Exhibit 99.1
News Release
Waddell & Reed Financial, Inc. Reports Third Quarter Results
Overland Park, KS, October 27, 2020 — Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter 2020 net income1 of $30.5 million, or $0.48 per diluted share, compared to net income of $24.8 million, or $0.38 per diluted share, during the prior quarter and net income of $33.1 million, or $0.46 per diluted share, during the third quarter of 2019. The third quarter of 2019 included $3.1 million in severance expense related to the outsourcing of our transfer agency transactional processing operations. Excluding the severance expense, adjusted net income for the third quarter of 2019 was $35.4 million and adjusted net income per diluted share was $0.492.
Highlights
| · | Strong financial performance, with 11.5% increase in revenues compared to the prior quarter due to higher average assets benefiting both Investment Management revenues and Wealth Management Advisory revenues |
| · | Continued execution of strategic initiatives in Asset Management, with average Assets Under Management (AUM) up 10% compared to the prior quarter |
| o | Both sales and redemptions improved vs. the same quarter in 2019, particularly in institutional and unaffiliated |
| o | Continued progress in strategic pricing evaluation, with 75% of AUM at or better than competitor median fees |
| · | Successful quarter for Wealth Management recruiting and asset growth |
| o | Net new Assets Under Administration3 (AUA) continue to improve, and net new Advisory AUA were positive for the 7th consecutive quarter |
| o | Since January 1, 2020, 32 advisors have affiliated with Waddell & Reed with combined prior firm AUA totaling over $1.9 billion |
| o | $474 thousand average trailing 12-month productivity per Advisor for the third quarter of 2020 improved 2% and 12% compared to the prior quarter and the third quarter of 2019, respectively |
| · | Robust balance sheet continued to support investment in strategic growth and meaningful capital return |
| o | $744.6 million in cash and investments at the end of the third quarter of 20204 |
| o | $56.3 million was returned to shareholders in the third quarter of 2020, including $40.1 million of share repurchases |
| · | Hired two executives focused on strategic growth – one to lead the technology teams dedicated to leveraging technology as a strategic asset across the organization, and one to develop and lead strategies in support of best-in-class client and advisor experience, processes and procedures |
Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc. shared, “I am pleased with the progress in transforming our wealth management business this quarter with continued recruiting success, growth in advisory assets and further advancement of our technologies. At the same time, flows within our asset management business improved compared to the prior year, and our teams are seeing solid engagement across our distribution network.” Mr. Sanders continued, “While the operating environment remains challenging, we are as focused as ever on partnering with clients to help them realize their long-term financial goals through superior investment performance, advice and client service.”
1 Net income represents net income attributable to Waddell & Reed Financial, Inc.
2 See Non-GAAP Financial Measures section and Reconciliation of GAAP to Non-GAAP Financial Measures table
3 Net new advisory AUA are calculated as total client deposits and net transfers less client withdrawals. Client deposits include dividends and interest.
4 Excluding restricted cash
| Consolidated Financial Results | | Three Months Ended | | | Nine Months Ended | |
| | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Sep. 30, | | | Sep. 30, | |
| | | 2020 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| GAAP basis (in thousands, except per share data): | | | | | | | | | | | | | | | |
| Revenue | | $ | 267,670 | | | $ | 240,034 | | | $ | 270,680 | | | $ | 771,437 | | | $ | 800,244 | |
| Operating expenses | | $ | 230,035 | | | $ | 216,407 | | | $ | 230,656 | | | $ | 670,784 | | | $ | 683,417 | |
| Operating income | | $ | 37,635 | | | $ | 23,627 | | | $ | 40,024 | | | $ | 100,653 | | | $ | 116,827 | |
| Operating margin | | | 14.1 | % | | | 9.8 | % | | | 14.8 | % | | | 13.0 | % | | | 14.6 | % |
| Controllable expenses1 | | $ | 101,352 | | | $ | 102,034 | | | $ | 104,516 | | | $ | 300,516 | | | $ | 312,505 | |
| Net income | | $ | 30,523 | | | $ | 24,824 | | | $ | 33,054 | | | $ | 77,333 | | | $ | 99,056 | |
| Net income per share, basic and diluted | | $ | 0.48 | | | $ | 0.38 | | | $ | 0.46 | | | $ | 1.18 | | | $ | 1.33 | |
| As adjusted2 (in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 267,670 | | | $ | 240,034 | | | $ | 270,680 | | | $ | 771,437 | | | $ | 800,244 | |
| Operating expenses | | $ | 230,035 | | | $ | 216,407 | | | $ | 227,575 | | | $ | 670,784 | | | $ | 680,336 | |
| Operating income | | $ | 37,635 | | | $ | 23,627 | | | $ | 43,105 | | | $ | 100,653 | | | $ | 119,908 | |
| Operating margin | | | 14.1 | % | | | 9.8 | % | | | 15.9 | % | | | 13.0 | % | | | 15.0 | % |
| Controllable expenses | | $ | 101,352 | | | $ | 102,034 | | | $ | 101,435 | | | $ | 300,516 | | | $ | 309,424 | |
| Net income | | $ | 30,523 | | | $ | 24,824 | | | $ | 35,396 | | | $ | 77,333 | | | $ | 101,398 | |
| Net income per share, basic and diluted | | $ | 0.48 | | | $ | 0.38 | | | $ | 0.49 | | | $ | 1.18 | | | $ | 1.36 | |
| Assets under management (in millions) | | $ | 67,869 | | | $ | 64,966 | | | $ | 68,782 | | | $ | 67,869 | | | $ | 68,782 | |
| Average assets under management (in millions) | | $ | 67,946 | | | $ | 61,718 | | | $ | 70,527 | | | $ | 65,272 | | | $ | 70,667 | |
| Assets under administration (in millions) | | $ | 62,694 | | | $ | 58,991 | | | $ | 57,113 | | | $ | 62,694 | | | $ | 57,113 | |
| Average assets under administration (in millions) | | $ | 61,400 | | | $ | 55,181 | | | $ | 57,411 | | | $ | 58,583 | | | $ | 55,770 | |
Financial Summary
Revenues totaled $267.7 million for the quarter, an increase of $27.6 million, compared to the prior quarter and a decrease of $3.0 million compared to the third quarter of 2019. Operating expenses for the quarter of $230.0 million increased $13.6 million compared to the second quarter of 2020 and decreased $0.6 million compared to the third quarter of 2019. Adjusted operating expenses2 increased $2.5 million compared to the third quarter of 2019. The operating margin was 14.1% during the current quarter, compared to 9.8% and 14.8% during the prior quarter and the third quarter of 2019, respectively. The adjusted operating margin2 was 15.9% during the third quarter of 2019.
