Shares of Waddell & Reed Financial Inc.’s (WDR) fell 4.2% on concerns regarding rising expenses following the second-quarter 2014 earnings release. The company reported earnings per share of 98 cents, outpacing the Zacks Consensus Estimate of 92 cents and marking the eighth consecutive earnings beat. The reported figure was also up 60.7% from 61 cents earned in the year-ago quarter.
Waddell & Reed’s top-line growth continued, aided by strong inflows. Consistent rise in assets under management (AUM), a strong balance sheet position and steady capital deployment activities were the quarterly tailwinds. However, rising expenses acted as a headwind.
Net income for the quarter came in at $83.0 million, up 59.7% year over year.
Performance Highlights
Waddell & Reed’s operating revenues grew 20.8% from the prior-year quarter to $400.6 million. However, it missed the Zacks Consensus Estimate of $406.0 million.
Gross sales were $7.5 billion, up 10.3% year over year. Redemptions were $6.3 billion, up 7.4% from the prior-year quarter. Moreover, net inflows were $1.2 billion at the quarter-end, increasing 28.6% year over year.
At the Advisors channel, gross sales climbed 3.8% year over year to $1.5 billion. Net inflows were $271 million, rising 4.6% from the year-earlier quarter.
At the Wholesale channel, gross sales decreased 3.3% from the prior-year quarter to $4.9 billion. Net inflows were $104 million, plunging 90.6% year over year.
Gross sales at the Institutional channel came in at $1.2 billion, up significantly from $379 million in the year-ago quarter. Further, the segment witnessed net inflows of $827 million versus outflows of $432 million as of Jun 30, 2013.
Operating expenses rose 12.3% year over year to $277.0 million. This was primarily due to increase in underwriting and distribution expenses, compensation and related costs, general and administrative expenses as well as depreciation costs.
Operating margin was 30.9%, up from 25.6% in the prior-year quarter.
As of Jun 30, 2014, AUM totaled $135.6 billion, up 30.0% from Jun 30, 2013.
At the end of the reported quarter, cash and cash equivalents as well as investment securities were $725.1 million. Moreover, long-term debt totaled $190.0 million and stockholders’ equity was recorded at $772.3 million.
Share Repurchase
In the reported quarter, Waddell & Reed bought back 628.0 million shares for $44.0 million.
Overall, the company returned $73.0 million to its shareholders in the form of dividends and share repurchases.
Our Stance
Waddell & Reed has recorded consistent inflows in the reported quarter. Going forward, we expect this trend to continue, backed by improvement in the overall market scenario. However, rising expenses and a competitive landscape will tend to challenge the company’s top-line growth.
At present, Waddell & Reed has a Zacks Rank #3 (Hold).
Other Investment Managers
Top-line growth aided by an increase in AUM drove BlackRock, Inc.’s (BLK) second-quarter adjusted earnings of $4.89 per share. It surpassed the Zacks Consensus Estimate of $4.46 for the third consecutive quarter.
Impressive performance fees drove The Blackstone Group L.P.'s (BX) second-quarter 2014 economic net income (ENI) of $1.15 per share, which outpaced the Zacks Consensus Estimate by 64%.
Invesco Ltd. (IVZ) is scheduled to announce results on Jul 31.
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