Jefferies & Co. Earnings: The Good, The Bad And The Excuses

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Jefferies & Co reported fourth quarter earnings today. The firm had earnings which beat expectations, but for some not such great reasons. The earnings can be summed up as the Good, the bad and the excuses.  The firm’s revenues were in line with most analysts expectations’, but the reason is that the firm benefitted from elevated “other income,” which is typically non-recurring. Operating expenses were much higher than we expected as the firm continues to be very generous with its employees at the expense of shareholders. Lastly, Jefferies Group, Inc. (NYSE:JEF) enjoyed a $0.03 benefit from an unusually low tax rate.

Jefferies & Co. Earnings: The Good, The Bad And The Excuses

Jefferies Group, Inc. (NYSE:JEF) reported F4Q12 non-GAAP EPS of $0.35, two pennies  above the Street consensus $0.32. Net revenues were $761 million,  above the Street consensus $732 million. Management noted a $49 million revenue and $0.04 EPS contribution from the firm’s Knight Capital Group Inc. (NYSE:KCG) investment, both numbers in line with expectations.

Jefferies & Co. earned roughly $0.29 per share during F4Q12, adjusting for a $0.03 per share tax rate benefit (30% actual vs. 36% estimate) and $0.03 per share contribution from higher than expected “other income.” Total operating expenses (non-GAAP) were $635 million, approximately $24 million (4%) above consensus of $611 million.

The Good

Jefferies Group, Inc. (NYSE:JEF) had a very strong quarter in debt underwriting where revenues of $146 million were up 66% from F3Q12(despite a post-quarter end boost in debt underwriting expectations given strong industry-wide volumes). Equities revenues of $177 million were 10% above many forecasts despite what was another slow quarter for trading volumes.

The Bad

While total F4Q12 net revenues of $761 million were in line with forecasts, higher than expected “other income” ($62 million actual vs. estimates $35 million estimate) made up for slack in other areas. For example, fixed income sales & trading revenues of $293 million, although up 10% from a slow F3Q12, were 9% below estimates for the quarter as Jefferies & Co. did not benefit from a favorable trading environment .

Jefferies & Co.’ equity underwriting and advisory investment banking revenues were also below expectations, with the latter down 37% from F3Q12. Total operating expenses (non-GAAP) of $635 million were up 5% from F3Q12 and 4% above $611 million estimates. Jefferies F4Q12 compensation ratio (non-GAAP) of 59.5% was up from 59.1% in the previous quarter and well above a 56.8% estimate, while non-comp operating expenses were mostly higher than expected even after backing out $11.5 million in non-recurring items.

On the conference call,

Richard Handler – Jefferies & Co. – Chairman, CEO gave a reason for the miss. He states that:

For the fourth quarter, ended November 30, 2012, we posted net revenues of $769 million, net income to common shareholders of $72 million and earnings per share of $0.31. Net income would have been $81 million and EPS would have been $0.35 on a non-GAAP basis without the negative impact in the current quarter of fees and expenses attributable to our proposed merger of Leucadia $4.2 million, our $4.1 million contribution to the Hurricane Sandy recovery effort and certain items arising from historical acquisitions and debt extinguishment accounting gains recognized in prior quarters. Our results for the quarter were solid, considering the mix environment that persisted throughout the period. Trading markets vand volumes were reasonably robust during September and most of October, but slowed after the US election for the remainder of our fiscal year. Activity and volumes have been solid for the first few weeks of December.

For our fiscal year ended November 30, 2012, we achieved record fiscal year revenues of nearly $3 billion, net income to common shareholders of $282 million and earnings per share of $1.22. Annual net income would have been $302 million and EPS would have been $1.31 without the items I mentioned before. Our record annual net revenues reflect our increased market share and our significantly enhanced global position and brand, during a year in which the environment was often challenging and volatile. Short periods of relative calmness in the financial markets were  interrupted by slowdowns in both trading volumes and Investment Banking activity stemming from uncertainty about the EU and inconsistent momentum in the US economy. Consistent with recent periods and as Peg will describe in more detail, at November 30, our balance sheet was about $36 billion or 9.6 times equity. Our liquidity buffer again exceeded $4 billion and our Level 3 assets continue to represent about 3% of our trading inventory.

The combination of our well capitalized and highly liquid balance sheet along with our record net annual revenues underscores the position of strength with which we enter our proposed merger with Leucadia, which we announced on November 12. We do not intend to change Jefferies business model or strategy. Going forward, we will continue our 50 year focus on clients first. We will continue to strive for market share gains from our full service, global platform and our much enhanced competitive position. That said, our top priority for 2013 will be to improve operating leverage and drive margin improvement with the goal of delivering a solid return on equity for our shareholders.

Disclosure: No position

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