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WADDELL&REED FINL- : Waddell & Reed Financial, Inc. Reports Second Quarter Results

07/29/2008 | 06:59am US/Eastern
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OVERLAND PARK, Kan., July 29 /PRNewswire-FirstCall/ -- Waddell & Reed Financial, Inc. (NYSE: WDR) reported second quarter net income of $35.2 million, or $0.42 per diluted share compared to net income of $28.3 million, or $0.33 per diluted share during the first quarter and net income of $29.7 million, or $0.36 per diluted share in last year's second quarter.

Business Discussion

Management commentary

"Our quarterly results support our confidence in our distribution model," said Hank Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. "Despite a turbulent market environment, we achieved very strong gross sales and net flows across our distribution channels.

"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 $1.1 billion, a 5% increase compared to the first quarter of this year and a 27% increase compared to the same period last year. Net flows were $243 million, nearly double the level experienced in the previous quarter and a meaningful improvement compared to the outflows we have experienced historically in this channel. Our Advisors channel has seen significant improvement in individual productivity and overall sales volume over the past few years. This has resulted in steady improvements to net flows every year since 2006. It is notable and gratifying that this progress has continued through the challenging equity environment.

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 $4.6 billion, gross sales continued to exhibit a strong rate of growth and year-to-date has surpassed total sales in 2007. Net flows are following a similar pattern. Net flows of $3.4 billion during the quarter represent an annualized growth rate of 55%.

Sales continue to broaden with seven funds internally forecasted to reach annual gross sales of at least $100 million and five of these have already surpassed that mark.

Institutional channel

Gross sales during the quarter were $664 million, a 5% decline during the quarter and nearly a four-fold increase compared to last year's second quarter. Sales continue to be largely driven by our subadvisory relationship with Pictet & Cie. Net flows of $196 million during the quarter represent a respectable annualized quarterly growth rate of 9%.

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 $12.8 billion in the current quarter, compared to $11.6 billion during the first quarter of 2008 and $10.1 billion during the second quarter of 2007.

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 $273 million (excluding $117 million held for the benefit of customers segregated in compliance with federal and other regulations). We have no short-term borrowings against our money market loan program or our $200 million credit facility.

Stockholders' equity was $378 million and there were 86.2 million shares outstanding. During the quarter, we repurchased 588 thousand shares on the open market or privately at an aggregate cost of $19.8 million.



    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, July 29, 2008 at 10:00 a.m. Eastern. During this call, Henry J. Herrmann, CEO, will review our second quarter results. Live access to the teleconference will be available on the "Corporate" section of our Web site at http://www.waddell.com. A Web cast replay will be made available shortly after the call through Aug. 6th.

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 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 Advisors channel (our network of financial advisors), our Wholesale channel (encompassing broker/dealer, retirement, registered investment advisors as well as the activities of our Legend subsidiary), and our Institutional channel (including defined benefit plans, pension plans and endowments, as well as the activities of ACF 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, W&R Target Funds, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Investment Management Company serves as investment advisor to Ivy Funds, Inc. and the Ivy Funds portfolios. Waddell & Reed, Inc. serves as principal underwriter and distributor to the Waddell & Reed Advisors Group of Mutual Funds, W&R Target Funds, Inc. and Waddell & Reed InvestEd Portfolios, Inc., while Ivy Funds Distributor, Inc. serves as principal underwriter and distributor to Ivy Funds, Inc. and the Ivy Funds portfolios.

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, 2007, which include, without limitation:

-- 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 December 31, 2007 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2008. 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.

SOURCE Waddell & Reed Financial, Inc.

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