Waddell & Reed Financial, Inc. Reports First Quarter Results
Waddell & Reed Financial, Inc. Reports First Quarter Results Business Wire OVERLAND PARK, Kan. -- April 23, 2013 Waddell & Reed Financial, Inc. (NYSE: WDR) today reported first quarter net income of $53.9 million, or $0.63 per diluted share, compared to net income from continuing operations $52.4 million, or $0.61 per diluted share during the fourth quarter of 2012 and net income from continuing operations of $46.8 million, or $0.55 per diluted share during the first quarter of 2012. Operating revenues of $316.6 million rose 5% sequentially and 10% compared to the same period last year. The operating margin was 26.2%, or 130 basis points lower than last quarter’s high water mark due to higher compensation and payroll tax expenses and two fewer days of management fees in the current quarter. When compared to the same period last year, our operating margin expanded by 120 basis points. Unless otherwise noted, any reference to 2012’s income statement items refers to results from continuing operations. Assets under management broke $100 billion during the first quarter and reached $103.8 billion at quarter-end. Sales of $6.8 billion represent a multi-year high, having only exceeded that level once, during the first quarter of 2008. Net inflows of $2.1 billion represent an annualized organic growth rate of nearly 9%. Business Discussion Management commentary “This year is off to a good start. Sales were solid each month with only an 8% difference between the monthly high and low. Flows were similarly steady with each month firmly in positive territory,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “While it is still too early to tell where retail clients are along the re-risking continuum, the first few months of this year feel decidedly more positive.” Channelized flows discussion Sales from our Wholesale channel were $5.0 billion during the quarter, a 40% improvement over the previous quarter and a 12% improvement compared to the same period last year. Net flows of $2.0 billion reflect a sharp improvement to the slight outflows experienced during the fourth quarter of 2012 and were twice as much as last year’s first quarter. In our Advisors channel, sales marked a new record at $1.3 billion, an 8% improvement compared with the previous quarter and a 19% improvement compared to the same period last year. Net inflows were $190 million during the current quarter, better than the outflows of $75 million last quarter and net inflows of $158 million during the first quarter of 2012. Our Institutional channel had sales of $430 million, a reduction compared to both the first and fourth quarters of 2012. Despite weaker sales, this channel saw only minor outflows in both the current and prior quarters. During the first quarter of 2012, net inflows were $175 million. Management Fee Revenue Analysis Revenues rose compared to the previous quarter as well as the same period in 2012, but at a rate that was slightly below the rate of increase in average assets under management. This was partly due to fewer days in the current period, and a lower effective fee rate. The effective fee rate during the quarter was 59.5 basis points, compared to 59.8 basis points and 60.2 basis points during the fourth and first quarter of 2012, respectively. Net Distribution Cost Analysis Wholesale channel Compared to the previous quarter, higher asset levels and higher sales commissions led to an increase in both revenues and direct costs. Indirect costs rose slightly due to an increase in compensation, which was partly offset by lower travel and marketing costs. Compared to the same period in 2012, higher asset levels and, to a lesser extent, higher sales commissions caused both revenues and direct expense to rise. Indirect costs also increased due to higher IT and marketing costs. Advisors channel Both sales and asset levels increased sequentially, resulting in an increase to revenues and direct expenses. The effective payout rate remained relatively consistent. Indirect costs rose slightly due to a combination of annual