Lazard Ltd. LAZ reported a positive surprise of 1.7% in second-quarter 2016 which led to a rise of 3.26% in its share price. The company reported adjusted earnings of 61 cents per share, surpassing the Zacks Consensus Estimate by a penny. However, the reported figure compared unfavorably with 98 cents earned in the prior-year quarter.
Results were driven by lower operating expenses. However, deteriorating top-line performance was recorded on the back of lower M&A (mergers and acquisitions) advisory activity. Furthermore, lower AUM was a major drag.
Adjusted net income in the quarter came in at $80 million, down 38% year over year. On a GAAP basis, Lazard’s net income came in at $80 million or 61 cents per share, compared with $374 million or $2.82 in the prior-year quarter.
Revenue Pressure Persist with Effective Cost Control
In the second quarter, adjusted operating revenues came in at $542 million, down 11% year over year. The slump can chiefly be attributed to a decrease in financial advisory revenues as well as asset management revenues. However, revenues outpaced the Zacks Consensus Estimate of $532 million.
Adjusted operating expenses were around $418.6 million in the quarter, down 6.4% year over year. Lower compensation and benefits expenses were partly mitigated by higher non-compensation expenses.
Adjusted compensation and benefits expense decreased 9% on a year-over-year basis to $306.4 million. Adjusted non-compensation expense for the quarter was $112.2 million, up 2% year over year.
The ratio of compensation expense to operating revenue was 56.5% compared with 55.6% in the prior-year quarter. The ratio of non-compensation expense to operating revenue was 20.7% compared with 18.1% in the prior-year quarter.
The company affirmed its annual targets of an adjusted non-compensation expense-to-revenue ratio between 16% and 20%, while the compensation-to-operating revenue ratio target is in the mid-to high 50 percentage range.
Segment Performance
Financial Advisory: The segment’s total revenue was $287 million, down 9% from the prior-year quarter. The fall was primarily due to fall in revenues from strategic advisory, partially neutralized by higher restructuring revenues.
Asset Management: The segment’s total revenue was $251 million, down 14% from the prior-year quarter. Lower management, incentive and other fees led to the drop.
Corporate: The segment generated total revenue of $4.6 million, up considerably from $0.2 million recorded in the prior-year quarter.
Decreased Assets Under Management (AUM)
As of Jun 30, 2016, AUM was recorded at $191.9 billion, down 5.5% year over year. The company recorded net inflows of $453 million. Also, the quarter experienced market and foreign exchange appreciation of $858 million.
Average AUM came in at $192.6 billion, down 5.2% year over year.
Stable Balance Sheet
Lazard’s cash and cash equivalents stood at $646.5 million as of Jun 30, 2016, compared with $1.13 billion as of Dec 31, 2015. The company’s stockholders’ equity was $1.15 billion compared with $1.31 billion as of Dec 31, 2015.
Steady Capital Deployment Activity
During second-quarter 2016, Lazard returned $163 million to its shareholders. This included dividend payment of $48 million, share repurchase of $112 million and $3 million paid for meeting employee tax obligations in exchange of share issuances upon vesting of equity grants.
Our Viewpoint
Results reflect a decent quarter for Lazard. Though the company’s diverse footprint, steady capital deployment activities and cost containment initiatives position it favorably for the long run, macro headwinds, revenue pressure and stringent regulations put the company’s financials under strain.