Waddell & Reed Financial, Inc. (NYSE: WDR) today reported
first quarter 2016 net income1 of $37.0 million, or $0.45 per
diluted share, compared to net income of $62.9 million, or $0.76
per diluted share, during the prior quarter and net income of $67.1
million, or $0.80 per diluted share, during the first quarter of
2015. The current quarter’s net income included investment losses
of $10.2 million, compared to investment gains of $7.6 million
during the fourth quarter of 2015 and investment gains of $4.0
million during the first quarter of 2015. Operating income of $71.4
million declined 22% compared to the prior quarter and 32% compared
to the first quarter last year. A lower level of assets under
management is the primary driver for the decline in operating
income.
During the quarter we consolidated several sponsored funds for
which we have a majority ownership interest. Net income
attributable to these consolidated funds is reported in
noncontrolling interests presented in a separate caption in the
consolidated statement of income.
Assets under management declined 9% sequentially due to an
increase in net outflows and market depreciation. Compared to the
same period in 2015, assets under management declined 23% due to a
combination of net outflows and market depreciation.
In order to maintain an acceptable level of profitability given
the magnitude of net outflows, weakness in fund performance and
heightened market volatility, the company announced cost cutting
initiatives in February 2016 that were intended to reduce fixed
operating expenses by approximately 10%, or $40 million from our
annual run-rate. After completing an internal process, we have
identified cost savings to meet our target. These will reduce
underwriting and distribution, compensation and general and
administrative expenses.
“The entire executive team is focused on positioning the company
for renewed growth,” said Hank Herrmann, Chairman and Chief
Executive Officer of Waddell & Reed Financial, Inc. “Central to
our efforts is improving investment performance. I am confident
that our investment culture, our proven investment process, and the
resources we have committed to our investment staff will bear
fruit.
“At the same time, we need to make strategic investments to
adapt to a fast-changing world,” continued Herrmann. “Project E
will strengthen our broker-dealer (formerly referred to as our
‘Advisors channel’) and enable us to compete with other
broker-dealers of similar size. We have also intensified our
efforts to broaden our product line in order to compete more fully
with other asset managers.”
Management Fee Revenue Analysis
Management fees declined 13% sequentially, in line with a 12%
decline in average assets under management and one fewer day during
the current quarter. Compared to the same quarter last year,
management fees declined 20% due to a 22% decline in average assets
under management, which was partly offset by an additional day
during the current quarter and a mix-shift in the asset base that
increased the average fee rate.
Average assets under management were $95.7 billion during the
current quarter, compared to $108.9 billion during the prior
quarter and $123.3 billion during the first quarter of 2015. The
effective fee rate for the current quarter was 60.8 basis points
compared to 60.6 basis points and 59.9 basis points during the
fourth and first quarters of 2015, respectively.
Underwriting and Distribution Analysis
Underwriting and Distribution Revenues
Revenues declined 9% sequentially, due primarily to lower
asset-based Rule 12b-1 fees. Additionally, our broker-dealer had
lower sales commissions and lower advisory fee revenues. Compared
to the same period last year, revenues declined 12% due to lower
asset-based Rule 12b-1 and lower advisory fee revenues in our
broker-dealer.
Underwriting and Distribution Costs
Sequentially, direct costs declined 10%, slightly more than
related revenues due to lower wholesaler commissions. Indirect
costs declined modestly. The fourth quarter of 2015 included costs
for severance, while the current quarter saw lower advertising and
business travel costs. Lower costs in the current quarter were more
than offset by an increase in costs associated with the
implementation of Project E.
Compared to the first quarter of 2015, direct costs declined
16%, in line with the decrease in revenues and lower wholesaler
commissions. Indirect costs rose 4% due to higher IT, employee
compensation and benefits and consulting costs, and partly offset
by lower advertising and sales meeting costs.
Compensation and Related Expense Analysis
Costs rose 10% compared to the fourth quarter of 2015 due to
higher equity compensation and severance costs, and to a lesser
degree, annual merit increases and payroll taxes. Compared to the
same period last year, compensation costs declined 1% as annual
merit increases, higher pension and higher equity compensation
costs were more than offset by lower incentive compensation.
General and Administrative Expense Analysis
Costs declined 26% sequentially. Last year’s fourth quarter
included higher IT and legal costs as well as higher advertising
costs associated with the launch of new funds. The current quarter
saw a decrease in IT costs, as our system renovation project nears
completion as well as lower money market fund waivers.
Compared to the same quarter in 2015, costs declined 25% due to
lower dealer servicing costs and lower usage of IT contractors.