AUM ended the quarter at $67.9 billion, an increase of 4% compared to the prior quarter primarily due to market appreciation and a decrease of 1% compared to the third quarter of 2019. Average AUM were $67.9 billion during the current quarter, compared to $61.7 billion during the prior quarter and $70.5 billion during the third quarter of 2019. Net outflows of $1.8 billion during the current quarter were higher compared to net outflows of $1.4 billion in the prior quarter and were lower compared to net outflows of $2.7 billion in the third quarter of 2019. Sales of $1.8 billion during the current quarter decreased 17% compared to the prior quarter and increased 2% compared to the third quarter of 2019. Redemptions were slightly better compared to the prior quarter and were 19% better compared to the third quarter of 2019.
Wealth management AUA ended the quarter at $62.7 billion, an increase of 6% and 10%, compared to the second quarter of 2020 and the third quarter of 2019, respectively. Average AUA were $61.4 billion during the current quarter, compared to $55.2 billion during the prior quarter and $57.4 billion during the third quarter of 2019. Net new advisory
AUA was $437.3 million, as advisory products continue to drive the majority of new sales. Non-advisory asset flows continue to be negative, experiencing an increase in outflows compared to the prior quarter and reduced outflows compared to the same quarter in 2019.
1 Controllable expenses defined as compensation and benefits, general and administrative, occupancy, technology, and marketing and advertising costs
2 See Non-GAAP Financial Measures section and Reconciliation of GAAP to Non-GAAP Financial Measures table
Revenues Analysis
Investment management fees increased $10.8 million, or 11%, compared to the second quarter of 2020 due to a 10% increase in average AUM and one additional day in the quarter partially offset by additional money market fee waivers. The effective management fee rate for the current quarter was 62.4 basis points remaining consistent with the prior quarter’s rate. Compared to the third quarter of 2019, investment management fees declined $5.2 million, or 5%, primarily due to lower average AUM and a lower effective management fee rate due to targeted fee reductions made in previous periods and money market fee waivers.
Underwriting and distribution fees increased $15.8 million, or 13%, compared to the prior quarter due to higher advisory fees and higher service and distribution fees due to higher asset levels. In addition, sales commissions were $2.7 million higher compared to the prior quarter as a result of increased sales activity across insurance product lines. Compared to the same quarter in 2019, underwriting and distribution fees increased $3.7 million, or 3%, due to increased advisory fees from higher asset levels, partially offset by lower sales commissions and lower service and distribution fees from lower asset levels.
Shareholder service fees increased $1.0 million, or 5%, compared to the second quarter of 2020 primarily due to an increase in average assets and one additional day in the quarter. Compared to the third quarter of 2019, shareholder service fees declined $1.5 million, or 6%, due to a decrease in average assets and fewer accounts. There was also a reduction in fund reimbursement revenues related to the outsourcing of our transfer agency transactional processing operations which was offset by lower costs.
Operating Expenses Analysis
Controllable expenses decreased $0.7 million and $3.2 million compared to the prior quarter and the third quarter of 2019, respectively as investment in targeted growth areas of our strategy continue.
Distribution expenses increased $14.3 million, or 13%, compared to the prior quarter and increased $4.8 million, or 4%, compared to the third quarter of 2019 as a result of the increase in underwriting and distribution revenue. The expense increase compared to the third quarter of 2019 was larger than the revenue increase primarily due to an increase in the average advisor payout rate from continued increases in production.
Compensation and benefits expense increased $0.6 million, or 1%, compared to the prior quarter primarily due to an increase in base salaries and benefits expense due to an increase in headcount. These increases were partially offset by mark-to-market adjustments on equity-based compensation. Compared to the third quarter of 2019, compensation and benefits expense decreased $2.6 million, or 4%, due to severance paid related to the outsourcing of our transfer agency transactional processing operations in the third quarter of 2019, lower costs from reduced headcount and lower equity-based compensation. These decreases were partially offset by mark-to-market adjustments on deferred compensation plans.
General and administrative expenses decreased $1.4 million, or 7%, compared to the second quarter of 2020 primarily due to lower meeting costs. Compared to the same quarter in 2019, general and administrative expenses increased $2.5 million, or 15%, due to a shift of our transfer agency transactional processing operations costs from technology expenses to general and administrative expenses as a result of outsourcing and increased strategic project spending, partially offset by lower travel and meetings costs.
