Waddell & Reed Financial Inc.‘s (WDR) fourth quarter earnings came in at 47 cents per share, missing the Zacks Consensus Estimate by a penny. This also compares unfavorably with earnings of 54 cents in the prior-year quarter.
Though results benefited from higher operating revenues as well as improved investment and other income,deterioration in gross sales across all its revenue channels and higher operating costs were the headwinds. However, assets under management (AUM) showed decent growth.
Waddell & Reed’s net income for the reported quarter came in at $40.0 million, almost flat sequentially but up 11% year over year.
For the full year 2011, earnings were $2.05 per share, a cent below the Zacks Consensus Estimate. This compares with earnings of $1.83 per share in 2010.
Waddell & Reed’s operating revenues for the reported quarter were $290.9 million, down 2% from $297.7 million in the prior quarter but up 16% from $251.6 million in the year-ago quarter. Operating revenues surpassed the Zacks Consensus Estimate of $281.0 million.
For the full year, operating revenues were $1.2 billion, up 14% from $1.0 billion in the previous year.
Quarter in Details
Overall gross sales declined 22% sequentially and 18% year over year to $6.0 billion during the reported quarter. Redemptions were $5.2 billion, down from $5.3 billion in the prior quarter but up from $3.4 billion in the year-ago quarter. Inflows were significantly down to $42 million from $1.3 billion in the prior quarter and $2.8 billion in the prior-year quarter.
At the Advisors channel, revenues increased 5% sequentially and 21% year over year to $73.4 million. Gross sales for the quarter were $858 million, down from $867 million in the prior quarter and $886 million in the year-ago quarter. Net outflows during the quarter were $114 million compared with net outflow of $133 million in the prior quarter and net inflow of $146 million in the year-ago quarter.
At the Wholesale channel, revenues slipped 5% from the prior quarter but improved 11% from the prior-year quarter to $58.2 million. Gross sales dropped 6% from the prior quarter and 16% from the year-ago quarter to $3.7 billion. Net inflows significantly deteriorated to $153 million from $550 million in the prior quarter and $2.4 billion in the prior-year quarter.
Gross sales at the Institutional channel were $456 million, down from $1.6 billion in the prior quarter and $819 million in the year-ago quarter. Net inflows during the quarter were $3 million as against $906 million in the prior quarter and $325 million in the year-ago quarter.
Waddell & Reed’s operating expenses increased 2% sequentially and 18% year over year to $227.6 million. Both sequential and year-over-year increase was mainly due to higher underwriting and distribution costs as well as compensation costs. However, these were partially mitigated by lower sub-advisory fees.
Operating margin decreased to 21.8% in the reported quarter from 25.2% in the prior quarter and 23.3% in the prior-year quarter.
Assets Under Management
As of December 31, 2011, AUM totaled $83.2 billion compared with $77.5 billion as of September 30, 2011 and $74.2 billion as of December 31, 2010.
During the reported quarter, Waddell & Reed repurchased 342,000 shares.This brings the annual total repurchase to 2.0 million shares at an aggregate cost of $65 million.
Our Viewpoint
Although we expect Waddell & Reed to maintain its strong growth story, volatility in the equity markets and significant intangibles on its balance sheet will drag down profitability.
However, we are encouraged to see the competitive ranking of its funds. Further, the company has been boosting shareholder value through dividend hike and share repurchase activities.
Waddell & Reed currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. One of Waddell & Reed’s competitors, Janus Capital Group Inc. (JNS) also retains a Zacks #3 Rank.
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