Jefferies Slows Hiring to Focus on Market Share Growth

Though Jefferies Group's Q2 profits beat analysts’ estimates with fixed income trading revenue rising 31 percent from a year earlier, the firm plans to slow its hiring effort going forward, the chairman of its executive committee reported this week.

“Both product-wise and geographically, we think we now have a substantial portion of the long-term architecture of our firm,” Brian Friedman, chairman of the firm’s executive committee, said during a conference call with analysts on Tuesday.

“Our emphasis is in going deeper, growing our market share,” Friedman said, adding that Jefferies wants to benefit from the maturation of the people it’s already hired.

The company’s chief financial officer, Peregrine Broadbent, added, "On May 31, we had a total of 3,809 employees, a net decrease of 42 from the 3,851 at the end of the first quarter, primarily reflecting our ongoing efforts to streamline and create efficiencies within our support functions.”

Jefferies set aside $423.5 million for compensation expenses in the fiscal second quarter, 1.9 percent less than a year earlier. Total non-interest expenses rose to $600 million from $592.3 million.

Jefferies’ revenue from fixed income trading jumped to $292.6 million from $223.1 million a year earlier.

Smaller balance sheet anticipated

Jefferies CEO Richard Handler explained early in the conference call, “We basically have told people, given the environment that we see in terms of the challenging nature of Europe and the challenging domestic economy, that we're going to have a relatively smaller balance sheet for the foreseeable future, which we've done now for the last three quarters.”

Broadbent went on to report that fixed income revenues were $293 million for the second quarter, up 31 percent from last year's second quarter of $223 million and down from the strong first quarter of $339 million. Equities net revenues for the second quarter were $120 million, lower than both the $165 million reported in the comparable quarter last year, and the first quarter's $136 million. Asset management revenues for the quarter were about $2 million versus the $6 million reported for the first quarter and the $10.5 million reported for the year-ago quarter. About $8 million of fee income this quarter was offset by $6 million of unrealized markdowns in investments in unconsolidated funds.

“Our team has really established solid niches with our clients, and we’re gaining a reasonable market share” in fixed income trading, Handler said on the conference call.

Analysts had been lowering their estimates in recent weeks amid a decline in fixed income and equity markets and heightened concern that Europe’s debt crisis would spread. Revenue from trading fell 16 percent from the first quarter.

Overall, Jefferies’ net income for the three months ended May 31st dropped 21 percent to $63.5 million, or 28 cents a share, from $80.6 million, or 36 cents, a year earlier, the New York-based firm said in a statement. That beat the average estimate of 27 cents in a Bloomberg survey of eight analysts.

Investment banking revenue declined 9.6 percent from a year earlier to $297 million as advisory revenue fell to $108.9 million from $144.6 million. Capital markets revenue climbed to $188.1 million from $183.8 million.