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Executives

Richard Handler – Chairman, Chief Executive Officer

Brian Friedman - Chairman of our Executive Committee

Peg Broadbent – Chief Financial Officer

Analysts

Patrick Davitt – Bank of America/Merrill Lynch

Douglas Sipkin – Ticonderoga

Jefferies Group, Inc. (JEF) Q1 2010 Earnings Call April 20, 2010 9:00 AM ET

Operator

Welcome to the Jefferies 2010 first quarter financial results call. A question and answer period will follow management’s prepared remarks. In addition to any previously submitted questions, security industry professionals may ask a question (Operator Instructions).

As a reminder, this call is being recorded. A press release containing Jefferies’ 2010 fourth quarter financial results was distributed via Business Wire before the market opened today and can be accessed at Jefferies website at www.Jefferies.com.

Some of the comments made in this conference call may include forward-looking statements. These forward-looking statements may contain statements about management’s current expectations, strategic objectives, growth opportunities, business, and prospects. These forward-looking statements are not statements of historical fact and represent only Jefferies’ belief as to future performance.

They usually include the words continue, will, believe, should, or other similar expressions. Actual results could differ materially from those projected in these forward-looking statements. Please refer to Jefferies annual report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010 and in Jefferies Forms 10-Q and 8-K for discussion of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.

I would now like to introduce your host for today’s conference, Mr. Richard Handler, Chairman and Chief Executive Officer of Jefferies Group.

Richard Handler

I apologize, some of you may have heard this beginning before and some of you will be hearing this for the first time but let’s just go through it. Good morning and thank you for joining our discussion of Jefferies first Quarter results. I am Rich Handler, CEO of Jefferies, and with me on the call today are Brian Friedman, Chairman of our Executive Committee, and Peg Broadbent, our Chief Financial Officer.

For the first quarter ending March 31, 2010, we posted net revenues of $582 million, net income to common shareholders of $74 million, and earnings per share of $0.36. We are pleased with the strength of our results and in particular with the broad balance of our revenues from every one of our major business lines: equities, fixed income and investment banking.

At this stage, it is important to highlight the meaningful contribution made by our recently expanded international sales and trading businesses. These solid results were achieved in an uneven operating environment, with the month of January and March being strong, while February was choppy and quite challenging as investors and traders seemed to pause due to factors as diverse as concerns and ambiguity surrounding global regulatory reform, including U.S. health care and financial services legislation and the Greek debt crisis. The good news is that March was particularly strong and the momentum has carried into April.

The breadth, strength and congruence of our first quarter performance signify what Jefferies is today: a major, global, full service, investment banking and securities firm focused as one firm delivering quality ideas and top tier execution to our clients. At the same time, we’re a firm built on a rock solid foundation of log term capital, pure liquidity, zero arrogance and entrepreneurial culture that always puts our clients’ needs first. Now, let me turn it over to Peg to discuss our results and financial condition in more detail.

Peg Broadbent

Thank you, Rich. Before we turn to our results, we would like to explain two changes in our reporting format as well as address the change in our fiscal year end that we also announced this morning and our recent change in auditors.

First, we have amalgamated the FICC and high yield revenue lines in our revenues by source statement into one new line, fixed income. As our firm grows and at the same time achieves greater integration across our platform, our high yield and other fixed income businesses are increasingly working together every day. By way of example, as announced last August, we hired New Talent [ph] in London to help expand an integrated European credit effort focused on investment grade, high yield and loan products. Thus, in London, a single team focuses on investment grade and less than investment grade credit products.

Another example of our integration fixed income focus is our placing a 2 billion BA3 and BBB minus split rated bond for [i-com] enterprises in January using both our investment grade and high yield taxable bond sales forces. With sales and trading of mortgages, treasuries, agencies, municipals, emerging markets, corporate high grade, convertibles and high yields we now have a high quality and highly integrated fixed income efforts at Jefferies.

Second, to assist readers in understanding the composition of our capital markets revenues, we will now subdivide capital markets revenues into debt capital markets and equity capital markets in our revenues by source statement.

Now to our change in fiscal year end, since, unlike our primary competitors, we have not found it necessary to become a bank holding company but rather have chosen to remain a securities firm, we have decided to move our year end from December 31. Henceforth, our fiscal year end will now be November 30. Our fiscal 2010, thus, will be an 11 month period running from January first to November 30. Our 2010 second quarter will end May 31 and our third quarter will end August 31. It will not be necessary for us to restate prior year quarters since they are considered comparable. When we report our results for the 3 months ending May 31 we will compare it to last year’s second quarter ended June 30.

As many of you may recall, historically, a number of other major broker dealers operated on an off calendar fiscal schedule. This fiscal year end change should allow us to conclude substantially all fiscal year end administrative duties prior to the calendar year end holidays, so that both management and employees are refreshed and ready to serve our clients from the first day of each calendar year. Moreover, as a result of this minor modification, in our reporting schedule, Jefferies will now be the first major Wall Street firm to report results each quarter.

