Broadridge Financial Solutions, Inc. (NYSE:BR)
F1Q09 Earnings Call
November 6, 2008 8:30 am ET
Marvin Sims – Vice President, Investor Relations
Rich Daly – Chief Executive Officer
Dan Sheldon – Vice President and Chief Financial Officer
Ian Zaffino - Oppenheimer & Co.
Anurag Rana - KeyBanc Capital Markets
David Togut - First Manhattan
Tien-Tsin Huang - J.P. Morgan
Maharth Kapur - Credit Suisse
Good morning. This is [Carol] and I will be your conference facilitator today. (Operator Instructions)
I will now turn the conference over to Marvin Sims, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Carol. Good morning, everyone, and welcome to the Broadridge quarterly earnings call and webcast for the first quarter of the fiscal year 2009.
I'm Marvin Sims, Vice President of Investor Relations. This morning I'm here with Rich Daly, Chief Executive Officer for Broadridge, and Dan Sheldon, Chief Financial Officer for Broadridge.
I'm sure by now everyone has had the opportunity to review the earnings release we issued earlier this morning. The news release and slide presentation that accompanied today's earnings call and webcast can be found on the Investor Relations homepage of our website at Broadridge.com.
Before we begin, I would like to remind everyone that during today's conference call we'll discuss some forward-looking statements that involve risks. These risks are discussed here on Slide 1 and in our periodic filings with the SEC.
Now let's turn to the next slide to review today's agenda. Rich Daly will start today's call with his opening remarks and will provide you with a summary of the financial results for the quarter, followed by a discussion on a few key topics. Dan Sheldon will then review the first quarter results in further detail, including a review of the cash flows for the quarter. Rich will then return and summarize the fiscal year 2009 guidance and provide his overall summary and some closing thoughts before we head into the Q&A part of the call.
Now please turn to the next slide and I'll turn the call over to Rich Daly. Rich?
Thanks, Marvin. Good morning, everyone.
This morning I'll talk about a few topics: First, a summary of our first quarter financial results and the reaffirmation of our 2009 fiscal year nonGAAP EPS guidance; next, a general overview of the current market dynamics and how to put these dynamics into context at Broadridge as well as a discussion on the resiliency of our business. As part of this, I'll also talk about our clients and the recent industry consolidations and how we think it could affect Broadridge's overall revenue. Then, our strong cash flows and the thinking around our capital allocation strategy, and we'll end with Q&A. There is a lot we need to cover, so let's start.
Overall, I'm pleased with our first quarter results, especially given the current environment. Our revenues for the quarter were up 5%. Net earnings, while better than anticipated, were down 1% as a result of the grow-over items related to last year's corporate build and investment spend, as we forecasted during our first quarter fiscal '08 earnings call. Again, both the revenue and earnings metrics are slightly better than what was contemplated in our guidance due to higher trade volumes in late September.
Included in these results is a gain that resulted from a partial redemption of our bonds. This gain on our bond redemption is another benefit versus our overall original plan performance for the first quarter.
As we look forward for the remainder of the fiscal year, we're reaffirming our full year guidance for EPS to be in the range of $1.45 to $1.55, which excludes the benefit of $0.04 for the onetime gain on the partial redemption of our bonds. We're anticipating revenue growth of zero to 3%, which is slightly down from our previous growth guidance of 2% to 4%, primarily as a result of FX and event-driven activities.
Despite the challenging markets, the business fundamentals and our operating units continue to be solid and are generating positive results. Overall, our anticipated level of transactions remains in the full year guidance range we communicated back in August.
We're in an unprecedented market environment but, whether the Dow is at 12,000 or 4,000, there's always transaction activity, and our revenue is based primarily on transactions and not on assets under management or market performance.
The resiliency of our overall business model is clearest in our Investor Communications business, which accounts for 70% of our revenue and earnings. In this segment, equity proxy services, the shares of publicly traded companies, will always need corporate governance services. Share ownership can shift from individual investors to institutional holders or vice versa, and if institutions hold a greater percentage of shares outstanding, it could result in fewer holders overall.
On the other hand, if hedge funds and mutual funds reduce their holdings and the shares are absorbed by individual investors, this would result in a greater number of overall holders as individual investors tend to have much smaller positions, thus requiring more holders.
In either illustration, we don't believe this will create a material difference. Historically, it never has.
On the mutual fund side, people may move out of equity funds into other asset classes, such as bond funds or money funds, but these institutions are still required to furnish semiannual and annual reports as well as proxies from time to time. Investors will still need to get their account statements. The statements may contain less transaction detail, but again, this won't create a material impact.
In Securities Processing and Ridge with regard to trading volumes, investors still trade. In a downward cycle trading activity can initially spike in the short-term, but it typically drops back down to a lower level that grows at a slower rate until we head back into an upward market. In an upward market cycle, trading volume growth typically is not as volatile and there's a more consistent growth rate in trading activity.
To help put this into context, depending on the mix of retail and institutional trades, recent history shows that a 1% change in trades per day translates into between $300,000 and $700,000 in annual revenue for Broadridge.
Overall, Broadridge will perform better in rising markets than in down markets. In a strong market, we can grow revenue high single-digits to better than 10%, and in a down market our revenue growth can be below 5%. This nets to historical revenue growth average of between 4% and 6%. However, in a down market today, our business model is far more resilient than it was in the last major down market. I'll go into more detail on this a little later.
