Broadridge Beats 4Q EPS, Misses Rev

Broadridge Financial Solutions Inc.’s ( BR - Snapshot Report ) fourth-quarter fiscal 2012 adjusted earnings per share (EPS) of $1.00 were above the Zacks Consensus Estimate of 98 cents.

Revenues

Total revenue in the fourth quarter was $800.3 million, up 3.8% from $776.1 million a year ago. The revenue figure missed the Zacks Consensus Estimate of $815.0 million. The year-over-year improvement was buoyed by a 6.0% increase in recurring revenues, improved contribution from event-driven mutual fund, partially offset by lower distribution 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. ( ) also aided revenue growth.

Broadridge managed to sustain a 99% client retention rate.

Segment Revenues

The Investor Communication Solutions segment generated $630.2 million in revenues, up 2.2% from $368.9 million in the prior-year quarter. The increase was attributable to higher recurring revenues from net new business, revenue gains from acquisitions, and higher event-driven mutual fund proxies, which was significantly offset by a decline in distribution revenues.

The Securities Processing Solutions segment reported revenues of $166.7 million, up 9.7% from $151.9 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 11.8% year over year to $665.0 million. Reported pre-tax income was $135.3 million, down from $181.2 million in the year-earlier quarter. Pre-tax margin dropped 670 basis points year over year to 17.4%.

GAAP net income from continuing operations decreased 27.7% year over year to $83.4 million. Earnings per share in the quarter fell 28.1% to 65 cents from 91 cents in the year-ago quarter. Excluding the effect of International Business Machines Inc. ( IBM - Analyst Report ) migration costs; impairment charge on investment in the common stock of Penson Worldwide and restructuring charges, adjusted net income was $127.7 million or $1.00 per share. 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 - Snapshot Report ) .

Balance Sheet

Broadridge exited the quarter with cash and cash equivalents of $320.5 million, up from $218.8 million in the prior quarter. Receivables increased 25.0% from the previous quarter to $296.6 million. Long-term debt decreased $69.9 million sequentially to $524.4 million.

Share Repurchase & Dividend Payout

During the quarter, Broadridge bought back 1.7 million of its common stock at an average price of $23.06 per share. Apart from this, the board also approved another share repurchase plan to buy 4 million of common stock. With this approval, the company has 10 million of common stock available for repurchase.

The company also declared a quarterly dividend of 18 cents per share, which is scheduled to be paid on October 1, 2012 to shareholders of record as of September 14, 2012. The dividend per share increased 12.5% from 16 cents paid earlier. Notably, the company started paying dividend of 6 cents from July 2007.

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.

For fiscal 2013, Broadridge expects revenue growth of 3.0% to 4.0%, and recurring revenue growth of 4.0% to 7.0%. The company expects recurring revenue closed sales to be the key driver for revenue growth. Recurring revenue closed sales are forecast in the range of $110.0 million to $150.0 million.

GAAP pretax margin is expected in the range of 13.8% to 14.4%, while non-GAAP margin is expected between 14.2% and 14.8%. Earnings per share are expected between $1.60 and $1.70. However, excluding the effect of Penson charges, adjusted EPS is still expected in the range of $1.65–$1.75. Management also expects adjusted free cash flow in the range of $200.0 million to $250.0 million.

Our Take

Broadridge Financial posted a mixed-bag fourth quarter by beating the Zacks Consensus Estimate on the bottom line, but missing the top line. Broadridge has provided cautious revenue and earnings guidance for fiscal 2013 due to flat event-driven and distribution revenues and higher charges.

The company believes that outsourcing will be a key driver for its growth and we believe that Broadridge seems to be in a good position to make such deals. Broadridge entered into a 10-year Master Services Agreement with Apex, under which Apex will outsource its securities processing and back office support services to Broadridge.

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 2013 guidance. Management expects a weaker trend in event-driven mutual fund proxy revenue. Additionally, Broadridge faces significant competition from companies such as HD Supply and DST Systems Inc. ( DST - Analyst Report ) , 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 rating.