Investment and Other Income
The company’s seed investment in sponsored funds has grown
significantly due to the launch of new products. Our ownership in
certain sponsored funds exposes investment and other income to an
increased level of market volatility. To mitigate this risk, we
entered into a number of total return swap contracts during the
current quarter to serve as an economic hedge against the market
risk associated with our investments in sponsored funds. The
performance of the hedge has been largely effective since
inception; however, we experienced a $9.6 million investment loss
before our hedging strategy was fully implemented.
Unaudited Consolidated Statement of Income
(Amounts in thousands, except for per
share data)
2015 2016 1st Qtr.
2nd Qtr. 3rd Qtr. 4th
Qtr. 1st Qtr. 2nd Qtr. 3rd
Qtr. 4th Qtr. Operating Revenues:
Investment management fees $ 182,105 $ 185,914 $ 175,218 $ 166,325
$ 144,778 Underwriting and distribution fees 166,978 171,508
165,130 160,382 146,658 Shareholder service fees
36,375 36,568 35,761
34,367 32,380
Total operating revenues
385,458 393,990 376,109
361,074 323,816
Operating Expenses: Underwriting and distribution 195,420
195,762 189,065 189,534 173,836 Compensation and related costs
53,495 52,829 46,157 48,271 52,940 General and administrative
25,678 27,897 25,458 26,033 19,152 Subadvisory fees 2,387 2,394
2,305 2,048 2,093 Depreciation 4,034
4,064 4,117 3,831
4,362 Total
operating expenses 281,014
282,946 267,102 269,717 252,383
Operating Income
104,444 111,044 109,007 91,357 71,433 Investment and other
income/(loss) 3,972 9 (16,872) 7,647 (10,218) Interest expense
(2,766) (2,765)
(2,765) (2,772) (2,768)
Income before taxes 105,650 108,288 89,370
96,232 58,447 Provision for taxes 38,537
40,843 41,312 33,312
20,978
Net
Income $ 67,113 $ 67,445 $ 48,058
$ 62,920 $ 37,469
Noncontrolling interests - -
- - 501
Net Income Attributable to Waddell &
Reed Financial, Inc. $ 67,113 $ 67,445
$ 48,058 $ 62,920 $ 36,968
Net income per share, basic and diluted:
0.80 0.80 0.58
0.76 0.45
Weighted average shares outstanding - basic and diluted
83,581 84,079
83,469 82,873 82,104
Operating margin
27.1% 28.2% 29.0% 25.3%
22.1%
Net Distribution Cost Analysis
(Amounts in thousands)
Retail Unaffiliated Distribution1 1st Qtr.
2nd Qtr. 3rd Qtr. 4th
Qtr. 1st Qtr. 2nd Qtr. 3rd
Qtr. 4th Qtr. U&D Revenues $ 52,142 $ 51,768
$ 47,040 $ 43,091 $ 35,923 U&D Expenses - Direct (68,595)
(66,947) (62,117) (57,119) (46,846) U&D Expenses - Indirect
(14,029) (13,972) (13,329)
(14,614) (13,349)
Net Distribution (Costs)
($
30,482)
($
29,151)
($
28,406)
($
28,642)
($
24,272)
Retail
Broker-Dealer2 U&D Revenues $ 114,836 $ 119,740 $
118,090 $ 117,291 $ 110,735 U&D Expenses - Direct (82,022)
(85,177) (84,420) (83,413) (80,277) U&D Expenses - Indirect
(30,774) (29,666) (29,199)
(34,388) (33,364)
Net Distribution Excess/(Costs) $ 2,040 $
4,897 $ 4,471
($
510)
($
2,906)
1 Retail
Unaffiliated Distribution was previously referred to as the
"Wholesale channel" 2 Retail Broker-Dealer was previously referred
to as the "Advisors channel"
Changes in Assets Under
Management 2015 2016 (Amounts in millions)
1st Qtr. 2nd Qtr. 3rd Qtr.
4th Qtr. 1st Qtr. 2nd Qtr.