salary increases, higher payroll tax costs and higher group health costs. Compared to the same period last year, sales and asset levels rose, resulting in an increase to revenues and direct expenses; however, the effective payout rate declined slightly. Indirect expenses rose primarily on higher group health costs. Compensation and Related Expense Analysis The sequential increase in compensation costs was due to a combination of annual merit increases, higher payroll taxes and pension costs. Lower equity compensation costs were due to the forfeiture of restricted stock by Legend employees at the close of the company’s sale in January, offset by higher incentive compensation costs. Higher base salaries, due to a combination of annual merit increases and higher head count, as well as higher incentive compensation costs were the main contributors to the year over year increase. General and Administrative Expense Analysis A combination of lower consultant fees and a reduction in estimated legal costs resulted in the sequential decline in costs. Compared to the same period last year, lower legal costs were the primary reason for the variance. Investment and Other Income Analysis Compared to the fourth quarter, investment and other income rose principally on a combination of gains realized in our available-for-sale securities and gains in our investment portfolios, and were partly offset by partnership losses. Compared to the same period last year, gains on our available-for-sales securities were partly offset by partnership losses and lower gains in our investment portfolios. Balance Sheet Information As of March 31, 2013, cash and cash equivalents and investment securities were $566 million. Long-term debt was $190 million and there was no short-term debt outstanding. Stockholders’ equity was $553 million and there were 85.5 million shares outstanding. During the quarter, we repurchased 82 thousand shares on the open market or privately at an aggregate cost of $3.4 million. On April 2^nd, we granted 1.1 million shares of restricted stock in accordance with our annual program and repurchased 464 thousand shares to cover employee minimum income tax withholdings in connection with the vesting of stock awards. Unaudited Consolidated Statement of Income (Amounts in thousands, 2012 2013 except for per share data) 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd 3rd 4th Qtr. Qtr. Qtr. Operating Revenues: Investment management $ 134,900 $ 134,213 $ 138,364 $ 141,754 $ 148,445 fees Underwriting and 121,153 123,687 122,819 128,806 135,419 distribution fees Shareholder 31,818 31,786 32,182 32,323 32,691 service fees Total operating 287,871 289,686 293,365 302,883 316,555 revenues Operating Expenses: Underwriting and 144,486 148,067 147,408 150,020 161,571 distribution Compensation and related 44,158 41,931 42,343 43,343 48,155 costs General and 17,764 23,634 15,774 18,160 16,208 administrative Subadvisory 6,271 5,208 4,921 4,609 4,484 fees Depreciation 3,359 3,329 3,188 3,335 3,227 Total operating 216,038 222,169 213,634 219,467 233,645 expenses Operating Income 71,833 67,517 79,731 83,416 82,910 Investment and 3,949 1,325 2,632 1,911 4,377 other income Interest expense (2,826 ) (2,825 ) (2,826 ) (2,834 ) (2,854 ) Income from continuing 72,956 66,017 79,537 82,493 84,433 operations before taxes Provision for 26,119 24,792 27,421 30,143 30,570 taxes Income from continuing 46,837 41,225 52,116 52,350 53,863 operations Income/(loss) from discontinued 550 493 (43,590 ) 971 0 operations, net of income taxes Net Income $ 47,387 $ 41,718 $ 8,526 $ 53,321 $ 53,863 Net Income per share from 0.55 0.48 0.61 0.61 0.63 continuing operations Income/(loss) per share from 0.00 0.00 (0.51 ) 0.01 0.00 discontinued operations Net income per 0.55 0.48 0.10 0.62 0.63 share Weighted average shares 85,606 86,095 85,755 85,459 85,593 outstanding - diluted Operating 25.0 % 23.3 % 27.2 % 27.5 % 26.2 % margin Net Distribution Cost Analysis (Amounts in thousands) Wholesale 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd 3rd 4th Channel Qtr. Qtr. Qtr. U&D Revenues $ 44,473 $ 43,908 $ 44,659 $ 45,660 $ 48,175 U&D Expenses - (55,104 ) (55,287 ) (57,390 ) (56,963 ) (63,548 ) Direct U&D Expenses - (9,339 ) (10,212 ) (10,045 ) (10,333 ) (11,000 ) Indirect Net Distribution $ (19,970 ) $ (21,591 ) $ (22,776 ) $ (21,636 ) $ (26,373 ) (Costs) Advisors Channel U&D Revenues $ 76,680 $ 79,779 $ 78,160 $ 83,146 $ 87,244 U&D Expenses - (53,676 ) (55,813 ) (54,246 ) (56,375 ) (59,657 ) Direct U&D Expenses - (26,367 ) (26,755 ) (25,727 ) (26,349 ) (27,366 ) Indirect Net Distribution $ (3,363 ) $ (2,789 ) $ (1,813 ) $ 422 $ 221 (Costs)/Excess Changes in Assets Under 2012 2013 Management (Amounts in 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd 3rd 4th millions) Qtr. Qtr. Qtr. Wholesale Channel Beginning $ 40,954 $ 46,738 $ 44,379 $ 47,650 $ 48,930 assets Sales & Other 4,520 4,113 3,699 3,599 5,042 Net Inflows* Redemptions (3,446 ) (3,535 ) (3,088 ) (3,828 ) (3,157 ) Net Exchanges (104 ) 48 59 152 66 Net flows 970 626 670 (77 ) 1,951 Market action 4,814 (2,985 ) 2,601 1,357 2,373 Ending assets $ 46,738 $ 44,379 $ 47,650 $ 48,930 $ 53,254 Advisors Channel Beginning $ 31,709 $ 35,073 $ 33,846 $ 35,374 $ 35,660 assets Sales & Other 1,097 1,193 1,004 1,209 1,303 Net Inflows* Redemptions (1,042 ) (961 ) (1,019 ) (1,132 ) (1,047 ) Net Exchanges 103 (49 ) (60 ) (152 ) (66 ) Net flows 158 183 (75 ) (75 ) 190 Market action 3,206 (1,410 ) 1,603 361 2,065 Ending assets $ 35,073 $ 33,846 $ 35,374 $ 35,660 $ 37,915 Institutional Channel Beginning $ 10,494 $ 11,981 $ 10,894 $ 11,785 $ 11,775 assets Sales & Other 682 625 763 649 430 Net Inflows* Redemptions (507 ) (1,058 ) (532 ) (662 ) (469 ) Net Exchanges 0 0 0 0 0 Net flows 175 (433 ) 231 (13 ) (39 ) Market action 1,312 (654 ) 660 3 890 Ending assets $ 11,981 $ 10,894 $ 11,785 $ 11,775 $ 12,626 Consolidated Total Beginning $ 83,157 $ 93,792 $ 89,119 $ 94,809 $ 96,365 assets Sales & Other 6,299 5,931 5,466 5,457 6,775 Net Inflows* Redemptions (4,995 ) (5,554 ) (4,639 ) (5,622 ) (4,673 ) Net Exchanges (1 ) (1 ) (1 ) 0 0 Net flows 1,303 376 826 (165 ) 2,102 Market action 9,332 (5,049 ) 4,864 1,721 5,328 Ending assets $ 93,792 $ 89,119 $ 94,809 $ 96,365 $ 103,795 * Sales & Other Net Inflows is primarily gross sales (net of sales commissions). This amount also includes net reinvested dividends & capital gains and investment income. Supplemental 2012 2013 Information 1st 2nd 3rd 4th 1st 2nd 3rd 4th Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Channel highlights Number of 49 50 50 50 50 Wholesalers Number of 1,778 1,764 1,753 1,763 1,717 Advisors Gross revenue per advisor 40.3 42.2 41.4 44.3 47.3 (in Thousands) Redemption rates - long term assets Wholesale 30.7% 31.5% 26.6% 31.9% 24.6% Advisors 10.1% 9.1% 9.7% 10.6% 9.4% Institutional 18.2% 37.3% 18.4% 22.8% 15.5% Total 21.5% 23.9% 19.3% 22.9% 18.0% Operating highlights Organic growth/(decay) 6.3% 1.6% 3.7% -0.7% 8.7% Annualized Total assets under 93,792 89,119 94,809 96,365 103,795 management (in Millions) Diversification (CompanyTotal) As % of Sales Asset Strategy 27.7% 28.6% 21.1% 25.7% 33.6% Fixed Income 32.3% 30.9% 39.4% 34.6% 30.7% Other 40.0% 40.5% 39.5% 39.7% 35.7% As % of Assets Under Management Asset Strategy 35.3% 34.2% 33.6% 33.8% 33.7% Fixed Income 16.9% 19.4% 20.2% 21.0% 20.7% Other 47.8% 46.4% 46.2% 45.2% 45.6% Operating margin 25.0% 23.3% 27.2% 27.5% 26.2% Lipper Fund Rankings 1 Year 3 Years 5 Years Funds ranked in top quartile 26% 33% 48% Funds ranked in top half 44% 52% 62% Assets ranked in top quartile 24% 64% 41% Assets ranked in top half 65% 77% 75% 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, April 23^rd 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. 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, 2012, 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, 2012 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2013. 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. Contact: Waddell & Reed, Inc. Investor Contact: Nicole McIntosh-Russell, 913-236-1880 VP, Investor Relations firstname.lastname@example.org or Mutual Fund Investor Contact: 888-WADDELL, or visit www.waddell.com or www.ivyfunds.com.