Broadridge Financial Solutions Inc. (BR) reported first-quarter fiscal 2011 earnings per share of 10 cents, down from 19 cents in the prior-year quarter and below the Zacks Consensus Estimate of 12 cents.
The operating results were significantly down from the previous quarter, which according to management was in line with expectations. The drop was mainly due to the implementation of the Penson outsourcing services agreement. Moreover, last quarter’s results had benefited from higher contributions from the Morgan Stanley Smith Barney (“MSSB”) deal.
Historically, Broadridge has posted a lackluster first quarter due to seasonality.
Total revenue in the first quarter was $421.4 million, down 3.4% from $438.2 million in the year-ago quarter and below the Zacks Consensus Estimate of $454.0 million. The decrease in revenues was due to lower contributions from fee revenues, which were driven primarily by event-driven mutual fund proxy revenues.
Despite the shortfall, Broadridge witnessed a significant improvement in recurring revenue closed sales and client revenue retention rate. The quarter’s revenue had a positive impact from currency translation.
Segment Revenues
The Investor Communication Solutions segment generated $279.5 million in revenues, down 9.8% from $309.9 million in the prior-year quarter. The decrease was mainly due to lower event-driven mutual fund proxies, partially offset by higher recurring revenues from net new business and revenue gains from acquisitions.
The Securities Processing Solutions segment reported revenues of $141.7 million, up 8.9% from $130.1 million in the prior-year quarter. The increase was due to strength in new business, which was offset by the carryover impact of fiscal 2009 client losses and price concessions.
Operating Results
Total expenses in the quarter increased 1.2% year over year to $400.5 million. Pre-tax income was $20.9 million, down from $42.5 million in the year-earlier quarter. Pre-tax margin slipped 470 basis points year over year to 5.0%. Lower revenues, higher strategic initiative costs and increased investment on acquisitions led to the margin contraction.
Based on the above reasons, net income from continuing operations plunged 50.0% year over year to $13.3 million. Earnings per share in the quarter fell 47.4% to 10 cents from 19 cents in the year-earlier quarter.
Balance Sheet & Share Repurchase
Broadridge exited the quarter with cash and cash equivalents of $180.7 million, down from $412.6 million in the prior-year quarter. Receivables declined 17.1% from the year-earlier quarter to $354.3 million. Long-term debt was $324.2 million, unchanged from the prior-year quarter.
Broadridge repurchased 4.5 million common shares at an average price of $20.91.
Broadridge paid a quarterly dividend of 15 cents per share to stockholders of record as on September 15, 2010.
Guidance
Broadridge expects earnings per share to remain muted during the first half of fiscal 2011 due to the impact of client losses witnessed in 2009, following the divestiture of its subsidiary, Ridge Clearing & Outsourcing Solutions Inc. to Penson Financial Services Inc., a subsidiary of Penson Worldwide Inc. (PNSN). The closing of two significant mutual fund proxy jobs will act as a negative catalyst.
However, based on the current quarter’s strong closed sales, lower client losses, pending implementation of the Penson outsourcing services agreement and recent acquisitions, Broadridge expects to achieve its fiscal 2011 guidance.
For FY11, Broadridge reiterates its guidance range of $1.55 to $1.65 for earnings per share. Broadridge also expects free cash flow (including costs related to the Penson transaction and the IBM data center services agreement) to remain in the range of $170 million to $220 million for fiscal 2011.
Our Take
Broadridge posted an unimpressive first quarter and missed the Zacks Consensus Estimate both in respect of top and bottom lines. We believe that the sale of the Clearing business will enable Broadridge to focus solely on revenue opportunities associated with 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, which can be inferred from the dull fiscal 2011 guidance. Additionally, Broadridge faces significant competition from companies such as HD Supply, DST Systems Inc. (DST) and State Street Corp. (STT), which have increased pricing pressures for the company. We believe that share prices will remain depressed until there is a positive turn in investor sentiment.
Currently, Broadridge has a short-term Sell recommendation, as indicated by the Zacks #4 Rank.
