Broadridge Financial Solutions, Inc. F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

May.11.09 | About: Broadridge Financial (BR)

Broadridge Financial Solutions, Inc. (NYSE:BR)

F3Q09 Earnings Call

May 11, 2009 8:30 am ET


Marvin Sims - Vice President Investor Relations

Richard Daly - Chief Executive Officer

Dan Sheldon - Chief Financial Officer


Anurag Rana – KeyBanc Capital

Ian Zaffino – Oppenheimer

Tien-Tsin Huang - J.P. Morgan

Stefan Mykytiuk - Pike Place Capital


(Operator Instructions) Welcome everyone to the Broadridge Financial Solutions, Inc. Third Quarter Fiscal 2009 Earnings Conference Call. I will now turn the conference over to Marvin Sims, Vice President of Investor Relations.

Marvin Sims

I’d like to welcome everyone to the Broadridge quarterly earnings call and webcast for the third quarter of the fiscal year 2009. I'm Marvin Sims, Vice President of Investor Relations. As usual this morning I am here with Richard 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 this morning. The news release and slide presentation that accompany today's earnings call and webcast can be found on the Investor Relations homepage of our website at At the end of today’s call, as some of you have requested we’ll also post our quarterly revenue metrics on our IR website as well.

Before we begin, I would like to remind everyone that during today's conference call we will discuss some forward looking statements regarding Broadridge that involve risks. These risks are discussed here on slide one and we encourage participants to refer to our SEC filings including those on Forms 8-K, 10-Q, and 10-K for the complete discussion of forward looking statements and risks.

Now let's turn to the next slide and 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 of a few key topics. Dan Sheldon will then review the third quarter financial results in further detail including a review of cash flows for the quarter end. 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 Daly

This morning as part of my opening remarks I’ll talk about the following topics. First, a summary of our third quarter financial results and the reaffirmation of our 2009 fiscal year non-GAAP EPS guidance and the increase in our GAAP EPS guidance. Next, an update on the current market dynamics including the latest update on industry consolidation and how to put these dynamics into context for Broadridge. Finally, a review of our closed sales performance and our sales pipeline.

Let’s start of slide number four. Give the current economic environment in the financial services market we’re satisfied with our results for the third quarter. Our third quarter performance for our GAAP EPS and non-GAAP EPS were better than expected. Our GAAP net earnings for the quarter are up 39% and our non-GAAP earnings are up 15%.

Our positive earnings performance was driven primarily by the growth in the higher margin recurring fee revenue, the benefit from the state tax credit granted this quarter, lower interest expenses and the positive benefit this year from the grow overs related to the one time transition expenses from last year.

For the quarter we had fee revenue growth of 2%, with fee revenue growth in all three of our operating segments. However, when you factor in lower distribution revenues and the negative impact from our foreign currency exchange our revenues for the quarter were down 4%. As we look forward to the remainder of the year we are increasing our full year GAAP EPS guidance range to $1.52 to $1.62 from our previous guidance of $1.49 to $1.59 as a result of the $0.03 EPS benefit related to the one time shore from the state tax credit from our previous fiscal year.

We are reaffirming our full year non-GAAP EPS guidance of $1.45 to $1.55 as the negative impact from lower event-driven mutual fund proxy activity and the impact from lower margin balances and unfavorable trade volume mix primarily in our Clearing and Outsourcing solutions segment are being offset by the recurring benefit from our state tax credit. The state tax credit will lower our effective tax rate by approximately one percentage point and will continue for the next eight years.

We’re reaffirming our revenue guidance of flat to -3% which reflects the negative impact from foreign currency exchange, lower event-driven mutual fund activity and lower distribution revenues resulting from Notice and Access. We’re also anticipating higher free cash flow with a new range of $230 to $270 million which is $20 million higher on both the low and high end of our previous guidance. We anticipate lower needs of cash for working capital and capital expenditures.

Now let’s move on to slide number five for an update of the general market conditions. For the most part the headwinds and uncertainty we’ve discussed in our previous quarters remain in the market. However, we have not seen an increased intensity of these headwinds. All of the headwinds we discussed in our last earnings call back in February are for the most part playing out as anticipated.

As expected, we’ve also seen event-driven mutual fund proxy activity decline as well as a reduction in the revenue contribution coming our trades per day growth. In addition, we’ve seen a larger than anticipated decline in our margin lending balances. It continues to be difficult to predict any short term increase in margin lending balances or trading activity.

As firms focused on obtaining immediate cost savings the added pricing pressures we had anticipated from the headwind did materialize. The impact from this pricing pressure is within our forecasted range for concessions of approximately 5% of annual revenue and the SPS segment. This annual rate is approximately 2% above our historical average rate of about 3%.

