Waddell & Reed Financial, Inc. (NYSE: WDR) today reported
first quarter 2018 net income1 of $46.3 million, or $0.56 per
diluted share, compared to net income of $29.8 million, or $0.36
per diluted share, during the prior quarter and net income of $33.9
million, or $0.40 per diluted share, during the first quarter of
2017.
Revenues of $297.6 million during the quarter increased 1%
sequentially and 4% compared to the first quarter of 2017.
Operating expenses of $237.7 million during the quarter increased
2% sequentially and 2% compared to the same quarter in 2017. The
operating margin was 20.1% during the current quarter, compared to
21.0% and 18.5% during the fourth and first quarters of 2017,
respectively.
Assets under management ended the quarter at $80.2 billion,
declining 1% compared to the prior quarter and 1% compared to the
first quarter of 2017. Gross sales increased 40% compared to the
fourth quarter of 2017 and 30% compared to the first quarter of
2017, while redemptions improved. Net outflows were $1.5 billion
during the current quarter, compared to net outflows of $2.7
billion during the prior quarter and net outflows of $3.4 billion
during the comparable quarter in 2017.
Broker-dealer assets under administration ended the quarter at
$56.3 billion, declining less than 1% compared to the fourth
quarter of 2017 and increasing 5% compared to the same quarter in
2017. Average trailing twelve-month productivity increased to $285
thousand per advisor during the first quarter of 2018 compared to
$256 thousand and $230 thousand during the fourth and first
quarters of 2017, respectively.
“Over the last 18 months, we have made solid progress in
transitioning our business model to one that better positions us
for the future,” said Philip J. Sanders, Chief Executive Officer of
Waddell & Reed Financial, Inc. “We have made headway on a
number of corporate initiatives, including improving investment
performance, which we know is key to our long-term success.”
Effective January 1, 2018, we elected to change our accounting
policy on how we report indirect underwriting and distribution
expenses in the underwriting and distribution caption and certain
expenses historically reported as general and administrative. The
change in presentation of certain line items in our consolidated
statements of income is intended to improve the transparency of our
financial statements. Separately, we adopted Accounting Standards
Update (“ASU”) 2017-07, “Compensation Retirement Benefits (Topic
715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost”, which reclassifies net
periodic pension costs, other than historical service costs, from
compensation and benefits to investment and other income (loss).
All reclassifications were applied retrospectively and did not
affect net income.
______________________________
1 Net income represents net income attributable to Waddell &
Reed Financial, Inc.
Revenues Analysis
Investment management fee revenues decreased $2.7 million, or
2%, sequentially as an increase in average assets under management
was offset by two fewer days during the current quarter and a
decrease in the effective management fee rate. Compared to the
first quarter of 2017, fees increased $3.3 million, or 2%, due to
higher average assets under management and an increase in the
effective management fee rate. During the current quarter, the
effective management fee rate was 65.8 basis points, compared to
66.5 basis points during the fourth quarter of 2017 and 65.0 basis
points during the first quarter of 2017. Average assets under
management were $82.4 billion during the current quarter, compared
to $81.3 billion and $81.4 billion during the fourth and first
quarters of 2017, respectively.
Underwriting and distribution fees increased $5.8 million, or
4%, sequentially. The increase was largely due to payments received
from independent financial advisors for office space, compliance
oversight and affiliation fees. Prior to 2018, the cost of these
services was embedded in commissions. An increase in advisory fee
revenues also contributed to the sequential increase in
underwriting and distribution fees. Compared to the first quarter
of 2017, revenues increased $9.2 million, or 7%, due to growth in
advisory fee revenue and new revenues from independent financial
advisors for office space, compliance oversight and affiliation
fees, which were partly offset by lower distribution fees to
third-party distributors.
Operating Expenses Analysis
Distribution expenses increased $6.6 million, or 6%,
sequentially due primarily to higher payout rates to independent
financial advisors under the new commission structure that became
effective on January 1, 2018. Compared to the same quarter in 2017,
costs increased $6.0 million, or 6%, due to higher commission rates
for advisors, which were partly offset by lower commissions to
third-party distributors.
Compensation and benefits expenses declined $0.5 million, or
less than 1%, sequentially due to a discretionary 401(k)
contribution in the fourth quarter and partially offset by higher
payroll taxes during the first quarter. Compared to the first
quarter of 2017, expenses increased $1.8 million, or 3%, primarily
due to annual merit increases, which were partly offset by lower
pension costs due to the prior year plan freeze.
General and administrative expenses declined $0.5 million, or
3%, sequentially due to lower business meeting and travel costs and
lower usage of contractors and consultants due to the completion of
various projects. Compared to the first quarter of 2017, expenses
declined $2.7 million, or 12%, primarily due to a combination of
lower usage of contractors and consultants, and lower business
meeting and travel costs.
