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