Waddell & Reed Financial, Inc. (NYSE: WDR) today reported fourth quarter 2015 net income of $62.9 million, or $0.76 per diluted share, compared to net income of $48.1 million, or $0.58 per diluted share, during the previous quarter and net income of $80.9 million, or $0.97 per diluted share, during the fourth quarter of 2014.

Operating income of $91.4 million declined 16% sequentially and 23% compared to the same quarter in 2014. Sequentially, operating revenues fell by 4% while expenses rose 1%. Compared to the same period last year, operating revenues declined by 9% and expenses declined 3%. The operating margin during the quarter was 25.3% compared to 29.0% and 30.0% for the third quarter of 2015 and the fourth quarter of 2014, respectively.

Assets under management ended the year at $104 billion; down 2% during the quarter as market appreciation partly offset the impact of net outflows. Compared to December 31, 2014, assets under management declined 16% due to a combination of net outflows and market erosion.

“Heightened market volatility has been a consistent theme throughout 2015, challenging performance and causing anxiety with investors,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “In addition to market challenges, we have had to manage increased redemption pressure and weaker sales in some of our key strategies due in part to underperformance in these funds. In light of lower levels of assets under management, we are evaluating operating expenses to align our cost structure with revenues.

“We are focused on broad strategic initiatives across our distribution channels that will secure our success in the future,” continued Herrmann. “Our Advisors channel will undergo a major upgrade to introduce a state-of-the-art brokerage platform and initiate important changes within our product offerings and share classes, including a shift to I-shares in our advisory programs, to ensure that our broker/dealer remains competitive. Now more than ever, it is critical that our products remain responsive to rapid changes in investor sentiment, and as such, we will continue to adapt and bring solutions to our distribution partners.”

Management Fee Revenue Analysis

Management fees declined 5% sequentially in correlation with lower average assets under management. Compared to the same quarter last year, management fees declined 12% compared to a 14% decline in average assets under management. Average assets under management were $108.9 billion during the current quarter compared to $114.8 billion during the prior quarter and $126.9 billion during the fourth quarter of 2014. The effective fee rate for the current quarter was 60.6 basis points compared to 60.5 basis points and 59.0 basis points during the third quarter of 2015 and fourth quarter of 2014, respectively. Management fees as a percentage declined less than average assets due to a mix-shift in the asset base that led to an improvement of 1.6 basis points in the effective fee rate compared to the fourth quarter of 2014.

Underwriting and Distribution Analysis

Underwriting and Distribution Revenues

Revenues declined 3% sequentially primarily due to a decline in asset-based Rule 12b-1 fees in our Wholesale channel, and to a lesser degree in our Advisors channel. Our Advisors channel also experienced a decline in advisory fees revenues; however, this was partially offset by an increase in sales commissions.

Compared to the same period last year, revenues declined 6% due to lower asset-based Rule 12b-1 fees in our Wholesale and Advisors channels, which was partially offset by an increase in advisory fees in our Advisors channel.

Underwriting and Distribution Costs

Costs in the fourth quarter of 2015 were relatively unchanged compared to the third quarter. Direct costs in both retail distribution channels generally declined in line with revenues. Indirect costs rose due to severance costs and higher health insurance costs in our Advisors channel. Indirect costs in our Wholesale channel increased due to additional marketing and advertising costs, which were partially offset by lower IT costs.

Compared to the fourth quarter of 2014, costs declined 3%. Direct costs in our Wholesale channel declined with revenues while direct costs in our Advisors channel rose with higher advisory fees. Indirect costs rose due to higher compensation costs in our Advisors channel as well as higher IT costs in our Wholesale channel.

Compensation and Related Expense Analysis

Costs rose 5% sequentially due to higher deferred compensation, taxes and health insurance costs, which were partly offset by lower incentive compensation and lower equity compensation costs. Compared to the fourth quarter of 2014, costs rose 2% due to higher incentive compensation, base salaries and pension costs, which were partially offset by lower severance and equity compensation.

General and Administrative Expense Analysis

Costs increased 2% sequentially due primarily to an increase in IT costs. Compared to the same quarter last year, costs declined 10% due to lower consulting and dealer services costs and to a lesser degree, lower advertising costs.

Investment and Other Income

Investment and other income of $7.6 million represent a net increase of $24.5 million from the losses of $16.9 million in the prior quarter. The current quarter’s effective tax rate was 34.6%, down from 46.2% in the prior quarter due primarily to unrealized investment gains.

