Waddell & Reed Financial, Inc. (NYSE: WDR) today reported second quarter net income of $83.0 million, or $0.98 per diluted share, compared to net income of $74.9 million, or $0.88 per diluted share during the previous quarter and net income of $52.0 million, or $0.61 per diluted share during the second quarter of 2013.

Operating revenues of $400.6 million rose 3% sequentially and 21% compared to the same period last year. Our operating margin was 30.9% during the quarter compared to 29.9% during the previous quarter and 25.6% during the second quarter of 2013.

Assets under management ended the quarter at $135.6 billion, rising 3% sequentially and 30% compared to June 2013. Sales were $7.5 billion during the current quarter, an increase of 10% compared to the second quarter of 2013 and a decrease of 25% compared to the record-setting first quarter of this year. Each of our distribution channels saw inflows during the quarter for a complex-wide total of $1.2 billion, resulting in a 3.7% rate of organic growth.

Business Discussion

“Results in the quarter were strong,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “Sales improved 10% compared to last year’s second quarter and our organic growth rate increased slightly, continuing to exceed industry trends.”

Wholesale sales were $4.9 billion, 3% below last year’s second quarter and 31% less than the previous quarter’s record-setting $7.0 billion. Inflows of $104 million were suppressed by a client’s exchange of $485 million from mutual funds to separate accounts, resulting in a reclassification of those assets from our Wholesale channel to our Institutional channel.

Our Advisors channel had sales of $1.5 billion during the quarter, a new record. At $271 million, net flows grew 5% compared to the second quarter of 2013. We continue to focus our efforts on improving productivity, which increased 18% compared to the same period last year while headcount has remained flat.

The Institutional channel had sales of $1.2 billion, more than three times the volume of the second quarter of 2013. Net flows were $827 million, benefiting from the $485 million exchange from the Wholesale channel previously mentioned and $342 million of net new sales.

Management Fee Revenue Analysis

Management fees, benefiting from one additional day during the current quarter, rose 3% sequentially, a rate that was slightly higher than the rate of growth in average assets under management. Compared to the second quarter of 2013, revenues rose 24% due to an increase in average assets under management.

The effective fee rate during the current quarter was 58.9 basis points compared to 59.2 basis points and 59.5 basis points in the first quarter of 2014 and second quarter of 2013, respectively.

Underwriting and Distribution Analysis

Wholesale channel

Revenues rose slightly compared to the previous quarter on a modest increase in asset-based Rule 12b-1 fees. Direct costs declined as an increase in Rule 12b-1 fees was more than offset by lower commission costs. Indirect costs rose with higher IT costs.

Compared to the same period in 2013, revenues rose with higher asset-based Rule 12b-1 fees. Direct costs rose with higher Rule 12b-1 fees, partly offset by a small decline of commissions paid to third party distributors. Indirect costs rose due to higher IT costs.

Advisors channel

Sequentially, revenues increased due to asset-based advisory fees, and to a lesser degree, Rule 12b-1 fees. Direct costs increased in correlation with revenues while indirect costs remained unchanged.

Compared to the second quarter of 2013, the increase in revenues was largely due to higher advisory fees, and to a lesser degree, higher asset-based Rule 12b-1 fees. Direct costs rose with revenues while indirect costs increased with field management salaries.

Compensation and Related Expense Analysis

Costs declined sequentially due to lower incentive compensation and to a lesser degree, lower pension and saving plan costs.

Compared to the same period last year, costs increased due to higher equity compensation. An increase in base salaries was offset by lower incentive compensation and lower pension costs.

General and Administrative Expense Analysis

Costs increased compared to the previous quarter due in part to higher legal and technology consulting costs, and to a lesser degree higher advertising and dealer services costs.

Last year’s second quarter included $6.6 million of costs associated with the launch of a closed-end fund. This year’s second quarter included higher costs for legal, technology consulting and dealer services.

