BlackRock, Inc.

Good morning, my name is Jess, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated First Quarter 2023 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer Lawrence D. Fink, Chief Financial Officer Martin S. Small, President Robert S. Capito, and General Counsel Christopher J. Mead. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. Mr. Meade, you may begin your conference.

Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from the statements. As you know, BlackRock has filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, I'll turn it over to Martin.

Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the first quarter of 2023. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and As Adjusted financial results. I'll be focusing primarily on our As Adjusted results. Beginning in the first quarter of 2023, we updated our definitions of As Adjusted operating income, operating margin, non-operating income, and net income. They now exclude the compensation expense impact of mark-to-market volatility associated with certain deferred cash compensation plans and the non-operating impact of an economic hedge, which the company began in 2023. We believe this change provides investors and management with a more useful understanding of our core financial performance over time and increases comparability with other asset management companies. BlackRock regularly reviews our disclosures with the goal of providing helpful information to our investors and streamlining where appropriate. To this end, we also simplified our disclosure of distribution revenue and expense beginning in the first quarter. I'm excited to be presenting for the first time as CFO. As many of you know, most of my first 17 years at BlackRock were spent in client-facing roles. And I can tell you firsthand, BlackRock was built for clients. Financial cracks and economic damage from this rapid rate hiking cycle burst into view over the last few weeks. 20 years of easy money is definitely behind us. The world's adjusting to higher rates and tightening credit conditions. BlackRock's platform has been built over time to help clients in all market environments. Market dislocations present significant opportunities for BlackRock and most importantly for our clients. Asset management firms connect investors to capital markets. And we see these recent dislocations driving more economic activity and growth to markets. We've spent 35 years creating more access, creating more connections among long-term investors, capital markets, and the real economy. We've unlocked new markets through iShares and personalized SMAs. We pioneered unconstrained bond strategies, and we put Aladdin on the desktops of thousands of investors and advisors. Leading the industry, leading our clients on this journey, With world-class investment capabilities, markets insights, advice and technology, that's the center of BlackRock's growth strategy. We're a partner. We have long-term perspective. We have the ability to move quickly in times of stress. We're a whole portfolio advisor, providing end-to-end technology and investment portfolio servicing. Clients use BlackRock as a scale enabler. They use our platform as a service. They use it to streamline and support the growth and commercial nimbleness of their own business. Our unique platform combination of ETFs, advisory, outsourcing, technology, alongside with active and private markets capabilities, that's what's driving BlackRock's differentiated organic growth. Whether adding or reducing risk, our continued industry-leading organic growth demonstrates that clients are consolidating more of their portfolios with BlackRock. And in the first quarter, BlackRock generated total net inflows of $110 billion, representing 5% annualized organic asset growth and 1% organic base fee growth. First quarter revenue of $4.2 billion was 10% lower year on year, primarily driven by the impact of significantly lower markets and dollar appreciation over the last 12 months on average AUM, as well as lower performance fees. Operating income of $1.5 billion was down 17%, while earnings per share of $7.93 was lower 17% versus a year ago, also reflecting a higher effective tax rate partially offset by higher non-operating income. Non-operating results for the quarter included $60 million of net investment gains driven primarily by mark-to-market gains in the value of our private equity co-investment portfolio and unhedged seed capital investments. Our as-adjusted tax rate for the quarter was approximately 25%. This reflects lower discrete tax benefits related to stock-based compensation awards that vest in the first quarter of each year compared to the first quarter of 2022. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2023. The actual effective tax rate may differ because of non-recurring or discrete items or potential changes in tax legislation. First quarter base fees and securities lending revenue of 3.5 billion was down 9% year over year. This reflected the negative revenue impact of approximately 800 billion of market beta and foreign exchange movements on our AUM over the last 12 months, and was partially offset by the elimination of discretionary money market fund fee waivers and higher securities lending revenue. Sequentially, base fee and securities lending revenue increased 3%, reflecting higher average AUM and securities lending spreads, partially offset by the impact of a lower day count in the first quarter. On an equivalent day count basis, our annualized effective fee rate was modestly lower compared to the fourth quarter, mainly due to changing client risk preferences. Performance fees of $55 million decreased from a year ago, primarily reflecting lower revenue from alternatives. In 2022, our Aladdin platform delivered record net sales, and we continue to see strong client interest for our technology solutions. Quarterly technology services revenue was approximately flat compared to a year ago, reflecting this continuing strong demand, but also significant headwinds associated with the foreign exchange impact on Aladdin's non-dollar revenue and market declines on Aladdin's fixed income platform assets over the last 12 months. Sequential technology services revenue was impacted by one-time fees in the prior quarter and the timing of implementations. Annual contract value, or ACV, increased 6% year over year. We remain committed to low to mid-teens ACV growth over the long term, especially as periods of market volatility have historically underscored the importance of Aladdin and generated increased demand. Total expense decreased 