STT State Street Corporation

Broadridge Financial Solutions Inc.’s (BR) fourth-quarter fiscal 2011 adjusted earnings per share of 94 cents beat the Zacks Consensus Estimate of 91 cents and improved from 84 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 fourth quarter was $776.1 million, up 3.4% from $750.5 million in the year-ago quarter and ahead of the Zacks Consensus Estimate of $773.0 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) also aided the revenue growth.

Broadridge managed to sustain a 99% client retention rate.

Segment Revenues

The Investor Communication Solutions segment generated $616.6 million in revenues, up 1.1% from $609.9 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 $151.9 million, up 94.7% from $78.0 million in the prior-year quarter. The increase was attributable to the strength in new business, Penson outsourcing services agreement and the City Networks Ltd acquisition, offset by the carryover impact of fiscal 2009 client losses and price concessions.

Operating Results

Total expenses in the quarter crept up 4.8% year over year to $594.9 million. Pre-tax income was $181.2 million, slightly down from $182.7 million in the year-earlier quarter. Pre-tax margin fell 100 basis points year over year to 23.3%. Increased investment in acquisitions and lower event-driven mutual fund proxy revenues were responsible for the margin contraction.

Net income from continuing operations decreased 0.8% year over year to $115.3 million. Earnings per share in the quarter rose 8.3% to 91 cents from 84 cents in the year-ago quarter. Excluding the effect of International Business Machines Inc. (IBM) migration costs, adjusted net income was $119.3 million or 94 cents, compared to $116.2 million or 84 cents in the year-ago quarter. This cost for migration to IBM’s platform is due to an information technology services agreement signed between the two companies on March 2010. Per the deal terms, 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).

Balance Sheet, Share Repurchase & Dividend

Broadridge exited the quarter with cash and cash equivalents of $241.5 million, up from $151.3 million in the prior quarter. Receivables increased 2.9% from the previous quarter to $406.6 million. Long-term debt remained roughly flat sequentially at $124.3 million.

During fiscal 2011, Broadridge repurchased 8.7 million common shares at an average price of $21.83. Approximately 7.6 million shares remain available under the company's current stock repurchase plan.

The company's board of directors declared a quarterly dividend of 16 cents per share payable on October 3, 2011 to stockholders of record as of September 15. The annual dividend amount was increased approximately 7% from 60 cents per share to 64 cents per share, subject to the board’s discretion.

Guidance

For fiscal 2012, Broadridge expects revenue growth of 8.0% to 10.0%, based on recurring revenue closed sales and acquisitions, representing a 99% client revenue retention rate. Recurring revenue closed sales are forecast in the range of $110.0 million to $150.0 million. Earnings per share are expected at $1.34 to $1.44. Excluding the effect of IBM migration costs, adjusted EPS is expected in the range of $1.50–$1.60. Management also expects adjusted free cash flow in the range of $108.0 million to $195.0 million.

Moreover, management still thinks that contribution from the event-driven mutual fund proxy revenues will be negligible. But it believes that the situation could be better during the later half of the fiscal year.

Our Take

Broadridge Financial posted a decent fourth 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 securities processing and outsourcing services. 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 2012 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) and State Street Corp. (STT), 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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