Business Discussion
Management commentary
"Our quarterly results support our confidence in our distribution model,"
said
"We attribute our current sales success not only to our top notch investment management team that continues to deliver solid relative results in this difficult market environment," continued Herrmann, "but also as importantly, to our ever stronger sales and support organization."
Advisors channel
Gross sales during the quarter were
Our brokerage platform is now operational. A few of our financial advisors moved to the new platform during the quarter. With the first phase now in place, we will begin active recruiting of experienced financial advisors. This complements our traditional recruiting model that focuses primarily on individuals with little or no previous industry experience. Success in this new approach should further accelerate sales and productivity.
Wholesale channel
Gross sales decelerated slightly compared with the first quarter's
exceptional volume. At
Sales continue to broaden with seven funds internally forecasted to reach
annual gross sales of at least
Institutional channel
Gross sales during the quarter were
Demand for our Large Capitalization Growth style remains strong not only through Pictet & Cie's distribution network, but also in the traditional institutional market, which continues to favor this investment style. The pipeline looks promising but prospects remain in the early or mid-stage of development as the closing cycle is being elongated by volatile markets.
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 are influenced by asset composition, sales, redemptions, and the financial market conditions.
Average assets under management increased by 10% on a sequential quarter basis and 33% compared to last year's second quarter.
The effective management fee rate declined slightly to 65.1 basis points in the current quarter compared to 65.3 basis points in the previous quarter and 68.4 basis points in last year's second quarter. The decline is due to a mix-shift in assets under management.
Underwriting and Distribution Revenue and Expense Analysis
Advisors channel
On a sequential basis, the increase in revenues was largely due to strong sales and asset growth in our asset allocation products, and to a lesser extent, higher asset-based service fee revenues. Direct expenses rose in correlation with higher asset levels in our asset allocation products and asset-based service fees while indirect costs increased due to a combination of items including sales convention, incentive compensation and group insurance costs.
Compared to last year's second quarter, the increase in revenues was due to a combination of higher variable annuity sales volume and higher asset-based fee revenues. Direct expenses rose in correlation with higher sales volume and asset levels. Indirect expenses increased due to higher group health costs (last year's second quarter contained an adjustment due to favorable claim activity) as well as higher compensation, recruiting and support costs.
Wholesale channel
Sequentially, the increase in revenues was largely attributable to higher asset-based service and distribution fees as asset levels continued to rise. Direct costs rose as asset-based distribution fees paid to our distributors more than offset the drop in commission paid mostly from lower sales volume. Indirect costs remained unchanged.
Compared to the same period last year, revenues rose on higher asset-based service and distribution costs while direct expenses increased on higher sales volume. Indirect expenses rose more moderately due to a combination of additional marketing, higher compensation and group health costs.
Operating Expense Analysis
On a sequential quarter basis, the increase in operating costs is almost entirely due to higher underwriting and distribution costs as discussed above. The increase in both subadvisory fees and general and administrative costs was largely offset by lower compensation and related costs. Subadvisory fees rose on strong sales in our subadvised products. The increase in general and administrative expenses was due to a number of items including higher consulting and information technology costs. Compensation and related costs were lower in the current quarter as costs in the previous quarter included higher incentive compensation for the investment management staff.
Compared to the same period last year, the increase was mostly due to higher underwriting and distribution costs as discussed above. The remainder of the increase was due in part to higher compensation and related costs and to a lesser extent higher general and administrative costs and higher subadvisory fees. Compensation and related costs increased due to a combination of higher headcount and base compensation, group health and insurance costs and higher incentive compensation. General and administrative costs rose on a combination of higher information technology and fund-related costs. Subadvisory fees rose on higher levels of subadvised assets under management.
Subadvised average assets under management were
Margin Discussion
On a sequential quarter basis, strong asset growth was largely responsible for the 8% increase in operating revenues while a drop in sales volume in our Wholesale channel and a more normalized compensation level help contain expenses. These factors led to an improvement in operating margin during the quarter to 22.4% compared to 19.7% during the first quarter of 2008.
Compared to last year's second quarter, operating revenues rose 26% while operating costs rose 28% leading to a 140 basis point contraction in the operating margin. Expense growth surpassed revenue growth primarily due to a 169% increase in the sales volume in our Wholesale channel.
Management fees earned at current levels of assets under management are sufficient to offset the cost of distribution through our Wholesale channel at current sales volume. If asset levels decline or sales volume increases, we could experience pressure on our operating margin.
