Waddell & Reed Financial, Inc. Reports Fourth Quarter Results

Company Release - 2/4/2020 6:45 AM ET

OVERLAND PARK, Kan.--(BUSINESS WIRE)-- Waddell & Reed Financial, Inc. (NYSE: WDR) today reported fourth quarter 2019 net income¹ of $15.9 million, or $0.23 per diluted share, compared to net income of $33.1 million, or $0.46 per diluted share, during the prior quarter and net income of $46.5 million, or $0.60 per diluted share, during the fourth quarter of 2018. The fourth quarter of 2019 included non-cash asset impairment charges of $12.8 million in connection with certain assets held for sale, including real property related to our corporate headquarters move and the elimination of our internal aviation operations, an $11.2 million non-cash charge related to the annual revaluation of the pension plan liability and $2.3 million in severance expense related to the outsourcing of our transfer agency transactional processing operations. Excluding the non-cash charges and severance expense, adjusted net income² for the fourth quarter of 2019 was $36.0 million and adjusted net income per diluted share² was $0.51.

Revenues of $270.1 million decreased slightly compared to the prior quarter and decreased $2.2 million compared to the fourth quarter of 2018. Operating expenses as reported of $241.2 million increased $10.6 million compared to the prior quarter and increased $13.4 million compared to the same quarter of 2018. Adjusted operating expenses² decreased $1.5 million, or less than 1%, compared to the third quarter of 2019 and increased $1.4 million, or less than 1%, compared to fourth quarter of 2018. The reported operating margin was 10.7% and the adjusted operating margin² was 16.3% during the current quarter, compared to 15.9% during the prior quarter and 17.5% during the fourth quarter of 2018.

Assets under management ended the quarter at $70.0 billion, an increase of 2% compared to the prior quarter and an increase of 6% compared to the fourth quarter of 2018. Average assets under management were $69.1 billion during the current quarter, compared to $70.5 billion during the prior quarter and $71.6 billion during the fourth quarter of 2018. Net outflows of $3.4 billion during the current quarter were higher compared to net outflows of $2.7 billion in the third quarter of 2019 and were lower compared to net outflows of $3.8 billion in the fourth quarter of 2018. Sales of $1.5 billion during the current quarter declined 14% and 43% compared to the prior quarter and the fourth quarter of 2018, respectively. Industry-wide flows continued toward fixed income and money market strategies while equity flows remained challenged. Redemptions increased 10% compared to the prior quarter and improved 24% compared to the fourth quarter of 2018.

Wealth management assets under administration ended the quarter at $60.1 billion, an increase of 5% compared to the third quarter of 2019, and a 17% increase compared to prior year-end. For both comparative periods, assets under administration increased primarily due to strong market gains and growth in net new advisory assets, partially offset by brokerage redemptions.

Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc. shared, “While both the quarter and year remained challenging from a flow perspective within our asset management business, we continued to make steady progress in the transformation of our wealth management business.” Mr. Sanders continued, “On balance, the repositioning of our overall business model, combined with operational improvements across the enterprise and our strong balance sheet, has us well positioned to focus on renewed growth opportunities as we look ahead to 2020 and beyond.”

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¹ Net income represents net income attributable to Waddell & Reed Financial, Inc.

²See Non-GAAP Financial Measures section and Reconciliation of GAAP to Non-GAAP Financial Measures table

Revenues Analysis

Investment management fees decreased $1.1 million, or 1%, compared to the third quarter of 2019 due to a 2% decrease in average assets under management, partially offset by a higher effective management fee rate. The effective management fee rate was 63.6 basis points and increased compared to the prior quarter’s rate due to higher fund fee waivers in the prior quarter. Compared to the fourth quarter of 2018, investment management fees declined $3.8 million, or 3%, primarily due to lower average assets under management.

Underwriting and distribution fees increased slightly compared to the prior quarter and increased $2.5 million, or 2%, compared to the same quarter in 2018. For both comparative periods, the increases were primarily driven by increased fee-based asset allocation product revenues, partially offset by lower commissionable sales and lower service and distribution fees.

Shareholder service fees decreased slightly compared to the third quarter of 2019 due to lower average assets. Compared to the fourth quarter of 2018, shareholder service fees declined $0.9 million, or 4%, primarily due to fewer accounts and a decrease in average assets.

