, and more appropriately represents the
various investment strategies and asset management brands contributing to the continued growth of our
company. The Gabelli brand will continue to represent our absolute return, research driven Value style
that focuses on our unique Private Market Value with a Catalyst ™ investment approach. Our class A
common stock will continue to trade on the New York Stock Exchange under the ticker symbol "GBL".
- During July and August, following a tradition of underwriting value investor oriented symposiums,
the firm sponsored a series of lectures in Milan and London with Bruce C.N. Greenwald, the Robert
Heilbrunn Professor of Finance and Asset Management at Columbia University Graduate School of
Business and the academic Director of the Heilbrunn Center for Graham & Dodd Investing (DVDs and
podcasts are available).
- We have strengthened our investment team through the addition of eleven sell-side research analysts and
two portfolio managers. Gabelli & Company, Inc., our institutional research affiliate, now has twentyfive
sell-side analysts covering companies and sectors on a global basis.
- Gabelli & Company hosted its eleventh Annual Aircraft Supplier Conference in September. Portfolio
managers and securities analysts met with the senior managements of public companies in the aerospace
and defense industries as they presented updates on their industry, competition, and new strategies for
creating value. It was a terrific opportunity for Gabelli & Company’s institutional clients to gain insight
into the strong recovery our research points to in the commercial aircraft market.
- Earl V. Gould, CFA, joined the firm as portfolio manager of the GAMA Select Energy+ Fund, a
long/short private partnership focused on the energy sector. Mr. Gould’s investment career spans over
forty years, starting as a trader at European American Bank following his graduation from University of
Alberta in 1964. He served as an investment analyst and portfolio manager for institutions, most
recently with Atlantic Richfield before joining GAMCO. Born and raised in Denmark, Mr. Gould has
an MA in Economics from City College in New York.
- We remain over-capitalized. Our challenge is to convert our liquidity to growing operating income.
Until we can achieve this, we will enhance shareholder value through stock buybacks and dividend
increases. In line with this, GAMCO Investors, Inc. commenced a tender offer to purchase all
outstanding stock options to purchase shares of class A common stock of the Company in August. The
offer expired on October 4th. After completing the tender offer, approximately 214,000 stock options
- During September, The Gabelli Equity Trust Inc. (the "Equity Trust") (NYSE:GAB) completed the
acquisition of substantially all of the assets of Sterling Capital Corporation ("Sterling Capital") in a taxfree
exchange for shares of the Equity Trust's common stock. The Equity Trust, a non-diversified,
closed-end investment company with $1.7 billion in total assets whose primary objective is long-term
growth of capital and whose secondary objective is income, is managed by Gabelli Funds, LLC, a
subsidiary of GAMCO Investors, Inc.
- The Equity Trust also finalized the terms of its Rights Offering during September. Pursuant to the Offer,
the Equity Trust has distributed to shareholders of record one transferable right for each share of its
common stock held on the September 21, 2005 record date. Seven rights enable a shareholder to
purchase one additional share of common stock at a price of $7.00 per share. If fully subscribed, the
fund will raise in excess of $140 million. The Rights Offering expires on October 26, 2005.
Financial Highlights – Raises Quarterly Dividend 50%
Balance Sheet Strong
We ended the quarter with roughly $695 million in cash and investments in securities. This
includes approximately $82 million, at market value, in shares of The Gabelli Dividend & Income Trust,
The Gabelli Global Utility & Income Trust, various Gabelli open-end mutual funds as well as other
investments classified as available for sale securities. Our debt of $232.3 million consists of a $50
million 5% convertible note, $100 million of 5.5% senior notes, and $82.3 million of 5.22% senior notes
issued in connection with our mandatory convertible securities. Expressed another way, we had $15.51
per share of net cash and investments in securities on September 30, 2005 compared with $14.18 per
share on September 30, 2004 and $12.54 per share on December 31, 2004. The increase in net cash per
share from the end of 2004 is attributable in part to the February 2005 settlement of the purchase
contracts issued in connection with our mandatory convertible securities.
