Legg Mason's (LM) Q2 Earnings Beat Estimates, Revenues Down

Legg Mason Inc. (NYSE:LM) reported positive earnings surprise of 10.5% in second-quarter fiscal 2020 (ended Sep 30). The company recorded adjusted net income of 95 cents per share, outpacing the Zacks Consensus Estimate of 86 cents. Further, the reported figure escalated 17.3% year over year.

Higher assets under management (AUM) drove the company’s performance. In addition, controlled expenses were a tailwind. Nonetheless, fall in revenues, resulting from lower investment advisory fees, was a major drag in the quarter.

Including certain one-time items, Legg Mason reported net income of $67.1 million or 74 cents per share compared with the net income of $72.8 million or 82 cents recorded in the year-ago quarter.

Revenues Decline, Expenses Drop

Legg Mason’s total adjusted operating revenues in the reported quarter came in at $617.3 million, slightly down year over year. The fall mainly resulted from decreased distribution and service fees, reduced average fund AUM earning distribution fee revenue and lower advisory fee revenues. These decreases were partially offset by increased non-pass through performance fees. However, the revenue figure outpaced the Zacks Consensus Estimate of $732 million.

Investment advisory fees slipped slightly year over year to $675.1 million in the quarter. Distribution and service fees were down 15.2% year over year to $67.1 million. Also, other revenues slumped 45% year over year to $1.1 million.

Operating expenses edged down 1% to $618.3 million on a year-over-year basis. This downside chiefly resulted from lower distribution and other costs, partly offset by higher compensation and benefits.

Non-operating expense was $19.7 million, down 20.6% year over year.

Adjusted operating margin of Legg Mason was 25% in the September-end quarter, up from the 24.5% recorded in the prior-year quarter.

Assets Position

As of Sep 30, 2019, Legg Mason’s AUM was $781.8 billion, up 3.5% year over year from $755.4 billion. Of the total AUM, fixed income constituted 57%, equity 26%, liquidity 8% and alternatives represented 9%.

Also, AUM ascended slightly on a sequential basis from the $780.2 billion as of Jun 30, 2019, driven by an encouraging market performance and other of $8.7 billion. These were partly countered by negative foreign exchange of $3.2 billion, long-term outflows of $0.2 billion, liquidity outflows of $3.5 billion and $0.2 billion in realizations.

Notably, long-term flows included equity outflows of $2.1 billion and fixed income outflows of $0.5 billion, partly offset by alternative inflows of $2.4 billion.

Additionally, average AUM was $779.8 billion compared with the $750.2 billion witnessed in the year-earlier quarter and $765.9 billion in the previous quarter.

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Strong Balance Sheet

As of Sep 30, 2019, Legg Mason had $580.9 million in cash. Total debt was $2 billion. Shareholders’ equity came in at $3.7 billion.

The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 35% compared with the previous quarter’s 38%.

Our Viewpoint

We believe Legg Mason has the potential to outperform its peers over the long run, given the company’s diversified product mix and leverage in the changing market demography. In addition to these, with strategic acquisitions, restructuring initiatives and cost-cutting measures, we anticipate the company’s operating efficiencies to improve.

Though declining revenues is a key concern, prudent expense management and higher AUM remain driving factors.