Broadridge Financial Solutions BR
July 16, 2007 - 3:08pm EST by
mack885
2007 2008
Price: 19.89 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 2,800 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Broadridge Financial Solutions, Inc. (“Broadridge”) was spun off from Automatic Data Processing, Inc. before the NYSE had completed a review of its pricing in its core Investor Communications segment—or perhaps because the NYSE had not completed its review. The transaction’s timing, whether intentional or not, created incentives for management that may have shaped disclosures and contributed to the company’s attractive valuation.
Nowhere in Broadridge’s public filings will you find the word “monopoly” used to describe its market position distributing proxy statements for U.S. issuers, although it would be apt. Nor will you find it explained that because Broadridge is engaged by broker/dealers but paid by issuers to distribute proxy statements to their customers, a “third-party payor” dynamic is created. Management was limited in its ability to discuss just how good its proxy distribution and tabulation business is, because to do so would signal an ability to absorb lower prices while the NYSE was completing its pricing review. Although price reductions would not have been unreasonable, management was also limited in its ability to admit the possibility, because to do so could prove self-fulfilling. Left with an impression of the business that was less than it might have been and an unquantifiable material risk, some investors threw up their hands.
 
Broadridge began trading on a “when-issued” basis on March 22nd and completed its spin off from Automatic Data Processing, Inc. on March 30, 2007. The NYSE completed its pricing review before July 1st, and although it is still little known or understood, the NYSE’s new pricing schedule is extremely favorable to Broadridge. In addition, temporary losses from Broadridge’s Clearing & Outsourcing segment mask its profitability, and the absence of a publicly-traded company comparable to the Investor Communications segment and limited sell-side coverage make it more difficult to value. All of these factors may contribute to Broadridge’s attractive valuation of 16.5x FYE June 2008 estimated earnings for a quickly growing business with near-monopolistic market share, third-party payors and low and declining marginal costs that is itself critical to the functioning of the U.S. capital markets. Furthermore, additional value may be realized as the sub-scale Clearing & Outsourcing segment reaches critical mass.
 
