AB AllianceBernstein Holding LP

NEW YORK, Oct. 26, 2016 /PRNewswire/ -- AllianceBernstein L.P. ("AB") and AllianceBernstein Holding L.P. ("AB Holding") (NYSE: AB) today reported financial and operating results for the quarter ended September 30, 2016.

"Previously announced outflows totaling $14 billion related to the conclusion of our Rhode Island CollegeBound 529 fund relationship and the termination of an institutional alternative investment portfolio during the third quarter obscured the positive momentum we're experiencing in many parts of our business," said Peter S. Kraus, Chairman and Chief Executive Officer. "Excluding the 529 outflows, year-to-date Retail net inflows were $3 billion, a $5 billion improvement from the same period last year, and Private Wealth net inflows were $1.2 billion, compared to slight net outflows last year."

(1) The GAAP AB Holding Diluted EPU has been revised for 3Q15 and 2Q16.

(2) The adjusted financial measures are all non-GAAP financial measures. See page 13 for reconciliations of GAAP Financial Results to Adjusted Financial Results and pages 14-15 for notes describing the adjustments.

(3) The Adjusted AB Holding Diluted EPU has been revised for 2Q16.

Kraus continued: "We're encouraged by the progress we continue to make in executing on our strategy of delivering for our clients around the world with the strength of our investment performance, the breadth and relevance of our offering and the efficiency of our operations. Our equity investment performance rebounded after a difficult first half, improving the track records of many of our services. For the period through September 30th, 43%, 63% and 64% of our active equity assets were in services that beat their benchmarks for the 1-, 3- and 5-year periods, respectively. In fixed income, we were at 83% for the 1-year and 90% for the 3- and 5-year periods. In each of our channels, we're seeing strong interest in key focus areas where we are performing and where clients want to be. In Institutional, demand for our Managed Volatility Equities, Strategic Core Equity, Small Cap Value, US Investment Grade Corporate and Global Credit services led to notable new mandate wins during the quarter. In Retail, yield-focused investors in Asia ex Japan and the US drove positive momentum in our American Income, Global High Yield and AB High Income funds, where combined sales totaled more than $6 billion during the third quarter. In Private Wealth, the structural superiority of our integrated approach is more evident than ever to our clients during these uncertain times. Year-to-date net inflows are up $900 million from 2015 and our redemption rate is near an all-time low. Our differentiation continues to resonate on the sell side as well: Every Bernstein fundamental research team that has been publishing for at least one full year was top ranked in the 2016 Institutional Investor All America Research Team Survey - an outstanding testament to the quality of our research franchise. Finally, in a low-growth environment where operational efficiency is critical, our cost containment efforts continue to pay off. We reduced our adjusted operating expenses by 3% year-on-year in the third quarter and added 70 basis points to our adjusted margin of 24.2%. We also completed our acquisition of Ramius Alternative Solutions from Cowen & Co."

Kraus concluded: "Each new strategic step we take moves AB closer to our goal of being the preeminent solutions provider for our global clients in any market environment. Considering the headwinds we face in our industry, I'm extremely proud of our people for the progress they continue to make in keeping AB Ahead of Tomorrow for our clients in so many ways."

The firm's cash distribution per unit of $0.45 is payable on November 17, 2016, to holders of record of AB Holding Units at the close of business on November 7, 2016.

Market Performance

US and global equity and fixed income markets were higher in the third quarter. The S&P 500's total return was 3.9% in the third quarter, while the MSCI EAFE Index's total return was 6.5%. The Bloomberg Barclays US Aggregate Index returned 0.5% during the third quarter and the Bloomberg Barclays Global Aggregate ex US Index's total return was 1.0%.

Assets Under Management ($ Billions)

Total assets under management as of September 30, 2016 were $490.2 billion, up $0.7 billion, or 0.1%, from June 30, 2016, and up $27.3 billion, or 5.9%, from September 30, 2015.

Total net outflows were $15.3 billion, compared to net inflows of $3.5 billion in the previous quarter and net outflows of $2.4 billion in the prior year period. Two previously announced redemptions occurred during the third quarter - $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.

Net outflows from the Institutions channel were $9.9 billion, including the $7.6 billion of previously mentioned alternative investment portfolio outflows, compared to net inflows of $1.0 billion in the second quarter of 2016. Institutions gross sales of $5.2 billion were flat compared to the prior quarter. The pipeline of awarded but unfunded Institutional mandates decreased sequentially from $6.1 billion to $5.4 billion at September 30, 2016.

The Retail channel experienced third quarter 2016 net outflows of $5.0 billion, which included $6.3 billion of the Rhode Island CollegeBound 529-related outflows, compared to $2.3 billion of net inflows in the prior quarter. Retail gross sales of $12.3 billion increased 14% from the second quarter's $10.8 billion.

In the Private Wealth channel, net outflows of $0.4 billion, which included $0.4 billion of the Rhode Island CollegeBound 529-related outflows, compared to net inflows of $0.2 billion in the prior quarter. Private Wealth gross sales of $2.4 billion were flat compared to the prior quarter.

Third 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 be 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 that are included in our Third Quarter 2016 Form 10-Q and this Earnings Release.

