05 January 2009

BR: Look Ahead to December 2008 Quarterly Results

For Broadridge Financial (NYSE: BR), the turn of the calendar marked the end of the second quarter of fiscal 2009. The company will announce its results for this quarter in February.

This post explains how we modeled Broadridge Financial's Income Statement for the December quarter. When the results are published, we will compare them to the model and calculate how much the actual figures varied from our expectations. GCFR estimates are derived from trends in the historical financial record and guidance provided by company management.

Broadridge Financial Solutions, Inc. provides investor communication, securities processing, and clearing services to financial companies. Broadridge received "Top Overall Honors" in annual survey of brokerage process service providers. In fiscal 2008, the Investor Communication Solutions business segment was responsible for more than 70 percent of Broadridge's revenue and an even greater share of pre-tax earnings. The services provided by this segment include the distribution and processing of proxies for public companies and mutual funds.

Automatic Data Processing, Inc. (NYSE: ADP) spun off Broadridge on 30 March 2007.

The ongoing credit crisis has pummeled brokers, banks, and investment managers serviced by Broadridge. Lehman Brothers was a client of the company's Securities Processing business. Barclays Bank (NYSE: BCS and LON:BARC) bought Lehman's investment banking and capital markets units in the U.S. when the latter went bankrupt. Asset manager Neuberger Berman, an erstwhile Lehman subsidiary, signed a three-year contract with Broadridge for clearing services. Neuberger Berman managers and employees recently won an auction to buy the unit from the bankrupt Lehman.

Broadridge had one unfortunate moment in the spotlight. A Broadridge error caused Yahoo (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 leaders have been roundly criticized for their critical response to the purchase offer from Microsoft (NASDAQ: MSFT).

In the first quarter of fiscal 2009, which ended last September, the GCFR Overall Gauge of Broadridge Financial increased from 32 to 45 of the 100 possible points. Our analysis report explained the results in some detail. [Because of a year-end change to our equations, another point was added to the most recent score.]

The score increase can mostly be attributed to the contrarian Value gauge's positive response to the 27 percent drop in the Broadridge's share price during the quarter. (The share price fell further in the December quarter.) The Cash Management gauge also showed some strength, in recognition of the lower Long Term Debt to Equity ratio and the higher Working Capital/Market Capitalization.

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

Earnings in the September quarter benefited greatly from a one-time gain due to the early extinguishment of debt. Cash Flow and Net Income are both lower in the past year than in the preceding twelve months.

The company updated its guidance for the remainder of fiscal 2009 when it reported the September quarter's results.
Fiscal Year 2009 Financial Guidance

As a result of the one-time gain from early extinguishment of debt we are increasing our fiscal year 2009 GAAP earnings per share guidance to a range of $1.49 to $1.59. We are reaffirming the fiscal year 2009 Non-GAAP earnings per share guidance in a range of $1.45 to $1.55, which excludes the one-time gain from the purchase of our senior notes. The earnings per share guidance is based on diluted weighted-average shares outstanding of approximately 143 million shares. We anticipate net revenue growth in the range of 0% to 3%, which is slightly lower than our original guidance of 2% to 4%, primarily as a result of unfavorable foreign exchange rates due to the strengthening U.S. dollar and lower distribution fees. We anticipate earnings before interest and taxes margin in the range of 15.9% to 16.8%, which is slightly higher than our original guidance of 15.9% to 16.6%.

It's noteworthy that Broadridge lowered Revenue guidance to 0 to 3 percent at the same time the company announced first-quarter Revenue growth of 4.7 percent. Therefore, management must be expecting Revenue in the remainder of the year to grow at a pace somewhat slower than the guidance range.

We experimented with some curves to get fiscal 2009 Revenue to 1.015 times (1.5 percent growth) fiscal 2008 Revenue, taking both Broadridge's seasonality and the actual results for the first fiscal quarter into account. This approach yielded a Revenue estimate for the December quarter of $460 million. Since the year-earlier figure was $465 million, we're expecting a Revenue decline of 1.1 percent.

In Broadridge's short history as a separate company, its Gross Margin has mostly between 23 and 26 percent in September, December, and March quarters and between 30 and 31 percent in June quarters. With this pattern and the state of the financial services industry in mind, and we consider 23.5 percent of Revenue to be a conservative target for the December 2008 quarter. 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 - 0.235) * $460 million = $352 million.

Broadridge's Sales, General, and Administrative (SG&A) expenses as a percentage of Revenue have mostly been between 11 and 13 percent during non-June quarters. Given our expectation of declining Revenue, we believe the expense ratio in December will be closer to the upper end of the range. If our target is 12.5 percent of Revenue, SG&A will equal 0.125 * $460 million = $57.5 million.

With these estimates, we get a projected Operating Income, as we define it, of $51 million. This is 11 percent under the equivalent year-earlier figure.

Other expenses, mostly interest, have been between $5 million and $10 million per quarter in the last year, but the trend has been down. Our estimate for the December quarter is $6 million. This would bring pretax income to $45 million. If the Income Tax Rate is 39 percent (a typical value for Broadridge), Net Income in the quarter would be $27.2 million ($0.19 per share), compared to $29 million ($0.21 per share) in the December 2007 quarter.

Please also note that the Income Statement arrangement 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.


1 comment:

  1. great post, keep it up. i also feel that I think financial institutions are in trouble. with the markets frozen, these P2P lending sites are stealing market share, by eliminating the middle man. Plus the returns seem unreal, this guy says it good at