Broadridge Financial Solutions Inc. (BR) reported second-quarter fiscal 2011 earnings per share of 8 cents, which was below the Zacks Consensus Estimate of 14 cents and down from 25 cents earned in the prior-year quarter.
The operating results were significantly down from the previous quarter, which was in line with management’s expectation. Lower revenues and a higher tax rate were the main reasons.
Revenues
Total revenue in the second quarter was $442.3 million, down 16.5% from $529.7 million in the year-ago quarter and below the Zacks Consensus Estimate of $477.0 million. The decrease in revenues was due to an unexpectedly low contribution from event-driven mutual fund proxy fee revenues. Mutual fund event-driven revenues are highly cyclical in nature and unpredictable, according to Broadridge.
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 of 2 cents from currency translation.
Segment Revenues
The Investor Communication Solutions segment generated $294.1 million in revenues, down 25.2% from $393.3 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 $146.1 million, up 9.2% from $133.8 million in the prior-year quarter. The increase was due to the 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 decreased 7.7% year over year to $425.8 million. Pre-tax income was $16.5 million, down from $68.5 million in the year-earlier quarter. Pre-tax margin fell 920 basis points year over year to 3.7%. Lower revenues and increased investment on acquisitions led to the margin contraction.
Based on the above reasons, net income from continuing operations plunged 69.0% year over year to $10.4 million. Earnings per share in the quarter fell 68.0% to 8 cents from 25 cents in the year-earlier quarter.
Balance Sheet & Share Repurchase
Broadridge exited the quarter with cash and cash equivalents of $187.8 million, up from $180.7 million in the prior quarter. Receivables declined 17.8% from the previous quarter to $291.3 million. Long-term debt was $324.2 million, unchanged from the last quarter.
Broadridge repurchased 4.7 million common shares at an average price of $20.98. Broadridge paid a dividend of 15 cents per share during the quarter.
Guidance
Broadridge expects earnings per share to remain muted during the first half of fiscal 2011 due to the impact of client losses 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.
For FY11, Broadridge reduces its guidance range of earnings per share from $1.55 to $1.65 to $1.30 to $1.40, reflecting event-driven revenue shortfall plus a $0.05 one-time charge. Broadridge also expects free cash flow (including costs related to the Penson transaction and the International Business Machines Inc. (IBM) data center services agreement) in the range of $131.0 million to $189.0 million for fiscal 2011 (previously $170.0-$220.0 million).
Broadridge also stated that the financial results for the second half of fiscal 2011 will be significantly higher than that in the first half due to the seasonality of the equity proxy business.
Our Take
Broadridge Financial posted an unimpressive second quarter and missed the Zacks Consensus Estimates on both the 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. Positive customer retention rate and recurring revenues are also encouraging.
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 investor sentiment is unlikely to improve until market activity picks up significantly. We therefore think that share price appreciation will be limited over the next 1-3 months.
Currently, Broadridge has a Zacks #3 Rank, implying a short-term Hold recommendation.
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