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Strong performance owing to consistent inflows across all the segments drove Waddell & Reed Financial Inc.’s (WDR - Analyst Report) first-quarter 2014 earnings per share of 88 cents, which outpaced the Zacks Consensus Estimate of 85 cents. The reported figure was also up 39.7% from 63 cents earned in the year-ago quarter. Moreover, the results continued the company’s earnings streak of 2013.

Waddell & Reed’s top-line growth continued, aided by strong inflows. Consistent rise in assets under management (AUM), strong balance sheet position and steady capital deployment activities were the quarterly tailwinds. However, rising expenses was a headwind.

Net income for the said quarter came in at $74.9 million, up 39.0% year over year.

Performance Highlights

Waddell & Reed’s operating revenues grew 23.3% from the prior-year quarter to $390.4 million. Moreover, it cruised ahead of the Zacks Consensus Estimate of $380.0 million.

Overall, gross sales were $10.0 billion, up 47.7% year over year. Redemptions were $5.3 billion, up 14.4% from the prior-year quarter. Moreover, net inflows were $4.7 billion at the quarter-end, increasing substantially from $2.1 billion as of Mar 31, 2013.

At the Advisors channel, gross sales rose 10.1% year over year to $1.4 billion. Net inflows were $217 million, rising 14.2% from the year-earlier quarter.

At the Wholesale channel, gross sales increased 39.2% from the prior-year quarter to $7.0 billion. Net inflows were $3.6 billion, up 82.8% year over year.

Gross sales at the Institutional channel came in at $1.6 billion, up significantly from $430 million in the year-ago quarter. Further, the segment witnessed net inflows of $875 million versus outflows of $39 million as of Mar 31, 2013.  

Operating expenses rose 17.2% year over year to $273.8 million. This was primarily due to increase in underwriting and distribution expenses, compensation and related costs as well as general and administrative costs.

Operating margin came in at 29.9%, up from 26.2% in the prior-year quarter.

As of Mar 31, 2014, AUM totaled $131.4 billion, up 26.6% from Mar 31, 2013.

At the end of the reported quarter, cash and cash equivalents as well as investment securities were $720.6 million. Moreover, long-term debt totaled $190.0 million and stockholders’ equity was recorded at $729.5 million.

Share Repurchase

In the reported quarter, Waddell & Reed bought back 280.2 million shares for $17.7 million.  

Overall, Waddell & Reed returned $46.7 million to shareholders in the form of dividends and share repurchases during the quarter.

Our Stance

Despite volatility in the equity market, Waddell & Reed has recorded consistent inflows in the reported quarter. Therefore, going forward, we expect this trend to continue on the back of a modest improvement in the overall market scenario. However, rising expenses and a competitive landscape will tend to challenge the company’s top-line growth.

At present, Waddell & Reed has a Zacks Rank #2 (Buy).

Performance of Other Investment Managers

The first-quarter 2014 results of Ameriprise Financial, Inc. (AMP - Analyst Report), Affiliated Managers Group Inc. (AMG - Analyst Report) and BlackRock, Inc. (BLK - Analyst Report) surpassed the Zacks Consensus Estimate, primarily driven by top-line growth but partially offset by higher expenses. Further, the three companies recorded impressive AUM growth as well.

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