| Exhibit 99.1 |
News Release
Waddell & Reed Financial, Inc. Reports Fourth Quarter Results
Overland Park, KS, January 31, 2006 – Waddell & Reed Financial, Inc. (NYSE: WDR) reported fourth quarter net income of $19.9 million, or $0.24 per diluted share, compared to net income of $25.7 million, or $0.31 per diluted share in last year’s fourth quarter and net income of $24.5 million, or $0.30 per diluted share in the third quarter of 2005. As previously disclosed, this year’s fourth quarter results included a pre-tax charge of $6.1 million ($3.8 million net of tax, or $0.05 per diluted share) related to the settlement of an arbitration case. This year’s third quarter included a tax benefit of $1.8 million, or $0.02 per diluted share, related to a change in determination of the deductibility of certain legal matters expensed in the second quarter of 2005. Excluding these non-recurring items, the current quarter’s net income was $23.8 million, or $0.29 per diluted share and third quarter net income was $22.7 million, or $0.28 per diluted share. We believe adjusting our results for these non-recurring items provides stockholders with a more comparable basis for evaluating results and financial performance to other periods. A schedule reconciling adjusted results to GAAP is provided on the bottom of our Schedule of Selected Operating Data on page 5.
Channel Discussion
Advisors channel
The year 2005 was marked with significant changes for our Advisors channel. We began the year by appointing a new executive leadership team tasked with reinvigorating this channel. The team’s top priority was the implementation of numerous initiatives designed to increase sales, improve productivity and enhance field support. Recent trends imply our efforts are gaining traction and, in aggregate, these initiatives have created a solid platform for continued improvement.
Sales trends in the Advisors channel improved throughout the year. Gross sales of $637 million during the quarter were up 1.4% compared to the third quarter and 14.8% compared to last year’s fourth quarter, while annual gross sales of $2.4 billion increased 8.4% over those of 2004.
Net sales, although still in outflow mode, also improved throughout the year and ended the year at their best levels since 2001. The reduction in outflows is due in part to improved sales efforts, and to sustained low redemption rates. The long-term redemption rate in our Advisors channel was 9.6% for the full year 2005 compared to 11.3% for the full year 2004.
“These trends are encouraging,” said Hank Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. “Our efforts to reinvigorate our Advisors channel are showing signs of success, but we still have a long way to go until this channel reaches its optimal potential.
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“As we look towards 2006, we will continue focusing our energies on accelerating sales momentum by leveraging our new recruiting and field support resources.”
Wholesale channel
Sales from our non-proprietary distribution continued its impressive growth. Fourth quarter 2005 gross sales of $668 million were up 18.4% compared to the third quarter and 45.2% compared to last year’s fourth quarter. Annual gross sales of $2.3 billion increased 70.6% compared to the prior year.
Net sales during the quarter were an impressive $381 million, a 31.4% improvement compared to the third quarter and a 114.0% improvement compared to last year’s fourth quarter. For the year ended December 31, 2005, net sales of $1.2 billion translated into an organic growth rate (gross sales in excess of redemptions) in excess of 25%.
“We experienced rapid growth in our non-proprietary distribution channel in 2005,” said Thomas Butch, Chief Marketing Officer. “Our investment management expertise has gained recognition and acceptance from the broker/dealer community in a relatively short period of time. As we look ahead, we will strive to sustain and build upon our results to date.”
Management Fee Revenues
The increase in revenues in the current quarter compared to that of the third quarter of 2005 and the fourth quarter of 2004 is attributable to higher average assets under management and, to a lesser degree, a higher overall management fee rate. The improvement in the management fee rate is due in large part to a mix shift toward equity products.