Operating Expenses Analysis

Distribution expenses decreased slightly compared to the prior quarter and increased $5.8 million, or 5% compared to the fourth quarter of 2018 as a result of the increase in underwriting and distribution revenue. Compared to the fourth quarter of 2018, the expense increase is larger than the revenue increase primarily due to an increase in the compensation grid for associated independent financial advisors implemented at the beginning of 2019.

Compensation and benefits expense totaled $62.8 million and included $2.3 million of severance expense compared to $3.1 million of severance expense in the prior quarter. In addition to lower severance costs, the decrease of $2.2 million, or 3%, compared to the prior quarter is primarily due to lower headcount and lower share-based compensation due to mark-to-market adjustments of cash-settled restricted stock unit awards. Compared to the fourth quarter of 2018, compensation and benefits expense decreased $1.3 million, or 2%, due to lower incentive compensation costs, lower severance costs and lower headcount. The decreases were partially offset by an increase in share-based compensation costs due to higher forfeitures in the prior year.

General and administrative expenses increased $13.4 million compared to the third quarter of 2019, due to a $12.8 million non-cash asset impairment charge and increased project spend during the quarter. Compared to the same quarter in 2018, general and administrative expenses increased $12.7 million due to the non-cash impairment charge.

Technology costs increased $0.9 million, or 6% compared to the prior quarter, primarily due to increased technology consulting expense. Compared to the fourth quarter of 2018, technology costs decreased slightly, as lower shareholder servicing expense resulting from fewer accounts was partially offset by increased software costs for new technologies.

Occupancy expenses decreased $0.5 million, or 10%, compared to the prior quarter and decreased $1.0 million, or 16%, compared to the fourth quarter of 2018. For both comparative periods, occupancy costs decreased as a result of the planned closure of field offices.

Marketing and advertising expenses increased $0.3 million, or 16%, compared to the prior quarter due to the timing of sponsorship fees. Compared to the fourth quarter of 2018, these expenses declined $0.2 million, or 8%, due to reduced fund-related marketing expenses from prior year fund mergers.

Depreciation expense declined $1.1 million, or 22%, compared to the prior quarter and declined $2.6 million, or 41%, compared to the fourth quarter of 2018, primarily due to fully depreciated capitalized development assets.

Investment and Other Income

Investment and other income declined $10.0 million and $22.2 million compared to the prior quarter and the fourth quarter of 2018, respectively. For both comparative periods, the decline is primarily due to a non-cash charge related to the annual revaluation of the pension plan liability, partially offset by unrealized gains on the seed and corporate investment portfolios.

The effective tax rate was 28.3% for the quarter compared to 23.3% in the prior quarter and 23.5% last year. The higher effective rate was due to $1.1 million of discrete items related to an increase in state taxes and stock compensation vestings in the current quarter.