Investor Communications Solutions
The U.S. public markets are built on a clearance and settlement infrastructure that is not well understood, even by active market participants. The proxy processing business, which was essentially invented by Broadridge and its current management team, is properly understood in the context of the unified, national clearance and settlement systems. While concerns have been raised with respect to certain aspects of these systems, such as issues surrounding failure-to-deliver, they are critical to the functioning of U.S. markets, highly efficient and resistant to change.
The Depository Trust & Clearing Corporation (DTCC) is the world’s largest post-trade infrastructure organization. Its subsidiary, the Depository Trust Company (DTC), acts as a central securities depository, so that stock certificates and checks do not need to be physically transferred with each trade, as they were in the 1960s. The DTC holds approximately 85% of all U.S. equities. Stocks are kept in the name of its partnership nominee, Cede & Co. Investors own proportional interests in the shares held by Cede & Co. rather than identifiable shares, and ownership changes are recorded electronically. The other principal DTCC subsidiary, the National Securities Clearing Corporation (NSCC), negates the need to settle each transaction on an individual basis and expedites settlement by allowing multiple trades to be settled by a single net instruction for the movement of securities and cash, greatly reducing the time and capital needed to support trade settlement.
Tracking the voting rights associated with the movement of shares in this system is more complicated than tracking economic interests. This complexity results from the practice of lending shares to short sellers:  the buyer of shares sold short expects voting rights to be attached to those shares. The buyer is the only party with voting rights, in keeping with the idea of “one share, one vote.” Two parties, however—the original owner who lent shares and the buyer of shares sold short—have an economic interest in those shares.
The data needed to compile a shareholder list has to be compiled by the DTC from disparate sources. The DTC’s own records do not include the beneficial owners of shares held in street name; only the individual broker/dealers know the identity of their customers. The broker/dealers hire Broadridge to act as their agent, and Broadridge supplies beneficial ownership data to the DTC. That data, together with additional data from the exchanges and other sources, is used to generate a shareholder list, which is provided to the issuer one day following the record date, for which there is twenty days notice.
Issuers are not given a shareholder list with all of the beneficial ownership attributed; issuers only know the identities of shareholders who did not object to direct communication between themselves and the issuer (called non-objecting beneficial owners, or NOBOs). Objecting beneficial owners (OBOs), constituting approximately 70-80% of all shares, appear on the shareholder list in street name, and direct communication between the issuer and these shareholders is prohibited.
Issuers need an intermediary to communicate with the vast majority of their shareholders, but none of the broker/dealers is set up to distribute investor communications (Merrill Lynch had been in the business, but sold to ADP in 1999). To communicate with their shareholders, then, issuers rely on Broadridge as the broker/dealer’s agent. When proxies, proxy ballots and annual reports are printed, they are sent to Broadridge, who sends them to beneficial owners in the familiar blue polyurethane bag (some are sent to transfer agents who, in turn, send them to shareholders). The same web of intermediaries is used when communications are in electronic, rather than hard copy, form.
Shareholders receive proxies and vote in one of four ways: (i) by completing the paper proxy and returning it to Broadridge, (ii) by telephone with a Broadridge employee, (iii) through the internet, and (iv) by using Broadridge’s proprietary ProxyEdge platform or a competitive platform. Broadridge then tabulates the votes.
Broadridge receives several different fees for distributing investor communications, including fees for each nominee (broker/dealer) with which it interacts on every security, a base fee and a bulk processing fee. It also marks up its postage costs and is paid an incentive fee every time it is able to reduce an issuer’s cost by suppressing a mailing (called an elimination fee). An example of the latter would be Broadridge’s practice of “householding” or eliminating multiple mailings to the same address. Broadridge also receives fees when it tabulates votes through any of the four channels. In each case, the issuer pays the fees to Broadridge, who pays a rebate to the broker/dealers.
The pricing dynamic for proxy processing is extraordinary. Broadridge enjoys a market share of approximately 99% in proxy distribution for shares held in street name (70% for all proxies). The service it offers is, in the NYSE Proxy Working Group’s own words, “critical to the functioning of the corporate governance system for American publicly traded companies,” which rely on an infrastructure that requires an intermediary for data and communication distribution. The entities contracting with Broadridge, the broker/dealers, are not paying its fees; the fees are instead paid by the issuers. The cost to individual issuers is immaterial, so they are less price-sensitive, although fees are large in the aggregate. The NYSE, which determines Broadridge’s pricing in consultation with the company, could act as a check in this structure under NYSE Rule 465; it was, until its IPO, owned by its member firms, including the broker/dealers who receive rebates from Broadridge and who helped design the industry’s fee architecture.
 
Broadridge’s profitability will only be enhanced by the SEC’s recent amendments to the proxy rules, known as “notice and access.” Notice and access removes the requirement for public companies to send automatically a full, hard-copy set of annual meeting and proxy materials by allowing them to deliver instead a “Notice of Internet Availability of Proxy Materials,” and to provide online access to the documents. Companies choosing the option to use this new notice and access delivery model must give shareholders an ability to request a paper copy of the posted materials. Under notice and access, Broadridge will be paid for electronic distribution while it continues to receive elimination fees. The economics of vote tabulation will also improve because its marginal costs for electronic tabulation are near zero while its costs for paper and telephonic tabulation are quite high and its profit margins quite low.
 
Below are statistics regarding recent proxy volumes:
 
 
 
2004
2005
2006
Street name proxies (millions)
 
285
305
310
Growth
 
 
6.9%
1.8%
Mailed proxies
 
187
180
171
Eliminated proxies
 
98
125
140
 
Securities Processing Solutions
 
Securities Processing Solutions (SPS) provides trade processing from order management to clearance and settlement, record keeping for compliance reporting, integrated web based desktop applications, including BPS Advantage, ProVisor and Enterprise Workflow. SPS process approximately 2 million equity and 2 million fixed income trades per day. Many large banks utilize their platforms, including Bank of America and Bear Stearns. Broadridge competes primarily with SunGard Data Systems Inc. and with in-house providers who may acquire Broadridge clients. SPS is a very high margin business (>27% EBIT margins) with very entrenched customers that have been with the company for an average of 10 years. Channel checks indicate that clients rarely leave because of high switching costs; customer losses really only occur when clients are acquired by brokerages with in-house processing. For example, Broadridge is losing TD Waterhouse, which represented $40 million in revenues to SPS, to Ameritrade. Potential new clients may be gained from amongst the 5,000 small bank/brokerages that exist, of whom approximately 10 could generate revenues of $50-80 million.
 
