Waddell & Reed Financial Inc.’s (WDR) first quarter 2011 earnings came in at 53 cents per share, in line with the Zacks Consensus Estimate. This compares favorably with earnings of 42 cents in the prior-year quarter.
Results benefited primarily from improved gross sales across almost all Waddell & Reed’s revenue channels, robust revenues, stronger growth in assets under management and an improved operating margin. These positives were offset by higher redemptions and increased operating expenses.
Net income for the reported quarter came in at $45.6 million, down 1.6% from $46.4 million in the prior quarter but up 27.1% from $35.9 million in the prior-year quarter.
Quarter in Detail
Waddell & Reed’s operating revenues for the reported quarter were $296.6 million, up 17.9% from $251.6 million in the year-ago quarter. Operating revenues also surpassed the Zacks Consensus Estimate of $294.0 million. Higher revenues from all sources helped deliver better results during the quarter.
In the Advisors channel, revenues increased 19.9% year over year to $72.6 million. Gross sales for the quarter grew 20.1% year over year to $1.1 billion. Net inflows during the quarter were $66 million compared with $146 million in the year-ago quarter.
In the Wholesale channel, revenues improved 14.5% year over year to $60.2 million. Gross sales increased 6.5% year over year to $4.7 billion. However, net inflows fell 31.2% year over year to $1.6 billion.
Gross sales of the Institutional channel decreased 5.3% year over year to $776 million. Net inflows during the quarter were $262 million, down 19.4% from $325 million in the year-ago quarter.
Waddell & Reed’s operating expenses increased 14.9% year over year to $221.8 million in light of higher underwriting and distribution costs, compensation costs,sub-advisory fees and general and administrative expenses.
Net operating margin improved to 25.2% in the reported quarter from 24.8% in the prior quarter and 23.3% in the prior-year quarter.
Asset Position
As of March 31, 2011, assets under management (AUM) were $90.1 billion, compared with $83.7 billion as of December 31, 2010 and $74.2 billion as of March 31, 2010.
Overall gross sales increased 16.2% sequentially and 6.9% year over year to $6.6 billion. Inflows were up 58.9% sequentially but down 31.0% year over year at $1.9 billion.Redemptions for the reported quarter were $4.7 billion, up from $4.6 billion in the prior quarter and $3.4 billion in the year-ago quarter.
Share Repurchase
During the quarter, Waddell & Reed repurchased 175,000 shares at an aggregate cost of $6.7 million.An additional 509,000 shares were bought back during the first four weeks of April, at an aggregate cost of $20.9 million.
Peer Performance
Waddell & Reed’s competitor, Janus Capital Group Inc. (JNS) reported its first quarter 2011 earnings per share of 21 cents last week, outpacing the Zacks Consensus Estimate only by a penny. The better-than-expected number was primarily aided by higher AUM.
Our Viewpoint
Though we expect Waddell & Reed to maintain its strong growth story with improving AUM as a result of solid investment and sales performance, operating margin volatility due to increasing flows and significant intangibles on its balance sheet will drag its profitability. However, we are encouraged to see the competitive ranking of its funds.
Waddell & Reed currently retains a Zacks #2 Rank, which translates into ‘Buy’ rating on a short-term basis. However, in the absence of any significant positive or negative catalyst, we maintain a long-term ‘Neutral’ recommendation on the stock.
JANUS CAP GRP (JNS): Free Stock Analysis Report
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