AB AllianceBernstein Holding LP

NEW YORK, Feb. 14, 2017 /PRNewswire/ -- AllianceBernstein L.P. ("AB") and AllianceBernstein Holding L.P. ("AB Holding") (NYSE: AB) today reported financial and operating results for the quarter ended December 31, 2016.

"In a year characterized by uncertainty and change, I'm proud of all we were able to accomplish in executing on our long-term growth strategy," said Peter S. Kraus, Chairman and Chief Executive Officer. "During challenging times, we maintained strong long-term track records in the large majority of our fixed income and equity strategies; expanded our business in promising growth areas like customized factor analysis, energy and real estate commercial debt; and increased our adjusted operating margin for the fifth straight year."

"There's no question that active managers are under more pressure than ever these days to produce consistent strong investment performance and remain relevant to our clients. These remain our primary objectives at AB and we demonstrated in many ways during 2016 how we're positioning our business in a client-focused way. In fixed income, more than 80% of our assets were in outperforming services for the 1-, 3- and 5-year periods at year-end. In equities, despite a disappointing 2016, we continued to strengthen our long-term track records, with a multi-year high 80% of our active assets in outperforming strategies for the 3-year and 64% for the 5-year. We keep delivering for clients as well with our innovative approach to broadening our global offering set. In our Institutional business, we launched a third fundraise for our Real Estate Commercial Debt fund in 2016 that attracted $200 million in new commitments by year-end, and acquired Ramius Alternative Solutions, a provider of customized, factor-based and alternative risk premia solutions for institutional clients. Recently relaunched as AB Custom Alternative Solutions (CAS), this business has already secured its first new client. In Retail, we had our fourth year of $40 billion-plus gross sales out of the last five, driven largely by the resurgence of our flagship Global High Yield and American Income Portfolio funds, where combined gross sales increased 85%. Two of our newer offerings contributed as well: 3-year-old Muni Tax Aware SMA helped drive our US Retail annual sales growth of 43% and the new US Short Duration Fixed Maturity Lux fund we introduced last year raised nearly $900 million. Building momentum through innovation has been the theme with our Private Wealth Management business as well. The suite of research-based targeted services we've introduced over the past five years as a diversifying complement to our integrated offering attracted private client commitments of $1.3 billion in 2016. And we recently closed our latest offering, Energy Opportunities, at capacity with $435 million in committed assets. Our sell-side has been synonymous with innovation for the 50 years we've been in business. Differentiated research is our cornerstone, but we're increasingly becoming known for our distinctive trading capabilities as well. One leading independent industry survey has ranked Bernstein #1 for Electronic Trading Quality and Electronic Trading Service for the past two years. Finally, I'm proud of the efficiency gains we made throughout the firm in 2016. In a challenged revenue environment, we were vigilant in our expense management, and continued our multi-year streak of expanding our adjusted operating margin, this time by 80 basis points, to 25.3%.

Kraus concluded: "At a time when providing unique value to clients is more important than ever, I feel very good about our strategy and offering. And I'm especially proud of the people here at AB, who execute relentlessly and ingeniously, year in and year out, on our clients' behalf. Our goal for the past 50 years has been to keep clients Ahead of Tomorrow, and it will be for many years to come."

The firm's cash distribution per unit of $0.67 is payable on March 9, 2017, to holders of record of AB Holding Units at the close of business on February 24, 2017.

Market Performance

US and global equity markets were mixed in the fourth quarter, while US and global fixed income markets were weak. US and global equity and fixed income markets finished higher for the full year. The S&P 500's total return was 3.8% in the fourth quarter and 12.0% for the full year, while the MSCI EAFE Index's total return was (0.7)% in the fourth quarter and 1.5% for the full year. The Bloomberg Barclays US Aggregate Index returned (3.0)% during the fourth quarter and 2.7% for the full year and the Bloomberg Barclays Global Aggregate ex US Index's total return was (10.3)% for the fourth quarter and 1.5% for the full year.

Assets Under Management ($ Billions)

Total assets under management as of December 31, 2016 were $480.2 billion, down $10.0 billion, or 2.0%, from September 30, 2016, and up $12.8 billion, or 2.7%, from December 31, 2015.

Total net outflows were $0.1 billion in the fourth quarter, compared to net outflows of $15.3 billion in the previous quarter, which included $6.7 billion in outflows related to the conclusion of our Rhode Island CollegeBound 529 fund relationship and $7.6 billion in outflows related to the termination of an institutional alternative investment portfolio, and net outflows of $2.5 billion in the prior year period.

