This post provides the GCFR analysis for the period, which was the third quarter of the company's fiscal 2009.
First, we present some background information.
Automatic Data Processing, Inc. (NASDAQ: ADP) spun off Broadridge on 30 March 2007.
This is challenging time to be serving the financial industry, which has been significantly undermined by the credit crisis and the recession it spawned. However, according to its 10-K, Broadridges's Securities Processing business in fiscal 2008 handled fixed income trades valued at approximately $3 trillion per day.
The Investor Communication Solutions business segment was responsible for more than 70 percent of Broadridge's revenue in fiscal 2008, according to the 10-K, 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.
Lehman Brothers was a Broadridge client. Broadridge made the best of the situation by signing a three-year contract for clearing services with asset manager Neuberger Berman, an erstwhile Lehman subsidiary.
Standard & Poor's in February 2009 revised its ratings outlook on Broadridge Financial to positive from stable. S&P recognized "the company's focus on reducing debt and its stable profitability."
The share price fell a disheartening 44 percent in 2008, sinking as low as $9.72 in late November. However, the shares rebounded in early 2009, reaching $19.82 in early April.
In March 2009, Broadridge announced an alliance with Beacon Capital Strategies, Inc. Beacon "operates a marketplace dedicated to providing liquidity and electronic trading in the less-liquid fixed-income market." The alliance is intended to "help the firms' clients locate difficult-to-find securities." The types of securities involved include mortgage-backed securities, asset-backed securities, and collateralized mortgage obligations.
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).
In the three months that ended last December, Revenue fell 1.3 percent compared to the year-earlier period. Higher SG&A expenses had a greater effect on Operating Income, which dropped 17.0 percent. One significant reason SG&A costs increased, according to the 10-Q, was that the company recorded a $2.2 million compensation expense "related special stock option grants to corporate officers." Despite the decline in Operating Income, a $4.7 million gain on foreign currency exchange enabled Net Income to eke out a small gain.
The GCFR Overall Gauge rose from 49 to 60 points when December's results were considered. The increase was driven by a three-point increase in the Cash Management gauge and a five-point increase in the double-weighted Value gauge. The latter measure responded positively to the big drop in Broadridge's share price during 2008.
Now, with the available data from the March 2009 quarter, our gauges are displaying the following scores:
- Cash Management: 14 of 25 (down from 18 in December)
- Growth: 3 of 25 (up from 0)
- Profitability: 15 of 25 (unchanged)
- Value: 1 of 25 (down from 17)
- Overall: 32 of 100 (down from 60)
We are seeing atypical variability in the GCFR gauges because Broadridge does not have a long financial record as an independent company.
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-2009q1?mode=html
Revenue in the March 2009 quarter was 3.5 percent less than in the year-earlier period. Our target for the Revenue, which assumed a decline of 2.8 percent, was too high by less than one percent. Revenue in the last four quarters was just slightly less than Revenue in the four previous quarters.
Cost of Goods Sold -- called Cost of Net Revenues on Broadridge's Income Statement -- was 77.5 percent of Revenue. This translates into a Gross Margin of 22.5 percent, down from 23.2 percent last year. Our 24-percent expectation for the margin was too optimistic by 1.5 percent.
Sales, General, and Administrative expenses were 10.7 percent of Revenue in the quarter, down from 12.0 percent in the year-earlier quarter. Our target for the SG&A expenses was 12.5 percent of Revenue, so the actual costs were much less than we expected.
Operating Income, as we defined it, was 2.7 percent more than the amount attained one year earlier. Our prediction for Operating Income was 2.5-percent too pessimistic because the savings from lower-than-expected SG&A expenses were more significant than the costs of a weaker-than-expected Gross Margin.
Other expenses were $1.3 million more than we expected, but they were still $4 million less than the value last year.
The Income Tax Rate was only 24.3 percent in the quarter. The tax rate was unexpectedly low (we anticipated 39.0 percent) because of a state tax credit that had retroactive benefits.
Net Income was 39 percent above its value in the March 2008 period. We had projected an increase of 11.5 percent.
Now for the gauges:
| Cash Management | March 2009 | 3 months prior | 12 months prior |
| Current Ratio | 1.4 | 1.4 | 1.3 |
| LTD/Equity | 40.9% | 42.4% | 75.3% |
| Debt/CFO | 1.2 years | 1.2 years | 1.6 years |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 59.9 days | 50.4 days | 62.8 days |
| Working Capital/Invested Capital | 78.0% | 67.4% | 56.2% |
| Cash Conversion Cycle Time | 39.1 days | 32.0 days | 40.6 days |
| Gauge Score (0 to 25) | 14 | 18 | 14 |
On the positive side, there is now much more Equity and Cash Flow to cover the company's Debt than there was last year. The company is also in good shape with respect to liquidity -- net Working Capital is over $500 million. The Cash Management score slipped because of the increases in DSO and CCCT from December; however, both of these measures of cash efficiency have improved relative to March 2008.
| Growth | March 2009 | 3 months prior | 12 months prior |
| Revenue growth (1) | 0.7% | 1.8% | 5.1% |
| Revenue/Assets | 77.6% | 83.7% | 78.7% |
| CFO growth (1, 2) | -21.8% | -16.5% | 12.3% |
| Net Income growth (1) | 5.7% | -6.2% | -3.0% |
| Gauge Score (0 to 25) | 3 | 0 | 3 |
2. Cash Flow from Operations excludes securities processing activities.
Revenue growth is tepid, and Cash Flow from Operations has declined rather significantly in the last four quarters relative to the previous four quarters. Net Income, however, swung to a gain, and lifted the Growth score above the zero mark. A trend in Revenue/Assets isn't yet apparent.
| Profitability | March 2009 | 3 months prior | 12 months prior |
| Operating Expenses/Revenue | 84.9% | 85.1% | 84.0% |
| ROIC | 31.2% | 27.8% | 24.2% |
| Free Cash Flow/Invested Capital | 35.9% | 33.8% | 33.1% |
| Accrual Ratio | -0.5% | -1.1% | -2.8% |
| Gauge Score (0 to 25) | 15 | 15 | 16 |
The ROIC and FCF/IC ratios are impressive and have kept the Profitability score high. While we look favorably on negative Accrual Ratios (a signal of Earnings Quality), its rise towards zero indicates that there is less Cash Flow backing up Net Income.
| Value | March 2009 | 3 months prior | 12 months prior |
| P/E | 12.9 | 9.2 | 12.9 |
| P/E vs. S&P 500 P/E | 82% | 49% | 73% |
| PEG | N/A | N/A | 1.7 |
| Price/Revenue | 1.2 | 0.8 | 1.1 |
| Enterprise Value/Cash Flow (EV/CFO) | 9.5 | 6.3 | 8.2 |
| Gauge Score (0 to 25) | 1 | 17 | 7 |
Broadridge's share price soared 48 percent during the March quarter, from $12.54 to $18.61, making back much of the decline in late 2008. This was too much too fast for the stern, contrarian Value gauge, although the shares aren't too much more expensive than they were one year ago.
The gauge scores in the table above were calculated using the quarter-end price, per GCFR standard practice. Broadridge's valuation ratios can be compared with other companies providing Business Services.
| Overall | March 2009 | 3 months prior | 12 months prior |
| Gauge Score (0 to 100) | 32 | 60 | 43 |
Although Revenue was down in the March quarter, Net Income got a boost from a state tax credit. Cash Flow from Operations was particularly weak. Our Value gauge reacted with disappointment. It wanted much, much, more, given a 48 percent increase in the share price.
Long BR at time of writing
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