Victory Capital Holdings, Inc. Class A Common Stock 2026 Q2 Earnings Call

Thank you, operator. Good morning, everyone. Before I turn the call over to Chairman and CEO David Brown, I would like to remind you that during today's conference call, we may make several forward-looking statements. Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release, which was issued after the market closed yesterday, disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance.

Reconciliations between these non-GAAP measures and the most comparable GAAP measures are available in the tables that can be found in our earnings press release and in the slides accompanying this call, both of which are available on the investor relations section of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO.

David. Thanks, Carly. Good morning, everyone, and welcome to Victory Capital's second quarter 2026 earnings call.

I am also joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer. I will start with an overview of our second quarter results, which I am pleased to say were exceptional, setting new records across multiple dimensions of our business. After that, I will turn the call over to Mike to review the financial results in greater detail. Following our prepared remarks, we will be available to answer your questions. On slide five, you will see that Q2 2026 was the strongest quarter in our history. Total client assets reached $346 billion, up 11% from Q1 and 15% higher than at the end of the same period last year. Long-term gross flows of $22 billion were up 17% quarter-over-quarter, and 43% versus the same quarter last year.

We generated record net long-term inflows of $4.2 billion, reflecting the strategic investments we have made, the momentum we have built across all our distribution channels, and the strength of our investment performance by our investment franchises and our solutions platform. From a financial perspective, adjusted EBITDA reached $243 million, and our adjusted EBITDA margin expanded to 55.8%. Adjusted earnings per share was $2.21, up 21% from last quarter and 41% higher than Q2 of last year. All were records for our company. Moreover, the Pioneer integration is now complete, and the full $110 million in net run rate expense synergies have been fully realized. Turning to slide six, investment performance remains a source of great pride for our organization, and it continues to be the foundation of what we do. Strong investment performance is not incidental to what we do.

It is the reason clients hire us and the reason they stay with us. In an industry where trust is earned through long-term investment results, we believe our track record speaks for itself. As of June 30, 2026, 57 of our mutual funds and ETFs earned four or five-star overall ratings from Morningstar, which is 60% of our rated AUM. This represents over half of our Morningstar-rated funds. By comparison, only about a third of Morningstar-rated funds industry-wide carry a four or five-star rating. When we look at performance against benchmarks, the picture is equally compelling. 71% of our AUM outperformed over the one-year period, 68% over three years, 65% over five years, and an impressive 81% over the 10-year period. On a strategy count basis, 66%, 64%, 67%, and 69% of strategies outperform their benchmarks over those same time horizons.

This breadth of outperformance across time periods, asset classes, and investment styles reflects the talent and discipline of our investment professionals across our platform. We remain deeply committed to delivering excellent investment outcomes for our clients. Slide seven is the one that I find particularly compelling when you step back and look at how far we have come as a company. When we completed our MBO in 2013, Victory Capital was, at its core, a U.S. equity manager with $18 billion in AUM. At the time, approximately 80% of our AUM was in U.S. equity strategies, with fixed income and global equity each making up about 10%. We were excellent at what we did, but we were highly concentrated in U.S. equities. That picture had already begun to evolve by our IPO in 2018, when we had grown to over $60 billion in AUM.

U.S. equity had moved to about 73% of AUM, with fixed income at 12%, global equity at 7%, and solutions at 5%, which included the ETF business in its infancy through a small acquisition. The seeds of diversification had been planted, but the transformation was still in its early stages. Fast-forward to today, and that story is almost unrecognizable in the best possible way. U.S. equity now represents just 31% of our $346 billion in total client assets. Our solutions business, which now includes over $23 billion in ETFs, represents 32%. Fixed income has grown to 24%, and global and non-U.S. equity stands at 11%. This did not happen by accident, as we have been very purposeful and strategic in the growth of our business. Before every acquisition we've made over the past 13 years, we asked ourself a simple question beyond the standalone financial merits.

Will this make our company better, more competitive, more resilient, and more capable of servicing clients across different market cycles? Our answer has been yes in every case. An intentional approach to building our exceptional platform into what it is today. We also recognize that self-reflection and a relentless willingness to make our company better is essential to our continued growth. We are constantly reassessing areas of potential growth, guided by our disciplined approach to strengthening our entire business, from strategically refining our already diverse product mix, expanding our distribution capabilities, to enabling our investment professionals with best-in-class tools and resources. Turning to slide eight, our ETF platform continues to be one of the most exciting and consequential growth stories in our business. ETF AUM ended the quarter at $23.2 billion, up 24% year-to-date, and 54% year-over-year.

Net flows of $1.2 billion in Q2 bring our year-to-date total to $2.5 billion, representing an annualized organic growth rate of 27%. The momentum here is sustained, broad-based, and is accelerating as we move through the back half of this year and look forward into the future. I want to spend a moment on how we think about this business because I think it is important context. Back in 2015, we made a deliberate, forward-looking decision to acquire the ETF capabilities and infrastructure that form the foundation of what VictoryShares is today. The acquisition included just a few hundred million dollars of ETF assets. The real story of this business has been what we have built from there. We have never treated this as a static platform.

The growth of VictoryShares has been driven by a consistent commitment to product innovation and a disciplined, ongoing evaluation of our investment capabilities relative to what we have heard from clients around what they want and need. What distinguishes us in the marketplace is that we are not in the race to zero. Our average fee rate of 34 basis points reflects the fact that we have built a diversified ETF platform featuring active and rules-based strategies that are organized around innovative investment themes, not a passive product suite competing on price. Importantly, the margins of our ETF business adhere to our firm-wide standards. Our free cash flow ETF series continues to generate strong and consistent inflows. Our flagship free cash flow ETF, VFLO, closed the quarter at $7.8 billion in AUM.

In its three years since launch, VFLO has outperformed the S&P 500, Russell 1000 Growth, and Russell 1000 Value all with zero Mag Seven exposure. It has earned a Morningstar five-star overall rating, and we are seeing strong demand from financial advisors throughout our intermediary channel. Across the product suite, we are winning new home office recommendations, deepening relationships with key platform partners, and are continuing to add dedicated ETF distribution resources to support that momentum. In addition, our ETFs are now available for sale across Asia and, as of this quarter in Latin America, a new geography that we believe represents a significant long-term growth opportunity. We will continue to leverage our partnership with Amundi and expand our ETF distribution globally. Slide nine covers our international business, which continues to gain real and meaningful traction.

The Amundi partnership is performing exactly as expected and trending above our initial financial expectations. At quarter end, we had $62.6 billion in AUM from clients outside the U.S. across 61 countries, with 35 of those countries now having more than $100 million in Victory Capital AUM. Importantly, our international business was net flow positive again in the quarter, and is year to date, and has been net flow positive cumulatively since we closed the Pioneer acquisition. Year to date, a vast majority of Amundi's client roadshows have been focused on Victory Capital products, a clear reflection of the priority they have placed on bringing our capabilities to their global client base. Amundi has also maintained several Victory Capital strategies on their concentrated focus list across client segments and geographies, providing important structural support for flows. We now sub-advise 23 UCITS spanning equities, fixed income, and global multi-asset strategies.