Investment Product Sales (1)
Advisors Channel
($ thousands)
| | 4Q 2005 | | 4Q 2004 | | % | | 3Q 2005 | | % | |
Front-load sales | | $ | 446,637 | | $ | 391,438 | | 14.1 | % | $ | 423,966 | | 5.3 | % |
Deferred-load sales | | 45,561 | | 60,215 | | -24.3 | % | 43,488 | | 4.8 | % |
Allocation product sales (no-load)(2) | | 8,786 | | 7,097 | | 23.8 | % | 7,055 | | 24.5 | % |
| | | | | | | | | | | |
Total | | $ | 500,984 | | $ | 458,750 | | 9.2 | % | $ | 474,509 | | 5.6 | % |
(1) Investment product sales exclude sales at net asset value, Class Y sales, and sales of money market funds. Sales load is included.
(2) Includes Strategic Portfolio Allocation (“SPA”) and Model Allocation Portfolio (“MAP”) products.
Underwriting and Distribution
See the attached table on page 6 for details of underwriting and distribution revenues and expenses.
Underwriting and Distribution Revenues
On a sequential quarterly basis, a meaningful improvement in front-load sales volume in our Advisors channel as well as higher financial plan fees contributed approximately half of the improvement in revenues. The remainder of the increase is due to a combination of higher asset-based 12b-1 service and distribution fees and higher sales volume by Legend advisors.
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Comparing the current quarter to last year’s fourth quarter, revenues improved in part due to higher front-load sales volume in our Advisors channel, although a portion of this increase was offset by lower asset-based fees on our SPA and MAP portfolios and lower insurance sales commission. The remainder of the increase was due to higher asset-based 12b-1 service and distribution fees, as well as higher sales volume by Legend advisors.
Underwriting and Distribution Expenses
Sequentially, direct expenses increased in line with higher sales volume in the Advisors channel and by Legend advisors, and on higher asset-based 12b-1 service and distribution fees. Indirect expenses incurred to support our Advisors channel as well as our non-proprietary distribution efforts remained essentially unchanged.
Compared to last year’s fourth quarter, approximately two-thirds of the increased cost is due to higher direct expenses. Higher sales volume in our Advisors channel and by Legend advisors resulted in higher commission expenses. Higher average assets also led to higher asset-based 12b-1 service and distribution fees. The remainder of the increase is due to a combination of higher costs associated with our efforts to improve sales and new client capture in our Advisors channel, and higher wholesaling support costs in our non-proprietary distribution channel.
Other Operating Items
Compensation and related costs increased compared to last year’s fourth quarter due to increases in headcount and higher compensation costs.
General and administrative expenses in the current quarter included a charge for $6.1 million ($3.8 million net of tax) related to the settlement of an arbitration case with a former financial advisor. Excluding this charge, general and administrative expenses were $10.7 million. Compared to this year’s third quarter, the increase on an adjusted basis is due to a combination of higher legal costs and travel expenses. Compared to last year’s fourth quarter, the increase is due to higher costs for facilities, computer services and legal costs. Lower audit and consulting fees partially offset the above mentioned costs.
Subadvisory expenses, calculated on average daily assets, continue to increase due to strong sales and asset growth in select subadvised funds.
Senior Notes Issued
On January 13, 2006, we issued $200 million in principal amount 5.60% senior notes due January 15, 2011, resulting in net proceeds of approximately $198.2 million (net of discounts, commissions and estimated expenses.) We used the net proceeds, together with cash on hand, to repay the entire $200 million aggregate principal amount outstanding 7.5% senior notes due January 18, 2006. The notes represent senior unsecured obligations and are rated “Baa2” by Moody’s and “BBB” by Standard & Poor’s.
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Balance Sheet Information
As of December 31, 2005
• Cash balance of $162.8 million ($26.1 million held for the exclusive benefit of customers in compliance with federal securities industry regulations).
• Investment securities of $51.7 million.
• Long-term debt outstanding of $198.2 million.
• Short-term debt outstanding of $1.7 million.
• Shareholders’ equity of $247.3 million.
• Shares outstanding were 83.8 million.
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WADDELL & REED FINANCIAL, INC.
