BlackRock’s Operating Margins: Could They Reach 45% in 2018?
Core income rises on growth, margins
BlackRock (BLK) posted record margins of 45% in 3Q17, which was in line with the prior year and higher than 43.9% in the previous quarter. The company’s next 12-month operating margins are expected to expand 50–100 basis points over the previous four quarters’ average of 43.9%, helped by economies of scale, efficiencies, and lower administrative spending, partially offset by higher technology spending.
BlackRock spent ~$1.8 billion in 3Q17, a growth of 13% compared to 14% growth in revenues. Expenses rose on compensation, direct fund expense, distribution and servicing costs, and general expenses.
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BlackRock’s adjusted operating margin stood at 43.1%, a rise of 20 basis points, on an industry-wide trend of expense cutting. The rise in the broad markets (SPX-INDEX) (SPY) has led to higher performance fees for asset managers, leading to higher compensation. Other majors (XLF), including JPMorgan Chase (JPM), Blackstone (BX), and Goldman Sachs (GS), have also seen higher compensation for their employees in recent quarters.
Rising general and other expenses
BlackRock’s general spending increased $51 million in 3Q17 due to professional services, technology investments, portfolio services, and a higher foreign exchange remeasurement expense. Its compensation rose to ~$1.1 billion (by $119 million) due to an increase in the number of employees and performance fees. The company’s direct fund expenses have increased in recent quarters, largely due to a push of various offerings through advisors and brokers.
In 2018, BlackRock could target an adjusted operating margin of 43%–45%, which is high among major asset managers and banks offering asset management services among various arms of financial services. The asset management giant may have to rake in more assets in order to maintain growth momentum.