Securities Clearing and Outsourcing Operations Solutions
 
Clearing & Outsourcing was acquired from Bank of America for $360mm in November 2004. Clearing takes over a trade where SPS ends by dealing with the actual exchange of money at settlement. Clearing is a scale business and Broadridge is on its way to achieving break-even scale, which management projects will occur this fiscal year (FYE 6/08). With this business, Broadridge is able to offer a one-stop shop for its processing customers who typically also need trade clearing services. Many of the larger clearing businesses, including Spear Leeds & Kellogg (now Goldman Sachs) and Pershing (The Bank of New York Mellon) are no longer independent. However, Penson Worldwide, which went public in May 2006, is a stand-alone clearing business that provides some insight into scale economies:
 
Penson Worldwide
 
 
 
Broadridge Clearing and Outsourcing  Operations
 
 
2002
2004
2006
 
 
9 mo 06
2006
9 mo 07
2008E
Net sales
$80
$116
$288
 
Net sales
$58
$81
$68
$121
Net income
($4)
$8
$25
 
EBIT
($21)
($25)
($11)
$0
margin
(4.7%)
6.7%
8.5%
 
margin
(35.8%)
(31.0%)
(16.6%)
0.0%
 
Valuation
 
Broadridge currently trades at 14x FYE June 2007 estimated earnings of $1.40 and 16.4x FYE June 2008 estimated earnings of $1.18. Note that earnings are expected to decline as a result of previously announced customer losses due to acquisition. While there are no companies directly comparable to Broadridge, most processing companies trade at 20x earnings or higher (e.g., JKHY, BSG, FISV, DST, STT, BK, and IFIN).  Given Broadridge’s monopoly position in its ICS segment and potential new client growth in its SPS, it should at least trade in line with its comparables. There has also been a very healthy acquisition appetite for processing businesses lately including FirstData at 25x forward earnings, Ceridian at 24x forward earnings and Metavante at 22x (before incorporating stand-alone company costs). Additionally, Clearing should be worth at least the $2.50 per share Broadridge paid, which corresponds with JP Morgan’s thesis that Penson is worth 3-3.5x revenue. Putting it all together, Broadridge is worth approximately $26 per share today with a value that should increase as it gains new securities processing customers, achieves scale in clearing, and benefits from new fees and lower marginal costs in investor communications.
  
Other
  • Excellent management team
  • Equity compensation package is still on the come
  • Capex runs at a low 2% of revenue  vs. D&A at 2.5%
  • Free cash flow will be used to pay down debt and pay dividends. Note that BR’s Debt/EBITDA is already a conservative 1.9x

Catalyst

Catalysts
· Realization that notice and access will help rather than impair ICS
· Possible announcement of a new large SPS client
· 4Q earnings
· Additional analyst coverage
    sort by   Expand   New

    Description

    Broadridge Financial Solutions, Inc. (“Broadridge”) was spun off from Automatic Data Processing, Inc. before the NYSE had completed a review of its pricing in its core Investor Communications segment—or perhaps because the NYSE had not completed its review. The transaction’s timing, whether intentional or not, created incentives for management that may have shaped disclosures and contributed to the company’s attractive valuation.
    Nowhere in Broadridge’s public filings will you find the word “monopoly” used to describe its market position distributing proxy statements for U.S. issuers, although it would be apt. Nor will you find it explained that because Broadridge is engaged by broker/dealers but paid by issuers to distribute proxy statements to their customers, a “third-party payor” dynamic is created. Management was limited in its ability to discuss just how good its proxy distribution and tabulation business is, because to do so would signal an ability to absorb lower prices while the NYSE was completing its pricing review. Although price reductions would not have been unreasonable, management was also limited in its ability to admit the possibility, because to do so could prove self-fulfilling. Left with an impression of the business that was less than it might have been and an unquantifiable material risk, some investors threw up their hands.
     
    Broadridge began trading on a “when-issued” basis on March 22nd and completed its spin off from Automatic Data Processing, Inc. on March 30, 2007. The NYSE completed its pricing review before July 1st, and although it is still little known or understood, the NYSE’s new pricing schedule is extremely favorable to Broadridge. In addition, temporary losses from Broadridge’s Clearing & Outsourcing segment mask its profitability, and the absence of a publicly-traded company comparable to the Investor Communications segment and limited sell-side coverage make it more difficult to value. All of these factors may contribute to Broadridge’s attractive valuation of 16.5x FYE June 2008 estimated earnings for a quickly growing business with near-monopolistic market share, third-party payors and low and declining marginal costs that is itself critical to the functioning of the U.S. capital markets. Furthermore, additional value may be realized as the sub-scale Clearing & Outsourcing segment reaches critical mass.
     