Unaudited Schedule of Selected Operating Data
(Amounts in thousands, except for per share data)
| | Three Months Ended
December 31, | | Change | | Three Months Ended
September 30, | | Change | |
| | 2005 | | 2004 | | $ | | % | | 2005 | | $ | | % | |
Operating Revenues: | | | | | | | | | | | | | | | |
Investment management fees | | $ | 70,709 | | $ | 62,504 | | 8,205 | | 13.1 | | $ | 68,857 | | 1,852 | | 2.7 | |
Underwriting & distribution fees | | 71,342 | | 65,037 | | 6,305 | | 9.7 | | 68,069 | | 3,273 | | 4.8 | |
Shareholder service fees | | 21,092 | | 19,333 | | 1,759 | | 9.1 | | 20,587 | | 505 | | 2.5 | |
Total operating revenues | | 163,143 | | 146,874 | | 16,269 | | 11.1 | | 157,513 | | 5,630 | | 3.6 | |
| | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | |
Underwriting and distribution | | 79,663 | | 70,111 | | 9,552 | | 13.6 | | 75,957 | | 3,706 | | 4.9 | |
Compensation and related costs | | 20,859 | | 19,577 | | 1,282 | | 6.5 | | 21,413 | | (554 | ) | -2.6 | |
Equity Compensation | | 4,470 | | 2,872 | | 1,598 | | 55.6 | | 4,279 | | 191 | | 4.5 | |
General and administrative | | 16,820 | | 9,399 | | 7,421 | | 79.0 | | 10,106 | | 6,714 | | 66.4 | |
Subadvisory | | 5,599 | | 2,774 | | 2,825 | | 101.8 | | 4,953 | | 646 | | 13.0 | |
Depreciation | | 2,840 | | 2,313 | | 527 | | 22.8 | | 2,651 | | 189 | | 7.1 | |
Total operating expense | | 130,251 | | 107,046 | | 23,205 | | 21.7 | | 119,359 | | 10,892 | | 9.1 | |
| | | | | | | | | | | | | | | |
Operating Income | | 32,892 | | 39,828 | | (6,936 | ) | -17.4 | | 38,154 | | (5,262 | ) | -13.8 | |
| | | | | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | | | | |
Investment & other income | | 2,411 | | 2,037 | | 374 | | 18.4 | | 1,449 | | 962 | | 66.4 | |
Interest expense | | (3,680 | ) | (3,230 | ) | 450 | | 13.9 | | (3,659 | ) | 21 | | 0.6 | |
| | | | | | | | | | | | | | | |
Income before taxes | | 31,623 | | 38,635 | | (7,012 | ) | -18.1 | | 35,944 | | 4,321 | | -12.0 | |
| | | | | | | | | | | | | | | |
Provision for taxes | | 11,698 | | 12,974 | | (1,276 | ) | -9.8 | | 11,412 | | (286 | ) | 2.5 | |
| | | | | | | | | | | | | | | |
Net income | | $ | 19,925 | | $ | 25,661 | | (5,736 | ) | -22.4 | | $ | 24,532 | | (4,607 | ) | -18.8 | |
| | | | | | | | | | | | | | | |
Net income per share - diluted | | $ | 0.24 | | $ | 0.31 | | (0.06 | ) | -19.4 | | $ | 0.30 | | (0.05 | ) | -16.7 | |
| | | | | | | | | | | | | | | |
Adjusted net income (1) | | $ | 23,773 | | $ | 25,661 | | (1,888 | ) | -7.4 | | $ | 22,717 | | 1,056 | | 4.6 | |
| | | | | | | | | | | | | | | |
Adjusted net income per share - diluted(1) | | $ | 0.29 | | $ | 0.31 | | (0.02 | ) | -6.5 | | $ | 0.28 | | 0.01 | | 3.6 | |
| | | | | | | | | | | | | | | |
Weighted average shares outstanding - diluted | | 82,338 | | 82,090 | | | | | | 81,891 | | | | | |
| | | | | | | | | | | | | | | |
Operating margin | | 20.2 | % | 27.1 | % | | | | | 24.2 | % | | | | |
Adjusted operating margin (1) | | 23.9 | % | n/m | | | | | | n/m | | | | | |
Waddell & Reed Advisors U&D margin (2) | | -5.7 | % | -1.2 | % | | | | | -6.2 | % | | | | |
