BlackRock Doubles Q2 Net Income, but Client Outflow Problems Persist

$2.21 per share results compared to $1.59 last year reflect Barclays Global Investors acquisition

BlackRock Inc. on Wednesday, July 21, reported second-quarter 2010 net income of $432 million, up $214 million from a year ago and up $9 million from the first quarter. The results, which incorporated the $13 billion acquisition of Barclays Global Investors, beat analysts' expectations.

The money management giant's second-quarter profits came in at $2.21 a share compared to $1.59 a year ago. Analysts' consensus was for EPS of $2.29. Excluding acquisition-related costs and employee compensation, net income was $2.37 per diluted common share, at $463 million, up 35% compared to second-quarter 2009 diluted EPS of $1.75 but down $0.03 compared to first-quarter 2010.

Despite the doubling of income BlackRock (BLK) shares fell in trading, to as low as $141.01 a share after opening at $149.99, on market concerns about client outflows and the trend toward passively managed low-free products such as exchange-traded funds. The stock has fallen 36% this year.

"Market conditions were difficult, but overall investment performance remained strong and clients continued to award us new business in a wide variety of products," said BlackRock Chairman and CEO Laurence Fink in the second-quarter 2010 earnings release. "Going into the merger, we knew that some clients would have to address concentration issues and that the active quantitative style was under stress industry-wide. As expected, these two issues continued to drive outflows, and are expected to do so for at least another quarter."

BlackRock's board of directors approved the repurchase of up to 5.1 million shares "to neutralize the dilutive effects of restricted stock units and options that have been granted to employees and which will become dilutive over the next several years," according to the release.

In a report titled, "Decent Quarter and Pipeline, But Outflows Continue," equity research analyst Michael Carrier of Deutsche Bank maintained his hold rating on BLK shares.

"While BLK remains well positioned long term with a healthy pipeline ($60B), given the attrition outflows, more modest organic growth, and limited margin expansion in the near term, we remain at Hold," Carrier wrote.

On a positive note, Fink said the December 2009 Barclays acquisition is on track, including systems integration and new leadership appointments, adding that business momentum is building. Further, Strong cash flow from BlackRock's operating results of $697 million has allowed the firm to reduce its commercial paper balances to approximately $180 million as of July 15.

"Aside from these outflows, trends in long-term new business were very positive and our pipeline shows increasing new business momentum," Fink said. "Retail flows have been particularly strong in the United States, and iShares flows picked up nicely in the second quarter. In addition, we continued to win a wide variety of mandates from institutional investors, including outsourcing services for insurance companies and pension plan sponsors."

Assets under management totaled $3.151 trillion at June 30, down 6%, or $213.3 billion, since March 31. "Equity markets suffered sharp declines in the second quarter, with the major market indices down as much as 13%," according to the release. "The combination of adverse equity markets and foreign exchange movements contributed $194.1 billion, or 91%, of the total decrease in AUM."

BlackRock's new business pipeline was $59.5 billion as of July 15. Net wins funded or to be funded included $47.0 billion in long-term products, $5.6 billion in cash management, and $6.9 billion in advisory AUM. The long-term mandates included $30.9 billion in a variety of active strategies and $16.1 billion in index products.

In addition, BlackRock Solutions continued to have strong demand for its products, with outstanding proposals for more than 25 net new assignments and one new contract in negotiation. BlackRock Solutions and advisory revenue was $114 million in second-quarter 2010 compared to $112 million in second-quarter 2009.

Read a story about a recent BlackRock defined contribution survey from the archives of InvestmentAdvisor.com.

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