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Broadridge Financial Solutions Inc. (BR - Snapshot Report) reported adjusted earnings of 25 cents in the second quarter of 2014, which lagged the Zacks Consensus Estimate of 28 cents. Nonetheless, reported earnings improved 44.7% from the year-ago quarter primarily aided by margin expansions and share buybacks.

Quarter Details

Broadridge’s second-quarter revenues increased 5.6% on a year-over-year basis to $520.6 million but lagged the Zacks Consensus Estimate of $522.0 million. Year-over-year revenues were driven by recurring fee revenues, which also include contribution from Net New Business.

Moreover, revenues from Investor Communication Solutions segment (66% of total revenue) increased 5.8% from the year-ago quarter to $345.9 million. The improvement was attributable to higher recurring revenues from new business and higher internal growth from market based activities.

The Securities Processing Solutions segment (34% of total revenue) reported revenues of $174.1 million, up 6.3% from the year-ago quarter. The increase was driven by strength in new business and higher equity trade volumes per day.

Apart from this, the company witnessed higher demand for its Fluent digital service, which aims at simplifying communications between financial services firms and their clients.

Broadridge’s gross margins expanded 462 basis points on a year-over-year basis to 26.0% primarily due to higher revenue base. The company’s earnings before interests and taxes (EBIT) margins also expanded from 6.9% to 9.3% during the same period of time aided by higher revenues and improved productivity.

The company reported adjusted net income of $31.2 million or 25 cents which increased from $21.8 million or 17 cents reported in the year-ago quarter.

Broadridge exited the quarter with cash and cash equivalents of $240.3 million, up from $183.1 million in the previous quarter. Long-term debt was $524.1 million compared to $524.0 million in the earlier quarter.

During the quarter, Broadridge repurchased 0.1 million shares at $38.82 per share and declared approximately 21 cents per share as dividends.

Fiscal 2014 Guidance

Broadridge raised fiscal 2014 guidance and now expects fiscal 2014 revenue growth of 4% to 5% (previous 2.0% to 4.0%) and recurring revenue growth of 7% to 8% (previous 5.0% to 7.0%). The company expects recurring revenues from closed sales to be the key revenue growth driver. Recurring revenues from closed sales are forecast in the range of $110.0 to $150.0 million. Client retention rate is expected to be 98.0%.

Non-GAAP margin is now expected between 16.4% and 17.0% up from 15.6% and 16.1%. Adjusted earnings per share are also expected in the range of $2.15–$2.25, up from the previous guided range of $2.00–$2.10. Management also expects adjusted free cash flow within $275 to $325 million (previous $250.0–$300.0 million).

Apart from this, Broadridge is positive about the ramp up of its post-trade processing service and digital communication service, which have strengthened the company’s deal pipeline.

Our Take

Although Broadridge’s second-quarter results lagged the Zacks Consensus Estimate but the year-over-year comparisons were favorable. The mutual fund proxy business has done well this quarter and boosted event-driven fee revenues. Also, cost reduction initiatives and solid growth in net new businesses were the quarter’s positive. Moreover, buoyed by these factors the company raised its fiscal 2014 guidance.

We remain optimistic on Broadridge’s strategic acquisitions, product launches, share repurchase program and dividend paying initiatives. We also believe Broadridge’s close association with Accenture (ACN - Analyst Report) will be beneficial in the long term. However, significant competition from companies such as Barrett Business Services (BBSI - Snapshot Report) and DST Systems Inc. (DST - Analyst Report) has intensified pricing pressure for the company.

Currently, Broadridge has a Zacks Rank #2 (Buy).

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