WDR Waddell and Reed Financial

Waddell & Reed Financial, Inc. (NYSE: WDR) today reported second quarter 2015 net income of $67.4 million, or $0.80 per diluted share, compared to net income of $67.1 million, or $0.80 per diluted share, during the previous quarter and net income of $83.0 million, or $0.98 per diluted share, during the second quarter of 2014.

Operating revenues of $394.0 million rose 2% sequentially, while operating income rose 6%, leading to a 110 basis point improvement in the operating margin. Revenues increased primarily due to an additional day and a higher effective fee rate during the current quarter. Expenses increased primarily due to higher IT costs, while other costs remained largely unchanged. Compared to the second quarter of 2014, revenues declined 2% and operating income decreased 10%. Revenues declined with lower levels of assets under management, while compensation costs drove expenses higher. The operating margin during the quarter was 28.2% compared to 27.1% during the previous quarter and 30.9% during the same period last year.

Assets under management ended the quarter at $121 billion, down 2% sequentially and 11% compared to June 30, 2014. Sales during the quarter were $5.8 billion, rising 6% sequentially and down 23% compared to the second quarter of 2014. Net outflows of $1.1 billion during the quarter compared favorably to the previous quarter’s net outflows of $3.6 billion. The second quarter of 2014 had net inflows of $1.2 billion.

Business Discussion

“Outflows in Asset Strategy moderated during the quarter, while outflows in High Income were in line with the first quarter despite negative industry trends for the high yield category,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “Beyond these two funds, we experienced net inflows of $622 million in our retail distribution channels and an additional $200 million of net inflows in our Institutional channel.”

Net outflows in the Wholesale channel were $1.2 billion compared to $2.2 billion last quarter and were at the lowest level since the third quarter of 2014, while redemptions improved during the quarter, sales volume declined.

The Advisors channel experienced an increase in sales and an improvement in net outflows. Sales of $1.3 billion increased 6% sequentially and net outflows were $76 million compared to $233 million during the prior quarter.

We won two new accounts in the Institutional channel, which contributed more than $550 million to sales, resulting in net inflows of $200 million.

Management Fee Revenue Analysis

Management fees rose 2% sequentially due to an increase in the effective fee rate resulting from an additional day during the current quarter and a mix-shift in the asset base. Average assets under management remained largely unchanged. Compared to the same period last year, management fees declined 4% compared to a 6% decline in average assets under management due to a mix-shift in the asset base that led to an improvement of 1.5 basis points in the effective fee rate.

The effective fee rate for the current quarter was 60.4 basis points compared to 59.9 basis points and 58.9 basis points during the first quarter of 2015 and second quarter of 2014, respectively.

Underwriting and Distribution Analysis

Underwriting and Distribution Revenues

Revenues improved 3% sequentially due to a combination of higher asset-based advisory fees, front-load variable annuity sales and insurance product commissions in our Advisors channel, and to a lesser degree, higher Rule 12b-1 fees in our Advisors channel.

Compared to the same quarter in 2014, revenues rose 1% as higher asset-based advisory fees and front-load variable annuity sales commissions in our Advisors channel were largely offset by lower Rule 12b-1 fees in our Wholesale channel.

Underwriting and Distribution Costs

Sequentially, costs remained unchanged. The increase in direct costs from our Advisors channel were partly offset by an adjustment in our Wholesale channel due to a share class conversion by one of our third-party broker dealers. Indirect costs declined due to lower employee benefit-related expenses, IT costs and sales convention costs in our Advisors channel.

Compared to the second quarter of 2014, costs remained unchanged. Direct costs rose in our Advisors channel in line with revenues and were more than offset by lower Rule 12b-1 fees in our Wholesale channel. Indirect costs rose in both retail channels due to higher compensation related costs, which were partly offset by lower IT costs.

Compensation and Related Expense Analysis

Costs declined 1% sequentially. An adjustment to forfeiture rates for our equity plan awards resulted in lower equity compensation costs; payroll taxes also trended lower. These decreases were offset by higher incentive compensation accruals during the period. Compared to the second quarter of 2014, costs rose 9% due to higher incentive compensation and an increase in base salaries, which were partly offset by lower equity compensation costs.

General and Administrative Expense Analysis

Costs rose 9% sequentially and 3% year over year. Both the sequential and year over year increase in costs was predominantly due to higher IT costs.

