Exhibit 99.1
News Release
Waddell & Reed Financial, Inc. Reports First Quarter Results
Overland Park, KS, April 25, 2006 – Waddell & Reed Financial, Inc. (NYSE: WDR) reported first quarter net income of $24.6 million, or $0.30 per diluted share, compared to net income of $19.9 million, or $0.24 per diluted share in last year’s fourth quarter and net income of $22.8 million, or $0.28 per diluted share in the first quarter of 2005.
The current quarter includes a pre-tax charge of $1.9 million ($1.3 million net of tax, or $0.01 per diluted share) related to employee separation costs at Austin Calvert & Flavin, Inc. (“ACF”), an investment advisor subsidiary, and an after-tax addition to net income of $321 thousand to capture the cumulative affect of the implementation of SFAS 123R. As previously disclosed, fourth quarter 2005 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. Excluding these non-recurring items, the current quarter’s net income would have been $25.5 million, or $0.31 per diluted share while fourth quarter net income would have been $23.8 million, or $0.29 per diluted share. We believe adjusting our results for these non-recurring items provides stockholders with a more comparable basis for evaluating our operating 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.
As our business model continues to evolve, and to continue to provide our investors with the highest degree of disclosure clarity, we have refined the naming conventions of our distribution channels. We have separated the activities of our third-party (non-proprietary) retail mutual fund distribution efforts from those of our institutional distribution efforts. Our third-party distribution efforts include broker/dealer, retirement and registered investment advisors, as well as the activities of our Legend subsidiary. Our institutional efforts include separate accounts for defined benefit plans, pension plans and endowments, as well as the activities of ACF and our subadvisory partnership with Mackenzie Financial in Canada.
The activities of Waddell & Reed’s financial advisors will remain under the “Advisors channel” caption, the activities of our third-party distribution efforts under “Wholesale channel,” and our institutional efforts under “Institutional.”
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Channel Discussion
Advisors channel
The turnaround efforts made in our sales force last year are having the desired effect of strengthening sales and productivity. Our progress is apparent as our financial advisors turned in their strongest quarterly gross and net sales results since 2001. The quarter’s sales improvement was also reflected in our Advisors U&D margin, which improved to -3.6% compared to - -5.7% and -4.2% during the fourth and first quarters of 2005, respectively. We are pleased with our progress to date, but believe there is still considerable opportunity for additional improvement.
Two areas in need of improvement are variable annuity sales and the recruitment of new advisors; both remain at depressed levels. We are actively working with our advisors and field managers to ensure that they understand the features, potential benefits and suitability requirements of variable annuity products in the context of financial planning. While we continue to recruit actively, year-to-date results have been disappointing, and gaining recruiting traction is a priority for the balance of the year.
Wholesale channel
Our Wholesale channel continues its momentum, with gross sales reaching $1.15 billion during the quarter compared to $668 million in the fourth quarter of 2005 and $611 million in the first quarter of 2005. While sales of Ivy Global Natural Resources fund remained at the forefront, significant traction was generated in Waddell & Reed managed products. Sales of such products were $410 million during the quarter, compared to $266 million and $131 million in the fourth and first quarters of 2005, respectively. We remain focused on broadening the span of product sold through the Wholesale channel.
Institutional
We made substantial personnel changes at ACF during the quarter to address the subsidiary’s underperformance. We severed the portfolio management and analyst staff, appointed a new chief investment officer with close ties to Kansas City, and will provide research coverage from Kansas City. During the quarter, ACF recorded net redemptions of $223 million as redemption pressure persists. On March 31, 2006, ACF had assets under management of $912 million.
Our defined benefit business is beginning to show signs of improvement. Sales were near breakeven during the quarter with net redemptions of $10 million on a combination of lower redemptions and slight improvement in sales level.
“Our results this quarter reflected good momentum,” said Hank Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. “We anticipate further progress for the remainder of the year, presuming of course that financial markets cooperate and remain on an upward path.”
