Waddell & Reed Outshines Again

Waddell & Reed Financial Inc.’s (WDR - Analyst Report) third-quarter earnings came in at 37 cents per share, four pennies ahead of the Zacks Consensus Estimate of 33 cents. However, this compares unfavorably with earnings of 40 cents in the prior-year quarter. 

Despite a difficult environment, the company witnessed an improvement in its sales volume across all revenue channels except Advisors channel. Results were also aided by higher net inflows, strong growth in assets under management, improvement in operating margin and expense management. 

Net income came in at $33.4 million, or 39 cents per share, compared to $23.4 million, or 27 cents per share in the prior quarter and $33.4 million or 39 cents per share in the prior-year quarter. 

The results for the reported quarter were impacted by a charge of $0.5 million for severance and other costs related to the sale of its subsidiary Austin, Calvert & Flavin on Jul 15, 2009. 

During the quarter, operating revenue increased 9.2% sequentially but decreased 9.6% year-over-year to $218.0 million. Net operating margin improved to 22.4% compared to 19.0% in the prior quarter but declined from 23.1% in the prior-year quarter. 

In the Advisors channel, revenue improved 1.7% sequentially as higher levels of assets under management resulted in an increase in asset-based service fees and asset allocation product fees. This increase was largely offset by lower commission fee revenues as sales volume fell in the front-load Class A mutual funds and variable annuity products. In the Wholesale channel, the 5.0% sequential improvement in revenue was primarily attributable to higher asset-based service and distribution fees. Higher sales volume by Legend advisors also positively contributed to revenues. 

Operating expenses increased 4.7% sequentially but decreased 8.8% year-over-year to $169.1 million. The sequential increase was primarily attributable to higher underwriting and distribution costs, sub-advisory fees and compensation costs. 

As of Sep 30, 2009, assets under management were $64.5 billion, compared to $55.6 billion at the end of the prior quarter and $59.8 billion at the end of prior-year quarter. Net inflows were $2.4 billion, compared to $3.2 billion in the prior quarter and $1.3 billion in the prior-year quarter. Redemptions for the reported quarter increased 15.8% sequentially but decreased 27.3% year-over-year to $2.9 billion. 

Though we expect that the company will be able to maintain its strong growth with increasing assets under management as a result of solid investment and sales performance, operating margin compression as a result of growth in flows and significant intangibles on its balance sheet will be a drag on profitability.