              Unaudited Consolidated Statement of Income                               (Amounts in thousands, except for per share data)   2014 2015   1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. Operating Revenues: Investment management fees $188,037 $193,624 $197,783 $188,658 $182,105 $185,914 Underwriting and distribution fees 165,267 169,001 173,047 171,363 166,978 171,508   Shareholder service fees     37,112     38,009     38,728     37,130   36,375     36,568             Total operating revenues     390,416     400,634     409,558     397,151   385,458     393,990           Operating Expenses: Underwriting and distribution 194,951 195,608 197,246 195,522 195,420 195,762 Compensation and related costs 50,009 48,589 48,375 47,437 53,495 52,829 General and administrative 23,756 27,183 24,924 28,774 25,678 27,897 Subadvisory fees 1,877 2,069 2,203 2,287 2,387 2,394 Depreciation 3,249 3,541 3,786 4,058 4,034 4,064   Intangible asset impairment     -     -     7,900     -   -     -             Total operating expenses     273,842     276,990     284,434     278,078   281,014     282,946           Operating Income 116,574 123,644 125,124 119,073 104,444 111,044 Investment and other income/(loss) 3,900 6,100 (1,205 ) 7,995 3,972 9 Interest expense     (2,755 )   (2,755 )   (2,769 )   (2,763 ) (2,766 )   (2,765 )         Income before taxes     117,719     126,989     121,150     124,305   105,650     108,288           Provision for taxes     42,855     44,001     46,564     43,412   38,537     40,843           Net Income     $ 74,864     $ 82,988     $ 74,586     $ 80,893   $ 67,113     $ 67,445           Net income per share, basic and diluted:     0.88     0.98     0.89     0.97   0.80     0.80           Weighted average shares outstanding - basic and diluted     85,019     85,073     84,242     83,623   83,581     84,079             Operating margin     29.9%   30.9%   30.6 %   30.0%   27.1%   28.2%             Net Distribution Cost Analysis (Amounts in thousands)                               Wholesale Channel 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. U&D Revenues $59,564 $60,237 $59,807 $55,331 $52,142 $51,768 U&D Expenses - Direct (79,700 ) (76,834 ) (75,775 ) (70,150 ) (68,595 ) (66,947 ) U&D Expenses - Indirect (11,535 )   (12,791 )   (13,317 )   (14,032 ) (14,029 )   (13,972 )         Net Distribution (Costs) ($31,671 )   ($29,388 )   ($29,285 )   ($28,851 ) ($30,482 )   ($29,151 )           Advisors Channel U&D Revenues $105,703 $108,764 $113,240 $116,032 $114,836 $119,740 U&D Expenses - Direct (74,697 ) (76,867 ) (79,700 ) (82,231 ) (82,022 ) (85,177 ) U&D Expenses - Indirect (29,019 )   (29,116 )   (28,454 )   (29,109 ) (30,774 )   (29,666 )         Net Distribution Excess $1,987     $2,781     $5,086     $4,692     $2,040     $4,897                       Changes in Assets Under Management 2014     2015 (Amounts in millions) 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. Wholesale Channel             Beginning assets $67,055 $70,467 $71,671 $66,375 $60,335 $59,412 Sales* 7,017 4,864 4,269 2,383 3,870 3,239 Redemptions (3,562 ) (4,363 ) (7,008 ) (8,592 ) (6,259 ) (4,558 ) Net Exchanges 112     (397 )   112     74   224     144           Net flows 3,567 104 (2,627 ) (6,135 ) (2,165 ) (1,175 ) Market action (155 )   1,100     (2,669 )   95   1,242     (692 )         Ending assets $70,467     $71,671     $66,375     $60,335   $59,412     $57,545             Advisors Channel Beginning assets $43,667 $44,224 $45,797 $44,908 $45,517 $46,385 Sales* 1,435 1,457 1,322 1,332 1,270 1,347 Redemptions (1,106 ) (1,098 ) (1,146 ) (1,224 ) (1,279 ) (1,279 ) Net Exchanges (112 )   (88 )   (112 )   (74 ) (224 )   (144 )         Net flows 217 271 64 34 (233 ) (76 ) Market action 340     1,302     (953 )   575   1,101     (362 )         Ending assets $44,224     $45,797     $44,908     $45,517   $46,385     $45,947             Institutional Channel Beginning assets $15,821 $16,692 $18,165 $17,603 $17,798 $17,097 Sales* 1,554 1,193 328 317 300 1,203 Redemptions (679 ) (851 ) (727 ) (663 ) (1,460 ) (1,003 ) Net Exchanges -     485     -     -   -     -           Net flows 875 827 (399 ) (346 ) (1,160 ) 200 Market action (4 )   646     (163 )   541   459     (83 )         Ending assets $16,692     $18,165     $17,603     $17,798   $17,097     $17,214             Consolidated Total Beginning assets $126,543 $131,383 $135,633 $128,886 $123,650 $122,894 Sales* 10,006 7,514 5,919 4,032 5,440 5,789 Redemptions (5,347 ) (6,312 ) (8,881 ) (10,479 ) (8,998 ) (6,840 ) Net Exchanges -     -     -     -   -     -           Net flows 4,659 1,202 (2,962 ) (6,447 ) (3,558 ) (1,051 ) Market action 181     3,048     (3,785 )   1,211   2,802     (1,137 )         Ending assets $131,383     $135,633     $128,886     $123,650     $122,894     $120,706               * Sales is primarily gross sales (net of sales commissions). This amount also includes net reinvested dividends & capital gains and investment income.                                     Supplemental Information 2014   2015   1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. Channel highlights             Number of Wholesalers 60 60 59 59 61 62 Number of Advisors 1,737 1,740 1,759 1,766 1,745 1,780 Advisors' Productivity * 60.9 62.4 64.6 65.7 65.9 67.9   Redemption rates - long term assets Wholesale 21.1% 25.1% 40.3% 53.8% 42.9% 31.0% Advisors 8.2% 7.9% 8.2% 8.9% 9.0% 9.0% Institutional 17.0% 19.9% 16.1% 14.7% 33.7% 23.2% Total 16.2% 18.7% 26.1% 32.4% 29.0% 21.7%   Operating highlights Organic growth/(decay) annualized 14.7% 3.7% -8.7% -20.0% -11.5% -3.4% Total assets under management (in millions) 131,383 135,633 128,886 123,650 122,894 120,706   Diversification (Company Total) As % of Sales Asset Strategy 33.4% 26.3% 24.9% 4.2% 17.1% 12.5% Fixed Income 23.3% 25.4% 28.8% 28.1% 23.8% 16.8% Other 43.3% 48.3% 46.3% 67.7% 59.1% 70.7% As % of Assets Under Management Asset Strategy 33.9% 32.9% 32.0% 28.8% 27.0% 25.7% Fixed Income 18.6% 18.7% 18.2% 17.8% 17.7% 17.5% Other 47.5% 48.4% 49.8% 53.4% 55.3% 56.8%   Operating margin 29.9%   30.9%   30.6%   30.0%   27.1%   28.2%                       Lipper Fund Rankings 1 Year   3 Years   5 Years   Funds ranked in top quartile 22%   30%   30% Funds ranked in top half 49% 60% 46%   Assets ranked in top quartile 12% 59% 66% Assets ranked in top half 26%   74%   74%   * Advisors' productivity is calculated by dividing U&D revenues for the Advisors channel by the average number of advisors during the period.         Unaudited Balance Sheet Information Schedule of Selected Items   Jun. 30, 2015 (Amounts in millions) Cash & cash equivalents (unrestricted) $614.9 Investment securities 239.0 Total assets 1,462.0 Long-term debt 190.0 Total liabilities 616.3 Stockholders' equity 845.7   Shares outstanding

