Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter 2015 net income of $48.1 million, or $0.58 per diluted share, compared to net income of $67.4 million, or $0.80 per diluted share, during the previous quarter and net income of $74.6 million, or $0.89 per diluted share, during the third quarter of 2014.

The current quarter’s net income included unrealized losses on seed investments totaling $15.3 million ($0.18 per diluted share). The third quarter of 2014 included a non-cash impairment charge of $7.9 million ($5.0 million net of taxes, or $0.06 per diluted share) related to a subadvisory agreement.

Operating income of $109.0 million declined 2% sequentially and 13% compared to the third quarter of 2014. Sequentially, operating revenues fell by 5% while expenses fell by 6%, leading to a slight improvement in the operating margin to 29.0% in the current quarter compared to 28.2% in the second quarter. Compared to the same period last year, operating revenues declined by 8% and expenses declined 6%.

The current quarter’s effective tax rate was 46.2%, compared to 37.7% during the previous quarter and 38.4% during the same period last year. This quarter’s increase in the effective tax rate was mainly driven by unrealized investment losses in our seed investment portfolios for which no tax benefits were recognized.

Assets under management ended the quarter at $106 billion, down 12% from June 30, 2015. Market depreciation was responsible for more than 70% of the sequential decline in assets under management. Sales of $4.5 billion during the current quarter declined 23% sequentially. While sales decelerated across each distribution channel, the decline was most notable in our Institutional channel due to a strong second quarter, which included the funding of two new accounts. Net outflows of $4.2 billion during the current quarter were due principally to net outflows of $2.6 billion from our Asset Strategy funds and redemptions totaling $1.0 billion from an institutional account that moved from active core to a smart beta strategy.

“The underperformance of a few key strategies negatively impacted sales and obscured the underlying opportunities building across a broader number of funds. Volatility in the financial markets, the economic slowdown in China and uncertainty around the Federal Reserve’s rate decision has created considerable anxiety for investors,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “Our focus is on improving performance while protecting our clients’ assets through this period of extraordinary volatility. We remain committed both to careful cost control and the pursuit of key strategic initiatives, and will work hard to balance both.”

Management Fee Revenue Analysis

Management fees declined 6% sequentially due to lower average assets under management; however, this was modestly offset from one additional day in the current quarter. Compared to the same period last year, management fees declined 11% compared to a 14% decline in average assets under management. Management fees as a percentage declined less than average assets 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 60.5 basis points compared to 60.4 basis points and 59.0 basis points during the second quarter of 2015 and third quarter of 2014, respectively.

Underwriting and Distribution Analysis

Underwriting and Distribution Revenues

Revenues declined 4% sequentially due principally to a decline in asset-based Rule 12b-1 fees in our Wholesale channel. Our Advisors channel also contributed to the decrease in revenues through lower asset-based advisory fees, front-load commissions and Rule 12b-1 fees.

Compared to the same quarter in 2014, revenues declined 5% due to lower Rule 12b-1 fees in our Wholesale channel and were partly offset by higher asset-based advisory fees and front-load variable annuity sales commissions in our Advisors channel.

Underwriting and Distribution Costs

Costs declined 3% sequentially. Direct costs in both retail distribution channels declined along with revenues. Indirect costs in the Wholesale channel declined due to lower compensation and advertising expenses, while lower sales meeting costs were the primary driver in our Advisors channel.

Compared to the same period last year, costs declined 4%. Wholesale channel direct costs declined due to lower Rule 12b-1 fees and lower commission costs, while Advisor channel direct costs increased slightly more as a percentage of revenues. Indirect costs were largely unchanged.

Compensation and Related Expense Analysis

Costs declined 13% sequentially due principally to lower incentive compensation costs and, to a lesser degree, lower equity compensation costs and payroll taxes. Compared to the third quarter of 2014, costs declined 5% due to lower incentive and equity compensation costs, which were partially offset by an increase in base compensation and pension costs.