Now I'll talk about our client concentration and industry consolidation, since these two topics are closely tied together. First, let's take the bulk of the ICS segment off the table, because industry consolidation does not have a material impact on the proxy or post-sale fulfillment businesses given our leading position servicing these markets.
Our transaction reporting business could experience some upside or some risk; however, keep in mind that 50% of any revenue lost to statements or transaction reporting work consists of pass-through postage revenue that has virtually no margin.
Previously we've told you that our top five clients represent 23% of Broadridge's consolidated revenue. Our ICS clients are responsible for the majority of these revenues and, as I've just explained, this is not where any significant consolidation risk lies.
In light of the recent turmoil in the financial services industry, we have received an increased number of inquiries from investors on how these unprecedented events have affected our business. As a result of this, we believe a better way to help you think about the potential effects of our client concentration is to understand who our top clients are in our Securities Processing Solutions business, where industry consolidation can have a more significant impact on earnings.
So let me provide you with some of the specifics around our Securities Processing clients. Our top 15 clients in the SPS segment make up approximately 65% of the SPS segment revenue. As you can see, we've provided an alphabetical list of these top 15 clients, and we've broken out the detail of who is using our equity or fixed income processing services. For equity processing, we've broken it out even further between retail and institutional equity processing since firms do process on multiple platforms.
As you can see, this is an impressive list of clients and we like our odds in the event of any further industry consolidation. This has proven to be correct to date through the recent dramatic player changes. I will detail further in a minute more of this.
Furthermore, most industry leaders are contemplating that as the world moves forward there's going to be more regulation. Broadridge has always historically benefited from more regulation.
Now that you have a better understanding of our client base in Securities Processing Solutions, let's talk about the most recent consolidations.
Before I start, I want to state that historically in a merger of two brokerage firms or banks, the acquiring company's platform was normally the surviving platform. In the current market environment, we're seeing a trend where merged companies are choosing the better platforms. And based on us being rated number one in the industry by Brown-Wilson, we believe our strong value propositions are partially why we fared so well in the recent historic changes. I'll give more details in a minute about our number one rating from Brown-Wilson's Black Book of Outsourcing.
Let's talk about the bottom line summary first. In the recent consolidations, we're winning about as much revenue as we're losing. Longer term, it appears these consolidations will create new opportunities for us to demonstrate our strong value proposition to firms as they look for ways to increase efficiency, functionality, and reliability, while at the same time lowering overall risk and cost to their organizations.
Some of our initial conversations reveal a willingness of these firms to consider another Broadridge solution. This is particularly true for fixed income processing, where we have become the industry standard.
Now let's move beyond the summary. Let me talk about some specific consolidations and our early view of how the scorecard is shaping up for Broadridge.
First, J.P. Morgan and Bear Stearns. We're optimistic that we'll win all the fixed income business as we're diligently working with J.P. Morgan to customize the new functionality required. We anticipate we'll continue to process fixed income on our service bureau and equities on our licensed version of our equity processing software for this long-term player and consolidator in the market.
Next, Bank of America and Merrill Lynch. Bank of America has publicly stated that they'll spend $2 billion in the short term to achieve $7 billion in run rate savings, and we hope to play a part in helping them achieve this objective. This will take months or years to play out.
Next, Barclays, Lehman and Neuberger Berman. We're also optimistic about winning the Lehman fixed income business, given that Barclays is a fixed income client. And we anticipate keeping the Lehman and Barclays U.S. equities business. On balance, we believe this consolidation, including the Neuberger [win], which is an [elephant] clearing sale, will be an overall positive for Broadridge. This will take a few months to understand to the extent of the net positive benefit driven by Neuberger Berman.
Finally, Wells Fargo, Wachovia, and Wachovia's A.G. Edwards unit. This merger had no new effect on us and should be considered a normal sales pipeline opportunity.
Overall, based on the current consolidation activity, there appears to be more upside opportunity than there is downside risk for Broadridge in both the short term and longer term. When you consider the number of large banks that are clients of our Securities Processing segment, we believe Broadridge is well positioned for the future as the firm of choice.
Okay, earlier I mentioned that Broadridge was rated number on in its industry and that we have the best and most efficient processing platform. But just don't take my word for it. Take the 2008 Black Book of Outsourcing's word. We're very pleased to see that Broadridge was rated number one in the 2008 Black Book of Outsourcing's survey published by Brown-Wilson. Out of 18 operational excellent key performance indicators, we were rated number one in 14 of them. The survey covered 52 global brokerage outsourcing vendors and included input from 1,400 validated respondents.
Now I'll talk about how this market is different than in the fiscal '03 down market. I'll put Broadridge's portfolio during that market into context versus what's happening in today's environment.
In 2003, the ICS segment event-driven revenue fell off by 30% or $100 million. This was all in mutual fund proxy and in contest/mergers/corporate actions, where combined we saw a one-year drop of $100 million. In the next fiscal year, fiscal '04, event-driven revenue rebounded.
Today on the M&A side we've already experienced a 45% drop off in M&A, which occurred in this past fiscal '08. Given the recent merger consolidation activity, we can actually see limited growth this year in M&A event-driven revenues.
Today in the mutual fund proxy area there's an increased focus on compliance, even more than there was back in fiscal '03, which partially supports the fact that we didn't see a mutual fund activity drop in last year's down market. Therefore, we're not anticipating as significant a drop this time.
