03 November 2009

BR: Income Statement Analysis for the September 2009 Quarter

Broadridge Financial (NYSE: BR) earned $0.19 per share in the first quarter of fiscal 2010, which ended 30 September 2009, down from $0.25 in the same quarter of last year. 

This post examines the Income Statement for the quarter in the earnings announcement, and it compares the entries on each line to our "look-ahead" estimates.  Our target for Broadridge's Net Income in the latest quarter was $0.22 per share.

In a second article, we will report Broadridge's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Broadridge Financial Solutions, Inc., provides investor communication, securities processing, and clearing services to financial companies.  Some background information about Broadridge Financial and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the 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.

Revenue in the September 2009 quarter was 3.1 percent less than in the year-earlier period.  We expected Revenue to fall only 0.5 percent.  Our estimate was based on the company's guidance for the fiscal year (4 to 8 percent growth) and a seasonality factor that accounts for the uneven distribution of Revenue over the year.

Broadridge blamed the Revenue decline on decreased distribution activities in the Investor Communication Solutions business, the loss of some clients, price concessions to retain other clients, and unfavorable foreign currency exchanges.

On a more positive note, new business activities brought in higher fees, and there were more Revenue-producing "events" such as mutual fund proxies.

Cost of Net Revenues -- we call it Cost of Goods Sold -- was 77.6 percent of Revenue.  This translates into a Gross Margin of 22.4 percent, down from 23.2 percent last year.  We had expected the margin to be 23.5 percent in the latest quarter.

The lower-than-expected margin may be due to the loss of high-margin customer services and to price concessions.

Sales, General, and Administrative expenses were 12.3 percent of Revenue in the quarter, up from 12.0 percent in the year-earlier quarter. Our target for the SG&A expenses was 11.5 percent of Revenue, so actual costs were more than we expected.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 12.5 percent less than the amount attained in last year's September quarter.  We were overly optimistic in expecting a 7.0 percent gain.  Revenue was less than our estimate, the Gross Margin was lower than expected, and SG&A expenses were more than we forecast.

Other, non-operating items such as interest and foreign exchange summed to a $3.8 million net expense in the September quarter, a little better than we expected.

The Income Tax Rate was 37.6 percent in the quarter, slightly less burdensome than the 38 percent we expected.

At the bottom line, Net Income was 25.8 percent below its value in the September 2008 period.  We had projected a decrease of 9.4 percent. 

The earnings announcement repeatedly mentions that the results of the September quarter were consistent with expectations.  We had forecast better numbers, from top to bottom, based on our interpretation of the guidance for the fiscal year and historical trends.

Along with the earnings news, Broadridge announced it agreed to sell "clearing client contracts" to Penson Worldwide (NASDAQ: PNSN) and a related company.  As part of this arrangement, Broadridge to will provide specified securities processing and other services to Penson.  Broadridge reported that this transaction is a part of the company's "strategy to exit the securities clearing business."

In addition, Broadridge announced it had reached a new seven-year agreement to provide "customer communications services" to Morgan Stanley Smith Barney.  This firm combines the wealth management businesses of Morgan Stanley with those of  Citi Smith Barney.

Full disclosure: Long BR at time of writing.

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