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Waddell & Reed Financial Inc. reported second-quarter 2016 adjusted earnings of 59 cents per share, surpassing the Zacks Consensus Estimate of 48 cents. However, it compared unfavorably with the prior-year quarter earnings of 80 cents (non-recurring items were absent during the quarter).
Better-than-expected results were primarily driven by lower expenses. However, a decline in revenues, elevated outflows and deteriorating assets under management (AUM) were the undermining factors. These reasons perhaps led to a 1.6% decline in the company’s share price, following the announcement of the results.
The results excluded $24.1 million in charges related to severance, accelerated amortization of deferred acquisition costs and Project E implementation costs. After considering these, net income totaled $33.7 million, down 50% year over year.
Operating revenues fell 19% year over year to $319.2 million, reflecting a decline in all components. However, it surpassed the Zacks Consensus Estimate of $315.3 million.
Gross sales declined 51.5% year over year to $2.8 billion. Redemptions rose 83.8% year over year to $12.6 billion. Further, net outflows were $9.8 billion at the quarter end, up significantly from $1.1 billion in the prior-year quarter.
Operating expenses fell 6.2% year over year to $265.4 million. All expense components, except depreciation and compensation & related costs, declined.
Operating margin was 16.8%, down from 28.2% a year ago.
As of Jun 30, 2016, AUM totaled $86.5 billion, down 28.4% from Jun 30, 2015 level. A rise in net outflows and unfavorable market action were responsible for the decline.
As of Jun 30, 2016, the company’s cash and cash equivalents as well as investment securities totaled $829.1 million. Moreover, long-term debt totaled $189.5 million and stockholders’ equity was recorded at $817.5 million.
Deteriorating Performance of the Distribution Channels
At Retail Broker-Dealer (previously referred as “Advisors” channel), gross sales decreased 18.8% year over year to $1.1 billion. Net outflows totaled $398 million, up drastically from the year-ago figure of $76 million.
At Retail Unaffiliated Distribution (previously referred to as "Wholesale” channel), gross sales declined 52.9% year over year to $1.5 billion. Net outflows amounted to $3.9 billion, considerably up year over year.
Gross sales at the Institutional channel were $190 million, declining 84.2% from the year-ago quarter. Moreover, the segment witnessed net outflows of $5.5 billion, as against net inflow of $200 million in the prior-year quarter.
Share Repurchase
In the reported quarter, Waddell & Reed bought back 1.1 billion shares for $21.9 million. Overall, the company returned $60.4 million to its shareholders in the form of dividends and share repurchases during the quarter.
Our View
Waddell & Reed’s strained top line raises concerns about its prospects. Despite the company’s cost cutting initiatives, the magnitude of net outflows and weakness in fund performance continue to make investors wary. Also, a rise in redemption rates, increasing competition and unfavorable market conditions are anticipated to trouble its financials in the near term.
Currently, Waddell & Reed has a Zacks Rank #5 (Strong Sell).
Other Investment Managers
BlackRock, Inc. (BLK - Free Report) reported second-quarter 2016 adjusted earnings of $4.78 per share, which lagged the Zacks Consensus Estimate by a penny. Earnings were lower-than-expected primarily due to a decline in adjusted operating income. However, efficient cost containment was on the positive side. Moreover, AUM experienced a year-over-year rise during the quarter.
The Blackstone Group L.P. (BX - Free Report) reported second-quarter 2016 economic net income of 44 cents per share, which surpassed the Zacks Consensus Estimate of 40 cents. Results were attributable to a significant decline in expenses and higher total investment income, partially offset by lower performance fees. Also, growth in assets under management continued to be impressive.
Affiliated Managers Group Inc. (AMG - Free Report) is scheduled to report second-quarter 2016 earnings results on Aug 1.
