Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, Broadridge’s fiscal 2023 first quarter (compared with the three months ended September 30, 2021). Amounts are in U.S. dollars.
Business context
Broadridge provides investor communications and financial technology services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). ICS includes investor communications, proxy processing, distribution and customer communications; GTO provides trading, transaction-processing and wealth-management technology and services.
Financial performance
| Metric | Quarter ended Sep. 30, 2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,283.3 million | $1,192.9 million | Up 8% |
| Operating income / margin | $87.5 million / 6.8% | $103.3 million / 8.7% | Income down 15% |
| Earnings before income taxes | $55.4 million | $78.2 million | Down 29% |
| Net earnings | $50.4 million | $67.2 million | Down 25% |
| Diluted EPS | $0.42 | $0.57 | Down 26% |
| Adjusted operating income (non-GAAP) | $150.1 million; 11.7% margin | $176.7 million; 14.8% margin | Down 15% |
| Adjusted diluted EPS (non-GAAP) | $0.84 | $1.07 | Down 21% |
Revenue growth reflected recurring revenue up 7% to $805.8 million, distribution revenue up 13% to $414.8 million, and event-driven revenue down 18% to $62.7 million. Recurring revenue grew 9% on a constant-currency basis (non-GAAP). Distribution growth included about $38.3 million from postage-rate increases.
- ICS: Revenue rose 8% to $920.6 million, but segment earnings before taxes fell 27% to $60.0 million; pre-tax margin declined to 6.5% from 9.7%. Higher recurring revenue was offset by lower mutual-fund proxy activity, higher postage and distribution costs, and prior-year investments.
- GTO: Revenue rose 7% to $362.7 million. Segment earnings before taxes increased to $40.3 million from $18.6 million, and pre-tax margin improved to 11.1% from 5.5%, primarily reflecting recurring revenue growth.
The effective tax rate was 9.0%, versus 14.1%, with the decrease attributed to excess tax benefits from equity compensation and other discrete tax benefits. Higher borrowing costs contributed to net interest expense increasing to $26.9 million from $22.6 million.
Cash flow, debt and liquidity
- Operating cash flow was negative $204.5 million, compared with negative $135.4 million. Free cash flow (non-GAAP) was negative $218.1 million, versus negative $151.4 million. Management attributed the increase in operating cash use primarily to scaling client implementation and development, lower net earnings and lower non-cash add-backs.
- Investing cash outflow was $13.6 million, versus $36.4 million. Financing cash inflow was $222.8 million, including $410.0 million of debt proceeds and $140.0 million of repayments. Dividends paid were $75.0 million.
- Cash and cash equivalents were $227.1 million at September 30, 2022, compared with $224.7 million at June 30, 2022. Current assets were $1,222.0 million and current liabilities were $991.7 million.
- Debt carrying value was $4,064.2 million, up from $3,793.0 million at June 30, 2022. The company reported $1,205.0 million of unused revolving-credit capacity and compliance with debt covenants.
- Management expects operating cash, existing cash and borrowing capacity to cover working capital, capital expenditures, dividends, debt service and other expected needs for at least the next 12 months and the foreseeable future.
Material changes, outlook and risks
- On October 26, 2022, the SEC adopted a rule requiring tailored shareholder reports for mutual funds and ETFs. Broadridge estimates the change could reduce annual recurring revenue by approximately $30 million, phased in over fiscal 2025 and 2026, assuming no offset from new services.
- Management said COVID-19 had not materially affected consolidated revenue or pre-tax income in fiscal 2023 to date, and reported that production facilities and critical vendors remained operational.
- The company is winding down its limited Russia operations following Russia’s invasion of Ukraine and relocating affected services. It reported Russia-related exit costs of $2.6 million in the quarter and did not expect the conflict or its response to materially affect core operations or financial results.
- Mutual-fund proxy activity remains volatile: related revenue fell 42% year over year in the quarter after rising 57% in fiscal 2022. Management said future activity is difficult to forecast.
- Closed sales were $29.0 million, down 2% from $29.7 million. Management noted that larger GTO sales can take 12 to 24 months or longer to convert to revenue.
- The quarter is seasonally weaker for certain ICS activity; proxy and annual-report processing typically make revenue, earnings and operating cash flow higher in the third and fourth fiscal quarters.
- Principal risks include cybersecurity incidents, reliance on a relatively small number of clients, market and economic conditions, regulation, service-provider or systems disruptions, competition, technology change, and acquisition and divestiture execution. The filing reported no material changes to previously disclosed risk factors and no litigation expected to have a material financial impact.
Non-GAAP measures exclude specified items. For the quarter, adjustments included $55.9 million of acquired-intangible amortization, $4.1 million of acquisition and integration costs, and $2.6 million of Russia-related exit costs. These measures supplement, and are not substitutes for, GAAP results.
Important facts for investors to verify
- Whether recurring-revenue growth can offset weaker event-driven activity and foreign-exchange effects.
- Whether higher postage and distribution costs, compensation and technology spending continue to pressure GAAP margins, particularly in ICS.
- The timing and cash-flow effects of client implementation spending, and the company’s ability to fund dividends and debt obligations.
- The actual revenue impact of the SEC shareholder-report rule relative to the estimated $30 million annual reduction and any offsets from new services.
- Progress in relocating Russia-based services and any changes in exit costs, cybersecurity exposure or operational risk.
- Debt levels and refinancing exposure, including the $1.54 billion term loan maturity in May 2024 and the impact of borrowing costs.