Technology costs were consistent with the prior quarter as higher software costs for new technologies were offset by lower technology consulting costs. Technology costs decreased $0.8 million, or 5%, compared to the third quarter of 2019 as costs related to the transfer agency transactional processing operations outsourcing were shifted to general and administrative expenses. This decrease was partially offset by increased consulting and software costs for new technologies.
Occupancy expenses decreased $0.1 million, or 3%, compared to the prior quarter and decreased $1.5 million, or 27%, compared to the third quarter of 2019. For both comparative periods, occupancy costs decreased as a result of the planned transition out of corporate field offices in our wealth manager.
Marketing and advertising expenses increased slightly compared to the prior quarter and decreased $0.8 million, or 36%, compared to the third quarter of 2019 primarily due to lower sponsorship fees in connection with the shift to virtual industry conferences.
Depreciation expense declined slightly compared to the prior quarter and declined $1.8 million, or 38%, compared to the third quarter of 2019 due to capitalized software development assets becoming fully depreciated.
Investment and Other Income
Investment and other income decreased $9.7 million compared to the prior quarter due to lower unrealized gains, net of hedging activity, on the seed and corporate investment portfolios and an increase in pension expense as a result of the pension plan liquidation in the third quarter of 2020. Compared to the third quarter of 2019, investment and other income increased slightly as higher unrealized gains, net of hedging activity, on the seed and corporate investment portfolio were offset by an increase in pension expense due to the plan liquidation and a decline in interest income for the corporate investment portfolio.
The effective tax rate was 24.8% and was consistent with the prior quarter’s rate of 25.3%. Compared to the third quarter of 2019, the rate increased slightly, primarily due to increased state taxes as a result of additional filings in the current quarter.
AUM
(in millions)
| | | Three Months Ended | | | | | | | | | | | | | |
| | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Prior Qtr. | | | Year-over-Year Qtr. | |
| | | 2020 | | | 2020 | | | 2019 | | | Change | | | % | | | Change | | | % | |
| Unaffiliated1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning assets | | $ | 23,724 | | | $ | 20,244 | | | $ | 27,545 | | | $ | 3,480 | | | | 17 | % | | $ | (3,821 | ) | | | (14 | )% |
| Sales2 | | | 1,127 | | | | 1,490 | | | | 999 | | | | (363 | ) | | | (24 | )% | | | 128 | | | | 13 | % |
| Redemptions | | | (1,977 | ) | | | (2,179 | ) | | | (2,684 | ) | | | 202 | | | | 9 | % | | | 707 | | | | 26 | % |
| Net exchanges | | | 239 | | | | 205 | | | | 334 | | | | 34 | | | | 17 | % | | | (95 | ) | | | (28 | )% |
| Net Flows | | | (611 | ) | | | (484 | ) | | | (1,351 | ) | | | (127 | ) | | | (26 | )% | | | 740 | | | | 55 | % |
| Market action | | | 1,755 | | | | 3,964 | | | | (337 | ) | | | (2,209 | ) | | | (56 | )% | | | 2,092 | | | | 621 | % |
| Ending assets | | $ | 24,868 | | | $ | 23,724 | | | $ | 25,857 | | | $ | 1,144 | | | | 5 | % | | $ | (989 | ) | | | (4 | )% |
| Annualized organic growth rate | | | (10.3 | )% | | | (9.6 | )% | | | (19.6 | )% | | | | | | | | | | | | | | | | |
| Annualized redemption rate3 | | | 32.3 | % | | | 39.9 | % | | | 40.9 | % | | | | | | | | | | | | | | | | |
| Institutional | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning assets | | $ | 2,997 | | | $ | 2,427 | | | $ | 3,887 | | | $ | 570 | | | | 23 | % | | $ | (890 | ) | | | (23 | )% |
| Sales2 | | | 59 | | | | 52 | | | | 49 | | | | 7 | | | | 13 | % | | | 10 | | | | 20 | % |
| Redemptions | | | (165 | ) | | | (202 | ) | | | (230 | ) | | | 37 | | | | 18 | % | | | 65 | | | | 28 | % |
| Net exchanges | | | — | | | | 22 | | | | — | | | | (22 | ) | | | NM | | | | — | | | | NM | % |
| Net Flows | | | (106 | ) | | | (128 | ) | | | (181 | ) | | | 22 | | | | 17 | % | | | 75 | | | | 41 | % |
| Market action | | | 297 | | | | 698 | | | | (29 | ) | | | (401 | ) | | | (57 | )% | | | 326 | | | | 1,124 | % |
| Ending assets | | $ | 3,188 | | | $ | 2,997 | | | $ | 3,677 | | | $ | 191 | | | | 6 | % | | $ | (489 | ) | | | (13 | )% |
| Annualized organic growth rate | | | (14.1 | )% | | | (21.1 | )% | | | (18.6 | )% | | | | | | | | | | | | | | | | |
