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Waddell & Reed Financial, Inc. Reports First Quarter Results.

Overland Park, KS: Waddell & Reed Financial, Inc. (NYSE: WDR) today reported first quarter 2016 net income1 of $37.0 million, or $0.45 per diluted share, compared to net income of $62.9 million, or $0.76 per diluted share, during the prior quarter and net income of $67.1 million, or $0.80 per diluted share, during the first quarter of 2015. The current quarter's net income included investment losses of $10.2 million, compared to investment gains of $7.6 million during the fourth quarter of 2015 and investment gains of $4.0 million during the first quarter of 2015. Operating income of $71.4 million declined 22% compared to the prior quarter and 32% compared to the first quarter last year. A lower level of assets under management is the primary driver for the decline in operating income.

During the quarter we consolidated several sponsored funds for which we have a majority ownership interest. Net income attributable to these consolidated funds is reported in noncontrolling interests presented in a separate caption in the consolidated statement of income.

Assets under management declined 9% sequentially due to an increase in net outflows and market depreciation. Compared to the same period in 2015, assets under management declined 23% due to a combination of net outflows and market depreciation.

In order to maintain an acceptable level of profitability given the magnitude of net outflows, weakness in fund performance and heightened market volatility, the company announced cost cutting initiatives in February 2016 that were intended to reduce fixed operating expenses by approximately 10%, or $40 million from our annual run-rate. After completing an internal process, we have identified cost savings to meet our target. These will reduce underwriting and distribution, compensation and general and administrative expenses.

"The entire executive team is focused on positioning the company for renewed growth," said Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial, Inc. "Central to our efforts is improving investment performance. I am confident that our investment culture, our proven investment process, and the resources we have committed to our investment staff will bear fruit."

"At the same time, we need to make strategic investments to adapt to a fast-changing world," continued Herrmann. "Project E will strengthen our broker-dealer (formerly referred to as our 'Advisors channel') and enable us to compete with other broker-dealers of similar size. We have also intensified our efforts to broaden our product line in order to compete more fully with other asset managers."

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


Management Fee Revenue Analysis

Management fees declined 13% sequentially, in line with a 12% decline in average assets under management and one fewer day during the current quarter. Compared to the same quarter last year, management fees declined 20% due to a 22% decline in average assets under management, which was partly offset by an additional day during the current quarter and a mix-shift in the asset base that increased the average fee rate.

Average assets under management were $95.7 billion during the current quarter, compared to $108.9 billion during the prior quarter and $123.3 billion during the first quarter of 2015. The effective fee rate for the current quarter was 60.8 basis points compared to 60.6 basis points and 59.9 basis points during the fourth and first quarters of 2015, respectively.

Underwriting and Distribution Analysis

Underwriting and Distribution Revenues

Revenues declined 9% sequentially, due primarily to lower asset-based Rule 12b-1 fees. Additionally, our broker-dealer had lower sales commissions and lower advisory fee revenues. Compared to the same period last year, revenues declined 12% due to lower asset-based Rule 12b-1 and lower advisory fee revenues in our broker-dealer.

Underwriting and Distribution Costs

Sequentially, direct costs declined 10%, slightly more than related revenues due to lower wholesaler commissions. Indirect costs declined modestly. The fourth quarter of 2015 included costs for severance, while the current quarter saw lower advertising and business travel costs. Lower costs in the current quarter were more than offset by an increase in costs associated with the implementation of Project E.

Compared to the first quarter of 2015, direct costs declined 16%, in line with the decrease in revenues and lower wholesaler commissions. Indirect costs rose 4% due to higher IT, employee compensation and benefits and consulting costs, and partly offset by lower advertising and sales meeting costs.

Compensation and Related Expense Analysis

Costs rose 10% compared to the fourth quarter of 2015 due to higher equity compensation and severance costs, and to a lesser degree, annual merit increases and payroll taxes. Compared to the same period last year, compensation costs declined 1% as annual merit increases, higher pension and higher equity compensation costs were more than offset by lower incentive compensation.

General and Administrative Expense Analysis

Costs declined 26% sequentially. Last year's fourth quarter included higher IT and legal costs as well as higher advertising costs associated with the launch of new funds. The current quarter saw a decrease in IT costs, as our system renovation project nears completion as well as lower money market fund waivers.

Compared to the same quarter in 2015, costs declined 25% due to lower dealer servicing costs and lower usage of IT contractors.


Investment and Other Income

The company's seed investment in sponsored funds has grown significantly due to the launch of new products. Our ownership in certain sponsored funds exposes investment and other income to an increased level of market volatility. To mitigate this risk, we entered into a number of total return swap contracts during the current quarter to serve as an economic hedge against the market risk associated with our investments in sponsored funds. The performance of the hedge has been largely effective since inception; however, we experienced a $9.6 million investment loss before our hedging strategy was fully implemented.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Article Type:Financial report
Date:May 4, 2016
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