At the end of our current contract renewal efforts we will have 11 of our top 15 Securities Processing clients under multi-year contracts. For the other four clients two more contracts are expected to be signed before the end of the fiscal year. Another client contract has about one year remaining on its term. The last client is Bank of America which I will talk about more in a minute.

Despite the short term challenges generated by these market headwinds we continue to see long term opportunities being created in all segments and we continue to have active dialogues around these opportunities. However, the sales cycle has been longer then anticipated in our Outsourcing services as a result of the complexity created by the economic conditions related to mergers and liquidity concerns.

With regard to the latest news on industry consolidation in the financial services industry last quarter I told you that we were winning about as much as we were losing but overall we’re in a net revenue and market share positive position and that the Bank of America and Merrill Lynch transaction was the last unsettled piece of the recent industry known consolidation activity.

Although Bank of America remains an important Broadridge client, due to its acquisition of Merrill Lynch it has decided to perform its institutional equity securities processing in house on the acquired Merrill Lynch system. We’re anticipating that on an annual basis this decision will result in a negative impact on Broadridge’s annual revenue of just under $20 million.

The Bank of America loss will turn our previously slight net positive revenue gain resulting from financial services industry consolidation into a negative revenue and earnings position. Despite the negative impact on revenue our overall net client retention position in our Securities Processing and Clearing and Outsourcing segments is at least as good as it was prior to the recent industry consolidation. I believe this will continue to position Broadridge well in the markets as we move forward.

Now let’s move to slide number six and talk about the positive impact being created by some of the tailwinds in the current market. One of the biggest positives we’ve seen in this market has been the resilient and positive performance of the Investor Communications segment which represents over 70% of Broadridge’s revenue and earnings.

This segment has been able to continue to grow recurring revenue by approximately 7% so far this year despite the challenging economic environment. As a result we’ve created a much higher revenue base to grow from when event-driven revenue activity returned as it has always done historically.

We’re seeing a leveling off of the decline in event-driven mutual fund proxy activity and were even having conversations with a few firms about potentially mutual fund proxy jobs in this calendar year. So it’s good to see signs that they’re at least starting to think about these activities.

We’ve also seen a slight positive benefit coming from other event-driven revenue areas related to M&A activities. We continue to believe that we have longer term up side opportunity here when more merger discussions and subsequent deals come back into the market.

Another tailwind has been the anticipated movement to electronic communications and the reduction of hard copy delivery driven by increasing suppression rates and higher adoption rates for our Notice and Access services. As a result, we’re seeing a reduction in the low margin distribution revenues being offset by higher margin revenues associated with electronic communications. This fits nicely into our unique ability to provide a total integrated communications solution for our clients.

An additional tailwind we’re seeing is that although most firms initially were focused on obtaining short term price concessions they are now in a position to focus on longer term strategic cost savings opportunities. We’re seeing these opportunities in our sales pipeline and they include the potential of some very promising large deals. In a minute I’ll go into more detail about this during my update on close sales performance.

Accordingly with these opportunities in the market and the changes that will undoubtedly occur as a result of more regulation we continue to make investment sin the business. In our Investment Communications business we’ve created and are continuing to work on some new and exciting products. Just recently we announced that Intel launched the use of our new Investor Network product and its Shareholder Survey functionality as well as our virtual shareholder annual meeting capability.

Now let’s move on to slide number seven and talk about the sales tailwinds. We had closed sales for the quarter of $30 million which were slightly lower then we had expected as the decision timelines for deals in our pipeline were pushed out. Our year to date closed sales of $110 million are up 5% over the prior year. We’re still tracking to our full year closed sales forecast of $160 to $180 million. Achieving this will hinge on landing some of the exciting larger opportunities that are in our sales pipeline.

Our year to date closed sale performance for recurring sales continues to be strong as closed recurring sales of $82 million increased 61% over the prior year. In addition, closed recurring sales were approximately 75% of our total closed sales. We believe this trend will continue for the balance of the fiscal year. This is very good news for the long term given our successful history of client retention and the importance of growing recurring revenue.

Our sales pipeline remains robust and includes some promising large opportunities in the Transaction Reporting business in our Investor Communications segment as well as in our Outsourcing business. It’s again worth noting that for Outsourcing sales we have seen its sales cycle lengthen as a result of liquidity concerns created by the current economic conditions. Of course it’s always difficult to predict when these opportunities will close.

We’re also seeing some very encouraging sales activity around our Wealth Management Services which includes products that we obtained as part of our tuck in acquisition of Investigo earlier in the fiscal year. We continue to believe that the combination of our year to date sales performance and our robust pipeline puts us in a position to deliver our full year closed sales forecast of $160 to $180 million.

