Business Context and Reporting Period
Lazard Ltd, a Bermuda holding company, reported results for the quarterly period ended September 30, 2008. The company operates primarily through two segments: Financial Advisory (M&A, restructuring, capital raising) and Asset Management (equity, fixed income, and alternative investments). A significant portion of the company's operations is conducted through Lazard Group LLC, in which Lazard Ltd held a 62.2% interest as of the reporting date. The period was characterized by severe global financial market volatility, a contraction in credit markets, and the impact of the Lazard Asset Management (LAM) Merger.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Total Revenue | $439.5 million | $1,292.0 million | $580.1 million | $1,431.5 million |
| Net Revenue | $405.8 million | $1,181.3 million | $542.0 million | $1,332.6 million |
| Operating Income (Loss) | $(134.7) million | $(29.0) million | $118.6 million | $286.0 million |
| Net Income (Loss) | $(77.0) million | $(34.8) million | $40.3 million | $95.9 million |
| Net Income (Loss) Per Share (Basic) | $(1.17) | $(0.61) | $0.79 | $1.87 |
| Cash and Cash Equivalents | $774.9 million | As of Sep 30, 2008 | ||
| Total Assets | $3,324.7 million | As of Sep 30, 2008 | ||
| Total Liabilities | $2,932.4 million | As of Sep 30, 2008 | ||
| Senior Debt | $1,150.0 million | As of Sep 30, 2008 |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 25% for the quarter and 11% for the nine-month period compared to the prior year. Investment banking fees dropped 30% (quarterly) and 9% (year-to-date) due to a significant contraction in global M&A activity. Money management fees declined 5% quarterly but increased 7% year-to-date, driven by a 2% increase in average Assets Under Management (AUM) for the nine-month period, despite a 20% drop in total AUM by period-end due to market depreciation.
- Profitability Impact: The company reported a net loss for both periods, a reversal from profitability in 2007. This was primarily driven by a $199.6 million pre-tax charge related to the LAM Merger (including $197.6 million in compensation expense). Excluding the LAM Merger, operating income would have been $64.8 million for the quarter and $170.6 million for the nine-month period.
- Expense Management: Compensation and benefits expense increased significantly on an as-reported basis due to the LAM Merger charge. Excluding this charge, compensation expense decreased 27% for the quarter and 11% for the nine-month period, aligning with lower operating revenue.
- Counterparty Losses: The company recorded a $12.4 million provision for losses related to the bankruptcy of Lehman Brothers Inc., a prime broker, and fully reserved the amount of $11.4 million not received from account transfers.
Guidance, Outlook, and Risks
- LAM Merger Impact: The merger with Lazard Asset Management LLC resulted in a $108.6 million reduction in after-tax income for the quarter. The company expects annual pre-tax charges of approximately $7.0 million related to the merger through October 31, 2011.
- Market Environment: Management highlighted a challenging business environment with volatile equity and credit markets, high oil prices, and a contraction in credit markets. Global M&A activity is expected to remain challenging in 2008 and 2009.
- Restructuring Outlook: Financial restructuring activity increased significantly due to corporate debt defaults (e.g., Lehman Brothers, Washington Mutual). Management expects the Financial Restructuring practice to benefit from this trend over the next several years.
- Liquidity: As of September 30, 2008, the company held $774.9 million in cash and cash equivalents and had approximately $217 million in unused lines of credit. Management believes cash flows from operations and credit lines are sufficient to fund obligations for the next 12 months.
- Reserve Primary Fund: The company holds a $77.6 million receivable from the Reserve Primary Fund, which was suspended by the SEC. While the company expects full recovery, there is a risk of diminution in value during the liquidation process.
Investor Verification Checklist
- LAM Merger Charges: Verify the specific components of the $199.6 million pre-tax charge and the timing of future annual charges ($7 million/year through 2011).
- Counterparty Exposure: Confirm the status of the $11.4 million receivable from Lehman Brothers and the $77.6 million receivable from the Reserve Primary Fund.
- Assets Under Management (AUM): Monitor the trend of AUM, which dropped 20% year-over-year to $113.3 billion, and its impact on future fee revenue.
- Debt Maturities: Review the schedule for senior debt maturities, noting the $600 million 6.85% notes due in 2017 and the $550 million 7.125% notes due in 2015.
- Minority Interest: Understand the impact of the minority interest in Lazard Group (held by LAZ-MD Holdings), which fluctuates based on ownership percentage and net income, significantly affecting consolidated net income.