Market Overview

Waddell & Reed Financial, Inc. Reports Third Quarter Results

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OVERLAND PARK, Kan.--(BUSINESS WIRE)--

Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter income from continuing operations of $52.1 million, or $0.61 per diluted share, compared to $41.2 million, or $0.48 per diluted share, during the second quarter of 2012 and $39.4 million, or $0.46 per diluted share, during the same period last year.

On October 29 of this year, the Company entered into a definitive agreement to sell its Legend group of subsidiaries to First Allied Holdings Inc. As a result of this transaction, Legend's operations are now classified as discontinued operations in current and prior periods presented. Results from discontinued operations in the current quarter include a non-cash charge of $42.4 million related to the write-down of Legend as a result of the sale. We expect the transaction to close in January 2013, subject to regulatory approval customary for transactions of this type.

“The sale of Legend reflects our desire to emphasize our core business,” said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. “We appreciate the efforts of the Legend team over the past 12 years and wish them continued success in their new alliance with First Allied.”

Net income, including the loss from discontinued operations, was $8.5 million, or $0.10 per diluted share, during the quarter compared to net income of $41.7 million, or $0.48 per diluted share, during the previous quarter and $39.8 million, or $0.46 per diluted share, during the third quarter of 2011. Unless stated otherwise, any reference to income statement items in this release refers to results from continuing operations.

Operating income was $79.7 million during the quarter, an 18% increase compared to the previous quarter and 8% increase compared to the same period last year. Our operating margin reached 27.2%, compared to 23.3% during the previous quarter and 26.4% during the same period last year.

Assets under management rose 6% during the quarter and ended the month of September at $95 billion driven by a combination of positive market action and organic growth.

Business Discussion

Advisors channel

Sales of $906 million rose 4% compared to the same period in 2011, but fell 13% compared to the second quarter of 2012 due principally to weaker sales of variable annuity products. After a good start to 2012, third quarter flows were slightly negative at $75 million. For the first nine months of this year, the Advisors channel generated positive flows of $266 million.

Our Advisors business remains our most stable channel. The stickiness of our clients' investments yields one of the longest asset retention periods in the industry, and certainly the highest among the retail clientele of our publicly traded peers. Clients' growing preference for fee-based solutions also provides us with an increasingly predictable stream of recurring revenues. Fee-based assets currently comprise 25% of total assets under management in this channel, up from 20% during the same period last year.

Wholesale channel

Sales from our Wholesale channel were $3.6 billion during the quarter, or 10% lower than the same period last year and 8% lower than the previous quarter. Net flows improved 22% and 7% compared to the third quarter of 2011 and second quarter of 2012, respectively. The improvement in net flows was due to lower redemptions.

Despite a 16% increase year-to-date in the S&P 500 index, investors continue to withdraw from actively managed equity products. While this continues to pose a challenge, the strength of our investment process, breadth of our product line and our embedded relationships with key distributors and their financial advisors continue to facilitate our organic growth in this channel. On a year-to-date basis, 59% of our equity funds and 74% of our equity assets beat their Lipper peers. Our longer-term record is similarly solid.

Institutional channel

Sales of $721 million rose 27% compared to the previous quarter and inflows of $231 million compare favorably to outflows of $433 during the second quarter. Last year's third quarter included the funding of a material mandate for approximately $800 million that boosted both sales and inflows.

Our Core Equity strategy continues to generate meaningful interest and led to two significant new relationships being funded in the current quarter. This has been the fastest growing strategy over the past year and now ranks second, as measured by assets, behind Large Cap Growth in this channel.

Management Fee Revenue Analysis

The sequential increase in revenues was due to higher levels of assets under management and one additional day in the current period. Compared to the same period last year, the increase in revenues was due to higher levels of assets under management and partly offset by a mix-shift toward fixed income products.

The effective fee rate during the current quarter was 59.8 basis points, compared to 59.9 basis points during the second quarter and 60.6 basis points during the third quarter of 2011.

Underwriting and Distribution Revenue and Expense Analysis

Advisors channel

Revenues declined sequentially due to lower sales from front-load funds, variable annuity products and insurance products. These were partly offset by higher revenue from asset allocation fees and Rule 12b-1 fees. Direct expenses declined with revenues while indirect expenses declined due to a combination of lower convention costs, payroll taxes and group insurance costs.