| Annualized redemption rate3 | | | 20.5 | % | | | 28.6 | % | | | 23.9 | % | | | | | | | | | | | | | | | | |
| Wealth Management | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning assets | | $ | 38,245 | | | $ | 33,339 | | | $ | 40,444 | | | $ | 4,906 | | | | 15 | % | | $ | (2,199 | ) | | | (5 | )% |
| Sales2 | | | 634 | | | | 649 | | | | 744 | | | | (15 | ) | | | (2 | )% | | | (110 | ) | | | (15 | )% |
| Redemptions | | | (1,488 | ) | | | (1,259 | ) | | | (1,542 | ) | | | (229 | ) | | | (18 | )% | | | 54 | | | | 4 | % |
| Net exchanges | | | (239 | ) | | | (227 | ) | | | (334 | ) | | | (12 | ) | | | (5 | )% | | | 95 | | | | 28 | % |
| Net Flows | | | (1,093 | ) | | | (837 | ) | | | (1,132 | ) | | | (256 | ) | | | (31 | )% | | | 39 | | | | 3 | % |
| Market action | | | 2,661 | | | | 5,743 | | | | (64 | ) | | | (3,082 | ) | | | (54 | )% | | | 2,725 | | | | 4,258 | % |
| Ending assets | | $ | 39,813 | | | $ | 38,245 | | | $ | 39,248 | | | $ | 1,568 | | | | 4 | % | | $ | 565 | | | | 1 | % |
| Annualized organic growth rate | | | (11.4 | )% | | | (10.0 | )% | | | (11.2 | )% | | | | | | | | | | | | | | | | |
| Annualized redemption rate3 | | | 13.1 | % | | | 11.6 | % | | | 13.4 | % | | | | | | | | | | | | | | | | |
| Consolidated Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning assets | | $ | 64,966 | | | $ | 56,010 | | | $ | 71,876 | | | $ | 8,956 | | | | 16 | % | | $ | (6,910 | ) | | | (10 | )% |
| Sales2 | | | 1,820 | | | | 2,191 | | | | 1,792 | | | | (371 | ) | | | (17 | )% | | | 28 | | | | 2 | % |
| Redemptions | | | (3,630 | ) | | | (3,640 | ) | | | (4,456 | ) | | | 10 | | | | — | % | | | 826 | | | | 19 | % |
| Net exchanges | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Net Flows | | | (1,810 | ) | | | (1,449 | ) | | | (2,664 | ) | | | (361 | ) | | | (25 | )% | | | 854 | | | | 32 | % |
| Market action | | | 4,713 | | | | 10,405 | | | | (430 | ) | | | (5,692 | ) | | | (55 | )% | | | 5,143 | | | | 1,196 | % |
| Ending assets | | $ | 67,869 | | | $ | 64,966 | | | $ | 68,782 | | | $ | 2,903 | | | | 4 | % | | $ | (913 | ) | | | (1 | )% |
| Annualized organic growth rate | | | (11.1 | )% | | | (10.3 | )% | | | (14.8 | )% | | | | | | | | | | | | | | | | |
| Annualized redemption rate3 | | | 20.5 | % | | | 22.6 | % | | | 24.3 | % | | | | | | | | | | | | | | | | |
1 Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only, Registered Investment Advisor and Variable Annuity.
2 Sales consist of gross sales and includes net reinvested dividends, capital gains and investment income.
3 Excludes Money Market.
| MorningStar Fund Rankings1 | | 1 Year | | | 3 Years | | | 5 Years | |
| Funds ranked in top half | | | 49 | % | | | 49 | % | | | 39 | % |
| Assets ranked in top half | | | 43 | % | | | 52 | % | | | 47 | % |
| MorningStar Ratings1 | | Overall | | | 3 Years | | | 5 Years | |
| Funds with 4/5 stars | | | 26 | % | | | 28 | % | | | 19 | % |
| Assets with 4/5 stars | | | 40 | % | | | 42 | % | | | 35 | % |
| 1 | Based on class I share, which reflects the largest concentration of sales and assets. |
| | | Three Months Ended | | | | | | | | | | | | | |
| Wealth Management | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Prior Qtr. | | | Year-over-Year Qtr. | |
| (in millions) | | 2020 | | | 2020 | | | 2019 | | | Change | | | % | | | Change | | | % | |
| AUA | | | | | | | | | | | | | | | | | | | | | |
| Ending advisory AUA | | $ | 29,330 | | | $ | 27,155 | | | $ | 25,107 | | | $ | 2,175 | | | | 8 | % | | $ | 4,223 | | | | 17 | % |
| Ending non-advisory AUA | | | 33,364 | | | | 31,836 | | | | 32,006 | | | | 1,528 | | | | 5 | % | | | 1,358 | | | | 4 | % |
| Ending total AUA | | | 62,694 | | | | 58,991 | | | | 57,113 | | | | 3,703 | | | | 6 | % | | | 5,581 | | | | 10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average advisory AUA 1 | | $ | 28,502 | | | $ | 25,030 | | | $ | 24,921 | | | $ | 3,472 | | | | 14 | % | | $ | 3,581 | | | | 14 | % |
| Average non-advisory AUA 1 | | | 32,898 | | | | 30,151 | | | | 32,490 | | | | 2,747 | | | | 9 | % | | | 408 | | | | 1 | % |
| Average AUA 1 | | | 61,400 | | | | 55,181 | | | | 57,411 | | | | 6,219 | | | | 11 | % | | | 3,989 | | | | 7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net new advisory AUA 2 | | $ | 437 | | | $ | 189 | | | $ | 328 | | | $ | 248 | | | | 131 | % | | $ | 109 | | | | 33 | % |
| Net new non-advisory AUA 2, 3 | | | (475 | ) | | | (346 | ) | | | (720 | ) | | | (129 | ) | | | (37 | )% | | | 245 | | | | 34 | % |