Assets Under Management
(in millions)
	Three Months Ended
	Dec. 31,				Sep. 30,				Dec. 31,					Prior Qtr.						Year-over Year Qtr.
	2019				2019				2018					Change		%				Change		%
Unaffiliated ¹
Beginning assets	$	25,857			$	27,545			$	31,172			$	(1,688	)	(6	)	%	$	(5,315	)	(17	)	%
Sales ²		854				999				1,673				(145	)	(15	)	%		(819	)	(49	)	%
Redemptions		(2,502	)			(2,684	)			(3,637	)			182		7		%		1,135		31		%
Net exchanges		278				334				(131	)			(56	)	(17	)	%		409		312		%
*Net Flows*		(1,370	)			(1,351	)			(2,095	)			(19	)	(1	)	%		725		35		%
Market action		1,777				(337	)			(4,100	)			2,114		627		%		5,877		143		%
Ending assets	$	26,264			$	25,857			$	24,977			$	407		2		%	$	1,287		5		%
Annualized organic growth rate		(21.2	)	%		(19.6	)	%		(26.9	)	%
Annualized redemption rate ³		39.3		%		40.9		%		53.8		%
Institutional
Beginning assets	$	3,677			$	3,887			$	5,187			$	(210	)	(5	)	%	$	(1,510	)	(29	)	%
Sales ²		32				49				85				(17	)	(35	)	%		(53	)	(62	)	%
Redemptions		(874	)			(230	)			(1,316	)			(644	)	(280	)	%		442		34		%
Net exchanges		—				—				511				—		NM				(511	)	100		%
*Net Flows*		(842	)			(181	)			(720	)			(661	)	(365	)	%		(122	)	(17	)	%
Market action		261				(29	)			(812	)			290		1,000		%		1,073		132		%
Ending assets	$	3,096			$	3,677			$	3,655			$	(581	)	(16	)	%	$	(559	)	(15	)	%
Annualized organic growth rate		(91.6	)	%		(18.6	)	%		(55.5	)	%
Annualized redemption rate ³		104.1		%		23.9		%		117.3		%
Wealth Management
Beginning assets	$	39,248			$	40,444			$	43,183			$	(1,196	)	(3	)	%	$	(3,935	)	(9	)	%
Sales ²		662				744				958				(82	)	(11	)	%		(296	)	(31	)	%
Redemptions		(1,535	)			(1,542	)			(1,547	)			7		0		%		12		1		%
Net exchanges		(278	)			(334	)			(380	)			56		17		%		102		27		%
*Net Flows*		(1,151	)			(1,132	)			(969	)			(19	)	(2	)	%		(182	)	(19	)	%
Market action		2,501				(64	)			(5,037	)			2,565		4,008		%		7,538		150		%
Ending assets	$	40,598			$	39,248			$	37,177			$	1,350		3		%	$	3,421		9		%
Annualized organic growth rate		(11.7	)	%		(11.2	)	%		(9.0	)	%
Annualized redemption rate ³		13.6		%		13.4		%		13.1		%
Consolidated Total
Beginning assets	$	68,782			$	71,876			$	79,542			$	(3,094	)	(4	)	%	$	(10,760	)	(14	)	%
Sales²		1,548				1,792				2,716				(244	)	(14	)	%		(1,168	)	(43	)	%
Redemptions		(4,911	)			(4,456	)			(6,500	)			(455	)	(10	)	%		1,589		24		%
Net exchanges		—				—				—				—		—				—		—
*Net Flows*		(3,363	)			(2,664	)			(3,784	)			(699	)	(26	)	%		421		11		%
Market action		4,539				(430	)			(9,949	)			4,969		1,156		%		14,488		146		%
Ending assets	$	69,958			$	68,782			$	65,809			$	1,176		2		%	$	4,149		6		%
Annualized organic growth rate		(19.6	)	%		(14.8	)	%		(19.0	)	%
Annualized redemption rate ³		27.7		%		24.3		%		35.4		%

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(1)		Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only “DCIO”, Registered Investment Advisor “RIA” and Variable Annuity “VA”.
(2)		Sales is primarily gross sales (net of sales commissions). This amount also includes net reinvested dividends and capital gains, and investment income.
(3)		Excludes Money Market.


MorningStar Fund Rankings ¹	1 Year		3 Years		5 Years
Funds ranked in top half	43	%	42	%	33	%
Assets ranked in top half	52	%	62	%	41	%

MorningStar Ratings ¹	Overall		3 Years		5 Years
Funds with 4/5 stars	34	%	31	%	23	%
Assets with 4/5 stars	51	%	42	%	34	%

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(1)			Based on class I share, which reflects the largest concentration of sales and assets.


	Three Months Ended
Wealth Management	Dec. 31,				Sep. 30,				Dec. 31,					Prior Qtr.						Year-over-Year Qtr.
(in millions)	2019				2019				2018					Change		%				Change		%
Assets under administration (AUA)
Advisory assets	$	26,947			$	25,107			$	21,207			$	1,840		7		%	$	5,740		27		%
Non-advisory assets		33,148				32,006				30,059				1,142		4		%		3,089		10		%
Total assets under administration		60,095				57,113				51,266				2,982		5		%		8,829		17		%

Net new advisory assets ¹	$	261			$	236			$	(45	)		$	25		11		%	$	306		680		%
Net new non-advisory assets ^{1, 2}		(859	)			(769	)			(840	)			(90	)	(12	)	%		(19	)	(2	)	%
Total net new AUA ^{1, 2}		(598	)			(533	)			(885	)			(65	)	(12	)	%		287		32		%

Annualized advisory AUA growth ³		4.2		%		3.8		%		(0.8	)	%
Annualized AUA growth ³		(4.2	)	%		(3.7	)	%		(6.1	)	%

Advisors and advisor associates		1,327				1,344				1,403				(17	)	(1	)	%		(76	)	(5	)	%
Avg. trailing 12-month revenue per advisor ⁴ (in thousands)	$	438			$	422			$	343			$	16		4		%	$	95		28		%

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(1)		Net new assets are calculated as total client deposits and net transfers less client withdrawals.
(2)		Excludes activity related to products held outside of our wealth management platform. These assets represent less than 10% of total AUA.
(3)		Annualized growth is calculated as annualized quarterly net new assets divided by beginning AUA.
(4)		Production per Advisor is calculated as trailing 12- month Total underwriting and distribution fees less “other” underwriting and distribution fees divided by the average number of Advisors. “Other” underwriting and distribution fees predominantly includes fees paid by Advisors for programs and services.

