STT State Street Corporation

Broadridge Financial Solutions Inc.’s (BR) first-quarter fiscal 2012 adjusted earnings per share (EPS) of 15 cents beat the Zacks Consensus Estimate of 11 cents and improved from 10 cents earned in the prior-year quarter. Higher recurring revenue prompted the outperformance, which was partially offset by higher operating expenses and tax rate.

Revenues

Total revenue in the first quarter was $476.4 million, up 13.1% from $421.4 million in the year-ago quarter. The improvement was buoyed 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. Positive currency translation, net new businesses, contributions from recent acquisitions 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 $313.0 million in revenues, up 12.0% from $279.5 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 $158.4 million, up 11.8% from $141.7 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.

Operating Results

Total expenses in the quarter crept up 12.4% year over year to $450.2 million. Pre-tax income was $26.2 million, up from $20.9 million in the year-earlier quarter. Pre-tax margin grew 60 basis points year over year to 3.4%.

Net income from continuing operations increased 26.4% year over year to $16.7 million. Earnings per share in the quarter rose 29.3% to 13 cents from 10 cents in the year-ago quarter. Including the effect of International Business Machines Inc. (IBM) migration costs, adjusted net income was $18.7 million or 15 cents, compared to $13.3 million or 10 cents in the year-ago quarter. 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 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 $252.8 million, up from $241.5 million in the prior quarter. Receivables decreased 19.2% from the previous quarter to $328.5 million. Long-term debt increased $500.0 million sequentially to $624.3 million.

The company entered into a $990 million senior unsecured credit facility, consisting of a $490 million five-year term loan facility and a $500 million five-year revolving credit facility.

During fiscal 2012, Broadridge repurchased 0.3 million common shares at an average price of $24.05. Approximately 7.2 million shares remain available under the company's current stock repurchase plan.

Guidance

For fiscal 2012, Broadridge expects revenue growth of 9.0% to 11.0% (previously 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 between $1.34 and $1.44. Including 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 $210.0 million to $260.0 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 in the later half of this fiscal year.

Our Take

Broadridge Financial posted a decent first quarter and surpassed the Zacks Consensus Estimate on the bottom line. The upbeat revenue guidance is also very encouraging. 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 intensified pricing pressure for the company.

Currently, Broadridge has a Zacks #2 Rank, implying a short-term Buy recommendation.

 
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