| Total net new AUA 2, 3 | | | (38 | ) | | | (157 | ) | | | (392 | ) | | | 119 | | | | 76 | % | | | 354 | | | | 90 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Annualized advisory AUA growth 4 | | | 6.4 | % | | | 3.3 | % | | | 5.3 | % | | | | | | | | | | | | | | | | |
| Annualized AUA growth 4 | | | (0.3 | )% | | | (1.2 | )% | | | (2.7 | )% | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advisors and advisor associates | | | 1,313 | | | | 1,317 | | | | 1,344 | | | | (4 | ) | | | — | % | | | (31 | ) | | | (2 | )% |
Avg. trailing 12-month revenue per
advisor 5 (in thousands) | | $ | 474 | | | $ | 464 | | | $ | 422 | | | $ | 10 | | | | 2 | % | | $ | 52 | | | | 12 | % |
| 1 | Average AUA are calculated as the average of the beginning of month AUA during each reporting period. |
| 2 | Net new AUA are calculated as total client deposits and net transfers less client withdrawals. Client deposits include dividends and interest. |
| 3 | Excludes activity related to products held outside of our wealth management platform. These assets represent less than 10% of total AUA. |
| 4 | Annualized growth is calculated as annualized quarterly net new AUA divided by beginning AUA. |
| 5 | 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 | | | | | | | | | | | | | |
| | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Prior Qtr. | | | Year-over-Year Qtr. | |
| | | 2020 | | | 2020 | | | 2019 | | | Change | | | % | | | Change | | | % | |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment management fees | | $ | 106,617 | | | $ | 95,824 | | | $ | 111,806 | | | $ | 10,793 | | | | 11 | % | | $ | (5,189 | ) | | | (5 | )% |
| Underwriting and distribution fees | | | 139,456 | | | | 123,633 | | | | 135,787 | | | | 15,823 | | | | 13 | % | | | 3,669 | | | | 3 | % |
| Shareholder service fees | | | 21,597 | | | | 20,577 | | | | 23,087 | | | | 1,020 | | | | 5 | % | | | (1,490 | ) | | | (6 | )% |
| Total | | | 267,670 | | | | 240,034 | | | | 270,680 | | | | 27,636 | | | | 12 | % | | | (3,010 | ) | | | (1 | )% |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Distribution1 | | | 122,195 | | | | 107,876 | | | | 117,425 | | | | 14,319 | | | | 13 | % | | | 4,770 | | | | 4 | % |
| Compensation and benefits (including share-based compensation of $11,080, $12,532 and $11,580, respectively) | | | 62,416 | | | | 61,863 | | | | 64,999 | | | | 553 | | | | 1 | % | | | (2,583 | ) | | | (4 | )% |
| General and administrative | | | 19,156 | | | | 20,524 | | | | 16,680 | | | | (1,368 | ) | | | (7 | )% | | | 2,476 | | | | 15 | % |
| Technology | | | 14,250 | | | | 14,237 | | | | 15,019 | | | | 13 | | | | 0 | % | | | (769 | ) | | | (5 | )% |
| Occupancy | | | 4,160 | | | | 4,291 | | | | 5,684 | | | | (131 | ) | | | (3 | )% | | | (1,524 | ) | | | (27 | )% |
| Marketing and advertising | | | 1,370 | | | | 1,119 | | | | 2,134 | | | | 251 | | | | 22 | % | | | (764 | ) | | | (36 | )% |
| Depreciation | | | 2,998 | | | | 3,209 | | | | 4,833 | | | | (211 | ) | | | (7 | )% | | | (1,835 | ) | | | (38 | )% |
| Subadvisory fees | | | 3,490 | | | | 3,288 | | | | 3,882 | | | | 202 | | | | 6 | % | | | (392 | ) | | | (10 | )% |
| Total | | | 230,035 | | | | 216,407 | | | | 230,656 | | | | 13,628 | | | | 6 | % | | | (621 | ) | | | — | % |
| Operating income | | | 37,635 | | | | 23,627 | | | | 40,024 | | | | 14,008 | | | | 59 | % | | | (2,389 | ) | | | (6 | )% |
| Investment and other income | | | 5,449 | | | | 15,148 | | | | 5,212 | | | | (9,699 | ) | | | (64 | )% | | | 237 | | | | 5 | % |
| Interest expense | | | (1,542 | ) | | | (1,539 | ) | | | (1,562 | ) | | | (3 | ) | | | — | % | | | 20 | | | | 1 | % |
| Income before provision for income taxes | | | 41,542 | | | | 37,236 | | | | 43,674 | | | | 4,306 | | | | 12 | % | | | (2,132 | ) | | | (5 | )% |
| Provision for income taxes | | | 10,296 | | | | 9,412 | | | | 10,175 | | | | 884 | | | | 9 | % | | | 121 | | | | 1 | % |
| Net income | | | 31,246 | | | | 27,824 | | | | 33,499 | | | | 3,422 | | | | 12 | % | | | (2,253 | ) | | | (7 | )% |
| Net income attributable to redeemable noncontrolling interests | | | 723 | | | | 3,000 | | | | 445 | | | | (2,277 | ) | | | (76 | )% | | | 278 | | | | 62 | % |
| Net income attributable to Waddell & Reed Financial, Inc. | | $ | 30,523 | | | $ | 24,824 | | | $ | 33,054 | | | $ | 5,699 | | | | 23 | % | | $ | (2,531 | ) | | | (8 | )% |
| Net income per share, basic and diluted: | | $ | 0.48 | | | $ | 0.38 | | | $ | 0.46 | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding - basic and diluted | | | 64,240 | | | | 65,488 | | | | 72,387 | | | | | | | | | | | | | | | | | |