Net inflows to the Institutions channel were $1.8 billion, compared to net outflows of $9.9 billion in the third quarter of 2016, which included $7.6 billion in outflows related to the termination of an alternative investment portfolio. Institutions gross sales of $6.7 billion increased 29% from the third quarter's $5.2 billion. The pipeline of awarded but unfunded Institutional mandates decreased sequentially from $5.4 billion to $4.1 billion at December 31, 2016.

The Retail channel experienced fourth quarter 2016 net outflows of $1.5 billion, compared to $5.0 billion of net outflows in the prior quarter, which included $6.3 billion of outflows related to the conclusion of our Rhode Island CollegeBound 529 fund relationship. Retail gross sales of $10.3 billion decreased 16% from the third quarter's $12.3 billion.

In the Private Wealth channel, net outflows of $0.4 billion were flat compared to the prior quarter's net outflows of $0.4 billion, which included $0.4 billion of outflows related to the conclusion of our Rhode Island CollegeBound 529 fund relationship. Private Wealth gross sales of $2.3 billion decreased 4% from the third quarter's $2.4 billion.

Fourth Quarter Financial Results

We are presenting both earnings information derived in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and non-GAAP, adjusted earnings information in this release. Management principally uses these non-GAAP financial measures in evaluating performance because they present a clearer picture of our operating performance, and allow management to see long-term trends without the distortion caused by long-term incentive compensation-related mark-to-market adjustments, real estate consolidation charges/credits and other adjustment items. Similarly, we believe that this non-GAAP earnings information helps investors better understand the underlying trends in our results and, accordingly, provides a valuable perspective for investors. Please note, however, that these non-GAAP measures are provided in addition to, and not as substitutes for, any measures derived in accordance with US GAAP and they may not be comparable to non-GAAP measures presented by other companies. Management uses both US GAAP and non-GAAP measures in evaluating our financial performance. The non-GAAP measures alone may pose limitations because they do not include all of our revenues and expenses.

AB Holding is required to distribute all of its Available Cash Flow, as defined in the AB Holding Partnership Agreement, to its Unitholders (including the General Partner). Since the third quarter of 2012, Available Cash Flow has been the adjusted diluted net income per unit for the quarter multiplied by the number of units outstanding at the end of the quarter. Management anticipates that Available Cash Flow will continue to be based on adjusted diluted net income per unit, unless management determines with concurrence of the Board of Directors that one or more of the non-GAAP adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation.

Revision

During the third quarter of 2016, management determined that the frequency with which we settle our U.S. inter-company payable balances with foreign subsidiaries over the past several years created deemed dividends under Section 956 of the U.S. Internal Revenue Code of 1986, as amended ("Section 956"). In the past, we funded our foreign subsidiaries as they required cash for their operations rather than pre-fund them each quarter, thereby reducing the inter-company balance to zero on a quarterly basis, as required by Section 956. As a result, we have been understating our income tax provision and income tax liability since 2010. We evaluated the aggregate effects of this error in our income tax provision and income tax liability to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, have determined that the error was not material to our previously issued financial statements. However, the cumulative effect of this error would have been material to our third quarter 2016 financial results if recorded as an out-of-period adjustment in the third quarter of 2016. Accordingly, we have revised our previously issued financial statements  by recording a cumulative debit adjustment to our January 1, 2012 partners' capital account and revised our consolidated statements of financial condition and consolidated statements of income from 2012 through the second quarter of 2016. We established an income tax liability, including interest and potential penalties, of $34.2 million as of December 31, 2016. As of December 31, 2015, the cumulative impact of the revision on partners' capital in the consolidated statement of financial condition was $37.7 million. See page 13 for a summary of the impact of the revisions to net income attributable to AB Unitholders, diluted net income per Holding Unit (GAAP basis) and adjusted diluted net income per Holding Unit.

US GAAP Earnings

Net revenues of $786 million increased 8% compared to the fourth quarter of 2015 due to higher investment advisory fees, driven by particularly strong performance-based fees, Bernstein Research revenues, and dividend and interest income; as well as investment gains in the current quarter compared to investment losses in the prior year period, partly offset by lower distribution revenues and shareholder servicing fees. Sequentially, net revenues increased 5% due to higher performance-based fees, Bernstein Research revenues and dividend and interest income, partly offset by lower investment gains compared to the prior period. Bernstein Research revenues increased 8% year-over-year and 15% sequentially, in both cases as a result of an increase in client activity in the US following the outcome of the presidential election.

