Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Business context and reporting period. Broadridge provides investor communications and financial technology services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). This filing covers the quarter and six months ended December 31, 2022—the second quarter and first half of fiscal 2023—and compares them with the prior-year periods.
Financial performance and position
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Revenue | $1,292.9 million; up 3% | $2,576.2 million; up 5% |
| Operating income / margin | $107.9 million / 8.3%; prior year 5.5% | $195.4 million / 7.6%; prior year 7.0% |
| Net earnings | $57.5 million; up 22% | $108.0 million; down 6% |
| Diluted EPS | $0.48; prior year $0.40 | $0.91; prior year $0.97 |
| Operating cash flow | Not separately reported for the quarter | $(81.4) million; prior year $(94.6) million |
| Free cash flow (non-GAAP) | Not separately reported for the quarter | $(114.5) million; prior year $(123.8) million |
Quarterly GAAP results improved despite higher interest expense and a higher effective tax rate. For the six-month period, revenue and operating income rose, but net earnings and diluted EPS fell as interest and other non-operating expense increased. Adjusted net earnings (non-GAAP) were $108.4 million for the quarter, versus $97.3 million, and $208.2 million for the six months, versus $223.5 million. Adjusted diluted EPS was $0.91 for the quarter and $1.75 for the six months, compared with $0.82 and $1.89, respectively.
Revenue mix and segments. Quarterly recurring revenue increased 6% to $840.4 million, event-driven revenue decreased 42% to $37.6 million, and distribution revenue rose 3% to $414.9 million. For the six months, recurring revenue grew 7% to $1,646.2 million, event-driven revenue declined 29% to $100.2 million, and distribution revenue grew 8% to $829.7 million. Management reported constant-currency recurring revenue growth of 8% for the quarter and 9% for the half year (non-GAAP).
- ICS revenue rose 3% for the quarter and 5% for the half year. ICS pre-tax earnings increased 11% in the quarter but declined 12% for the half year, reflecting lower event-driven activity and higher postage/distribution costs.
- GTO revenue rose 2% for the quarter and 4% for the half year. GTO pre-tax earnings increased 30% and 61%, respectively; management cited recurring revenue growth and lower acquired-intangible amortization.
Margins, liquidity and debt. Six-month operating cash flow remained negative, although less negative than a year earlier; free cash flow was also negative. The company attributed improved operating cash flow primarily to stronger receivable collections and lower client platform implementation and development spending, partly offset by lower net earnings. Cash and cash equivalents were $280.0 million at December 31, 2022, compared with $224.7 million at June 30, 2022. Long-term debt was $4,105.4 million, up from $3,793.0 million; debt principal was $4,125.0 million. The company had $1,165.0 million of unused revolving credit capacity and reported compliance with debt covenants. It paid $160.3 million in dividends during the half year.
Material changes versus prior periods
- Quarterly operating income rose 57%, while six-month operating income rose 14%; six-month net earnings declined 6% and diluted EPS declined 6%.
- Lower mutual fund proxy communications reduced event-driven revenue. Management noted that such activity is volatile and difficult to forecast.
- Higher postage rates supported distribution revenue, but also increased costs. The six-month postage-rate impact was approximately $53.3 million on revenue and $65.0 million on ICS cost of revenue.
- Net interest expense rose to $34.1 million for the quarter and $61.0 million for the half year, primarily due to higher borrowing costs.
- Foreign-currency translation losses were $135.1 million for the half year, contributing to comprehensive loss of $26.7 million despite net earnings of $108.0 million.
Outlook, risks and unusual items
- Outlook: The filing provides no consolidated earnings or revenue guidance. Broadridge estimates the SEC tailored shareholder-report rule could reduce annual recurring revenue by approximately $30 million, phasing in over fiscal 2025 and 2026, assuming no offset from new services. The rule’s final compliance date is July 24, 2024.
- Management commentary: Management expects cash, operating cash flows and borrowing capacity to fund operations and commitments for at least the next 12 months and thereafter. It reported no material COVID-19 impact on consolidated revenue or pre-tax income in fiscal 2023 to date.
- Russia: The company is winding down its Russian operations and has largely moved services to other locations. Russia-related exit costs were $7.9 million in operating expenses for the quarter and $10.5 million for the half year, partly offset by a $1.2 million non-operating gain.
- Legal contingency: A jury found a subsidiary liable for breach of contract and gross negligence/willful misconduct in the Plan Management matter. Post-trial motions were pending; the company said it did not believe a loss was probable at the time of filing. For other litigation, management estimated reasonably possible losses of up to $30 million beyond established reserves.
- Other commitments and risks: Fixed minimum commitments include $108.4 million under data-center services, $154.9 million under a private-cloud agreement, $14.7 million under an EU IT agreement, and $204.5 million under an AWS cloud-services agreement. Key stated risks include cybersecurity or service failures, client concentration and retention, market activity, regulation, technology changes, and economic or geopolitical conditions.
Important facts for investors to verify
- Whether recurring revenue growth can offset continued weakness or volatility in mutual fund proxy and other event-driven activity.
- The earnings and cash-flow effects of higher financing costs, working-capital movements, and the May 2024 maturity of $1.54 billion in term loans.
- The timing and net revenue impact of the tailored shareholder-report rule, including the possibility of offsetting new services.
- Developments and potential exposure in the Plan Management litigation and other claims.
- Progress in winding down Russia operations and any further exit costs or operational impacts.