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Waddell & Reed (WDR) Tops Q2 Earnings, Outflows Increase
Waddell & Reed Financial Inc. reported second-quarter 2016 adjusted earnings of 59 cents per share, surpassing the Zacks Consensus Estimate of 48 cents. However, it compared unfavorably with the prior-year quarter earnings of 80 cents (non-recurring items were absent during the quarter).
Better-than-expected results were primarily driven by lower expenses. However, a decline in revenues, elevated outflows and deteriorating assets under management (AUM) were the undermining factors. These reasons perhaps led to a 1.6% decline in the company’s share price, following the announcement of the results.
The results excluded $24.1 million in charges related to severance, accelerated amortization of deferred acquisition costs and Project E implementation costs. After considering these, net income totaled $33.7 million, down 50% year over year.
Revenues, Expenses & AUM Witness a Decline
Operating revenues fell 19% year over year to $319.2 million, reflecting a decline in all components. However, it surpassed the Zacks Consensus Estimate of $315.3 million.
Gross sales declined 51.5% year over year to $2.8 billion. Redemptions rose 83.8% year over year to $12.6 billion. Further, net outflows were $9.8 billion at the quarter end, up significantly from $1.1 billion in the prior-year quarter.
Operating expenses fell 6.2% year over year to $265.4 million. All expense components, except depreciation and compensation & related costs, declined.
Operating margin was 16.8%, down from 28.2% a year ago.
As of Jun 30, 2016, AUM totaled $86.5 billion, down 28.4% from Jun 30, 2015 level. A rise in net outflows and unfavorable market action were responsible for the decline.
As of Jun 30, 2016, the company’s cash and cash equivalents as well as investment securities totaled $829.1 million. Moreover, long-term debt totaled $189.5 million and stockholders’ equity was recorded at $817.5 million.
Deteriorating Performance of the Distribution Channels
At Retail Broker-Dealer (previously referred as “Advisors” channel), gross sales decreased 18.8% year over year to $1.1 billion. Net outflows totaled $398 million, up drastically from the year-ago figure of $76 million.
At Retail Unaffiliated Distribution (previously referred to as "Wholesale” channel), gross sales declined 52.9% year over year to $1.5 billion. Net outflows amounted to $3.9 billion, considerably up year over year.
Gross sales at the Institutional channel were $190 million, declining 84.2% from the year-ago quarter. Moreover, the segment witnessed net outflows of $5.5 billion, as against net inflow of $200 million in the prior-year quarter.
Share Repurchase
In the reported quarter, Waddell & Reed bought back 1.1 billion shares for $21.9 million. Overall, the company returned $60.4 million to its shareholders in the form of dividends and share repurchases during the quarter.
Our View
Waddell & Reed’s strained top line raises concerns about its prospects. Despite the company’s cost cutting initiatives, the magnitude of net outflows and weakness in fund performance continue to make investors wary. Also, a rise in redemption rates, increasing competition and unfavorable market conditions are anticipated to trouble its financials in the near term.
WADDELL&REED -A Price, Consensus and EPS Surprise
WADDELL&REED -A Price, Consensus and EPS Surprise | WADDELL&REED -A Quote
Currently, Waddell & Reed has a Zacks Rank #5 (Strong Sell).
Other Investment Managers
BlackRock, Inc. (BLK - Free Report) reported second-quarter 2016 adjusted earnings of $4.78 per share, which lagged the Zacks Consensus Estimate by a penny. Earnings were lower-than-expected primarily due to a decline in adjusted operating income. However, efficient cost containment was on the positive side. Moreover, AUM experienced a year-over-year rise during the quarter.
The Blackstone Group L.P. (BX - Free Report) reported second-quarter 2016 economic net income of 44 cents per share, which surpassed the Zacks Consensus Estimate of 40 cents. Results were attributable to a significant decline in expenses and higher total investment income, partially offset by lower performance fees. Also, growth in assets under management continued to be impressive.
Affiliated Managers Group Inc. (AMG - Free Report) is scheduled to report second-quarter 2016 earnings results on Aug 1.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>