Legg Mason’s (LM) third quarter earnings of 28 cents per share missed the Zacks Consensus Estimate of 31 cents per share as well as the 30 cents per share from the second quarter of 2010.
However, year-over-year the earnings came in substantially ahead of the loss of $10.59 per share reported in the third quarter of 2009 due to increased operating expenses and augmented compensation on higher revenues. This included 11 cents per share or $28.3 million in real estate lease losses. Net income was $44.9 million, compared to $45.8 million in the second quarter and a net loss of $1.5 billion in the year-ago quarter.
During the reported quarter, total revenues were $690.5 million, up 4.6% sequentially due to increase in the percentage of higher yielding equity assets and higher performance fees. On a year-over-year basis, revenues were down 4.1% due to a decline in fees earned due to lower average assets under management (AUM).
Revenue from Investment Advisory fees increased 4.8% sequentially to $591.2 million, but declined 4.2% on a year-over-year basis. Revenue from Distribution and Service fees increased 3.5% sequentially to $97.9 million but declined 2.1% on year-over-year basis. Other revenues were flat sequentially but decreased 46.2% on a year-over-year basis to $1.4 million.
Operating margins declined to 17.9% from 21.0% in the prior quarter and from 20.9% year-over-year, driven by the impact of its real estate lease losses.
As of Dec 30, 2009, Legg Mason’s AUM was $681.6 billion, down 3% sequentially from $702.7 billion, driven by increased outflows. On a year-over-year basis, AUM was down 2% from $698.2 billion. Fixed income represented 54% of the consolidated AUM as of Dec 31, 2009, liquidity represented 21% and equity comprised 25%. During the quarter, fixed income outflows were approximately $24 billion, equity outflows were $4 billion and liquidity inflows were $2 billion. Total outflows of $33 billion were a significant improvement against the $8 billion outflow in the second quarter of 2010.
At the end of the quarter, Legg Mason had approximately $1.4 billion in cash and $2.0 billion in debt. The ratio of total debt to total capital (total equity plus total debt) was 25%. In Jan 2010, the company received a tax refund of $459 million and subsequently paid down a $550 million term loan, bringing the ratio of total debt to total capital to 20%.
Business Developments
During the quarter, Legg Mason raised $315.8 million in the Western Asset Global Corporate Defined Opportunity Fund, its third and largest closed-end fund offering during 2009. Additionally, ClearBridge Advisors was selected by Pax World and Morningstar to serve as a sub-advisor in their new SRI Asset Allocation offering in four strategies: Aggressive Growth, Growth, Moderate and Conservative. As well, the company launched and registered the Legg Mason Permal Global Absolute fund, a Dublin-domiciled fund, in the UK.
The sharp decline in equity markets and dislocations in the credit markets has adversely affected the entire financial sector during fiscal 2009. Legg Mason continues to reel under the after-effects of an acute recessionary environment as most of the company’s business continues to face difficult market conditions. Going forward, management believes the conditions will remain challenging in fiscal 2010 as well.
Nevertheless, management has been able to pave a recovery path over the past three quarters, after posting five consecutive quarters of net losses, given early signs of economic recovery and improvement in business sentiments. However, the road to recovery will be a long and challenging one.
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