Waddell & Reed Beats on Revenue - Analyst Blog

Waddell & Reed Financial Inc.'s (WDR) fourth quarter 2010 earnings of 54 cents per share were ahead of the Zacks Consensus Estimate of 49 cents. This also compares favorably with earnings of 47 cents in the prior quarter and 39 cents in the prior-year quarter.

For full-year 2010, Waddell & Reed reported earnings of $1.83 per share, ahead of the Zacks Consensus Estimate of $1.79. The full year figure also compares favorably with $1.23 reported in the prior year.

Better-than-expected results benefited the company primarily due to improved gross sales across all of Waddell & Reed's revenue channels, solid revenue growth, stronger growth in assets under management and an improved operating margin. These positives were offset by higher redemptions and increased operating expenses.

Net income for the reported quarter came in at $46.4 million, up 14.4% from $40.5 million in the prior quarter and 39.4% from $33.3 million in the prior-year quarter. For the full-year, net income totaled $157.0 million compared with $105.5 million in 2009.

Quarter in Detail

Waddell & Reed's operating revenues for the reported quarter were $281.2 million, up 10.4% from $254.8 million in the prior quarter and 14.9% from $244.8 million in the year-ago quarter. Operating revenues also surpassed the Zacks Consensus Estimate of $273.0 million. An increase in revenues from all sources helped deliver better results during the quarter.

For the full-year, the company's operating revenues came in at $1,044.9 million, 24.5% ahead of $839.1 million reported in the prior year and also ahead of the Zacks Consensus Estimate of $1,037.0 million.

In the Advisors channel, revenues increased 13.8% sequentially and 14.65% year over year to $69.3 million. Gross sales for the quarter grew 11.4% sequentially and 1.6% year over year to $935 million. Net inflows during the quarter were $10 million compared with net outflows of $137 million in the prior quarter and net outflows of $86 million in the year-ago quarter.

In the Wholesale channel, revenues improved 7.6% sequentially and 17.8% year over year to $41.6 million. Gross sales increased 23.2% sequentially but fell 13.7% year over year to $3.6 billion. Net inflows also surged to $1.1 billion from $453 million in the prior quarter but fell substantially from $2.6 billion in the year-ago quarter.

Gross sales of the Institutional channel escalated 17.5% sequentially and substantially up from year over year to $1.1 billion. Net inflows during the quarter were $35 million, down from $342 million in the prior quarter but up from $6 million in the year-ago quarter.

Waddell & Reed's operating expenses increased 8.4% sequentially and 9.7% year over year to $211.4 million in light of higher underwriting and distribution costs, sub-advisory fees and general and administrative expenses.

Net operating margin improved to 24.8% in the reported quarter from 23.5% in the prior quarter and 21.3% in the prior-year quarter.

Asset Position

As of December 31, 2010, assets under management (AUM) were $83.7 billion, compared with $76.0 billion as of September 30, 2010 and $69.8 billion as of December 31, 2009.

Net inflows were $1.2 billion, compared with $658 million in the prior quarter and $2.7 billion in the year-ago quarter. Redemptions for the reported quarter increased 10.6% sequentially and 52.3% year over year to $4.6 billion.

Share Repurchase

During the quarter, Waddell & Reed repurchased 127,000 shares. As of December 31, 2010, the company bought back a total of 2.0 million shares for an aggregate cost of $65.9 million.

Peer Performance

Waddell & Reed's close competitor – Janus Capital Group Inc. (JNS) had last week reported fourth quarter earnings per share of 36 cents, outpacing the Zacks Consensus Estimate of 21 cents on a better-than-expected increase in revenues and higher AUM. For the full-year, the company had reported earnings of 88 cents per share, beating the Zacks Consensus Estimate of 72 cents.

Our Viewpoint

Though we believe that Waddell & Reed will be able to maintain its strong growth story with increasing AUM as a result of solid investment and sales performance, rising operating expenses and significant intangibles on its balance sheet will drag profitability. However, we are impressed by the recent dividend hike by the company.

Waddell & Reed currently retains a Zacks #1 Rank, which translates into ‘Strong Buy' rating on a short-term basis. However, in the absence of any significant positive or negative catalysts, we maintain a long-term Neutral recommendation on the stock.

 
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