Technology expenses increased $1.4 million, or 9%, sequentially
due to higher data service costs related to fund mergers and cost
of service increases, as well as higher technology consulting
costs. Compared to the first quarter of 2017, expenses declined
$0.3 million, or 2%.
Income Taxes
Our effective tax rate during the current quarter was 24.6% and
was lower compared to prior periods as a result of the Tax Reform
Act, which lowered the statutory rate from 35% to 21%. We expect
our effective tax rate to range from 23% to 25%, exclusive of the
effects of share-based payments, state tax incentives,
unanticipated state tax legislative changes and unanticipated
fluctuations in earnings.
Assets
Under Management Three Months Ended (in millions)
Mar. 31, Jun.
30, Sep. 30, Dec.
31, Mar. 31, 2017
2018 Unaffiliated 1 Beginning assets $ 30,295
$ 30,182 $ 30,307 $ 31,062 $ 31,133 Sales 2 1,799 2,080 1,790 1,577
2,245 Redemptions (3,707 ) (2,886 ) (2,486 ) (2,912 ) (2,692 ) Net
exchanges 236 235 213
316 247
Net Flows
(1,672 ) (571 ) (483 ) (1,019 ) (200 ) Market action 1,559
696 1,238
1,090 122 Ending assets $ 30,182 $ 30,307 $
31,062 $ 31,133 $ 31,055 Annualized organic growth rate (22.1 )%
(7.6 )% (6.4 )% (13.1 )% (2.6 )% Annualized redemption rate 50.5 %
39.2 % 33.0 % 37.9 % 35.8 %
Institutional Beginning assets $
7,904 $ 7,792 $ 7,036 $ 6,365 $ 6,289 Sales 2 142 78 68 66 552
Redemptions (727 ) (1,057 ) (1,139 ) (521 ) (604 ) Net exchanges
- 6 -
- -
Net Flows (585 ) (973 )
(1,071 ) (455 ) (52 ) Market action 473 217
400 379 212
Ending assets $ 7,792 $ 7,036 $ 6,365 $ 6,289 $ 6,449
Annualized organic growth rate (29.6 )% (49.9 )% (60.9 )% (28.6 )%
(3.3 )% Annualized redemption rate 37.2 % 58.7 % 67.3 % 32.2 % 37.8
%
Broker-Dealer Beginning assets $ 42,322 $ 43,110 $ 43,084
$ 43,472 $ 43,660 Sales 2 978 1,142 1,024 1,077 1,001 Redemptions
(1,871 ) (1,812 ) (2,049 ) (2,026 ) (1,958 ) Net exchanges
(236 ) (241 ) (213 ) (316 )
(247 )
Net Flows (1,129 ) (911 ) (1,238 ) (1,265 )
(1,204 ) Market action 1,917 885
1,626 1,453 251
Ending assets $ 43,110 $ 43,084 $ 43,472 $ 43,660 $ 42,707
Annualized organic growth rate (10.7 )% (8.5 )% (11.5 )% (11.6 )%
(11.0 )% Annualized redemption rate 15.1 % 14.7 % 16.4 % 16.1 %
15.1 %
Consolidated Total Beginning assets $ 80,521 $ 81,084
$ 80,427 $ 80,899 $ 81,082 Sales 2 2,919 3,300 2,882 2,720 3,798
Redemptions (6,305 ) (5,755 ) (5,674 ) (5,459 ) (5,254 ) Net
exchanges - - -
- -
Net Flows (3,386 )
(2,455 ) (2,792 ) (2,739 ) (1,456 ) Market action 3,949
1,798 3,264
2,922 585 Ending assets $ 81,084 $ 80,427 $
80,899 $ 81,082 $ 80,211 Annualized organic growth rate (16.8 )%
(12.1 )% (13.9 )% (13.5 )% (7.2 )% Annualized redemption
rate 30.5 % 27.9 %
27.1 % 25.7 %
24.8 % 1 Unaffiliated includes National channel (home
office and wholesale), Defined Contribution Investment Only "DCIO",
Registered Investment Advisor "RIA" and Variable Annuity "VA"
2 Sales is primarily gross sales (net of sales commissions).
This amount also includes net reinvested dividends & capital
gains and investment income.
Fund Rankings
1 Year 3 Years
5 Years Lipper Funds
ranked in top half 43% 35% 43% Assets ranked in top half 52% 49%
50%
MorningStar Funds ranked in top half 38% 35% 41% Assets
ranked in top half 44% 38% 48%
MorningStar Ratings
Overall 3 Years 5
Years Funds with 4/5 stars 38% 19% 25% Assets
with 4/5 stars 58% 26% 49% Based on class I
share, which reflects sales and asset concentrations.