Our liquid balance sheet coupled with investment grade borrowing power provides us the
flexibility to opportunistically add to our business, repurchase our stock and consider other strategic
Stockholders' equity was $432.4 million or $14.48 per share on September 30, 2005 compared
with $396.1 million or $13.40 per share on September 30, 2004 and $334.9 million or $11.61 per share
on December 31, 2004.
- Dividends: Quarterly Rate increased 50%
Our Board of Directors increased our regular quarterly dividend 50% to $0.03 per share beginning
with the fourth quarter 2005 dividend. During the first nine months of 2005, we have paid total
dividends of $0.66 per share to all shareholders, including a special dividend of $0.60 per share on
January 18, 2005. This follows the $1.16 per share in dividends paid during 2004, including special
dividends of $0.10 per share in the second quarter 2004 and $1.00 per share in the fourth quarter 2004.
- Stock Buyback
Shares outstanding on September 30, 2005 were 29,861,817, approximately 0.3% lower than June
30, 2005 outstanding shares of 29,949,142, and approximately 1.0% above the 29,557,853 shares
outstanding on September 30, 2004. Fully diluted shares outstanding for the third quarter of 2005 were
31,079,413 approximately 0.4% lower than second quarter 2005 fully diluted shares of 31,211,347 and
approximately 2.3% lower than our fully diluted shares of 31,820,157 for the third quarter 2004.
Our stock buyback program was initiated in March 1999. Since that time, 3,307,826 class A
common shares have been repurchased through September 30, 2005 at an average investment of $37.33
per share. During 2005, we have repurchased 534,200 shares at an average investment of $42.25,
including 106,600 at an average investment of $44.93 during the third quarter 2005 During August
2005, our Board of Directors authorized an additional 500,000 shares to be repurchased under the
current stock repurchase program. At the end of September, the shares currently available to be
repurchased under the program was approximately 910,000 shares.
Fourth Quarter Earnings Outlook
Since over 95% of our AUM are equities, our interim financial results are equity-market sensitive.
In this context, we point out that the robust market conditions that unfolded in last year’s fourth quarter
added approximately $0.10 per fully diluted share to our income from management fees earned on
preferred shares issued by our closed-end funds and fulcrum fees from institutional accounts. These
revenues from our money management services and investment income are sensitive to stock market
dynamics. We also note that management fees on preferred shares of closed-end funds accrued in the
third quarter 2005 may have to be partially or totally reversed in the fourth quarter if the stock market
declines from third quarter levels. Should this occur, we will report a larger negative swing in our
operating results for the fourth quarter 2005, than would otherwise be the case.
NOTES ON NON-GAAP FINANCIAL MEASURES
- Cash and investments as adjusted have been computed as follows: (in millions)
|Cash and cash equivalents
|Investments (marketable securities)
|Total cash and investments (marketable securities)
|Net amounts receivable/(payable) to brokers
|Adjusted cash and investments (marketable securities)
|Investments (available for sale)
|Total adjusted cash and investments
We believe adjusted cash and investments is a more useful measure of the company’s liquidity
for analytical purposes.
Net amounts receivable/(payable) from/to brokers reflects cash and cash equivalents held with
brokers and cash payable for securities purchased and recorded on a trade date basis for which
settlement occurs subsequent to period end.
- Operating income before management fee expense is used by management for purposes of
evaluating its business operations. We believe this measure is useful in illustrating the
operating results of the Company as management fee expense is based on pre-tax income and
includes non-operating items including investment gains and losses from the company’s proprietary
investment portfolio and interest expense. The reconciliation of operating income before management
fee to operating income is provided in Table IV.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Our disclosure and analysis in this press release contain some forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or
current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and
terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and
financial results. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds
of what we currently know about our business and operations, there can be no assurance that our actual results will not differ
materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or
beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our
products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain
key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and selfregulatory
organizations. We also direct your attention to any more specific discussions of risk contained in our Form 10-K and other
public filings. We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to
update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we
receive any additional information relating to the subject matters of our forward-looking statements.