3rd Qtr. 4th Qtr. Retail
Unaffiliated Distribution
Beginning assets $60,335 $59,412 $57,545 $49,320 $45,641
Sales* 3,870 3,239 2,768 2,341 2,144 Redemptions (6,259) (4,558)
(5,569) (7,300) (7,680) Net Exchanges 224 144 265
176 158
Net
flows (2,165) (1,175) (2,536) (4,783) (5,378) Market action
1,242 (692) (5,689) 1,104 (1,640)
Ending assets $59,412
$57,545 $49,320 $45,641 $38,623
Retail Broker-Dealer
Beginning assets $45,517 $46,385 $45,947 $42,215 $43,344 Sales*
1,270 1,347 1,238 1,218 1,068 Redemptions (1,279) (1,279) (1,242)
(1,245) (1,197) Net Exchanges (224) (144) (265)
(176) (172)
Net
flows (233) (76) (269) (203) (301) Market action 1,101
(362) (3,463) 1,332 (901)
Ending assets $46,385 $45,947 $42,215
$43,344 $42,142
Institutional Beginning assets $17,798 $17,097
$17,214 $14,657 $15,414 Sales* 300 1,203 465 773 453 Redemptions
(1,460) (1,003) (1,817) (799) (1,068) Net Exchanges - -
- - 14
Net flows (1,160) 200 (1,352) (26) (601) Market action 459
(83) (1,205) 783 (387)
Ending assets $17,097 $17,214
$14,657 $15,414 $14,426
Consolidated Total Beginning assets
$123,650
$122,894
$120,706
$106,192
$104,399
Sales* 5,440 5,789 4,471 4,332 3,665 Redemptions (8,998) (6,840)
(8,628) (9,344) (9,945) Net Exchanges - - - -
-
Net flows
(3,558) (1,051) (4,157) (5,012) (6,280) Market action 2,802
(1,137) (10,357) 3,219 (2,928)
Ending assets
$122,894
$120,706
$106,192
$104,399
$95,191
* Sales is primarily gross sales (net of sales commissions).
This amount also includes net reinvested dividends & capital
gains and investment income.
Supplemental Information
Asset
Manager 2015 2016 (S in millions)
1st Qtr.
2nd Qtr. 3rd Qtr. 4th
Qtr. 1st Qtr. 2nd Qtr. 3rd
Qtr. 4th Qtr. Retail- Unaffiliated
Distribution AUM $ 59,412 $ 57,545 $ 49,320 $ 45,641 $ 38,623
Net flows $ (2,165) $ (1,175) $ (2,536) $ (4,783) $ (5,378) Organic
growth -14.4% -7.9% -17.6% -38.8% -47.1% Redemption Rate 42.9%
31.0% 41.2% 59.3% 77.7%
Retail - Broker Dealer AUM $ 46,385
$ 45,947 $ 42,215 $ 43,344 $ 42,142 Net flows $ (233) $ (76) $
(269) $ (203) $ (301) Organic growth -2.0% -0.7% -2.3% -1.9% -2.8%
Redemption Rate 9.0% 9.0% 8.9% 9.3% 9.3%
Institutional AUM $
17,097 $ 17,214 $ 14,657 $ 15,414 $ 14,426 Net flows $ (1,160) $
200 $ (1,352) $ (26) $ (601) Organic growth -26.1% 4.7% -31.4%
-0.7% -15.6% Redemption Rate 33.7% 23.2%
45.4% 20.5% 29.9%
Fund Rankings 1 Year 3 Years
5 Years Lipper Funds ranked in top half 27%
43% 41% Assets ranked in top half 20% 33% 51%
MorningStar
Funds with 4/5 stars 19% 16% 11% Assets with 4/5 stars 15%
11% 5%
2015 2016 Broker Dealer 1st
Qtr. 2nd Qtr. 3rd Qtr.
4th Qtr. 1st Qtr. 2nd Qtr.
3rd Qtr. 4th Qtr. AUA* (in billions) $ 53.7 $
53.6 $ 49.4 $ 51.0 $ 49.9 AUA* fee based accounts (in billions) $
18.0
$ 18.3 $ 17.0 $ 17.6 $ 17.4 # Advisors 1,745 1,780 1,795 1,819
1,803 Advisor productivity (in thousands) $ 65.9 $ 67.9 $ 66.3 $
64.9 $ 61.3 U&D revenues (in thousands) $ 114,836 $
119,740 $ 118,090 $ 117,291 $ 110,735
* AUA represent Assets
Under Administration
Unaudited Balance
Sheet Information Schedule of Selected Items
Mar. 31, 2016 (Amounts in millions) Cash & cash
equivalents (unrestricted) $447.1 Investment securities 372.8
Total assets 1,444.7 Long-term debt 189.5
Total
liabilities 598.0 Stockholders' equity
846.7 Shares outstanding 81.8
million shares
Quarter ended Year-to-Date Mar. 31,
2016 Apr. 2, 2016 ($ in thousands)
Shares repurchased Number of shares 1,125,671 1,384,346
Total cost $25,598 $31,729
Dividend paid Rate per
share $0.46 $0.46 Total paid $38,115 $38,115
Capital
returned to stockholders $63,713 $69,844
On April 18, 2016, we granted 2,209,135 shares of restricted stock
pursuant to our stock incentive plan
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.
Contacts
Investor Contact:Nicole Russell,
VP, Investor Relations, (913) 236-1880, nrussell@waddell.com
Mutual 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.
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 Ivy Global Investors 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, 2015, 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;
- Our inability to reduce expenses
rapidly enough to align with declines in our revenues, 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, 2015 and as updated in our
quarterly reports on Form 10-Q for the year ending December 31,
2016. 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.
1 Net income represents net income attributable to Waddell &
Reed Financial, Inc.
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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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