Waddell & Reed Financial, Inc. Reports Second Quarter Results

Waddell & Reed Financial, Inc. (NYSE: WDR) today reported second quarter net income of $41.7 million, or $0.48 per diluted share, compared to net income of $47.4 million, or $0.55 per diluted share, during the first quarter of 2012 and net income of $50.0 million, or $0.58 per diluted share, during the same period last year.

The second quarter of 2012 included a pre-tax charge of $5.0 million ($3.1 million net of taxes, or $0.04 per diluted share) to general and administrative expenses to reflect an impairment of certain capitalized software development costs. Our ongoing assessment and changes to our enterprise information technology infrastructure and software resulted in the decision to discontinue the usage of certain capitalized software. Excluding the charge discussed above, general and administrative costs during the quarter would have been $20.0 million, net income $44.9 million, and earnings per diluted share $0.52. We believe supplementing our discussion with these non-GAAP measures provides a more meaningful comparison to other periods. A detailed reconciliation of non-GAAP measures to reported GAAP numbers is included in the table below.

Reconciliation to GAAP Unaudited Condensed Statement of Income
  As reported     Adjusted
(Amounts in thousands, except for per share data) (GAAP) Adjustments (Non-GAAP)
Total Operating Revenues $ 308,208 $ - $ 308,208
 
Operating Expenses:
General and administrative 25,095 (5,047 ) 20,048
All other operating expenses     214,641       -       214,641  
Total Operating Expenses     239,736       (5,047 )     234,689  
 
Operating Income 68,472 5,047 73,519
 
Non-operating income (expenses)     (1,553 )     -       (1,553 )
 
Income before provision for income taxes 66,919 5,047 71,966
Provision for income taxes     25,201       1,903       27,104  
Net Income     41,718       3,144       44,862  
 
Net income per share     0.48       0.04       0.52  
             
Weighted average shares outstanding - diluted     86,095       86,095       86,095  
 
Operating margin 22.2 % N/A 23.9 %
 

Operating revenues of $308 million rose 0.5% sequentially, while operating income of $68.5 million declined 5.8%. Excluding the charge for the write-off (discussed above), operating income would have been $73.5 million, an improvement of 1.2% compared to the first quarter. Our operating margin was 22.2% for the quarter. Excluding the charge for the write-off (discussed above), our adjusted operating margin during the quarter was 23.9%, a 20 basis point improvement compared to the previous quarter.

Assets under management ended the quarter at $89 billion, or 5% below their high-water mark set at the end of the first quarter of 2012, as negative market action more than offset net inflows of $376 million during the quarter.

Business Discussion

Management commentary

“Our broad product set and balanced distribution model has once again proven beneficial to our shareholders,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “Our fixed income products continue to be well received by investors who remain careful and avoid equities. Our financial advisors remain focused on promoting the benefits of long term goals and keeping their clients invested.”

Advisors channel

The stability of our Advisors channel across various market backdrops remains an important asset for us. In an environment of volatility and investor caution, we continued to generate organic growth, and to maintain a good balance of sales among distribution channels and products. Net inflows were $183 million compared to inflows of $158 million during the previous quarter and inflows of $25 million during the second quarter of 2011. The channel’s redemption rate of 9.1% for the current quarter remains well below the industry’s average of approximately 25%.

Advisor productivity continued to increase, due in large part to our success with asset-allocation products. Investors continue to favor fee-based solutions over point-of-sale commission-based sales. Our financial advisors have been able to provide their clients with competitive solutions using our Managed Allocation Portfolio (MAP) suite of products.

Wholesale channel

Sales during the quarter were $3.9 billion, a decline of 13% compared to the previous quarter and 8% compared to the same period last year. Inflows were $626 million during the current quarter, compared to $970 million during the previous quarter and $1.8 billion during the second quarter of 2011. The uncertainty surrounding both the global financial crisis and geopolitical landscape continues to adversely affect investor behavior. Our broad product lineup affords an array of solutions ranging from fixed income to specialty equity funds. A number of strategies are seeing meaningful daily sales with approximately a third of sales generated by Asset Strategy and a third by fixed income products.

