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BlackRock, Inc. (BLK)

Q3 2009 Earnings Call Transcript

October 20, 2009 9:00 am ET


Ann Marie Petach -- CFO

Robert Connolly -- General Counsel

Laurence Fink -- Chairman and CEO

Sue Wagner -- Vice Chairman and COO


Roger Smith -- Fox-Pitt Kelton

William Katz -- Buckingham Research

Mike Carrier -- Deutsche Bank

Roger Freeman -- Barclays Capital

Marc Irizarry -- Goldman Sachs

Jeffrey Hopson -- Stifel Nicolaus

Craig Siegenthaler -- Credit Suisse

Chris Varr [ph] -- CLSA



Good morning. My name is Tina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. third quarter 2009 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink, Chief Financial Officer, Ann Marie Petach and General Counsel, Robert P. Connolly.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions). Thank you.

Mr. Connolly, you may begin your conference.

Robert Connolly

Good morning. This is Bob Connolly. I'm General Counsel, BlackRock. Before Larry and Ann Marie and Sue Wagner, our Chief Operating Officer make their remarks, I want to point out that during the course of this conference call we may make a number of forward-looking statements. We call to your attention the fact that BlackRock's actual results may differ from these statements. As you know, BlackRock has filed with the SEC reports which list some of the factors which may cause our results to differ materially from these statements. Finally, BlackRock assumes no duty to and does not undertake to update any forward-looking statements.

With that I will turn it over to Ann Marie, our Chief Financial Officer.

Ann Marie Petach

Good morning, everyone. As usual, I'll be discussing primarily as adjusted results. Third quarter as adjusted net income was $293 million or $2.10 per share. This includes $1.86 per share of operating earnings and $0.24 per share of non-operating earnings.

Net income improved 23% compared to second quarter and 28% compared to a year ago. Note that the third quarter GAAP results included a $45 million deferred tax benefit related to a tax law change. We've excluded this benefit from our as adjusted results because it is tax law related. The as adjusted tax rate was 35%.

During the third quarter, we continued to see substantial improvements in equity and fixed income markets, with equity markets up 15% or more since June 30th. These improvements in market tone positively affected long-dated asset flows as investors continued to seek higher returns and reduced tax assets.

While equity markets are still about 10% below year ago level, assets under management actually reached a new peak at $1.435 trillion at September 30th. These improvements positively affected the revenue, operating income and non-operating income results. We have maintained cost discipline and continue to benefit from our diversified business model. Our $42 billion pipeline includes $36 billion in long-dated assets.

Revenues of $1.140 billion improved by 11% compared to the second quarter. The improvement in revenues reflected $14 billion of positive long-dated asset flows and $78 billion in positive market effects on AUM. The revenue declined by 13% compared to a year ago. This is despite net new business and long-dated assets of $18 billion and new advisory AUM of $116 billion. This is explained by the effect of equity and alternative market declines on average AUM.

As to the revenue trend, it's worth pointing out that long-dated assets of $981 billion at September 30th are actually up 6% compared to a year ago and that includes an 11% increase in equity and balanced assets compared to a year ago.

BlackRock Solutions and Advisory revenues remained strong at $127 million. This reflects a continued appetite for analytic and aligned services to our traditional business as well as continued advisory assignments.

BRS continues to have a strong pipeline of financial market advisory, Aladdin and risk reporting opportunities. As adjusted operating income of $400 million improved 32% compared to the second quarter and decreased 7% compared to the third quarter of 2008. The revenue changes I mentioned earlier were a key driver to the operating income results.

The operating margin as adjusted of 40.1% reflects the combination of improved revenues and continued cost discipline. Excluding hedge changes in deferred comp, compensation changes were driven by changes in incentive comp that is compared to both periods and reduced staffing levels as compared to a year ago. We have continued to increase the bonus accrual to reflect improvements in income.

Third quarter G&A expense included a $3 million benefit associated with balance sheet foreign currency effects whereas prior periods included more material effects. There was $18 million of expense in the second quarter and a $30 million benefit in the third quarter of 2008. The absence of these effects in the present period explains a material portion of the period over period changes in G&A expense. Excluding these effects, G&A expense relative to prior periods reflects strong cost discipline.

Just note that the GAAP G&A expense also included $16 million of expense related to BGI integration. We expect to close the BGI transaction on December 1. We continue to estimate total BGI integration costs in the range of $300 million to $350 million. The key cost drivers will include transaction costs, professional fees, restructuring costs, technology synchronization, re-branding and marketing expense.

As we have discussed before, BlackRock co-invests with our clients. The majority of these co-investments and (inaudible) investments are mark-to-market through the income statement in non-operating income. As adjusted non-operating income totaled $52 million in the third quarter. This reflects improving spreads under stress debt, particularly really some mortgage-related products and positive movements in the private equity markets. Our balance sheet exposure remains at levels reduced greatly from one year ago.

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