|
|
(1) Reconciliation to GAAP provided below |
(2) Excludes our wholesale underwriting and distribution activities |
| | | | | | | | | | | | | | | |
GAAP net income | | $ | 19,925 | | $ | 25,661 | | | | | | $ | 24,532 | | | | | |
Add back arbitration case settlement (net of tax) | | 3,848 | | — | | | | | | — | | | | | |
Add back tax benefit related to legal matter | | — | | — | | | | | | (1,815 | ) | | | | |
Adjusted net income | | $ | 23,773 | | $ | 25,661 | | | | | | $ | 22,717 | | | | | |
| | | | | | | | | | | | | | | |
GAAP net income per share (diluted) | | $ | 0.24 | | $ | 0.31 | | | | | | $ | 0.30 | | | | | |
Add back arbitration case settlement (net of tax) | | 0.05 | | — | | | | | | — | | | | | |
Add back tax benefit related to legal matter | | — | | — | | | | | | (0.02 | ) | | | | |
Adjusted earnings per share (diluted) | | $ | 0.29 | | $ | 0.31 | | | | | | $ | 0.28 | | | | | |
| | | | | | | | | | | | | | | |
GAAP operating margin | | 20.2 | % | 27.1 | % | | | | | 24.2 | % | | | | |
Add back arbitration case settlement | | 3.7 | % | — | | | | | | — | | | | | |
Adjusted operating margin | | 23.9 | % | 27.1 | % | | | | | 24.2 | % | | | | |
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WADDELL & REED FINANCIAL, INC.
Underwriting and Distribution
For the quarter ended
(Amounts in thousands)
December 31, 2005 | | Advisors | | Non-Proprietary | | Legend | | Total | |
Revenues | | $ | 53,017 | | $ | 6,232 | | $ | 12,093 | | $ | 71,342 | |
| | | | | | | | | |
Expenses | | | | | | | | | |
Direct | | 36,729 | | 9,029 | | 8,214 | | 53,972 | |
Indirect | | 19,319 | | 3,623 | | 2,749 | | 25,691 | |
Total Expenses | | $ | 56,048 | | $ | 12,652 | | $ | 10,963 | | $ | 79,663 | |
| | | | | | | | | |
Net U&D | | $ | (3,031 | ) | $ | (6,420 | ) | $ | 1,130 | | $ | (8,321 | ) |
| | | | | | | | | |
Margin | | -5.7 | % | n/m | | 9.3 | % | | |
| | | | | | | | | |
December 31, 2004 | | Advisors | | Non-Proprietary | | Legend | | Total | |
Revenues | | $ | 50,753 | | $ | 3,745 | | $ | 10,539 | | $ | 65,037 | |
| | | | | | | | | |
Expenses | | | | | | | | | |
Direct | | 34,333 | | 5,942 | | 7,150 | | 47,425 | |
Indirect | | 17,013 | | 2,935 | | 2,738 | | 22,686 | |
Total Expenses | | $ | 51,346 | | $ | 8,877 | | $ | 9,888 | | $ | 70,111 | |
| | | | | | | | | |
Net U&D | | $ | (593 | ) | $ | (5,132 | ) | $ | 651 | | $ | (5,074 | ) |
| | | | | | | | | |
Margin | | -1.2 | % | n/m | | 6.2 | % | | |
| | | | | | | | | |
September 30, 2005 | | Advisors | | Non-Proprietary | | Legend | | Total | |
Revenues | | $ | 51,296 | | $ | 5,696 | | $ | 11,077 | | $ | 68,069 | |
| | | | | | | | | |
Expenses | | | | | | | | | |
Direct | | 34,795 | | 7,882 | | 7,313 | | 49,990 | |
Indirect | | 19,678 | | 3,370 | | 2,919 | | 25,967 | |
Total Expenses | | $ | 54,473 | | $ | 11,252 | | $ | 10,232 | | $ | 75,957 | |
| | | | | | | | | |
Net U&D | | $ | (3,177 | ) | $ | (5,556 | ) | $ | 845 | | $ | (7,888 | ) |
| | | | | | | | | |
Margin | | -6.2 | % | n/m | | 7.6 | % | | |
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WADDELL & REED FINANCIAL, INC.