General and Administrative Expense Analysis

Costs declined 9% sequentially due primarily to lower IT costs. Compared to the third quarter of 2014, costs were largely unchanged as higher IT costs were offset by lower account servicing costs to third party dealers stemming from lower asset levels and lower temporary office services 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 $ 175,218 Underwriting and distribution fees 165,267 169,001 173,047 171,363 166,978 171,508 165,130 Shareholder service fees     37,112       38,009       38,728       37,130     36,375       36,568       35,761       Total operating revenues     390,416       400,634       409,558       397,151     385,458       393,990       376,109       Operating Expenses: Underwriting and distribution 194,951 195,608 197,246 195,522 195,420 195,762 189,065 Compensation and related costs 50,009 48,589 48,375 47,437 53,495 52,829 46,157 General and administrative 23,756 27,183 24,924 28,774 25,678 27,897 25,458 Subadvisory fees 1,877 2,069 2,203 2,287 2,387 2,394 2,305 Depreciation 3,249 3,541 3,786 4,058 4,034 4,064 4,117 Intangible asset impairment     -       -       7,900       -     -       -       -       Total operating expenses     273,842       276,990       284,434       278,078     281,014       282,946       267,102       Operating Income 116,574 123,644 125,124 119,073 104,444 111,044 109,007 Investment and other income/(loss) 3,900 6,100 (1,205 ) 7,995 3,972 9 (16,872 ) Interest expense     (2,755 )     (2,755 )     (2,769 )     (2,763 )   (2,766 )     (2,765 )     (2,765 )     Income before taxes 117,719 126,989 121,150 124,305 105,650 108,288 89,370 Provision for taxes     42,855       44,001       46,564       43,412     38,537       40,843       41,312       Net Income   $ 74,864     $ 82,988     $ 74,586     $ 80,893   $ 67,113     $ 67,445     $ 48,058       Net income per share, basic and diluted:     0.88       0.98       0.89       0.97     0.80       0.80       0.58       Weighted average shares outstanding - basic and diluted     85,019       85,073       84,242       83,623     83,581       84,079       83,469       Operating margin     29.9 %     30.9 %     30.6 %     30.0 %     27.1 %     28.2 %     29.0 %         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 $ 47,040 U&D Expenses - Direct (79,700 ) (76,834 ) (75,775 ) (70,150 ) (68,595 ) (66,947 ) (62,117 ) U&D Expenses - Indirect   (11,535 )     (12,791 )     (13,317 )     (14,032 )   (14,029 )     (13,972 )     (13,329 )     Net Distribution (Costs)   ($31,671 )     ($29,388 )     ($29,285 )     ($28,851 )   ($30,482 )     ($29,151 )     ($28,406 )       Advisors Channel U&D Revenues $ 105,703 $ 108,764 $ 113,240 $ 116,032 $ 114,836 $ 119,740 $ 118,090 U&D Expenses - Direct (74,697 ) (76,867 ) (79,700 ) (82,231 ) (82,022 ) (85,177 ) (84,420 ) U&D Expenses - Indirect   (29,019 )     (29,116 )     (28,454 )     (29,109 )   (30,774 )     (29,666 )     (29,199 )     Net Distribution Excess $ 1,987     $ 2,781     $ 5,086     $ 4,692     $ 2,040     $ 4,897     $ 4,471                 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 $ 57,545 Sales* 7,017 4,864 4,269 2,383 3,870 3,239 2,768 Redemptions (3,562 ) (4,363 ) (7,008 ) (8,592 ) (6,259 ) (4,558 ) (5,569 ) Net Exchanges   112       (397 )     112       74     224       144       265       Net flows 3,567 104 (2,627 ) (6,135 ) (2,165 ) (1,175 ) (2,536 ) Market action   (155 )     1,100       (2,669 )     95     1,242       (692 )     (5,689 )     Ending assets $ 70,467     $ 71,671     $ 66,375     $ 60,335   $ 59,412     $ 57,545     $ 49,320         Advisors Channel Beginning assets $ 43,667 $ 44,224 $ 45,797 $ 44,908 $ 45,517 $ 46,385 $ 45,947 Sales* 1,435 1,457 1,322 1,332 1,270 1,347 1,238 Redemptions (1,106 ) (1,098 ) (1,146 ) (1,224 ) (1,279 ) (1,279 ) (1,242 ) Net Exchanges   (112 )     (88 )     (112 )     (74 )   (224 )     (144 )     (265 )     Net flows 217 271 64 34 (233 ) (76 ) (269 ) Market action   340       1,302       (953 )     575     1,101       (362 )     (3,463 )     Ending assets $ 44,224     $ 45,797     $ 44,908     $ 45,517   $ 46,385     $ 45,947     $ 42,215         Institutional Channel Beginning assets $ 15,821 $ 16,692 $ 18,165 $ 17,603 $ 17,798 $ 17,097 $ 17,214 Sales* 1,554 1,193 328 317 300 1,203 465 Redemptions (679 ) (851 ) (727 ) (663 ) (1,460 ) (1,003 ) (1,817 ) Net Exchanges   -       485       -       -     -       -       -       Net flows 875 827 (399 ) (346 ) (1,160 ) 200 (1,352 ) Market action   (4 )     646       (163 )     541     459       (83 )     (1,205 )     Ending assets $ 16,692     $ 18,165     $ 17,603     $ 17,798   $ 17,097     $ 17,214     $ 14,657         Consolidated Total Beginning assets $ 126,543 $ 131,383 $ 135,633 $ 128,886 $ 123,650 $ 122,894 $ 120,706 Sales* 10,006 7,514 5,919 4,032 5,440 5,789 4,471 Redemptions (5,347 ) (6,312 ) (8,881 ) (10,479 ) (8,998 ) (6,840 ) (8,628 ) Net Exchanges   -       -       -       -     -       -       -       Net flows 4,659 1,202 (2,962 ) (6,447 ) (3,558 ) (1,051 ) (4,157 ) Market action   181       3,048       (3,785 )     1,211     2,802       (1,137 )     (10,357 )     Ending assets $ 131,383     $ 135,633     $ 128,886     $ 123,650     $ 122,894     $ 120,706     $ 106,192        