Let me tell you how I feel about where we are before I hand it over to Dan for more detail on the third quarter. After I consider the impact of the headwinds and the tailwinds I believe our Investor Communications business is stronger then ever but we have some work to do to get the Securities Processing and Clearing and Outsourcing segment to meet our satisfaction. Overall, I remain confident that we’ll leave these challenging times in a better position then we entered them.

I’ll now turn the call over to Dan who will go into more detail about the quarter and the year to date results for each of the segments.

Dan Sheldon

On slide eight the results for the quarter and year to date our revenues were down 4% for the quarter and flat year to date. We continue to have a positive impact from net new business while internal growth in event-driven pretty much are offsetting each other at this point and with respect to distribution and FX they continue to be a drag. As Rich mentioned, our three operating segments all had fee revenue growth for both the quarter and year to date.

With respect to our pre-tax margins for both the quarter and year to date were up and driven by lower interest expense, no transition expenses this year, and reduction in discretionary spend as well as benefits from lower stock compensation expense due to our stock price in the third quarter.

Our EPS was up significantly for the quarter due to both benefits from pre-tax margins I just discussed and a $0.05 contribution from our state tax credit. By the way, $0.03 relate to a retro credit back to FY08 and $0.02 year to date benefit which for the full year will be $0.03 and as Rich mentioned contributing 100 basis point reduction to our effective tax rate which we expect to continue for the next eight years. We continue to look for federal and state tax incentives as we balance our presence in the US and various state jurisdictions versus offshoring opportunities.

With respect to our credit rating agencies I’m pleased to report that S&P upgraded up to BBB- with a positive outlook and Moody’s maintained our BAA2 with a stable outlook rating. We meet with Fitch in June but would expect to maintain our BBB with a stable outlook from them. This means red investment grade ratings with all three of our agencies.

Let’s move on to discussions of the segments starting on slide nine. There are lots of data points on this slide but let me first focus you on the boxed revenue area. Fee revenues were up for the quarter and year to date and are forecasted to be up for the year. Most importantly recurring revenues were up greater than mid single digits and we expect that to continue for the remainder of the year. We’ve seen year date and expect full year that all recurring revenue products will have growth and it’s a combination from both net new business and internal growth.

With respect to net new business which contributed 4% to the quarter and 3% year to date we expect the contribution on a full year basis to be between two and three percentage points. Also, Notice and Access fees represent about two points of the recurring revenue growth both year to date and for the full year.

Event-driven revenues were down year to date and all due to significantly less mutual fund proxy activity which also has a negative impact in Q4 due to a large job last year that won’t happen in FY09. On the event-driven positive side equity proxy content and other event-driven activity have been up slightly year to date and expected to be for the remainder of the year.

Moving down to distribution revenues, the biggest impact both year to date and full year is related to Notice and Access and lower event-driven revenues. We expect Notice and Access to have an option rate of about 50% and this is up from just under 30% last year. This will mean just over a $30 million negative impact to distribution revenues and an increase of about $11 million in recurring fees with a net up side contribution to the margins of around 40 to 60 basis points. Most of this activity occurs in our fourth quarter during the proxy season.

With respect to margins, the incremental investments we made in the business in the first half had very little impact in the third quarter but year to date negatively impacted us by just over 100 basis points and will on a full year basis have a negative impact of about 50 basis points. On a full year basis we expect margin expansion between 30 to 90 basis points and this is driven by Notice and Access, increased suppression rates, the electronic distribution versus mail and lower discretionary spending. All in all, this business has performed well in this down market and we don’t see anything that would change the performance as we move into the next few months.

Let’s turn to slide 10, Securities Processing Solutions. As we expected our revenue growth rate for the quarter was up but has slowed due to less trade volume growth as well as increased losses and price concessions in the second half as compared to the first half which were also expected. Our non-transaction revenues were up for the quarter due to year end and T&M activity which we expect to see fall off in the fourth quarter given the industry is pulling back on spending.

You can see under the internal growth bullet that we continued to have some equity and fixed income trade per day growth this quarter but below what we were averaging in the first half and we expect this lower growth to continue into the fourth quarter.

Last quarter I shared with you that we expected higher contract price concessions and they are now just under 5% of annualized revenue. This is hitting us primarily in the second half as most of the contract resigns were finalized this quarter. As well, we had forecasted in the low end of our guidance for this segment last quarter that we would lose the Bank of America equities institutional business and this has now materialized and has the greatest impact to Q4 and into next year. As Rich mentioned the annualized value is just under $20 million.

