Crow Quoted on Focus Financial’s 3Q18 Earnings

Matthew R. Crow, ASA, CFA, president of Mercer Capital, was quoted in the Financial Planning article, “Focus Financial’s revenue gains keep spotlight on RIA proxy.”

Despite Focus Financial’s continued revenue and acquisition growth, the third quarter earnings call also raised questions.

Focus reported organic revenue growth of nearly 10% for the third quarter, compared to 14% growth for the same period last year. “We don’t have real numbers to show ‘same store sales,’” says Matt Crow, president of the research and consulting firm Mercer Capital.

While Focus reported more than 30% year-over-year quarterly revenue growth, Crow noted that the firm “bought two-thirds of that through direct acquisitions and some of the remaining third was growth from acquired subsidiary acquisitions conducted by existing partner firms.”

Focus’ insistence on emphasizing adjusted EBITDA and net income, which are not compliant with generally accepted accounting principles [although allowed when explained], has also raised eyebrows.

“Focus wants to be judged on adjusted earnings, not reported earnings,” Crow says. “I think the market will eventually run out of patience with that. This report includes $92 million in adjustments for the third quarter to take a reported loss of nearly $39 million and turn it into adjusted EBITDA of $53 million. I don’t doubt the veracity of the numbers — it’s just whether or not one is willing to accept that some expenses, such as those associated with equity compensation or acquisitions, are really addbacks for a firm with their business plan.”

Focus’ $39 million loss in the quarter, Crow added, “is both a function of ongoing operations as well as the cost of implementing their acquisition strategy.”

Mercer Capital’s Asset Management practice provides RIAs, trust companies, and investment consultants with corporate valuation, financial reporting valuation, transaction advisory, portfolio valuation, and related services. Our industry blog, RIA Valuation Insights, is updated weekly with commentary on issues important to the Asset Management industry. We provided some initial thoughts on the Focus Financial offerings, an update after it went public, and will continue to follow related headlines.