April 27, 2012 / 11:51 AM / 7 years ago

UPDATE 3-Lazard profit drops on costs, but still beats Street

* 1st qtr EPS of 20 cents vs 43 cents year-ago

* Adjusted EPS of 33 cents vs consensus 25 cents

* One-time charge of $25 million for severance pay

* Weaker asset management revenue, higher costs

By Lauren Tara LaCapra

April 27 (Reuters) - Lazard Ltd’s first-quarter earnings dropped sharply because of higher costs, but the investment bank beat analyst expectations by a wide margin when excluding a previously announced charge related to severance packages.

Lazard has had a harder time than some bigger Wall Street rivals in cutting compensation expenses, partly because of contractual obligations but also because it has historically paid a bigger portion of revenue to its investment bankers.

Last quarter, Lazard’s compensation costs of $338.3 million reflected a $25 million severance charge, as well as higher levels of deferred compensation that stem back to 2008.

The company has lately taken steps to cut both staff and pay because it is unclear whether financial markets have fully recovered, Chief Financial Officer Matthieu Bucaille said in an interview.

“We always have to be very careful that we’re adequately staffed, in particular given the uncertainty in the broader economic environment,” said Bucaille. “I think we are scaled at this stage to benefit from a recovery in the markets.”

Lazard paid out nearly 70 percent of its net revenue in compensation last quarter, a higher ratio than bigger Wall Street rivals Goldman Sachs Group, Morgan Stanley and JPMorgan.

But Bucaille said that underlying pay packages directly related to first-quarter performance reflected an assumption that Lazard will pay out 60 percent of its revenue, down from an adjusted rate of 62 percent in 2011.

“We are very focused on compensation,” Bucaille said, especially as markets remain fragile.

Although market conditions improved during the first quarter compared with a dismal end to 2011, it was still generally a weak period for investment banking business across Wall Street. Lower deal volumes led analysts to assume that profits would be weak compared with a strong first quarter in 2011.

However, Lazard’s financial advisory business reported higher revenue thanks to a sharp rise in restructuring activity, as well as an increase in fees from mergers and acquisitions and strategic advice.

“Unlike its independent advisory firm peers, Lazard grew advisory revenues both on a sequential and year-over-year basis, and its asset management business held up quite a bit better as well,” said David Trone, an analyst with JMP Securities.

Lazard, which is one the largest independent advisory firms globally, competes against big Wall Street banks like Goldman as well as smaller firms like Evercore Partners Inc for positions on big deals. Lazard’s first-quarter results were helped by its position on three of the 10 largest M&A deals, as well as its advisory role in Greece’s sovereign bond exchange.

Lazard’s other major business, asset management, reported a 6 percent decline in revenue. The division faced $200 million in net outflows during the quarter and a corresponding decline in management fees, though results were better than the previous period, when investor activity was at a lull.

Overall, Lazard’s net revenue rose 11 percent, to $486 million from $438 million in the year-ago period.

Its operating expenses rose 23 percent, to $448.2 million from $364.6 million a year before, reflecting both the higher compensation costs and higher spending on items like office space, equipment and marketing.

Lazard’s net income attributable to common shareholders dropped 54 percent, to $26 million, or 20 cents per share, from $55 million, or 43 cents per share, in the year-ago period.

Adjusting for the one-time charge, Lazard’s earnings fell 23 percent, to $44.8 million, or 33 cents per share. Analysts had expected a comparable profit of 25 cents per share, according to Thomson Reuters I/B/E/S.

Lazard’s shares were up 1.2 percent to $27.10 in afternoon trading. The stock was up 2.6 percent so far this year as of Thursday’s close.

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