Jefferies Group Inc. Q2 2010 Earnings Call Transcript - TheStreet

Jefferies Group Inc. Q2 2010 Earnings Call Transcript

Jefferies Group Inc. Q2 2010 Earnings Call Transcript
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Jefferies Group Inc. (JEF)

Q2 2010 Earnings Call

June 22, 2010 9:00 AM ET

Executives

Richard Handler – Chairman and CEO

Brian Friedman – Chairman, Executive Committee

Peg Broadbent – Chief Financial Officer

Analysts

Steve Stelmach – FBR Capital Markets

Chris Kotowski – Oppenheimer & Company

Douglas Sipkin – Ticonderoga

Michael Wong – Morningstar Equity

Casey Ambrich – Millennium Partners

Daniel Harris – Goldman Sachs

Lauren Smith – KBW

Presentation

Operator

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Welcome to the Jefferies 2010 Fiscal Second Quarter Financial Results Conference Call. A question-and-answer period will follow managements prepared remarks. (Operator Instructions)

As a reminder, this conference call is being recorded. A press release containing Jefferies 2010 fiscal second quarter financial result was distributed via Business Wire before the market opened today, and can be accessed at Jefferies website

www.jefferies.com

.

Some of the comments made in this conference call may include forward-looking statements. These forward-looking statements may contain statements about management’s current assumptions, expectations, strategic objectives, growth opportunities, business and prospects. These forward-looking statements are not statements of historical fact and represent only Jeffries belief as to future performance. They usually include the words such as, continue, will, believe, should, estimate, or other similar expressions.

Actual results could differ materially from those projected in these forward-looking statements. Please refer to Jeffries Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010 and in Jeffries Forms 10-Q and 8-K for discussions of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.

I would now like to introduce your host for today’s call, Mr. Richard Handler, Chairman and CEO of Jefferies. Mr. Handler, you may begin your conference.

Rich Handler

Good morning. And thank you for joining our discussion of Jefferies second quarter fiscal results. I’m Rich Handler, CEO of Jefferies and with me on the call today are Brian Friedman, Chairman of our Executive Committee; and Peg Broadbent, our Chief Financial Officer.

For the three-month period ended May 31, 2010, we posted net revenues of $670 million, net income to common shareholders of $85 million and earnings per share of $0.41.

We are pleased with our strong results, as they reflect progress in our continual efforts to grow, diversify and integrate Jefferies. Our results continue to be well balanced across our major business lines, Equities, Fixed Income and Investment Banking.

Our record quarterly banking results are a sure sign of the continuous strengthening of Jefferies presence and our enhanced brand. Our client focused sales and trading businesses and our increasingly vibrant investment bank realize solid levels of regular business flow even though market indexes were down significantly during the quarter and May was clearly choppy at best.

Our business model remains weighted towards rapid turnover of our liquid inventory rather than positioning of level three or other assets for speculative or proprietary purposes. The results in our global equity business reflect the significant investment we have made in our research and training platform, as we’ve invested heavily to enhance our traditional cash execution capabilities.

Solid Fixed Income results are also reflecting investments we have made in the last two years, which more recently include global expansion. Our firm continues to make enormous progress and we’re staying true to our firm-wide goals of integrating and globalizing our new businesses with our longstanding businesses, while focusing on quality ideas and execution for ever increasing array of clients.

Now, I’ll turn over to Peg to discuss our results in more detail.

Peg Broadbent

Thank you, Rich. As we mentioned when we announced the change in our fiscal year-end November 30th, we are comparing our three months ended May 31st results, which includes March to the comparable three-month period ended June 30, 2009.

As Rich said, our net revenues for the second fiscal quarter were $670 million, an increase of 13% over the second quarter of 2009 and 15% up versus $583 million reported for the first quarter of 2010.

Our net income to common shareholders was $85 million and earnings per share $0.41, which is an approximately 37% increase from the second quarter of 2009 and approximately a 15% increase from the results of $74 million and $0.36 per share in the first quarter of 2010.

Fixed Income revenues were $231 million, 33% below the cyclical influenced second quarter of 2009 and an 8% increase from the $213 million performance in the first quarter of 2010.

Equities net revenues of $169 million were a 37% increase from the second quarter of 2009 and a 2% increase from the $165 million generated in the first quarter of 2010.

Investment Banking revenues were a record $256 million, more than double the second quarter of 2009 and a 29% increase over the $198 million generated last quarter.

Asset Management revenues for the quarter were a solid $14 million versus virtually flat revenues for the second quarter of 2009. Non-compensation expenses were $138 million, compared to $136 million reported last quarter.

The successful growth of our global sales and trading platform over the last two years has driven increases in our operating costs, particularly floor brokerage and clearing, as well as technology and communications. We are working actively to optimize our processes and costs.

Also, our clearing costs have increased in recent quarters as a function of successfully growing our Fixed Income businesses, many of which are cleared by third parties. Within the next 12 months we expect to bring the clearing of most of our Fixed Income activities in-house. We’re adding support teams to accommodate just undertaking. However, we anticipate that the cost of so doing will be more than offset by the corresponding reduction in the clearing costs that we pay to third parties.

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