Broadridge Financial Solutions, Inc. (NYSE: BR) provides investor communication, securities processing, and clearing services to financial companies. In fiscal 2008, the Investor Communication Solutions business segment was responsible for more than 70 percent of Broadridge's revenue and an even greater share of pre-tax earnings. The services provided by this segment include the distribution and processing of proxies for public companies and mutual funds.
Automatic Data Processing, Inc. (NYSE: ADP) spun off Broadridge on 30 March 2007.
The ongoing credit crisis has pummeled most brokers, banks, and investment managers, which are the types of firms serviced by Broadridge. Barclays Bank (NYSE: BCS and LON:BARC) and Lehman Brothers are/were clients of the company's Securities Processing business. Barclays bought Lehman's investment banking and capital markets units in the U.S. when the latter went bankrupt.
Asset manager Neuberger Berman, which is a Lehman subsidiary not in bankruptcy, recently signed a three-year contract with Broadridge for clearing services. Lehman announced plans to sell Neuberger Berman to private equity firms Bain Capital and Hellman & Friedman.
Broadridge has had other moments in the spotlight. A Broadridge error caused Yahoo! Inc. (NASDAQ: 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 response to the purchase offer from Microsoft Corp. (NASDAQ: MSFT).
Three months ago, we made our first gauge calculations for the 15-month old Broadridge when the company's fiscal 2008 concluded. The Overall Gauge measured 32 of the 100 possible points, and the Profitability Gauge was strongest at 15 of 25 points. Revenue in the June 2008 quarter was 2.4 percent more than in the year-earlier period. However, the effective income tax rate was five percent higher, which explained why Net Income fell by 1.0 percent in the second quarter.
Now, with the available data from the September 2008 quarter, our gauges are displaying the following scores:
- Cash Management: 17 of 25 (up from 12 in June)
- Growth: 0 of 25 (down from 4)
- Profitability: 11 of 25 (down from 15)
- Value: 11 of 25 (up from 2)
- Overall: 44 of 100 (up from 32)
We wouldn't be surprised to see the GCFR gauges vary widely from quarter to quarter until Broadridge establishes a longer financial record. [Note: the scores for June were modified from their original reported values because we decided to exclude securities processing activities from Cash Flow from Operations.]
Before we examine the factors that affected each gauge, we will review the latest quarterly Income Statement and compare it to our previously communicated expectations.
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) | | September 2008 (actual) | September 2008 (predicted) | September 2007 (actual) |
| Revenue (1) | | 472 | 465 | 451 |
| Operating expenses | | | ||
| | CGS (2) | (363) | (349) | (334) |
| | SG&A | (57) | (51) | (49) |
| | Other | (0) | (0) | (0) |
| Operating Income | | 53 | 65 | 68 |
| Other income | | | ||
| | Investments | 0 | 0 | 0 |
| | Interest, etc. (3) | 6 | (8) | (9) |
| Pretax income | | 58 | 57 | 59 |
| Income tax | | (23) | (23) | (23) |
| Net Income | | 36 | 34 | 36 |
| | | $0.25/sh | $0.24/sh | $0.26/sh |
| Shares outstanding | 142 | 142 | 140 |
2. Cost of Net Revenues
3. Other expenses, net (mostly interest)
Revenue in the quarter was 4.7 percent above the value in the year-earlier period. Year-over-year Revenue Growth was 3.7 percent. Revenue exceeded our target, which assumed 3 percent growth, by 1.5 percent.
Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- was 76.8 percent of Revenue. This translates into a Gross Margin of 23.2 percent. The actual results fell a little short of our expectation of a 25 percent margin.
Sales, General, and Administrative (SG&A) expenses were 12.0 percent of Revenue, up from 10.9 percent in the year-earlier quarter. We thought SG&A expenses would equal to 11 percent of Revenue.
Operating Income, as we defined it, was 22.4 percent less than the amount attained one year earlier. Operating Income was 18.5 percent below our projection because of the lower-than-expected Gross Margin and the higher-than-expected SG&A expenses, despite higher Revenue.