Balance Sheet Information
Cash and cash equivalents and investment securities are
Stockholders' equity was
Unaudited Schedule of Operating Data (Amounts in thousands, except for per share data) 2007 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Operating Revenues: Investment management fees $82,860 $89,383 $94,806 $105,296 Underwriting and distribution fees 84,016 88,556 92,168 106,345 Shareholder service fees 22,623 23,347 23,678 24,476 Total operating revenues 189,499 201,286 210,652 236,117 Operating Expenses: Underwriting and distribution 94,397 99,528 105,604 122,745 Compensation and related costs 26,932 28,312 28,760 31,901 General and administrative 10,083 11,840 12,745 13,819 Subadvisory fees 9,215 10,638 11,459 12,532 Depreciation 3,043 3,062 3,167 3,140 Total operating expenses 143,670 153,380 161,735 184,137 Operating Income: 45,829 47,906 48,917 51,980 Investment and other income 2,480 2,609 4,831 6,532 Interest expense (2,984) (2,982) (2,984) (2,974) Income before taxes 45,325 47,533 50,764 55,538 Provision for taxes 16,598 17,827 18,797 20,441 Net Income $28,727 $29,706 $31,967 $35,097 Net income per share - diluted 0.35 0.36 0.39 0.42 Weighted average shares outstanding - diluted 82,803 82,323 82,099 83,676 Operating margin 24.2% 23.8% 23.2% 22.0% Unaudited Schedule of Operating Data (Amounts in thousands, except for per share data) 2008 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Operating Revenues: Investment management fees $102,972 $112,583 Underwriting and distribution fees 106,111 114,254 Shareholder service fees 24,986 25,946 Total operating revenues 234,069 252,783 Operating Expenses: Underwriting and distribution 124,777 132,292 Compensation and related costs 34,346 32,870 General and administrative 13,833 14,731 Subadvisory fees 11,834 13,037 Depreciation 3,140 3,188 Total operating expenses 187,930 196,118 Operating Income: 46,139 56,665 Investment and other income 2,186 1,817 Interest expense (2,978) (2,982) Income before taxes 45,347 55,500 Provision for taxes 17,006 20,313 Net Income $28,341 $35,187 Net income per share- diluted 0.33 0.42 Weighted average shares outstanding - diluted 84,964 84,594 Operating margin 19.7% 22.4% Underwriting and Distribution (Amounts in thousands) 2007 Advisors Channel 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Revenues $56,807 $57,839 $57,728 $65,836 Expenses Direct 39,340 40,173 39,539 44,461 Indirect 20,775 20,057 21,145 22,800 Total expenses $60,115 $60,230 $60,684 $67,261 Margin -5.8% -4.1% -5.1% -2.2% Wholesale Channel (Third-Party) Revenues $12,968 $15,609 $19,271 $25,343 Expenses Direct 16,951 20,025 25,340 35,253 Indirect 5,001 6,158 6,304 6,820 Total expenses $21,952 $26,183 $31,644 $42,073 Wholesale Channel (Legend) Revenues $14,241 $15,108 $15,169 $15,166 Expenses Direct 9,478 10,165 10,158 10,046 Indirect 2,852 2,950 3,118 3,365 Total expenses $12,330 $13,115 $13,276 $13,411 Consolidated Total Revenues $84,016 $88,556 $92,168 $106,345 Expenses Direct 65,769 70,363 75,037 89,760 Indirect 28,628 29,165 30,567 32,985 Total expenses $94,397 $99,528 $105,604 $122,745 Underwriting and Distribution (Amounts in thousands) 2008 Advisors Channel 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Revenues $61,677 $63,812 Expenses Direct 42,712 44,872 Indirect 22,616 23,588 Total expenses $65,328 $68,460 Margin -5.9% -7.3% Wholesale Channel (Third-Party) Revenues $30,345 $35,905 Expenses Direct 39,595 43,307 Indirect 7,252 7,372 Total expenses $46,847 $50,679 Wholesale Channel (Legend) Revenues $14,089 $14,537 Expenses Direct 9,423 9,695 Indirect 3,179 3,458 Total expenses $12,602 $13,153 Consolidated Total Revenues $106,111 $114,254 Expenses Direct 91,730 97,874 Indirect 33,047 34,418 Total expenses $124,777 $132,292 Changes in Assets Under Management (Amounts in millions) 2007 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Advisors Channel Beginning assets $29,905 $30,427 $32,153 $34,069 Sales (net of commissions) 783 866 902 1,000 Redemptions (915) (1,027) (922) (965) Net sales (132) (161) (20) 35 Net exchanges (39) (46) (67) (29) Reinvested dividends & capital gains 65 108 80 (8) Net flows (106) (99) (7) (2) Market action 628 1,825 1,923 495 Ending assets $30,427 $32,153 $34,069 $34,562 Wholesale Channel Beginning assets $10,819 $11,996 $14,247 $17,405 Sales (net of commissions) 1,300 1,703 2,500 3,967 Redemptions (596) (635) (701) (863) Net sales 704 1,068 1,799 3,104 Net exchanges 37 45 65 27 Reinvested dividends & capital gains 12 35 18 (89) Net flows 753 1,148 1,882 3,042 Market action 424 1,103 1,276 1,090 Ending assets $11,996 $14,247 $17,405 $21,537 Institutional