WAD REED FIN 'A' : Waddell & Reed Financial, Inc. Reports Second Quarter Results
07/28/2010 | 08:00am US/Eastern
Waddell & Reed Financial, Inc. (NYSE: WDR) today reported second quarter
net income of $34.2 million, or $0.40 per diluted share, compared to net
income of $35.9 million, or $0.42 per diluted share, in the first
quarter of 2010 and net income of $23.4 million, or $0.27 per diluted
share, during the second quarter of 2009.
?In the context of high market volatility and subdued investor demand
for equities, we achieved positive flows in each of our three
distribution channels,? said Henry J. Herrmann, chairman and chief
executive officer of Waddell & Reed Financial, Inc. ?We believe this
reflects the breadth and performance of our products and the ongoing
acceptance and demand that has been created among investors for Waddell
& Reed and Ivy investment strategies.
?Our business faced two major challenges during the second quarter,?
Herrmann added. ?First, financial markets suffered a meaningful pullback
as investors around the world questioned the pace of economic recovery.
This affected not only the level of assets managed, but also investors'
willingness to invest in equities. Second, as of June 30th,
year-to-date performance of our funds has been mixed. Almost two-thirds
of our mutual funds outperformed their peer group, but performance of
our two largest funds remains relatively weak.
?That said,? Herrmann continued, ?we remain well positioned to continue
capturing market share.?
Sales in our Advisors channel during the quarter improved on both a
sequential and year-over-year basis. At $954 million, gross sales
increased 8% compared to the previous quarter and 22% compared to the
same period in 2009. Flows remained positive at $100 million and
represent the fifth consecutive quarter of inflows. Our advisors'
productivity continues to improve, and their focus on long-term
financial planning has once again validated the stability of this
channel's distribution model.
Considering the volatility in the financial markets and weak performance
of our lead fund, Ivy Asset Strategy, sales held up relatively well. At
$3.5 billion, gross sales for the quarter were down 20% sequentially and
14% compared to the second quarter of 2009. Flows during the quarter
were positive at $388 million, but weaker than previous quarters due to
higher redemptions and somewhat lower sales volume. Redemptions, which
peaked during the month of May, had meaningfully abated by the beginning
of June. Nonetheless, we continue to compare favorably to the industry.
The Wholesale channel's organic growth rate for equity assets during the
quarter was 1.9% compared with organic decay of 1.4% experienced by the
Sales diversification continues to play a key role in our Wholesale
channel. During the quarter, sales of products other than the Asset
Strategy and Global Natural Resources funds reached $920 million, or 26%
of total sales, including five funds with daily sales in excess of $1
Gross sales of $768 million during the quarter were solid and flows
remained positive. Our subadvisor efforts continue to show promise and
are responsible for more than 85% of sales and substantially all of the
flows during the quarter. Sales of traditional defined benefit products
were more modest, but net flows were positive.
Management Fee Revenue Analysis
We earn management fee revenues by providing investment management
services to our retail funds and institutional clients. These revenues
are based on the amount of average assets under management and
influenced by asset composition, sales, redemptions and financial market
Average assets under management of $72.6 billion during the quarter
increased 2% compared to the previous quarter and 37% compared to the
second quarter of 2009. The effective fee rate remained relatively
unchanged at 62.5 basis points compared to 62.6 basis points and 62.5
basis points in the first quarter of 2010 and second quarter of 2009,
Underwriting and Distribution Revenue and Expense Analysis
Compared to the first quarter of 2010, revenues rose on higher asset
allocation product fees and variable annuity commissions while
front-load commissions declined. Direct expenses rose in close
correlation to revenues. Indirect expenses were lower, largely due to a
decline in group insurance and payroll tax costs.
Compared to the same period in 2009, revenues increased due to a
combination of higher asset-based Rule 12b-1 and asset allocation
product fees. Direct expenses increased in concert with higher revenues.
Indirect expenses rose slightly due to higher compensation and
information technology charges.
Sequentially, revenues increased on higher asset-based service and
distribution fees. Direct expenses increased slightly as higher
asset-based Rule 12b-1 service and distribution fees were offset by
lower wholesaler commissions. Indirect expenses declined slightly.
Compared to the second quarter of 2009, revenues increased on higher
asset-based Rule 12b-1 service and distribution fees, and to a lesser
degree, higher sales volume at Legend. Direct expenses rose in
correlation with higher asset-based fees, and were partly offset by
lower wholesaler commissions. Indirect expenses rose largely on higher
Compensation and Related Expense Analysis
Compensation and related costs increased sequential quarterly largely
due to higher equity compensation. The increase in incentive
compensation was offset by lower payroll taxes as FICA caps were met and
lower software development costs.
Compared to the second quarter of 2009, the increase in costs is due to
a combination of higher incentive and equity compensation, and to a
lesser degree, base compensation.
General and Administrative Expense Analysis
General and administrative costs rose compared to both periods largely
due to higher dealer services and fund related expenses as well as
higher IT costs.
Subadvisory fees, which are paid on average asset levels in subadvised
funds, fell on a sequential quarter basis, but increased compared to the
second quarter of 2009. The change is largely due to changes in assets
in the Ivy Global Natural Resources fund. Subadvised average assets
under management during the quarter were $6.7 billion.
Investment and Other Income
We recorded an investment loss of $1.6 million, which was largely the
result of $2.6 million in losses incurred in our mutual fund trading
portfolio during the quarter. These were partly offset by gains of $800
thousand from the sale of available-for-sale mutual fund holdings.
Our effective tax rate during the current quarter was 40.7%. The
increase to our effective tax rate was mainly due to increasing our
reserves against capital loss carryforwards as a result of the decline
in the market value of our investment portfolio during the quarter. A
charge to earnings of $1.8 million, or $0.02 per diluted share, resulted
from the increase to these reserves. Our effective tax rate, excluding
the impact of tax reserves, was 37.6%. The effective tax rate for future
periods (excluding any changes related to the valuation allowance) is
anticipated to range between 37.3% and 38.3%.
Balance Sheet Information
As of June 30, 2010, cash and cash equivalents and investment securities
were $290 million (excluding $54 million held for the benefit of
customers segregated in compliance with federal and other regulations).
Short-term debt was $190 million, reflecting the current maturity of our
January 2011 senior notes.
Stockholders' equity was $377 million and there were 85.4 million shares
outstanding. During the quarter, we repurchased 1.5 million shares on
the open market or privately at an aggregate cost of $46.7 million for a
total of 1.9 million shares repurchased since the beginning of 2010.