Lazard, Inc. (Lazard Ltd) — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018; unaudited. Comparisons are with Q1 2017 unless otherwise noted. Lazard provides financial advisory and asset management services; results are cyclical and can vary significantly by quarter.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $768.2 million | $637.4 million | Up 21% |
| Net revenue | $754.7 million | $623.5 million | Up 21% |
| Operating income | $185.8 million | $150.2 million | Up 24% |
| Net income attributable to Lazard Ltd | $159.7 million | $107.6 million | Up 48% |
| Diluted earnings per share | $1.21 | $0.81 | Up 49% |
| Operating margin on net revenue | 24.6% | 24.1% | Up 0.5 percentage points |
Financial Advisory net revenue was $409.1 million, up 22%, and operating income was $84.4 million; its operating margin declined to 20.6% from 21.8%. Asset Management net revenue was $354.3 million, up 25%, and operating income was $124.6 million; its operating margin improved to 35.2% from 33.4%. Corporate reported an $8.7 million net revenue loss and a $23.2 million operating loss.
Adjusted compensation expense was $404.0 million, or 55.8% of operating revenue, versus 56.5%. Adjusted non-compensation expense was $114.1 million, or 15.8% of operating revenue, versus 17.2%. These are company-defined non-GAAP measures.
Cash, liquidity and debt
- Cash and cash equivalents were $962.3 million at March 31, down from $1.484 billion at year-end. Cash, deposits with banks and short-term investments, and segregated cash totaled $1.864 billion, versus $2.455 billion at year-end.
- Operating cash flow was negative $38.7 million, compared with positive $99.3 million in Q1 2017. Investing cash outflow was $14.9 million; financing cash outflow was $586.8 million, including dividends, share repurchases, compensation-related share settlements, customer deposits and tax receivable agreement payments.
- Senior debt carrying value was $1.191 billion, essentially unchanged from year-end. No borrowings were outstanding under the $150 million revolving credit facility; approximately $170 million in unused credit lines were available. The company reported compliance with debt covenants and stated that cash flows and available credit should fund obligations for the next 12 months.
- Total stockholders’ equity was $1.056 billion, down from $1.259 billion at year-end. The quarterly dividend declared per share was $1.71; the board subsequently declared a $0.44 quarterly dividend payable in May.
Material changes and business drivers
- Advisory fees rose $73.8 million, mainly from increased M&A Advisory revenue, partly offset by lower restructuring revenue. Asset Management fees increased $65.2 million, primarily due to higher average assets under management (AUM).
- AUM was $251.7 billion at March 31, up 1% from year-end; average Q1 AUM rose 24% year over year. Net inflows of $2.4 billion and foreign-exchange appreciation were partly offset by market depreciation. AUM was $251.6 billion on April 20, after net outflows and FX depreciation were largely offset by market appreciation.
- Industry completed M&A value and deal count fell 7% and 20%, respectively, year over year, while announced deal value rose 47%. Management said near- to mid-term macroeconomic conditions appeared supportive, but highlighted market volatility and geopolitical, trade, tax and regulatory factors.
- Share repurchases were $145.9 million in Q1, covering 2.66 million shares at an average $54.82. On April 25, the board authorized an additional $300 million in repurchases, bringing total authorization to approximately $351 million.
Outlook, accounting, risks and contingencies
- Management expressed a constructive business outlook: it sees continued demand for independent advisory services and expects gradual expansion in developing economies for Asset Management. It plans to invest selectively in hiring, strategies and growth opportunities. No specific revenue or earnings guidance was provided.
- The company adopted the new revenue recognition standard on January 1, 2018. Revenue recognition timing was not materially affected, but gross presentation increased both Q1 net revenue and operating expenses by $23.6 million, with no material effect on net income. Comparisons of reported revenue and expenses should account for this presentation change.
- The effective tax rate fell to 13.0% from 26.5%, principally reflecting the lower U.S. corporate tax rate under the Tax Act and tax benefits associated with share-based compensation. Management’s Tax Act estimates remained provisional, with analysis expected to be completed in the second half of 2018.
- The tax receivable agreement obligation was $277.2 million, down from $310.3 million at year-end; payment timing and amounts can differ materially from estimates. Receivables were $674.7 million net of a $38.6 million doubtful-account allowance, which increased from $23.7 million at year-end.
- Management said pending legal matters, in aggregate, were not expected to materially affect the business or financial condition, while noting outcomes could be significant relative to any quarter’s earnings. The filing reported no material change in previously disclosed risk factors.
- Cash flow is seasonal: substantial incentive-compensation payments are generally made early in the year, and management expects cash to decline early and build later. The filing also identifies exposure to M&A activity, AUM and market performance, currencies, credit and investment values, competition, talent retention, liquidity, taxes and regulatory changes.
Important facts for investors to verify
- Whether advisory-fee growth is supported by completed transactions and recurring client demand, given weaker completed industry M&A activity and the timing uncertainty of transaction fees.
- Whether AUM flows, investment performance, market movements and foreign-exchange changes sustain asset-management revenue; review the subsequent AUM update for April 20.
- How seasonal compensation payments and working-capital movements affect cash generation through the rest of the year; Q1 operating cash flow was negative.
- The effect of compensation, ERP implementation, office reorganization and gross revenue presentation on expense trends and reported margins.
- Potential changes to tax estimates, deferred tax assets and the tax receivable agreement obligation, including payment timing and assumptions about future taxable income.
- Execution of the expanded repurchase authorization and the balance among buybacks, dividends, debt obligations and liquidity needs.