Channel Beginning assets $7,677 $7,315 $7,564 $7,908 Sales (net of commissions) 353 137 282 1,111 Redemptions (899) (319) (542) (368) Net sales (546) (182) (260) 743 Net exchanges 0 0 0 0 Reinvested dividends & capital gains 28 28 24 25 Net flows (518) (154) (236) 768 Market action 156 403 580 93 Ending assets $7,315 $7,564 $7,908 $8,769 Consolidated Total Beginning assets $48,401 $49,738 $53,964 $59,382 Sales (net of commissions) 2,436 2,706 3,684 6,078 Redemptions (2,410) (1,981) (2,165) (2,196) Net sales 26 725 1,519 3,882 Net exchanges (2) (1) (2) (2) Reinvested dividends & capital gains 105 171 122 (72) Net flows 129 895 1,639 3,808 Market action 1,208 3,331 3,779 1,678 Ending assets $49,738 $53,964 $59,382 $64,868 Changes in Assets Under Management (Amounts in millions) 2008 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Advisors Channel Beginning assets $34,562 $32,075 Sales (net of commissions) 1,048 1,100 Redemptions (917) (914) Net sales 131 186 Net exchanges (67) (36) Reinvested dividends & capital gains 69 93 Net flows 133 243 Market action (2,620) 369 Ending assets $32,075 $32,687 Wholesale Channel Beginning assets $21,537 $24,532 Sales (net of commissions) 5,413 4,574 Redemptions (1,171) (1,243) Net sales 4,242 3,331 Net exchanges 65 35 Reinvested dividends & capital gains 6 31 Net flows 4,313 3,397 Market action (1,318) 1,019 Ending assets $24,532 $28,948 Institutional Channel Beginning assets $8,769 $8,285 Sales (net of commissions) 696 664 Redemptions (365) (497) Net sales 331 167 Net exchanges 0 0 Reinvested dividends & capital gains 27 29 Net flows 358 196 Market action (842) 8 Ending assets $8,285 $8,489 Consolidated Total Beginning assets $64,868 $64,892 Sales (net of commissions) 7,157 6,338 Redemptions (2,453) (2,654) Net sales 4,704 3,684 Net exchanges (2) (1) Reinvested dividends & capital gains 102 153 Net flows 4,804 3,836 Market action (4,780) 1,396 Ending assets $64,892 $70,124 Supplemental Information 2007 2008 1st 2nd 3rd 4th 1st 2nd 3rd 4th Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Redemption rates - long term assets Advisors 9.8% 10.0% 8.8% 8.0% 8.4% 7.7% Wholesale 21.0% 18.8% 17.9% 17.3% 20.6% 18.0% Institutional 48.0% 17.0% 28.4% 17.4% 17.5% 23.4% Total 18.4% 13.3% 14.1% 12.2% 14.0% 13.8% Sales per advisor (000s) Total 252 305 296 334 351 357 2+ Years 371 434 439 505 548 538 0 to 2 Years 77 102 91 94 100 105 Gross production per advisor (000s) 16.1 15.9 15.2 17.4 17.2 17.4 Number of advisors 2,171 2,175 2,273 2,293 2,235 2,285 Number of shareholder accounts (000s) 2,969 3,047 3,142 3,275 3,432 3,638 Number of shareholders (000s) 663 688 696 720 757 850 Fund Rankings Lipper Equity funds 1 Year 3 Years 5 Years Top quartile 50% 55% 50% Top half 76% 64% 71% Equity assets Top quartile 67% 69% 64% Top half 75% 88% 91% All funds Top quartile 48% 52% 40% Top half 72% 66% 71% All assets Top quartile 66% 66% 59% Top half 75% 88% 89% MorningStar % of funds with 4 or 5 stars Equity funds 44% 41% 38% All funds 35% 36% 30% % of assets with 4 or 5 stars Equity funds 82% 58% 57% All funds 75% 54% 53%
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,
Web site Resources
We invite you to visit the "Corporate" section of our Web site at http://www.waddell.com under the caption "Data Tables" to review supplemental information schedules.
Contacts Investor Contact: Nicole McIntosh, Director of Investor Relations, (913) 236-1880, nmcintosh@waddell.com Mutual Fund Investor Contact: Call (888) WADDELL, or visit http://www.waddell.com or http://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
Through its subsidiaries, Waddell & Reed Financial, Inc. provides
investment management and financial planning services to clients throughout
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
-- 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;
-- Investors' failure to renew our investment management or subadvisory agreements, or the terms of any such renewals being on unfavorable terms;
-- 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 unsuccessful implementation of new systems business technology platforms or such implementations not being timely or cost effective;
-- Changes in, or non-compliance with, laws, regulations or in legal, regulatory, accounting, tax or compliance requirements or governmental policies applicable to the investment management and broker/dealer industries; and
-- Investors' failure to renew our investment management or subadvisory agreements, or the terms of any such renewals being on unfavorable terms.
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
SOURCE Waddell & Reed Financial, Inc.