For investors in the brokerage industry, it would appear that the party still isn't over -- particularly for Merrill Lynch (NYSE:MER), which announced first-quarter results yesterday. The headline is that the firm put up $9.9 billion of revenue, a 24% increase over the first quarter of last year, and earnings per share clocked in at $2.26, easily topping analysts' expectations of $1.97.

Steadying subprime
Recently, the subprime industry has been acting like that guy at the party who drinks a little too much, then throws up in the coat room -- a real buzzkill. I imagine there's little need to recap the subprime mess here, but suffice it to say that the extent to which the market can digest the blowup is a prominent concern for a broad swath of investors.

Merrill has a particular interest in seeing to it that our subprime partier gets a cold shower and some black coffee. Back in September, Merrill increased its subprime exposure by buying First Franklin Financial, a Northern California-based residential subprime loan originator, from National City (NYSE:NCC). While it's questionable whether Merrill realized how quickly the industry would start to unravel, it's continuing to sound an encouraging tone.

On the conference call, Merrill CFO Jeff Edwards did sound less confident that First Franklin would be accretive to 2007 earnings, as Merrill said at the time of the acquisition, but he said the company is still bullish on it being very beneficial to its business. In particular, he pointed out that having the platform in-house has been allowing Merrill to see and react to market and pricing trends sooner. Looking at the bigger picture, though, Edwards also pointed out that the revenue contribution from subprime-related areas (origination, securitization, etc.) was less than 1% of total net revenue over the past five quarters.

Back to the good news
Getting past subprime, which was obviously not the reason that Merrill was able to put up impressive results for the quarter, it was the rest of the global markets and investment banking (GMI) segment that led Merrill's charge. GMI made up roughly two-thirds of Merrill's total revenue for the quarter and improved 43% versus the prior year's quarter. In particular, the equity markets and investment banking sub-segments were up 50% and 47%, respectively, for the quarter, reflecting the good, albeit volatile, performance from the equity markets as well as strong deal flow across debt, equity, and M&A. Fixed income, currencies, and commodities (FICC), which is the largest sub-segment and includes the subprime operations, also did well despite the mortgage market softness and was up 36%.

Financially, it was a nice quarter for Merrill. But as much as the firm is diversifying itself both geographically and across asset classes, it still remains a highly cyclical business. Three-quarters of the total year-over-year gain in revenue for Merrill came from investment banking and principal transactions, two areas that could be particularly susceptible to a marked slowdown if the market hits the skids.

I don't want to be a party pooper myself, but investors in Merrill, as well as competing brokerages like Morgan Stanley (NYSE:MS) and Lehman Brothers (NYSE:LEH), should certainly enjoy the good times. At the same time, though, don't expect to see these guys start trading at multiples much above the low double digits they're currently sporting.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy was originally one of three wild and crazy guys. It turned out to be neither wild nor crazy and was dropped from the trio.