05 February 2010

BR: Income Statement Analysis for the December 2009 Quarter

Broadridge Financial (NYSE: BR) earned $0.24 per diluted share in the second quarter of fiscal 2010, which ended 31 December 2009.  This result was 12 percent more profitable than earnings per share of $0.21 in the same quarter of the previous year.

Broadridge announced last November it will sell its securities clearing business to Penson Worldwide (NASDAQ: PNSN) and a related company for $60 million to $70 million.  This transaction is expected to close before fiscal 2010 concludes in June.  Broadridge has started to treat the results of the securities clearing business as a discontinued operation. 

Earnings from continuing operations (i.e., excluding the securities clearing) in the December quarter increased from $0.21 to $0.37 per share.

This post examines Broadridge's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Our target for Net Income in the latest quarter was $0.22 per share, which Broadridge exceeded by $0.02.

The principal sources for the income statement analysis were the earnings announcement, the webcast and conference call presentation, and the formal 10-Q report.

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.  Additional background information about Broadridge 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 of $530 million in the December 2009 quarter was a remarkable 21 percent more than in the year-earlier period, which was restated to treat the securities clearing business as a discontinued operation.  Broadridge's earlier guidance had been to expect Revenue growth between 6 and 8 percent for the year.

Quarterly Revenue exceeded our $476 million estimate by 11.3 percent.

The company attributed the Revenue increase to
"... higher contributions from fee revenues of $59.7 million and higher distribution revenues of $32.5 million. Higher fee revenues were driven primarily by event-driven mutual fund proxy revenues."

"We had planned for the event-driven mutual fund revenues to rebound, but they were stronger than anticipated and were a significant contributor to our revenue growth this quarter.”
"Recurring revenue sales" increased 35 percent for the quarter, and "event-driven revenue sales" grew 13 percent.

Cost of Revenues -- we call it Cost of Goods Sold -- was 75.5 percent of Revenue.  This translates into a Gross Margin of 24.5 percent, down from a restated 25.0 percent last year.  We had expected the margin to be 24.2 percent in the latest quarter.

The $58.4 million Broadridge spent on Sales, General, and Administrative expenses was 5.8 percent less than in last year's December quarter.  SG&A was reduced from 14.2 percent of Revenue to 11 percent.  The earlier quarter included $2.2 million additional stock-based compensation expenses.  We had expected SG&A expenses to be flat. 

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 51.4 percent more than the amount attained in last year's December quarter.  In expecting a 13 percent gain, we were far too conservative.   Revenue was much more than expected and expenses were less.

Other, non-operating items (generally interest income and expense, plus foreign exchange gains and losses) summed to a $3.1 million net expense, $600 thousand less than we expected.

The Income Tax Rate (on pretax earnings from continuing operations) was only 24.8 percent, down from 38.4 percent last year.  The 10-Q reports:

The decrease in the effective tax rates is primarily attributable to the release of a valuation allowance on a deferred tax asset relating to tax loss carryforwards, approved certification for a state tax credit program, and lower enacted tax rates in certain non-U.S. tax jurisdictions for the six months ended December 31, 2009.
If, for example, the 38.4 percent rate of December 2008 quarter had been applicable in the December 2009 quarter, Net Income from continuing operations would have reduced by $9.3 million (almost $0.07 per share).

Broadridge recognized a loss on the discontinued securities clearing business of $17.9 million.  The loss was due entirely to the company writing down the underlying assets to their realizable value.

This asset impairment charge reduced the overall Net Income to $33.6 million ($0.24 per share), up 12.4 percent from $29.9 million ($0.21 per share) in the December 2008 quarter.  Our Net Income estimate was $31.0 million ($0.22 per share), which Broadridge surpassed by 8.4 percent.

In the earnings announcement, Broadridge said closed sales in the quarter were valued at 30 percent more than sales closed in the year-earlier quarter.  The company also reported that it repurchased almost $60 million of its common shares in the latest quarter.

Full disclosure: Long BR at time of writing.

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