Franklin Resources Q2 Earnings: Mixed Results Amid Persistent Headwinds
4min read Franklin Resources (NYSE: BEN) reported its second-quarter 2025 earnings on May 2, 2025, delivering a mix of resilience and challenges for investors. While the company met adjusted diluted EPS estimates at $0.47, revenue fell short of expectations, underscoring ongoing struggles with asset outflows and margin pressures. The report highlights a bifurcated landscape: strategic progress in high-growth segments like ETFs and alternatives contrasts with broader declines in assets under management (AUM) and fee-based income.
Key Financial Highlights
Franklin reported adjusted diluted EPS of $0.47, aligning with consensus estimates but reflecting a 21% quarterly decline from $0.59 in Q1 2025 and a 16% year-over-year drop from $0.56 in Q2 2024. Revenue totaled $1.61 billion, below both the prior quarter’s $1.68 billion and the $1.67 billion in Q2 2024. Analysts had projected revenue of $1.67 billion, making this a modest miss.
The earnings were tempered by a $41.4 million loss on a closed renewable energy fund, which impacted non-GAAP metrics. GAAP net income fell 7% sequentially to $151.4 million, while operating income dropped 34% to $145.6 million due to higher expenses and lower AUM-driven fees.
Assets Under Management (AUM): A Persistent Headwind
Total AUM declined to $1.54 trillion at quarter-end, a 2% sequential drop and a 6% year-over-year contraction. This reflects:
- $26.2 billion in long-term net outflows, driven by $33.6 billion exiting Western Asset Management, Franklin’s fixed-income subsidiary.
- A $11.6 billion negative market impact, including foreign exchange headwinds.
Notably, excluding Western Asset Management, the company recorded $7.4 billion in net inflows, highlighting progress in other segments. ETFs continued their strong performance, with $4.1 billion in net inflows, marking the 14th consecutive quarter of positive flows and contributing to record AUM of $1.54 trillion. Alternatives also shone, raising $6.8 billion through private markets, including a $2 billion launch for the Franklin Lexington Private Markets Fund.
Operational Strengths and Strategic Shifts
Franklin emphasized operational discipline and strategic realignment:
- Integration of Western Asset Management into Franklin Templeton’s corporate structure aims to reduce costs and streamline operations.
- Alternatives and ETFs remain growth pillars. The company’s five-year $100 billion alternatives target is advancing, with $6.8 billion raised in Q2 alone.
- Institutional pipelines grew to $20.4 billion in won-but-unfunded mandates, up $2.3 billion sequentially, signaling future inflow potential.
CEO Jenny Johnson highlighted client diversification as a key advantage, with 30% of AUM now in alternatives and ETFs—a strategic shift from traditional equity/fixed-income dominance.
Challenges and Risks
Despite pockets of growth, Franklin faces significant hurdles:
1. AUM Declines: The $1.54 trillion AUM figure is the lowest since 2020, with U.S. AUM down 3% to $1.07 trillion. Fixed-income outflows remain a critical issue, as Western Asset Management grapples with regulatory scrutiny and client attrition.
2. Margin Pressure: Adjusted operating margins fell to 23.4%, down from 25.2% in Q2 2024, due to lower fee revenue and higher costs.
3. Shareholder Returns: Franklin spent just $10 million on share repurchases in Q2, a stark contrast to its $2.3 billion buyback authorization. The dividend was maintained at $0.32 per share, but growth remains stagnant.
Market Reaction and Analyst Outlook
BEN’s stock closed at $18.74 on the earnings release date, down 10% year-to-date and underperforming the S&P 500. Analysts at Zacks assigned a "Strong Sell" rating, citing persistent outflows and margin erosion. The average price target of $18.46 suggests little optimism in the near term.
Conclusion: A Stock Struggling to Find Momentum
Franklin Resources’ Q2 results paint a company in transition. While its focus on alternatives, ETFs, and institutional pipelines offers long-term promise, short-term challenges—particularly in stabilizing AUM and margins—dominate the narrative. The stock’s valuation reflects this tension: at just 8.3x trailing 12-month P/E, it trades at a discount to peers like BlackRock (BLK) and Invesco (IVZ), which command 14x and 12x, respectively.
Investors must weigh two realities:
1. Growth Catalysts: Alternatives and ETFs are scaling, with the Franklin Lexington Private Markets Fund already at $2 billion. Institutional pipelines at $20.4 billion suggest future upside if mandates convert.
2. Near-Term Risks: The $33.6 billion Western Asset outflows and 6% year-over-year AUM decline highlight execution risks. Margin compression and regulatory pressures (e.g., SEC investigations into trading practices) add uncertainty.
For now, Franklin’s valuation offers a contrarian opportunity for investors willing to bet on strategic execution over the next 12–18 months. However, until AUM stabilizes and margins rebound, the stock is likely to remain under pressure.
Final Takeaway: Franklin Resources’ Q2 results were a reminder that asset management’s success hinges on both innovation and stability. While the former is evident in alternatives and ETFs, the latter remains elusive. Investors should monitor Q3 AUM trends and cost-saving progress closely before committing to a long-term position.