| Operating margin | | | 14.1 | % | | | 9.8 | % | | | 14.8 | % | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1Distribution expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unaffiliated | | | 22,733 | | | | 20,587 | | | | 24,068 | | | | | | | | | | | | | | | | | |
| Wealth Management | | | 99,462 | | | | 87,289 | | | | 93,357 | | | | | | | | | | | | | | | | | |
| | | $ | 122,195 | | | $ | 107,876 | | | $ | 117,425 | | | | | | | | | | | | | | | | | |
Unaudited Consolidated Statements of Income
(in thousands, except per share data and margin)
| | | Nine Months Ended | | | | | | | |
| | | Sep. 30, | | | Sep. 30, | | | | |
| | | 2020 | | | 2019 | | | Change | | | % | |
| Revenues: | | | | | | | | | | | | |
| Investment management fees | | $ | 307,660 | | | $ | 334,438 | | | $ | (26,778 | ) | | | (8 | )% |
| Underwriting and distribution fees | | | 400,032 | | | | 395,527 | | | | 4,505 | | | | 1 | % |
| Shareholder service fees | | | 63,745 | | | | 70,279 | | | | (6,534 | ) | | | (9 | )% |
| Total | | | 771,437 | | | | 800,244 | | | | (28,807 | ) | | | (4 | )% |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Distribution1 | | | 350,104 | | | | 343,696 | | | | 6,408 | | | | 2 | % |
| Compensation and benefits (including share-based compensation of $33,595 and $35,471, respectively) | | | 182,704 | | | | 191,718 | | | | (9,014 | ) | | | (5 | )% |
| General and administrative | | | 58,278 | | | | 47,421 | | | | 10,857 | | | | 23 | % |
| Technology | | | 41,989 | | | | 47,769 | | | | (5,780 | ) | | | (12 | )% |
| Occupancy | | | 13,160 | | | | 19,100 | | | | (5,940 | ) | | | (31 | )% |
| Marketing and advertising | | | 4,385 | | | | 6,497 | | | | (2,112 | ) | | | (33 | )% |
| Depreciation | | | 9,720 | | | | 16,062 | | | | (6,342 | ) | | | (39 | )% |
| Subadvisory fees | | | 10,444 | | | | 11,154 | | | | (710 | ) | | | (6 | )% |
| Total | | | 670,784 | | | | 683,417 | | | | (12,633 | ) | | | (2 | )% |
| Operating income | | | 100,653 | | | | 116,827 | | | | (16,174 | ) | | | (14 | )% |
| Investment and other income | | | 12,852 | | | | 23,690 | | | | (10,838 | ) | | | (46 | )% |
| Interest expense | | | (4,630 | ) | | | (4,662 | ) | | | 32 | | | | 1 | % |
| Income before provision for income taxes | | | 108,875 | | | | 135,855 | | | | (26,980 | ) | | | (20 | )% |
| Provision for income taxes | | | 29,341 | | | | 35,036 | | | | (5,695 | ) | | | (16 | )% |
| Net income | | | 79,534 | | | | 100,819 | | | | (21,285 | ) | | | (21 | )% |
| Net income attributable to redeemable noncontrolling interests | | | 2,201 | | | | 1,763 | | | | 438 | | | | 25 | % |
| Net income attributable to Waddell & Reed Financial, Inc. | | $ | 77,333 | | | $ | 99,056 | | | $ | (21,723 | ) | | | (22 | )% |
| Net income per share, basic and diluted: | | $ | 1.18 | | | $ | 1.33 | | | | | | | | | |
| Weighted average shares outstanding - basic and diluted | | | 65,795 | | | | 74,446 | | | | | | | | | |
| Operating margin | | | 13.0 | % | | | 14.6 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 1Distribution expense | | | | | | | | | | | | | | | | |
| Unaffiliated | | | 66,944 | | | | 73,326 | | | | | | | | | |
| Wealth Management | | | 283,160 | | | | 270,370 | | | | | | | | | |
| | | $ | 350,104 | | | $ | 343,696 | | | | | | | | | |
Underwriting and distribution fees
(in thousands)
| | | For the three months ended Sep. 30, 2020 | |
| | | Unaffiliated | | | Wealth
Management | | | Total | |
| Advisory fees | | $ | — | | | $ | 82,591 | | | $ | 82,591 | |
| Service and distribution fees | | | 14,623 | | | | 15,305 | | | | 29,928 | |
| Sales commissions | | | 223 | | | | 17,847 | | | | 18,070 | |
| Other revenues | | | 82 | | | | 8,785 | | | | 8,867 | |
| Total underwriting and distribution fees | | $ | 14,928 | | | $ | 124,528 | | | $ | 139,456 | |
| | | For the three months ended Jun. 30, 2020 | |
| | | Unaffiliated | | | Wealth
Management | | | Total | |
| Advisory fees | | $ | — | | | $ | 72,534 | | | $ | 72,534 | |
| Service and distribution fees | | | 13,670 | | | | 13,600 | | | | 27,270 | |
| Sales commissions | | | 373 | | | | 15,034 | | | | 15,407 | |
| Other revenues | | | 91 | | | | 8,331 | | | | 8,422 | |
| Total underwriting and distribution fees | | $ | 14,134 | | | $ | 109,499 | | | $ | 123,633 | |
| | | For the three months ended Sep. 30, 2019 | |
| | | Unaffiliated | | | Wealth
Management | | | Total | |
| Advisory fees | | $ | — | | | $ | 73,356 | | | $ | 73,356 | |
| Service and distribution fees | | | 16,286 | | | | 16,143 | | | | 32,429 | |
