Broadridge Beats, Reaffirms Outlook

Broadridge Financial Solutions Inc.’s (BR - Snapshot Report) third-quarter fiscal 2011 earnings per share of 25 cents handily beat the Zacks Consensus Estimate of 19 cents and improved from 22 cents earned in the prior-year quarter. Higher recurring revenue prompted the outperformance, partially offset by higher operating expenses and tax rate.

Revenues

Total revenue in the third quarter was $527.1 million, up 38.4% from $380.9 million in the year-ago quarter and well ahead of the Zacks Consensus Estimate of $521.0 million. The improvement was driven by an 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, according to Broadridge. Positive currency translation, net new businesses and an outsourcing services agreement with Penson Worldwide Inc. (PNSN - Snapshot Report) also aided the revenue growth.

Despite the outperformance, Broadridge witnessed a downfall in recurring and event-driven closed sales, which were compensated by improved client revenue retention rate.

Segment Revenues

The Investor Communication Solutions segment generated $368.9 million in revenues, up 3.5% from $356.5 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.

The Securities Processing Solutions segment reported revenues of $153.9 million, up 15.2% from $133.6 million in the prior-year quarter. The increase was attributable to the strength in new business, offset by the carryover impact of fiscal 2009 client losses and price concessions.

Operating Results

Total expenses in the quarter crept up 7.6% year over year to $476.0 million. Pre-tax income was $51.1 million, up from $48.4 million in the year-earlier quarter. But, pre-tax margin fell 300 basis points year over year to 9.7%. Increased investment in acquisitions and lower event-driven mutual fund proxy revenues were responsible for the margin contraction.

Net income from continuing operations increased 5.8% year over year to $32.6 million. Earnings per share in the quarter rose 13.6% to 25 cents from 22 cents in the year-ago quarter.

Balance Sheet & Share Repurchase

Broadridge exited the quarter with cash and cash equivalents of $151.3 million, down from $187.8 million in the prior quarter. Receivables increased 35.7% from the previous quarter to $395.3 million. Long-term debt reduced to $124.2 million from $324.2 million in the last quarter.

Broadridge repurchased 3.6 million common shares at an average price of $22.82. Broadridge paid a dividend of 15 cents per share during the quarter.

Guidance

For fiscal 2011, Broadridge reiterated its earnings guidance of $1.30 to $1.40 per share. Broadridge expects free cash flow (including costs related to the Penson transaction and the International Business Machines Inc. (IBM - Analyst Report) data center services agreement) in the range of $140.0 million to $200.0 million (previously $131.0–$189.0 million).

Our Take

Broadridge Financial posted a decent third quarter and surpassed the Zacks Consensus Estimates on both top and bottom lines. We believe that the sale of the Clearing business will enable Broadridge to focus solely on revenue opportunities associated with the securities processing and outsourcing services businesses. Moreover, we remain optimistic on Broadridge’s strategic acquisitions and potential product launches.

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 2011 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, DST Systems Inc. (DST - Analyst Report) and State Street Corp. (STT - Analyst Report), which have increased pricing pressure for the company.

Currently, Broadridge has a Zacks #3 Rank, implying a short-term Hold recommendation.

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