    Investor Communications Solutions
    The U.S. public markets are built on a clearance and settlement infrastructure that is not well understood, even by active market participants. The proxy processing business, which was essentially invented by Broadridge and its current management team, is properly understood in the context of the unified, national clearance and settlement systems. While concerns have been raised with respect to certain aspects of these systems, such as issues surrounding failure-to-deliver, they are critical to the functioning of U.S. markets, highly efficient and resistant to change.
    The Depository Trust & Clearing Corporation (DTCC) is the world’s largest post-trade infrastructure organization. Its subsidiary, the Depository Trust Company (DTC), acts as a central securities depository, so that stock certificates and checks do not need to be physically transferred with each trade, as they were in the 1960s. The DTC holds approximately 85% of all U.S. equities. Stocks are kept in the name of its partnership nominee, Cede & Co. Investors own proportional interests in the shares held by Cede & Co. rather than identifiable shares, and ownership changes are recorded electronically. The other principal DTCC subsidiary, the National Securities Clearing Corporation (NSCC), negates the need to settle each transaction on an individual basis and expedites settlement by allowing multiple trades to be settled by a single net instruction for the movement of securities and cash, greatly reducing the time and capital needed to support trade settlement.
    Tracking the voting rights associated with the movement of shares in this system is more complicated than tracking economic interests. This complexity results from the practice of lending shares to short sellers:  the buyer of shares sold short expects voting rights to be attached to those shares. The buyer is the only party with voting rights, in keeping with the idea of “one share, one vote.” Two parties, however—the original owner who lent shares and the buyer of shares sold short—have an economic interest in those shares.
    The data needed to compile a shareholder list has to be compiled by the DTC from disparate sources. The DTC’s own records do not include the beneficial owners of shares held in street name; only the individual broker/dealers know the identity of their customers. The broker/dealers hire Broadridge to act as their agent, and Broadridge supplies beneficial ownership data to the DTC. That data, together with additional data from the exchanges and other sources, is used to generate a shareholder list, which is provided to the issuer one day following the record date, for which there is twenty days notice.
    Issuers are not given a shareholder list with all of the beneficial ownership attributed; issuers only know the identities of shareholders who did not object to direct communication between themselves and the issuer (called non-objecting beneficial owners, or NOBOs). Objecting beneficial owners (OBOs), constituting approximately 70-80% of all shares, appear on the shareholder list in street name, and direct communication between the issuer and these shareholders is prohibited.
    Issuers need an intermediary to communicate with the vast majority of their shareholders, but none of the broker/dealers is set up to distribute investor communications (Merrill Lynch had been in the business, but sold to ADP in 1999). To communicate with their shareholders, then, issuers rely on Broadridge as the broker/dealer’s agent. When proxies, proxy ballots and annual reports are printed, they are sent to Broadridge, who sends them to beneficial owners in the familiar blue polyurethane bag (some are sent to transfer agents who, in turn, send them to shareholders). The same web of intermediaries is used when communications are in electronic, rather than hard copy, form.
    Shareholders receive proxies and vote in one of four ways: (i) by completing the paper proxy and returning it to Broadridge, (ii) by telephone with a Broadridge employee, (iii) through the internet, and (iv) by using Broadridge’s proprietary ProxyEdge platform or a competitive platform. Broadridge then tabulates the votes.
    Broadridge receives several different fees for distributing investor communications, including fees for each nominee (broker/dealer) with which it interacts on every security, a base fee and a bulk processing fee. It also marks up its postage costs and is paid an incentive fee every time it is able to reduce an issuer’s cost by suppressing a mailing (called an elimination fee). An example of the latter would be Broadridge’s practice of “householding” or eliminating multiple mailings to the same address. Broadridge also receives fees when it tabulates votes through any of the four channels. In each case, the issuer pays the fees to Broadridge, who pays a rebate to the broker/dealers.
    The pricing dynamic for proxy processing is extraordinary. Broadridge enjoys a market share of approximately 99% in proxy distribution for shares held in street name (70% for all proxies). The service it offers is, in the NYSE Proxy Working Group’s own words, “critical to the functioning of the corporate governance system for American publicly traded companies,” which rely on an infrastructure that requires an intermediary for data and communication distribution. The entities contracting with Broadridge, the broker/dealers, are not paying its fees; the fees are instead paid by the issuers. The cost to individual issuers is immaterial, so they are less price-sensitive, although fees are large in the aggregate. The NYSE, which determines Broadridge’s pricing in consultation with the company, could act as a check in this structure under NYSE Rule 465; it was, until its IPO, owned by its member firms, including the broker/dealers who receive rebates from Broadridge and who helped design the industry’s fee architecture.
     
