News Column

Waddell & Reed Financial, Inc. Reports First Quarter Results

April 29, 2014

Operating revenues rose 23% year-over-year; operating margin 29.9%

Inflows of $4.7 billion represent annualized organic growth of 15%

OVERLAND PARK, Kan.--(BUSINESS WIRE)-- Waddell & Reed Financial, Inc. (NYSE: WDR) today reported first quarter net income of $74.9 million, or $0.88 per diluted share, compared to net income of $78.8 million, or $0.92 per diluted share during the previous quarter and net income of $53.9 million, or $0.63 per diluted share during the first quarter of 2013.

Operating revenues of $390.4 million rose 4% sequentially and 23% compared to the same period last year. Our operating margin was 29.9% during the quarter compared to 30.2% during the previous quarter and 26.2% during the first quarter of 2013.

Last year’s fourth quarter benefited from a record-high level of investment income due to strong investment gains and dividends and the related tax benefit from a capital loss carryforward. While non-operating in nature, these items added approximately $0.09 to diluted earnings per share to the fourth quarter’s results, compared to $0.03 in the current quarter.

Assets under management rose 4% during the quarter and ended March at a record $131.4 billion. Inflows of $4.7 billion accounted for the majority of the increase in asset levels, improving monthly throughout the quarter. Each of our distribution channels saw solid inflows during the quarter.

Business Discussion

“Our results once again showcase the strength and resiliency of our distribution model,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “We continue to gain market share. According to Strategic Insight, Waddell & Reed ranks 11th in net flows for stock/hybrid & bond fund managers year-to-date. This ranking compared favorably to last year when we ranked 20th.”

The Wholesale channel had $7.0 billion of new sales, a 14% increase compared to the previous quarter and a 39% improvement compared to the same period last year. Inflows of $3.6 billion represent an organic growth rate of 21%. Third-party distributors continue to turn to the Ivy Funds as an investment choice for their clients, as evidenced by the steady increase in sales as well as the growing span of strategies capturing solid daily volume. In all, seven investment strategies saw sales surpass the $100 million mark during the quarter, including three with sales in excess of $1 billion.

Our Advisors channel had record sales of $1.4 billion in the quarter, a 10% increase year-over-year. Inflows of $217 million also exceeded last year’s levels by 14%. The quarter brought continued improvement in productivity, reaching $60,900 per advisor during the quarter, a 21% gain compared to the same period last year. The channel maintains an industry-low redemption rate of 8.2%.

The Institutional channel experienced solid results. Sales of $1.55 billion were distributed across new mandates, expansion of existing mandates and ongoing sales into existing relationships. Inflows were $875 million, close to the record levels of last year’s fourth quarter.

Management Fee Revenue Analysis

Revenues rose 4% compared to the previous quarter and 27% compared to the same period in 2013, but in both instances at a rate that was slightly below the rate of increase in average assets under management. This difference was due to fewer days in the current period compared to the fourth quarter and a slightly lower effective fee rate. The effective fee rate during both the first and fourth quarters of 2013 was 59.5 basis points and during the first quarter of 2014 it was 59.2 basis points.

Underwriting and Distribution Analysis

Wholesale channel

The sequential increase in revenues was due to higher asset-based Rule 12b-1 fees. Direct costs rose on a combination of higher sales commissions and asset-based Rule 12b-1 fees paid to third party distributors. Higher sales volume also resulted in an increase in commissions paid to our wholesalers. Indirect costs were largely unchanged as an increase in compensation costs was offset by lower advertising costs.

Compared to the same period in 2013, revenues rose with higher levels of assets under management. Higher asset-based Rule 12b-1 fees paid to third party distributors accounted for approximately half of the increase in direct costs, while sales commissions paid to third party distributors and wholesalers accounted for the remainder. Indirect costs rose due to higher advertising and compensation costs.

Advisors channel

Sequentially, revenues increased with asset-based advisory fees, and to a lesser degree, Rule 12b-1 fees. This increase in revenues was partly offset by lower front-end load sales commissions. Direct costs increased as a percentage of revenues due to bonus adjustments in the fourth quarter and to a lesser degree, higher advisor payouts in the first quarter. Indirect costs increased slightly as higher IT costs and payroll taxes were largely offset by lower pension, group medical, and business meeting and travel costs.

Compared to the first quarter of 2013, the increase in revenues was largely due to higher advisory fees. Asset-based Rule 12b-1 fees and front-end load and other point-of-sale commissions also contributed to the increase in revenues. Direct costs rose slightly more than related revenues due to increased advisor payouts while IT costs contributed to the increased indirect costs.