As previously stated, the core of Investor Communications is proxy processing. This has historically been our most resilient business. Given our success with notice and access, our position for future opportunities within this segment of Investor Communications should improve.
Now let me talk about the impact of our Securities Processing Solutions segment. In the fiscal '03 bubble burst, our Securities Processing segment was impacted by consolidation, trade compression, and a shift in clearing models utilized by midsize retail [inaudible]. In 2003, industry consolidation created an unfavorable trend where our retail broker/dealer clients were being acquired by firms that weren't outprocessing clients. Today, bigger banks make up a large percentage of our clients, which is detailed earlier, and this is a far stronger position today versus in 2003.
In fiscal '03 we experienced a 20% reduction in trades per day. To save money, firms netted the increased trading activity volume resulting from decimalization back then and only sent us their net trades, whereas prior to that they sent us all their trades. If you exclude the impact from trade compression, our trade per day for fiscal year 2003 actually grew by 3% under our same-store trade per day metric. There has been no equivalent netting activity experienced by Broadridge in this current market.
Finally, driven by economic reasons, we saw midsize broker/dealers shift from self-clearing to fully disclosed clearing. Today, with our Clearing and Outsourcing offering, we have a stronger value proposition to mitigate this. The Neuberger Berman new business win this quarter is the proof statement.
This year's proving to be filled with more opportunities than risks for Broadridge.
Now on to sales, certainly one of my favorite topics. Our closed sales of $33 million for the quarter, which includes the Neuberger elephant win, were up approximately 15% over last year and were in line with our expectations. And we are still very comfortable with our full year sales forecast of $160 to $180 million. Our pipeline continues to be strong, and I'm optimistic about achieving our full year sales forecast.
We also closed a meaningful deal for performance reporting and wealth management in our Securities Processing segment. This is particularly exciting as it represents a new market for us and encouraging activity on some of the additional investments we've been making.
I feel good about Broadridge's prospects since Broadridge is the industry's industrial-strength solution. We have the best product depth and functionality at the most efficient cost. Our value propositions are the best in the industry. We again demonstrated our industrial-strength reliability during the recent volatile markets as trading volume levels spiked significantly and Broadridge, as always, was the standard for reliable performance.
Let's move on to free cash flow and our capital allocation. I want to start by reiterating that in any economic cycle or market, the Broadridge business model will generate significant free cash flow. Given our current debt level and the committed bank revolver as well as our other bank lines, we believe we have an appropriate level of liquidity to run our businesses, even in these unprecedented and unpredictable times.
Moving to our capital allocation strategy, during our fourth quarter fiscal '08 earnings call, when our stock was trading in the $20 per share range, we said we were looking to use our free cash flows to first and foremost invest in the business, including acquisitions, pay dividends and buy back shares to the extent of dilution from our equity compensation plan. Our plans are generally the same, but we'll be more focused on liquidity options than we previously were.
Here's how you should think generally about our long-term use of free cash. With respect to acquisitions, let me start by saying that in today's environment - which is different than our last earnings call in August - we realize we have new filters, variables and hurdles to consider when we think about acquisitions. We've always been diligent in our focus on acquisitions and this diligence has increased at this point in time. We continue to have an extraordinarily high level of discipline around acquisitions. This now includes making sure we look at all considerations in using our cash.
In the past I've described the kind of deals we were pursuing as [pumpkins]. We realize the phrase pumpkins may mean different things to different people, so let me help clarify by saying that you should be thinking small to midsize deals.
The two acquisitions we've completed thus far have been in the small, $5 to $15 million range, and given the current price of Broadridge's stock and overall market valuations, the hurdle rate for such acquisitions has gone up from where it was six months ago. We'll pursue acquisitions that allow us to leverage our distribution channel and our industry leading service delivery and relationship model.
We look to improve an acquired solutions value proposition by combining it with other Broadridge solutions and our processing expertise and scale; however, we're not looking to go beyond our core competency as a financial processor or to add another business line by pursuing a new vertical. We would not do an acquisition just to acquire revenue, and we're very critical about strategic fit and our ability to successfully execute and get successful returns. There are presently no large acquisitions in our pipeline.
Let me move on to dividends. This is easy. We'll always look to pay a dividend.
Finally, with respect to stock buybacks, as you know, our Board has authorized a buyback program of up to 2 million shares to offset the dilution related to our equity compensation plan. As of Broadridge's closing price last night, we're trading at about 8 times free cash flow.
So let me summarize before I hand it off to Dan. Our fiscal year is off to a good start, and I believe we're well positioned to achieve earnings per share results in line with our guidance. And we'll continue to generate strong free cash flow.
We have a resilient business that continues to perform well in these challenging and unique market environments, and our business is more resilient than it was in the last major market downturn in fiscal 2003.
Industry consolidation within the financial sector is providing new and exciting opportunities for Broadridge and our clients appear to be well positioned to be the surviving key players. We have a strong product portfolio and processing scale which I believe has positioned Broadridge to have a very real opportunity to leave this period of market upheaval stronger than we entered it.
Dan, it's all yours.
Thanks, Rich. I'm on Page 10.
So our Q1 key highlights, as Rich mentioned, this has been a good quarter. We ended the quarter with 5% revenue growth and we're up over our plan, due, again as Rich mentioned, to the very high September trade volumes. And by the way, all the revenue growth is coming from the segments this year.
