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Waddell & Reed Financial Inc.’s (WDR - Analyst Report) second-quarter 2013 earnings came in at 67 cents per share, surpassing the Zacks Consensus Estimate of 64 cents. This also compares favorably with the prior-year quarter figure of 48 cents.

Notably, results for the reported quarter include a charge of $8.6 million associated with the launch of Ivy High Income Opportunities Fund – the company’s first closed-end fund. Considering the aforementioned one-time expenditure, the net income figure came in at $52.0 million,  increasing 24.7% from $41.7 million in the year-ago quarter.

The year-over-year improvement was aided by top-line growth, partially offset by higher operating expenses. Further, enhanced assets under management (AUM) and a solid balance sheet were among the positives. Additionally, gross sales increased across all revenue channels, except the Institutional channel.

Performance in Detail

Waddell & Reed’s operating revenues climbed 14.5% to $331.7 million from $289.7 million in the year-ago quarter. Moreover, operating revenues surpassed the Zacks Consensus Estimate of $329.0 million.

Overall, gross sales increased 14.9% year over year to $6.8 billion. Redemptions were $5.9 billion, up 5.8% from $5.6 billion in the prior-year quarter. Net inflows were $935 million, up significantly from the prior-year quarter.

At the Advisors channel, gross sales rose 17.7% to $1.4 billion from $1.2 billion in the year-ago quarter. Net inflows grew 41.5% to $259 million from $183 million in the prior-year quarter.

At the Wholesale channel, gross sales also rose 22.3% year over year to $5.0 billion. Net inflows grew to $1.1 billion from $626 million in the year-ago period.

Gross sales at the Institutional channel came in at $379 million, plunging 39.4% from $625 million in the year-ago quarter. Further, the segment witnessed net outflows of $432 million, compared with outflows of $433 million in the year-ago quarter.

Waddell & Reed’s operating expenses rose 11.0% year over year to $246.7 million. This was primarily due to increases in underwriting and distribution expenses, compensation and related costs as well as general and administrative costs.

Operating margin of 25.6% increased from 23.3% in the prior-year quarter.

As of Jun 30, 2013, AUM totaled $104.3 billion, up 17.1% from $89.1 billion as of Jun 30, 2012.

Balance Sheet

As of Jun 30, 2013, cash and cash equivalents and investment securities were $547 million. Moreover, long-term debt totaled $190 million and stockholders’ equity was recorded at $563 million.

Share Repurchase

During the reported quarter, Waddell & Reed repurchased 789,000 shares.

Our Take

Waddell & Reed’s sustained growth and its history of boosting shareholder value through meaningful capital deployment activities are impressive. Although we are optimistic about the competitive ranking of Waddell & Reed’s funds and its efforts to control cost in the upcoming quarters, irregular investment performance, significant intangibles on its balance sheet and rising competition keep us cautious.

Similar to Waddell & Reed, earnings per share for BlackRock, Inc. (BLK - Analyst Report), The Blackstone Group L.P. (BX - Analyst Report) and Ameriprise Financial Inc. (AMP - Analyst Report) also surpassed the respective Zacks Consensus Estimate. The outperformance by these companies was attributable to revenue growth, partially offset by increased operating expenses.

Waddell & Reed currently carries a Zacks Rank #3 (Hold).

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