09 October 2010

BR: Look Ahead to September 2010 Quarterly Results

This post describes our model of Broadridge Financial's (NYSE: BR) Income Statement for the first quarter of fiscal 2011, which ended on 30 September 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 brokerage and other services to financial companies.  In 2009, Broadridge was ranked 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 $190 million ($225 million from continuing operations) in fiscal 2010, which ended in June, on revenue of $2.2 billion.  The company earned $223 million and had revenue of $2.1 billion in 2009.

The market value of Broadridge is currently about $3.1 billion.

Broadridge, for financial data reporting, divides its operations into two business segments:  Investor Communication Solutions (ICS) and Securities Processing Solutions (SPS).   The ICS segment, which contributed more than 75 percent of Broadridge's revenue and pretax earnings in fiscal 2010, distributes and processes proxies for public companies and mutual funds.

The SPS business, as described by the company, provides real-time transaction processing services, including order capture and execution, trade confirmation, settlement and accounting to financial institutions to support global trading of equity, option, mutual fund, and fixed income securities.  Broadridge in fiscal 2010 "processed on average over 1.5 million equity trades per day and over $3.5 trillion in fixed income trades per day of U.S. and Canadian securities." [emphasis added]

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 (NYSE: MS) with those of Citi Smith Barney.

Broadridge sold its Securities Clearing business, in a deal that closed in June 2010, to Penson Worldwide (NASDAQ: PNSN).  The final purchase price, in income and equity securities, was $35.2 million.  As part of the transaction, Penson has hired Broadridge to provide securities processing and other services.
In May 2010, Standard & Poor's raised Broadridge's credit rating to BBB-/A-2 from BBB-/A-3, with a stable outlook.  Fitch Ratings on 1 July 2010 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's board in August hiked its annual dividend 7 percent to $0.60 per share.  The board also authorized the repurchase of 10 million shares of the company's common stock.  Broadridge had 138 million shares outstanding, on a fully diluted basis, in June 2010.

Broadridge Financial earned $0.76 per diluted share on a GAAP basis in fiscal 2010's fourth quarter, which ended 30 June.  Earnings per share were 7.5 percent less than the $0.83 Broadridge made in the same quarter of 2009.

Earnings from continuing operations were $0.84 per share in the June 2010 quarter, up from $0.82 one year earlier.  The securities clearing business, which was treated as a discontinued operation, lost $0.08 per share, after tax, in the quarter.

Broadridge's earnings are always highest in the June quarter of each year.

Readers wanting to take another look at Broadridge's June 2010 quarter might wish to review our Income Statement analysis.

We're now ready to look specifically at the September 2010 quarter.

Broadridge provided its guidance for fiscal 2011, which will end next June, when it reported fourth-quarter results in August.

Fiscal Year 2011 Financial Guidance

We anticipate revenue growth in the range of 1% to 4%, earnings before interest and taxes margin in the range of 14.8% to 15.2%, and diluted earnings per share from continuing operations in the range of $1.55 to $1.65, based on diluted weighted-average shares outstanding in the range of approximately 128 million to 130 million shares. We expect earnings to be lower in the first six months of fiscal year 2011, as a result of a previously-announced client loss, the implementation of the Penson outsourcing services agreement and the non-recurrence of two significant mutual fund proxy jobs. Free cash flow is expected to be in the range of approximately $170 million to $220 million which includes approximately $45 million in investment implementation costs in connection with the Penson outsourcing implementation and the IBM data center services agreement. Free cash flow is defined as cash flow from operating activities, less capital expenditures and intangibles. Closed sales are expected to be in the range of $160 million to $215 million.

[emphasis added]

The one-to-four percent Revenue growth guidance, applied to fiscal 2010's Revenue of $2.209 billion, yields a fiscal 2011 range between $2.23 billion and $2.30 billion.  We have selected $2.25 billion as a Revenue target for the year.

September quarters, which are the first of each new fiscal year, have provided between 19 percent and 22 percent of Broadridge's annual Revenue since the company became independent.

For the September 2010 quarter, we are estimating that Revenue will equal 20.5 percent of the year's forecast total.  This translates into 0.205 * $2.25 billion = $461 million.

Broadridge's Gross Margin has been close to 23 percent of Revenue in most of its September quarters.  We would have assumed a similar margin in the September 2010 quarter, but the company's guidance refers to additional costs and lower profits, especially in the first half of the fiscal year.  We are, therefore, using a slightly more conservative 22 percent Gross Margin in our estimates.  This percentage translates into a Cost of Goods Sold -- called Cost of Net Revenues by Broadridge -- equal to (1 - 0.22) * $461 million = $360 million.

Sales, General, and Administrative expenses in previous September quarters have been between 11 and 12 percent of Revenue, with an average value closer to the top of the range.   We will stick with 12 percent for the most recent quarter, so our estimate for SG&A is 0.12 * $461 million = $55 million.

We are also making a provision for $5 million in restructuring expenses related to the Penson deal.

Rolling up these estimates for Revenue and Operating Expenses, we arrive at a projected Operating Income of $41 million.  This is 11 percent less than Operating Income of $46 million in the September 2009 quarter.

If we assume a $3 million net expense for non-operating items, pretax income would be $38 million.  If the Income Tax Rate is 38 percent, Net Income in the quarter will be $23.6 million (about $0.18 per share), compared to $26.4 million ($0.19 per share) in the September 2009 quarter.

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

Please click here to see a 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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