24 June 2010

BR: Look Ahead to June 2010 Quarterly Results

This post describes our model of Broadridge Financial's (NYSE: BR) Income Statement for the fourth quarter of fiscal 2010, which will end on 30 June 2010.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report.  Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.
We begin by reviewing background information about Broadridge and the business environment in which it is currently operating.

Broadridge Financial Solutions, Inc. (NYSE: BR) provides various automated services to financial companies.  In 2009, Broadridge was listed as the top Brokerage Services Outsourcing Provider for the second consecutive year in the Black Book of Outsourcing

Automatic Data Processing (NASDAQ: ADP) spun off Broadridge on 30 March 2007.  (GCFR articles related to ADP can be found here.)

Broadridge earned $223 million on Revenue of $2.1 billion in fiscal 2009, which ended last June. The company's current market capitalization is about $2.7 billion.

Broadridge's organization includes the following three business segments:  Investor Communication Solutions (ICS), Securities Processing Solutions (SPS), and Clearing and Outsourcing Solutions.  The ICS 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.

The SPS business provides real-time transaction processing services, including portfolio management, order capture and execution, trade confirmation, settlement and accounting services. According to the company's 10-K annual report, Broadridge 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 in return.  As part of the transaction, which should close this month, Penson will hire Broadridge to provide specified securities processing and other services to Penson for the next ten years.

//UPDATE-28 June 2010// Broadridge announced that the sale to Penson had closed and that the final purchase price, in income and equity securities, was $35.2 million.//

On 7 June 2010, Broadridge authorized the repurchase of 10 million shares of its common stock.  This amount of shares is presently worth approximately $200 million.  Broadridge had about 140 million shares outstanding in March 2010.

In May 2010, Standard & Poor's raised Broadridge's credit rating to BBB-/A-2 from BBB-/A-3, with a stable outlook. 

 //UPDATE - 1 July 2010//Fitch Ratings upgraded Broadridge's credit rating from "BBB" to "BBB+," with a stable outlook.  Fitch noted that Broadridge's cash flow should be more stable as a result of the deal with Penson.//

Broadridge doubled its dividend in August 2009.

Last year, Broadridge reached a seven-year agreement with Morgan Stanley Smith Barney to provide "customer communications services."  MSSB combines the wealth management businesses of Morgan Stanley with those of Citi Smith Barney.

More recently, Broadridge completed the acquisition of City Networks Ltd on 21 June 2010.  City Networks is a "provider of reconciliation, multi-asset process automation and operational risk management solutions to the global financial services industry."

In the third quarter of fiscal 2010, which ended 31 March, Broadridge earned $0.18 per diluted share on a GAAP basis, down from $0.29 per share in the same quarter of 2009. Earnings from continuing operations were $0.22 in the latest quarter.

We are now ready to look specifically at the fourth fiscal quarter.

Broadridge updated its guidance for the remainder of fiscal 2010, which will end in June, when it reported third quarter results in May.

Fiscal Year 2010 Financial Guidance

We expect to be at the low end of the revenue guidance we provided last quarter of 7% to 9% due to the flat to negative market-driven volumes we continue to experience (i.e. trade volumes and equity stock record growth). Our GAAP earnings per share from continuing operations are expected to be in the range of $1.58 to $1.64 on a diluted share basis. Our non-GAAP earnings per share from continuing operations are expected to be in the range of $1.52 to $1.58 on a diluted share basis, which excludes a positive $0.06 per share impact of a one-time foreign tax credit. Our GAAP earnings per share are expected to be in the range of $1.36 to $1.42 on a diluted share basis which includes the loss from discontinued clearing operations. The earnings per share guidance is based on diluted weighted-average shares outstanding of approximately 139 million shares. In addition, our fiscal year 2010 financial guidance assumes that the Penson transaction closes during the fourth quarter of our 2010 fiscal year.

We anticipate margins from continuing operations before interest and taxes in the range of 15.8% to 16.2%. Our effective annual tax rate will be approximately 34.7% (GAAP) including the one-time foreign tax credit and 37.5% (non-GAAP run rate) without the credit. Free cash flow is expected to remain in the range of $235 million to $270 million, as previously provided. Our closed sales forecast for fiscal year 2010 remains unchanged in the range of $185 million to $205 million.

[emphasis added]

Broadridge's Revenue is much higher in June quarters than in any other period.

Before doing anything with the guidance for revenue growth, we needed to learn whether it applied to revenue from the Securities Clearing business in either the current year or in fiscal 2009.  The answer was found in a presentation given by Broadridge during its last earnings conference call:  the guidance, refined to 7 ± 0.5 percent, applies to continuing operations only, and the 2009 Revenue baseline is $2.073 billion.

The company's Revenue guidance for the entirety of fiscal 2010 is, therefore, $2.218 billion, give or take about $10 million.  Revenue from continuing operations in the first three quarters of fiscal 2010 was $1.459 billion.  This leaves $2.218 billion - $1.459 billion = $759 million for the fourth quarter.

The Gross Margin has been between 31 and 33 percent of Revenue in the four previous June quarters.  We will assume a 32 percent margin for the latest quarter, which leads to an estimate for the Cost of Goods Sold -- called Cost of Net Revenues by Broadridge -- of (1 - 0.32) * $759 million = $516.1 million.

Sales, General, and Administrative expenses have been between 7 and 9 percent of Revenue in previous June quarter.  Splitting the difference, our estimate for SG&A in the June 2010 quarter is 0.08 * $759 million = $60.7 million.

With these estimates, we project Operating Income of $182.2 million.  This is 5.7 percent less than Operating Income in the June 2009 quarter.

If we assume a $4 million net expense for non-operating items, pretax income would be $178.2 million.  If the Income Tax Rate is 37 percent, Net Income in the quarter will be $112.2 million ($0.81 per share), compared to $116.9 million ($0.83 per share) in the June 2009 quarter.

Our fourth-quarter estimate would lead to full-year Net Income from continuing operations of $221.1 million, about $1.59 per share.  This is near the bottom of the company's guidance.  Perhaps we were a little conservative with some estimates, but we've sharpened our pencils and are comfortable with the numbers used.

We haven't assumed any income or loss from the discontinued Securities Clearing business.

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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