Changes in Assets Under Management
For the quarter ended
(Amounts in millions)
| | | | Wholesale Channel | | | |
| | Advisors Channel | | Non-Proprietary | | Institutional | | Total | |
December 31, 2005 | | | | | | | | | |
Beginning Assets | | $ | 26,579 | | $ | 6,138 | | $ | 8,004 | | $ | 40,721 | |
| | | | | | | | | |
Sales | | 637 | | 668 | | 166 | | 1,471 | |
Redemptions | | (757 | ) | (287 | ) | (521 | ) | (1,565 | ) |
Net Sales | | (120 | ) | 381 | | (355 | ) | (94 | ) |
| | | | | | | | | |
Net Exchanges and Adjustments | | (31 | ) | 29 | | 0 | | (2 | ) |
Reinvested Dividends and Capital Gains | | 33 | | (7 | ) | 23 | | 49 | |
Net Flows | | (118 | ) | 403 | | (332 | ) | (47 | ) |
| | | | | | | | | |
Market Appreciation | | 727 | | 188 | | 274 | | 1,189 | |
Ending Assets | | $ | 27,188 | | $ | 6,729 | | $ | 7,946 | | $ | 41,863 | |
| | | | | | | | | |
December 31, 2004 | | | | | | | | | |
Beginning Assets | | $ | 23,484 | | $ | 4,124 | | $ | 7,995 | | $ | 35,603 | |
| | | | | | | | | |
Sales | | 555 | | 460 | | 275 | | 1,290 | |
Redemptions | | (813 | ) | (282 | ) | (372 | ) | (1,467 | ) |
Net Sales | | (258 | ) | 178 | | (97 | ) | (177 | ) |
| | | | | | | | | |
Net Exchanges and Adjustments | | (15 | ) | (24 | ) | 36 | | (3 | ) |
Reinvested Dividends and Capital Gains | | 75 | | 7 | | 49 | | 131 | |
Net Flows | | (198 | ) | 161 | | (12 | ) | (49 | ) |
| | | | | | | | | |
Market Appreciation | | 2,011 | | 417 | | 676 | | 3,104 | |
Ending Assets | | $ | 25,297 | | $ | 4,702 | | $ | 8,659 | | $ | 38,658 | |
| | | | | | | | | |
September 30, 2005 | | | | | | | | | |
Beginning Assets | | $ | 25,392 | | $ | 5,367 | | $ | 8,315 | | $ | 39,074 | |
| | | | | | | | | |
Sales | | 628 | | 564 | | 127 | | 1,319 | |
Redemptions | | (745 | ) | (274 | ) | (744 | ) | (1,763 | ) |
Net Sales | | (117 | ) | 290 | | (617 | ) | (444 | ) |
| | | | | | | | | |
Net Exchanges and Adjustments | | (26 | ) | 23 | | 0 | | (3 | ) |
Reinvested Dividends and Capital Gains | | 36 | | 4 | | 27 | | 67 | |
Net Flows | | (107 | ) | 317 | | (590 | ) | (380 | ) |
| | | | | | | | | |
Market Appreciation | | 1,294 | | 454 | | 279 | | 2,027 | |
Ending Assets | | $ | 26,579 | | $ | 6,138 | | $ | 8,004 | | $ | 40,721 | |
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WADDELL & REED FINANCIAL, INC.