Operating expenses were $564 million for the fourth quarter of 2016, up 1% year-over-year, due to higher total employee compensation and benefits expenses, partly offset by lower general and administrative ("G&A") and promotion and servicing expenses. Additionally, during the fourth quarter of 2015 we recorded a $7.2 million credit due to the reversal of contingent payment liabilities related to previous acquisitions. Total employee compensation and benefits expenses increased as a result of higher incentive compensation, partly offset by lower fringes and other employment costs. Within G&A, lower professional fees and occupancy expense were partly offset by higher portfolio servicing fees. Within promotion and servicing, lower transfer fees, amortization of deferred sales commissions, and travel and entertainment expense were partly offset by higher distribution related payments. During the fourth quarter of 2016, we recorded a $6.9 million non-cash real estate credit as part of our ongoing global real estate consolidation plan compared to a $0.2 million non-cash real estate credit recorded in the fourth quarter of 2015.

On a sequential basis, operating expenses were essentially flat compared to the third quarter of 2016 due to lower total employee compensation and benefits and G&A expenses, that were partly offset by higher promotion and servicing. Additionally, during the third quarter of 2016 we recorded a $21.5 million credit due to the reversal of contingent payment liabilities related to previous acquisitions. The decline in total employee compensation and benefits expense was driven by lower incentive compensation and commissions, partly offset by higher fringes and base compensation. The decline in G&A was driven by lower professional fees. Within promotion and servicing, higher travel and entertainment and marketing expenses drove the increase. Our $6.9 million non-cash real estate credit in the current quarter compares to a $0.1 million non-cash real estate credit recorded in the third quarter of 2016.

Operating income of $222 million for the fourth quarter of 2016 increased 30% from $171 million for the fourth quarter of 2015 and 20% from $185 million in the third quarter of 2016.

Diluted net income per Unit for the fourth quarter of 2016 was $0.77 compared to a revised $0.52 in the fourth quarter of 2015 (see note on page 4 and table on page 13) and $0.52 in the third quarter of 2016.

Non-GAAP Earnings

This section discusses our fourth quarter 2016 non-GAAP financial results, as compared to the fourth quarter of 2015 and the third quarter of 2016. The phrases "adjusted net revenues", "adjusted operating expenses", "adjusted operating income", "adjusted operating margin" and "adjusted diluted net income per Unit" are used in the following earnings discussion to identify non-GAAP information.

Adjusted net revenues of $662 million were up 9% compared to the fourth quarter of 2015, due to higher investment advisory fees, Bernstein Research revenues, and dividend and interest income; as well as investment gains in the current quarter compared to investment losses in the prior year period, partly offset by higher net distribution expenses. Sequentially, adjusted net revenues were up 8%, driven by higher performance-based fees, Bernstein Research revenues, dividend and interest income and investment gains.

Adjusted operating expenses were $453 million for the fourth quarter, up 2% from the prior-year period due to higher total employee compensation and benefits, partly offset by lower G&A and promotion and servicing expenses. Total employee compensation and benefits expense increased as the result of higher incentive compensation, partially offset by lower fringes and other employment costs. The decline in G&A was driven by lower professional fees, occupancy expense and other miscellaneous expenses, partly offset by higher portfolio servicing fees. Within promotion and servicing, the decline was driven by lower transfer fees and travel and entertainment expense.

Sequentially, adjusted operating expenses were down 3%, driven by lower total employee compensation and benefits and G&A expenses, partly offset by higher promotion and servicing expense. The sequential decrease in total employee compensation and benefits expense was driven by lower incentive compensation and commissions, partially offset by higher fringes and base compensation. Within G&A, the decrease was driven by lower professional fees and other miscellaneous expenses. The sequential increase in promotion and servicing was driven by higher travel and entertainment and marketing expenses.

Adjusted operating income of $209 million increased 29% from $162 million for the fourth quarter of 2015, and the adjusted operating margin increased 490 basis points to 31.6% from 26.7%. On a sequential basis, adjusted operating income increased 41% from $149 million, and the adjusted operating margin increased 740 basis points from 24.2%.

Adjusted diluted net income per Unit was $0.67, up from a revised $0.50 in the fourth quarter of 2015 and up from $0.45 in the third quarter of 2016.

Headcount

As of December 31, 2016, we had 3,438 employees, compared to 3,600 employees as of December 31, 2015 and 3,454 employees as of September 30, 2016.

Unit Repurchases

During the fourth quarter and full year of 2016, we purchased 4.7 million and 10.5 million AB Holding Units for $107.4 million and $236.6 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 2.2 million and 7.9 million AB Holding Units for $49.0 million and $176.1 million, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards. Purchases of AB Holding Units reflected on the consolidated statements of cash flows are net of AB Holding Unit purchases by employees as part of a distribution reinvestment election.

Fourth Quarter 2016 Earnings Conference Call Information

Management will review fourth quarter 2016 financial and operating results during a conference call beginning at 8:00 a.m. (ET) on Tuesday, February 14, 2017. The conference call will be hosted by Peter S. Kraus, Chairman and Chief Executive Officer, and John C. Weisenseel, Chief Financial Officer.

