On Apr 22, Federated Investors Inc. (FII) reported first quarter operating earnings per share of 42 cents, which missed the Zacks Consensus Estimate by a penny and the year-ago earnings of 47 cents. The reported earnings also slipped from 51 cents per share reported in the prior quarter. 

GAAP net income increased 20% year-over-year but decreased 19% from the prior quarter to $42.0 million. GAAP earnings for the reported quarter included 4 cents in accounting applications with regard to the special dividend payment. 

Results reflected an increase in fixed income equity funds, fixed income assets and equity assets, decrease in operating expenses and a decline in the amortization of deferred sales commissions. This was offset by an increase in voluntary fee waivers, reduced top-line growth and lower assets under management (AUM). 

Total revenue decreased 25% year-over-year and 12% from prior quarter to $233.0 million. The decrease was primarily attributable to a $59.8 million increase in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields. Alongside, revenue declined due to lower average money market managed assets that were partially offset by the impact of increased average fixed-income and equity managed assets. 

During the reported quarter, Federated derived 50% of its revenue from money market assets, 49% from fluctuating assets (32% from equity assets and 17% from fixed-income assets) and 1% from other products and services. 

Total operating expenses decreased 36% year-over-year and 10% from prior quarter to $161.2 million, primarily reflecting lower general, administrative and distribution expenses due to the aforementioned fee-waiver related reductions. 

As of Mar 31, 2010, total AUM was $349.9 billion, down from $398.3 billion as of Dec 31, 2009 and from $409.2 billion reported as of Mar 31, 2009. Average managed assets were $366.9 billion, down from $388.1 billion in the prior quarter and from $411.7 billion in the year-ago quarter. 

At quarter-end, fixed-income assets increased 42% year-over-year and 5% from prior quarter to $35.5 billion. Equity assets came in at $30.1 billion, up 29% year-over-year and 1% from prior quarter. However, money market assets in both funds and separate accounts declined by 24% year-over-year and 13% from prior quarter to $272.3 billion. 

At the end of the quarter, cash and other short-term investments were $75.8 million, down from $122.0 million at the end of Dec 31, 2009. However, total long term debt was $109.2 million, down from $118.6 million at the end of Dec 31, 2009. During the reported quarter, Federated Investors purchased 111,000 shares of Federated Class B common stock for $2.7 million. 

Dividend Update 

The Board of Federated Investors declared a quarterly dividend of 24 cents per share, which will be payable on May 14, 2010 to shareholders of record as on May 7, 2010. 

The financial service industry had been the hardest hit zone during the economic crisis in 2008 and Federated Investors was also jolted by the credit crunch in the markets. However, the company is now in a restructuring and recovering phase, hence the bumps in the ride are justified at the moment. 

Nevertheless, the near term outlook remains cautious and we remain on the edge before the markets score a strong and steady rebound that will help increase market activity and generate client demand. Overall, the company has the potential for substantial growth in the long run, given its fairly healthy balance sheet, firm strategy of cost-cutting initiatives and a diversified asset and product mix.
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