LAZARD, INC. THIRD QUARTER 2026 EARNINGS - LAZARD INC

Financial Performance:

• Firm-wide adjusted net revenue increased 11% year-over-year in Q3 2026, reaching record levels in Financial Advisory ($465M Q3, $1.3B YTD).
• Asset Management adjusted net revenue was $330M in Q3 and $970M YTD; management fees hit a record $321M in Q3 (+18% YoY).
• Asset Management AUM stands at $284B (up 7% YoY), with record gross inflows of $54B in the first nine months.
• Compensation ratio was 69.9% for Q3; non-compensation ratio was 19.3% (ratio of $156M expense).
• Effective tax rate for Q3 was 38.1%, with a full-year expectation in the high 20s.
• Capital allocation included $88M returned to shareholders in Q3 ($49M dividend, $33M buybacks); a new quarterly dividend of $0.50/share was declared.
• Revenue included a standard pull-forward of transactions closing just after September 30th, consistent with the two-year average.

Guidance and Future Outlook:

• Lazard expects Lazard CL (post-acquisition) to generate approximately $500M in revenue and be accretive to earnings in 2027.
• Second-half revenue is expected to outperform the first half for the second consecutive year, driven by strong momentum.
• The weighted pipeline for 2027 is projected to be roughly double the 2026 pipeline on a revenue-weighted basis.
• Management anticipates a potential acceleration of private capital M&A in the future, currently held back by valuation disconnects.
• Long-term strategy "Lazard 2030" is on track, with a focus on decoupling expense growth from revenue growth via operational efficiency.
• Future margin expansion is expected to exceed the embedded 2030 goals once efficiency initiatives regarding centralization and AI fully materialize.

Business Segments and Product Lines:

• Financial Advisory: Achieved record Q3 revenue driven by M&A; lead table position is best in over a decade. Investments in hiring/promoting 80 MDs over three years are yielding results, particularly in the Americas and UK.
• Private Capital Advisory: Performing ahead of acquisition assumptions; Lazard CL will combine Lazard's private capital group with Campbell Lutyens to form the leading global platform for primary fundraising and secondary advisory.
• Asset Management: Investment performance is at its best in five years, with 70% of client AUM outperforming benchmarks over one year. Strong flows into quantitative equity, emerging markets, and infrastructure strategies.
• Restructuring: Expected to see continued growth due to elevated financial distress risks among AI ecosystem firms and lower-performing market segments.
• Lazard CL Launch: Acquisition of Campbell Lutyens is approved, with a planned closing and launch of the new entity in early November.

Market and Competitive Landscape:

• Conflict clearances are up >30% YoY (dollar-weighted) and >85% for deals over $5B; announced lead table rankings are the strongest in over 10 years.
• M&A activity remains robust despite rising interest rates, driven by strategic needs for scale, vertical integration, and geographic reconfiguration, particularly in tech and AI.
• Regulatory environment in the U.S. is currently constructive, encouraging large-scale strategic transactions.
• European macro conditions are challenging, but deal flow remains strong as many European targets are global firms with sales outside the region.
• Private Equity M&A is currently suppressed by valuation gaps but may see a rebound driven by LP pressure for liquidity.

Risks and Challenges:

• Valuation Disconnects: Significant gaps between seller expectations and market valuations, particularly in software and private equity, are delaying liquidity events.
• Interest Rates: Higher rates increase financial distress at the lower end of the market but may not deter large strategic deals driven by long-term necessity.
• Regulatory Uncertainty: Potential shifts in antitrust enforcement (DOJ vs. FTC) and global regulatory frameworks post-2028 could alter the M&A landscape.
• Talent Retention: Competitive market for senior banking talent; compensation deferral structures are being reviewed to improve retention and attract top-tier MDs.
• Technology Disruption: While creating opportunities for advisory, AI uncertainty continues to impact activity in the software sector.

Management Commentary and Tone:

• Tone is highly confident and optimistic, citing "strong underlying momentum," high internal morale, and being ahead of the internal Lazard 2030 schedule.
• Management emphasizes the successful "duality" of excelling in both large-cap strategic M&A and private capital advisory simultaneously.
• Peter Orszag (CEO) and Tracy Farr (CFO) defended the valuation and strategy, stating the firm is not missing the M&A cycle but emerging from a "J-curve" period of investment.
• Significant focus placed on the integration of AI to boost productivity, reduce the associate-to-MD ratio, and transform client delivery.
• Management clarified that while the firm is open to structural changes in Asset Management if they maximize shareholder value, the current trajectory is preferred.

Analyst Questions and Answers:

• Compensation Ratio: Analysts queried the impact of potential deferral reductions. Management clarified this is an accounting acceleration of expense recognition to improve ratio quality and reduce share dilution, not a change in total awarded compensation.
• Pipeline Clarification: Peter Orszag confirmed the "double pipeline" metric is revenue-weighted and probability-adjusted for 2027 closing, indicating significant future revenue potential.
• M&A Drivers: Management attributed strong activity to strategic imperatives (scale, supply chain, geopolitical shifts) rather than just a favorable regulatory window, though the 2028 election may provide a marginal "seize the moment" incentive.
• Expense Efficiency: Tracy Farr identified vendor rationalization, workflow centralization, and AI adoption as key areas for future cost savings, aiming to decouple expenses from revenue.
• Stock Valuation: Management acknowledged the stock may not yet reflect progress but highlighted the firm is on schedule with internal targets and generating record forward indicators.
• Restructuring Outlook: The firm expects a divergence in the market where top-tier firms pursue M&A for frontier status while laggards face distress, creating concurrent opportunities in both areas.

Other Key Points:

• The firm is reviewing deferral practices to align more closely with market averages, which could raise the reported compensation ratio by a few percentage points in 2026 before declining subsequently.
• Recent strategic hires include a head of defense/emerging tech and expansion teams in Paris and Switzerland.
• The firm's culture score regarding employee pride and happiness is at all-time highs, attributed to the Lazard 2030 strategy and AI adoption.
• Asset Management has launched approximately half a dozen active ETFs recently, with more planned to expand the product suite.
• The acquisition of Campbell Lutyens is already showing early synergy potential in real estate, vendor, and IT integration.