| Sales commissions | | | 364 | | | | 20,544 | | | | 20,908 | |
| Other revenues | | | 67 | | | | 9,027 | | | | 9,094 | |
| Total underwriting and distribution fees | | $ | 16,717 | | | $ | 119,070 | | | $ | 135,787 | |
| | | For the nine months ended Sep. 30, 2020 | |
| | | Unaffiliated | | | Wealth
Management | | | Total | |
| Advisory fees | | $ | — | | | $ | 232,243 | | | $ | 232,243 | |
| Service and distribution fees | | | 43,569 | | | | 43,494 | | | | 87,063 | |
| Sales commissions | | | 1,047 | | | | 53,538 | | | | 54,585 | |
| Other revenues | | | 308 | | | | 25,833 | | | | 26,141 | |
| Total underwriting and distribution fees | | $ | 44,924 | | | $ | 355,108 | | | $ | 400,032 | |
| | | For the nine months ended Sep. 30, 2019 | |
| | | Unaffiliated | | | Wealth
Management | | | Total | |
| Advisory fees | | $ | — | | | $ | 208,806 | | | $ | 208,806 | |
| Service and distribution fees | | | 49,366 | | | | 47,589 | | | | 96,955 | |
| Sales commissions | | | 1,300 | | | | 60,959 | | | | 62,259 | |
| Other revenues | | | 242 | | | | 27,265 | | | | 27,507 | |
| Total underwriting and distribution fees | | $ | 50,908 | | | $ | 344,619 | | | $ | 395,527 | |
Unaudited Condensed Balance Sheet
(in thousands)
| | | Sep. 30, | | | Dec. 31, | |
| | | 2020 | | | 2019 | |
| Assets | | | | | | | | |
| Cash & cash equivalents (unrestricted) | | $ | 165,259 | | | $ | 151,815 | |
| Investment securities | | | 579,344 | | | | 688,346 | |
| Other assets | | | 207,745 | | | | 245,572 | |
| Property and equipment, net | | | 27,213 | | | | 34,726 | |
| Goodwill and intangible assets | | | 145,869 | | | | 145,869 | |
| Total assets | | $ | 1,125,430 | | | $ | 1,266,328 | |
| Liabilities, redeemable noncontrolling interests and equity | | | | | | | | |
| Short-term notes payable | | $ | 94,980 | | | $ | — | |
| Long-term debt | | | — | | | | 94,926 | |
| Other liabilities | | | 282,939 | | | | 343,300 | |
| Redeemable noncontrolling interests | | | — | | | | 19,205 | |
| Total stockholders’ equity | | | 747,511 | | | | 808,897 | |
| Liabilities, redeemable noncontrolling interests and equity | | $ | 1,125,430 | | | $ | 1,266,328 | |
| Shares outstanding | | | 62,548 | | | | 68,847 | |
Unaudited Condensed Cash Flow
(in thousands)
| | | Three Months Ended | | | Nine Months Ended | |
| | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Sep. 30, | | | Sep. 30, | |
| | | 2020 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Cash provided by (used in): | | | | | | | | | | | | | | | | | | | | |
| Operating activities | | $ | 63,222 | | | $ | (526 | ) | | $ | 61,084 | | | $ | 91,972 | | | $ | 84,231 | |
| Investing activities | | | 18,084 | | | | 20,430 | | | | (14,173 | ) | | | 66,208 | | | | (18,160 | ) |
| Financing activities | | | (55,634 | ) | | | (32,123 | ) | | | (58,591 | ) | | | (157,128 | ) | | | (171,709 | ) |
| Net change during period | | $ | 25,672 | | | $ | (12,219 | ) | | $ | (11,680 | ) | | $ | 1,052 | | | $ | (105,638 | ) |
| | | Three Months Ended | | | Nine Months Ended | |
| | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Sep. 30, | | | Sep. 30, | |
| (in thousands, except number of shares) | | 2020 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Shares repurchased | | | | | | | | | | | | | | | |
| Number of shares | | | 2,617,108 | | | | 1,468,367 | | | | 2,480,019 | | | | 7,892,913 | | | | 6,849,238 | |
| Total cost | | $ | 40,052 | | | $ | 18,061 | | | $ | 40,715 | | | $ | 112,052 | | | $ | 116,677 | |
| Dividend paid | | | | | | | | | | | | | | | | | | | | |
| Rate per share | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.75 | | | $ | 0.75 | |
| Total paid | | $ | 16,292 | | | $ | 16,528 | | | $ | 18,372 | | | $ | 49,939 | | | $ | 56,560 | |
| Capital returned to stockholders | | $ | 56,344 | | | $ | 34,589 | | | $ | 59,087 | | | $ | 161,991 | | | $ | 173,237 | |
Non-GAAP Financial Measures
“Adjusted net income attributable to Waddell & Reed Financial, Inc.,” “adjusted net income per share, basic and diluted,” “adjusted controllable expenses,” “adjusted operating expenses,” and “adjusted operating margin” are non-GAAP financial measures that are not presented in accordance with U.S. generally accepted accounting principles (GAAP). We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding charges and gains that are not indicative of our core operating results, and allow management and investors to better evaluate our performance between periods and compared to other companies in our industry.