Compensation and Related Expense Analysis

Costs declined sequentially due to lower incentive compensation, and to a lesser degree, lower equity compensation and pension costs. This decline was partly offset by annual merit increases and higher payroll taxes. Compared to the same period last year, costs rose due to higher base salaries and equity compensation and were partly offset by lower pension costs.

General and Administrative Expense Analysis

Sequentially, costs were largely unchanged as a decline in advertising costs was offset by small increases in costs across a number of different items, including IT, dealer services, fund expenses and consulting.

Year-over-year, costs increased with higher legal and consulting, dealer services, temporary office staff and IT costs.

Unaudited Balance Sheet Information        
Schedule of Selected ItemsQuarter ended
    March 31, 2014
(Amounts in millions)
Cash & cash equivalents (unrestricted) $520.7
Investment securities 199.9
Total assets1,348.4
Long-term debt 190.0
Total liabilities618.9
Stockholders' equity729.5
 
 
Quarter-to-DateYear-to-Date*
 
Shares granted - equity compensation 38,365 780,506
 
($ in thousands)
Shares repurchased
Number of shares 280,186 666,351
Total cost $17,675$47,008
 
Dividend paid
Rate per share $0.34$0.34
Total paid $28,986$28,986
 
Capital returned to stockholders$46,661$75,994
* Includes activity through April 2, 2014 (date of equity grant)
                     
Unaudited Consolidated Statement of Income                                    
(Amounts in thousands, except for per share data)     2013   2014
    1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Operating Revenues:
Investment management fees $ 148,445 $ 156,219 $ 165,559 $ 180,219 $ 188,037
Underwriting and distribution fees 135,419 141,597 146,863 158,940 165,267
  Shareholder service fees       32,691         33,890         34,667         35,845     37,112              
  Total operating revenues       316,555         331,706         347,089         375,004     390,416              
Operating Expenses:
Underwriting and distribution 161,571 164,844 169,046 181,252 194,951
Compensation and related costs 48,155 47,376 49,472 52,594 50,009
General and administrative 16,208 26,938 20,462 22,811 23,756
Subadvisory fees 4,484 4,291 1,667 1,778 1,877
  Depreciation       3,227         3,222         3,172         3,213     3,249              
  Total operating expenses       233,645         246,671         243,819         261,648     273,842              
Operating Income 82,910 85,035 103,270 113,356 116,574
Investment and other income 4,377 1,002 5,212 9,313 3,900
Interest expense       (2,854 )       (2,858 )       (2,832 )       (2,700 )   (2,755 )            
Income before taxes 84,433 83,179 105,650 119,969 117,719
Provision for taxes       30,570         31,222         37,231         41,210     42,855              
Net Income     $ 53,863       $ 51,957       $ 68,419       $ 78,759   $ 74,864              
Net income per diluted share       0.63         0.61         0.80         0.92     0.88              
Weighted average shares outstanding - diluted       85,593         85,869         85,603         85,294     85,019              
  Operating margin       26.2 %       25.6 %       29.8 %       30.2 %   29.9 %            
 
                               
Net Distribution Cost Analysis
(Amounts in thousands)                                            
Wholesale Channel1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
U&D Revenues $ 48,175 $ 49,846 $ 52,472 $ 56,926 $ 59,564
U&D Expenses - Direct (63,548 ) (64,694 ) (67,107 ) (72,698 ) (79,700 )
U&D Expenses - Indirect   (11,000 )       (11,229 )       (10,409 )       (11,285 )   (11,535 )                  
Net Distribution (Costs) $ (26,373 )     $ (26,077 )     $ (25,044 )     $ (27,057 ) $ (31,671 )                  
   
Advisors Channel
U&D Revenues $ 87,244 $ 91,751 $ 94,391 $ 102,014 $ 105,703
U&D Expenses - Direct (59,657 ) (62,794 ) (64,550 ) (69,023 ) (74,697 )
U&D Expenses - Indirect   (27,366 )       (26,127 )       (26,980 )       (28,246 )   (29,019 )                  

Net Distribution (Costs)/Excess

$ 221       $ 2,830       $ 2,861       $ 4,745   $ 1,987                    
 
       
Changes in Assets Under Management2013   2014
(Amounts in millions) 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
Wholesale Channel                        
Beginning assets $ 48,930 $ 53,254 $ 53,860 $ 59,661 $ 67,055
Sales* 5,042 5,030 5,191 6,148 7,017
Redemptions (3,157 ) (3,983 ) (3,723 ) (3,449 ) (3,562 )
Net Exchanges   66         61         83         91     112                    
Net flows 1,951 1,108 1,551 2,790 3,567
Market action   2,373         (502 )       4,250         4,604     (155 )                  
Ending assets $ 53,254       $ 53,860       $ 59,661       $ 67,055   $ 70,467                    
   