Institutional channel

Sales of $567 million declined 13% sequentially, but increased 2% compared to the same period last year. The quarter saw net outflows of $433 million, negatively impacted by the redemption of approximately $300 million from one account’s decision to reallocate their portfolio away from traditional asset class allocations. The current quarter’s outflows compare to inflows of $175 million during the previous quarter and outflows of $125 million during the second quarter of 2011.

Management Fee Revenue Analysis

During the current quarter, average assets under management were $90.2 billion, unchanged sequentially and down 0.6% compared to the same quarter last year.

Compared to the previous quarter, revenues fell 0.5%; compared to the same period last year, revenues declined 3%. Fee revenues declined at a greater rate than average assets under management due primarily to a mix-shift to lower fee products. The effective fee rate for the current quarter was 59.9 basis points, compared to 60.2 basis points and 61.4 basis points in the first quarter of 2012 and second quarter of 2011, respectively.

Underwriting and Distribution Revenue and Expense Analysis

Advisors channel

The increase in revenues compared to the first quarter is due in large part to higher asset allocation fees as these products continue to account for an increasingly larger percentage of assets. Higher sales commission revenues from variable annuity products also contributed to the increase in revenues. Direct expenses rose in correlation with associated revenues, while indirect expenses remained largely unchanged.

Compared to the second quarter of 2011, revenues increased with higher asset allocation fees. This increase was partly offset by lower sales commissions from variable annuity products, and to a lesser degree, lower financial planning fees. Direct expenses grew with associated revenues. Indirect expenses increased due to higher field office expenses associated with our electronic books and records initiative.

Wholesale channel

Sequentially, revenues and direct expenses remain relatively unchanged. The increase in indirect expenses is largely due to higher marketing and support costs.

Compared to the same period last year, revenues declined with lower asset-based fees. Direct expenses fell in correlation with associated revenues while indirect costs rose in large part due to higher advertising and compensation costs.

Compensation and Related Expense Analysis

Lower earnings on portfolio manager deferred compensation plans, and to a lesser degree, lower payroll taxes, contributed to the sequential decline in costs. The first quarter included severance charges and an incentive compensation adjustment, which also contributed to the sequential drop in costs.

Compared to the second quarter of 2011, costs rose due to higher salary and related costs, and were partly offset by lower incentive compensation costs in the current year.

General and Administrative Expense Analysis

Excluding the $5.0 million charge to write-off software capitalization costs, the slight increase in costs compared to the first quarter is due to higher advertising expenses as our programs resumed during the second quarter. Compared with the second quarter of 2011, costs remained largely unchanged excluding the above mentioned charge.

Subadvisory Fees

Expenses declined 17% sequentially and 37% compared to the same period last year due to lower levels of subadvised assets under management. Subadvised average assets under management were $5.0 billion in the current quarter, compared to $6.1 billion during the previous quarter and $8.2 billion during the second quarter of 2011.

Investment and Other Income/Loss

Investment and other income declined in both the sequential and year-over-year comparative periods due to lower gains recognized on the sale of available-for-sale securities and in our mutual fund trading portfolios.

Balance Sheet Information

As of June 30, 2012, cash and cash equivalents and investment securities were $505 million. Long-term debt was $190 million and there was no short-term debt outstanding.

Stockholders’ equity was $572 million and there were 85.8 million shares outstanding. During the quarter, we repurchased 945 thousand shares on the open market or privately at an aggregate cost of $29 million.

