Lazard Ltd (LAZ.N) reported a 40 percent drop in first-quarter profit, missing analysts' expectations, as the investment bank's revenue suffered from a lack of big-ticket deals.
Lazard lost significant market share even in a tough first quarter across Wall Street, Thomson Reuters data show, as it advised on a large number of smaller deals that closed in that period.
Lazard announced additional cost-cutting, an issue it has been working on for some time and one that activist shareholder Nelson Peltz raised in a presentation last year after building a 5 percent stake in the bank.
Lazard Chief Executive Ken Jacobs said many of the bank's small and mid-sized clients rushed to close their sales in the fourth quarter, before tax rates were due to rise at the beginning of 2013. As a result, fewer deals moved into the first quarter, which ate into revenue.
And some of the bigger deals Lazard is advising on - such as Anheuser-Busch InBev SA's (ABI.BR) $20.1 billion deal to buy the rest of Grupo Modelo SAB de CV (GMODELOC.MX) - did not close in the first quarter as expected.
"On the advisory side, it was a soft quarter," Jacobs said in an interview.
Lazard shares rose 1.4 percent to $33.64 following its earnings report. The bank said it would raise its quarterly dividend by 25 percent, to 25 cents per share, starting next month.
Morningstar analyst Michael Wong said shares likely rose on the higher expense saving target outlined by management. "It's the only thing that really looks all that hopeful in there," he said. "It gives them a little additional buffer to be able to hit their operating margin targets."
Lazard was not the only investment bank to post weaker advisory revenue in the quarter. But Lazard's 37 percent drop was steeper than its bigger peers. JPMorgan Chase & Co's (JPM.N) revenues from advising on fees fell 9 percent, Morgan Stanley's (MS.N) dropped by nearly 20 percent, and Goldman Sachs Group Inc's (GS.N) by less than 1 percent.
Lazard tends to rely on restructuring deals to bolster revenue when merger activity slows down, but last quarter both businesses suffered, with financial advisory revenue falling 39 percent to $168.5 million. Merger advisory revenue fell 37 percent to $120.8 million, and restructuring advisory revenue fell 53 percent to $33.0 million.
The asset management business was a bright spot on the earnings report, with revenue up 14 percent to $239.7 million, but even with that increase overall operating revenue slid 17 percent to $413.7 million.
Net income attributable to common shareholders fell to $15.4 million, or 12 cents per share, from $25.6 million, or 20 cents per share, a year earlier.
On an adjusted basis, excluding charges related to a cost- saving initiative, the company earned 28 cents per share.
Analysts were expecting profit of 31 cents per share on revenue of $454.6 million, according to Thomson Reuters I/B/E/S.
Boutique investment bank Greenhill & Co Inc (GHL.N) reported higher advisory revenue last week, but missed analysts' estimates as negative investment revenues weighed on its profit.
MORE COST CUTTING AHEAD
Lazard represented clients in 31 deals globally that closed in the first quarter, making it the third-strongest bank by that metric during the quarter, Thomson Reuters data show.
But Lazard's deals were much smaller, on average about $300 million compared with $1.4 billion for Goldman Sachs, for example.
The average first-quarter completed deal size for the top 30 advisers was $1 billion. Lazard ranked eighth on that list, which evaluates the size of transactions by adding the money paid for the target company to the target's debt.
Because Lazard's deals were so much smaller, its market share shrank to 5.5 percent, from 10.4 percent in the same quarter a year ago.
As the bank faces revenue pressure, Lazard Chief Operating Officer Alex Stern said the investment bank will cut another $10 million to $20 million from its expenses by reducing staff, renegotiating service contracts and scaling back investments in certain businesses.
Those cuts come in addition to a $125 million expense savings program Lazard outlined last year that is expected to be fully implemented by the end of the second quarter and to start bolstering annual profits next year.
Lazard has so far spent $129 million implementing the cost-cutting program, with $26 million of those expenses in the first quarter. It will spend up to another $26 million in the second quarter, Stern said.
The investment bank aims to get to an operating profit margin of 21 or 22 percent this year, and 25 percent next year, through the cost cuts. It wants to reduce compensation expenses to a "mid-to-high" 50 percent range from a current level of 60 percent.
Executives said they are still on track for those targets.
(Reporting by Tanya Agrawal in Bangalore; Editing by Sriraj Kalluvila, Gary Hill)