Operating revenues of $189 million increased 2% sequential quarterly and 9% compared to last year's first quarter. The operating margin improved to 24.2% compared to 23.5% and 23.0% for the fourth and first quarters of 2006, respectively. A line-item discussion of our operating results is included below.
Gross sales of $2.4 billion represented a record quarterly level, while net sales remained modestly positive at $26 million. Assets, for the first time in the Company's history, reached $50 billion.
Gross sales in our Advisors channel increased 2% from last year's fourth quarter and declined 7% compared to last year's first quarter. Net sales in the channel were disappointing with outflows of $132 million during the first quarter of 2007. This compares to outflows of $93 million and $6 million for the fourth and first quarters of 2006, respectively. Late in the quarter, we launched two new fee-based asset allocation products which are meeting with strong acceptance by our advisors and showing promising results early in the second quarter. The expected launch of these much anticipated products may have held back sales somewhat in the first quarter.
Advisor productivity increased 6% sequentially and declined 4% compared to the same period last year. The rate of change in productivity differed from the rate of change in sales due to our usual seasonal drop in advisor headcount. We expect to re-engage headcount growth in 2007.
Sales in our Wholesale channel hit an all-time quarterly high at $1.3 billion during the current quarter, increasing 15% compared to $1.1 billion during the fourth quarter and 13% compared to $1.2 billion during the same period last year. Net sales of $704 million during the quarter remain strong and imply a 26% annualized organic growth rate for this channel. Assets under management reached $12 billion.
Outflows rose during the quarter to $546 million compared to outflows of $296 million during the fourth quarter and $278 million during the first quarter of 2006. The increase in outflows stems from higher redemption activity, and resulted in a redemption rate of 48.0%. Redemptions were varied and spread across many investment disciplines, including large cap growth, small cap growth, core equity, and international growth.
"We have made significant progress in diversifying our distribution network and our efforts are beginning to be reflected in our operating margin," said Hank Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. "Assets under management reached $50 billion, and provide the scale necessary for us to continue investing for growth and supporting margin improvements over time."
On a sequential quarter basis, revenues increased at a lower rate than average assets under management due to two fewer days during the current quarter. The effective management fee rate remained nearly unchanged.
Compared to last year's first quarter, revenue growth was in line with the growth in average assets under management. The effective management fee rate remained nearly unchanged. The fee reduction mandated on certain mutual funds by a regulatory settlement (effective October 1, 2006) was offset by a mix shift in assets under management.
The effective management fee rate during the current quarter was 68.4 basis points, compared to 68.2 basis points and 68.6 basis points in the fourth and first quarters of 2006, respectively.
On a sequential quarterly basis, revenues were essentially flat as higher load and insurance product sales were offset by lower financial planning fees. Direct expenses, which typically correlate to revenues, were lower in the fourth quarter as we adjusted estimates related to compensation tied to production. This resulted in a sequential increase in expenses. Indirect expenses remained almost unchanged.
Compared to last year's first quarter, revenues increased slightly as higher insurance commission and asset-based Rule 12b-1 service fee revenues offset lower load sales commissions. Higher expenses were due in part to higher direct expense costs associated with commissions and Rule 12b-1 payouts. The remainder of the increase is attributable to indirect expenses, namely higher compensation, legal and advertising expenses, and offset partially by lower sales meeting costs.
Sequentially, approximately 75% of the increase in revenues is attributable to higher asset-based Rule 12b-1 service and distribution fees, driven by higher average assets under management. The remainder of the increase is due to higher sales volume at Legend. Direct expenses increased on higher sales volume while indirect expenses declined due to lower travel and marketing costs.
Compared to last year's first quarter, revenues increased largely on higher Rule 12b-1 service and distribution fees and to a lesser extent, higher sales volume at Legend. The increase in expenses is largely attributable to direct expenses, which were driven by higher sales volume, and asset-based Rule 12b-1 service and distribution fee expenses. The increase in indirect expenses was tied to a number of items, including higher marketing, business travel and compensation costs.
On a sequential quarterly basis, operating expenses increased slightly. Higher underwriting and distribution expenses (as discussed above) were the primary cause of higher costs. To a lesser extent, higher subadvisory expenses also contributed to the increase in costs. Partially offsetting these cost increases were lower compensation and related costs. Our fourth quarter results included higher costs for bonus accruals, which resulted in a sequential cost decline.
Compared to last year's first quarter, costs increased primarily on higher underwriting and distribution costs (as discussed above) and to a lesser extent, higher subadvisory costs. Partially offsetting this increase were lower compensation costs. Last year's first quarter included a $1.9 million charge for employee separation costs at ACF and an after-tax addition to net income of $321 thousand to recapture the cumulative effect of the implementation of SFAS 123R "Share-Based Payment, (revised 2004)".
The 2007 annual restricted stock grant resulted in the issuance of an additional 1.1 million shares of restricted stock. These shares, like those issued in previous years, will vest on a straight line basis over the next four years.
For the quarter ended March 31, 2007, subadvised average assets under management were $8.7 billion, compared to $8.4 billion and $6.1 billion for the fourth and first quarters of 2006, respectively.
Investment and other income was lower in the first quarter of 2007 compared to fourth quarter 2006 due to a reduction in capital gain and dividend distributions, and recognized gains from sales in our mutual fund investment portfolio. Compared to last year's first quarter, investment income was slightly higher due mainly to higher earnings on cash balances.
Our effective income tax rate for the first quarter of this year was higher when compared to fourth quarter 2006 due to state incentives recognized in our fourth quarter tax provision. There were no state tax incentives recognized in this year's first quarter; however, we do expect to recognize additional state incentives based on future capital spending. The adoption of FIN 48 "Accounting for Uncertainty in Income Taxes," had little impact on our effective rate in the first quarter.
Cash and cash equivalents and investment securities are $229 million (including $40 million held for the exclusive benefit of customers in compliance with federal securities industry regulations). We have no short-term outstanding borrowings against our money market loan program or our $200 million credit facility.
Stockholders' equity is $229 million and there are 83.3 million shares outstanding. During the quarter, we repurchased 1,465,000 shares of common stock in the open market at an aggregate cost of $38.8 million.
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 channel (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.
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, a drop off in sales or a reduction in net asset flows, increased expenses, 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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