ADP: Financial Analysis through June 2008 (Updated)

We previously posted an analysis of ADP's preliminary results for the three months that ended on 30 June 2008, which was the fourth quarter of the company's fiscal 2008.  Our evaluation was incomplete because the Balance Sheet was condensed and the Cash Flow Statement was omitted in the initial financial statements,

ADP has since filed a 10-K annual report with the SEC, and we have updated the GCFR analysis to incorporate the data that hadn't previously been disclosed.

Automatic Data Processing, Inc. (NYSE: ADP) is a top provider of payroll and other personnel-related information technology services.  ADP is one of a mere handful of U.S. companies with a AAA bond rating, and it is an S&P 500 Dividend Aristocrat.  The company publishes the monthly ADP National Employment Report on non-farm private employment, and it competes with firms such as Paychex, Inc. (NASDAQ:PAYX).  Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (NYSE: BR).  (ADP continues to provide services to Broadridge in the same capacity it had prior to the spinoff.)

ADP made two changes to the way it accounts for client funds and obligations.  The first change, which doesn't concern us, reclassifies these amounts as Current Assets and Current Liabilities.  The second change moves the net increase in Client Fund Obligations from the Investing to the Financing section of the Cash Flow Statement.  This arcane but big-dollar change -- $3.5 billion in the last fiscal year -- significantly alters the Net Cash Used in Investing Activities.  We use this figure to compute the Accrual Ratio, which is an indicator of Earnings Quality and Profitability.  For consistency with historical data, we adjusted the newly reported Cash Flow figures to comply the older classification.

With the additional data in the 10-K changed, our gauges now display the following scores.

• Cash Management: 8 of 25 (down from 13 after the March quarter)
  
• Growth: 20 of 25 (up from 18)
  
• Profitability: 12 of 25 (down from 15)
  
• Value: 16 of 25 (up from 13)
  

• Overall: 54 of 100 (down from 57)
  

The new information didn't change our evaluation of the latest quarter's Income Statement, including the comparison with our previously communicated expectations.


Cash Management. This gauge decreased from 13 points in March to 8 points now. 

	June 2008	3 mos. ago	12 mos. ago
Current Ratio	1.7	1.8	1.9
LTD/Equity	1.0%	1.0%	0.8%
Debt/CFO	0.0 yrs	0.0 yrs	0.0 yrs
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	43.2 days	44.6 days	42.3 days
Working Capital/Market Capitalization	6.2%	6.9%	5.9%
Cash Conversion Cycle Time (CCCT)	31.4 days	34.7 days	28.7 days

Debt is a non-factor for this AAA company, but cash management efficiency may have slipped an iota when judged by DSO and CCCT.

The 10-K proudly reports that ADP's "investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages or home equity loans, collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), credit default swaps, asset-backed commercial paper, auction rate securities, structured investment vehicles or non-investment-grade securities."


Growth. This gauge increased from 18 points in March to 20 points now.

	June 2008	3 mos. ago	12 mos. ago
Revenue growth	12.5%	13.3%	13.2%
Revenue/Assets	104%	97%	98%
CFO growth	36.5%	2.4%	-28.4%
Net Income growth	13.8%	16.6%	19.1%

Growth rates are trailing four quarters compared to four previous quarters.

Most of the Growth metrics improved, especially Cash Flow from Operations which jumped in the June quarter.  Increasing Revenue/Assets is also a welcome result.  Net Income for the trailing four quarters benefited from a decrease in the effective income tax rate from 37.1 to 35.9 percent.


Profitability. This gauge decreased from 15 points in March to 12 point now.

	June 2008	3 mos. ago	12 mos. ago
Operating Expenses/Revenue	80.3%	80.1%	80.7%
ROIC	26.2%	27.9%	27.5%
FCF/Equity	31.3%	23.8%	21.9%
Accrual Ratio	+3.0%	-3.8%	-8.9%

Although fourth-quarter Operating Expenses were higher than we anticipated, on a trailing four quarters basis they were remarkably stable.  The growth in Free Cash Flow and the stable ROIC is comforting.   The increase in the Accrual Ratio suggests lower Earnings Quality, but might have been affected by the change in Cash Flow item classifications.


