Broadridge Beats EPS, Guides Lower

Zacks

Broadridge Financial Solutions Inc. (BR) third-quarter fiscal 2012 adjusted earnings per share (EPS) of 28 cents were a penny above the Zacks Consensus Estimate of 27 cents.

Revenues

Total revenue in the third quarter was $547.0 million, up 3.8% from $527.1 million a year ago. The revenue figure missed the Zacks Consensus Estimate of $562.0 million. The improvement was buoyed by a 9.0% increase in recurring revenues from acquisitions, partially offset by lower contribution from event-driven mutual fund proxy fee revenues.

Mutual fund event-driven revenues are highly cyclical in nature and unpredictable. Positive currency translation, net new businesses, contributions from recent acquisitions and an outsourcing services agreement with Penson Worldwide Inc. (PNSN) also aided the revenue growth.

Broadridge managed to sustain a 99% client retention rate.

Segment Revenues

The Investor Communication Solutions segment generated $374.0 million in revenues, up 1.4% from $368.9 million in the prior-year quarter. The increase was attributable to higher recurring revenues from net new business and revenue gains from acquisitions, with event-driven mutual fund proxies being the dampener as a result of lower mutual fund activity.

The Securities Processing Solutions segment reported revenues of $169.3 million, up 10.0% from $153.9 million in the prior-year quarter. The increase was attributable to the strength in new business, Penson outsourcing services agreement and the Paladyne Systems Inc. acquisition.

Operating Results

Total expenses in the quarter crept up 8.9% year over year to $518.2 million. Reported pre-tax income was $28.8 million, down from $51.1 million in the year-earlier quarter. Pre-tax margin dropped 310 basis points year over year to 3.7%.

GAAP net income from continuing operations decreased 44.5% year over year to $18.1 million. Earnings per share in the quarter fell 44.6% to 14 cents from 25 cents in the year-ago quarter. Excluding the effect of International Business Machines Inc. (IBM) migration costs and impairment charge on investment in the common stock of Penson Worldwide, adjusted net income was $36.0 million or 28 cents. This cost of migrating to IBM’s platform follows an information technology services agreement signed between the two companies in March 2010. Per the deal, IBM will provide certain aspects of Broadridge’s information technology infrastructure that are currently being provided under a data center outsourcing services agreement with Automatic Data Processing Inc. (ADP).

Balance Sheet

Broadridge exited the quarter with cash and cash equivalents of $218.8 million, down from $238.2 million in the prior quarter. Receivables increased 31.0% from the previous quarter to $296.6 million. Long-term debt increased $30.0 million sequentially to $594.3 million.

Guidance

Management still thinks that contribution from the event-driven mutual fund proxy revenues will be negligible. Moreover, the company expects lower distribution revenues and higher Penson Impairment charges. Keeping this in view, Broadridge lowered its fiscal 2012 guidance.

For fiscal 2012, Broadridge expects revenue growth of 7.0% to 8.0% (previously 8.0% to 9.0%), based on recurring revenue closed sales and acquisitions, representing a 99% client revenue retention rate. Recurring revenue closed sales are forecast in the range of $110.0 million to $150.0 million. Earnings per share are expected between $1.18 and $1.28 (previously $1.29–$1.39). However, excluding the effect of IBM migration costs, adjusted EPS is still expected in the range of $1.50–$1.60. Management also expects adjusted free cash flow in the range of $210.0 million to $260.0 million.

Our Take

Broadridge Financial posted a mixed-bag third quarter by beating the Zacks Consensus Estimate on the bottom line, but missing the top line. Broadridge has lowered its revenue and GAAP earnings guidance due to lower-than-expected event-driven revenues and higher charges.

However, we believe that weaker market activity during the recession continues to impact the company’s performance as can be inferred from the dull fiscal 2012 guidance. Management expects a weaker trend in the event-driven mutual fund proxy revenue. Additionally, Broadridge faces significant competition from companies such as HD Supply and DST Systems Inc. (DST), which have intensified pricing pressure for the company. But, we remain optimistic on Broadridge’s strategic acquisitions and potential product launches.

Currently, Broadridge has a Zacks #4 Rank, implying a short-term Sell recommendation.

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