30 September 2008

BR: Look Ahead to September 2008 Quarterly Results

While we have been keeping an eye on Broadridge Financial since Automatic Data Processing (NYSE: ADP) spun it off in March 2007, we waited until the end of the company's 2008 fiscal year, in June, to compute gauge scores.  The Overall Gauge measured 34 of the 100 possible points, and the Profitability Gauge was strongest at 19 of 25 points. 

We expect the GCFR gauges to vary widely until Broadridge adds more chapters to its financial history.

Revenue in the June 2008 quarter was 2.4 percent more than in the year-earlier period.  However, the effective income tax rate was five percent higher, which was a big reason Net Income in the quarter fell by 1.0 percent.

Broadridge Financial Solutions, Inc. (NYSE: BR) provides investor communication, securities processing, and clearing services to financial companies.  Broadridge's broker, bank, and investment manager customers have been pummeled by the credit crisis.  Broadridge recently found it necessary to announce that Barclays Bank (NYSE: BCS and LON:BARC) and Lehman Brothers are/were clients of the company's Securities Processing business.  Barclays bought Lehman's investment banking and capital markets units in the U.S. when the latter went bankrupt.

Asset manager Neuberger Berman, which is a Lehman subsidiary not in bankruptcy, recently signed a three-year contract with Broadridge for clearing services, effective 22 September 2008.  Lehman has just announced plans to sell Neuberger Berman to private equity firms Bain Capital and Hellman & Friedman.

Broadridge has already had other moments in spotlight.  A $380 million loan raised questions about the company's risk management practices.  However, the loan was repaid, and it might have escaped notice entirely if the transaction hadn't spanned two fiscal quarters.  More recently, a Broadridge error caused Yahoo! Inc. (NASDAQ: YHOO) to under-report votes withheld from board members at its highly publicized shareholder meeting.  Votes withheld often signify lack of support for management, and Yahoo management has been widely criticized for its response to the purchase offer from Microsoft Corp. (NASDAQ: MSFT).

We expect an early-November announcement by Broadridge of its results for the September quarter, the first of fiscal 2009.  In anticipation of this report, we've modeled Broadridge's Income Statement for the quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

This will be the first time we've projected Broadridge's earnings.  Given this, and the turmoil in the financial services industry, readers are strongly cautioned that our estimates may turn out to be far from reality.

Guidance for fiscal 2009 was included Broadridge's report on the fiscal year and quarter that ended on 30 June 2008.  The key paragraph was:
We anticipate net revenue growth in the range of 2% to 4%, earnings before interest and taxes margin in the range of 15.9% to 16.6%, and earnings per share in the range of $1.45 to $1.55, based on diluted weighted-average shares outstanding of approximately 143 million shares. As a result of the timing of expense buildups in fiscal year 2008, we expect earnings to be lower in the first six months of fiscal year 2009, and up in the latter half of the year with a strong exit rate. Our guidance does not take into consideration any share repurchases.
Given this guidance, we will set a $465 million target for Revenue in the September 2008 quarter.  This figure is 3 percent greater than Revenue of $451 million in the year-earlier quarter.

We expect the Broadridge to achieve a Gross Margin of 25 percent of Revenue, which is the average margin for non-June quarters.  Given our Revenue estimate, the Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- is estimated to be (1 - 0.25) * $465 million = $349 million.

Sales, General, and Administrative (SG&A) expenses have been between 9 and 13 percent of Revenue.  We will split the difference and look for SG&A of 11 percent of Revenue, or 0.11 * $465 million = $51 million.

With these estimates, we get a projected Operating Income, as we define it, of $65 million, $3 million below the equivalent year-earlier figure.

Other expenses, mostly interest, have been between $5 million and $10 million per quarter in the last year.  Our estimate for the September quarter is $8 million.  This would bring pretax income to $57 million.  If the Income Tax Rate, which has been increasing, stabilizes at 41 percent, the tax provision will be $23 million.

The end result would be Net Income in the quarter of $34 million ($0.24 per share), compared to $36 million ($0.26 per share) in the September 2007 quarter.

Please also note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)

September 2008
September 2007
Revenue (1)


CGS (2) (349)

SG&A  (51)


Other income


Interest, etc.
Pretax income

Income tax

Net Income


Shares outstanding

1.  Total Revenues= Services revenues + Other revenues - Interest expense from securities operations.
2.  Cost of Net Revenues
3.  Other expenses, net (mostly interest)

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