We went into this year's plan, by the way, with the knowledge that we were already in a down market and appropriately managed expectations in August for fiscal year '09 would be a lower single-digit revenue growth period for us. Although pre-tax margins and earnings per share are down on a GAAP basis, we are in line with our plan and this is before the one-time gain from the $125 million bond redemption.
Before turning to the segments, I'd like to remind everyone that although we're in a down market, 80% of our revenues are recurring and in up markets can drive our revenue growth upwards of 10%. And the other 20% of our revenue we call event-driven revenues, which I'll go into next, don't look to be as problematic this year as they were in fiscal year '03.
So let's move on to the segments, and I'll start with Slide 11, our Investor Communications. For the quarter we had 5% revenue growth, and this, again, was in line with our plan. Fee revenue growth is from both net new business and internal growth. And with respect to internal growth, we saw an increase in all of our recurring revenue products this quarter. Event-driven revenues are down slightly for the quarter, primarily due to the registered mutual fund proxy and solicitation, which were partially offset by some higher mutual fund supplemental [inaudible]. Our distribution revenues are in line with our revenue growth.
With respect to margins being down in the quarter, the product mix of less event-driven, especially the registered mutual fund proxies as well as some increased notice and access investments and one-time benefits last year, account for the decrease.
By the way, given that 55% of our profits occur in the fourth quarter and that it's also impossible to predict when event-driven revenues will occur each year, you can expect ups and downs with respect to our margins in the first three quarters, and it is a reality. I'm never concerned about margin changes quarterly in this business as we know our expense levels and invest prudently.
When you look over at our full year margins, both the low and high range is wider than it was in August, and this again is due to the revenue product mix, which I'll now go into. We're lowering our full year revenue forecast from 2% to 4% to zero to 3% due to event-driven and distribution revenues.
With respect to our recurring revenues, we're forecasting a 5% to 8% growth range. On the high end, we're assuming volumes continue to be up for all recurring products and we also see increased sales pipeline activity around our notice and access, which will have the biggest impact in Q4. On the low end, we're assuming equity and interim stock record positions could have less growth or a decline in the second half given the current state of the economy.
With respect to event-driven revenues on both the high and low end, we're taking down due to the mutual fund proxies, where we're forecasting less activity this year.
In the FY '03 downturn, income from proxies and equity proxy contests and specials were the cause of the 30% drop in the event-driven revenues year-over-year Rich described earlier. With respect to equity proxy contests, we already saw a 45% drop last year. And given the shareholder activism, especially around Board seats, and current mergers and acquisitions, we're still expecting there to be additional activity in this space. As a reminder, event-driven revenues have had a greater than 10% CAGR over any five-year time horizon, and there's nothing to suggest this has changed.
With respect to distribution revenues, they're down slightly from our August guidance, due again to the product mix.
Let's turn to Slide 12. This is our Securities Processing segment, and our revenues are up 7%. And this is a combination of positive net new business and internal growth in both the equities and fixed income trades per day.
With respect to equity and fixed income trades per day statistics, we're now giving you two key statistics - total trades per day, which we've always given to you, and now internal growth trades per day. The difference between the two statistics is that internal growth trades per day take out new sales and losses to ensure we only look at same client activity year-over-year. Think of this as same-store growth year-over-year activity with what you look at with other businesses. Therefore, the Lehman trades and other losses and new sales are out of the statistic, but are in the total trades per day statistic you see here at 2.4 million trades per day.
With respect to equity, internal growth trades per day - and I'm now focused on the 1.6 million trades per day - it had 3% growth for the quarter. July and August were actually down from last year, but September trades per day were up over 20% and this has continued into October.
The September and October uptick in trades per day volumes for both equity and fixed income are driven by all the selling activity going on in the market, especially in retail equities as well as what we call a flight to safety related to fixed income U.S. Treasuries. Our full year forecast for revenue growth is still 2% to 4%. The higher than planned trading volumes in Q1 and 2 help offset the net impact of Lehman being taken over by Barclays.
What do I mean by that? As we described before, it's always better when one client is acquired or merged into another one of our clients versus losing that client to a non-client. However, given that not all of the business from Lehman was purchased by Barclays and given our tiered pricing, we don't expect the same level of revenue from the combined businesses in the SPS segment. However, given the new Neuberger business in the Clearing segment, which I'll go into in a second, we expect all combined - or look at it both ways, SPS and Clearing combined - will be in a net positive position, as Rich mentioned earlier.
Our full year range also comprehends all the impact from other consolidations Rich, again, mentioned earlier. Having said that, there are upside opportunities to sell additional products, like our fixed income and outsourcing to the combined businesses.
We also don't expect the second half to have as much growth as we originally planned with respect to internal growth from equity trade volumes. We planned the first half of the year to have lower internal growth than the second, and the reverse may indeed play out given the current economic environment. As we pointed out, in our worst year we still had 3% internal growth from equity trades per day.
With respect to margins, the decrease of 310 basis points in the quarter is better than we planned given the uptick in trade volumes and the one-time benefit. Our plan comprehended the higher expenses in the first half associated with incremental investments we made in the second half of last year, as well as lower capitalized conversion expenses this year, which combined created the grow-over expense in the first half of this fiscal year '09. The first half grow-over is why our full year margin ranges are down from the prior year, but in line with our plan and the guidance we gave in August.