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Investment Product Sales (1)
Advisors Channel
($ thousands)
| | 1Q 2006 | | 1Q 2005 | | % | | 4Q 2005 | | % | |
Front-load sales (Class A) | | $ | 472,233 | | $ | 322,971 | | 46.2 | % | $ | 380,896 | | 24.0 | % |
Variable annuity products | | 62,854 | | 79,585 | | -21.0 | % | 65,741 | | -4.4 | % |
Total Front-load sales | | 535,087 | | 402,556 | | 32.9 | % | 446,637 | | 19.8 | % |
Deferred-load sales | | 56,033 | | 57,702 | | -2.9 | % | 45,561 | | 23.0 | % |
Allocation product sales (no-load)(2) | | 13,325 | | 8,405 | | 58.5 | % | 8,786 | | 51.7 | % |
Total | | $ | 604,445 | | $ | 468,663 | | 29.0 | % | $ | 500,984 | | 20.7 | % |
(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 quarter basis, a notable increase in front-load sales volume in our Advisors channel led to more than half of the improvement in revenues. The remainder of the increase is due to higher asset-based Rule 12b-1 service and distribution fees in our Wholesale channel, and to a lesser extent, higher asset-based Rule 12b-1 service and distribution fees in our Advisors channel and higher sales volume by Legend advisors.
Compared to last year’s first quarter, revenues improved on a combination of substantial improvements in front-load sales volume in our Advisors channel (partially offset by lower variable annuity sales volume) higher asset-based Rule 12b-1 service and distribution fees in our Wholesale channel and higher sales volume by Legend advisors.
Underwriting and Distribution Expenses
Sequentially, direct expenses rose with higher sales volumes and higher asset-based Rule 12b-1 service and distribution fees. Indirect expenses in both Advisors and Wholesale distribution channels remained relatively unchanged from the previous quarter’s levels.
Compared to last year’s first quarter, approximately three-quarters of the increase in costs is directly tied to increased sales volumes and higher asset-based Rule 12b-1 service and distribution fees. The remainder of the increase is due to higher indirect costs, that is, higher costs associated with our efforts to improve the performance of our Advisors channel, and to a lesser extent, higher wholesaling support costs in our Wholesale channel.
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Other Operating Items
Compensation and Related Costs
With the adoption of SFAS 123R in the first quarter of 2006, we have reclassified our equity-based compensation expense to compensation and related costs.
The first quarter of 2006 included employee separation costs totaling $1.9 million (including $1.5 million of equity compensation) relating to the personnel changes we made at ACF. Excluding this severance charge, costs increased on a sequential quarter basis due to annual salary increases in January and higher incentive compensation.
Compared to last year’s first quarter, costs increased due to higher headcount and salary increases as well as higher equity-based compensation to recognize the additional amortization related to our April 2005 restricted stock grants. On April 2, 2006, we issued an additional 1.1 million shares of restricted stock. These shares, as with previous years grants, will vest on a straight line basis over the next four years.
General and Administrative Costs
During the fourth quarter of 2005, we incurred a charge of $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 remain relatively unchanged.
Subadvisory Costs
Subadvisory costs, calculated on average daily assets, continue to increase due to strong sales and asset growth in select subadvised funds.
Balance Sheet Information
As of March 31, 2006
• Cash balance of $186.9 million ($38.7 million held for the exclusive benefit of customers in compliance with federal securities industry regulations).
• Investment securities of $50.3 million.
• Long-term debt outstanding of $199.9 million.
• No short-term debt outstanding.
• Shareholders’ equity of $265.1 million.
• Shares outstanding were 83.8 million.
• No shares repurchased.
