Lazard Ltd. Form 10-Q Summary
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Lazard provides financial advisory services and asset management globally; amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | First 9 months 2023 | First 9 months 2022 |
|---|---|---|---|---|
| Total revenue | $543.2 | $746.4 | $1,767.4 | $2,123.2 |
| Net revenue | $523.9 | $726.7 | $1,709.5 | $2,061.2 |
| Operating income (loss) | $(4.9) | $158.1 | $(151.9) | $443.7 |
| Net income (loss) attributable to Lazard Ltd | $7.1 | $105.8 | $(139.0) | $315.2 |
| Diluted earnings (loss) per share | $0.06 | $1.06 | $(1.60) | $3.03 |
| GAAP operating margin | (0.9)% | 21.8% | (8.9)% | 21.5% |
- Revenue drivers: Q3 investment banking and advisory fees were $265.3, down 42%; asset management fees were $265.6, down 5%. For the first nine months, advisory fees fell 29% and asset management fees, including incentive fees, fell 7%.
- Segment results: Financial Advisory operating loss was $29.6 in Q3 and $167.7 for nine months, versus income of $114.9 and $298.2 in the prior-year periods. Asset Management operating income was $52.8 in Q3 and $107.9 for nine months, down 19% and 51%, respectively. Asset Management AUM was $228.3 billion at September 30, up 6% from year-end 2022, principally due to market appreciation; nine-month net flows were approximately flat.
- Costs and margins: Q3 operating expenses declined 7% to $528.8, but nine-month expenses rose 15% to $1,861.3. Adjusted compensation was 68.4% of operating revenue in Q3 and 70.7% for nine months, compared with 60.0% and 59.0%. Adjusted non-compensation expense was 25.9% and 25.2%, compared with 17.7% and 17.9%. Non-GAAP earnings from operations were $30.5 in Q3 and $68.5 for nine months.
- Cash flow: Operating cash flow was $(176.9) for the first nine months, versus $519.7 in 2022. Cash used in financing was $1,420.9, including $585.9 distributed following LGAC’s liquidation, $129.4 in dividends, and $102.1 in share repurchases. Cash, bank deposits/short-term investments and restricted cash together declined from $2,639.4 at year-end to $1,006.8; this total includes restricted cash and should not be treated as wholly available liquidity.
- Debt and liquidity: Senior debt principal was $1.70 billion (carrying value $1.69 billion), with notes maturing from 2025 to 2029. Lazard reported $653.4 of cash and cash equivalents, approximately $209 of unused credit lines, and no revolver borrowings. It reported compliance with debt covenants; leverage and interest coverage ratios were 2.86x and 11.51x, respectively, against stated limits.
Material changes and unusual items
- Results weakened sharply versus 2022, particularly in Financial Advisory, amid lower M&A activity. In the first nine months, completed M&A transaction value globally fell 41%; transactions over $500 million fell 40% in value and 41% in number.
- The 2023 nine-month results include $183.2 of costs associated with firm-wide cost-saving initiatives, including $166.3 of severance and employee termination expense. A further $63.0 remained accrued at September 30.
- A $40.4 benefit from revaluing the tax receivable agreement liability reduced nine-month operating expenses. The obligation was $118.5 at September 30, down from $191.2 at year-end.
- LGAC was liquidated in February 2023 after failing to complete a business combination. The filing reports a $17.9 liquidation loss and a $585.9 distribution to public shareholders.
- The Q3 effective tax rate was 239.5%; management attributed the unusually high rate to geographic earnings mix, losses without tax benefits and discrete items. The nine-month effective rate was 15.2%.
Outlook, risks and contingencies
Management said the global macro environment was improving, with easing inflation and moderating expectations for further rate increases, and that the M&A market appeared to be stabilizing. However, low M&A completions persisted and management expected recovery to be slow. It cited narrowing valuation gaps, more accessible financing and continuing client engagement. The filing provides no specific earnings or revenue guidance.
Key exposures include the cyclical and transaction-dependent nature of advisory fees; market performance, currency movements and client flows affecting AUM and fees; competition for and retention of professionals; investment and counterparty risk; and access to liquidity. Management stated that existing liquidity sources should meet obligations for the next 12 months. Pending legal matters were not expected, in aggregate, to materially affect business or financial condition based on information available, though outcomes in any quarter could be significant relative to earnings. No material changes to previously disclosed risk factors were reported.
On October 26, 2023, Lazard announced its intention to convert to a U.S. C-corporation effective January 1, 2024, subject to global regulatory requirements; the conversion was expected to be non-taxable to the company and shareholders. The board declared a $0.50 per-share quarterly dividend payable November 17, 2023.
Important facts for investors to verify
- Whether advisory activity and completed M&A transactions recover, and how that translates into Lazard’s revenue and margins.
- Whether AUM growth persists and whether client outflows, market declines or currency movements pressure asset management fees.
- How quickly the cost-saving initiatives reduce recurring expenses relative to their recorded restructuring costs.
- Cash-flow generation, the distinction between unrestricted and restricted cash, and continued covenant compliance.
- Potential effects of the planned U.S. C-corporation conversion, including required regulatory approvals and actual tax consequences.