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BlackRock Manages Strong Growth in 1Q17 on New Flows, ETFs

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Part 5
BlackRock Manages Strong Growth in 1Q17 on New Flows, ETFs PART 5 OF 8

BlackRock’s Operating Margin Is Stable amid High Performance Fees

Improving operating margins

In its 1Q17 earnings release on April 19, 2017, BlackRock (BLK) reported an 8% rise in total revenue on a YoY (year-over-year) basis.

The company’s operating expenses rose only 1% YoY to ~$1.7 billion. Specifically, its expenses rose $16 million due to higher employee compensation, distribution and servicing costs, and lower general expenses, not restructuring charges.

BlackRock&#8217;s Operating Margin Is Stable amid High Performance Fees

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BlackRock’s adjusted operating margin rose 100 basis points to 42.6% on spending cuts as competition across the industry led to lower fees. BlackRock faces competition in the ETF space mainly from Vanguard and State Street (STT). BlackRock is reducing its expenses by achieving economies of scale and spreading out its costs to maintain healthy operating margins.

BlackRock posted a net income margin of 28.4% in 2016. Its peers’ margins are as follows:

  • Bank of New York Mellon (BK): 16.9%
  • State Street: 19.8%
  • JPMorgan Chase (JPM): 23.1%

Together, these companies make up 1.8% of the SPDR S&P 500 ETF (SPX-INDEX) (SPY).

Falling administrative costs

In 1Q17, BlackRock’s general and administrative expenses fell $17 million compared to 1Q16 and $54 million compared to 4Q16, mainly due to lower discretionary marketing and promotional spending. 

The company’s compensation expenses rose $74 million to $1.0 billion in 1Q17, mainly due to higher incentive compensation driven by higher performance and operating income. Its direct fund expenses also rose $20 million YoY due to its higher assets under management.

The asset management industry is facing headwinds due to low-cost ETFs becoming preferable to active managers, who can charge high fees.

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