Compared to the third quarter of 2011, revenues increased with higher asset allocation fees and were partly offset by lower sales commissions from variable annuity products. Direct expenses rose with associated revenues. Indirect expenses were largely unchanged.

Wholesale channel

Compared to the previous quarter, revenues rose with higher Rule 12b-1 fees, partly offset by lower sales commissions. Direct expenses rose with associated revenues and higher third party payouts. Indirect expenses remained unchanged.

Compared to the same period last year, revenues declined on a combination of lower asset-based fees and sales commissions. Direct expenses rose on higher third party payouts. Business travel and related expenses were the main contributors to the increase in indirect costs.

Compensation and Related Expense Analysis

Last year's third quarter included an adjustment of $3.2 million to lower estimates for annual incentive bonuses. The remainder of the increase compared to the same period last year is attributable to higher base salary, equity compensation and pension costs.

Sequentially, compensation and related costs remained unchanged as higher earnings on deferred compensation was offset by lower payroll taxes.

General and Administrative Expense Analysis

The current quarter included an adjustment to reflect a revision in the estimated costs of distributing the 2006 SEC market timing settlement and a reduction in the estimated legal costs related to an ongoing class action suit, partly offset by higher consultant fees. In sum, these items totaled a $2.5 million benefit.

The second quarter of 2012 included a $5 million charge to write off software capitalization costs. It, along with adjustments to estimates described above, were responsible for the sequential decline in costs.

Subadvisory Fees

The decline in subadvisory fees is attributable to lower levels of subadvised assets under management compared to the previous quarter, as well as the same quarter last year. During the current quarter, subadvised average assets under management were $4.7 billion.

Investment and Other Income/Loss

Compared with the second quarter, investment and other income include higher gains recognized on the sale of available-for-sale securities and gains in our investment trading portfolio. These gains were partly offset by the write-down of a partnership interest.

Compared with the same period last year, gains recognized on the sale of available-for-sale securities were much more sizable while losses in our mutual fund trading portfolios were lower.

Tax Rate

Our effective tax for continuing operations during the current quarter was 34.5%. The lower tax rate resulted from statute limitations running out on previously open tax years, which resulted in the release of tax reserves for those years; investment gains that reduced the valuation allowance against capital loss carryforwards; and adjustment to prior year tax estimates based upon actual filing positions.

We estimate our annual effective tax rate to range between 37% and 39%, excluding any changes related to the valuation allowance.

Balance Sheet Information

As of September 30, 2012, cash and cash equivalents and investment securities were $545 million. Long-term debt was $190 million and there was no short-term debt outstanding.

Stockholders' equity was $568 million and there were 85.6 million shares outstanding. During the quarter, we repurchased 213 thousand shares on the open market or privately, bringing our annual total to 1.2 million shares at an aggregate cost of $36 million.

Unaudited Consolidated Statement of Income        
(Amounts in thousands, except for per share data) 2011   2012
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Operating Revenues:            
Investment management fees $ 131,644 $ 138,985 $ 133,495 $ 126,476 $ 134,900 $ 134,213 $ 138,364
Underwriting and distribution fees 117,041 121,101 115,786 115,556 121,153 123,687 122,819
Shareholder service fees     29,750       31,109       31,060       30,530     31,818       31,786       32,182      
Total operating revenues     278,435       291,195       280,341       272,562     287,871       289,686       293,365      
Operating Expenses:
Underwriting and distribution 138,607 142,910 138,111 140,590 144,486 148,067 147,408
Compensation and related costs 39,542 40,971 36,105 40,714 44,158 41,931 42,343
General and administrative 16,087 17,854 20,979 19,190 17,764 23,634 15,774
Subadvisory fees 8,080 8,313 7,291 6,201 6,271 5,208 4,921
Depreciation     3,483       3,725       3,866       3,690     3,359       3,329       3,188      
Total operating expenses     205,799       213,773       206,352       210,385     216,038       222,169       213,634      
Operating Income 72,636 77,422 73,989 62,177 71,833 67,517 79,731
Investment and other income/(loss) 948 2,459 (4,178 ) 2,876 3,949 1,325 2,632
Interest expense     (2,900 )     (2,832 )     (2,837 )     (2,839 )   (2,826 )     (2,825 )     (2,826 )    
Income from continuing operations before taxes 70,684 77,049 66,974 62,214 72,956 66,017 79,537
Provision for taxes     26,314       27,954       27,603       22,843     26,119       24,792       27,421      
Income from continuing operations 44,370 49,095 39,371 39,371 46,837 41,225 52,116
Income/(loss) from discontinued operations, net of income taxes     1,263       875       463       651     550       493       (43,590 )    
Net Income   $ 45,633     $ 49,970     $ 39,834     $ 40,022   $ 47,387     $ 41,718     $ 8,526      
Net Income per share from continuing operations 0.52 0.57 0.46 0.46 0.55 0.48 0.61
Income/(loss) per share from discontinued operations     0.01       0.01       0.00       0.01     0.00       0.00       (0.51 )    
Net income per share     0.53       0.58       0.46       0.47     0.55       0.48       0.10      
Weighted average shares outstanding - diluted     85,836       86,275       85,782       85,286     85,606       86,095       85,755      
Operating margin     26.1 %     26.6 %     26.4 %     22.8 %     25.0 %     23.3 %     27.2 %    
 