Value. ADP's stock price slipped from $42.39 to $41.90 during the June quarter -- it has since reversed decline.  The Value gauge, based on the quarter-end closing price, moved up from 13 to 16 points.

	June 2008	3 mos. ago	12 mos. ago
P/E	18.7	19.6	26.2
P/E to S&P 500 average P/E	106%	114%	160%
Price/Revenue	2.5	2.6	3.4
Enterprise Value/Cash Flow (EV/CFO)	11.4	13.8	19.2

ADP's valuation ratios, which have become less expensive by the metrics we follow most closely, can be compared with other companies in the Business Software and Services industry.


The Overall gauge score of 54 of 100 points is a relatively good score for ADP.  This rock-solid company is growing, highly profitable, and trading at a discount relative to historical measures.

Financial Statements: Changes are Coming

Floyd Norris, in the New York Times (NYSE: NYT), wrote about a step by the U.S. Securities and Exchange Commission to allow, and eventually require, U.S. companies to prepare their financial statements in accordance with International Accounting Standards.  Our parochial concern is that comparisons between new and old financial statements could be misleading in the first years after the transition.  We prefer to have a five-year (20-quarter) or longer historical record for the companies we analyze, to get the full benefits of the GCFR methodology.  We're thrilled when we have 10 years of data.
 
The SEC also recently announced a replacement for the EDGAR repository of financial reports.  We love having online access to every company's 10-Q and 10-K since 1994, and these reports are only a fraction of the information available from EDGAR.  However, we spend too much time retyping data from the forms into custom spreadsheets, and the process is error-prone.  The replacement system, Interactive Data Electronic Applications (IDEA), promises to make data available in more useful and convenient ways.

The ongoing transition to eXtensible Business Reporting Language (XBRL) is a key enabler for IDEA.

Reader Feedback Requested

GCFR is looking for feedback from readers.  Do you prefer information that explains the organization of financial statements, analytical approaches to assess these statements, evaluations of actual quarterly reports, or extrapolated "look-aheads" to future earnings? 

All of the above?  None of the above?

Readers are asked to visit the GCFR web site and vote.  The poll will remain open through September. 

Feel free to leave a comment on web page or email us if you wish to provide more specific comments.

NVDA: Financial Analysis through July 2008

We have analyzed NVIDIA's financial statements through the fiscal quarter that ended on 27 July 2008.

Since we had not examined this company previously, we first collected the 10-Q and 10-K reports NVIDIA submitted to the SEC since its initial public offering in 1999.  We converted the financial statements in these filings into the normalized forms used for GCFR analyses.  We coped with restatements, acquisitions, stock splits, and changes in accounting rules to build a 35-quarter historical record that is as consistent as we could make it.  However, readers should be aware that misleading results are possible when financial data from one period are compared with another.

NVIDIA Corporation (NVDA), based in Santa Clara, CA, builds a variety of specialized Graphics Processing Units.  These devices perform computationally intense tasks required to produce realistic images for video games and other applications.
 
The company competes with firms such as Intel Corporation (INTC) and Advanced Micro Devices (AMD).

NVIDIA has increased Revenue significantly over the years, but sales in the July 2008 quarter were 5 percent lower than in the July 2007 quarter.  NVIDIA attributes the slowdown to reduced sales of GPUs for desktop computers and to a "miscalculation of competitive price position." 

The company's problems in the quarter were compounded by a $196 million charge related to faults in certain products for notebook computers.  This led to a $121 million loss in the quarter.  As best we can determine, this was only the second quarter NVIDIA in its current form recorded a loss.

Not surprisingly, NVIDIA's missteps have damaged the company's shares, which are now trading at a price almost 2/3 below the 52-week high.  To help stem the tide, the company recently added $1 billion to its stock repurchase program.


The deep slide in the share price has a positive effect on our gauges of NVIDIA's financials.