    Broadridge’s profitability will only be enhanced by the SEC’s recent amendments to the proxy rules, known as “notice and access.” Notice and access removes the requirement for public companies to send automatically a full, hard-copy set of annual meeting and proxy materials by allowing them to deliver instead a “Notice of Internet Availability of Proxy Materials,” and to provide online access to the documents. Companies choosing the option to use this new notice and access delivery model must give shareholders an ability to request a paper copy of the posted materials. Under notice and access, Broadridge will be paid for electronic distribution while it continues to receive elimination fees. The economics of vote tabulation will also improve because its marginal costs for electronic tabulation are near zero while its costs for paper and telephonic tabulation are quite high and its profit margins quite low.
     
    Below are statistics regarding recent proxy volumes:
     
     
     
    2004
    2005
    2006
    Street name proxies (millions)
     
    285
    305
    310
    Growth
     
     
    6.9%
    1.8%
    Mailed proxies
     
    187
    180
    171
    Eliminated proxies
     
    98
    125
    140
     
    Securities Processing Solutions
     
    Securities Processing Solutions (SPS) provides trade processing from order management to clearance and settlement, record keeping for compliance reporting, integrated web based desktop applications, including BPS Advantage, ProVisor and Enterprise Workflow. SPS process approximately 2 million equity and 2 million fixed income trades per day. Many large banks utilize their platforms, including Bank of America and Bear Stearns. Broadridge competes primarily with SunGard Data Systems Inc. and with in-house providers who may acquire Broadridge clients. SPS is a very high margin business (>27% EBIT margins) with very entrenched customers that have been with the company for an average of 10 years. Channel checks indicate that clients rarely leave because of high switching costs; customer losses really only occur when clients are acquired by brokerages with in-house processing. For example, Broadridge is losing TD Waterhouse, which represented $40 million in revenues to SPS, to Ameritrade. Potential new clients may be gained from amongst the 5,000 small bank/brokerages that exist, of whom approximately 10 could generate revenues of $50-80 million.
     
    Securities Clearing and Outsourcing Operations Solutions
     
    Clearing & Outsourcing was acquired from Bank of America for $360mm in November 2004. Clearing takes over a trade where SPS ends by dealing with the actual exchange of money at settlement. Clearing is a scale business and Broadridge is on its way to achieving break-even scale, which management projects will occur this fiscal year (FYE 6/08). With this business, Broadridge is able to offer a one-stop shop for its processing customers who typically also need trade clearing services. Many of the larger clearing businesses, including Spear Leeds & Kellogg (now Goldman Sachs) and Pershing (The Bank of New York Mellon) are no longer independent. However, Penson Worldwide, which went public in May 2006, is a stand-alone clearing business that provides some insight into scale economies:
     
    Penson Worldwide
     
     
     
    Broadridge Clearing and Outsourcing  Operations
     
     
    2002
    2004
    2006
     
     
    9 mo 06
    2006
    9 mo 07
    2008E
    Net sales
    $80
    $116
    $288
     
    Net sales
    $58
    $81
    $68
    $121
    Net income
    ($4)
    $8
    $25
     