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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
March 31, | | Change | | Three Months Ended
December 31, | | Change | |
| | 2006 | | 2005 | | $ | | % | | 2005 | | $ | | % | |
Operating Revenues: | | | | | | | | | | | | | | | |
Investment management fees | | $ | 74,049 | | $ | 63,582 | | 10,467 | | 16.5 | | $ | 70,709 | | 3,340 | | 4.7 | |
Underwriting & distribution fees | | 77,012 | | 67,345 | | 9,667 | | 14.4 | | 71,342 | | 5,670 | | 7.9 | |
Shareholder service fees | | 22,009 | | 19,810 | | 2,199 | | 11.1 | | 21,092 | | 917 | | 4.3 | |
Total operating revenues | | 173,070 | | 150,737 | | 22,333 | | 14.8 | | 163,143 | | 9,927 | | 6.1 | |
Operating Expenses: | | | | | | | | | | | | | | | |
Underwriting and distribution | | 84,754 | | 74,289 | | 10,465 | | 14.1 | | 79,663 | | 5,091 | | 6.4 | |
Compensation and related costs (1) | | 29,446 | | 22,609 | | 6,837 | | 30.2 | | 25,329 | | 4,117 | | 16.3 | |
General and administrative | | 10,246 | | 10,234 | | 12 | | 0.1 | | 16,820 | | (6,574 | ) | -39.1 | |
Subadvisory | | 6,549 | | 3,521 | | 3,028 | | 86.0 | | 5,599 | | 950 | | 17.0 | |
Depreciation | | 2,853 | | 2,376 | | 477 | | 20.1 | | 2,840 | | 13 | | 0.5 | |
Total operating expense | | 133,848 | | 113,029 | | 20,819 | | 18.4 | | 130,251 | | 3,597 | | 2.8 | |
Operating Income | | 39,222 | | 37,708 | | 1,514 | | 4.0 | | 32,892 | | 6,330 | | 19.2 | |
Investment & other income | | 2,264 | | 1,364 | | 900 | | 66.0 | | 2,411 | | (147 | ) | -6.1 | |
Interest expense | | (3,254 | ) | (3,254 | ) | 0 | | 0.0 | | (3,680 | ) | (426 | ) | -11.6 | |
Income before taxes | | 38,232 | | 35,818 | | 2,414 | | 6.7 | | 31,623 | | 6,609 | | 20.9 | |
Provision for taxes | | 13,961 | | 13,068 | | 893 | | 6.8 | | 11,698 | | 2,263 | | 19.3 | |
Net income before change in accounting principle | | 24,271 | | 22,750 | | 1,521 | | 6.7 | | 19,925 | | 4,346 | | 21.8 | |
Change in accounting principle - net of taxes | | 321 | | — | | 321 | | n/m | | — | | 321 | | n/m | |
Net Income | | 24,592 | | 22,750 | | 1,842 | | 8.1 | | 19,925 | | 4,667 | | 23.4 | |
Net income per share before change in accounting principle - diluted | | 0.29 | | 0.28 | | 0.01 | | 3.6 | | 0.24 | | 0.05 | | 20.8 | |
Net income per share - diluted | | 0.30 | | 0.28 | | 0.02 | | 7.1 | | 0.24 | | 0.06 | | 25.0 | |
Adjusted net income (2) | | 25,542 | | 22,750 | | 2,792 | | 12.3 | | 23,773 | | 1,769 | | 7.4 | |
Adjusted net income per share - diluted (2) | | 0.31 | | 0.28 | | 0.03 | | 10.7 | | 0.29 | | 0.02 | | 6.9 | |
Weighted average shares outstanding - diluted | | 82,943 | | 82,105 | | | | | | 82,338 | | | | | |
Operating margin | | 22.7 | % | 25.0 | % | | | | | 20.2 | % | | | | |
Adjusted operating margin (2) | | 23.7 | % | 25.0 | % | | | | | 23.9 | % | | | | |
Waddell & Reed Advisors U&D margin (3) | | -3.6 | % | -4.2 | % | | | | | -5.7 | % | | | | |
