Waddell & Reed Financial Inc.’s (NYSE:WDR - News) second quarter 2011 earnings came in at 58 cents per share, surpassing the Zacks Consensus Estimate by a penny. This also compared favorably with earnings of 53 cents recorded in the prior quarter and 40 cents in the prior-year quarter.
Results benefited primarily from improved gross sales across almost all Waddell & Reed’s revenue channels, robust revenues, a strong growth in assets under management, lower redemptions and an improved operating margin. These positives were offset by increased operating expenses.
Net income for the reported quarter came in at $50.0 million, up 9.6% from $45.6 million in the prior quarter and 46.2% from $34.2 million in the prior-year quarter.
Behind the Headlines
Waddell & Reed’s operating revenues for the reported quarter were $309.9 million, up 4.5% from $296.6 million in the previous quarter and 20.5% from $257.2 million in the year-ago quarter. Higher revenues from all sources helped deliver better results during the quarter. However, operating revenues missed the Zacks Consensus Estimate of $312.0 million.
Overall gross sales decreased 11.9% sequentially but grew 10.0% year over year to $5.8 billion. Similarly, inflows were also down 11.8% sequentially but up 134.9% year over year at $1.7 billion. However, redemptions for the reported quarter were $4.3 billion, down from $4.7 billion in the prior quarter and $4.8 billion in the year-ago quarter.
In the Advisors channel, revenues increased 2.0% sequentially and 20.5% year over year to $74.0 million. Gross sales for the quarter fell 5% sequentially but grew 6% year over year to $1.0 billion. Net inflows during the quarter were $25 million compared with $66 million in the prior quarter and $100 million in the year-ago quarter.
In the Wholesale channel, revenues improved 5.2% from the prior quarter and 19.3% from the prior-year quarter to $63.3 million. Gross sales declined 11% from the prior quarter but increased 19% year over year to $4.2 billion. However, net inflows improved 12.5% sequentially to $1.8 billion.
Gross sales of the Institutional channel decreased 28% sequentially and year over year to $556 million. Net outflows during the quarter were $125 million compared with net inflows of $262 million in the prior quarter and net inflows of $243 million in the year-ago quarter.
Waddell & Reed’s operating expenses increased 4.1% sequentially and 18.5% year over year to $231.0 million in light of higher underwriting and distribution costs, compensation costs, sub-advisory fees, and general and administrative expenses.
Net operating margin improved to 25.5% in the reported quarter from 25.2% in the prior quarter and 24.2% in the prior-year quarter.
As of June 30, 2011, assets under management (:AUM) were $91.7 billion compared with $90.1 billion as of March 31, 2011 and $68.3 billion as of June 30, 2010.
During the quarter, Waddell & Reed repurchased 782,000 shares. This brings total 958,000 shares repurchased at an aggregate cost of $38 million during the first half of the year.
One of Waddell & Reed’s competitors, Janus Capital Group Inc. (NYSE:JNS - News), reported its second quarter 2011 earnings per share of 23 cents, in line with the Zacks Consensus Estimate. Results compared favorably with 17 cents in the year-ago quarter, aided by higher AUM, as well as a growth in revenues and a decline in operating expenses.
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 will drag its profitability due to increasing flows and significant intangibles on its balance sheet. However, we are encouraged to see the competitive ranking of its funds.
Waddell & Reed currently retains a Zacks #3 Rank, which translates into ‘Hold’ rating on a short-term basis. Also, in the absence of any significant positive or negative catalyst, we maintain a long-term “Neutral” recommendation on the stock.
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