    EBIT
    ($21)
    ($25)
    ($11)
    $0
    margin
    (4.7%)
    6.7%
    8.5%
     
    margin
    (35.8%)
    (31.0%)
    (16.6%)
    0.0%
     
    Valuation
     
    Broadridge currently trades at 14x FYE June 2007 estimated earnings of $1.40 and 16.4x FYE June 2008 estimated earnings of $1.18. Note that earnings are expected to decline as a result of previously announced customer losses due to acquisition. While there are no companies directly comparable to Broadridge, most processing companies trade at 20x earnings or higher (e.g., JKHY, BSG, FISV, DST, STT, BK, and IFIN).  Given Broadridge’s monopoly position in its ICS segment and potential new client growth in its SPS, it should at least trade in line with its comparables. There has also been a very healthy acquisition appetite for processing businesses lately including FirstData at 25x forward earnings, Ceridian at 24x forward earnings and Metavante at 22x (before incorporating stand-alone company costs). Additionally, Clearing should be worth at least the $2.50 per share Broadridge paid, which corresponds with JP Morgan’s thesis that Penson is worth 3-3.5x revenue. Putting it all together, Broadridge is worth approximately $26 per share today with a value that should increase as it gains new securities processing customers, achieves scale in clearing, and benefits from new fees and lower marginal costs in investor communications.
      
    Other
    • Excellent management team
    • Equity compensation package is still on the come
    • Capex runs at a low 2% of revenue  vs. D&A at 2.5%
    • Free cash flow will be used to pay down debt and pay dividends. Note that BR’s Debt/EBITDA is already a conservative 1.9x

    Catalyst

    Catalysts
    · Realization that notice and access will help rather than impair ICS
    · Possible announcement of a new large SPS client
    · 4Q earnings
    · Additional analyst coverage

    Messages


    SubjectLost of Processing Customer
    Entry07/16/2007 03:45 PM
    Memberconway968
    As you note, BR has lost TD Waterhouse this year, and they also lost a major customer (or two) several years ago after they also took processing in-house. With the consolidation trend among brokers continuing, are you worried about the loss of one or two more major customers in the next few years?

    If I recall correctly, TD had to pay a fee for terminating the processing contract early, but that fee did not come close to making uo fir the lost profit.

    More than the dynamics of electronic proxies, this is the issue that made me pass on this name. The processing numbers has been a sawtooth as growth has been strong for a few years until a major customer is lost. And as you note, this biz is all about operational leverage. And that works both ways as earnings drop significantly with the loss of major customers.

    Does your valuation assume no major losses of processing customers and what happens to you valuation if they lose a major customer in the next four years? I got a similar valuation until I factored in the probability that another major processing client leaves.

    And do you have any thoughts on the likelihood of their losing a major customer in the next few years?

    Subjectquestions
    Entry07/18/2007 12:55 PM
    Memberoscar1417
    First off, thanks for the write-up, and probably the best succinct description of the back-office settlement process that I've seen.
    This seems like a great private business to own, given its market position and presumed moat. So why was it spun off by ADP? Do you have any insights into their rationale? One report said that "ADP Brokerage" (as it was formerly known) generated about 20% of ADP's revenues and profits, while at a current prices is only 10% of its market cap.
    Also, your 99% market share comment is at odds with the loss of TD Waterhouse; presumably TD Waterhouse represents more than 1% of the market? Unless we define "the market" as the shareholder communications that are not provided by the large broker/dealers, in which case I'd ask what the long-term prognosis is for that market? I guess this is just another way of asking how the consolidation trend is going to impact their business.
    Thanks.

    Subjectresponse to conway
    Entry07/25/2007 12:52 PM
    Membermack885
    Conway:
    My valuation assumes neither customer losses nor customer gains. My channel checks led me to conclude that switching costs are very high and customers almost never terminate service unless it is the result of an acquisition. You are correct in asserting that consolidation is a risk; however, consolidation could also result in customer gains. For example, activists recently pushed for an E*Trade/Ameritrade deal, and E*Trade is a customer. In the event a transaction is consummated, it is possible Broadridge could end up with both accounts. Furthermore, E*Trade has a multiyear agreement that has no outs (i.e. if they wanted to switch they would have to pay for years of undelivered service). I believe the current price provides a margin of safety to absorb the loss of E*Trade.

    Securities processing outsourcing is not a business in secular decline. To the contrary, the outsourcing model is generally cheaper and more efficient than taking the work in house. Broadridge’s pitch to clients with in-house processing is: “Let us perform your back office functions more efficiently than you can for 80% of your current back office costs.” Brokerage businesses are not focused on securities processing, but rather, generating trading commissions. Piper Jaffray’s recent engagement of Broadridge, while not an “elephant” customer, provides evidence of continued traction.