Underwriting and Distribution      
(Amounts in thousands) 2011 2012
Advisors Channel 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Revenues $ 72,555 $ 74,018 $ 70,088 $ 73,416 $ 76,680 $ 79,779 $ 78,160
Expenses
Direct 50,872 52,422 49,748 51,316 53,676 55,813 54,246
Indirect   22,791       23,724       24,761       26,138     26,367       26,755       25,727      
Total expenses $ 73,663     $ 76,146     $ 74,509     $ 77,454   $ 80,043     $ 82,568     $ 79,973      
Wholesale Channel
Revenues $ 44,486 $ 47,083 $ 45,698 $ 42,140 $ 44,473 $ 43,908 $ 44,659
Expenses
Direct 56,498 58,425 55,502 53,664 55,104 55,287 57,390
Indirect   8,446       8,339       8,100       9,472     9,339       10,212       10,045      
Total expenses $ 64,944     $ 66,764     $ 63,602     $ 63,136   $ 64,443     $ 65,499     $ 67,435      
Total
Revenues $ 117,041 $ 121,101 $ 115,786 $ 115,556 $ 121,153 $ 123,687 $ 122,819
Expenses
Direct 107,370 110,847 105,250 104,980 108,780 111,100 111,636
Indirect   31,237       32,063       32,861       35,610     35,706       36,967       35,772      
Total expenses $ 138,607     $ 142,910     $ 138,111     $ 140,590   $ 144,486     $ 148,067     $ 147,408      
Margin   -18.4 %     -18.0 %     -19.3 %     -21.7 %     -19.3 %     -19.7 %     -20.0 %    
 
               
Changes in Assets Under Management                              
(Amounts in millions) 2011 2012
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Advisors Channel
Beginning assets $ 33,181 $ 34,922 $ 34,843 $ 29,760 $ 31,709 $ 35,073 $ 33,846
Sales (net of commissions) 1,064 1,011 867 858 1,030 1,046 906
Redemptions   (990 )     (1,059 )     (1,004 )     (994 )   (1,042 )     (961 )     (1,019 )    
Net sales 74 (48 ) (137 ) (136 ) (12 ) 85 (113 )
Net exchanges (62 ) (55 ) (79 ) (66 ) 103 (49 ) (60 )
Reinvested dividends & capital gains   54       128       83       88     67       147       98      
Net flows 66 25 (133 ) (114 ) 158 183 (75 )
Market action   1,675       (104 )     (4,950 )     2,063     3,206       (1,410 )     1,603      
Ending assets $ 34,922     $ 34,843     $ 29,760     $ 31,709   $ 35,073     $ 33,846     $ 35,374      
 
Wholesale Channel
Beginning assets $ 40,883 $ 44,742 $ 46,558 $ 38,138 $ 40,954 $ 46,738 $ 44,379
Sales (net of commissions) 4,719 4,211 3,957 3,707 4,433 3,864 3,563
Redemptions   (3,162 )     (2,566 )     (3,515 )     (3,752 )   (3,446 )     (3,535 )     (3,088 )    
Net sales 1,557 1,645 442 (45 ) 987 329 475
Net exchanges 62 55 79 65 (104 ) 48 59
Reinvested dividends & capital gains   0       117       29       133     87       249       136      
Net flows 1,619 1,817 550 153 970 626 670
Market action   2,240       (1 )     (8,970 )     2,663     4,814       (2,985 )     2,601      
Ending assets $ 44,742     $ 46,558     $ 38,138     $ 40,954   $ 46,738     $ 44,379     $ 47,650      
 