Let's turn to Slide 13. This is our Clearing and Outsourcing segment, and net new business added 4% to revenues. But this benefit was negatively impacted by the decrease of over 350 basis points in fed funds rates year-over-year, as well as a significant drop in margin lending balances in the latter part of the quarter. The drop in margin lending balances occurred in September and continues into October. Even with the rapid market value declines and increased margin calls, this business did not incur any credit losses and that's given to our tight credit policies.
Let's focus on the year. Revenues for the year are expected to still be in line with guidance we gave in August, and that's due to the net new business, including Neuberger business, which will add 20% to 22% to revenues overall sales. However, we will continue to be negatively impacted from the continued drop in fed funds rates and forecasted rest of the year reduced margin lending balances. Our current plan has this business running at a profit during the second half, but Q2 will still be running at a loss of between $3 to $4 million.
We're seeing a slowdown in closing outsourcing deals in the mid to lower end of the market; however, there are more active discussions surrounding larger outsourcing deals but, if signed, won't positively impact revenues until FY '10 given the conversion time.
Let's move to Slide 14, Other and FX. With respect to revenues from termination fees, we don't see much of any this year. And, given the current strength of the U.S. dollar and forward rates, we're forecasting FX to be less than our original plan. Therefore, we've adjusted our low and high end for FX down from the August guidance.
In the interest line, this quarter benefited from the gain on the bond redemption for must over $8 million. Full year interest expense will be between $14 and $16 million and less the gain gives us the $6 to $8 million you see on the slide. The low end assumes higher LIBOR and the high end assumes lower LIBOR rates.
Finally, with respect to corporate and investments, it's just over $6 million for the quarter, and if you annualized it would be about $25 million. We know we'll have founder grants and additional stock comp in Qs 2 through 4 for about $7 million, as well as the timing of other investments. Our original guidance was for $38 to $41 million, and we've cut that back to $30 to $38 million to reflect Q1 actuals and at the low end reduced spend, including reduced bonuses should we hit the low end of our guidance.
Let's move to Slide 15, which is the grow-over discussion. This is a slide you've seen before. As we did in August, we're sharing with you the impact to the quarters for the grow-over items we've previously disclosed. To understand the chart, the first column reflects the grow-over items that actually occurred in Q1 and then the columns with Q1 through 4, called Forecast columns, reflect our plan. There have been some timing differences between quarters, but nothing has changed in aggregate for either the category we call other or the SPS segment.
I'll move on to Slide 16, which is our cash flow. As we've discussed before, we break out cash flows between financing activities related to clearing and what's generated and available for use in the core businesses.
Under the first column, labeled Clearing, I'd point out at the end of September we had $271 million in increased securities clearing activities and $238 million of increased short-term debt, which pretty much relates to the timing and converting assets and liabilities related to the Neuberger business. As I mentioned before, this business has ranges and short-term borrowings at quarter end of between zero to $150 million as part of financing of customer margins, and even with the Neuberger business, we expect to manage to the same level of short-term debt in the future.
With respect to all processing activities for the quarter, which is the second column in from the left, there's nothing unique here. Working capital, as I mentioned before, plus or minus any period, due to the timing of receivables and payable, and on a full year basis we expect it will have slightly negative impact due to the growth in receivables approximately equal to the growth in revenues.
There was only one acquisition this quarter for $15 million, and the debt paydown of $114 million was within the ranges we shared in August of between $100 to $150 million of additional paydowns. We do not anticipate any additional debt paydown as our long-term debt is now at $324 million, and even [break in audio] short-term borrowings would bring our total debt to $474 million, which approximates our 1 to 1 debt-to-EBITDA ratio which we said we'd achieve with the rating agencies.
Having said that, not much has changed with respect to our full year view of sources and uses of cash, which are the last two columns on the page. We did have one small classification change that impacted cash at the beginning of the year by $15 million between Clearing and the rest of the businesses, but it's immaterial to the direction we laid out in August.
Rich, I'll now turn it back over to you.
Thanks, Dan. Let me quickly summarize our fiscal year 2009 guidance as Dan and I have already touched on most of these points.
Our revenue growth for the year will be in the range of zero to 3%. This is down from our previous guidance of 2% to 4% primarily as a result of the anticipated continuation of the unfavorable foreign exchange rates due to the strengthening of the U.S. dollar [more than] driven revenue and lower distribution fees.
We still expect our sales plan to be in the range of $160 million to $180 million. We expect EBIT margins of 15.9% to 16.8%, GAAP EPS of $1.49 to $1.59, non-GAAP EPS of $1.45 to $1.55, and a tax rate of 39%.
And finally, we expect to generate free cash flows in the range of $180 million to $250 million.
So let me summarize and leave you a few thoughts on how we feel about the business in these unprecedented times before we go into the Q&A part of the call.
As you've just heard, our fiscal year is off to a good start as our first quarter results were slightly better than expected. The business fundamentals and the operating units are solid, and the business continues to demonstrate its resiliency as our business model is transaction based and not asset based, and thus is not directly tied to the level of the Dow.
There have been significant events in these unprecedented times that have increased and reduced revenues for our business, but overall our business continues to be on track, which has put us in a position to reaffirm our full year EPS guidance.