Unaudited Balance Sheet Information        
Schedule of Selected Items Quarter ended
    June 30, 2014
(Amounts in millions)
Cash & cash equivalents (unrestricted) $507.7
Investment securities 217.4
Total assets 1,437.0
Long-term debt 190.0
Total liabilities 664.7
Stockholders' equity 772.3
 
 
Quarter-to-Date Year-to-Date
 
($ in thousands)
Shares repurchased
Number of shares 628,022 908,208
Total cost $44,047 $61,722
 
Dividend paid
Rate per share $0.34 $0.68
Total paid $28,977 $57,963
 
Capital returned to stockholders $73,024 $119,685
 
                           
Unaudited Consolidated Statement of Income
(Amounts in thousands, except for per share data)     2013   2014
    1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr. 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
Operating Revenues:
Investment management fees $ 148,445 $ 156,219 $ 165,559 $ 180,219 $ 188,037 $ 193,624
Underwriting and distribution fees 135,419 141,597 146,863 158,940 165,267 169,001
  Shareholder service fees       32,691         33,890         34,667         35,845     37,112         38,009              
  Total operating revenues       316,555         331,706         347,089         375,004     390,416         400,634              
Operating Expenses:
Underwriting and distribution 161,571 164,844 169,046 181,252 194,951 195,608
Compensation and related costs 48,155 47,376 49,472 52,594 50,009 48,589
General and administrative 16,208 26,938 20,462 22,811 23,756 27,183
Subadvisory fees 4,484 4,291 1,667 1,778 1,877 2,069
  Depreciation       3,227         3,222         3,172         3,213     3,249         3,541              
  Total operating expenses       233,645         246,671         243,819         261,648     273,842         276,990              
Operating Income 82,910 85,035 103,270 113,356 116,574 123,644
Investment and other income 4,377 1,002 5,212 9,313 3,900 6,100
Interest expense       (2,854 )       (2,858 )       (2,832 )       (2,700 )   (2,755 )       (2,755 )            
Income before taxes 84,433 83,179 105,650 119,969 117,719 126,989
Provision for taxes       30,570         31,222         37,231         41,210     42,855         44,001              
Net Income     $ 53,863       $ 51,957       $ 68,419       $ 78,759   $ 74,864       $ 82,988              
Net income per share, basic and diluted:       0.63         0.61         0.80         0.92     0.88         0.98              
Weighted average shares outstanding - basic and diluted       85,593         85,869         85,603         85,294     85,019         85,073              
  Operating margin       26.2 %       25.6 %       29.8 %       30.2 %   29.9 %       30.9 %            
 
                               
Net Distribution Cost Analysis
(Amounts in thousands)
Wholesale Channel 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr. 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
U&D Revenues $ 48,175 $ 49,846 $ 52,472 $ 56,926 $ 59,564 $ 60,237
U&D Expenses - Direct (63,548 ) (64,694 ) (67,107 ) (72,698 ) (79,700 ) (76,834 )
U&D Expenses - Indirect   (11,000 )       (11,229 )       (10,409 )       (11,285 )   (11,535 )       (12,791 )            
Net Distribution (Costs)   ($26,373 )       ($26,077 )       ($25,044 )       ($27,057 )   ($31,671 )       ($29,388 )            
   
Advisors Channel
U&D Revenues $ 87,244 $ 91,751 $ 94,391 $ 102,014 $ 105,703 $ 108,764
U&D Expenses - Direct (59,657 ) (62,794 ) (64,550 ) (69,023 ) (74,697 ) (76,867 )
U&D Expenses - Indirect   (27,366 )       (26,127 )       (26,980 )       (28,246 )   (29,019 )       (29,116 )            
Net Distribution (Costs)/Excess $ 221       $ 2,830       $ 2,861       $ 4,745   $ 1,987       $ 2,781              
 
                               
Changes in Assets Under Management 2013   2014
(Amounts in millions) 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr. 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
Wholesale Channel
Beginning assets $ 48,930 $ 53,254 $ 53,860 $ 59,661 $ 67,055 $ 70,467
Sales* 5,042 5,030 5,191 6,148 7,017 4,864
Redemptions (3,157 ) (3,983 ) (3,723 ) (3,449 ) (3,562 ) (4,363 )
Net Exchanges   66         61         83         91     112         (397 )            
Net flows 1,951 1,108 1,551 2,790 3,567 104
Market action   2,373         (502 )       4,250         4,604     (155 )       1,100              
Ending assets $ 53,254       $ 53,860       $ 59,661       $ 67,055   $ 70,467       $ 71,671              
   