Broker-Dealer Three Months Ended Mar.
31, Jun. 30,
Sep. 30, Dec. 31,
Mar. 31, (in millions)
2017
2018 Assets under administration (AUA) Advisory assets $
19,071 $ 19,535 $ 20,734 $ 21,613 $ 22,050 Non-advisory assets
34,453 34,373
34,856 35,073 34,216
Total assets under administration 53,524 53,908 55,590 56,686
56,266 Net new advisory assets 1 ($100 ) $ 22 $ 420 $ 129 $
392 Net new non-advisory assets 1, 2 (868 )
(693 ) (965 ) (1,047 ) (983 )
Total net new AUA 1 (968 ) (671 ) (545 ) (918 ) (591 )
Annualized advisory AUA growth 3 (2.2 )% 0.5 % 8.6 % 2.5 % 7.3 %
Annualized AUA growth 3 (7.4 )% (5.0 )% (4.0 )% (6.6 )% (4.2 )%
Advisor headcount 1,662 1,581 1,481 1,367 1,170 Avg.
trailing 12-month revenue per advisor 4 (in thousands) $ 230 $ 232
$ 240 $ 256 $ 285 Advisor associates 252
254 262 265
327 1 Net new assets is
calculated by taking total client deposits and net transfers less
client withdrawals. 2 Excludes activity related to products held
outside of our platform. These assets represent less than 10% of
total AUA. 3 Annualized growth is calculated by annualizing the
quarterly net new assets divided by beginning assets under
administration. 4 Production per advisor is calculated as trailing
12- month total underwriting and distribution fees less "other"
underwriting and distribution fees divided by the average number of
financial advisors. "Other" underwriting and distribution fees
predominantly include fees paid by advisors for programs and
services.
Unaudited Consolidated Statements of Income
(in thousands,
except per share data and margin)
Three Months Ended Mar.
31, Dec. 31, Mar. 31, Sequential Qtr.
Year-over-Year Qtr. 2018 2017 2017
Change % Change %
Revenues: Investment management fees $ 133,692 $ 136,387 $
130,436 ($2,695 ) (2.0 )% $ 3,256 2.5 % Underwriting and
distribution fees 138,041 132,200 128,831 5,841 4.4 % 9,210 7.1 %
Shareholder service fees 25,882 25,889
27,297 (7 ) (0.0 )% (1,415 ) (5.2 )%
Total 297,615 294,476 286,564
3,139 1.1 % 11,051 3.9 %
Operating expenses: Distribution 1 114,470 107,889 108,437
6,581 6.1 % 6,033 5.6 % Compensation and benefits 68,785 69,273
67,035 (488 ) (0.7 )% 1,750 2.6 % General and administrative 19,538
20,069 22,195 (531 ) (2.6 )% (2,657 ) (12.0 )% Technology 16,644
15,282 16,977 1,362 8.9 % (333 ) (2.0 )% Occupancy 6,964 7,743
7,785 (779 ) (10.1 )% (821 ) (10.5 )% Marketing and advertising
2,281 3,353 2,611 (1,072 ) (32.0 )% (330 ) (12.6 )% Depreciation
5,302 5,357 5,221 (55 ) (1.0 )% 81 1.6 % Subadvisory fees 3,708
3,717 2,697 (9 ) (0.2 )% 1,011 37.5 % Intangible asset impairment
- - 600 -
N/M (600 ) N/M Total 237,692 232,683
233,558 5,009 2.2 % 4,134
1.8 %
Operating income 59,923 61,793 53,006 (1,870 )
(3.0 )% 6,917 13.0 % Investment and other income (loss) 2,816
(2,218 ) 3,012 5,034 N/M (196 ) (6.5 )% Interest expense
(1,802 ) (2,909 ) (2,786 ) 1,107 38.1 %
984 35.3 % Income before provision for income taxes
60,937 56,666 53,232 4,271 7.5 % 7,705 14.5 % Provision for income
taxes 14,966 26,380 18,881
(11,414 ) (43.3 )% (3,915 ) (20.7 )%
Net
income 45,971 30,286 34,351
15,685 51.8 % 11,620 33.8 % Net
income attributable to redeemable noncontrolling interests
(366 ) 522 480 (888 ) (170.1 )%
(846 ) (176.3 )%
Net income attributable to Waddell &
Reed Financial, Inc. $ 46,337 $ 29,764 $ 33,871
$ 16,573 55.7 % $ 12,466 36.8 % Net income per
share, basic and diluted: $ 0.56 $ 0.36 $ 0.40
Weighted average
shares outstanding - basic and diluted 83,111
83,137 84,077 Operating margin 20.1 %
21.0 % 18.5 %
1 Distribution expense
Unaffiliated 30,354 31,395 33,908 Broker-dealer 84,116
76,494 74,529 $ 114,470 $
107,889 $ 108,437
Underwriting and
distribution fees (in thousands)
Three
months ended Mar. 31, 2018 Unaffiliated
Broker-Dealer Total Fee-based asset allocation
product revenues - $ 65,516 $ 65,516 Rule 12b-1 service and
distribution fees 20,976 18,377 39,353 Sales commissions on
front-end load mutual funds and variable annuity products 470
14,427 14,897 Sales commissions on other products - 8,422 8,422
Other revenues 185 9,668 9,853
Total
underwriting and distribution fees $ 21,631 $ 116,410 $ 138,041
Three months ended Dec. 31, 2017 Unaffiliated
Broker-Dealer Total Fee-based asset allocation
product revenues $ 63,905 $ 63,905 Rule 12b-1 service and