Consolidation in the financial service industry is proving more upside for new business opportunities than downside risk of losing business as more merging firms are selecting the best platform to consolidate onto, and in many cases thus far this has been Broadridge's processing platform. When you consider the large banks that are clients of our Securities Processing segment, Broadridge is well positioned for the future as the firm of choice.
The current unprecedented markets, although far more severe than in 2003, are not as severe to Broadridge as the key factors as different in this market. In this market, there is nothing equivalent to the trade compression that significantly lowered trades per day in the past. Our clients are among the strongest players today and our products are stronger. Therefore, when our clients are winning, we're winning. In cases where our clients aren't winning, we're still being considered. This dynamic has favorably impacted our sales pipeline with some very exciting opportunities.
Overall, our business is more resilient today than it was in 2003, and even in a down market, Broadridge generated significant free cash flows. As I look at Broadridge, I see a business where 70% of its revenue and earnings are generated by its Investor Communications segment, where 50% of Broadridge's overall business is arguably irreplaceable in the Investor Communications space and the other 20% of the business leverages the efficiencies of the larger same infrastructure.
As I look at our processing services in the Securities Processing and Ridge segments, I see a unique three-tiered processing model that enables high quality broker/dealers to first clear through us using a flexible solution that they can grow on as their business needs change.
So, as I look at Broadridge overall versus the world around us, I'm pleased and proud of how well we're performing, and I continue to be confident that we'll exist this unprecedented market better than we entered it. As I always say, "We're in control of our business, but we don't control the markets we serve." We have and will continue to work very hard to deliver the highest levels of performance, and while I'm disappointed with our stock performance in this turbulent market period, I look forward to our results being recognized and rewarded when the current economic crisis passes.
Finally, I want to thank the thousands of Broadridge associates whose tireless efforts have made us number one in everything we do. The accomplishments I've described today came at their great personal sacrifice, and I'm extremely grateful and proud of their commitment.
I'll now turn the call over to Carol, the operator, for the Q&A part of the call. Carol?
(Operator Instructions) Your first question comes from Ian Zaffino - Oppenheimer & Co.
Ian Zaffino - Oppenheimer & Co.
The question would be, I'm just trying to get a little bit better understanding of the tiering and the minimums in your Securities Processing Solutions. Is there anyway that you could almost help us understand when you talk about on the slide about your internal growth and you talk about these trades per day, if trades per day are up 3%, how much, you know, per se would revenues be up and, likewise, how much would your earnings be up and what would be the margin associated with that? Just trying to figure out the sensitivity in the model.
I stated that a 1% change in trades per day is annualized revenue impact of $300,000 to $700,000 based on the mix of clients, whether it be institutional, retail, etc. We're not going to disclose individual client terms and differences in tiering that different clients have found beneficial to them. But I think the overall 1% change, $300,000 to $700,000, gives you a very good indication.
Yes, Ian, this quarter - just so everybody knows if you're going back and doing the math - you would apply that same formula and you'd find out boy, it looks like they're more at $2 million for every 1%. But that's strictly due to what we saw in September and into October because of the retail side being up so significantly. And remember, retail has higher pricing per trade than institutional just because they're more difficult to process.
But [you] not be thinking that that's not going to go on and continue for a long period of time, at least that's our expectation, and so Rich is statistics are very good to use on a long-term basis.
Ian Zaffino - Oppenheimer & Co.
And is there anyway you could break out retail versus institutional?
Yes, we can think about that, Ian.
Ian Zaffino - Oppenheimer & Co.
And then the other question would be the cash flow. You talked about increasing the hurdle rate for acquisitions or maybe doing smaller acquisitions. You talked about a buyback program, but it's my understanding that a lot of that is just to offset dilution. Is there anyway that you were thinking about actually increasing that to in a way or in an effort to return the cash flow to shareholders?
Okay, I think there are two parts in that. If I'm missing one, let me know, Ian. The first part you talked about was acquisitions and increasing the hurdle rate. Valuations are down. It's a reality. So when we go out to look to do a deal, we're looking to get a very good return for our shareholders and, given that valuations are down, given that, you know, Broadridge is down, we would expect higher returns on a transaction right now versus where we were six months ago. So you should be thinking in the mid-20% plus range of a return we would look to get on a deal. And remember, that leveraging our infrastructure, where we have a unique benefit.
Going to the question as it relates to buybacks, we're taking a long-term view here, all right? And so these are unprecedented times. I added that a new consideration in the use of cash is liquidity. I emphatically stated that we have the liquidity to deal with these unprecedented markets right now. But liquidity is certainly a bigger topic for everyone, including Broadridge, than it was six months ago, so that's something that gets considered in our use of cash, whether it be acquisitions or buybacks as well.
Specifically as it relates to buybacks, it's regularly reviewed with the Board, okay? At every meeting it's discussed and we consider what's the best use of our cash to give our shareholders a return. I don't see that priority changing, but we will continue to look at this from a long-term point of view, so I simply stated where I was at this point in time through the last Board meeting with my discussions with the Board.
Your next question comes from Anurag Rana - KeyBanc Capital Markets.
Anurag Rana - KeyBanc Capital Markets
I'm actually going to beat a dead horse and talk about buybacks also. If your hurdle rate or your return that you're thinking you're going to get on these acquisitions is going to be about 20%, [given where] the stock price has gone over the last four months, why not, instead of small little acquisitions, just buy back a lot more shares?
And second, I mean, it's good that you're not looking at any large acquisition at this point, but if you were to look at a large acquisition, what would your appetite be in terms of size?