• Cash Management: 17 of 25
  
• Growth: 2 of 25
  
• Profitability: 8 of 25
• Value: 25 of 25
   
• Overall: 64 of 100
  

Before examining the factors that affected each gauge, we will review the latest quarterly Income Statement.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		July 2008 (actual)	July 2007 (actual)
Revenue		893	935
Op expenses
	CGS (1)	(547)	(511)
	R&D	(213)	(158)
	SG&A	(92)	(81)
	Other (2)	(196)	(0)
Operating Income		(155)	185
Other income
	Investments	0	0
	Interest, etc. (3)	9	16
Pretax income		(147)	201
Income tax		26	(28)
Net Income		(121)	173
		($0.22)/sh	$0.29/sh
Shares outstanding		555	604

(1) Cost of Revenue
(2) Repair and replacement costs.
(3) interest and other income (expense)

Revenue in the July 2008 quarter was 4.5 percent less than in the year-earlier quarter.  However, Revenue in the most recent four quarters exceeded Revenue in the four previous quarters by 25 percent.

NVIDIA achieved a Gross Margin of 38.7 percent in the quarter, compared to 45.3 percent of Revenue in July 2007.  Note that we excluded the $196 million charge to CGS in this calculation.

Research and Development (R&D) expenses were 23.9 percent of Revenue, up from 16.9 percent in the year-earlier quarter.  It shouldn't be surprising that this ratio would increase in a period of declining sales.  The company needs to keep its labs humming to avoid a further deterioration of its competitive position.

Sales, General, and Administrative (SG&A) expenses were 10.4 percent of Revenue, an increase from last year's 8.7 percent.

For all of these reasons, Operating Income in the quarter swung from a $185 million gain to a $155 million loss.

Non-operating interest and other income slipped by $7 million. 

The company was able to recover some of the Operating loss with a $26 million income tax benefit.  Still, Net Income was a sizable $121 million loss.


Cash Management. This gauge increased from 15 points in April to 17 points now.

	July 2008	3 months ago	12 months ago
Current Ratio	2.5	3.1	3.5
LTD/Equity	0%	0%	0%
Debt/CFO	N/A	N/A	N/A
Inventory/CGS	53.0 days	57.2 days	61.1 days
Finished Goods/Inventory	52.9%	53.9%	64.4%
Days of Sales Outstanding (DSO)	49.7 days	46.5 days	50.8 days
Working Capital/Market Capitalization	26.4%	15.4%	9.3%
Cash Conversion Cycle Time (CCCT)	49.1 days	47.9 days	57.3 days

NVIDIA's Balance Sheet is strong.  The company has over $1.6 billion in Cash and Short-term Investments.  With the recent drop in Market Value, the Working Capital ratio is especially high.  Given the challenges of the second quarter, one might have expected a bloated Inventory, but just the opposite is true.   Days of Sales Outstanding is up from April, but down from July 2007.

Growth. This gauge fell from 13 points in April to 2 points now.

	July 2008	3 months ago	12 months ago
Revenue growth	25.5%	36.4%	34.5%
Revenue/Assets	110%	116%	115%
CFO growth	-21.6%	36.9%	197.9%
Net Income growth	-4.6%	72.2%	69.2%

Growth rates are trailing four quarters compared to four previous quarters.

As indicated by the weak score, there isn't much good to report here.  Under other circumstances, a 25 percent year-over-year increase in Revenue would be celebrated, but the fact that sales are decelerating is obvious.

Profitability. This gauge decreased from 14 points in April to 8 points now.

	July 2008	3 months ago	12 months ago
Operating Expenses/Revenue	82.7%	79.6%	83.3%
ROIC	34.7%	40.7%	39.2%
FCF/Equity	18.1%	27.6%	43.6%
Accrual Ratio	10.3%	8.8%	-2.1%

Although the ROIC figure is impressive, we see the effect of declining Cash Flow from Operations on the FCF/Equity Ratio and the Accrual Ratio.  The latter measure of Earnings Quality, tells us by increasing that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals. 

The Operating Expense ratio does not include the large charge in the recent quarter.