83.9

 

million shares

  Quarter ended Year-to-Date Jun. 30, 2015 Jun. 30, 2015   ($ in thousands) Shares repurchased Number of shares 516,533 622,591 Total cost $25,405 $30,004   Dividend paid Rate per share $0.43 $0.86 Total paid $36,240 $72,219   Capital returned to stockholders $61,645 $102,223       Unaudited Consolidated Statement of Income           (Amounts in thousands, except for per share data)   Six Months Ended   Jun-14   Jun-15   % Change   Operating Revenues: Investment management fees $381,661 $368,019 -3.6 % Underwriting and distribution fees 334,268 338,486 1.3 %   Shareholder service fees     75,121     72,943     -2.9 %   Total operating revenues     791,050     779,448     -1.5 % Operating Expenses: Underwriting and distribution 390,559 391,182 0.2 % Compensation and related costs 98,598 106,324 7.8 % General and administrative 50,939 53,575 5.2 % Subadvisory fees 3,946 4,781 21.2 %   Depreciation     6,790     8,098     19.3 %   Total operating expenses     550,832     563,960     2.4 % Operating Income 240,218 215,488 -10.3 % Investment and other income 10,000 3,981 -60.2 % Interest expense     (5,510 )   (5,531 )   0.4 % Income before taxes 244,708 213,938 -12.6 % Provision for taxes     86,856     79,380     -8.6 % Net Income     $157,852     $134,558     -14.8 % Net income per share, basic and diluted     1.86     1.61     -13.5 % Weighted average shares outstanding - basic and diluted     85,046     83,831         Operating margin     30.4%   27.6%             Net Distribution Cost Analysis           (Amounts in thousands) Six Months Ended Wholesale Channel Jun-14   Jun-15   % Change   U&D Revenues $119,801 $103,910 -13.3 % U&D Expenses - Direct (156,534 ) (135,542 ) -13.4 % U&D Expenses - Indirect (24,326 )   (28,001 )   15.1 % Net Distribution (Costs) ($61,059 )   ($59,633 )   -2.3 %   Advisors Channel U&D Revenues $214,467 $234,576 9.4 % U&D Expenses - Direct (151,564 ) (167,199 ) 10.3 % U&D Expenses - Indirect (58,135 )   (60,440 )   4.0 % Net Distribution Excess $4,768     $6,937     45.5 %             Changes in Assets Under Management Six Months Ended (Amounts in millions) Jun-14   Jun-15   % Change   Wholesale Channel     Beginning assets $67,055 $60,335 -10.0 % Sales* 11,881 7,110 -40.2 % Redemptions (7,925 ) (10,816 ) 36.5 % Net Exchanges (285 )   367     N/M Net flows 3,671 (3,339 ) -191.0 % Market action 945     549     -41.9 % Ending assets $71,671     $57,545     -19.7 %     Advisors Channel Beginning assets $43,667 $45,517 4.2 % Sales* 2,892 2,616 -9.5 % Redemptions (2,204 ) (2,558 ) 16.1 % Net Exchanges (200 )   (367 )   N/M Net flows 488 (309 ) -163.3 % Market action 1,642     739     -55.0 % Ending assets $45,797     $45,947     0.3 %   Institutional Channel Beginning assets $15,821 $17,798 12.5 % Sales* 2,747 1,504 -45.2 % Redemptions (1,530 ) (2,464 ) 61.0 % Net Exchanges 485     -     N/M Net flows 1,702 (960 ) -156.4 % Market action 642     376     -41.4 % Ending assets $18,165     $17,214     -5.2 %   Consolidated Total Beginning assets $126,543 $123,650 -2.3 % Sales* 17,520 11,230 -35.9 % Redemptions (11,659 ) (15,838 ) 35.8 % Net Exchanges -     -     N/M Net flows 5,861 (4,608 ) -178.6 % Market action 3,229     1,664     -48.5 % Ending assets $135,633     $120,706     -11.0 %     * Sales is primarily gross sales (net of sales commissions). This amount also includes net reinvested dividends & capital gains and investment income.  

Earnings Conference Call

Stockholders, members of the investment community and the general public are invited to listen to a live Web cast of our earnings release conference call today at 10:00 a.m. Eastern. During this call, Henry J. Herrmann, Chairman and CEO, will review our quarterly results. Live access to the teleconference will be available on the “Investor Relations” section of our Web site at www.waddell.com. A Web cast replay will be made available shortly after the conclusion of the call and accessible for seven days.

Web Site Resources

We invite you to visit the “Investor Relations” section of our Web site at www.waddell.com under the caption “Data Tables” to review supplemental information schedules.

About the Company

Waddell & Reed, Inc., founded in 1937, is one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors Group of Mutual Funds in 1940. Today, we distribute our investment products through the Waddell & Reed Wholesale channel (encompassing broker/dealer, retirement, and registered investment advisors), our Advisors channel (our network of financial advisors), and our Institutional channel (including defined benefit plans, pension plans and endowments, and our subadvisory partnership with Mackenzie in Canada).

Through its subsidiaries, Waddell & Reed Financial, Inc. provides investment management and financial planning services to clients throughout the United States and internationally. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios, while Ivy Investment Management Company serves as investment advisor to Ivy Funds and investment advisor and global distributor to the Selector Management Fund SICAV, an umbrella UCITS fund range domiciled in Luxembourg. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios, while Ivy Funds Distributor, Inc. serves as principal underwriter and distributor to Ivy Funds.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of such words as "may," "could," "should," "would," "believe," "anticipate," "forecast," "estimate," "expect," "intend," "plan," "project," "outlook," "will," "potential" and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2014, which include, without limitation:

• The loss of existing distribution channels or inability to access new distribution channels;
• A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;
• The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;
• The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;
• A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;
• The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
• Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;
• Our inability to attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment advisory business;
• A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and
• Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission, including the information in Item 1 "Business" and Item 1A "Risk Factors" of Part I and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part II to our Annual Report on Form 10-K for the year ended December 31, 2014 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2015. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150728005175/en/

Waddell & Reed Financial, Inc.Investor Contact:Nicole Russell, 913-236-1880VP, Investor Relationsnrussell@waddell.comorMutual Fund Investor Contact:Call (888) WADDELL, or visit www.waddell.com or www.ivyfunds.com.Past performance is no guarantee of future results. Please invest carefully.