BREAKINGVIEWS-Lazard keeps antsy activists at bay
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Antony Currie
NEW YORK, Feb 7 (Reuters Breakingviews) - Lazard (LAZ.N) boss Ken Jacobs is keeping antsy activist investors at bay. He's making progress on the firm's promise last spring to boost margins. And last year Lazard returned $200 million of excess cash to shareholders, a year ahead of target. On top of that, business is looking robust.
That helps keep Jacobs ahead of the likes of Nelson Peltz, the activist whose firm Trian took a 5.1 percent stake last year. Thus far Peltz has been nothing but polite, taking pains to stress his view that Lazard is well placed to deliver good returns to shareholders. But investors of the activist persuasion tend to stay passive only until company executives come up short.
Jacobs has kept expenses under control. Awarded compensation in 2012 – which excludes deferred pay from earlier years – was $1.17 billion, essentially the same as the previous year. With revenue up 5 percent last year from 2011, that knocked almost three percentage points off the compensation ratio, leaving it at 59.4 percent of the top line.
Non-comp expenses stayed flat too. And the ratio of both categories to revenue should decrease thanks to cost cuts worth around $125 million a year that Jacobs has under way. Charges relating to the bulk of those were booked in the final three months of 2012.
Strip those charges out and Lazard's operating margin for 2012 was 19.2 percent – solidly above the 16.8 percent showing the year before and on the way to Jacobs' 2014 target of 25 percent. On top of that, handing back cash earlier than expected should please shareholders – though that did require a one-off special dividend and paying the regular fourth-quarter dividend earlier than usual.
That was made easier by better-than-expected earnings as Lazard's advisory top line continued to rise faster than the industry average. Revenue for the final three months of the year came in a quarter above analysts' estimates. Net income, excluding $103 million of pre-tax restructuring charges, was $82 million – almost double what Lazard watchers expected. So far, Peltz and his ilk have little, if anything, to complain about.
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- Lazard on Feb. 7 reported a fourth-quarter loss of $5 million after booking a pre-tax charge of $103 million relating to a previously announced cost-saving initiative that could rack up to $130 million in one-off expenses. Excluding the charge, net income for the quarter was $82 million, or 61 cents a share, beating the consensus estimate of sell-side analysts of 33 cents. Revenue for the quarter was $574 million, compared with expectations of $477.2 million.
- Full-year 2012 net income was $195 million, or $1.44 a share on revenue of $1.97 billion. Reported compensation, excluding the fourth-quarter charge and $25 million to cover redundancies earlier in the year, was $1.22 billion, or 61.8 percent of revenue. Awarded compensation for the year, which excludes the cost to the firm of deferrals from 2008, was $1.7 billion, or 59.4 percent of revenue, down from 62 percent in 2011.
- Non-compensation costs for the year were $421 million, excluding restructuring charges, or 21.4 percent of revenue – similar to the level seen in 2011. Lazard is targeting 16 percent to 20 percent for this measure over the cycle.
- Lazard returned $540 million to shareholders in 2012, including $200 million of surplus cash, which was a 2013 target. Returns included a $23 million special dividend in the fourth quarter as well as an early payment of the $23 million regular fourth-quarter dividend.
- The firm's operating margin, based on awarded compensation for 2012, was 19.2 percent, compared with 16.8 percent in 2011. Lazard is targeting a 25 percent operating margin for 2014.
- Lazard release: link.reuters.com/jaw75t
- Reuters: Lazard beats estimates on higher advisory revenue [ID:nL4N0B74Y9]
Small is beautiful [ID:nL1N0AT6E4]
Necessary Grinch [ID:nL1E8LP58Z]
- For previous columns by the author, Reuters customers can click on [CURRIE/]
(Editing by Richard Beales and Martin Langfield)
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