Value. NVIDIA shares decreased in price from $20.55 on 30 April to $11.44 on 31 July. (The share price has since edged up on news that the quarter wasn't worse and on the additional share repurchases.)  The Value gauge, based on the July-end price, pegged the Value gauge at 25 of 25 points.

	July 2008	3 months ago	12 months ago	5-year median
P/E	11.6	14.4	32.0	29.0
P/E to S&P 500 average P/E	66%	80%	201%	166%
Price/Revenue	1.5	2.8	5.3	2.7
Enterprise Value/Cash Flow (EV/CFO)	5.3	9.4	15.0	18.5

NVIDIA's valuation ratios can be compared with other companies in the Specialized Semiconductor industry.


Former high-flier NVIDIA stumbled badly, and it has been punished severely.  Its shares are selling at a significant discount to their historic norms, which has led to a very good Overall Gauge score of 64 points, of 100 possible points.  Of course, our backward-looking gauge scores are blind to future changes in demand for new computers, and they are equally unaware of alterations in the relative standing of NVIDIA's products compared to its formidable competitors.  MarketWatch recently reported on one analyst's opinion that Advanced Micro Devices (AMD) is gaining ground on both Intel (INTC) and NVIDIA.

Investors have to ask themselves if "normal" conditions at NVIDIA will return.  If they do, the shares today will look inexpensive.

KG: Intentions Now Clear

It was just two weeks ago, in our analysis of second quarter results, that we remarked that King Pharmaceuticals, Inc. (NYSE: KG):

... had over $1 billion in Cash or equivalents on 30 June. The amount is far more than needed to meet current obligations. The company could be planning to reduce its debt or getting ready to make a large investment.

We now have a better understanding of King's intentions.

King Pharmaceuticals formally announced a $1.4 billion, all-cash offer to purchase all the shares of Alpharma, Inc. (NYSE: ALO). Alpharma immediately rejected the $33 per share offer as inadequate, despite a substantial premium over prior market value. The offer had apparently been made privately and rebuffed by Alpharma before King's announcement on Friday. Alpharma's latest response indicated a willingness to enter into negotiations leading to a higher offer.

It seems likely that King's interest in Alpharma was piqued by the latter's KADIAN and FLECTOR products for treating acute pain. King and Pain Therapeutics, Inc. (NASDAQ: PTIE) recently presented test results for the proposed REMOXY product to treat chronic pain.

HD: Financial Analysis through July 2008

We have analyzed Home Depot's preliminary report for fiscal 2008's second quarter, which consisted of the 13 weeks that ended 3 August 2008.  We will refer to this period as the July quarter because retailers typically report sales and earnings for intervals that conclude near the end of January, April, July, and October. 

Home Depot's initial financial statements were incomplete.  The Balance Sheet was abbreviated, and the Cash Flow Statement was omitted.  These shortfalls will be resolved when the company submits a 10-Q report to the SEC, and we will then update our evaluation.

The Home Depot, Inc. (NYSE: HD) is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products.  New management sold the Home Depot Supply division, which served professional contractors, to a consortium of private equity firms on 31 August 2007.  The price was $8.5 billion, or $1.8 billion less than the figure originally negotiated.  Management then executed a $10.7 billion Dutch Auction tender offer for Home Depot shares.

RBS Partners, L.P., a fund associated with Edward Lampert, reported in a Form 13F filing that it owned 19.7 million Home Depot shares on 30 June 2008.  The partnership appears to have cut its stake by about 3 million shares over the three previous months.  Mr. Lampert is Chairman of Sears Holdings (NASDAQ:SHLD).

When we analyzed Home Depot's preliminary results for the first quarter of the 2008 fiscal year, the GCFR Overall gauge of the company's performance and value stood at 41 of 100 points.  This score jumped to 49 points when we re-evaluated the company using the full set of financial statements in the formal 10-Q quarterly report.  Of the four individual gauges that fed into this composite result, Profitability was the strongest at 14 of 25 points.  Cash Management and Growth were weakest at 10 of 25 points.

