07 April 2009

BR: Look Ahead to March 2009 Quarterly Results

The GCFR Overall Gauge of Broadridge Financial (NYSE: BR) jumped 11 points in the three months ending on 31 December 2008, which was the second quarter of the company's fiscal 2009.  Our analysis report explained in some detail how this score was attained. 

The jump was originally calculated as being from 44 to 53 points.  Now, however, because of recent tweaks to our gauges, the jump would be characterized as from 51 to 62 points.  We expect the GCFR gauges of Broadridge to be volatile until the company adds more chapters to its financial history.

We have now modeled Broadridge's Income Statement for the March 2009 quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce in early May.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we present some background information.

Broadridge Financial Solutions, Inc. provides investor communication, securities processing, and clearing services to financial companies.  Although not widely known, Broadridge received "Top Overall Honors" in annual survey of brokerage process service providers. Broadridges's security processing business in fiscal 2008 handled fixed income trades valued at approximately $3 trillion per day.

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

The financial industry, which Broadridge serves, has been significantly damaged by the ongoing credit crisis.  For example, Lehman Brothers was a client of the company's Securities Processing business.  However, the situation was not dire for Broadridge.  Asset manager Neuberger Berman, an erstwhile Lehman subsidiary, signed a three-year contract with Broadridge for clearing services.

Although Broadridge's share price fell significantly (i.e., 44 percent) in 2008, the price per common share has rebounded nicely in 2009.  Standard & Poor's in February 2009 revised its ratings outlook on Broadridge Financial to positive from stable.  S&P gave Broadridge credit for "the company's focus on reducing debt and its stable profitability."

The Investor Communication Solutions business segment was responsible for more than 70 percent of Broadridge's revenue in fiscal 2008 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.

In March 2009, Broadridge announced an alliance with Beacon Capital Strategies, Inc.  Beacon "operates a marketplace dedicated to providing liquidity and electronic trading in the less-liquid fixed-income market."  The alliance is intended to "help the firms' clients locate difficult-to-find securities."  The types of securities involved include mortgage-backed securities, asset-backed securities, and collateralized mortgage obligations.

The Cash Management gauge rose in the December 2008 quarter.  One reason for the increase was that Broadridge's debt is now a much lower percentage of the company's Cash Flow from Operations.  An improving Return on Invested Capital, now at 28 percent, helped the Profitability gauge remain steady at a favorable level.  The contrary Value gauge was the star performer, increasing to 18 of 25 possible points, in response to the big drop in Broadridge's share price during 2008.

Not surprisingly in the current economic environment, the Growth gauge for Broadridge was the laggard.  It hit rock bottom at 0 points.

The company updated its guidance for the remainder of fiscal 2009 when it reported the December quarter's results.

We [Broadridge announced] are reaffirming the fiscal year 2009 GAAP earnings per share guidance range of $1.49 to $1.59 and our Non-GAAP earnings per share guidance 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 142 million shares. We anticipate our full year net revenues to remain flat or decline in the range of -3% to flat, which is lower than our previously provided guidance of flat to 3% increase, primarily as a result of the continued impact of unfavorable foreign currency exchange rates, lower event-driven mutual fund proxy revenues, and reduced distribution fees resulting from higher notice and access adoption rates. We anticipate earnings before interest and taxes margin in the range of 16.2% to 17.1%. Free cash flow is expected to be in the range of $210 million to $250 million, which is modestly higher on the low end than our previously provided guidance.

[CEO Richard J.] Daly commented, “We believe the better than anticipated EPS performance in the first half of the year, along with the second half growth in recurring fee revenues and effective discretionary cost containment will offset the EPS impact from continued slowing in event-driven revenue, the unfavorable impact of foreign currency exchange rates and anticipated lower trade volumes. The effects of these factors are allowing us to remain within our original EPS guidance range. The length and depth of these difficult market conditions are tough to predict, but I believe we are well-positioned to exit these troubling times better than we entered. Given our foundation of best products, high customer satisfaction and our high percentage of recurring revenues, we expect to navigate the storm better than the financial services market we serve.”

[emphasis added]

In the fiscal year that ended 30 June 2008, Broadridge's Revenue was $2.208 billion.  Given the Revenue growth guidance of zero to minus 3 percent, we will assume, for now, that fiscal 2009 Revenue will be 1.5 percent lower than 2008.  Therefore, the Revenue target for the fiscal year is $2.175 billion.

Revenue in the last two quarter (i.e., the first half of fiscal 2009) was $931.6 million.  This leaves $1.243 billion of the Revenue target for the second half of the year.  Given the seasonal pattern we've seen with Broadridge, we assume 39 percent of the $1.243 billion --  $485 million -- will be in March quarter and the remaining 61 percent will be in the June quarter.

In Broadridge's short history as a separate company, its Gross Margin has mostly been 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 24 percent of Revenue to be a conservative target for the March 2009 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 - 0.24) * $485 million = $368.6 million.

Broadridge's Sales, General, and Administrative 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 * $485 million = $60.6 million.

With these estimates, we get a projected Operating Income, as we define it, of $55.8 million.  This is essentially the same as the equivalent year-earlier figure.

Other income and expenses have been erratic from quarter to quarter.  Our estimate for the March quarter is an expense of $1.9 million.  This would bring pretax income to $53.9 million.  If the Income Tax Rate is 39 percent (a typical value for Broadridge), Net Income in the quarter would be $32.9 million ($0.23 per share), compared to $29.5 million ($0.21 per share) in the March 2008 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.


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