Franklin Resources, Inc. (BEN) Earnings

Management highlights

• Overall Strategic Progress - The firm is ahead of its five-year strategic plan, driven by disciplined execution of the "One Franklin Templeton" unified platform strategy, which has built a diversified business across public and private markets with multiple organic growth streams. - The firm will officially change its corporate name from Franklin Resources, Inc. to Franklin Templeton, Inc. on August 17, 2026, aligning the legal name with its global brand with no changes to corporate/capital structure, ticker (BEN on NYSE), or shareholder rights. - Long-term net inflows were positive across every asset class and every geography for the quarter, with new AUM records across all key growth segments and a record $28.6 billion institutional unfunded mandate pipeline (up $8 billion quarter-over-quarter). - More than half of mutual fund and ETF AUM outperformed peers over 3/5/10-year periods, with nearly half rated 4 or 5 stars by Morningstar; 55%+ of strategy composite AUM outperformed benchmarks over 3 and 5-year periods, and 70% over 10 years. • Product & Growth Initiatives - Private markets are a core long-term growth opportunity, with a diversified platform spanning secondary private equity, private credit, real estate, and venture capital, and growing adoption among wealth management clients. - Integrated fixed income strategy: The firm has integrated public and private fixed income capabilities under a single umbrella, offering combined multi-asset credit solutions that match client demand for end-to-end credit exposure. - Canvas (custom tax-optimized portfolios) has seen exponential growth from $2 billion at acquisition to $30.3 billion today, driven by its tech-focused architecture, unique capabilities (concentrated stock handling, in-kind transfers), and new partner onboarding. - The firm is an early mover in blockchain and tokenized investment products, with newly announced partnerships with MoonPay and PayWord (parent of Kraken) to expand access to tokenized traditional assets and on-chain products. - AI investments are underway across sales, investment, and operations, with early measurable productivity gains in client outreach and sales from the Microsoft AI Intelligence Hub partnership. • Financial Performance - Adjusted operating income increased 7% quarter-over-quarter and 35% year-over-year to $508.9 million, driven by higher average AUM, disciplined expense management, and operating leverage from the diversified business model.

Guidance

- Full year 2026 private markets fundraising is now expected to reach ~$40 billion, up from the original full-year target of $25-30 billion, with $33 billion already raised through three quarters. - Lexington Partners' flagship secondary fund is on track to exceed $10 billion in fundraising by September 2026. - For Q4 2026: Catch-up fees are expected to be ~$14 million; effective fee rate is projected to stay in the mid-to-high 37s basis points; compensation is expected to be $850 million; IS&T expense is projected at $165 million (including AI, data, and security investments); occupancy is expected at $70 million; G&A is projected at $200 million; the full-year 2026 tax rate is expected to be between 25% and 27%. - Full year 2026 total expenses are expected to be 3% to 3.5% above 2025 (2% to 2.5% including performance fees); full year 2026 adjusted operating margin is projected to be at least in the mid-27s, with Q4 2026 margin expected to reach very close to or exceed 30%. - For 2027, full year adjusted operating margin is projected to be between 29% and 30%, with the firm exiting 2027 at 30%+ margin, ahead of original plan; the effective fee rate is expected to remain stable in the high 37s basis points. All margin guidance assumes flat markets from current levels. - A full investor day to update the market on long-term strategy is planned for late 2026 or early 2027. - Balance sheet co-investment in the firm's own funds will grow to ~$3 billion (with $1.75 billion in private markets) through 2027.

Segment performance

Total AUM reached a record $1.8 trillion, with $18.4 billion in long-term net inflows for the quarter and $63.3 billion in fiscal year-to-date long-term net inflows. Key segment performance: - Alternatives & Private Markets: Alternative AUM hit a record $294 billion, with $11.8 billion raised across the alternatives platform ($10.3 billion in private markets) this quarter, bringing fiscal year-to-date private fundraising to $33 billion. The evergreen wealth platform reached $8.9 billion in AUM, with wealth management accounting for 20% of year-to-date private markets fundraising. - Fixed Income: Combined public and private fixed income AUM totals $620 billion ($520 billion public, $100+ billion private credit). The segment generated $2.6 billion in net inflows; excluding Western Asset, Franklin Templeton fixed income delivered its 10th consecutive positive quarter with $3.5 billion in net inflows. - Multi-Asset: Generated $4.7 billion in positive net flows, led by Canvas, Franklin Income Fund, and Franklin Templeton Investment Solutions. - ETFs: ETF AUM reached a record $75.6 billion, with $7.1 billion in net inflows this quarter. Active ETFs accounted for 61% of ETF net inflows. - Retail SMAs: Retail SMA AUM hit a record $187.6 billion, with $4.4 billion in net inflows. - Canvas (custom portfolio solutions): Canvas AUM reached a record $30.3 billion, with $3.7 billion in net inflows. - Equities: Generated $2 billion in positive net inflows, with broad demand across U.S. large cap value, U.S. large cap core, international equity, infrastructure, and systematic strategies. - International: International AUM reached approximately $525 billion, with positive long-term net flows across every region.

