Lazard, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Lazard provides financial advisory and asset management services. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $561.9 million | $716.1 million | Down 22% |
| Net revenue | $542.4 million | $694.9 million | Down 22% |
| Operating income (loss) | ($36.9 million) | $159.7 million | Declined $196.7 million |
| Net income (loss) | ($15.2 million) | $121.0 million | Turned to loss |
| Net income (loss) attributable to Lazard Ltd | ($22.2 million) | $113.9 million | Turned to loss |
| Basic and diluted EPS | ($0.27) | $1.09 basic; $1.05 diluted | Turned to loss |
| Operating margin | (6.8%) | 23.0% | Down 29.8 percentage points |
Investment banking and other advisory fees fell 29% to $277.4 million. Asset management fees fell 17% to $261.5 million; incentive fees were $5.4 million versus $25.2 million. Interest income rose to $12.6 million from $1.8 million.
- Financial Advisory: Net revenue was $277.6 million, down 29%; operating loss was $51.2 million versus income of $92.0 million. The segment cited fewer fees above $10 million. Its top 10 clients generated 38% of segment revenue, versus 44% a year earlier.
- Asset Management: Net revenue was $284.0 million, down 16%; operating income was $36.0 million, down 63%, and margin was 12.7% versus 28.7%. Lower average AUM and incentive fees weighed on results.
- Corporate: Net revenue loss was $19.2 million versus a loss of $33.8 million. Improved investment results and higher interest income were partly offset by LGAC liquidation and investment impairment losses.
Reported compensation and benefits expense rose 13% to $450.0 million. Non-GAAP adjusted compensation expense decreased 2% to $399.1 million, but was 75.7% of operating revenue versus 58.5%. Adjusted non-compensation expense increased 21% to $142.3 million, or 27.0% of operating revenue versus 16.8%. Non-GAAP earnings from operations were a loss of $14.3 million, compared with income of $172.8 million.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $411.4 million, compared with negative $213.5 million in Q1 2022. Investing cash flow was negative $15.1 million; financing cash flow was negative $1.072 billion.
- Cash, bank deposits and short-term investments, and restricted cash totaled $1.156 billion at March 31, down from $2.639 billion at year-end. The decline included the $585.9 million distribution following LGAC’s redemption, as well as other financing outflows. Cash and cash equivalents alone were $596.6 million.
- Total assets were $4.568 billion, down from $5.853 billion at year-end. Total stockholders’ equity was $508.4 million, down from $675.4 million.
- Senior debt carrying value was $1.688 billion, representing $1.700 billion principal across notes due 2025, 2027, 2028 and 2029. No amounts were drawn on the revolving facility. Approximately $209 million of unused lines were available; the $200 million revolving facility was due to expire in July 2023.
- Lazard reported compliance with debt covenants. For the 12 months ended March 31, 2023, its leverage ratio was 1.93x and interest coverage was 13.80x, against limits of 3.25x and a minimum 3.00x, respectively.
- Management said operating cash flows should be sufficient to fund current obligations for the next 12 months. Cash flow is seasonal, with substantial annual incentive-compensation payments generally made in the first quarter.
Material changes and unusual items
- Global announced M&A transaction value fell 48% year over year and completed transaction value fell 51%. Lazard’s advisory revenue declined amid lower transaction activity and fewer large fee events.
- Asset Management AUM ended the quarter at $232.1 billion, up 7% from year-end, reflecting $3.0 billion net inflows, $11.6 billion market appreciation and $1.4 billion foreign-exchange appreciation. Inflows included approximately $3.9 billion related to a wealth-management acquisition. Average quarterly AUM was down 12% year over year. AUM was $235.6 billion as of April 21, 2023.
- LGAC redeemed all publicly held shares on February 23, 2023 after failing to complete a business combination by its deadline. The distribution was $585.9 million; Lazard recorded a $17.9 million liquidation loss and reversed $20.1 million of deferred underwriting fees.
- A $40.4 million benefit from revaluing the tax receivable agreement reduced operating expenses. The related obligation fell to $118.6 million from $191.2 million; Lazard also paid $32.2 million under the agreement during the quarter.
- The company recorded $23.0 million of impairment charges for equity-method investments and other receivables. It also recorded $20.7 million of cost-saving initiative expense and $10.7 million of senior-management-transition expense. Management expects approximately $95 million of additional cost-saving costs in subsequent 2023 quarters.
- The effective tax rate was a 58.8% benefit rate, versus a 24.3% expense rate in 2022, reflecting changes in the geographic mix of earnings and discrete items.
Outlook, risks and contingencies
Management said macroeconomic and market conditions remained uncertain, with inflation, rising interest rates and turbulent capital markets. It expected the global M&A slowdown to extend beyond Q1 because of continuing uncertainty and weak decision-maker confidence. Lazard said it remained engaged with advisory clients, was selectively hiring senior professionals, and saw opportunities in Asset Management through its diversified platform and potential new strategies or acquisitions. The filing provides no specific numerical revenue or earnings guidance.
The company’s cost-saving program is expected to reduce its workforce by approximately 10% over 2023. The board declared a quarterly dividend of $0.50 per share on April 26, payable May 19 to holders of record May 8. Legal and regulatory matters arise in the ordinary course; management said pending matters in aggregate were not expected to materially affect business or financial condition, while noting individual outcomes could be significant relative to a quarter’s earnings. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether advisory activity and large transaction fees recover, and how the expected prolonged M&A slowdown affects Financial Advisory results.
- Whether Asset Management sustains AUM inflows and market gains, given lower average AUM and sensitivity to market, currency and client-flow changes.
- How much of the reported loss and cost base reflects recurring operations versus the tax receivable agreement benefit, LGAC liquidation, impairments and transition or restructuring costs.
- Progress, timing and realized savings from the workforce reduction, alongside the expected additional $95 million of 2023 costs.
- Liquidity and refinancing arrangements around the July 2023 revolving-credit-facility expiration, and the company’s ability to manage seasonal cash outflows and approximately $1.7 billion of senior-note principal.
- Credit quality of receivables: the allowance for credit losses rose to $24.9 million from $17.7 million at year-end.