Broadridge Financial Solutions, Inc. provides investor communication, securities processing, and clearing services to financial companies. Although not a widely known firm, Broadridge received "Top Overall Honors" in annual survey of brokerage process service providers. 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 brokers, banks, and investment managers serviced by Broadridge. Lehman Brothers was a client of the company's Securities Processing business. Barclays Bank (NYSE: BCS and LON:BARC) bought Lehman's investment banking and capital markets units in the U.S. when the latter went bankrupt. Asset manager Neuberger Berman, an erstwhile Lehman subsidiary, signed a three-year contract with Broadridge for clearing services. Neuberger Berman managers and employees won an auction to buy the unit from the bankrupt Lehman.
Broadridge had one unfortunate moment 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 leaders were roundly criticized for their critical response to the purchase offer from Microsoft Corp. (NASDAQ: MSFT).
Three months ago, the GCFR Overall Gauge of Broadridge Financial increased from 32 to 45 of the 100 possible points. Our analysis report of the first quarter of fiscal 2009, which ended last September, explained the results in some detail.
The score increase in September can mostly be attributed to the contrarian Value gauge's positive response to the 27 percent drop in the Broadridge's share price. The Cash Management gauge also showed some strength, in a positive response to a lower Long Term Debt to Equity ratio and a higher Working Capital/Market Capitalization ratio. We noted that Net Income in the September quarter benefited greatly from a one-time gain due to the early extinguishment of debt.
Now, with the available data from the December 2008 quarter, our gauges are displaying the following scores:
- Cash Management: 20 of 25 (up from 17 in September)
- Growth: 0 of 25 (unchanged)
- Profitability: 11 of 25 (unchanged)
- Value: 15 of 25 (up from 11)
- Overall: 53 of 100 (up from 44)
We expect to see atypical variability in the GCFR gauges until Broadridge establishes a longer financial record.
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.
http://sheet.zoho.com/public/ncarvin/br-income-statement-1?mode=html
Revenue in the quarter was 1.3 percent less than in the year-earlier period. Therefore, Revenue fell just slightly below our target, which assumed a decline of 1.1 percent. Currency exchange rates had a negative effect on Revenue, but positive effects in other ways (see below). Year-over-year (i.e., trailing 12 month) Revenue Growth was 1.8 percent.
Cost of Goods Sold -- called Cost of Net Revenues on Broadridge's Income Statement -- was 75.3 percent of Revenue. This translates into a Gross Margin of 24.7 percent. The margin was, thus, significantly more lucrative than our 23.5 percent expectation.
While the CGS expense was less than expected, Sales, General, and Administrative expenses were greater. SG&A was 14.4 percent of Revenue in the quarter, up from 13.4 percent in the year-earlier quarter. We thought SG&A expenses would equal to 12.5 percent of Revenue.
According to the 10-Q, "The increase [in SG&A] primarily reflects $2.8 million increase in stock-based compensation expense, including $2.2 million in related special stock option grants to corporate officers, $1.3 million in incremental public company expenses, and $1.2 million of selling expenses, partially offset by one-time transition costs of $3.5 million for the three months ended December 31, 2007."
Operating Income, as we defined it, was 17.0 percent less than the amount attained one year earlier. Operating Income was 6.7 percent below our projection. The shortfall was due to higher-than-expected SG&A costs, which were partially mitigated by the better-than-expected Gross Margin.
Other income greatly surpassed our expectation. The net amount was $1.4 million of income, whereas we expected an expense of $6.6 million. A good chunk of the difference was a $4.7 million gain on foreign currency exchange, which we wasn't in our model.
The Income Tax Rate was 38.5 percent in the quarter; our expectation was 39.0 percent.
"Other Income" and slightly lower tax rate were enough to push Net Income in the last quarter 3.5 percent above its value in the December 2007 period. We had projected a drop of 5.9 percent. Earnings per share were $0.02 more than we expected.
| Cash Management | December 2008 | 3 months ago | 12 months ago |
| Current Ratio | 1.4 | 1.2 | 1.3 |
| LTD/Equity | 42.4% | 42.1% | 85.7% |
| Debt/CFO | 1.2 yrs | 2.0 yrs | 2.9 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 50.4 days | 57.0 days | 55.7 days |
| Working Capital/Market Capitalization | 22.7% | 16.8% | 12.3% |
| Cash Conversion Cycle Time | 32.0 days | 38.4 days | 46.2 days |
| Gauge Score (0 to 25) | 20 | 17 | N/A |
Several Cash Management metrics have improved significantly. For one things. there is now much more Cash Flow to cover the company's Debt. In addition, the increase in Working Capital, as percentage of Broadridge's total market capitalization, is impressive. The steady decreases in the CCCT suggests this young firm is getting more efficient, even though its industry is suffering though troubled times.
| Growth | December 2008 | 3 months ago | 12 months ago |
| Revenue growth (1) | 1.8% | 3.7% | 7.0% |
| Revenue/Assets | 83.7% | 71.1% | 150% |
| CFO growth (1, 2) | -16.5% | -13.2% | N/A |
| Net Income growth (1) | -6.2% | -6.3% | 7.9% |
| Gauge Score (0 to 25) | 0 | 0 | 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. The increase in Revenue/Assets in the last quarter is mildly encouraging, but it wasn't enough to move the Growth gauge.
| Profitability | December 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 85.1% | 84.7% | 83.3% |
| ROIC | 27.8% | 24.1% | 15.4% |
| FCF/Equity | 34.7% | 35.9% | 93% |
| Accrual Ratio | -1.1% | -0.8% | -2.3% |
| Gauge Score (0 to 25) | 11 | 11 | N/A |
Operating expenses have inched up, which is a big part of the explanation for the Net Income decline. The steadily increasing ROIC is encouraging. 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.
| Value | December 2008 | 3 months ago | 12 months ago |
| P/E | 9.2 | 11.4 | 15.4 |
| P/E to S&P 500 average P/E | 68% | 64% | 87% |
| Price/Revenue | 0.8 | 1.0 | 1.4 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.3 | 8.1 | 12.4 |
| Gauge Score (0 to 25) | 15 | 11 | N/A |
Broadridge's share price fell from $15.39 to $12.54 during the December quarter, which continued the downward trend of the September period when the credit crisis really slammed financial companies. 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.
The EV/CFO ratio, if maintained, could be a special temptation for Value investors. The stability of the company's Revenue stream, since much is recurring, could add to the appeal.
Broadridge's valuation ratios can be compared with other companies providing Business Services.
| Overall | December 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 53 | 45 | 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 is improving good. Broadridge shares have become much less expensive recently, which does wonders for the contrarian Value gauge.
Broadridge repurchased one million shares of its common stock during the quarter.
Of course, the falling share prices reflects declines in trailing-year Cash Flow and Net Income. At this point, no one can be sure how much the Financial industry will contract, and how many of Broadridge's customers will consolidate. Continued caution is warranted.
Posts
No comments:
Post a Comment