Advisors Channel
Beginning assets $ 35,660 $ 37,915 $ 38,172 $ 40,767 $ 43,667
Sales* 1,303 1,404 1,242 1,283 1,435
Redemptions (1,047 ) (1,083 ) (1,071 ) (1,104 ) (1,106 )
Net Exchanges   (66 )       (62 )       (83 )       (92 )   (112 )                  
Net flows 190 259 88 87 217
Market action   2,065         (2 )       2,507         2,813     340                    
Ending assets $ 37,915       $ 38,172       $ 40,767       $ 43,667   $ 44,224                    
 
Institutional Channel
Beginning assets $ 11,775 $ 12,626 $ 12,312 $ 13,316 $ 15,821
Sales* 430 379 386 1,913 1,554
Redemptions (469 ) (811 ) (550 ) (792 ) (679 )
Net Exchanges   0         0         0         0     0                    
Net flows (39 ) (432 ) (164 ) 1,121 875
Market action   890         118         1,168         1,384     (4 )                  
Ending assets $ 12,626       $ 12,312       $ 13,316       $ 15,821   $ 16,692                    
 
Consolidated Total
Beginning assets $ 96,365 $ 103,795 $ 104,344 $ 113,744 $ 126,543
Sales* 6,775 6,813 6,819 9,344 10,006
Redemptions (4,673 ) (5,877 ) (5,344 ) (5,345 ) (5,347 )
Net Exchanges   0         (1 )       0         (1 )   0                    
Net flows 2,102 935 1,475 3,998 4,659
Market action   5,328         (386 )       7,925         8,801     181                    
Ending assets $ 103,795       $ 104,344       $ 113,744       $ 126,543   $ 131,383                    
* Sales is primarily gross sales (net of sales commissions). This amount also includes
net reinvested dividends & capital gains and investment income.
                                                   
Supplemental Information2013     2014
1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
Channel highlights                        
Number of Wholesalers 50 50 49 50 60
Number of Advisors 1,717 1,734 1,784 1,746 1,737
Advisors' Productivity * 50.5 53.1 53.7 57.4 60.9
 
Redemption rates - long term assets
Wholesale 24.6% 29.4% 25.7% 21.7% 21.1%
Advisors 9.4% 9.1% 8.7% 8.5% 8.2%
Institutional 15.5% 25.5% 17.0% 21.6% 17.0%
Total 18.0% 21.7% 18.6% 17.1% 16.2%
 
Operating highlights
Organic growth/(decay) annualized 8.7% 3.6% 5.7% 14.1% 14.7%
Total assets under management (in Millions) 103,795 104,344 113,744 126,543 131,383
 
Diversification (Company Total)
As % of Sales
Asset Strategy 33.6% 28.5% 25.9% 27.6% 33.4%
Fixed Income 30.7% 30.4% 31.8% 24.4% 23.3%
Other 35.7% 41.1% 42.3% 48.0% 43.3%
As % of Assets Under Management
Asset Strategy 33.7% 33.4% 33.8% 34.3% 33.9%
Fixed Income 20.7% 19.9% 19.0% 18.1% 18.6%
Other 45.6% 46.7% 47.2% 47.6% 47.5%
 
Operating margin 26.2%     25.6%     29.8%     30.2%     29.9%                  
 
Lipper Fund Rankings     1 Year     3 Years     5 Years
  Funds ranked in top quartile 47%     30%     28%
Funds ranked in top half 67% 48% 46%
 
Assets ranked in top quartile 73% 64% 21%
Assets ranked in top half 83%     74%     43%
* Advisors' productivity is calculated by dividing U&D revenues for the Advisors channel
by the average number of advisors during the period.


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.

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. Waddell & Reed Investment Management Company serves as investment advisor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and Waddell & Reed InvestEd Portfolios, while Ivy Investment Management Company serves as investment advisor to Ivy Funds. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, Ivy Funds Variable Insurance Portfolios and Waddell & Reed 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 or on behalf of the Company 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, 2013, 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;
  • Our inability to provide sufficient capital to support new investment products;
  • The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
  • Our inability to implement new information technology and systems, or inability to complete such implementation in a timely or cost effective manner;
  • Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;
  • 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; and
  • Our inability to attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment advisory business.

    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, 2013 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2014.All forward-looking statements speak only as 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.




    Waddell & Reed Financial, Inc.

    Investor Contact:

    Nicole Russell, 913-236-1880

    VP, Investor Relations

    nrussell@waddell.com

    or

    Mutual Fund Investor Contact:

    888-WADDELL, or visit www.waddell.comor www.ivyfunds.com.


    Source: Waddell & Reed Financial, Inc.


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