             
Unaudited Consolidated Statement of Income                          
(Amounts in thousands, except for per share data) 2011   2012
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.   1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Operating Revenues:  
Investment management fees $ 131,644 $ 138,985 $ 133,494 $ 126,476 $ 134,900 $ 134,213
Underwriting and distribution fees 132,763 137,354 131,001 131,575 137,490 139,944
Shareholder service fees     32,167       33,606       33,254       32,858       34,228       34,051          
Total operating revenues     296,574       309,945       297,749       290,909       306,618       308,208          
Operating Expenses:
Underwriting and distribution 152,004 157,219 151,936 154,872 159,475 163,032
Compensation and related costs 40,475 42,092 37,052 41,782 45,402 42,973
General and administrative 17,631 19,500 22,491 20,911 19,325 25,095
Subadvisory fees 8,080 8,313 7,291 6,201 6,271 5,208
Depreciation     3,604       3,842       3,980       3,809       3,472       3,428          
Total operating expenses     221,794       230,966       222,750       227,575       233,945       239,736          
Operating Income 74,780 78,979 74,999 63,334 72,673 68,472
Investment and other income/(loss) 1,003 2,452 (4,365 ) 2,959 4,056 1,272
Interest expense     (2,900 )     (2,835 )     (2,838 )     (2,840 )     (2,827 )     (2,825 )        
Income before taxes 72,883 78,596 67,796 63,453 73,902 66,919
Provision for taxes     27,250       28,626       27,962       23,431       26,515       25,201          
Net Income $ 45,633 $ 49,970 $ 39,834 $ 40,022 $ 47,387 $ 41,718
Net income per share     0.53       0.58       0.46       0.47       0.55       0.48          
Weighted average shares outstanding - diluted     85,836       86,275       85,782       85,286       85,606       86,095          
Operating margin     25.2 %     25.5 %     25.2 %     21.8 %     23.7 %     22.2 %        
 
 
Underwriting and Distribution                              
(Amounts in thousands) 2011   2012
Advisors Channel 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.   1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Revenues $ 72,555 $ 74,018 $ 70,088 $ 73,416 $ 76,680 $ 79,779
Expenses
Direct 50,872 52,422 49,748 51,316 53,676 55,813
Indirect   22,791       23,724       24,761       26,138       26,367       26,755          
Total expenses $ 73,663     $ 76,146     $ 74,509     $ 77,454     $ 80,043     $ 82,568          
Wholesale Channel
Revenues $ 60,208 $ 63,336 $ 60,913 $ 58,159 $ 60,810 $ 60,165
Expenses
Direct 66,591 69,376 65,526 64,199 65,837 66,142
Indirect   11,750       11,697       11,901       13,219       13,595       14,322          
Total expenses $ 78,341     $ 81,073     $ 77,427     $ 77,418     $ 79,432     $ 80,464          
Total
Revenues $ 132,763 $ 137,354 $ 131,001 $ 131,575 $ 137,490 $ 139,944
Expenses
Direct 117,463 121,798 115,274 115,515 119,513 121,955
Indirect   34,541       35,421       36,662       39,357       39,962       41,077          
Total expenses $ 152,004     $ 157,219     $ 151,936     $ 154,872     $ 159,475     $ 163,032          
Margin   -14.5 %     -14.5 %     -16.0 %     -17.7 %     -16.0 %     -16.5 %        
 
Changes in Assets Under Management                                
(Amounts in millions) 2011   2012
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.   1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Advisors Channel              
Beginning assets $ 33,181 $ 34,922 $ 34,843 $ 29,760 $ 31,709 $ 35,073
Sales (net of commissions) 1,064 1,011 867 858 1,030 1,046
Redemptions   (990 )     (1,059 )     (1,004 )     (994 )     (1,042 )     (961 )        
Net sales 74 (48 ) (137 ) (136 ) (12 ) 85
Net exchanges (62 ) (55 ) (79 ) (66 ) 103 (49 )
Reinvested dividends & capital gains   54       128       83       88       67       147          
Net flows 66 25 (133 ) (114 ) 158 183
Market action   1,675       (104 )     (4,950 )     2,063       3,206       (1,410 )        
Ending assets $ 34,922     $ 34,843     $ 29,760     $ 31,709     $ 35,073     $ 33,846          
 
Wholesale Channel
Beginning assets $ 40,883 $ 44,742 $ 46,558 $ 38,138 $ 40,954 $ 46,738
Sales (net of commissions) 4,719 4,211 3,957 3,707 4,433 3,864
Redemptions   (3,162 )     (2,566 )     (3,515 )     (3,752 )     (3,446 )     (3,535 )        
Net sales 1,557 1,645 442 (45 ) 987 329
Net exchanges 62 55 79 65 (104 ) 48
Reinvested dividends & capital gains   0       117       29       133       87       249          
Net flows 1,619 1,817 550 153 970 626
Market action   2,240       (1 )     (8,970 )     2,663       4,814       (2,985 )        
Ending assets $ 44,742     $ 46,558     $ 38,138     $ 40,954     $ 46,738     $ 44,379          
 