               
Unaudited Consolidated Statement of Income                                
(Amounts in thousands, except for per share data)   2014   2015  
    1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Operating Revenues:
Investment management fees $ 188,037 $ 193,624 $ 197,783 $ 188,658 $ 182,105 $ 185,914 $ 175,218 $ 166,325
Underwriting and distribution fees 165,267 169,001 173,047 171,363 166,978 171,508 165,130 160,382
  Shareholder service fees       37,112       38,009       38,728       37,130     36,375       36,568       35,761       34,367  
  Total operating revenues       390,416       400,634       409,558       397,151     385,458       393,990       376,109       361,074  
Operating Expenses:
Underwriting and distribution 194,951 195,608 197,246 195,522 195,420 195,762 189,065 189,534
Compensation and related costs 50,009 48,589 48,375 47,437 53,495 52,829 46,157 48,271
General and administrative 23,756 27,183 24,924 28,774 25,678 27,897 25,458 26,033
Subadvisory fees 1,877 2,069 2,203 2,287 2,387 2,394 2,305 2,048
Depreciation 3,249 3,541 3,786 4,058 4,034 4,064 4,117 3,831
  Intangible asset impairment       -       -       7,900       -     -       -       -       -  
  Total operating expenses       273,842       276,990       284,434       278,078     281,014       282,946       267,102       269,717  
Operating Income 116,574 123,644 125,124 119,073 104,444 111,044 109,007 91,357
Investment and other income/(loss) 3,900 6,100 (1,205 ) 7,995 3,972 9 (16,872 ) 7,647
Interest expense       (2,755 )     (2,755 )     (2,769 )     (2,763 )   (2,766 )     (2,765 )     (2,765 )     (2,772 )
Income before taxes 117,719 126,989 121,150 124,305 105,650 108,288 89,370 96,232
Provision for taxes       42,855       44,001       46,564       43,412     38,537       40,843       41,312       33,312  
Net Income     $ 74,864     $ 82,988     $ 74,586     $ 80,893   $ 67,113     $ 67,445     $ 48,058     $ 62,920  
Net income per share, basic and diluted:       0.88       0.98       0.89       0.97     0.80       0.80       0.58       0.76  
Weighted average shares outstanding - basic and diluted       85,019       85,073       84,242       83,623     83,581       84,079       83,469       82,873  
  Operating margin       29.9 %     30.9 %     30.6 %     30.0 %       27.1 %     28.2 %     29.0 %     25.3 %
 
 
 
 
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 $ 59,564 $ 60,237 $ 59,807 $ 55,331 $ 52,142 $ 51,768 $ 47,040 $ 43,091
U&D Expenses - Direct (79,700 ) (76,834 ) (75,775 ) (70,150 ) (68,595 ) (66,947 ) (62,117 ) (57,119 )
U&D Expenses - Indirect   (11,535 )     (12,791 )     (13,317 )     (14,032 )   (14,029 )     (13,972 )     (13,329 )     (14,614 )
Net Distribution (Costs)   ($31,671 )     ($29,388 )     ($29,285 )     ($28,851 )   ($30,482 )     ($29,151 )     ($28,406 )     ($28,642 )
 
Advisors Channel
U&D Revenues $ 105,703 $ 108,764 $ 113,240 $ 116,032 $ 114,836 $ 119,740 $ 118,090 $ 117,291
U&D Expenses - Direct (74,697 ) (76,867 ) (79,700 ) (82,231 ) (82,022 ) (85,177 ) (84,420 ) (83,413 )
U&D Expenses - Indirect   (29,019 )     (29,116 )     (28,454 )     (29,109 )   (30,774 )     (29,666 )     (29,199 )     (34,388 )
Net Distribution Excess/(Costs) $ 1,987     $ 2,781     $ 5,086     $ 4,692       $ 2,040     $ 4,897     $ 4,471       ($510 )
 
                                   
Changes in Assets Under Management 2014       2015  
(Amounts in millions) 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Wholesale Channel            
Beginning assets $ 67,055 $ 70,467 $ 71,671 $ 66,375 $ 60,335 $ 59,412 $ 57,545 $ 49,320
Sales* 7,017 4,864 4,269 2,383 3,870 3,239 2,768 2,341
Redemptions (3,562 ) (4,363 ) (7,008 ) (8,592 ) (6,259 ) (4,558 ) (5,569 ) (7,300 )
Net Exchanges   112       (397 )     112       74     224       144       265       176  
Net flows 3,567 104 (2,627 ) (6,135 ) (2,165 ) (1,175 ) (2,536 ) (4,783 )
Market action   (155 )     1,100       (2,669 )     95     1,242       (692 )     (5,689 )     1,104  
Ending assets $ 70,467     $ 71,671     $ 66,375     $ 60,335   $ 59,412     $ 57,545     $ 49,320     $ 45,641  
   
