This summary is based on the second quarter fiscal 2007 earnings call conducted by Lehman Brothers Holdings, Inc. (LEH: chart) on June 12, 2007.
IR: Shaun Butler
CFO: Christopher O''Meara
Key Investors Issues
- EPS were $2.21 a share compared to $1.69 a share in the year-ago period.
- Net income rose to $1.27 billion from $1 billion a year ago.
- Revenue rose to $5.51 billion from $4.41 billion a year earlier.
Second Quarter Highlights
Market conditions improved steadily over the period and were generally favorable for businesses, despite the slowing GDP growth in the U.S. and Japan and the early risk layer the company saw that carried over from the end of last quarter.
Global equities rallied strongly following the late February sell-off, driven by better than expected earnings results in the U.S. and Europe, coupled with a continued increase in M&A and LBO activity. Global equity markets rose approximately 8% in local currency terms, with Europe and the U.S. rising approximately 9% and Asia 5%. Several indices reached all-time highs, including the Dow, the S&P 500, the FTSE Europe, the FTSE Asia and the Hang Seng. Global equity trading volumes rose approximately 13% in dollar value terms compared to the prior quarter, with activity increasing the most in Europe followed by the U.S.
In the fixed income capital markets, interest rate actions by central banks remained fairly benign.
The Federal Reserve and the Bank of Japan kept rates unchanged while the European Central Bank increased rates once and then again last week. The Bank of England raised interest rates once over the course of the quarter.
High grade credit spreads widened, while high yield and emerging market credit spreads tightened to their all-time narrowest levels as investor demand for incremental yield continued to drive risk premiums lower.
Conditions in the U.S. subprime mortgage business remained challenging, although the company did see some signs of improvement by the end of the period.
The company continues to believe the subprime market challenges are, and will continue to be, reasonably contained to this asset class.
All of these conditions provided a strong underpinning to M&A and underwriting activity. The volume of announced M&A transactions was $1.7 trillion, rising 69% sequentially and surpassing the prior record set in 2000.
- In equity underwriting, volumes increased 23% versus the prior period, driven by an increase in IPO and convertible activity.
- Debt underwriting volumes grew by 8% compared to the sequential period.
In asset management, flows remained solid across asset classes.
- With this favorable environment net revenues were $5.5 billion, up 25% year over year and up 9% from the previous record set last quarter.
- Net income was $1.3 billion, up 27% from the prior year and up 11% from last quarter''s record level.
- EPS was $2.21, up 31% year over year and up 13% from the first quarter.
This strong financial performance illustrates the momentum established in franchise, and ability to translate product breadth and growing wallet share with clients into a higher level of earnings.
The businesses that showed the strongest increases in this period are areas where the company has made considerable investments over the past number of years and have continued to improve the overall level of client related revenues as evidence by a record level of capital market sales credits and highest level of revenues ever in fee-based businesses.
Performance Analysis of Segments
Investment Banking Segment