Finally, at the beginning of March, we announced a change in our auditors. Our policy is periodically to review all vendors and service providers to Jefferies to ensure our shareholders are getting fair value for money. Our auditors are no exception, and at least every five years they will be subject to appraisal. Recently, we were faced with the normal five year rotation in audit partners and we decided to conduct…

[technical difficulty]

Brian Friedman

…last year. Capital markets revenues of $136 million are an increase of 29% over the fourth quarter. Debt capital markets generated $102 million and equity capital markets $34 million. Our backlog for both debt and equity, as well as across all of our investment banking efforts, is growing nicely in terms of both quantity and quality.

During the quarter we completed 140 capital markets transactions including 74 corporate finance deals, 19 mortgage securitizations and 47 public finance offerings. The strongest sectors included energy, healthcare and mortgages. 119 were debt deals and 36 of these were lead managed. The other 21 transactions were equity offerings or placements of which 15 were lead managed. We are keenly focused on leading a greater proportion of our capital markets deals as it is the best way to utilize our very strong and unique distribution capabilities.

In most products, we have the largest institutional sales force among major firms. And we believe this provides issuers with significant added value. Our M&A and advisory revenues were $62 million in the first quarter. M&A activity has picked up as overall market confidence has increased. And CEOs and boards are more aggressively pursuing their strategic agendas. The flow of new restructuring assignments has been more muted of late, indicative that the general economy is returning to better health. Moreover, in many cases clients are able to access the capital markets rather than restructuring existing debt.

Fortunately our platform is designed to access whichever market is most advantageous for our clients. With enhanced leadership, a stronger and growing team, a strengthened brand and market position and capacity well in excess of recent performance, we believe our first quarter results both on an absolute and relative basis are indicative of the direction in which we are heading in investment banking. Now Rich will comment on our trading results before we take questions.

Richard Handler

Thanks Brian. Our fixed income revenues were $213 million for the quarter, as compared to $200 million a year ago. Every fixed income business, high yield, convertibles, mortgage-backed securities, rates, high grade corporates, immunities and emerging markets served our clients well during the quarter. The anticipation of the eventual spread compression which we expected would occur as the capital markets return to normalcy, we worked hard during the past two years to add quality talent, expand our client base, gain market share and globalize all of our creating capabilities.

It is also important to note that our fixed income business is largely a cash business, versus many of our competitors who take risk and positioned in the derivatives books. Our echo revenues were $165 million for the quarter as compared to $99 million a year ago. The performance of our global cash equity and electronic trading businesses was encouraging, particularly given a 12% decrease in exchange trade volume during the quarter, as well as reduced price volatility.

By continuing to increase market share, our international cash equity platform performed well again this quarter. We believe we also gained market share in the [lithid] derivative, electronic trading and prime brokerage business. We now have 325 prime brokerage clients, up from 150 just two years ago. The enhanced scope of our platform is allowing us to facilitate larger and more complex needs of a greater range of clients in a variety of markets.

In a few weeks I will mark my 20th anniversary at Jefferies and my 10th year as our firm's Chief Executive Officer. Time has gone by for me and I look around our firms today with immense pride. I am humbled by the breadth, competence, passion, energy, integrity and commitment of our 2729 employee partners. Jefferies has evolved continuously over these past 20 years. In particular these last few years have created the biggest challenge and opportunity of our professional lifetime. We do not know what the future will hold, but we do know that it will require continual evolution, adaptation, creativity and tenacity regardless of the environment.

Our commitment to our clients, employee partners, shareholders and bondholders is to keep our firm's foundation secure, improve and build continuously and do our best for every one of these vital constituencies every single day. Now before we go to questions, I just want to remind everybody that there will be a replay of this call on the Internet and we apologize for the technical difficulties. We're now available for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Patrick Davitt – Bank of America/Merrill Lynch.

Patrick Davitt – Bank of America/Merrill Lynch

I kind of want to dig in a little bit in terms of the sequential change [inaudible] to your larger competitors. Your comments suggest I think that you're saying that you think that the relative, I guess, difference in the sequential changes due to I guess the more principal risk that they take. Is that your perception?

Richard Handler

I don't think we commented on our competitors. I think we were pointing out the fact that – two things, we don't have legacy positions and we don’t have big derivatives books. That being said, we're pretty pleased with the breadth of our fixed income business considering the fact that it is a relatively new business for us and we've been building it over the course of the last two years.

Patrick Davitt – Bank of America/Merrill Lynch

Do you think there may be, in terms of just the international mix issue in terms that the larger firms have more international mix that that's where a lot of that sequential improvement came, or do you not really know?

Richard Handler

I don't know for sure, but if I had to guess I'd say larger international presence, bigger derivatives and some legacy positions are probably all things that we don't have as much of.

Patrick Davitt – Bank of America/Merrill Lynch

Can we get a little bit more detail on the international mix in the quarter?

Peg Broadbent

Yes. International businesses contributed to about 15% of our overall net revenues for the quarter, compared to about 13.8% for the whole of last year.

Okay, great. And could you give us an update on the UK tax situation and what you expect to happen there, and if the estimated impact is the same as you said last quarter?