Broadridge purchased $125 million of its "Senior Notes," which have an indicated interest rate of 6.125 percent. This purchase resulted in a one-time, non-cash $8.4 million gain from the early extinguishment of debt. The gain is included in the "Other Income" category. The additional "Other Income" in this quarter was almost enough to compensate for the big decline in Operating Income. Net Income in the quarter was only 1.1 percent less than in the September 2007 quarter. Net Income actually exceeded our projection by about five percent.
The Income Tax Rate was 38.8 percent in the quarter; our expectation was 41.1 percent.
| Cash Management | September 2008 | 3 months ago | 12 months ago |
| Current Ratio | 1.2 | 1.4 | 1.3 |
| LTD/Equity | 42.1% | 60.1% | 94.2% |
| Debt/CFO | 2.0 yrs | 1.3 yrs | 2.0 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 57.0 days | 75.9 days | 63.6 days |
| Working Capital/Market Capitalization | 16.8% | 16.1% | 12.6% |
| Cash Conversion Cycle Time | 38.4 days | 55.3 days | 53.0 days |
| Gauge Score (0 to 25) | 17 | 12 | N/A |
Long-term Debt is down as a percentage of Equity, and overall Debt is stable relative to the Cash Flow that must ultimately pay it off. The big drop in DSO is also encouraging, as is the increase in Working Capital.
| Growth | September 2008 | 3 months ago | 12 months ago |
| Revenue growth (1) | 3.7% | 3.3% | 7.6% |
| Revenue/Assets | 71.1% | 80.1% | 167% |
| CFO growth (1, 2) | -13.2% | 16.2% | N/A |
| Net Income growth (1) | -6.3% | -2.5% | 8.4% |
| Gauge Score (0 to 25) | 0 | 4 | N/A |
2. Cash Flow from Operations excludes securities processing activities.
Revenue growth is tepid, and both Cash Flow and Net Income have declined in the last four quarters relative to the previous four quarters.
| Profitability | September 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 84.7% | 83.8% | 83.5% |
| ROIC | 24.1% | 21.9% | 19.9% |
| FCF/Equity | 35.9% | 46.1% | 102% |
| Accrual Ratio | -0.8% | -3.2% | -2.7% |
| Gauge Score (0 to 25) | 11 | 15 | N/A |
Operating expenses have inched up, which bears watching but isn't yet a concern. The steadily increasing ROIC is impressive. While Free Cash Flow has declined, the ratio is still good. The negative Accrual Ratio is a signal of Earnings Quality, with Cash Flow backing up Net Income, but we'd like to see the Accrual Ratio decreasing.
| Value | September 2008 | 3 months ago | 12 months ago |
| P/E | 11.4 | 15.5 | 15.1 |
| P/E to S&P 500 average P/E | 68% | 85% | 89% |
| Price/Revenue | 1.0 | 1.4 | 1.4 |
| Enterprise Value/Cash Flow (EV/CFO) | 8.1 | 9.5 | 11.3 |
| Gauge Score (0 to 25) | 11 | 2 | N/A |
Broadridge's share price fell from $21.05 to $15.39 during the third quarter, when the credit crisis slammed financial companies. The price fell as low as $10 in October, before recovering to $12 and change. The shares sold for $19.51 when the company was spun off from ADP. The gauge score in the table above was calculated using the quarter-end price, per GCFR standard practice. At current prices, the Value gauge would read 17 points, which would add another 11 points to the Overall gauge score.
Broadridge's valuation ratios can be compared with other companies providing Business Services.
| Overall | September 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 44 | 32 | N/A |
One-year-old Broadridge is maturing while its customers, and thus Broadridge itself, are facing turbulent market conditions. Growth is weak, but Cash Management and Profitability are good. Broadridge shares have become much less expensive recently, which does wonders for the contrarian Value gauge.
However, earnings in the third quarter benefited greatly from a one-time gain due to the early extinguishment of debt. Cash Flow and Net Income have both dropped. At this point, no one can be sure how much the Financial industry will contract, and how many of Broadridge's customers will consolidate. Extreme caution is warranted for all investments in this line of work.
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