* 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 61 Number of Advisors 1,737 1,740 1,759 1,766 1,745 1,780 1,795 Advisors' Productivity * 60.9 62.4 64.6 65.7 65.9 67.9 66.3   Redemption rates - long term assets Wholesale 21.1 % 25.1 % 40.3 % 53.8 % 42.9 % 31.0 % 41.2 % Advisors 8.2 % 7.9 % 8.2 % 8.9 % 9.0 % 9.0 % 8.9 % Institutional 17.0 % 19.9 % 16.1 % 14.7 % 33.7 % 23.2 % 45.4 % Total 16.2 % 18.7 % 26.1 % 32.4 % 29.0 % 21.7 % 29.3 %   Operating highlights Organic growth/(decay) annualized 14.7 % 3.7 % -8.7 % -20.0 % -11.5 % -3.4 % -13.8 % Total assets under management (in millions) 131,383 135,633 128,886 123,650 122,894 120,706 106,192   Diversification (Company Total) As % of Sales Asset Strategy 33.4 % 26.3 % 24.9 % 4.2 % 17.1 % 12.5 % 12.5 % Fixed Income 23.3 % 25.4 % 28.8 % 28.1 % 23.8 % 16.8 % 18.9 % Other 43.3 % 48.3 % 46.3 % 67.7 % 59.1 % 70.7 % 68.6 % As % of Assets Under Management Asset Strategy 33.9 % 32.9 % 32.0 % 28.8 % 27.0 % 25.7 % 23.7 % Fixed Income 18.6 % 18.7 % 18.2 % 17.8 % 17.7 % 17.5 % 18.7 % Other 47.5 % 48.4 % 49.8 % 53.4 % 55.3 % 56.8 % 57.6 %   Operating margin 29.9 %   30.9 %   30.6 %   30.0 %   27.1 %   28.2 %   29.0 %               Lipper Fund Rankings 1 Year   3 Years   5 Years Funds ranked in top quartile 21 % 36 % 22 % Funds ranked in top half 48 % 64 % 52 %   Assets ranked in top quartile 10 % 51 % 34 % Assets ranked in top half 27 %   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 Sept. 30, 2015 (Amounts in millions) Cash & cash equivalents (unrestricted) $ 612.7 Investment securities 219.4 Total assets 1,442.8 Long-term debt 190.0 Total liabilities 605.9 Stockholders' equity 836.9   Shares outstanding