Now, with the limited data from the July 2008 quarter, our gauges display the following scores:

• Cash Management: 9 of 25 (down from 10 in April)
  
• Growth:  10 of 25 (unchanged)
• Profitability:  11 of 25 (down from 14)
• Value:  17 of 25 (up from 13)

• Overall:  51 of 100 (up from 49)

These scores are subject to change after we evaluate the 10-Q report.

Because Home Depot's corporate structure changed substantially in 2007, our gauge scores should be treated with an extra dose of skepticism.  Comparisons of current financial data with historic results drive the numbers, and the validity of some comparisons is questionable.  Caution is also advisable because of the state of the housing market.

Before examining the metrics associated with each gauge, we will compare the latest quarterly Income Statement to our previously communicated baseline. 

Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		3 August 2008 (actual)	3 August 2008 (predicted)	29 July 2007 (actual)
Revenue		20,990	21,200	22,184
Operating expenses
	CGS	(14,026)	(13,992)	(14,843)
	Depreciation	(452)	(450)	(414)
	SG&A	(4,470)	(5,088)	(4,370)
	Other	(0)	(0)	(0)
Operating Income		2,042	1,670	2,557
Other income
	Investments	0	0	0
	Interest, etc.	157	(175)	(145)
Pretax income		1,885	1,495	2,412
Income tax		(683)	(556)	(891)
Net Income from continuing operations		1,202 $0.71/sh	939 $0.56/sh	1,521 $0.77/sh
Discontinued operations		0	0	66
Net Income		1,202 $0.71	939 $0.56/sh	1,587 $0.81/sh
Shares outstanding		1,685	1,685	1,969

Revenue in the July 2008 quarter was 1.0 percent below our target and 5.4 percent less than in the year-earlier quarter.  Using the midpoint of management's guidance, we expected sales would decline by 4.5 percent.  Same-store sales were down a substantial 7.9 percent.  On a year-over-year basis, Revenue fell 2.9 percent.

We thought Home Depot could achieve a Gross Margin in the quarter of 34 percent, and they fell a little short at 33.2 percent of Revenue.  In other words, the Cost of Goods Sold (CGS) was 66.8 percent of Revenue.

Depreciation expenses were a scant $2 million more than we expected.  Depreciation was 2.2 percent of Revenue, instead of 2.1 percent.

Sales, General, and Administrative expenses were 21.3 percent of Revenue, much less than our 24.0 percent forecast.  We were overly conservative because the SG&A ratio was over 24 percent in the previous two quarters.

Despite lower Revenue and a smaller Gross Margin, the much lower-than-anticipated SG&A costs resulted in Operating Income 22.3 percent above the forecast value.  Alas, Operating Income in the quarter was still 20.1 percent less than in the comparable year-earlier period

Non-Operating interest expenses were 10.3 percent less than we expected.  And, the Income Tax Rate was also lower than predicted:  36.2 percent vs. 37.2 percent.  As a result, Net Income from continuing operations surpassed our prediction by 28 percent.  However, Net Income was down by 24 percent from the July 2007 quarter.

Cash Management.  This gauge decreased from 10 points in April to 9 points now.

	July 2008	3 months ago	12 months ago
Current Ratio	1.3	1.2	1.4
LTD/Equity	60.9%	64.0%	42.8%
Debt/CFO	2.3 yrs	2.2 yrs	1.7 yrs
Inventory/CGS	88.0 days	97.0 days	91.5 days
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	7.4 days	12.1 days	12.0 days
Working Capital/Market Capitalization	6.2%	3.7%	7.9%
Cash Conversion Cycle Time (CCCT)	41.0 days	43.9 days	41.5 days

Home Depot's capital structure is significantly more leveraged than last year, but the amount of leverage eases a little each quarter.  We were concerned last quarter about the high level of inventory, but it was cut back nicely in the most recent quarter.  The reduction in DSO and, to a lesser extent, CCCT could be signs of efficiency improvements.


Growth. This gauge didn't change from 10 points in April.