Parties may access the conference call by either webcast or telephone:

1. To listen by webcast, please visit AB's Investor Relations website at http://abglobal.com/corporate/investor-relations/home.htm at least 15 minutes prior to the call to download and install any necessary audio software.
2. To listen by telephone, please dial (866) 556-2265 in the U.S. or (973) 935-8521 outside the U.S. 10 minutes before the scheduled start time. The conference ID# is 52516403.

The presentation management will review during the conference call will be available on AB's Investor Relations website shortly after the release of fourth quarter 2016 financial and operating results on February 14, 2017.

AB will be providing live updates via Twitter during the conference call. To access the tweets, follow AB on Twitter: @AB_insights. Also, in the future, AB may provide public disclosures to investors via Twitter and other appropriate internet-based social media.

A replay of the webcast will be made available beginning approximately one hour after the conclusion of the conference call and will be available on AB's website for one week.  An audio replay of the conference call will also be available for one week. To access the audio replay, please call (855) 859-2056 in the US, or (404) 537-3406 outside the US, and provide the conference ID #: 52516403.

Availability of 2016 Form 10-K

Unitholders may obtain a copy of our Form 10-K for the year ended December 31, 2016 in either electronic format or hard copy on www.abglobal.com:

• Download Electronic Copy: Unitholders can download an electronic version of the report by visiting the "Investor & Media Relations" page of our website at www.abglobal.com/investorrelations and clicking on the "Reports & SEC Filings" section.
• Order Hard Copy Electronically or by Phone: Unitholders may also order a hard copy of the report, which is expected to be available for mailing in approximately eight weeks, free of charge. Unitholders with internet access can follow the above instructions to order a hard copy electronically. Unitholders without internet access, or who would prefer to order by phone, can call 212-969-2416.

Cautions Regarding Forward-Looking Statements

Certain statements provided by management in this news release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The most significant of these factors include, but are not limited to, the following: the performance of financial markets, the investment performance of sponsored investment products and separately-managed accounts, general economic conditions, industry trends, future acquisitions, competitive conditions, and current and proposed government regulations, including changes in tax regulations and rates and the manner in which the earnings of publicly-traded partnerships are taxed. AB cautions readers to carefully consider such factors. Further, such forward-looking statements speak only as of the date on which such statements are made; AB undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. For further information regarding these forward-looking statements and the factors that could cause actual results to differ, see "Risk Factors" and "Cautions Regarding Forward-Looking Statements" in AB's Form 10-K for the year ended December 31, 2016. Any or all of the forward-looking statements made in this news release, Form 10-K, other documents AB files with or furnishes to the SEC, and any other public statements issued by AB, may turn out to be wrong. It is important to remember that other factors besides those listed in "Risk Factors" and "Cautions Regarding Forward-Looking Statements", and those listed below, could also adversely affect AB's financial condition, results of operations and business prospects.

The forward-looking statements referred to in the preceding paragraph include statements regarding:

• The pipeline of new institutional mandates not yet funded: Before they are funded, institutional mandates do not represent legally binding commitments to fund and, accordingly, the possibility exists that not all mandates will be funded in the amounts and at the times currently anticipated.
• The possibility that AB will engage in open market purchases of Holding Units to help fund anticipated obligations under our incentive compensation award program: The number of Holding Units AB may decide to buy in future periods, if any, to help fund incentive compensation awards is dependent upon various factors, some of which are beyond our control, including the fluctuation in the price of a Holding Unit and the availability of cash to make these purchases.
• Our expectation that, as a result of repatriating future non-U.S. earnings, effective January 1, 2017, our effective tax rate will increase: Our effective tax rate fluctuates based on the mix of our earnings across our tax filing group, which includes our U.S. partnership, our U.S. corporate subsidiaries and our corporate subsidiaries operating in various non-U.S. jurisdictions, and the differences between the tax rates in the U.S and the other jurisdictions where we conduct business.

Qualified Tax Notice

This announcement is intended to be a qualified notice under Treasury Regulation §1.1446-4(b).  Please note that AB Holding's distributions to foreign investors is attributable to income that is effectively connected with a United States trade or business. Accordingly, AB Holding's distributions to foreign investors are subject to federal income tax withholding at the highest applicable tax rate, currently 39.6%.

About AB

AB is a leading global investment management firm that offers high-quality research and diversified investment services to institutional investors, individuals and private wealth clients in major world markets.

As of December 31, 2016, AB Holding owned approximately 35.9% of the issued and outstanding AB Units and AXA, a worldwide leader in financial protection, owned an approximate 63.7% economic interest in AB.

Additional information about AB may be found on our website, www.abglobal.com.