5% year over year, reflecting lower compensation and direct fund expense, partially offset by higher G&A expense. Employee compensation and benefit expense was down 6%, primarily reflecting lower incentive compensation due to lower operating income and performance fees. G&A expense increased 6% due to higher marketing and promotional expense including the impact of higher T&E expense and higher occupancy expense as a result of our moving to our new headquarters right here in Hudson Yards, New York. Sequentially, G&A expense decreased 10%, primarily reflecting seasonally lower marketing and promotional expense. Direct fund expense was down 4% year over year, primarily reflecting lower average index AUM. Sequentially, quarterly direct fund expense increased due to higher average index AUM in the current quarter, and higher rebates that seasonally occur in the fourth quarter. Our first quarter as adjusted operating margin of 40.4% was down 380 basis points from a year ago. This primarily reflects the negative impact of markets and foreign exchange movements on quarterly revenue. Although markets have improved since the end of 2022, we will continue to be disciplined in prioritizing our hiring and overall investments with the aim of delivering organic growth and a differentiated operating margin. The diversification and the resilience of our platform allow us to pursue critical investments while maintaining focus on expenses and our margin. BlackRock's industry-leading organic growth is a direct result of the disciplined investments we've consistently made through market cycles. Our business is well positioned to take advantage of the opportunities before us, and we remain committed to optimizing organic growth in the most efficient way possible. In line with our guidance in January, at present we'd expect our headcount to be broadly flat in 2023 and we'd also expect a mid to high single digit percentage increase in 2023 core G&A expense. Our capital management strategy remains first to invest in our business and then to return excess cash to shareholders through a combination of dividends and share repurchases. We continue to invest through prudent use of our balance sheet to best position BlackRock for continued success. This is primarily through seed and co-investments to support organic growth. We will make inorganic investments where we see an opportunity to accelerate growth and support our strategic initiatives. BlackRock's stable and differentiated business model enables us to invest and remain opportunistic. Our acquisition philosophy focuses on extending our product capabilities and our distribution reach. Prior examples of this strategy are the acquisitions of eFront to extend Aladdin's whole portfolio coverage. Appirio to scale direct indexing, and First Reserve to enrich energy and infrastructure investing at BlackRock for our clients. As previously announced in January, we increased our quarterly dividend by 2.5% to $5 per share of common stock. We also repurchased $375 million worth of common shares in the first quarter. At present, based on our capital spending plans for the year and subject to market conditions, We still anticipate repurchasing at least $375 million of shares per quarter for the balance of the year, consistent with our previous guidance in January. BlackRock's $110 billion of total net inflows evidence our strong ongoing connectivity with clients, which only grew as market liquidity stress events unfolded in the quarter. First quarter ETF net inflows of $22 billion were led by demand for our bond ETFs. This was partially offset by seasonal tax trading and sentiment-driven outflows from U.S. equity style box exposures and precision ETFs. As we've seen repeatedly in periods of market volatility, investors use iShares to implement tactical asset allocation preferences in their portfolios. Our bond ETFs again delivered for clients and generated $34 billion of net inflows. We've invested for years to support the growth of bond ETFs, both to create a diversified bond ETF platform and to deliver the liquidity and price transparency our clients expect, especially during periods of market volatility. Retail net inflows reflected strength in index SMAs through Appirio and broad-based net inflows into active fixed income. BlackRock's institutional franchise generated $81 billion of net inflows as we continue to partner as a scale enabler, a platform for institutional clients seeking turnkey access to investment expertise, greater customization, industry-leading risk management, technology, and investment servicing. Institutional active net inflows of $72 billion were led by multi-asset and fixed income net inflows, which included fundings from several significant outsourcing mandates. Demand for private markets also continued with $4 billion of net inflows, representing 16% annualized organic base fee growth led by private credit and infrastructure. We continue to source unique deals for our clients through our global network of relationships. They're underpinned by data, analytics, and technology. Examples include our agreement to form GigaPower, a joint venture with one of our diversified infrastructure funds and AT&T. We have approximately $33 billion of committed capital to deploy for clients in a variety of alternative strategies, and this represents a significant source of future base and performance fees. In aggregate, BlackRock generated approximately $68 billion of active net inflows during the quarter, and we've now generated positive active flows in all but two quarters since the beginning of 2019. Finally, BlackRock's cash management platform saw $8 billion of net inflows in the first quarter. Flows were driven by surging demand for our cash management solutions in March as clients looked to diversify away from deposits and enhance cash yields. March net inflows offset net redemptions in the first two months of the quarter that were primarily due to client-specific activity, such as SPAC unwinds. We're actively working with clients on their liquidity management strategies, providing technology, market and operational insights, and of course, delivering a full range of cash management capabilities. BlackRock's first quarter results highlight the benefits of the investments we've made to build a diversified and resilient investment technology platform. Throughout our history and in this most recent crisis, BlackRock's led by listening to clients. I'm excited about our future and the growing opportunities for BlackRock, for our clients, for our employees and our shareholders. And with that, I'll turn it over to Larry.