| | | | | | | | | | | | | | | | | | |
(1) Includes equity compensation of $5,951, $2,790, and $4,470 million, respectively
(2) Reconciliation to GAAP provided below
(3) Excludes our wholesale underwriting and distribution activities
GAAP net income | | $ | 24,592 | | $ | 22,750 | | | | | | $ | 19,925 | | | | | |
Add back severance costs (net of tax) | | 1,271 | | — | | | | | | — | | | | | |
Subtract cumulative change in accounting principle (net of tax) | | (321 | ) | — | | | | | | — | | | | | |
Add back arbitration case settlement (net of tax) | | — | | — | | | | | | 3,848 | | | | | |
Adjusted net income | | $ | 25,542 | | $ | 22,750 | | | | | | $ | 23,773 | | | | | |
| | | | | | | | | | | | | | | |
GAAP net income per share (diluted) | | $ | 0.30 | | $ | 0.28 | | | | | | $ | 0.24 | | | | | |
Add back severance costs (net of tax) | | 0.01 | | — | | | | | | — | | | | | |
Subtract cumulative change in accounting principle (net of tax) | | — | | — | | | | | | — | | | | | |
Add back arbitration case settlement (net of tax) | | — | | — | | | | | | 0.05 | | | | | |
Adjusted earnings per share (diluted) | | $ | 0.31 | | $ | 0.28 | | | | | | $ | 0.29 | | | | | |
| | | | | | | | | | | | | | | |
GAAP operating margin | | 22.7 | % | 25.0 | % | | | | | 20.2 | % | | | | |
Add back severance costs | | 1.1 | % | — | | | | | | — | | | | | |
Add back arbitration case settlement | | — | | — | | | | | | 3.7 | % | | | | |
Adjusted operating margin * | | 23.7 | % | 25.0 | % | | | | | 23.9 | % | | | | |
* May not foot due to rounding
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WADDELL & REED FINANCIAL, INC.
Underwriting and Distribution
For the quarter ended
(Amounts in thousands)
| | | | Wholesale | | | |
March 31, 2006 | | Advisors | | Third-Party | | Legend | | Total | |
Revenues | | $ | 56,280 | | $ | 7,909 | | $ | 12,823 | | $ | 77,012 | |
Expenses | | | | | | | | | |
Direct | | 38,468 | | 11,091 | | 8,654 | | 58,213 | |
Indirect | | 19,866 | | 3,832 | | 2,843 | | 26,541 | |
Total Expenses | | 58,334 | | 14,923 | | 11,497 | | 84,754 | |
Net U&D | | $ | (2,054 | ) | $ | (7,014 | ) | $ | 1,326 | | $ | (7,742 | ) |
Margin | | -3.6 | % | n/m | | 10.3 | % | | |
| | | | | | | | | |
March 31, 2005 | | | | | | | | | |
Revenues | | $ | 52,205 | | $ | 4,177 | | $ | 10,963 | | $ | 67,345 | |
Expenses | | | | | | | | | |
Direct | | 35,920 | | 6,685 | | 7,287 | | 49,892 | |
Indirect | | 18,494 | | 3,183 | | 2,720 | | 24,397 | |
Total Expenses | | 54,414 | | 9,868 | | 10,007 | | 74,289 | |
Net U&D | | $ | (2,209 | ) | $ | (5,691 | ) | $ | 956 | | $ | (6,944 | ) |
Margin | | -4.2 | % | n/m | | 8.7 | % | | |
| | | | | | | | | |
December 31, 2005 | | | | | | | | | |
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 | % | | |
| | | | | | | | | | | | | | | | | | |
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WADDELL & REED FINANCIAL, INC.