	July 2008	3 months ago	12 months ago
Revenue growth	-2.9%	-1.9%	-5.4%
Revenue/Assets	167%	168%	137%
CFO growth	N/A	-14.4%	-1.0%
Net Income growth	-28.9%	-24.9%	-21.5%

Growth rates are trailing four quarters compared to four previous quarters.

Revenue, Cash Flow, and Net Income are all down and, in some cases, substantially so.  The growth score is driven entirely by the substantial increase in Revenue as a percentage of Assets.  The latter decreased as a result of the share repurchase.


Profitability. This gauge decreased from 14 points in April to 11 points now.

	July 2008	3 months ago	12 months ago
Operating Expenses/Revenue	91.6%	91.1%	89.8%
ROIC	13.9%	15.0%	13.1%
FCF/Equity	N/A	12.4%	12.2%
Accrual Ratio	N/A	-17.6%	6.5%

The increase in Operating Expenses might be a reflection of commodity price inflation.  We await an updated Cash Flow statement to get a better read on Profitability, but for a company in the midst of the housing slump, the ROIC and FCF figures don't look too bad.


Value. Home Depot's stock price fell sharply from $28.80 on 30 April to $23.83 on 31 July 2008.  The Value gauge, based on the latter price, increased to 17 points from 13 points three months ago.

	July 2008	3 months ago	12 months ago	5 year median
P/E	12.2	13.4	15.8	15.5
P/E to S&P 500 average P/E	69.2%	74.2%	99.1%	90.2%
Price/Revenue	0.5	0.6	0.9	1.0
Enterprise Value/Cash Flow (EV/CFO)	N/A	10.9	11.8	12.1

Home Depot's valuation ratios can be compared with other companies in the Home Improvement industry.

By measures we track, Home Depot shares are selling at quite a discount to the market and to historical conditions.  However, we have no way to know how long sales and earnings will continue to decline.

We need the full set of financial statements that will be in the 10-Q report, but our initial reading of the Overall Gauge is a score of 51 out of 100 possible points.  As far as we're concerned, the big news in the second quarter was the substantial reduction in SG&A expenses as a percentage of Revenue.

BR: Financial Analysis through June 2008

We have analyzed Broadridge's financial statements for the quarter and fiscal year that ended on 30 June 2008. This might be the first time we've seen a company submit a 10-K annual report to the SEC on the same day they publicly announce fiscal fourth quarter results.

Broadridge Financial Solutions, Inc. (BR) provides investor communication, securities processing, and clearing services to financial companies. Customers include brokers, banks, and investment managers. Automatic Data Processing, Inc. (ADP) spun off Broadridge on 30 March 2007.

Broadridge has already had moments in spotlight. A $380 million loan raised questions about the company's risk management practices. However, the loan was repaid and, in retrospect, the transaction in question didn't seem particularly chancy. The loan probably would have escaped notice if it hadn't spanned two fiscal quarters. More recently, a Broadridge error led Yahoo! Inc. (YHOO) to under-report votes withheld from board members at its highly publicized shareholder meeting. Votes withheld often signify lack of support for management, and Yahoo management has been widely criticized for its handling of the offer by Microsoft Corp. (MSFT) to purchase the company.

We evaluated Broadridge after the March 2008 quarter, but we didn't compute gauge scores because the company is still maturing as separate entity and establishing its financial record. The GCFR methodology requires a historical baseline to which current financial metrics can be compared.

Now, with the available data from the June 2008 quarter, we are taking our first, tentative gauge readings for Broadridge:

• Cash Management: 12 of 25
  
• Growth: 4 of 25
  
• Profitability: 19 of 25
  
• Value: 0 of 25
  

• Overall: 34 of 100
  

We expect these scores to show erratic variations until Broadridge adds more chapters to its financial history.

Before we review the latest values for the metrics that drive the gauge scores, we will examine Broadridge's Income Statement for the recent quarter. We didn't attempt to predict the company's earnings. Note that the year-earlier June 2007 quarter was the first period Broadridge was independent of ADP.