Risks & headwinds

- Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections, as detailed in the firm's recent SEC filings (10-K, 10-Q). - Blockchain and tokenized product adoption is slower than expected due to limited existing wallet infrastructure among traditional financial distributors, slowing mainstream rollout of the firm's tokenized product offerings. - Rising platform and revenue sharing fees from large wealth platforms (including recent announced increases from Merrill Lynch and Schwab) could create incremental net revenue headwinds, though management views this as business as usual and expects to negotiate appropriate adjustments for lower-fee product structures like SMAs and ETFs. - Unconstrained AI development can lead to unexpected cost increases, requiring balance between encouraging workforce adoption and controlling agent deployment expenses. - Private markets fundraising requires ongoing balance sheet commitment for co-investments, which impacts available capital for other uses including share repurchases and acquisitions.

Analyst Q&A

• Q: Private markets fundraising has already exceeded the full-year target with one quarter remaining. Where is the strength coming from, and what is the outlook for Lexington Partners' flagship fund? /

  A: Management raised the full-year 2026 private markets fundraising target to ~$40 billion, up from the original 25-30 billion target. Lexington's flagship fund is on track to exceed $10 billion by September 2026, and accounted for ~40% of the quarter's $10.3 billion in private fundraising across four distinct Lexington strategies. Strength is broad-based: all private market sub-segments (secondaries, real estate, private credit, venture) contributed across more than 30 total strategies, with real estate fundraising seeing renewed traction after being out of favor in recent periods.

• Q: How has the firm integrated public and private fixed income, and what is your new integrated go-to-market strategy? /

  A: Management believes future fixed income success requires combined insights across public and private credit, so the firm has integrated all fixed income teams (including acquired Brandywine, Putnam, and Western Asset) under a single umbrella, while preserving individual investment team independence. Client reaction to the Western Asset integration has been positive, and the firm is seeing strong demand for combined multi-asset credit solutions (it recently won a large public pension mandate and has multiple active advanced RFP conversations). New products are being launched that combine public and private credit, including a repositioned target date retirement fund that includes 2-8% private real estate and private credit, and a combined public-private infrastructure product.

• Q: Canvas' growth rate has been very strong. What is driving this, what is the long-term growth outlook, and what is the pipeline for new white-label partnership opportunities? /

  A: Canvas has grown from $2 billion at acquisition to $30.3 billion today, driven by its tech-first architecture (built by quant managers, unlike competing tax platforms built by tax teams that rely on manual work). Unique capabilities including managed options for concentrated stock positions and support for in-kind transfers make it stand out from competitors. 26 new partners were added this quarter, bringing the total to 220 partners, with continued strong new partner pipeline. The biggest long-term growth opportunity is adding Canvas' tax overlay capabilities to the firm's existing $187.6 billion SMA business and white-labeling the service to third-party active strategy providers, which is just starting to scale.

• Q: What early ROI has the firm seen from its AI investments, and what areas are most likely to see fundamental change from AI over time? /

  A: The most mature AI project, the Microsoft partnership for the sales Intelligence Hub, has delivered measurable early results: a 25% increase in the number of client contacts per salesperson and an 11% uplift in sales in rolled-out territories. Across investment teams, over 1,000 AI agents are being tested for research efficiency and portfolio construction, with the firm running an R&D sandbox to test three AI-focused investment strategies. AI is also being rolled out for operational efficiency across RFP processing, HR, finance, and risk management, with long-term expected meaningful cost savings. The main near-term challenge is balancing workforce adoption with controlling unexpected AI compute costs.

• Q: How is the firm approaching capital management, including the recent step up in share repurchases? /

  A: Capital allocation priorities are: 1) fund organic growth and balance sheet co-investment in private market funds (expected to grow to $3 billion by 2027), 2) grow the regular dividend, 3) offset employee share grants, 4) opportunistic share repurchases. The firm now has more ability to repurchase shares after closing the Western Asset integration, which removed a long strategic blackout period, and the $350 million in repurchases last quarter included an opportunistic purchase from Great West Life's locked-up stake from the Putnam acquisition. Management will consider opportunistic acquisitions only to accelerate growth in priority areas (like global real estate and distribution partnerships), and may refinance revolving debt in the near term to reload balance sheet capacity for strategic initiatives.