Waddell & Reed Financial Inc.
) third quarter 2012 operating earnings of 61 cents per share
were ahead of the Zacks Consensus Estimate by a nickel. This also
compares favorably with earnings of 46 cents in the prior-year
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Better-than-expected results benefited from augmented top line,
partially offset by higher expenses. Further, enhanced assets
under management (AUM) and solid balance sheet were among the
positives. Moreover, gross sales across all the revenue channels,
except Advisory channel, decreased.
Net income (including the loss from discontinued operations) for
the reported quarter was $8.5 million or 10 cents per share
compared with $39.8 million or 46 cents per share in the year-ago
Performance in Detail
Waddell & Reed's operating revenues for the reported quarter
were $293.4 million, up 4.6% from $280.3 million in the year-ago
quarter. However, operating revenues lagged the Zacks Consensus
Estimate of $312.0 million by 6.0%.
Overall, gross sales fell 19.5% year over year to $5.2 billion.
Redemptions were $4.6 billion, down from $6.4 billion in the
prior-year quarter. Inflows deteriorated significantly from $1.3
billion in the previous-year quarter to $826 million in the
At the Advisors channel, revenues bolstered 11.5% year over year
to $78.2 million. Gross sales for the quarter were $906 million,
up 4.5% from $867 million in the year-ago quarter. Net outflows
were $75 million compared with $133 million in the third quarter
At the Wholesale channel, revenues dipped 2.3% from the
prior-year quarter to $44.7 million. Similarly, gross sales
decreased 10.0% from the year-ago quarter to $3.6 billion. Net
inflows, however, improved 21.8% from the prior-year quarter to
Gross sales at the Institutional channel were $721 million, down
55.6% from $1,625 million in the year-ago quarter. Likewise, net
inflows during the quarter were $231 million, down 74.5% from the
Waddell & Reed's operating expenses surged 3.5% year over
year to $213.6 million. The increase was primarily due to higher
underwriting and distribution expenses as well as rise in
compensation and related costs.
Operating margin of 27.2% in the reported quarter improved from
26.4% in the prior-year quarter.
As of September 30, 2012, AUM totaled $94.8 billion, up 22.3%
from $77.5 billion as of September 30, 2011 and 6.4% from $89.1
billion as of June 30, 2012. Both the increases were driven by
positive market action and organic growth.
As of September 30, 2012, cash and cash equivalents and
investment securities were $545 million. Moreover, long-term debt
totaled $190 million and stockholders' equity was $568 million.
During the reported quarter, Waddell & Reed repurchased
213,000 shares. This brings the year-to-date shares repurchased
to 1.2 million shares at a total cost of $36 million.
On October 29, Waddell & Reed signed a definitive agreement
to sell Legend group of subsidiaries to First Allied Holdings
Inc. The deal is expected to close in January next year, subject
to regulatory approvals.
Similar to Waddell & Reed,
) third-quarter 2012 earnings also beat the Zacks Consensus
Estimate by a nickel. Better-than-expected results reflect
enhanced assets under management (AUM) and a strong capital
position. Yet, a decline in the top line and increase in expenses
were the downsides.
Waddell & Reed's sustained growth and history of boosting
shareholders' value through meaningful capital deployment
activities are impressive. However, persistently volatile equity
markets and significant intangibles on its balance sheet are
expected to mar profitability in the upcoming quarters.
Though we remain optimistic considering the competitive ranking
of Waddell & Reed's funds and its efforts to control cost in
the upcoming quarters, irregular investment performance and
rising competition obscure our outlook.
Waddell & Reed currently retains a Zacks #1 Rank, which
translates into a short-term Strong Buy rating.