From the time of the [spin] we've been consistent in saying that we think Broadridge is well positioned, but we would continue to need to invest in our products, whether that's build or buy, to enable us to continue to win at higher rates in the industry.
So there are two things you should be thinking about when I talk about acquisitions. One, we're looking to get a good return. Two, we also believe that will better position Broadridge to win more overall business in the marketplace. So when I talked about the Black Book of Outsourcing rating of number one, I believe that's because of our successful expansion of our product breadth to make our clients more efficient and more competitive. So the acquisitions fit into that model.
Without question, we will not be just looking to buy revenue. And if we were ever looking to buy revenue, it of course would be benchmarked versus the good return we could get by buying our own stock at lower levels.
So all of these things will be considered - liquidity, the strategy of the acquisition, what it will do for us long-term, and by all means, what's the best use of our cash, including buybacks, to give our shareholders a good return.
Your next question comes from David Togut - First Manhattan.
David Togut - First Manhattan
First, if you could address pricing in the Investor Communications business - what are you seeing on a year-over-year basis and what are your expectations going forward?
Sure. The Investor Communications space pricing has been relatively stable. We believe that we've been able to offset pricing pressures by consistently improving the accuracy, efficiency and functionality of the products. So we have made our services very close to being indispensable in this space. So it's relatively stable pricing. And on the issuer side, where we add registered issuers, because of our notice and access and our leadership in that activity, we see market opportunity there. But again, I think pricing there will remain relatively stable.
David Togut - First Manhattan
And then the free cash flow guidance of $180 to $250 million is fairly broad. Could you discuss the assumptions at the low end versus the high end.
You know, I almost added to my comments - I should say my formal comments - that Dan and I have an internal bet, and I guess you can guess who's betting at the higher end. So I think the $180 is conservative. We are in unprecedented times. Will people start to pay slower, things of that nature. I would expect our free cash flow to be consistent with what we've historically seen, and I'm certainly thinking in the midpoint of that as my starting point.
David Togut - First Manhattan
[inaudible] tracts to possibilities around working capital changes as opposed to any variation in CapEx.
Right. That's the important point to take away. If you look back at the top, you can see about, you know, $15 million is related to our earnings, and then absolutely we control CapEx. And the way to think about CapEx is we don't use a lot of it and we never have used a lot of it. And the rest is all working capital or something that can happen, even, with deferred taxes. So that's the way to look at it.
(Operator Instructions) Your next question comes from Tien-Tsin Huang - J.P. Morgan.
Tien-Tsin Huang - J.P. Morgan
Rich, I really liked the disclosure on the SPS slide. It's really helpful. I just had a follow up question to some of the detail there. Can you talk more about the platform decision-making process in general in the event of consolidation? How long does it typically take for these decisions to happen? What's the typical outcome on pricing in the event of a win and who bears the conversion cost, the conversion times, etc. Kind of a loaded question, I know, but I get that question quite often.
Okay, I'm going to break it into two pieces, Tien-Tsin. First of all, each one of these deals, if it's not related to a consolidation is really separate in terms of all the activities. We've seen them move quickly, we've seen then move quickly install, we've seen them move slow and get to end of job, we've seen them move quickly and get to end of job. So it's a firm by firm activity.
The good news that I'm feeling is that the people on our platform really have far more flexibility in these high trading times. We always got them to the settlement cycles on time, and we always enable them to open on time. And there aren't a lot of people out there that can say that. This Black Book of Outsourcing clearly rating us number one versus any other player in some many categories - the lowest, I think, we were rated in any category out of the 52 vendors was number four - so the strength of our value proposition will enable some of these conversation and closing cycles, I believe, to improve.
Now, separately in consolidations, far more activity, far faster because they have to make a decision which platform to go on. And most firms are looking at this right now as through this consolidation there are opportunities to take out costs. They're not seeing near-term opportunities to grow a lot of revenue. And that's faring well for us as well because that puts more focus on how to get to the best and most efficient platform, and I like the dialogues that we're having right now. They're still major decisions. It's not over until it's over. But I'm going to end with my comment from the script, which is I expect to leave these unprecedented times better than we went into them.
Tien-Tsin Huang - J.P. Morgan
How about the outcome on pricing, typically in the margin profile of the combined deal in the event of a win?
What you have - and I apologize for not addressing that - what you have is, if you take two firms who have tiered pricing, the acquiring firm will look to take the best contract and then have the combined volumes reflected in the best contract. But what we're seeing here - so on a specific service you could see a reduction in revenue.
What we're seeing here, though, is that, as you saw in the checkmarks there, there are people that weren't on both services and, as long as one of the entities was on the service - whether it be fixed income or equities - we're generally leaving with both services right now. And so we're getting more volume where we hadn't had it before, and we're generally getting the opportunity to offer new services and to have dialogues even around things like outsourcing.
So consolidation, higher volumes means you have higher scale, it means you get better pricing. That's a reality and they deserve it. But for us, I think we can become a better and more strategic partner and create more opportunities as we go forward, and that's also why our focus on product expansion, whether it be internally developed or strategically acquired, will remain a high priority.
Tien-Tsin Huang - J.P. Morgan
And then I just had a question on Clearing, two parts, really. Is your liquidity focus, the comment there, is that primarily for the benefit of the Clearing business? And secondarily, given the current environment, how does the pipeline look for adding Clearing clients?
