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management’s฀discussion฀and฀analysis
42฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
42฀฀฀G O L D M A N ฀ S A C H S ฀ 2 004฀ A N N U A L ฀ R E P O RT
Net฀Revenues
2 0 0 4฀ v e r s u s฀ 2 0 0 3฀– ฀Our net revenues were $20.55 billion
in 2004, an increase of 28% compared with 2003, reflecting
strong growth in Trading and Principal Investments, Asset
Management and Securities Services, and Investment Banking.
The increase in Trading and Principal Investments reflected
significantly higher net revenues in FICC, as all major busi-
nesses and regions performed well in a generally favorable
environment. Net revenues in our Principal Investments busi-
ness also increased significantly, due to an unrealized gain on
our investment in the convertible preferred stock of SMFG, as
well as gains from other corporate principal investments. In
addition, Equities net revenues improved, primarily reflecting
higher customer-driven activity and favorable market condi-
tions early in 2004. Equities operated in a less favorable envi-
ronment after our first fiscal quarter of 2004, as volatility
levels continued to decline and markets generally lacked direc-
tion before moving higher in the last several weeks of our fiscal
year. Asset Management and Securities Services generated
strong revenue growth, primarily reflecting higher average
assets under management, increased incentive fees and signifi-
cantly higher customer balances in Securities Services. In
Investment Banking, net revenues also increased, highlighted
by strong growth in both our Financial Advisory and Equity
FINANCIAL฀OVERVIEW
The following table sets forth an overview of our financial results:
financial฀overview
฀ ฀ ฀YEAR฀ENDED฀NOVEMBER
($฀IN฀MILLIONS,฀EXCEPT฀PER฀SHARE฀AMOUNTS)฀ 2004฀ 2003฀ 2002฀
Net revenues $20,550 $16,012฀ $13,986
Pre-tax earnings 6,676 4,445฀ 3,253
Net earnings฀ 4,553 3,005฀ 2,114
Diluted earnings per share 8.92 5.87฀ 4.03
Return on average shareholders’ equity(1) 19.8% 15.0%฀ 11.3%
Return on average tangible shareholders’ equity(2) 25.2% 19.9%฀ 15.3%
(1)฀Return฀on฀average฀shareholders’฀equity฀is฀computed฀by฀dividing฀net฀earnings฀by฀average฀monthly฀shareholders’฀equity.฀
(2)฀฀
Tangible฀shareholders’฀equity฀equals฀total฀shareholders’฀equity฀less฀goodwill฀and฀identifiable฀intangible฀assets.฀We฀believe฀that฀return฀on฀average฀tangible฀share-
holders’฀equity฀is฀a฀meaningful฀measure฀of฀performance฀because฀it฀excludes฀the฀portion฀of฀our฀shareholders’฀equity฀attributable฀to฀goodwill฀and฀identifiable฀intangi-
ble฀assets.฀As฀a฀result,฀this฀calculation฀measures฀corporate฀performance฀in฀a฀manner฀that฀treats฀underlying฀businesses฀consistently,฀whether฀they฀were฀acquired฀
or฀developed฀internally.฀Return฀on฀average฀tangible฀shareholders’฀equity฀is฀computed฀by฀dividing฀net฀earnings฀by฀average฀monthly฀tangible฀shareholders’฀equity.
฀ The฀following฀table฀sets฀forth฀the฀reconciliation฀of฀average฀shareholders’฀equity฀to฀average฀tangible฀shareholders’฀equity:฀
฀ ฀ YEAR฀ENDED฀NOVEMBER
฀ (IN฀MILLIONS)฀ 2004฀ 2003฀ 2002
฀ Average฀shareholders’฀equity฀ $22,975 $20,031฀ $18,659
฀ Deduct:฀Average฀goodwill฀and฀identifiable฀intangible฀assets฀ (4,918) ฀(4,932)฀ (4,837)
฀ Average฀tangible฀shareholders’฀equity฀ $18,057 $15,099฀ $13,822
Underwriting businesses, primarily reflecting an increase in
industry-wide corporate activity.
2003฀vers u s ฀2002 ฀–฀Our net revenues were $16.01 billion in
2003, an increase of 14% compared with 2002, primarily
reflecting higher net revenues in Trading and Principal
Investments. The increase in Trading and Principal Investments
net revenues was primarily driven by FICC, which operated in
a generally favorable environment throughout 2003, and by
Principal Investments, which included an unrealized gain on our
investment in the convertible preferred stock of SMFG. Net
revenues in Asset Management and Securities Services increased
14% compared with 2002, primarily reflecting higher average
assets under management and higher customer balances in
Securities Services. Net revenues in Investment Banking declined
4% compared with 2002, due to generally lower levels of cor-
porate activity.
Operating฀Expenses
Our operating expenses are primarily influenced by compensa-
tion, headcount and levels of business activity. A substantial
portion of our compensation expense represents discretionary
bonuses, with our overall compensation and benefits expenses
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