Waddell & Reed Financial Inc.’s (WDR) third quarter earnings of 47 cents per share were ahead of the Zacks Consensus Estimate of 43 cents. This compares favorably with earnings of 40 cents in the prior quarter and 39 cents in the prior-year quarter.
Results benefited year over year, primarily due to improved gross sales across all of the company’s revenue channels, stronger growth in assets under management and an improved operating margin. Offsetting these positives were lower net inflow and higher operating expenses. However, positive flows were witnessed in each of Waddell & Reed’s three distribution channels.
Operating revenues for the reported quarter were $254.8 million, down 0.9% from $257.2 million in the prior quarter but up 16.9% from $218.0 million in the year-ago quarter. Operating revenues also surpassed the Zacks Consensus Estimate of $251.0 million. An increase in revenue from all sources helped deliver better results during the reported quarter.
Net operating margin decreased to 23.5% from 24.2% in the prior quarter, but improved from 22.4% in the prior-year quarter.
Quarter in Detail
Net income for the reported quarter came in at $40.5 million, up 18.4% from $34.2 million in the prior quarter and 21.3% from $33.4 million in the prior-year quarter.
In the Advisors channel, revenues decreased 1.0% sequentially but rose 0.5% year over year to $60.9 million. Gross sales for the quarter fell 12.0% sequentially but increased 4.0% year over year to $839 million. Flows during the quarter were positive at $137 million, up from $100 million in the prior quarter but down from $138 million in the year-ago quarter.
In the Wholesale channel, revenues decreased 0.3% sequentially but increased 24.8% year over year to $38.7 million. However, net flows increased to $453 million from $388 million in the prior quarter but fell substantially from $2.6 billion in the year-ago quarter. Gross sales decreased 17% sequentially and 28% year over year to $2.9 billion.
Gross sales of the Institutional channel increased 17.8% sequentially and substantially up from year over year to $905 million. Though sales of traditional defined benefit products were modest, net flows were positive. Net flows during the quarter were $342 million, up from $243 million in the prior quarter and outflows of $301 million in the year-ago quarter.
Waddell & Reed’s operating expenses increased 0.1% sequentially and 15.3% year over year to $195.1 million. The year-over-year increase was primarily attributable to higher underwriting and distribution costs, sub-advisory fees and compensation costs.
Assets Under Management
As of September 30, 2010, assets under management were $76.0 billion, compared with $68.3 billion at the end of the prior quarter and $64.5 billion at the end of the prior-year quarter. Net inflows were $658 million, compared with $7.31 million in the prior quarter and $2.4 billion in the prior-year quarter. Redemptions for the reported quarter decreased 11.9% sequentially but increased 46.9% year over year to $4.2 billion.
During the quarter, Waddell & Reed repurchased 37,000 shares. Through the end of third quarter, the company bought back a total of 1.9 million shares for an aggregate cost of $61.4 million.
Our Take
Though we expect that Waddell & Reed will be able to maintain its strong growth story with increasing assets under management as a result of solid investment and sales performance, operating margin compression as a result of growth in flows and significant intangibles on its balance sheet will drag profitability.
Waddell & Reed currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, in the absence of any significant positive or negative catalysts, we maintain a long-term Neutral recommendation on the stock.
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