Changes in Assets Under Management
For the quarter ended
(Amounts in millions)
March 31, 2006 | | Advisors | | Wholesale | | Institutional | | Total | |
Beginning Assets | | $ | 27,188 | | $ | 6,729 | | $ | 7,946 | | $ | 41,863 | |
Sales | | 843 | | 1,151 | | 172 | | 2,166 | |
Redemptions | | (849 | ) | (348 | ) | (450 | ) | (1,647 | ) |
Net Sales | | (6 | ) | 803 | | (278 | ) | 519 | |
Net Exchanges and Adjustments | | (64 | ) | 60 | | 0 | | (4 | ) |
Reinvested Dividends and Capital Gains | | 48 | | 10 | | 29 | | 87 | |
Net Flows | | (22 | ) | 873 | | (249 | ) | 602 | |
Market Appreciation | | 1,464 | | 625 | | 298 | | 2,387 | |
Ending Assets | | $ | 28,630 | | $ | 8,227 | | $ | 7,995 | | $ | 44,852 | |
| | | | | | | | | |
March 31, 2005 | | | | | | | | | |
Beginning Assets | | $ | 25,297 | | $ | 4,702 | | $ | 8,659 | | $ | 38,658 | |
Sales | | 582 | | 611 | | 238 | | 1,431 | |
Redemptions | | (734 | ) | (302 | ) | (506 | ) | (1,542 | ) |
Net Sales | | (152 | ) | 309 | | (268 | ) | (111 | ) |
Net Exchanges and Adjustments | | (17 | ) | 14 | | 0 | | (3 | ) |
Reinvested Dividends and Capital Gains | | 39 | | 1 | | 33 | | 73 | |
Net Flows | | (130 | ) | 324 | | (235 | ) | (41 | ) |
Market Depreciation | | (246 | ) | (4 | ) | (182 | ) | (432 | ) |
Ending Assets | | $ | 24,921 | | $ | 5,022 | | $ | 8,242 | | $ | 38,185 | |
| | | | | | | | | |
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 | |
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WADDELL & REED FINANCIAL, INC.
Supplemental Information
Other Items
| | 1Q 06 | | 1Q 05 | | % change | | 4Q 05 | | % change | |
Redemption rates - long-term assets | | | | | | | | | | | |
Advisors | | 9.8 | % | 9.6 | % | | | 9.1 | % | | |
Wholesale | | 18.3 | % | 24.8 | % | | | 17.5 | % | | |
Institutional | | 22.7 | % | 24.2 | % | | | 26.1 | % | | |
Total | | 13.7 | % | 14.8 | % | | | 13.7 | % | | |
| | | | | | | | | | | |
Sales per advisor (000s) (1) | | | | | | | | | | | |
Total | | 259 | | 189 | | 36.5 | % | 205 | | 26.39 | % |
2+ Years | | 395 | | 286 | | 38.1 | % | 307 | | 28.7 | % |
0 to 2 Years | | 71 | | 57 | | 24.6 | % | 56 | | 26.8 | % |
| | | | | | | | | | | |
Gross production per advisor (000s) (2) | | 15.9 | | 12.9 | | 23.3 | % | 13.8 | | 15.2 | % |
| | | | | | | | | | | |
Number of advisors (3) | | 2,299 | | 2,454 | | -6.3 | % | 2,409 | | -4.6 | % |
| | | | | | | | | | | |
Number of shareholder accounts (000s) | | 2,733 | | 2,483 | | 10.1 | % | 2,639 | | 3.6 | % |
| | | | | | | | | | | |
Number of shareholders | | 646,231 | | 644,515 | | 0.3 | % | 640,357 | | 0.9 | % |
(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 | | 38 | % | 34 | % | 53 | % |
Top Half | | 67 | % | 66 | % | 73 | % |
All Funds | | | | | | | |
Top Quartile | | 30 | % | 27 | % | 41 | % |
Top Half | | 61 | % | 59 | % | 69 | % |
MorningStar Ranking
Percentage of funds with 4 or 5 stars | | Overall | | 3 Years | | 5 Years | |
Equity Funds | | 30 | % | 23 | % | 33 | % |
All Funds | | 24 | % | 16 | % | 28 | % |
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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, April 25, 2006 at 10:00 a.m. Eastern. During this call, Henry J. Herrmann, CEO, will review our first 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 May 2nd.
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, Director of Investor Relations, (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.
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 distribution effort ( 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
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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