In regard to our revision to correct previously issued financial statements, we recorded a cumulative 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. As a result, we have established an income tax liability, including interest and potential penalties, of $45.6 million as of September 30, 2016. As of December 31, 2015, the cumulative impact of the revision on partners' capital in the condensed consolidated statement of financial condition was $37.7 million. See page 11 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 $748 million increased 1% compared to the third quarter of 2015 due to investment gains in the current quarter compared to investment losses in the prior year period and higher investment advisory fees, partly offset by lower Bernstein Research revenues and distribution revenues. Sequentially, net revenues increased 3% due to higher investment gains and investment advisory fees, partly offset by lower Bernstein Research revenues. Bernstein Research revenues declined 13% year-over-year and 4% sequentially, in both cases as a result of a slowdown in client activity across the US and Europe.

Operating expenses were $562 million for the third quarter of 2016, down 6% year-over-year, due to the reversal of contingent payment liabilities related to previous acquisitions, lower promotion and servicing, general and administrative ("G&A") and total employee compensation and benefits expenses. Within promotion and servicing, amortization of deferred sales commissions, transfer fees, travel and entertainment expense and trade execution fees were all lower compared to the prior year period. Within G&A, lower occupancy expense and professional fees were partly offset by higher other miscellaneous expenses. Total employee compensation and benefits expenses declined as a result of lower recruitment and base compensation expenses, partly offset by higher incentive compensation. During the third quarter of 2016, we recorded a $0.1 million non-cash real estate credit as part of our ongoing global real estate consolidation plan compared to a $1.7 million non-cash real estate charge we recorded in the third quarter of 2015.

On a sequential basis, operating expenses were down 4% as a result of the reversal of contingent payment liabilities related to previous acquisitions, lower promotion and servicing and G&A expenses, partly offset by higher total employee compensation and benefits expenses. The decline in promotion and servicing was driven by lower marketing, travel and entertainment, transfer fees and trade execution fees, partly offset by higher distribution related payments. Within G&A, lower professional fees and other miscellaneous expenses were partly offset by higher occupancy expense. Total employee compensation and benefits expenses increased due to higher commissions and incentive and base compensation. Our $0.1 million non-cash real estate credit in the current quarter compares to a $2.8 million non-cash real estate credit we recorded in the second quarter of 2016.

Operating income of $185 million for the third quarter of 2016 increased 31% from $142 million for the third quarter of 2015 and 30% from $143 million in the second quarter of 2016.

Diluted net income per Unit for the third quarter of 2016 was $0.52 compared to a revised $0.42 in the third quarter of 2015 and a revised $0.40 in the second quarter of 2016.

Non-GAAP Earnings

This section discusses our third quarter 2016 non-GAAP financial results, as compared to the third quarter of 2015 and the second 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 $613 million were down 2% compared to the third quarter of 2015, due to lower Bernstein Research revenues and higher net distribution expenses, partly offset by higher investment advisory fees and investments gains in the current quarter compared to investment losses in the prior period quarter. Sequentially, adjusted net revenues were up 2%, driven by higher investment advisory fees and investment gains in the current period compared to investment losses in the previous quarter, partly offset by lower Bernstein Research revenues and higher net distribution expenses.

Adjusted operating expenses were $464 million for the third quarter, down 3% from the prior-year period due to lower total employee compensation and benefits, promotion and servicing and G&A expenses. Total employee compensation and benefits declined as the result of lower incentive compensation, base compensation and recruitment expenses. The decline in promotion and servicing was driven by lower travel and entertainment and trade execution expenses. Within G&A, the decrease was primarily due to lower professional fees and occupancy expense, partly offset by higher portfolio servicing fees and other miscellaneous expenses.

Sequentially, adjusted operating expenses were down 1%, driven by lower promotion and servicing and G&A expenses, partly offset by higher total employee compensation and benefits. The sequential decrease in promotion and servicing was driven by lower marketing and travel and entertainment expenses. Within G&A, the decrease was driven by lower professional fees and other miscellaneous expenses, partly offset by higher portfolio servicing fees. The sequential increase in total employee compensation and benefits was driven by higher commissions and base compensation.

Adjusted operating income of $149 million increased 1% from $147 million for the third quarter of 2015, and the adjusted operating margin increased to 24.2% from 23.5%. On a sequential basis, adjusted operating income increased 10% from $135 million, and the adjusted operating margin increased 190 basis points from 22.3%.

Adjusted diluted net income per Unit was $0.45 up from $0.43 in the third quarter of 2015 and up from a revised $0.39 in the second quarter of 2016.

Headcount

As of September 30, 2016, we had 3,454 employees, compared to 3,599 employees as of September 30, 2015 and 3,466 employees as of June 30, 2016.

Unit Repurchases

During the third quarter and first nine months of 2016, we purchased 2.0 million and 5.8 million AB Holding Units for $45.2 million and $129.2 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 2.0 million and 5.7 million AB Holding Units for $45.1 million and $127.1 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.

Third Quarter 2016 Earnings Conference Call Information

Management will review third quarter 2016 financial and operating results during a conference call beginning at 8:00 a.m. (ET) on Wednesday, October 26, 2016. 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 91881828.

The presentation management will review during the conference call will be available on AB's Investor Relations website shortly after the release of third quarter 2016 financial and operating results on October 26, 2016.

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 #: 91881828.

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, 2015 and subsequent Forms 10-Q. Any or all of the forward-looking statements made in this news release, Form 10-K, Forms 10-Q, 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 100% of 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 September 30, 2016, AB Holding owned approximately 35.5% of the issued and outstanding AB Units and AXA, a worldwide leader in financial protection, owned an approximate 64.2% economic interest in AB.

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

⁽¹⁾ Includes index and enhanced index services.

⁽²⁾ Includes certain multi-asset solutions and services and certain alternative investments.