Supplemental Information
| | Other Items | |
| | 4Q 05 | | 4Q 04 | | % change | | 3Q 05 | | % change | |
Redemption rates - long-term assets | | | | | | | | | | | |
Advisors | | 9.1 | % | 10.9 | % | | | 9.2 | % | | |
Non-Proprietary | | 17.5 | % | 24.2 | % | | | 18.3 | % | | |
Institutional | | 26.1 | % | 17.8 | % | | | 35.8 | % | | |
Total | | 13.7 | % | 14.1 | % | | | 16.0 | % | | |
| | | | | | | | | | | |
Sales per advisor (000s) (1) | | | | | | | | | | | |
Total | | 205 | | 178 | | 15.2 | % | 195 | | 5.1 | % |
2+ Years | | 307 | | 264 | | 16.3 | % | 278 | | 10.4 | % |
0 to 2 Years | | 56 | | 45 | | 24.4 | % | 63 | | -11.1 | % |
| | | | | | | | | | | |
Gross production per advisor (000s) (2) | | 13.8 | | 13.2 | | 4.5 | % | 13.3 | | 3.8 | % |
| | | | | | | | | | | |
Number of advisors (3) | | 2,409 | | 2,623 | | -8.2 | % | 2,443 | | -1.4 | % |
| | | | | | | | | | | |
Number of shareholder accounts (000s) | | 2,639 | | 2,423 | | 8.9 | % | 2,579 | | 2.3 | % |
| | | | | | | | | | | |
Number of shareholders | | 640,357 | | 645,461 | | -0.8 | % | 639,675 | | 0.1 | % |
| | | | | | | | | | | |
|
(1) Average commissionable sales per Waddell & Reed Advisor |
(2) Average gross commission generated per Waddell & Reed Advisor |
(3) Excludes Legend retirement advisors |
Lipper Ranking
Percentage of funds | | 1 Year | | 3 Years | | 5 Years | |
Equity Funds | | | | | | | |
Top Quartile | | 59 | % | 38 | % | 56 | % |
Top Half | | 74 | % | 67 | % | 61 | % |
All Funds | | | | | | | |
Top Quartile | | 48 | % | 30 | % | 44 | % |
Top Half | | 69 | % | 61 | % | 62 | % |
MorningStar Ranking
Percentage of funds with 4 or 5 stars | | Overall | | 3 Years | | 5 Years | |
Equity Funds | | 29 | % | 17 | % | 34 | % |
All Funds | | 25 | % | 13 | % | 29 | % |
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Earnings Conference Call
Stockholders, members of the investment community and the general public are invited to listen to a live webcast of our earnings release conference call today, January 31, 2006 at 10:00 a.m. Eastern. During this call, Henry J. Herrmann, CEO, will review our fourth quarter results. Live access to the teleconference will be available on the “Corporate” section of our website at www.waddell.com. A webcast replay will be made available shortly after the call through February 6th.
Website Resources
We invite you to visit the “Corporate” section of our website at www.waddell.com under the caption “Data Tables” to review supplemental information schedules.
Contacts
Investor Contact:
Nicole McIntosh, Investor Relations Manager, (913) 236-1880, nmcintosh@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.
Forward-Looking Statements
The statements in this press release relating to matters that are not historical facts are forward-looking statements based on management’s belief and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. Such differences could be caused by a number of factors including, but not limited to, a risk that the expected benefits from the expansion of our distribution channels may not be as beneficial as anticipated, unexpected and adverse results of litigation or regulation, governmental investigation, settlements of such investigations and regulatory investigations of the Company, acts of terrorism and/or war, less favorable economic and market conditions including our cost to finance the Company, the risk that the intended results of our changes to long-term incentive compensation may not meet our expectations, and other risks as set out in the reports we have filed with the SEC. Should one or more of these risks materialize or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We assume no duty to publicly update or revise such statements, whether as a result of new information, future events or otherwise.
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