Advisors Channel
Beginning assets $ 43,667 $ 44,224 $ 45,797 $ 44,908 $ 45,517 $ 46,385 $ 45,947 $ 42,215
Sales* 1,435 1,457 1,322 1,332 1,270 1,347 1,238 1,218
Redemptions (1,106 ) (1,098 ) (1,146 ) (1,224 ) (1,279 ) (1,279 ) (1,242 ) (1,245 )
Net Exchanges   (112 )     (88 )     (112 )     (74 )   (224 )     (144 )     (265 )     (176 )
Net flows 217 271 64 34 (233 ) (76 ) (269 ) (203 )
Market action   340       1,302       (953 )     575     1,101       (362 )     (3,463 )     1,332  
Ending assets $ 44,224     $ 45,797     $ 44,908     $ 45,517   $ 46,385     $ 45,947     $ 42,215     $ 43,344  
 
Institutional Channel
Beginning assets $ 15,821 $ 16,692 $ 18,165 $ 17,603 $ 17,798 $ 17,097 $ 17,214 $ 14,657
Sales* 1,554 1,193 328 317 300 1,203 465 773
Redemptions (679 ) (851 ) (727 ) (663 ) (1,460 ) (1,003 ) (1,817 ) (799 )
Net Exchanges   -       485       -       -     -       -       -       -  
Net flows 875 827 (399 ) (346 ) (1,160 ) 200 (1,352 ) (26 )
Market action   (4 )     646       (163 )     541     459       (83 )     (1,205 )     783  
Ending assets $ 16,692     $ 18,165     $ 17,603     $ 17,798   $ 17,097     $ 17,214     $ 14,657     $ 15,414  
 
Consolidated Total
Beginning assets $ 126,543 $ 131,383 $ 135,633 $ 128,886 $ 123,650 $ 122,894 $ 120,706 $ 106,192
Sales* 10,006 7,514 5,919 4,032 5,440 5,789 4,471 4,332
Redemptions (5,347 ) (6,312 ) (8,881 ) (10,479 ) (8,998 ) (6,840 ) (8,628 ) (9,344 )
Net Exchanges   -       -       -       -     -       -       -       -  
Net flows 4,659 1,202 (2,962 ) (6,447 ) (3,558 ) (1,051 ) (4,157 ) (5,012 )
Market action   181       3,048       (3,785 )     1,211     2,802       (1,137 )     (10,357 )     3,219  
Ending assets $ 131,383     $ 135,633     $ 128,886     $ 123,650       $ 122,894     $ 120,706     $ 106,192     $ 104,399  
 
 
* Sales is primarily gross sales (net of sales commissions). This amount also includes
net reinvested dividends & capital gains and investment income.
 
                                       
Supplemental Information 2014     2015
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Channel highlights            
Number of Wholesalers 60 60 59 59 61 62 61 61
Number of Advisors 1,737 1,740 1,759 1,766 1,745 1,780 1,795 1,819
Advisors' Productivity * 60.9 62.4 64.6 65.7 65.9 67.9 66.3 64.9
 
Redemption rates - long term assets
Wholesale 21.1% 25.1% 40.3% 53.8% 42.9% 31.0% 41.2% 59.3%
Advisors 8.2% 7.9% 8.2% 8.9% 9.0% 9.0% 8.9% 9.3%
Institutional 17.0% 19.9% 16.1% 14.7% 33.7% 23.2% 45.4% 20.5%
Total 16.2% 18.7% 26.1% 32.4% 29.0% 21.7% 29.3% 33.7%
 
Operating highlights
Organic growth/(decay) annualized 14.7% 3.7% -8.7% -20.0% -11.5% -3.4% -13.8% -18.9%
Total assets under management (in millions) 131,383 135,633 128,886 123,650 122,894 120,706 106,192 104,399
 
Diversification (Company Total)
As % of Sales
Asset Strategy 33.4% 26.3% 24.9% 4.2% 17.1% 12.5% 12.5% 6.4%
Fixed Income 23.3% 25.4% 28.8% 28.1% 23.8% 16.8% 18.9% 24.5%
Other 43.3% 48.3% 46.3% 67.7% 59.1% 70.7% 68.6% 69.1%
As % of Assets Under Management
Asset Strategy 33.9% 32.9% 32.0% 28.8% 27.0% 25.7% 23.7% 20.8%
Fixed Income 18.6% 18.7% 18.2% 17.8% 17.7% 17.5% 18.7% 17.7%
Other 47.5% 48.4% 49.8% 53.4% 55.3% 56.8% 57.6% 61.5%
 
Operating margin 29.9%   30.9%   30.6%   30.0%     27.1%   28.2%   29.0%   25.3%
         
Lipper Fund Rankings 1 Year   3 Years   5 Years
Funds ranked in top quartile 18% 26% 22%
Funds ranked in top half 61% 60% 48%
 
Assets ranked in top quartile 13% 38% 35%
Assets ranked in top half 37%   56%   72%
 
* Advisors' productivity is calculated by dividing U&D revenues for the Advisors channel
by the average number of advisors during the period.
 
