BR: Look Ahead to March 2010 Quarterly Results

This post describes our model of Broadridge Financial's (NYSE: BR) Income Statement for the third quarter of fiscal 2010, which ended on 31 March 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.

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


Broadridge Financial Solutions, Inc. (NYSE: BR) provides investor communication, securities processing, and clearing services to financial companies.  Automatic Data Processing (NASDAQ: ADP) spun off Broadridge on 30 March 2007.  (GCFR articles related to ADP can be found here.)

Broadridge earned $223 million on Revenue of $2.1 billion in fiscal 2009, which ended last June.  The Investor Communication Solutions business, which distributes and processes proxies for public companies and mutual funds, contributed more than 70 percent of Broadridge's revenue and pre-tax earnings in fiscal 2009.

In 2009, Broadridge was listed as the top Brokerage Services Outsourcing Provider for the second consecutive year in the Black Book of Outsourcing.  According to the company's 10-K annual report, Broadridge's Securities Processing business in fiscal 2009 "processed on average over 1.6 million equity trades and over $3 trillion in trades of United States (U.S.) fixed income securities per day." [emphasis added]

The company's current market capitalization is about $2.9 billion.  In April 2009, Standard & Poor's raised Broadridge's credit rating to BBB-/A-3 from BB+/B, with a positive outlook. Broadridge doubled its dividend in August 2009 and authorized the repurchase of up to 10 million shares of its outstanding common stock.

The Securities Clearing business is being sold to Penson Worldwide (NASDAQ: PNSN) and a related company.  Broadridge will receive Penson debt and shares.  As part of this transaction, which is expected to close before fiscal 2010 concludes in June, Broadridge will provide specified securities processing and other services to Penson.  Broadridge has started to treat the results of the securities clearing business as a discontinued operation. 

In addition, Broadridge announced it had reached a new seven-year agreement to provide "customer communications services" to Morgan Stanley Smith Barney.  This firm combines the wealth management businesses of Morgan Stanley with those of Citi Smith Barney.

On 31 March 2010, Broadridge contracted with IBM for 10 years of data center services.


We are now ready to look specifically at the current quarter.

Broadridge updated its guidance for the remainder of fiscal 2010, which will end in June, when it reported second quarter results in February.

Fiscal Year 2010 Financial Guidance
We anticipate our revenue growth from continuing operations to be in the range of 7% to 9%. Our GAAP earnings per share from continuing operations are expected to be in the range of $1.56 to $1.66 on a diluted share basis. Our non-GAAP earnings per share from continuing operations are expected to be in the range of $1.50 to $1.60 on a diluted share basis, which excludes a positive $0.06 per share impact of a one-time foreign tax credit. Our GAAP earnings per share are expected to be in the range of $1.40 to $1.50 on a diluted share basis, which includes a $0.16 loss on the pending sale of the securities clearing business. The earnings per share guidance is based on diluted weighted-average shares outstanding of approximately 139 million shares. In addition, our fiscal year 2010 financial guidance assumes that the Penson transaction closes during the second half of our 2010 fiscal year.

We anticipate margins from continuing operations before interest and taxes in the range of 15.4% to 16.0% (non-GAAP). Our effective annual tax rate will be approximately 34.7% (GAAP) and approximately 36.7% (non-GAAP), excluding the one-time foreign tax credit of $0.06 per share. Free cash flow is expected to be in the range of $235 million to $270 million. Our closed sales forecast for fiscal year 2010 is expected to be in a range of $185 million to $205 million.
[emphasis added]

The Revenue growth rate guidance is up from 6-to-8 percent three months earlier and from 4-to-8 percent before that. The GAAP EPS guidance decreased by $0.02 because of an expected loss on the sale of the securities clearing business.

In fiscal 2009, Revenue from continuing operations was $2.07 billion.  Given the guidance of 7 to 9 percent growth, Broadridge expects Revenue in fiscal 2010 between $2.21 billion and $2.27 billion.  We'll use $2.24 billion.

Since Revenue in the first half of fiscal 2010 was $438.2 million + $529.7 million = $967.9 million, this leaves $2.24 billion - $967.9 million = $1.27 billion for the second half of the year.  It would be unwise to assume this amount will be split equally over the March and June quarters because Broadridge's Revenue is not distributed evenly.  June Revenue is usually about 50 percent greater than March Revenue.

Given this data, our target for Broadridge's Revenue in the March 2010 quarter is $1.27 billion * 0.40 = $509 million.


The Gross Margin has averaged 23 percent in the previous four March quarters, and we will assume a similar proportion in the latest quarter.  Given our Revenue estimate, the Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- is estimated to be (1 - 0.23) * $509 million = $392 million.

Sales, General, and Administrative expenses have been between 10 and 12 percent of Revenue in March.  Splitting the difference, our estimate for SG&A is 0.11 * $509 million = $56 million.

With these estimates, we project Operating Income of $61.1 million.  This is 6.8 percent more than Operating Income in the March 2009 quarter.

If we assume a $4 million net expense for non-operating items, pretax income down to $57.1 million.  If the Income Tax Rate is 37.5 percent, Net Income in the quarter will be $35.7 million ($0.26 per share), compared to $40.9 million ($0.29 per share) in the March 2009 quarter.

The year-earlier period benefited by about $0.05 per share from a state tax credit.


Please note that we have not made any provisions in the current quarter for the Penson loss or the foreign tax credit.


Please click here to see a full-sized, 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.