24 December 2009

BR: Look Ahead to December 2009 Quarterly Results

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 the previous year. 

In November, we examined Broadridge's Income Statement for the September quarter and compared the entries on each line to our "look-ahead" estimates.  We later performed a financial gauge analysis of Broadridge, which determined that the GCFR Overall gauge fell from 51 to 35 of the 100 possible points.

We have now modeled Broadridge's Income Statement for the quarter that will end on 31 December 2009.  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 February 2010.  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. 

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. 

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.

Broadridge was listed as the top Brokerage Services Outsourcing Provider for the second consecutive year in the Black Book of Outsourcing.  According to the company's 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]

Broadridge is selling its securities clearing business to Penson Worldwide (NASDAQ: PNSN) and a related company.  Broadridge will receive Penson debt and shares.  As part of this transaction, which is expected to close in 2010, Broadridge will provide specified securities processing and other services to Penson.

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.

Earlier in 2009, the company said it lost out on almost $20 million in annual Revenue when 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."

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 specifically at the current quarter.

Broadridge revised its guidance for the remainder of fiscal 2010, which will end next June, when it reported first quarter results last November.

Fiscal Year 2010 Financial Guidance

We are increasing our full year net revenues growth guidance to a range of 6% to 8% from our previous guidance range of 4% to 8%. We are reaffirming our Non-GAAP earnings per share guidance range of $1.50 to $1.60 on a fully-diluted basis, which excludes a negative $0.08 per share impact of one-time items related to the net effect of the Penson transaction and a foreign tax credit. The one-time items from the Penson transaction accounted for a negative $0.14 per share impact on EPS, offset by a positive $0.06 per share EPS impact from the foreign tax credit.

As a result of the impact of the one-time items, we are decreasing the GAAP earnings per share guidance range to $1.42 to $1.52 from $1.50 to $1.60 on a fully-diluted basis. The earnings per share guidance is based on diluted weighted-average shares outstanding of approximately 141 million shares. In addition, our fiscal year 2010 financial guidance assumes that the Penson transaction closes in our third fiscal quarter of 2010.

We anticipate earnings margin, before interest and taxes, excluding one-time items related to the Penson transaction in the range of 15.3% to 16.0% (Non-GAAP) and in the range of 13.9% to 14.7% (GAAP). Our effective annual tax rate will be approximately 37.5% excluding the one-time foreign tax credit (Non-GAAP), and 35.0% including the one-time tax credit (GAAP). Free cash flow is expected to be in the range of $235 million to $270 million. We are increasing our closed sales forecast for fiscal year 2010 to a range of $185 million to $205 million from our previous guidance range of $165 million to $185 million.

[emphasis added]

In fiscal 2009, Revenue was $2.15 billion.  Given the guidance of 6 to 8 percent growth, Broadridge expects Revenue in the new fiscal year between $2.28 billion and $2.32 billion.

Note that Broadridge's annual Revenue is not distributed evenly across the year.  In the last four years, the December quarter contributed an average of 20.7 percent of annual Revenue.  Our Revenue target for the quarter, $476 million, was calculated by applying the seasonality factor (20.7 percent) to the midpoint of the Revenue range ($2.3 billion).

The Gross Margin has averaged 24.2 percent in the previous four December 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 - 0.242) * $476 million = $361 million.

Sales, General, and Administrative expenses are typically around 13 percent of Revenue in December.  Therefore, our estimate for SG&A is 0.13 * $476 million = $62 million.

With these estimates, we project Operating Income of $53.3 million.  This is 12.9 percent more than Operating Income in the December 2008 quarter.

Over the last eight quarters, Broadridge's non-operating income and expenses averaged a net loss of about $4 million.  This figure, if realized in the current quarter, would bring pretax income down to $49.6 million.  If the Income Tax Rate is 37.5 percent, Net Income in the quarter would be $31 million ($0.22 per share), compared to $29.9 million ($0.21 per share) in the December 2008 quarter.

Please note that we have not made any provisions in the current quarter for the Penson loss or the foreign tax credit.

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.

Note: Yahoo Finance is the source of the historical share price data.

Full disclosure: Long BR and ADP at time of writing.

No comments:

Post a Comment