    Mack

    Subjectresponse to oscar
    Entry07/25/2007 12:59 PM
    Membermack885
    Oscar:

    ADP’s claimed rationale for spinning off Broadridge was twofold: (i) ADP’s base business is growing faster and has higher margins, and (ii) Shareholders of ADP own it for employer services. I believe the spin off’s timing may be telling. It is possible that ADP management wanted to spin off Broadridge prior to the NYSE’s Proxy Working Group review because (i) it would make it more difficult for the NYSE to cut pricing for a significantly smaller company whose existence is critical to the proper functioning of U.S. markets, and (ii) ADP shareholders, who might be attracted to ADP’s low business risk, could sell Broadridge and insulate themselves from the risk of the NYSE’s pricing review.

    Regarding market share, they have a 99% share with respect to “street name” proxy delivery. TD Waterhouse was a customer of the Securities Processing segment. I don’t know that segment’s market share, although the Form 10 indicates they provide securities processing solutions to seven out of the top ten US broker dealers and provide fixed income trade processing services for six out of ten Fortune Global 500 banks.

    Mack

    Subjectnew NYSE pricing schedule
    Entry08/09/2007 04:31 PM
    Membernumc911
    Mack: thanks for the very clear write-up of a complicated business. You mentioned in your opening summary that "The NYSE completed its pricing review before July 1st, and although it is still little known or understood, the NYSE’s new pricing schedule is extremely favorable to Broadridge" but (unless I missed it) did not elaborate further. Could you provide some more on this seemingly important point please, and in particular on your understanding of the likely potential benefits to Broadridge of this new extremely favorable pricing. Thanks,
    numc

    SubjectQuestion
    Entry08/10/2007 03:10 PM
    Memberbentley883
    You state that "Broadridge's profitability will only be enhanced by the SEC's recent amendments to the proxy rules...." This is clear from the fact that BR will lose comparatively low-margin postage-related fees and will earn higher margins on tabulation, as you say. But it is unclear to me what will happen to profits in $ terms, as opposed to margin % terms. Are you comfortable that BR will be able to replace what it has been earning from postage-related fees? My understanding is that postage related revenue has been a very high % (50%?) of overall revenue for this segment, and so the contribution might be significant despite being low as a % of revenue. Any thoughts would be much appreciated.
    Thanks
    Bentley

    SubjectBear market impact
    Entry08/10/2007 04:01 PM
    Membernatey1015
    I find it interesting that no one has talked about the potential impact of a bear market on BR's business. We are almost 4.5 years into a bull market run and I think the odds of a bear market given everything that is happening today is decent. In FY2003 ADP's Brokerage Services revenues (does not include Clearing & Outsourcing) declined by 9.3% while EBITDA declined by 29.8%! For FY2002 revenues increased 2.0%, which resulted in a 5.7% increase in EBITDA. Thus there is about a 3x multiplier on revenues to EBITDA. Clearing & Outsourcing, which was not with ADP until 2005 has the highest incremental margins at about 70%. So I would say the multiplier effect could be even higher than 3x for BR's business.

    In a bear market scenario BR could earn $1 or less in EPS. Where might the stock trade in that case? I think it's safe to say that it could be well south of $15 given P/E multiples tend to contract along with poor earnings.

    If all we see is a flat to up market over the next few years then BR should be a good investment from here. At the current price, making an investment in BR seems to imply we will not see a down market.

    SubjectRe: Mix Shift
    Entry08/12/2007 05:16 PM
    Membernatey1015
    I assume you're referring to a mix shift in securities processing where the segment is made up less of day traders today and more of institutional trading. While that is true (and I don't know what the exact % shift has been), that does not make the segment immune to a bear market impact nor does it really lessen the impact. It might delay the impact, but I doubt it lessens the impact. When the market goes down the little guy no longer feels it's safe to be in the stock market so they tend to cut back their holdings of stocks and mutual funds. Mutual funds face redemptions and have to sell. Hedge funds face redemptions as well, but can delay their sales more so than mutual funds--but they still have to sell at some point if they get redeemed.

    Thus investor communications takes a hit as does securities processing. Clearing & Outsourcing will get whacked as well because when buyers leave the market there is less liquidity and thus less trades are made. Less buyers and owners of stocks hurts BR's business segments across the board. The operating leverage within BR's business model is fairly significant since its cost structure is largely fixed.

    SubjectPost Quarter Thoughts
    Entry08/23/2007 10:07 AM
    Memberruby831
    any new thoughts?
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