Great question. Clearing absolutely adds to the liquidity equation for Broadridge, and if we hadn't had the Clearing business, the tone of this call would have been slightly different because we wouldn't have been able to add the Neuberger business.
And the fact that we added the Neuberger business in days - that client was converted in days; I don't think anyone has ever heard someone being converted in days before - not only enabled us to retain or add a significant new line of revenue, but what it also enabled us to do is demonstrate to the world that this really is the most reliable and I would argue safest platform for you to be on as you consider your business needs going forward.
So Clearing uses liquidity, but the Clearing model has given us the flexibility to win in these very difficult market times.
I would just add that when we're thinking about liquidity, it is correct the Clearing business is what we're focused on here. And we said we feel very good about it. I mean, we've shared with everyone that we have a $500 million revolver, and that revolver is good for another 3.5 years. As well as we have our uncommitted lines. They're with very good, solid banks who have also said to us there's no reason to be concerned that those bank lines are going to go away.
So that's what gives us the overall comfort in saying - and again, you saw the debt level; it was only $238. You've got a revolver of $500 plus an additional line. That's not considering, for us, to be thinking we have any kind of a liquidity issue.
Tien-Tsin Huang - J.P. Morgan
And then just adding, the opportunity to add Clearing clients in the current environment and then also a lot of regulatory changes going on, I'm curious as to how you might benefit from that.
Bear in mind our focus - when we add Clearing clients is they have to meet our very, very strict creditworthiness standards. So it's business as usual, but we're very pleased that we have the credit policies we have. Those credit policies will remain in place. And so our focus will be to add high-quality Clearing clients, but our primary focus in this business - and the key strategic reason why we went into it - was because we have the unique opportunity to add outsourcing clients, which no one else in the industry has the ability to offer at this point in time.
Your next question comes from Maharth Kapur - Credit Suisse.
Maharth Kapur - Credit Suisse
Dan, would you be able to walk me through some of the changes on your balance sheet from the last quarter in terms of the cash balances, the rise in short-term debt and some of the securities payables and when you expect that, if you expect that, you know, to go back to, I guess, the levels of last quarter, when would that happen?
Yes, absolutely. You mentioned cash first. I think you can see that the cash is down, you know, from the - we'll call it June 30, and that's all due primarily to the payment of the purchase back of the bond.
And when you're thinking about all the other changes in receivables, payables, I'll call it short-term debt as well as securities with regulatory groups, the way to think about that is all those changes are primarily due to the conversion of Neuberger. And as far as any concern of being that the debt levels at $238 will come back down to the - and this is, again, the short-term debt levels - back to the level I talked about in the call, which was anywhere between zero and $150 million and maybe spiking a couple of times, there's no reason to believe that those debt levels won't come back down.
And all the receivables and payables, by the way, are back down to what I'll call the normal kind of levels now that we've got Neuberger fully integrated inside the business. And actually, you could probably see - and, you know, we're just projecting here - that as we move forward in some of the quarters, we'll probably see where those margin lending debits start shrinking some more and also we'll see an increase in how much what we call payables, which will be showing much where people are holding onto cash.
Maharth Kapur - Credit Suisse
So you're saying these levels already are a bit more - I guess, have come down by now at the end of the quarter since Neuberger's already come on?
Yes. Now that Neuberger's fully integrated in. During the September 30, Neuberger was actually converting in, so that absolutely - when you've got assets and liabilities coming in on a little bit different timing, that creates a little bit of what we'll call the increase that you saw. At the same time, I believe that those - and I already have seen in October where they have come down, including the debt levels have absolutely come down.
Your next question comes from Anurag Rana - KeyBanc Capital Markets.
Anurag Rana - KeyBanc Capital Markets
Rich, I just wanted to get an idea about [SEC starts] about notice and access now. Now it's been some time and, you know, if you think the change at the center might have an impact. Just anything on that would be helpful.
Well, first of all, our friends at the SEC have been a little busy these days, so even though we're meeting with the staff on notice and access and future activities, obviously the organization is consumed by the current financial activities going on in the markets.
The thing I feel best about is on new dialogues about communications, there's a clear recognition that, although notice and access may have added efficiency to the markets in terms of cost, there's a significant reduction in individual investor participation caused by it. So as we go forward and look at the opportunities to use technology, to deliver different communications, I am hopeful and I've certainly in my dialogues and our dialogues with the staff of the SEC, there's a full recognition that push models really are the way you need to communicate with individual investors.
Beyond that, I think notice and access has been viewed as being successful. We have been asked to see if there's ways through technology and through creativity we can increase the individual investor participation rate in both voting and looking at material when notice and access is used. And although I didn't mention it here, it's our investor network that we think would be one of the key ways to do that.
The only update I can give you on the investor network is we're rolling out an internal pilot for friends and family, and I'm hoping in the future to be talking more about that with a very excited tone.
I'm showing that we have no further questions at this time. I'll now turn the call back to Mr. Daly.
All right. Well, I know we gave you a lot of information today. I really want to thank you for your patience through that. I want to thank you for your thoughtful questions, and Dan, Marvin and I are going to look forward to chatting with you in the near future. Thanks so much.
This concludes today's Broadridge Financial Solutions, Inc. first quarter fiscal 2009 earnings conference call. Thank you for your participation. You may now disconnect.
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