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 |
2. Cost of Net Revenues
3. Other expenses, net (mostly interest)
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% |
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 |
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.
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