BlackRock (BLK) Q3 Earnings Release

BlackRock reported Q3 2012 earnings of $3.65 per share, this beat consensus estimates of analysts that projected $3.32. BlackRock had several key themes throughout the quarter that drove the beat. Assets under management (AUM) grew to $3.673 Trillion; a 10% improvement over the same period ended a year prior. Also, contributing to strong revenue during the quarter were iShares posting the strongest quarter of inflows since 2009.  This included notable inflows into equity ETFs, not seen for some time. 

Revenue had a strong quarter improving 4% from Q2 2012, but expense management was a main highlight for BlackRock during the Q3. BlackRock’s operating margin improved to 37.7% a substantial increase over Q3 of 2011, which had a 34.9% operating margin.

BlackRock completed its acquisition of Swiss Re Private Equity Partners during September, which contributed the AUM improvement. Management decided to repurchase 960,100 shares during the quarter (8.2 million YTD), which was expected.

Earnings call discussion included the continued theme of price competition in the industry, following BlackRock’s disclosure earlier in the week that iShares ETF fees will be lowered to response to market pressure. This pressure mainly comes from competitor, Vangaurd. Our expectations regarding lower fees on ETFs is that improved AUM will offset the losses in the medium term.  Going forward BlackRock expects competitors to raise their fees modestly because they are barely breaking even on their products. BlackRock will launch TV advertisements for the first time to help combat growing competition; we expect this strategy to be successful and representative of BlackRock’s already strong brand position.

How our estimates compared: Revenue was inline with our expectations. Expenses were slightly under by 1%. Net income was 15% above our expectations, due to a favorable tax rate on the quarter. Diluted EPS beat our estimates by 16%; we projected EPS of $3.14 vs. $ 3.65 actual. We are currently projecting EPS of $3.42 for Q4 and EPS of $13.30 for Full Year 2012.

Looking forward we expect AUM inflows to be strong during Q4, paying special attention to iShares fee changes and how margins are impacted in that segment going forward.