distribution fees 22,123 19,305 41,428 Sales commissions on
front-end load mutual funds and variable annuity products 380
13,727 14,107 Sales commissions on other products - 7,615 7,615
Other revenues 186 4,959 5,145
Total
underwriting and distribution fees $ 22,689 $ 109,511 $ 132,200
Three months ended Mar. 31, 2017 Unaffiliated
Broker-Dealer Total Fee-based asset allocation
product revenues - $ 56,756 $ 56,756 Rule 12b-1 service and
distribution fees 24,016 18,655 42,671 Sales commissions on
front-end load mutual funds and variable annuity products 447
14,326 14,773 Sales commissions on other products - 7,237 7,237
Other revenues 426 6,968 7,394
Total
underwriting and distribution fees $ 24,889 $ 103,942 $ 128,831
Unaudited Condensed Balance Sheet
(in thousands)
Mar. 31, Dec. 31,
2018 2017 Assets Cash & cash equivalents
(unrestricted) $ 177,630 $ 207,829 Investment securities 642,237
700,492 Other assets 228,156 241,305 Property and equipment, net
82,488 87,667 Goodwill and intangible assets 147,069
147,069
Total assets $ 1,277,580 $ 1,384,362
Liabilities,
redeemable noncontrolling interests and equity Short-term notes
payable $ - $ 94,996 Long-term debt 94,801 94,783 Other liabilities
275,241 307,190 Redeemable noncontrolling interests 18,570 14,509
Total stockholders' equity 888,968 872,884
Liabilities, redeemable noncontrolling interests and equity
$ 1,277,580 $ 1,384,362
Shares outstanding (in millions)
82.7 82.7 Unaudited Condensed Cash Flow
(in thousands)
Three
Months Ended Mar. 31, Dec. 31, Mar. 31,
Cash (used in) provided by: 2018 2017
2017 Operating activities $ 50,265 $ 70,519 $ 63,565
Investing activities 56,272 (13,415 ) 10,220 Financing activities
(131,948 ) (75,197 ) (49,320 ) Net change
during period ($25,411 ) ($18,093 ) $ 24,465
Three Months Ended Mar. 31, Dec. 31,
Mar. 31, (in thousands)
2018 2017 2017
Shares repurchased Number of shares 996,309 937,927 476,882
Total cost $ 20,507 $ 20,133 $ 7,976 Dividend paid Rate per share $
0.25 $ 0.46 $ 0.46 Total paid $ 20,890 $ 38,351 $ 38,771 Capital
returned to stockholders $ 41,397 $ 58,484 $ 46,747
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, Philip J. Sanders,
CEO and CIO, will review our quarterly results. Live access to the
teleconference will be available on the “Investor Relations”
section of our Web site at ir.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 ir.waddell.com. Under the “Investor Information” tab you
will find a link to presentations as well as to data tables, which
include supplemental information schedules.
Past performance is no guarantee of future results. Please
invest carefully.
About the Company
Through its subsidiaries, Waddell & Reed
Financial, Inc. has provided investment management and
financial planning services to clients throughout the United States
since 1937. Today, we distribute our investment products through
the unaffiliated distribution channel (encompassing broker/dealer,
retirement, and registered investment advisors), our broker-dealer
channel (through independent financial advisors), and our
Institutional channel (including defined benefit plans, pension
plans, endowments and subadvisory relationships). For more
information, visit ir.waddell.com.
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, stock repurchases 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, 2017, which include, without
limitation:
- The loss of existing distribution
relationships or inability to access new distribution
relationships;
- 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;
- Changes in our business model,
operations and procedures, including our methods of distributing
our proprietary products, as a result of evolving fiduciary
standards;
- 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;
- Our inability to reduce expenses
rapidly enough to align with declines in our revenues due to
various factors, including fee pressure, the level of our assets
under management or our business environment.
- 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,
2017 and as updated in our quarterly reports on Form 10-Q for
the year ending December 31, 2018. 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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