25 June 2009

BR: Look Ahead to June 2009 Quarterly Results

The GCFR Overall Gauge of Broadridge Financial (NYSE: BR) plummeted from 60 to 31 points in the March 2009 quarter.  Our analysis report for the third quarter of the company's fiscal 2009 explained this result in some detail. 

The large drop in the score was exaggerated by Broadridge's yo-yo share price movement and its limited 2-year existence as an independent company.  The GCFR gauges tend to be more volatile when the subject firm is less than, say, five years old.  Score volatility is also common when a major corporate merger or restructuring makes the financial history less relevant.

In the March 2009 quarter, earnings per share rose from $0.21 in 2008 to $0.29 in the current year.  More than half of this increase was, however, due to a non-recurring $7.3 million ($0.05 per share) state-tax credit.  The credit had the effect of reducing the effective income tax rate from about 38 percent to 24.3 percent.  Revenue in the March quarter fell by 3.5 percent relative to the year-earlier period.  In addition to the tax credit, lower Sales, General, and Administrative expenses were also a positive feature of the March quarter. 

When examined carefully, the results were not deemed by our gauges to be commensurate with the 48 percent rise in Broadridge's share price, from $12.54 to $18.61, during the first three months of calendar 2009.

We have now modeled Broadridge's Income Statement for the June 2009 quarter.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce in early August.  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. (NYSE: BR) provides investor communication, securities processing, and clearing services to financial companies.  Automatic Data Processing, Inc. (NASDAQ: ADP) spun off Broadridge on 30 March 2007. 

Although not a household name, Broadridge received "Top Overall Honors" in the 2008 survey of brokerage process service providers.  According to its 10-K, Broadridge's Securities Processing business in fiscal 2008 handled fixed-income trades valued at approximately $3 trillion per day.  This business includes processing of transactions involving equity and fixed-income securities in the U.S and in various other markets.

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 Investor Communication Solutions business segment was responsible for more than 70 percent of Broadridge's revenue in fiscal 2008, according to the 10-K, 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.

As a result of the credit crisis, this is a challenging time for companies reliant on customers in the financial industry.  For example, Lehman Brothers was a Broadridge client.  Broadridge made the best of the situation by signing a three-year contract for clearing services with asset manager Neuberger Berman, an erstwhile Lehman subsidiary.

The company's success at handling current economic challenges was recognized in February by Standard & Poor's, which revised its ratings outlook on Broadridge from positive from stable.  S&P recognized "the company's focus on reducing debt and its stable profitability."

The share price fell a disheartening 44 percent in 2008, sinking as low as $9.72 in late November.  However, the shares have rebounded substantially in 2009.

Broadridge had one unfortunate moment in the spotlight.  A Broadridge error caused Yahoo! Inc. (NASDAQ: YHOO) to under-report votes withheld from board members at its highly publicized shareholder meeting

We are now ready to look ahead. 

Broadridge updated its guidance for the remainder of fiscal 2009, which ends this month, when it reported results for the March 2009 quarter.

Fiscal Year 2009 Financial Guidance

We are increasing the fiscal year 2009 GAAP earnings per share guidance range to $1.52 to $1.62 from $1.49 to $1.59, and we are reaffirming 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 and the state tax credit true-up benefit for the prior fiscal year. The earnings per share guidance is based on diluted weighted-average shares outstanding of approximately 142 million shares.

We are reaffirming our full year net revenues guidance of -3% to flat, and expect net revenue growth will be at the mid-point to lower end of the range, primarily as a result of lower event-driven mutual fund proxy revenues, a further reduction in distribution fees resulting from higher Notice and Access adoption rates, as well as continued decline in trade activity and margin balances. We anticipate earnings before interest and taxes margins in the range of 16.0% to 16.9%, which is slightly lower than our previously provided guidance of 16.2% to 17.1%, due to the decline in revenues somewhat offset by discretionary cost containment. Our effective annual tax rate will be approximately 38% as a result of the benefit from the recurring state tax credit.

Free cash flow is expected to be in the range of $230 million to $270 million, which is higher than our previously provided guidance of $210 million to $250 million, as a result of lower needs of cash for working capital and capital expenditures. We are anticipating closed sales for fiscal year 2009 to be in the range of $160 million to $180 million.

[emphasis added]

In fiscal 2008, Broadridge's Revenue was $2.208 billion.  Given the guidance of Revenue growth at the "mid-point to lower end" of the zero to -3 percent range, we will assume that fiscal 2009 Revenue will be 2 percent lower than 2008.  Therefore, the Revenue target for the current fiscal year is (1 - 0.02) * $2.208 billion = $2.164 billion.

Revenue was $1.413 billion in the nine months through Meach 2009.  This leaves Revenue of $751 million for the current quarter.  This estimate is 5 percent less than the June 2008 quarter's Revenue of $792 million.

Note that Broadridge's Revenue exhibits a seasonal pattern in which the June quarter is much stronger than any of the others.  Revenue in June quarters is 35 to 37 percent of the annual total.

In the June period of the three previous fiscal years, Broadridge's Gross Margin was about 31 percent of Revenue.  We will assume a similar proportion in the current 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 - 0.31) * $751 million = $518 million.

Sales, General, and Administrative expenses averaged 8.3 percent in the last three June quarters.  We will round down to 8 percent for the current quarter because Broadridge has had some success cutting costs.  Therefore, our estimate for SG&A is 0.08 * $751 million = $60.0 million.

With these estimates, we get a projected Operating Income, as we define it, of $172.6 million.  This is 2.1 percent less than Operating Income in the June 2008 quarter.

Our estimate for the June quarter of non-operating income and expenses -- items that have been erratic at Broadridge --  is for a net gain of $4 million.  This would bring pretax income to $176.6 million.  If the Income Tax Rate is 38 percent, Net Income in the quarter would be $109.5 million ($0.77 per share), compared to $97.8 million ($0.69 per share) in the June 2008 quarter.

For the fiscal year, our estimates would result in Net Income of $216 million ($1.53 per share).  In fiscal 2008, Net Income was $192 million ($1.35 per share).  We're right at the bottom end of the company's guidance for GAAP earnings. 

Please click here to see a full-sized, normalized depiction of the projected results next to Broadridge's quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Full disclosure: Long BR at time of writing.

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