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Waddell & Reed Financial Inc.’s (WDR - Analyst Report) first-quarter 2013 earnings from continuing operations reached 63 cents per share, beating the Zacks Consensus Estimate by a penny. This also compares favorably with earnings of 55 cents in the prior-year quarter.

Marginally better-than-expected results were aided by an augmented top line, 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 the revenue channels, except the Institutional channel.

Net income from continuing operations for the reported quarter came in at $53.9 million, increasing 15.0% from $46.8 million in the year-ago quarter.

Performance in Detail

Waddell & Reed’s operating revenues for the reported quarter climbed 10.0% to $316.6 million from $287.9 million in the year-ago quarter. Moreover, operating revenues surpassed the Zacks Consensus Estimate of $311.0 million.

Overall, gross sales increased 7.6% year over year to $6.8 billion. Redemptions were $4.7 billion, down 6.4% from $5.0 billion in the prior-year quarter. Net inflows were $2.1 billion, up 61.3% year over year.

At the Advisors channel, revenues improved 13.8% year over year to $87.2 million. Gross sales surged 18.8% to $1.3 billion from $1.1 billion in the year-ago quarter. Net inflows grew 20.3% to $190 million from $158 million in the prior-year quarter.

At the Wholesale channel, revenues improved 8.3% year over year to $48.2 million. Gross sales also rose 11.5% year over year to $5.0 billion. Net inflows grew to $2.0 billion from $970 million in the year-ago period.

Gross sales at the Institutional channel came in at $430 million, plunging 37.0% from $682 million in the year-ago quarter. Further, the segment witnessed net outflows of $39 million compared with inflows of $175 million in the year-ago quarter.

Waddell & Reed’s operating expenses increased 8.1% year over year to $233.6 million. This was primarily due to a rise in underwriting and distribution expenses along with higher compensation and related costs.

Operating margin of 26.2% improved from 25.0% in the prior-year quarter.

As of Mar 31, 2013, AUM totaled $103.8 billion, up 10.7% from $93.8 billion as of Mar 31, 2012.

Balance Sheet

As of Mar 31, 2013, cash and cash equivalents and investment securities were $566 million. Moreover, long-term debt totaled $190 million and stockholders’ equity was recorded at $553 million.

Share Repurchase

During the first quarter, Waddell & Reed repurchased 82,000 million shares at an aggregate price of $3.4 million.

Our Take

Waddell & Reed’s sustained growth and its history of boosting shareholders’ value through meaningful capital deployment activities are impressive. However, the persistently volatile equity markets and significant intangibles on the company’s balance sheet are expected to mar its profitability in the upcoming quarters.

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 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) surpassed earnings estimates. The outperformance by these companies was attributed to revenue growth, partially offset by increased operating expenses.

Waddell & Reed currently carries a Zacks Rank #2 (Buy).

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