These non-GAAP financial measures should not be considered a substitute for financial measures presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance.
A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is included in the table below.
| | | Three Months Ended | | | Nine Months Ended | |
| | | Sep. 30, | | | Jun. 30, | | | Sep. 30, | | | Sep. 30, | | | Sep. 30, | |
| | | 2020 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Net income attributable to Waddell & Reed Financial, Inc. (GAAP) | | $ | 30,523 | | | $ | 24,824 | | | $ | 33,054 | | | $ | 77,333 | | | $ | 99,056 | |
| Adjustments | | | | | | | | | | | | | | | | | | | | |
| Severance | | | — | | | | — | | | | 3,081 | | | | — | | | | 3,081 | |
| Tax effect of adjustments | | | — | | | | — | | | | (739 | ) | | | — | | | | (739 | ) |
| Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP) | | $ | 30,523 | | | $ | 24,824 | | | $ | 35,396 | | | $ | 77,333 | | | $ | 101,398 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding - basic and diluted | | | 64,240 | | | | 65,488 | | | | 72,387 | | | | 65,795 | | | | 74,446 | |
| Adjusted net income per share, basic and diluted (non-GAAP): | | $ | 0.48 | | | $ | 0.38 | | | $ | 0.49 | | | $ | 1.18 | | | $ | 1.36 | |
| | | | | | | | | | | | | | | | | | | | | |
| Controllable expenses (GAAP) | | $ | 101,352 | | | $ | 102,034 | | | $ | 104,516 | | | $ | 300,516 | | | $ | 312,505 | |
| Adjustments | | | | | | | | | | | | | | | | | | | | |
| Severance | | | — | | | | — | | | | (3,081 | ) | | | — | | | | (3,081 | ) |
| Adjusted controllable expenses (non-GAAP) | | | 101,352 | | | | 102,034 | | | | 101,435 | | | | 300,516 | | | | 309,424 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses (GAAP) | | $ | 230,035 | | | $ | 216,407 | | | $ | 230,656 | | | $ | 670,784 | | | $ | 683,417 | |
| Adjustments | | | | | | | | | | | | | | | | | | | | |
| Severance | | | — | | | | — | | | | (3,081 | ) | | | — | | | | (3,081 | ) |
| Adjusted operating expenses (non-GAAP) | | | 230,035 | | | | 216,407 | | | | 227,575 | | | | 670,784 | | | | 680,336 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income (GAAP) | | $ | 37,635 | | | $ | 23,627 | | | $ | 40,024 | | | $ | 100,653 | | | $ | 116,827 | |
| Adjustments | | | | | | | | | | | | | | | | | | | | |
| Severance | | | — | | | | — | | | | 3,081 | | | | — | | | | 3,081 | |
| Adjusted operating income (non-GAAP) | | $ | 37,635 | | | $ | 23,627 | | | $ | 43,105 | | | $ | 100,653 | | | $ | 119,908 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating revenue | | $ | 267,670 | | | $ | 240,034 | | | $ | 270,680 | | | $ | 771,437 | | | $ | 800,244 | |
| Operating margin (GAAP) | | | 14.1 | % | | | 9.8 | % | | | 14.8 | % | | | 13.0 | % | | | 14.6 | % |
| Adjusted operating margin (non-GAAP) | | | 14.1 | % | | | 9.8 | % | | | 15.9 | % | | | 13.0 | % | | | 15.0 | % |
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 at 10:00 a.m. Eastern. During this call, Philip J. Sanders, CEO, will review our quarterly results. Live access to the teleconference will be available on the “Investor Relations” section of our Web site at ir.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 ir.waddell.com. Under the “Investor Information” tab you will find a link to presentations as well as to data tables, which include supplemental information schedules.
Contacts
Investor Contact:
Mike Daley, Vice President, Chief Accounting Officer & Investor Relations, (913) 236-1795, mdaley1@waddell.com
Mutual Fund Investor Contact:
Call (888) WADDELL, or visit www.waddell.com or www.ivyinvestments.com.
Past performance is no guarantee of future results. Please invest carefully.
About the Company
Through its subsidiaries, Waddell & Reed Financial, Inc. has provided investment management and wealth management services to clients throughout the United States since 1937. Today, we distribute our investment products through the unaffiliated channel under the IVY INVESTMENTS® brand (encompassing broker/dealer, retirement, and registered investment advisors), our wealth management channel (through independent financial advisors associated with WADDELL & REED, INC.), and our institutional channel (including defined benefit plans, pension plans, endowments and subadvisory relationships). For more information, visit ir.waddell.com.
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 and assets under administration, distribution sources, expense levels, redemption rates, stock repurchases 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 us or on our behalf 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 the impact of the COVID-19 pandemic and related economic conditions, as well as the factors 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, 2019, which include, without limitation:
| · | The loss of existing distribution relationships or inability to access new distribution relationships; |
| · | 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; |
| · | The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body; |
| · | Changes in our business model, operations and procedures, including our methods of distributing our proprietary products, as a result of evolving fiduciary standards; |
| · | 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; |
| · | 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; |
| · | Our inability to reduce expenses rapidly enough to align with declines in our revenues due to various factors, including fee pressure, the level of our assets under management or our business environment; |
| · | Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies; |
| · | Our inability to attract and retain senior executive management and other key personnel to conduct our wealth management and investment management business; |
| · | A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and |
| · | Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner. |
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, 2019 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2020. All forward-looking statements speak only as of 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, except to the extent required by law.
