Waddell & Reed Financial Inc.’s (WDR) third quarter 2011 earnings came in at 46 cents per share, missing the Zacks Consensus Estimate of 51 cents. This also compares unfavorably with earnings of 58 cents per share in the prior quarter and 47 cents per share in the prior-year quarter.
Though Waddell & Reed’s results benefited from growth in gross sales across all its revenue channels and lower operating costs, reduction in operating revenue and decline in assets under management (AUM) were the negatives for the quarter.
Waddell & Reed’s net income for the reported quarter came in at $39.8 million, down 20.4% from $50.0 million in the prior quarter and 1.7% from $40.5 million in the prior-year quarter.
Waddell & Reed’s operating revenues for the reported quarter were $297.7 million, down 3.9% from $309.9 million in the previous quarter but up 16.9% from $254.8 million in the year-ago quarter. Operating revenues also missed the Zacks Consensus Estimate of $302.0 million.
Quarter in Details
Overall gross sales grew 11.6% sequentially and 37.8% year over year to $6.4 billion during the reported quarter. Similarly, redemptions were $5.3 billion, up from $4.3 billion in the prior quarter and $4.1 billion in the year-ago quarter. However, inflows were down 22.9% sequentially but up 101.1% year over year at $1.3 billion.
At the Advisors channel, revenues decreased 5.3% sequentially but rose 15.2% year over year to $70.1 million. Gross sales for the quarter fell 14.2% sequentially but grew 3.3% year over year to $867 million. Net outflows during the quarter were $133 million compared with net inflow of $25 million in the prior quarter and net outflow of $137 million in the year-ago quarter.
At the Wholesale channel, revenues slipped 3.8% from the prior quarter but improved 14.5% from the prior-year quarter to $60.9 million. Gross sales dropped 6.0% from the prior quarter but improved 34.9% year over year to $4.0 billion. Net inflows plummeted from $1.8 billion in the prior quarter but improved from $453 million in the prior-year quarter to $550 million.
Gross sales at the Institutional channel surged 192.3% sequentially and 79.6% year over year to $1.6 billion. Net inflows during the quarter were $906 million as against net outflows of $125 million in the prior quarter and net inflows of $821 million in the year-ago quarter.
Waddell & Reed’s operating expenses fell 3.6% sequentially but upped 14.2% year over year to $222.8 million. The sequential decline was mainly backed by lower underwriting and distribution costs, compensation costs and sub-advisory fees. However, these were partially mitigated by higher general and administrative expenses.
Net operating margin dropped to 25.2% in the reported quarter from 25.5% in the prior quarter but improved from 23.5% in the prior-year quarter.
Asset Position
As of September 30, 2011, AUM totaled $77.5 billion compared with $91.7 billion as of June 30, 2011 and $76.0 billion as of September 30, 2010.
Share Repurchase
During the third quarter, Waddell & Reed repurchased 652,000 shares.This amounts to 1.61 million shares repurchased at an aggregate cost of $57 million during the first nine months of 2011.
Peer Performance
One of Waddell & Reed’s competitors, Janus Capital Group Inc. (JNS) reported its third-quarter 2011 earnings per share of 21 cents, beating the Zacks Consensus Estimate by 4 cents per share. Moreover, results compared favorably with 18 cents in the year-ago quarter, driven by better expense control and higher servicing fees.
Our Viewpoint
Although we expect Waddell & Reed to maintain its strong growth story with improving investment and sales performance, operating margin volatility will drag its profitability going forward owing to increasing flows and significant intangibles on its balance sheet.
However, we are encouraged to see the competitive ranking of its funds. Furthermore, Waddell & Reed has been boosting shareholders value through dividend hike and share repurchase activities.
Waddell & Reed currently retains a Zacks #4 Rank, which translates into ‘Sell’ rating on a short-term basis.
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