Following the third-quarter 2014 earnings release, shares of Waddell & Reed Financial Inc. (WDR) lost 1.7% on concerns over the company’s weak expense management and net outflows. The company reported adjusted earnings per share of 94 cents, surpassing the Zacks Consensus Estimate by 2 cents. Moreover, the reported figure came in 17.5% above the year-ago quarter.

Better-than-expected results, which marked Waddell & Reed’s ninth consecutive earnings beat, were aided by consistent improvement in top line. Growth in assets under management (AUM.TO) continued to be a strong factor. However, decline in sales and outflows slightly dampened the results. Moreover, escalating expenses remained a concern.

The current quarter results included an after-tax intangible asset impairment charge of $5.0 million or 6 cents per share related to a subadvisory agreement to manage certain mutual funds.

Net income, taking into account the abovementioned charges, totaled $74.6 million, up 9% year over year.

Waddell & Reed Financial, Inc - Quarterly EPS (:BNRI) | FindTheBest

Performance Highlights

Waddell & Reed’s operating revenues surged 18% year over year to $409.6 million. Further, it outpaced the Zacks Consensus Estimate of $407.0 million.

Gross sales decreased 13% year over year to $5.9 billion. Redemptions rose 66% year over year to $8.9 billion. Further, net outflows came in at $3.0 billion at the quarter-end against net inflows of $1.5 billion in the prior-year quarter. Industry-wide outflows in high yield, deterioration in performance of one of the company’s major funds as well as apprehension regarding portfolio manager turnover resulted in overall outflows in the reported quarter.

At the Advisors channel, gross sales climbed 6% year over year to $1.3 billion. Net inflows totaled $64 million, falling 27% from the year-ago quarter.

At the Wholesale channel, gross sales declined 18% year over year to $4.3 billion. Net outflows amounted to $2.6 billion compared with net inflows of $1.6 billion in the prior-year quarter.

Gross sales at the Institutional channel came in at $328 million, down 15% from the year-ago quarter. Further, the segment witnessed net outflows of $399 million versus outflows of $164 million in the year-ago quarter.

Operating expenses climbed 17% year over year to $284.4 million. The rise was mainly driven by an increase in all the expense components except compensation and related costs.

Operating margin stood at 30.6%, up from 29.8% in the prior-year quarter.

As of Sep 30, 2014, AUM totaled $128.9 billion, up 13% from Sep 30, 2013.

At the end of the reported quarter, cash and cash equivalents as well as investment securities totaled $772.9 million. Moreover, long-term debt summed $190.0 million and stockholders’ equity was recorded at $791.8 million.

Share Repurchase

In the reported quarter, Waddell & Reed bought back 614.1 million shares for $34.4 million.

Overall, the company returned $63.2 million to its shareholders in the form of dividends and share repurchases in the reported quarter.

Our Stance

Waddell & Reed remains well positioned for future growth on the back of its sustained improvement in top line as well as AUM. Moreover, a strong balance sheet and effective capital deployment activities are bound to work in its favor.

However, certain firm-specific factors, which compelled the company to report outflows in the reported quarter, also raised concerns about the impact of these factors on the upcoming results. Rising expenses, a competitive landscape and unfavorable market conditions are expected to further aggravate the pressure on financials.

At present, Waddell & Reed has a Zacks Rank #4 (Sell).

Among other Investment Managers, Fortress Investment Group LLC (FIG), Oaktree Capital Group, LLC (OAK) and Invesco Ltd. (IVZ) are scheduled to announce their third-quarter 2014 earnings results on Oct 30.

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