Unaudited Consolidated Statements of Income
(in thousands, except per share data and margin)
	Three Months Ended
	Dec. 31,				Sep. 30,				Dec. 31,				Prior Qtr.						Year-over-Year Qtr.
	2019				2019				2018				Change			%			Change			%
Revenues:
Investment management fees	$	110,706			$	111,806			$	114,521			$	(1,100	)	(1	)	%	$	(3,815	)	(3	)	%
Underwriting and distribution fees		136,309				135,787				133,788				522		0		%		2,521		2		%
Shareholder service fees		23,056				23,087				23,921				(31	)	(0	)	%		(865	)	(4	)	%
Total		270,071				270,680				272,230				(609	)	(0	)	%		(2,159	)	(1	)	%
Operating expenses:
Distribution¹		117,225				117,425				111,456				(200	)	(0	)	%		5,769		5		%
Compensation and benefits (including share-based compensation of $11,142, $11,580 and $9,039, respectively)		62,816				64,999				64,155				(2,183	)	(3	)	%		(1,339	)	(2	)	%
General and administrative		30,061				16,680				17,403				13,381		80		%		12,658		73		%
Technology		15,950				15,019				15,982				931		6		%		(32	)	(0	)	%
Occupancy		5,143				5,684				6,116				(541	)	(10	)	%		(973	)	(16	)	%
Marketing and advertising		2,467				2,134				2,685				333		16		%		(218	)	(8	)	%
Depreciation		3,767				4,833				6,387				(1,066	)	(22	)	%		(2,620	)	(41	)	%
Subadvisory fees		3,777				3,882				3,647				(105	)	(3	)	%		130		4		%
Total		241,206				230,656				227,831				10,550		5		%		13,375		6		%
Operating income		28,865				40,024				44,399				(11,159	)	(28	)	%		(15,534	)	(35	)	%
Investment and other income		(4,804	)			5,212				17,351				(10,016	)	(192	)	%		(22,155	)	(128	)	%
Interest expense		(1,533	)			(1,562	)			(1,553	)			29		2		%		20		1		%
Income before provision for income taxes		22,528				43,674				60,197				(21,146	)	(48	)	%		(37,669	)	(63	)	%
Provision for income taxes		6,382				10,175				14,125				(3,793	)	(37	)	%		(7,743	)	(55	)	%
Net income		16,146				33,499				46,072				(17,353	)	(52	)	%		(29,926	)	(65	)	%
Net income (loss) attributable to redeemable noncontrolling interests		210				445				(396	)			(235	)	(53	)	%		606		153		%
Net income attributable to Waddell & Reed Financial, Inc.	$	15,936			$	33,054			$	46,468			$	(17,118	)	(52	)	%	$	(30,532	)	(66	)	%
Net income per share, basic and diluted:	$	0.23			$	0.46			$	0.60
Weighted average shares outstanding - basic and diluted		69,896				72,387				77,786
Operating margin		10.7		%		14.8		%		16.3		%

¹Distribution expense
Unaffiliated		23,392				24,068				25,406
Wealth Management		93,833				93,357				86,050
	$	117,225			$	117,425			$	111,456

Unaudited Consolidated Statements of Income
(in thousands, except per share data and margin)
	Year Ended
	Dec. 31,		Dec. 31,
	2019		2018		Change			%
Revenues:
Investment management fees	$	445,144	$	507,906	$	(62,762	)	(12	)	%
Underwriting and distribution fees		531,836		550,010		(18,174	)	(3	)	%
Shareholder service fees		93,335		102,385		(9,050	)	(9	)	%
Total		1,070,315		1,160,301		(89,986	)	(8	)	%
Operating expenses:
Distribution¹		460,921		456,832		4,089		1		%
Compensation and benefits (including share-based compensation of $46,613 and $51,565, respectively)		254,534