Advisors Channel
Beginning assets $ 35,660 $ 37,915 $ 38,172 $ 40,767 $ 43,667 $ 44,224
Sales* 1,303 1,404 1,242 1,283 1,435 1,457
Redemptions (1,047 ) (1,083 ) (1,071 ) (1,104 ) (1,106 ) (1,098 )
Net Exchanges   (66 )       (62 )       (83 )       (92 )   (112 )       (88 )            
Net flows 190 259 88 87 217 271
Market action   2,065         (2 )       2,507         2,813     340         1,302              
Ending assets $ 37,915       $ 38,172       $ 40,767       $ 43,667   $ 44,224       $ 45,797              
 
Institutional Channel
Beginning assets $ 11,775 $ 12,626 $ 12,312 $ 13,316 $ 15,821 $ 16,692
Sales* 430 379 386 1,913 1,554 1,193
Redemptions (469 ) (811 ) (550 ) (792 ) (679 ) (851 )
Net Exchanges   0         0         0         0     0         485              
Net flows (39 ) (432 ) (164 ) 1,121 875 827
Market action   890         118         1,168         1,384     (4 )       646              
Ending assets $ 12,626       $ 12,312       $ 13,316       $ 15,821   $ 16,692       $ 18,165              
 
Consolidated Total
Beginning assets $ 96,365 $ 103,795 $ 104,344 $ 113,744 $ 126,543 $ 131,383
Sales* 6,775 6,813 6,819 9,344 10,006 7,514
Redemptions (4,673 ) (5,877 ) (5,344 ) (5,345 ) (5,347 ) (6,312 )
Net Exchanges   0         (1 )       0         (1 )   0         0              
Net flows 2,102 935 1,475 3,998 4,659 1,202
Market action   5,328         (386 )       7,925         8,801     181         3,048              
Ending assets $ 103,795       $ 104,344       $ 113,744       $ 126,543   $ 131,383       $ 135,633              
* Sales is primarily gross sales (net of sales commissions). This amount also includes
net reinvested dividends & capital gains and investment income.
 
                               
Supplemental Information 2013 2014
    1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr. 1st Qtr.     2nd Qtr.     3rd Qtr.     4th Qtr.
Channel highlights
Number of Wholesalers 50 50 49 50 60 60
Number of Advisors 1,717 1,734 1,784 1,746 1,737 1,740
Advisors' Productivity * 50.5 53.1 53.7 57.4 60.9 62.4
 
Redemption rates - long term assets
Wholesale 24.6% 29.4% 25.7% 21.7% 21.1% 25.1%
Advisors 9.4% 9.1% 8.7% 8.5% 8.2% 7.9%
Institutional 15.5% 25.5% 17.0% 21.6% 17.0% 19.9%
Total 18.0% 21.7% 18.6% 17.1% 16.2% 18.7%
 
Operating highlights
Organic growth/(decay) annualized 8.7% 3.6% 5.7% 14.1% 14.7% 3.7%
Total assets under management (in millions) 103,795 104,344 113,744 126,543 131,383 135,633
 
Diversification (Company Total)
As % of Sales
Asset Strategy 33.6% 28.5% 25.9% 27.6% 33.4% 26.3%
Fixed Income 30.7% 30.4% 31.8% 24.4% 23.3% 25.4%
Other 35.7% 41.1% 42.3% 48.0% 43.3% 48.3%
As % of Assets Under Management
Asset Strategy 33.7% 33.4% 33.8% 34.3% 33.9% 32.9%
Fixed Income 20.7% 19.9% 19.0% 18.1% 18.6% 18.7%
Other 45.6% 46.7% 47.2% 47.6% 47.5% 48.4%
 
Operating margin 26.2%     25.6%     29.8%     30.2% 29.9%     30.9%            
 
           
Lipper Fund Rankings 1 Year     3 Years     5 Years
  Funds ranked in top quartile 44% 33% 31%
Funds ranked in top half 64% 55% 57%
 
Assets ranked in top quartile 62% 64% 36%
Assets ranked in top half 82%     78%     83%
* Advisors' productivity is calculated by dividing U&D revenues for the Advisors channel
by the average number of advisors during the period.
 