Peg Broadbent

Yes. We actually believe, having reviewed the code which is now being enacted by the UK government, that we will not be subject to the UK bank payroll tax.

Operator

Your next question comes from the line of Daniel Harris - Goldman Sachs.

Daniel Harris - Goldman Sachs

I was wondering if you could touch on, in the fixed income business, the biggest changes you've seen from your primary dealer status here in the US and how that's impacting both your commissions and your principal transactions.

Richard Handler

I think the major change is just the breadth of people who use Jefferies as their counterparty. We've had tremendous success both global corporations as well as foreign countries who are now using us as a counterparty. And we feel like being a primary dealer has just elevated our status with all the trading partners.

Daniel Harris - Goldman Sachs

So it's not quite as maybe visible in the rates business as in the overall fixed business. You're just generating much more interest from larger clients.

Richard Handler

I think in the rates business we couldn't clearly have the position that we're gaining without being primary dealers in the various constituents that we are.

Daniel Harris - Goldman Sachs

Moving on to the bar and block trades, obviously it sounds like this was more of a new phenomenon than what you guys have done in the past. Is that something that you think continues going forward, that your equities business is accelerating to the point where you are being entrusted to move large blocks versus previously you were more of a [inaudible] business?

Richard Handler

I think this is something we've done historically in the past and we've been relatively successful doing it. We do have a unique distribution platform across all asset classes. And as we are growing our company I think we are seeing more of these opportunities. It's interesting to note that as our company does grow, unlike historically there were a larger percentage of our revenues we've pointed them out, we're doing more of these in aggregate, and especially this quarter, it wasn't as dramatic an effect on our revenues, but we thought those worth pointing out.

Daniel Harris - Goldman Sachs

And then Peg, just on the accounting change, the calendar year going forward, so you're going to report three month numbers in about two months from now. And then as we get towards year end are you going to restate things so we get a 12 month year, or is it just going to be an 11 month year for –

Peg Broadbent

I beg your pardon. It's just going to be an 11 month year. And yes, in two month's time we will be announcing our second quarter results which will be for the three months ending the 31st of May.

Operator

The next question comes from the line of Douglas Sipkin with Ticonderoga.

Douglas Sipkin – Ticonderoga

Just a couple of questions. First obviously, terrific banking revenues. I'm just curious, obviously a lot of them made about how strong yield market has been. I’m just curious, I know it's not just high yield, but given where spreads are do you guys see this continuing or do you expect people are really trying to take advantage of the low rates and the tight spreads before maybe the Fed does something?

Richard Handler

I think it's a combination of the great degree of pent up demand historically having had the variety of capital markets closed for a significant period of time, a combination of still relatively low interest rates. Even if the Fed starts to raise rates it's still on a historic basis a relatively good financing environment. There's been tremendous cash inflows to the fixed income market which are starting out, we believe trickling into the equity market so there's good demand on the buyer's side.

And I think there's a degree of competence slowly seeping back to CEOs and senior leaders of companies across the United States and perhaps across the globe, where they have more competence in the fact that they've cut costs and they're starting to see some revenues come back in. So it feels like a general, positive environment. And for getting our fair share, if not a little bit more, of some of these capital markets' transactions.

Douglas Sipkin – Ticonderoga

And then second question, philosophical in nature. Obviously you guys have done a tremendous job in fixed income trading primary dealer status here and now abroad. As you grow out the business, obviously by definition that business requires more capital, more assets. I'm just curious philosophically why you guys are buying back stock. I know it's not that significant, but I was just thinking maybe it makes a little bit more sense to continue to grow the equity capital base as you grow and deal with probably more competitive landscape now that some of the bigger guys are coming back to the market.

Richard Handler

It's a fair question. I think one thing you have to remember is that we pay our people in shares, that in effect is issuing some common stock. So effectively we've been keeping our share count relatively neutral as we've been building out our business in terms of a share count perspective. And that's really been the mindset behind it.

Douglas Sipkin – Ticonderoga

So it's more a function of offsetting comp than opposed to sort of like buy back stock just for opportunistic purposes.

Richard Handler

Look, every time we buy back stock we're making a conscious decision to actually do it. So I think it means that we believe there is value. But it seems like we're mindful of our share count and we're balancing that as well.

Douglas Sipkin – Ticonderoga

And then just a final question, I guess for Peg. Can you just help us understand sort of normalized non-comp? I know there was some stuff in there for some of the charitable stuff that you guys did in terms of Haiti this quarter. Can you maybe clarify sort of how we should be thinking about that number? Obviously some stuff are dependent upon the revenues, but maybe range bound it for us.

Peg Broadbent

Yes, as I said the non-comp expenses, excluding the Haiti contribution, were $129 million, a little bit up from our fourth quarter. Clearly as you've indicated, there's a large comparability in that number depending on business volumes and so forth. But assuming similar business volumes we've seen recently, it wouldn't be unreasonable to think we would be running similar kind of non-comp levels going forward each quarter.

Operator

At this time if there are no further questions, I would like to turn the call back over to management for closing remarks.

Richard Handler

Basically, we apologize once again for the technical difficulties

[audio abruptly ends]

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