This summary is based on the second quarter fiscal 2008 earnings call conducted by Legg Mason Inc. (LM: chart) on October 24, 2007.
Management:
Chairman, CEO: Chip Mason
SVP of Finance: Barry Bilson
SVP, Head of Corporate Marketing and Communications: Tim Munoz
Key Investors Issues
- Net income was up 24% to $178 million or $1.23 a share.
- Revenue increased to $1.2 billion on strong growth in assets under management.
- The firm repurchased 1.1 million shares at a cost of $94 million.
Year-to-date Highlights
- Total revenues were $2.4 billion, up 15% from the prior year period, reflecting an increase of 14% in the average AUM and a $37 million increase in performance fees.
- Net income was $368.5 million or $2.55 per share, an increase of 23% from $299.7 million, or $2.08 per share in 2006.
- Higher net income was a result of higher AUM and performance fees, as well as a $13.1 million gain in other non-operating income and a lower effective state income tax rate.
- Cash income was $470.6 million or $3.25 per share, up 19% from $395.6 million, or $2.74 per share for the prior year period.
Second Quarter Highlights
Net income was $177.5 million or $1.23 a share, up 23.5% from $143.7 million or $1.00 per share in the prior year following strong revenue growth driven by investment advisory fees from separate accounts.
At the end September, 55% of the firm’s mutual fund assets rated by Morningstar were 4 or 5 stars, versus 39% of mutual fund assets so rated at the end of June 2006, when the firm commenced the fund realignment reflecting focus and discipline among key managers who are committed to long-term growth.
Operating expenses, at $894 million were 12.3% higher than the $795.7 million realized in the prior year as a result of a $62 million increase in compensation and benefits expenses primarily due to incentive accruals on increased revenues at the investment managers.
Increased distribution expenses paid to third parties as a result of increased revenues that are passed through as a direct cost of selling products also contributed to the increase in expenses.
Expenses also increased because of higher occupancy expense, up 43% to $31.5 million as a result of office relocations, and a 14.4% rise in investments in technology and data services infrastructure.
Revenues increased 14% from $1 billion in 2006 to $1.2 billion, reflecting an increase of 14% in average assets under management (AUM).
- Recurring investment advisory fees were up 16% from the same period last year, due to a higher level of average AUM.
- Total AUM increased to $1.012 trillion, up 13% from $891.4 billion in 2006.
- Net client cash flows were $300 million, with net client cash flows in long-term fixed income at $11 billion.
Liquidity outflows were $1 billion and there were negative client cash flows in equity of $9.6 billion.
An expected large retirement plan restructuring, and the loss of a college savings plan account, resulted in one-time outflows which contributed over $2 billion of the total equity client cash outflows.
Average AUM was $994.7 billion, compared to $870.3 billion in the prior year with assets managed for non-U.S. domiciled clients representing 33% of total AUM.
- Institutional division assets grew from $471.4 million in 2006 to $530.3 million primarily at Western Asset Management and Brandywine Global.
- Assets at the Wealth Management and Managed Investments divisions declined as a result of outflows in key equity products at ClearBridge Advisors, Legg Mason Capital Management and Private Capital Management.
- Western Asset Management continued to win fixed-income mandates as investors shifted to bond holdings, reflecting a more conservative approach to mixed signals from the markets.
Across the sector, investors continue to diversify their U.S. holdings toward a more global allocation.