83.1

million shares

  Quarter ended Year-to-Date Sept. 30, 2015 Sept. 30, 2015   ($ in thousands) Shares repurchased Number of shares 812,764 1,435,355 Total cost $ 33,274 $ 63,277   Dividend paid Rate per share $ 0.43 $ 1.29 Total paid $ 36,030 $ 108,249   Capital returned to stockholders $ 69,304 $ 171,526   Unaudited Consolidated Statement of Income             (Amounts in thousands, except for per share data) Nine Months Ended Sep-14   Sep-15   % Change Operating Revenues:     Investment management fees $579,444 $543,237 -6.2% Underwriting and distribution fees 507,315 503,616 -0.7% Shareholder service fees   113,849   108,704   -4.5% Total operating revenues   1,200,608   1,155,557   -3.8% Operating Expenses: Underwriting and distribution 587,805 580,247 -1.3% Compensation and related costs 146,973 152,481 3.7% General and administrative 75,863 79,033 4.2% Subadvisory fees 6,149 7,086 15.2% Depreciation 10,576 12,215 15.5% Intangible asset impairment   7,900   -   N/A Total operating expenses   835,266   831,062   -0.5% Operating Income 365,342 324,495 -11.2% Investment and other income 8,795 (12,891) -246.6% Interest expense   (8,279)   (8,296)   0.2% Income before taxes 365,858 303,308 -17.1% Provision for taxes   133,420   120,692   -9.5% Net Income   $232,438   $182,616   -21.4% Net income per share, basic and diluted   2.74   2.18   -20.4% Weighted average shares outstanding - basic and diluted   84,775   83,709     Operating margin   30.4%   28.1%       Net Distribution Cost Analysis                     (Amounts in thousands) Nine Months Ended Wholesale Channel Sep-14       Sep-15       % Change   U&D Revenues $ 179,608       $ 150,950       -16.0 % U&D Expenses - Direct (232,309 ) (197,659 ) -14.9 % U&D Expenses - Indirect   (37,643 )         (41,330 )       9.8 % Net Distribution (Costs)   ($90,344 )         ($88,039 )       -2.6 %   Advisors Channel U&D Revenues $ 327,707 $ 352,666 7.6 % U&D Expenses - Direct (231,264 ) (251,619 ) 8.8 % U&D Expenses - Indirect   (86,589 )         (89,639 )       3.5 % Net Distribution Excess $ 9,854         $ 11,408         15.8 %       Changes in Assets Under Management Nine Months Ended (Amounts in millions) Sep-14   Sep-15   % Change Wholesale Channel     Beginning assets $ 67,055 $ 60,335 -10.0 % Sales* 16,150 9,877 -38.8 % Redemptions (14,933 ) (16,386 ) 9.7 % Net Exchanges   (173 )     633     N/M   Net flows 1,044 (5,876 ) -662.8 % Market action   (1,724 )     (5,139 )   -198.1 % Ending assets $ 66,375     $ 49,320     -25.7 %   Advisors Channel Beginning assets $ 43,667 $ 45,517 4.2 % Sales* 4,214 3,856 -8.5 % Redemptions (3,350 ) (3,800 ) 13.4 % Net Exchanges   (312 )     (633 )   N/M   Net flows 552 (577 ) -204.5 % Market action   689       (2,725 )   N/M   Ending assets $ 44,908     $ 42,215     -6.0 %   Institutional Channel Beginning assets $ 15,821 $ 17,798 12.5 % Sales* 3,075 1,968 -36.0 % Redemptions (2,257 ) (4,280 ) 89.6 % Net Exchanges   485       -     N/M   Net flows 1,303 (2,312 ) -277.4 % Market action   479       (829 )   N/M   Ending assets $ 17,603     $ 14,657     -16.7 %   Consolidated Total Beginning assets $ 126,543 $ 123,650 -2.3 % Sales* 23,439 15,701 -33.0 % Redemptions (20,540 ) (24,466 ) 19.1 % Net Exchanges   -       -     N/M   Net flows 2,899 (8,765 ) -402.3 % Market action   (556 )     (8,693 )   N/M   Ending assets $ 128,886     $ 106,192     -17.6 %  

* 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.

Contacts

 

Investor Contact:

Nicole Russell, VP, Investor Relations, (913) 236-1880, nrussell@waddell.com

 

Mutual 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.  

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 Ivy Global Investors 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.

Waddell & Reed Financial, Inc.Investor Contact:Nicole Russell, 913-236-1880VP, Investor Relationsnrussell@waddell.comorMutual Fund Investor Contact:888-WADDELLwww.waddell.comwww.ivyfunds.com

Waddell and Reed Financial (NYSE:WDR)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Waddell and Reed Financial Charts.
Waddell and Reed Financial (NYSE:WDR)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Waddell and Reed Financial Charts.