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Lazard Ltd.’s (LAZ - Analyst Report) second-quarter 2012 adjusted earnings came in at 25 cents per share, in line with the Zacks Consensus Estimate. However, the results compare unfavorably with the prior-year quarter’s earnings of 48 cents.

The results were impacted by increased operating expenses and decreased revenue.  Moreover, reduced assets under management (AUM) were a negative for the quarter. Yet the company holds a strong capital position.

Including one-time charges in the quarter, Lazard’s second-quarter 2012 net income came in at $30.8 million or 24 cents per share, compared with a net income of $62.0 million or 48 cents per share, reported in the comparable quarter last year.

Behind the Headlines

In the reported quarter, Lazard’s operating revenue, on adjusted basis, was $455.2 million, down 7% from the prior-year quarter. The decline was mainly attributable to decreased financial advisory revenues and asset management fees, partially offset by a hike in revenue in the Corporate segment. Total revenue also lagged the Zacks Consensus Estimate of $461.0 million.

Operating expenses hiked 1.5% year over year to $391.0 million, attributable to a rise in non-compensation expense. Management expects amortization expense of roughly $341 million in 2012, up from $289 million recorded in 2011.

Segment Performance
Financial Advisory: The segment’s total revenue stood at $242.6 million in the quarter, declining 3% from $249.2 million recorded in the year-ago quarter. The fall was primarily due to a dip in restructuring revenues, partially offset by a rise in strategic advisory revenues.

Asset Management: The segment’s total revenue was $206.5 million, which declined 13% from $237.7 million reported in the year-ago quarter. The decrease was primarily due to a fall in management fees, incentive fees and other revenue.

Corporate: The segment generated total revenue of $6.0 million in the reported quarter, rising 23% from $4.9 million in the year-ago quarter.

Assets Under Management

AUM was recorded at $148.4 million as of June 30, 2012, down from $161.6 million as of June 30, 2011. Average AUM recorded was $151.0 million, compared with $161.0 million in the year-ago quarter.  

Capital Position

Lazard boasts a healthy and low-risk financial position with roughly $751 million in cash and cash equivalents as of June 30, 2012. Total stockholders’ equity was $704 million.

Capital Deployment

As of July 26, 2012, the company repurchased 1.8 million shares worth $48 million. This share repurchase comes under the company’s commitment of returning $200 million of excess cash to stockholders by 2013.

Our Viewpoint

The currently sluggish macroeconomic environment, coupled with regulatory issues, increasing expenses and a declining top line, will likely put Lazard’s profitability under pressure in the near term. However, we believe that the company’s diverse footprint and cost-curtailment initiatives will position it comfortably in the long run. Moreover, capital deployment efforts would further enhance investors’ confidence in the stock.

Currently, Lazard retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. However, one of its peers, Kohlberg Kravis Roberts & Co. (KKR - Snapshot Report) retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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