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.
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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.
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