Waddell & Reed Financial Inc. (
Q3 2010 Earnings Call
October 26, 2010 10:00 am ET
Hank Herrmann - Chairman & CEO
Tom Butch - EVP & CMO
Dan Connealy - SVP & CFO
Michael Strohm - SVP & COO
Robert Lee - KBW
Cynthia Mayer - Banc of America
Jeff Hopson - Stifel Nicolaus
Roger Freeman - Barclays Capital
Bill Katz - Citigroup
Craig Siegenthaler - Credit Suisse
Michael Kim - Sandler O’Neil
Marc Irizarry - Goldman Sachs
Mac Sykes - Gabelli & Co.
Previous Statements by WDR
» Waddell & Reed Financial Inc. Q2 2010 Earnings Call Transcript
» Waddell & Reed Financial, Inc. Q1 2010 Earnings Call Transcript
» Waddell & Reed Financial Inc. Q3 2009 Earnings Call Transcript
» Waddell & Reed Financial, Inc. Q1 2009 Earnings Call Transcript
Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Waddell & Reed Financial third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the conference over to Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed. Please go ahead sir.
Thank you, Stephanie. Good morning, with me today are Tom Butch, our Chief Marketing Officer; Mike Strohm, our Chief Operations Officer; Dan Connealy, our Chief Financial Officer; and Mike Avery, our Chief Investment Officer; and Nicole McIntosh, our AVP of Investor Relations. Nicole would you read the forward-looking statements please?
During this call some of our comments and responses will include forward-looking statements. While we believe these statements to be reasonable based on information that is currently available to us, actual results could actually materially differ from those expressed or implied due to a number of factors including but not limited to those referenced in our public filings with the Securities and Exchange Commission. We assume no duty to update any forward-looking statements. Materials relevant to today’s call, including a copy of today’s press release as well as supplemental schedule has been posted on our website at waddell.com under the Investor Relations tag.
Thank you, Nicole. Earlier today we announced our company’s results of the third quarter. I would like to highlight a few points. Assets under management reached an all time record high of $76 billion, and have continued to rise in October and currently are just a touch under $79 billion. Net income of $40.5 million in earnings per deluded share of $0.47 increased on both a sequential and year-over-year quarterly basis. The positive impact of tax benefit investment gains recorded during the quarter complicated comparisons with net income and earnings per share versus other periods.
Our operating results provide a better basis of comparison for our core business. Compared to last’s year’s third quarter, our operating margin expanded a 110 basis points primarily on higher levels of assets under management which provided both top line growth and distributional leverage. Sequentially, our operating margin fell 70 basis points as flat average assets did not fully offset higher compensation costs associated with retirement of a portfolio manager, and an increase in incentive compensation for semi-annual analyst bonus.
We believe we are more than holding our own in a challenging environment. Let me make a few points. First, the industry as you know has experienced significant headwinds with equity outflows for quite some time. By contrast, Waddell & Reed experienced equity inflows in the second quarter, and very modest equity outflows during the third quarter. Year-to-date we have had an annualized organic growth rate of 5.5% in equities compared to an estimated two tenths of a percent for the industry.
Second, our efforts to build subadvisory businesses within the institutional channel are going quite well and contributed nearly $800 million in sales during the quarter. Our subadvisory partnerships have created access to a broader client base since each partner is a significant distributor on its own. By the end of September, our institutional business had surpassed its previous annual best gross sales level.
Finally, monthly sales in the wholesale channel have increased each month sequentially throughout the quarter, and October has improved further. Our advisor channel continues to provide steady sales and exceptional asset retention.
Like many of our peers we have experienced lower sales during the quarter as investors remain particularly risk adverse. By September sales had meaningfully improved over the summer levels, and October volume has seen further improvement. Our solid performance restricted investment process and wide aggressive products positions us, we believe well for the future.
Operator at this time I would like to open the call for questions.
(Operator Instructions) Your first question comes from the line of Robert Lee with KBW.
Robert Lee - KBW
Hank, maybe I'd like to talk to your institutional channel if it is possible. You mentioned success you’ve had in the subadvisory businesses. It is possible just to get a feel for, if you look at the strong sales this past quarter, what proportion of that was subadvised mandate wins where big chunk of assets moves over? And what proportion of that may have been kind of what I would characterize maybe as more as recurring flow that for a mandate you've already had it in place and now you are seeing the aftermath of continued sales.
I don’t have the exact number off the top of my head Rob, but I would say the majority is flow related. There might have been one big platform move, but when you look in the aggregate relative to the $800 plus million it is a very high percentage that just flows.
Robert Lee - KBW
I know you did provide some color on monthly sales trends within the wholesale channel but just generally speaking since the flash crash report came out, and obviously Waddell's name has been in the press again close to that. I mean what kind of impact of foreline have you seen, have you seen any? Has it been kind of localized maybe to adjust the asset strategy fund? I mean how would you characterize any fall on that from that?