Business Context and Reporting Period
This summary covers Lazard Ltd's Form 10-Q for the quarterly period ended June 30, 2008. Lazard is a preeminent international financial advisory and asset management firm operating primarily through two segments: Financial Advisory (M&A, restructuring, capital raising) and Asset Management (equity, fixed income, and alternative investments). The company also maintains a Corporate segment which includes its Paris-based commercial bank, Lazard Frères Banque SA (LFB), and holds approximately 56.4% of the common membership interests in Lazard Group LLC.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $505.6 million | $852.5 million |
| Net Revenue | $467.4 million | $775.5 million |
| Operating Income | $87.7 million | $105.8 million |
| Net Income | $34.3 million | $42.1 million |
| Diluted EPS (Class A) | $0.54 | $0.70 |
| Cash and Cash Equivalents | $758.7 million (as of June 30, 2008) | N/A |
| Total Assets | $3.63 billion (as of June 30, 2008) | N/A |
| Total Senior Debt | $1.15 billion (as of June 30, 2008) | N/A |
| Operating Cash Flow (6 months) | $58.8 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 11% ($46 million) in the quarter and remained relatively flat (-2%, $15 million) for the six-month period compared to 2007. Investment banking fees rose 22% in the quarter and 7% for the six months, driven by an increase in the number of transactions exceeding $1 million.
- Profitability Decline: Operating income decreased 2% in the quarter but fell 37% ($62 million) for the six-month period. Net income for the six months dropped 24% to $42.1 million, primarily due to a significant decline in "Other" revenue.
- Investment Losses: "Other" revenue decreased 90% ($74 million) for the six-month period. This was attributed to broad-based illiquidity in credit markets and equity volatility, which negatively impacted investment income from LFB's corporate debt portfolio and corporate equity investments.
- Expense Increases: Total operating expenses rose 14% for the quarter and 7% for the six months. Compensation and benefits increased due to strategic headcount growth and higher RSU amortization. Non-compensation expenses rose due to new office costs from 2007 acquisitions (GAHL and CWC) and a weakened U.S. dollar.
- Debt Reduction: Senior debt decreased by $437.5 million as the company repurchased $437.5 million of its 6.12% Senior Notes in May 2008 in connection with the remarketing of Equity Security Units (ESUs).
Outlook, Risks, and Unusual Items
- Market Environment: Global M&A activity declined significantly (43% drop in completed transactions for the six months), though Lazard's restructuring practice benefited from increased corporate debt defaults ($18 billion in defaults vs. $3 billion in 2007).
- Assets Under Management (AUM): Total AUM decreased 5% to $134.1 billion as of June 30, 2008, due to market depreciation of $12.6 billion, partially offset by net inflows of $4.3 billion.
- Unusual Items: The 2007 period included a $9.3 million gain from the sale of a portion of LFCM Holdings' interest in Panmure Gordon & Co. plc, which is not present in the 2008 period.
- Legal Proceedings: The company is subject to ongoing investigations by the NASD, SEC, and U.S. Attorney's Office regarding gifts and gratuities related to its former Capital Markets business. Management believes the outcome will not have a material adverse effect on financial condition but could impact operating results in a specific period.
- Regulatory Status: Effective April 1, 2008, Lazard became subject to supervision by the SEC as a Supervised Investment Bank Holding Company (SIBHC).
Investor Verification Checklist
- Investment Portfolio Valuation: Verify the fair value of LFB's corporate debt portfolio and corporate equity investments, which contributed to the significant drop in "Other" revenue due to market volatility.
- Debt Structure: Confirm the terms of the remaining $1.15 billion in senior debt and the $150 million subordinated convertible note, noting the maturity dates and interest rates.
- Minority Interest: Review the impact of LAZ-MD Holdings' ownership stake (43.6% as of June 30, 2008) on net income attribution and future exchangeability of membership interests for Class A common stock.
- Compensation Liabilities: Assess the level of unrecognized RSU compensation expense ($522.5 million) and its impact on future operating expenses.
- Regulatory Capital: Confirm compliance with net capital requirements for subsidiaries in the U.S., U.K., and France, particularly given the new SIBHC status.