Waddell & Reed Beats on Higher Rev

Waddell & Reed Financial Inc.’s ( WDR - Analyst Report ) first-quarter earnings came in at 55 cents per share, outpacing the Zacks Consensus Estimate of 50 cents. This also compares favorably with earnings of 47 cents in the prior quarter and 53 cents in the prior-year quarter.

Results, on a sequential basis, benefited from higher operating revenue as well as improved investment and other income. Further, gross sales across all the revenue channels also grew while assets under management (AUM) showed decent growth. However, these positives were partially offset by higher operating costs.

Waddell & Reed’s net income for the reported quarter came in at $47.4 million, up 18.5% sequentially and 3.9% year over year.

Behind the Headlines

Waddell & Reed’s operating revenue for the reported quarter was $306.6 million, up 5.4% from $209.9 million in the prior quarter and 3.4% from $296.6 million in the year-ago quarter. Operating revenues marginally surpassed the Zacks Consensus Estimate of $306.0 million.

Overall gross sales climbed 21.8% sequentially but came down 6.8% year over year to $6.1 billion during the reported quarter. Redemptions were $5.0 billion, down from $5.3 billion in the prior quarter, but up from $4.7 billion in the year-ago quarter. Inflows improved significantly from $42 million in the prior quarter but declined from $1.9 billion in the prior-year quarter to $1.3 billion.

At the Advisors channel, revenues increased 4.4% sequentially and 5.7% year over year to $76.7 million. Gross sales for the quarter were $1,030 million, up from $858 million in the prior quarter but down from $1,064 million in the year-ago quarter. Net inflows during the quarter were $158 million compared with net outflow of $114 million in the prior quarter and net inflow of $68 million in the year-ago quarter.

At the Wholesale channel, revenues surged 4.6% from the prior quarter and 1% from the prior-year quarter to $60.8 million. Gross sales jumped 19.6% from the prior quarter but declined 6.1% from the year-ago quarter to $4.4 billion. Net inflows significantly improved from $153 million in the prior quarter but deteriorated from $1.6 billion in the prior-year quarter to $970 million.

Gross sales at the Institutional channel were $652 million, up 43% from $456 million in the prior quarter but down 16% from $776 million in the year-ago quarter. Net inflows during the quarter surged from $3 million in the prior quarter but fell from $262 million in the year-ago quarter to $175 million.

Waddell & Reed’s operating expenses increased 3% sequentially and 5.5% year over year to $233.9 million. Both sequential and year-over-year increase was mainly due to higher underwriting and distribution costs as well as compensation costs.

Operating margin was 23.7% in the reported quarter compared with 21.8% in the prior quarter and 25.2% in the prior-year quarter.

Assets Under Management

As of March 31, 2012, AUM totaled $93.8 billion compared with $83.2 billion as of December 31, 2011 and $90.2 billion as of March 31, 2011.

Balance Sheet

As of March 31, 2012, cash and cash equivalents and investment securities were $521 million. Moreover, long-term debt totaled $190 million.

Performance by Peer

Invesco Ltd.’s ( IVZ - Analyst Report ) first-quarter adjusted earnings were in line with the Zacks Consensus Estimate. Higher net revenue was mainly responsible for the improvement in the results. However, higher operating expenses were the primary dampeners. Moreover, the company’s AUM and balance sheet position remained healthy during the quarter.

Our Viewpoint

Although we expect Waddell & Reed to maintain its strong growth story, volatility in the equity markets and significant intangibles on its balance sheet will drag down the profitability.

However, we are encouraged to see the competitive ranking of Waddell & Reed’s funds. Further, the company has been boosting shareholder value through its capital deployment activities, which represents its stable capital position.

Waddell & Reed currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.