Institutional Channel
Beginning assets $ 9,609 $ 10,407 $ 10,346 $ 9,558 $ 10,494 $ 11,981
Sales (net of commissions) 776 556 1,625 456 652 567
Redemptions   (530 )     (709 )     (737 )     (503 )     (507 )     (1,058 )        
Net sales 246 (153 ) 888 (47 ) 145 (491 )
Net exchanges 0 0 0 0 0 0
Reinvested dividends & capital gains   16       28       18       50       30       58          
Net flows 262 (125 ) 906 3 175 (433 )
Market action   536       64       (1,694 )     933       1,312       (654 )        
Ending assets $ 10,407     $ 10,346     $ 9,558     $ 10,494     $ 11,981     $ 10,894          
 
Consolidated Total
Beginning assets $ 83,673 $ 90,071 $ 91,747 $ 77,456 $ 83,157 $ 93,792
Sales (net of commissions) 6,559 5,778 6,449 5,021 6,115 5,477
Redemptions   (4,682 )     (4,334 )     (5,256 )     (5,249 )     (4,995 )     (5,554 )        
Net sales 1,877 1,444 1,193 (228 ) 1,120 (77 )
Net exchanges 0 0 0 (1 ) (1 ) (1 )
Reinvested dividends & capital gains   70       273       130       271       184       454          
Net flows 1,947 1,717 1,323 42 1,303 376
Market action   4,451       (41 )     (15,614 )     5,659       9,332       (5,049 )        
Ending assets $ 90,071     $ 91,747     $ 77,456     $ 83,157     $ 93,792     $ 89,119          
 
                               
Supplemental Information 2011   2012
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.   1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Redemption rates - long term assets              
Advisors 9.6 % 10.1 % 10.0 % 10.4 % 10.1 % 9.1 %
Wholesale 29.7 % 22.3 % 31.0 % 35.7 % 30.7 % 31.5 %
Institutional 21.3 % 27.1 % 27.8 % 19.0 % 18.2 % 37.3 %
Total 21.0 % 18.2 % 22.9 % 24.1 % 21.5 % 23.9 %
 
Gross Revenue per advisor (000s) 39.2 40.2 37.6 38.7 40.3 42.2
 
Number of advisors 1,732 1,751 1,758 1,816 1,778 1,764
 
Number of shareholder accounts (000s) 3,988 4,087 4,118 4,155 4,082 4,139
 
Number of shareholders (000s) 803     819     827     825     832     824          
 
Fund Rankings        
Lipper            
Equity funds 1 Year     3 Years   5 Years
Top quartile 22 % 26 % 48 %
Top half 43 % 48 % 75 %
 
Equity assets
Top quartile 11 % 15 % 78 %
Top half 27 % 25 % 87 %
 
Fixed income funds
Top quartile 47 % 35 % 60 %
Top half 58 % 53 % 67 %
 
Fixed income assets
Top quartile 62 % 47 % 65 %
Top half 68 % 60 % 75 %
 
All funds
Top quartile 29 % 28 % 51 %
Top half 47 % 49 % 73 %
 
All assets
Top quartile 23 % 23 % 75 %
Top half 36 % 33 % 85 %
 
MorningStar
% of funds with 4 or 5 stars
Equity funds 44 % 12 % 53 %
All funds 38 % 9 % 53 %
 
% of assets with 4 or 5 stars
Equity assets 29 % 3 % 34 %
All assets 31 % 3 % 42 %
 

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, July 26 th at 11:00 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 Advisors channel (our network of financial advisors), our Wholesale channel (encompassing broker/dealer, retirement, registered investment advisors as well as the activities of our Legend subsidiary), 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, 2011, which include, without limitation:
  • 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;
  • 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 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;
  • 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 hire and retain senior executive management and other key personnel.

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, 2011 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2012. 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.

Copyright Business Wire 2010

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