Institutional Channel
Beginning assets $ 9,609 $ 10,407 $ 10,346 $ 9,558 $ 10,494 $ 11,981 $ 10,894
Sales (net of commissions) 776 556 1,625 456 652 567 721
Redemptions   (530 )     (709 )     (737 )     (503 )   (507 )     (1,058 )     (532 )    
Net sales 246 (153 ) 888 (47 ) 145 (491 ) 189
Net exchanges 0 0 0 0 0 0 0
Reinvested dividends & capital gains   16       28       18       50     30       58       42      
Net flows 262 (125 ) 906 3 175 (433 ) 231
Market action   536       64       (1,694 )     933     1,312       (654 )     660      
Ending assets $ 10,407     $ 10,346     $ 9,558     $ 10,494   $ 11,981     $ 10,894     $ 11,785      
 
Consolidated Total
Beginning assets $ 83,673 $ 90,071 $ 91,747 $ 77,456 $ 83,157 $ 93,792 $ 89,119
Sales (net of commissions) 6,559 5,778 6,449 5,021 6,115 5,477 5,190
Redemptions   (4,682 )     (4,334 )     (5,256 )     (5,249 )   (4,995 )     (5,554 )     (4,639 )    
Net sales 1,877 1,444 1,193 (228 ) 1,120 (77 ) 551
Net exchanges 0 0 0 (1 ) (1 ) (1 ) (1 )
Reinvested dividends & capital gains   70       273       130       271     184       454       276      
Net flows 1,947 1,717 1,323 42 1,303 376 826
Market action   4,451       (41 )     (15,614 )     5,659     9,332       (5,049 )     4,864      
Ending assets $ 90,071     $ 91,747     $ 77,456     $ 83,157     $ 93,792     $ 89,119     $ 94,809      
 
       
Supplemental Information 2011   2012
1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.
Redemption rates - long term assets            
Advisors 9.6 % 10.1 % 10.0 % 10.4 % 10.1 % 9.1 % 9.7 %
Wholesale 29.7 % 22.3 % 31.0 % 35.7 % 30.7 % 31.5 % 26.6 %
Institutional 21.3 % 27.1 % 27.8 % 19.0 % 18.2 % 37.3 % 18.4 %
Total 21.0 % 18.2 % 22.9 % 24.1 % 21.5 % 23.9 % 19.3 %
 
Gross Revenue per advisor (000s) 39.2 40.2 37.6 38.7 40.3 42.2 41.4
 
Number of advisors 1,732 1,751 1,758 1,816 1,778 1,764 1,753
 
Number of shareholder accounts (000s) 3,988 4,087 4,118 4,155 4,082 4,139 4,179
 
Number of shareholders (000s) 803     819     827     825     832     824     793      
 
         
Fund Rankings
Lipper              
Equity funds 1 Year     3 Years     5 Years
Top quartile 35 % 20 % 46 %
Top half 51 % 44 % 65 %
 
Equity assets
Top quartile 66 % 11 % 77 %
Top half 75 % 32 % 81 %
 
Fixed income funds
Top quartile 32 % 41 % 60 %
Top half 53 % 65 % 60 %
 
Fixed income assets
Top quartile 52 % 60 % 68 %
Top half 61 % 72 % 68 %
 
All funds
Top quartile 34 % 25 % 49 %
Top half 51 % 49 % 63 %
 
All assets
Top quartile 62 % 22 % 75 %
Top half 71 % 41 % 78 %
 
MorningStar
% of funds with 4 or 5 stars
Equity funds 36 % 16 % 43 %
All funds 33 % 13 % 44 %
 
% of assets with 4 or 5 stars
Equity assets 29 % 6 % 32 %
All assets 32 % 4 % 40 %
 

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, October 31st at 9:00 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.

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 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, 2011, which include, without limitation:

  • 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;
  • 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 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;
  • 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 hire and retain senior executive management and other key personnel.

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, 2011 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2012. 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.

Waddell & Reed Financial, Inc.
Investor Contact:
Nicole McIntosh, 913-236-1880
VP, Investor Relations
nmcintosh@waddell.com
or
Mutual Fund Investor Contact:
888-WADDELL
www.waddell.com
www.ivyfunds.com
Past performance is no guarantee of future results. Please invest carefully.









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