       
Unaudited Consolidated Statement of Income            
(Amounts in thousands, except for per share data)     Six Months Ended
    Jun-14     Jun-13     % Change  
Operating Revenues:
Investment management fees $ 381,661 $ 304,664 25.3 %
Underwriting and distribution fees 334,268 277,016 20.7 %
  Shareholder service fees       75,121         66,581       12.8 %
  Total operating revenues       791,050         648,261       22.0 %
Operating Expenses:
Underwriting and distribution 390,559 326,415 19.7 %
Compensation and related costs 98,598 95,531 3.2 %
General and administrative 50,939 43,146 18.1 %
Subadvisory fees 3,946 8,775 -55.0 %
  Depreciation       6,790         6,449       5.3 %
  Total operating expenses       550,832         480,316       14.7 %
Operating Income 240,218 167,945 43.0 %
Investment and other income 10,000 5,379 85.9 %
Interest expense       (5,510 )       (5,712 )     -3.5 %
Income before taxes 244,708 167,612 46.0 %
Provision for taxes       86,856         61,792       40.6 %
Net Income     $ 157,852       $ 105,820       49.2 %
Net income per share, basic and diluted       1.86         1.23       50.4 %
Weighted average shares outstanding - basic and diluted       85,046         85,732       -0.8 %
  Operating margin       30.4 %       25.9 %     17.2 %
 
           
Net Distribution Cost Analysis              
(Amounts in thousands) Six Months Ended
Wholesale Channel Jun-14     Jun-13     % Change  
U&D Revenues $ 119,801 $ 98,021 22.2 %
U&D Expenses - Direct (156,534 ) (128,242 ) 22.1 %
U&D Expenses - Indirect   (24,326 )       (22,229 )     9.4 %
Net Distribution (Costs)   ($61,059 )       ($52,450 )     16.4 %
   
Advisors Channel
U&D Revenues $ 214,467 $ 178,995 19.8 %
U&D Expenses - Direct (151,564 ) (122,451 ) 23.8 %
U&D Expenses - Indirect   (58,135 )       (53,493 )     8.7 %
Net Distribution (Costs)/Excess $ 4,768       $ 3,051       56.3 %
 
       
Changes in Assets Under Management Six Months Ended
(Amounts in millions) Jun-14     Jun-13     % Change  
Wholesale Channel    
Beginning assets $ 67,055 $ 48,930 37.0 %
Sales* 11,881 10,072 18.0 %
Redemptions (7,925 ) (7,140 ) 11.0 %
Net Exchanges   (285 )       127       N/M  
Net flows 3,671 3,059 20.0 %
Market action   945         1,871       -49.5 %
Ending assets $ 71,671       $ 53,860       33.1 %
   
Advisors Channel
Beginning assets $ 43,667 $ 35,660 22.5 %
Sales* 2,892 2,707 6.8 %
Redemptions (2,204 ) (2,130 ) 3.5 %
Net Exchanges   (200 )       (128 )     N/M  
Net flows 488 449 8.7 %
Market action   1,642         2,063       -20.4 %
Ending assets $ 45,797       $ 38,172       20.0 %
 
Institutional Channel
Beginning assets $ 15,821 $ 11,775 34.4 %
Sales* 2,747 809 239.6 %
Redemptions (1,530 ) (1,280 ) 19.5 %
Net Exchanges   485         0       N/M  
Net flows 1,702 (471 ) 461.4 %
Market action   642         1,008       -36.3 %
Ending assets $ 18,165       $ 12,312       47.5 %
 
Consolidated Total
Beginning assets $ 126,543 $ 96,365 31.3 %
Sales* 17,520 13,588 28.9 %
Redemptions (11,659 ) (10,550 ) 10.5 %
Net Exchanges   0         (1 )     N/M  
Net flows 5,861 3,037 93.0 %
Market action   3,229         4,942       -34.7 %
Ending assets $ 135,633       $ 104,344       30.0 %
* Sales is primarily gross sales (net of sales commissions). This amount also includes
net reinvested dividends & capital gains and investment income.
 

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.

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, 2013, 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;
  • Our inability to provide sufficient capital to support new investment products;
  • The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
  • 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 attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment advisory business.
  • Our inability to hire or retain senior executive management or other key employees.

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, 2013 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2014. 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.