   
Unaudited Balance Sheet Information
Schedule of Selected Items
    Dec. 31, 2015
(Amounts in millions)
Cash & cash equivalents (unrestricted) $558.5
Investment securities 291.7
Total assets 1,555.7
Long-term debt 190.0
Total liabilities 709.3
Stockholders' equity 846.4
 
Shares outstanding 82.9

 

million shares

 
Quarter ended Year-to-Date
Dec. 31, 2015 Dec. 31, 2015
 
($ in thousands)
Shares repurchased
Number of shares 520,154 1,955,509
Total cost $17,058 $80,335
 
Dividend paid
Rate per share $0.46 $1.75
Total paid $35,710 $143,959
 
Capital returned to stockholders $52,768 $224,294
 
On December 31 2015, we granted 355,468 shares of restricted stock
in accordance with our executive compensation program.
 
       
Unaudited Consolidated Statement of Income          
(Amounts in thousands, except for per share data) Year Ended
    Dec-14   Dec-15   % Change
Operating Revenues:
Investment management fees $ 768,102 $ 709,562 -7.6%
Underwriting and distribution fees 678,678 663,998 -2.2%
  Shareholder service fees       150,979       143,071     -5.2%
  Total operating revenues       1,597,759       1,516,631     -5.1%
Operating Expenses:
Underwriting and distribution 783,327 769,781 -1.7%
Compensation and related costs 194,410 200,752 3.3%
General and administrative 104,637 105,066 0.4%
Subadvisory fees 8,436 9,134 8.3%
Depreciation 14,634 16,046 9.6%
  Intangible asset impairment       7,900       -     N/A
  Total operating expenses       1,113,344       1,100,779     -1.1%
Operating Income 484,415 415,852 -14.2%
Investment and other income 16,790 (5,244 ) -131.2%
Interest expense       (11,042 )     (11,068 )   0.2%
Income before taxes 490,163 399,540 -18.5%
Provision for taxes       176,832       154,004     -12.9%
Net Income     $ 313,331     $ 245,536     -21.6%
Net income per share, basic and diluted       3.71       2.94     -20.7%
Weighted average shares outstanding - basic and diluted       84,485       83,499      
  Operating margin       30.3 %     27.4 %    
 
 
 
 
Net Distribution Cost Analysis          
(Amounts in thousands) Year Ended
Wholesale Channel Dec-14   Dec-15   % Change
U&D Revenues $ 234,939 $ 194,041 -17.4%
U&D Expenses - Direct (302,459 ) (254,778 ) -15.8%
U&D Expenses - Indirect   (51,675 )     (55,944 )   8.3%
Net Distribution (Costs)   ($119,195 )     ($116,681 )   -2.1%
 
Advisors Channel
U&D Revenues $ 443,739 $ 469,957 5.9%
U&D Expenses - Direct (313,495 ) (335,032 ) 6.9%
U&D Expenses - Indirect   (115,698 )     (124,027 )   7.2%
Net Distribution Excess $ 14,546     $ 10,898     -25.1%
 
     
Changes in Assets Under Management Year Ended
(Amounts in millions) Dec-14   Dec-15   % Change
Wholesale Channel  
Beginning assets $ 67,055 $ 60,335 -10.0%
Sales* 18,534 12,218 -34.1%
Redemptions (23,524 ) (23,686 ) 0.7%
Net Exchanges   (101 )     809     N/M
Net flows (5,091 ) (10,659 ) 109.4%
Market action   (1,629 )     (4,035 )   -147.7%
Ending assets $ 60,335     $ 45,641     -24.4%
   
Advisors Channel
Beginning assets $ 43,667 $ 45,517 4.2%
Sales* 5,545 5,073 -8.5%
Redemptions (4,575 ) (5,044 ) 10.3%
Net Exchanges   (384 )     (809 )   N/M
Net flows 586 (780 ) N/M
Market action   1,264       (1,393 )   N/M
Ending assets $ 45,517     $ 43,344     -4.8%
 
Institutional Channel
Beginning assets $ 15,821 $ 17,798 12.5%
Sales* 3,392 2,743 -19.1%
Redemptions (2,920 ) (5,081 ) 74.0%
Net Exchanges   485       -     N/M
Net flows 957 (2,338 ) N/M
Market action   1,020       (46 )   N/M
Ending assets $ 17,798     $ 15,414     -13.4%
 
Consolidated Total
Beginning assets $ 126,543 $ 123,650 -2.3%
Sales* 27,471 20,034 -27.1%
Redemptions (31,019 ) (33,811 ) 9.0%
Net Exchanges   -       -     N/M
Net flows (3,548 ) (13,777 ) 288.3%
Market action   655       (5,474 )   N/M
Ending assets $ 123,650     $ 104,399     -15.6%
 
 
* 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.

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, 2014, 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;
  • 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, 2014 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2015. 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.