Please also note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		June 2008 (actual)	June 2007 (actual)
Revenue (1)		792	774
Operating expenses
	CGS (2)	(643)	(537)
	SG&A	(73)	(68)
	Other	(0)	(0)
Operating Income		176	169
Other income
	Investments	0	0
	Interest, etc. (3)	(5)	(11)
Pretax income		171	159
Income tax		(73)	(60)
Net Income		98	99
		$0.69/sh	$0.71/sh
Shares outstanding		142	140

<sup>1. Total Revenues= Services revenues + Other revenues - Interest expense from securities operations.
2. Cost of Net Revenues
3. Other expenses, net (mostly interest)</sup>


Revenue in the quarter was 2.4 percent above the value in the year-earlier period. Year-over-year Revenue Growth was 3.3 percent. The Gross Margin in the quarter was 31.4 percent, a little better than the 30.6 percent margin in the June 2007 quarter. The actual margin translates into a Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- of 68.6 percent of Revenue.

Sales, General, and Administrative (SG&A) expenses were 9.2 percent of Revenue, up from 8.7 percent in the year-earlier quarter.

Operating Income, as we defined it, was 4.3 percent more than the amount attained one year earlier.

Other expenses, mostly interest, decreased by $5.3 million in the quarter. This is notable because interest expenses in the fiscal year were much higher in the previous fiscal year. Broadridge managed to reverse this situation in the final quarter of the fiscal year.

The Income Tax Rate was 42.8 percent in the quarter, up from 37.7 percent in the year-earlier period.

Net Income in the quarter fell by 1.0 percent, but it would have gained if the tax burden hadn't increased so sharply.


Cash Management.

	June 2008	3 months ago	12 months ago
Current Ratio	1.4	1.3	1.4
LTD/Equity	60.1%	75.3%	116.3%
Debt/CFO	0.9 yrs	1.0 yrs	4.5 yrs
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	75.9 days	62.8 days	85.8 days
Working Capital/Market Capitalization	16.1%	16.6%	15.6%
Cash Conversion Cycle Time	55.3 days	40.6 days	66.3 days

Debt is down in absolute terms, as a percentage of Equity, and in terms of the Cash Flow that must ultimately pay it off. The big drop in CCCT is also encouraging, but this metric may need more time to stabilize.

Growth.

	June 2008	3 months ago	12 months ago
Revenue growth	3.3%	5.1%	10.6%
Revenue/Assets	77.9%	67.6%	79.8%
CFO growth	200%	221%	71%
Net Income growth	-2.5%	-3.0%	9.2%

Growth rates are trailing four quarters compared to four previous quarters.

Revenue growth is tepid, and declining Net Income is a significant concern. But, the increase in Cash Flow really gets out attention.


Profitability.

	June 2008	3 months ago	12 months ago
Operating Expenses/Revenue	83.8%	84.0%	84.4%
ROIC	21.1%	24.2%	17.5%
FCF/Equity	59.1%	78.6%	24.2%
Accrual Ratio	-8.4%	-9.3%	2.8%

The ROIC and FCF figures are very strong. We will have to see how long they can be sustained. The negative Accrual Ratio is signal of Earnings Quality, with Cash Flow backing up Net Income.


Value. Broadridge's share price bounced back in 2008's second quarter from $17.60 to $21.05. The shares sold for $19.51 when the company was spun off from ADP.

	June 2008	3 months ago	12 months ago
P/E	15.5	12.9	13.6
P/E to S&P 500 average P/E	87.6%	74.7%	82.6%
Price/Revenue	1.4	1.1	1.3
Enterprise Value/Cash Flow (EV/CFO)	6.6	5.0	20.2

Broadridge's valuation ratios can be compared with other companies providing Business Services.


One-year-old Broadridge is maturing while its customers, and thus Broadridge itself, are facing turbulent market conditions. Growth is weak, and Profitability is strong. Broadridge has become more expensive in the the last three months, which hurts the associated gauge score, but the Value metrics are not unreasonable in absolute terms. Our first preliminary measurement of the Overall gauge shows a score of 34 of 100 possible points. The score can be expected to vary in wider range than normal over the next few quarters.