11 May 2010

BR: Income Statement Analysis for the March 2010 Quarter

Broadridge Financial (NYSE: BR) earned $0.18 per diluted share on a GAAP basis in the third quarter of fiscal 2010, which ended 31 March.  Broadridge made 38 percent less than the $0.29 per share it earned in the same quarter of 2009.

Earnings from continuing operations were $0.22 in the latest quarter.  The securities clearing business, which is being treated as a discontinued operation, lost $0.04 per share.  The sale of this business, announced last November, to Penson Worldwide (NASDAQ: PNSN) is expected to close before the end of June 2010.

This post examines Broadridge's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings and earnings from continuing operations were both lower than the $0.26 per share we had forecast.

The principal sources for this income statement analysis were the earnings announcement, the conference call presentation, the call transcript (available from Seeking Alpha), 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 brokerage and other services to financial companies.  The Investor Communication Solutions business, which distributes and processes proxies for public companies and mutual funds, contributed more than 70 percent of Broadridge's revenue and pre-tax earnings in fiscal 2009.  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."  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 $490.8 million was 5.8 percent more than Revenue of $463.7 million in the March 2009 quarter.  The earlier period's Revenue is lower than when first reported because of the decision to treat the securities clearing business as a discontinued operation. 

Our $509 million Revenue estimate was 3.7 percent too high.  The estimate was based on Broadridge's guidance to expect fiscal 2010 Revenue growth between 7 and 9 percent.

Revenue attributed to the Investor Communication Solutions business increased 6.5 percent, from $334.7 million to $356.5 million.  The latest amount was 72.6 percent of the company's total Revenue for the quarter.  Revenue from the Securities Processing Solutions business slipped 2.0 percent, from $136.3 million to $133.6 million.

Management stated that recurring Revenues did not rebound as much as anticipated, but event-driven Revenues (related to mutual fund proxies) were strong.  Revenue also resulted from the seven-year agreement, reached in late 2009, to provide "customer communications services" to Morgan Stanley Smith Barney.  These services include production and distribution of account statements, performance reports, tax reporting documents, and some trade confirmations
The Cost of Revenues -- we call it Cost of Goods Sold -- increased to $380.9 million (77.6 percent of Revenue) from $357.3 million in 2009's first quarter.  The latest amount translates into a Gross Margin of 22.4 percent, 50 basis points less profitable than last year.  The company incurred some integration costs in conjunction with the new MSSB arrangement.

Costs were also higher due to foreign currency exchange rate changes.

The Gross Margin was 60 basis points below the 23.0 percent we had estimated.

Sales, General, and Administrative expenses increased 23 percent, from $48.7 million to $60 million.  As a percentage of Revenue, SG&A rose from 10.5 percent to 12.2 percent.  The increase was amplified because a one-time $4.4 million credit in year-earlier quarter lowered expenses.

The latest SG&A expense was 7.1 percent more than our $56 million estimate.

Subtracting the various operating expenses from Revenue yields Operating Income of $49.9 million, down 13.5 percent from $57.7 million in the year-earlier quarter.  The decrease was due to the lower Gross Margin and to additional SG&A expenses, partially offset by greater Revenue.

Operating Income fell 18.3 percent short of our $61.1 million target for the latest quarter.

Other items that we classify as non-operating (generally interest income and expense, plus foreign exchange gains and losses) summed to a $1.5 million net expense.  The interest expense on borrowings was $1 million less than last year.  The $1.5 million net expense for non-operating items was less than the $4 million we had targeted.

The Income Tax Rate (on pretax earnings from continuing operations) was 36.4 percent, up from an unusually low 24.4 percent last year. We overestimated the tax rate at 37.5 percent.

After-tax earnings from continuing operations were $30.8 million ($0.22 per share), down 25 percent from last year's $41.2 million ($0.29 per share). 

Broadridge recognized a $5.9 million loss on the securities clearing business, which is treated as discontinued operation prior to its sale to Penson.  The loss resulted from Broadridge cutting the estimated value of the securities clearing business.  The decision by a customer against moving its business to Penson will reduce the consideration Broadridge receives from Penson.

This reduced the overall Net Income to $24.9 million ($0.18 per share), down 39 percent from $40.9 million ($0.29 per share) in the March 2009 quarter.  Our Net Income estimate was $35.7 million ($0.26 per share), which Broadridge missed by 30 percent.

Full disclosure: Long BR at time of writing.

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