Broadridge Financial: Looking Ahead to December 2010 Quarterly Results

| About: Broadridge Financial (BR)
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This post describes our model of Broadridge Financial's (NYSE: BR) Income Statement for the second quarter of fiscal 2011, which ended on 31 December 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.

If the normal seasonal pattern remains in place, earnings in the December quarter will be closer to those in September and March than June.

We begin by reviewing background information about Broadridge and the business environment in which it is currently operating.

Broadridge Financial Solutions, Inc., provides brokerage and other services to financial companies. Broadridge has been ranked the top Brokerage Process Services Outsourcing Provider for the last three consecutive years 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 $2.8 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]

In 2009, Broadridge entered into 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.

In the September-ending first quarter of fiscal 2011, Broadridge Financial earned $0.10 per diluted share on a GAAP basis, down 45 percent from $0.19 in the same three months of last year. Results in the the earlier quarter benefited from non-recurring items.

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

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

Broadridge updated its guidance for fiscal 2011, which will end next June, when it reported first-quarter results on 4 November 2010.
The company re-affirmed it expects fiscal 2011 Revenue to be one to four percent more than fiscal 2010's $2.209 billion. This guidance translates into a fiscal 2011 range between $2.23 billion and $2.30 billion. Since Revenue in the first quarter was $421.4 million, Revenue in the final three quarters of the fiscal year is expected to range from $1.81 billion to $1.89 billion.

If normal season patterns were to apply, Revenue in the December quarter would be 25 to 30 percent of Revenue in the last nine months. This gives us a notional range for December's Revenue of about $500 million, give or take $50 million. We are using $480 million, in the lower half of the range, because the company commented that comparisons in the first half of the year would be weaker than those that follow.

Broadridge's Gross Margin has been 23 to 26 percent of Revenue in December quarters, but the margin was only 20 percent in the September 2010 quarter. This led us to be conservative and assume the margin will be a lower-than-normal 22.5 percent. When combined with our Revenue estimate, the predicted margin translates into a Cost of Goods Sold -- called Cost of Net Revenues by Broadridge -- equal to (1 - 0.225) * $480 million = $372 million.

Sales, General, and Administrative expenses in previous December quarters have been between 11 and 14 percent of Revenue. We are using 13 percent for the most recent quarter, so our estimate for SG&A is 0.13 * $480 million = $62 million.

Rolling up these Revenue and Operating Expense estimates, we arrive at a projected Operating Income of $45.6 million. This is 36 percent less than Operating Income of $71.6 million in the December 2009 quarter.

If we assume a $3 million net expense for non-operating items, pretax income would be $42.6 million. If the Income Tax Rate is 37 percent, Net Income in the quarter will be $26.8 million (about $0.21 per share), compared to $33.6 million ($0.24 per share) in the December 2009 quarter.

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.