01 October 2009

BR: Look Ahead to September Quarterly Results

The GCFR Overall Gauge of Broadridge Financial (NYSE: BR) rebounded from 30 to 52 points in the June quarter, which ended fiscal 2009.  Our income statement and financial gauge analyses explained how the score was attained in some detail. 

Broadridge earned $0.83 per share in the quarter, up from $0.69 last year.  However, Revenue declined 7.1 percent.  An improved Gross Margin and lower operating expenses, partially offset by higher non-operating expenses, enabled Broadridge to beat expectations handily.

The company's relatively short existence as an independent entity has caused its scores to fluctuate widely from quarter to quarter

We have now modeled Broadridge's Income Statement for the September 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 November.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we set the stage with some background information about Broadridge and the business environment in which it is currently operating.  Readers that keep close tabs on the company are invited to skip ahead.

Broadridge Financial Solutions, Inc. (NYSE: BR) provides investor communication, securities processing, and clearing services to financial companies.  Broadridge received "Top Overall Honors" in the 2008 survey of brokerage process service providers.  According to its 10-K annual report, Broadridge's Securities Processing business in fiscal 2009 "processed on average over 1.6 million equity trades and over $3 trillion in trades of United States (U.S.) fixed income securities per day." [emphasis added]

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

The Investor Communication Solutions business segment contributed more than 70 percent of Broadridge's revenue and pre-tax earnings in fiscal 2009.  This segment distributes and processes proxies for public companies and mutual funds.

During the first three months of calendar 2009, Broadridge client Bank of America (NYSE: BAC) decided to "perform its equity securities processing in-house after its acquisition of a firm [Merrill Lynch] that has its own processing capabilities."  This decision will cut Broadridge's annual Revenue by almost $20 million.

A Broadridge product, MBS Expert®, was the first suite of applications certified as fully compliant by the Fixed Income Clearing Corporation for use with the new Central Counterparty (CCP) service.  This service is intended to modernize the clearing and settling of mortgage-backed securities.  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."

In April, Standard & Poor's raised Broadridge's credit rating to BBB-/A-3 from BB+/B, with a positive outlook.

Broadridge doubled its dividend in August and authorized the repurchase of up to 10 million shares of its outstanding common stock.

We are now ready to look ahead.

Broadridge provided guidance for fiscal 2010, which will end in June 2010, when it reported fourth-quarter results last August.

Fiscal Year 2010 Financial Guidance

We anticipate net revenue growth in the range of 4% to 8%, earnings before interest and taxes margin in the range of 16.0% to 16.3%, and earnings per share in the range of $1.50 to $1.60, based on diluted weighted-average shares outstanding of approximately 144 million shares. We expect earnings to be lower in the first six months of fiscal year 2010, as a result of the carryover impact of a previously-announced client loss and the impact of higher than historical average price concessions into the next fiscal year, as well as one-time benefits in the first half of fiscal year 2009 primarily related to the gain on the purchase of our Senior Notes. Free cash flow is expected to be in the range of $235.0 million to $270.0 million. Free cash flow is defined as cash flow from operating activities, excluding the financing activities in the clearing business, less capital expenditures and intangibles. Our guidance does not take into consideration any share repurchases.

[emphasis added]

Broadridge reiterated its guidance on 21 September 2009 during a presentation at the Bank of America Merrill Lynch --note the irony -- SMid Cap Conference 2009 in Boston.

In fiscal 2009, Revenue was $2.15 billion.  Given the guidance of 4 to 8 percent growth, Broadridge expects Revenue in the new fiscal year between $2.24 billion and $2.32 billion.

Note that Broadridge's annual Revenue is not distributed evenly across the year.  In the last four years, the September quarter contributed an average of 20.6 percent of annual Revenue.  Our Revenue target for the quarter, $470 million, was calculated by applying the seasonality factor (20.6 percent) to the midpoint of the Revenue range ($2.28 billion).

The Gross Margin has averaged 23.5 percent in the previous four September quarters, and 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 - 0.235) * $470 million = $360 million.

Sales, General, and Administrative expenses are typically around 11 to 12 percent of Revenue in September.  Therefore, our estimate for SG&A is 0.115 * $470 million = $54.1 million.

With these estimates, we project Operating Income of $56.4 million.  This is 7.0 percent more than Operating Income in the September 2008 quarter.

Over the last eight quarters, Broadridge's non-operating income and expenses averaged a net loss of $4.4 million.  This figure, if realized in the current quarter, would bring pretax income down to $52.0 million.  If the Income Tax Rate is 38 percent, Net Income in the quarter would be $32.2 million ($0.22 per share), compared to $35.6 million ($0.25 per share) in the September 2008 quarter.

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 and ADP at time of writing.

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