Poor ETF Inflows, Elevated Compensation Costs Will Weigh On BlackRock’s Q1 Revenues

BlackRock (NYSE:BLK) is scheduled to release its results for the first quarter of 2018 on Thursday, April 12. We expect the asset management giant to report earnings of $6.22 a share on revenues of $3.3 billion for the quarter based on our detailed interactive model for BlackRock’s revenues and expenses for the quarter. This compares to consensus estimates of $6.42 for BlackRock’s EPS and $3.3 billion for its revenues. The two key trends that contribute to our results forecast are slower growth in assets under management from industry headwinds, and seasonally high operating costs.

We maintain a $550 price estimate for BlackRock’s stock, which is about 5% ahead of its current share price.

Key Expectation #1: Subdued Assets Under Management Growth

BlackRock is the largest asset manager in the world, with just under $6.3 trillion in assets under management at the end of 2017. The single biggest driver of growth in the company’s asset base over recent years has been its iShares exchange-traded fund (ETF) offerings – especially equity iShares. However, the ETF industry witnessed considerable outflows over the first two months of the year, even as valuation across debt as well as equity markets remained largely around the levels seen at the end of 2017. This resulted in the total size of BlackRock’s ETFs in the U.S. (as compiled by ETF.com) shrinking marginally over the first quarter of the year (from $1.35 trillion to $1.349 trillion). We expect BlackRock to report a sequential increase in assets under management for its traditional actively-managed as well as indexed funds, though.

Based on this, we estimate BlackRock’s total asset base to increase from $6.29 trillion at the end of 2017 to $6.35 trillion at the end of Q1 2018. Taken together with a small decline in fees as a percentage of AUM, this should result in BlackRock’s advisory fees remaining largely level at the figure of $2.9 billion seen in the previous quarter.

Key Expectation #2: Seasonally Higher Compensation Costs Will Weigh On Margins

While industry headwinds are likely to lead to lower advisory fees and performance fees for BlackRock this time around, the company should report a sizable increase in its compensation costs year-on-year as it hands out annual bonuses and offers pay hikes to its employees. Compensation costs will largely remain in line with what the company reported in Q4 2017, however we expect a slight uptick in other expense streams (distribution costs, direct fund costs, and SG&A costs). This should result in BlackRock reporting total quarterly operating expenses in excess of $2 billion for the first time ever – something that is likely to drag down the company’s EBT margin figure to below 40% for the first time since Q1 2016.

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