The margins are down from last year for the quarter due to the lower capitalization of conversion expenses we’ve discussed before as well as losses and concessions fall 100% to the bottom line where new business comes in at 60% to 80% margins. Given the year to date results and full year forecast ranges you can calculate we’ll end Q4 with less revenue and operating margin then the average of the last three quarters which creates a drag into next year.

Given the current lower market activity around trade volumes and time and material we call T&M and the fact that large sales take at least 12 months to implement we’re looking at next year being a down year for this segment.

Having said that, I’d like to put this into perspective. We finished the first half of this year with 8% revenue growth primarily coming from increased trade volume. Although not continuing into our second half or possibly into next year on a long term basis trade volume growth has average over 10% and this includes up and down markets. Where in up markets it can be 20% and down markets near flat.

Having said that, with respect to concessions we said last quarter that over any long period of time we average about 3% negative impact to annualized revenues, in up markets less and down markets more. This segment is the systems technology foundation for our three tier outsourcing strategy so we’ll weather the storms during this economic downturn.

Let’s turn to slide 11, Clearing and Outsourcing Solutions. We generated 3% revenue growth for the quarter, 4% year to date, and expect 3% to 4% for the full year. We segregated our revenue in this segment into three categories; net interest, other clearing, and outsourcing revenues. As you read the bullets you can see that we continued to drive significant net new business in this segment. Just over half is related to the Neuberger sale which closed in the first quarter.

Our continued challenge to revenue and margins this year has been the drop in net interest due to lower fed funds rates and margin balances. Net interest drops 100% to the bottom line where new business contributes about 50% in this segment. For the quarter and year to date we’re down net interest by $4 million and $12 million respectively and expect to be down for the year approximately $16 million.

Operating losses for the quarter of $2 million are really closer to about $4 million given the offsets of some one time benefits we had this quarter. Having said that, our Q4 projections for revenue and pre-tax around $24 million in revenue and $4 million pre-tax and our fair representations of the run rate for this business before we have any new business or any other plus or minus impact from changes in margin balances or fed funds rate as we move into fiscal year ’10.

As I mentioned last quarter, I look forward to an up market where we should benefit from increased margin balances and interest rates since we’ve maintained our client retention in this business at over 95%.

Let’s move to slide 12, Other and FX. Again, we’re getting you a lot of data points you’ve asked for but I’m only going to focus on just a few. FX continues to be a drag on both the revenues and the margins and we expect it to continue into the fourth quarter. Corporate expenses are shown at $7 million for the quarter and $23 million year to date with a full year range of $29 to $35 million.

Once you adjust for plusses and minuses and one time activity primarily this quarter benefits from stock compensation expense given our low stock price for most of Q2 and into Q3 the run rate is about $9 million a quarter or $36 million on an annualized basis.

Let’s move to slide 13, Grow-Over discussion. Again, nothing new and only some changes in the timing with stock comp expense between Q3 and Q4 along with an additional benefit full year given some stock comp expense as I mentioned on the previous page.

Let’s move to slide 14, Cash Flow. For the nine months you can see that the Clearing business is in a positive cash position and our balance sheet at March 31st has no short term debt. As mentioned in the Clearing section, margin balances are down significantly so little need for short term borrowings at a quarter end.

With respect to all other processing activities, earnings contributions were $106 million year to date and represents around 50% of our full year forecast. There’s nothing really new this quarter versus last quarter with respect to changes in line items year to date for free cash flows, investing, or financing activities.

As Rich mentioned, for the full year we’ve increased our free cash flow forecast for both the low and the high end by $20 million due to reductions in working capital and CapEx needs for this year. I’d also point out that these are all timing differences for the long term projections. I still consider that working capital uses will grow in line with revenue and CapEx and software purchases will approximate $50 million in the year term.

As I said last quarter, this is my favorite slide and is always going to be a good news slide given our recurring revenue model and over 97% consolidated client retention rate.

I’ll now turn it back over to Rich.

Rich Daly

Let me review and summarize our fiscal year 2009 guidance on slide number 15. We’re reaffirming the revenue growth guidance we gave last quarter which was in the range of flat to -3%. We’re anticipating revenue growth at the lower end of the range primarily as a result of lower event-driven mutual fund proxy activity, a reduction in distribution revenues, lower growth related to trade, mix and volume, as well as lower customer margin debit balances.

Despite this, we’re still expecting overall fee revenue growth in the low single digits and mid single digits growth in recurring fee revenue in our Investor Communications Solutions segment.

We’re expecting our earnings margins before interest and taxes in the range of 16% to 16.9%. As I mentioned earlier, we expect GAAP EPS in a range of $1.52 to $1.62 and non-GAAP EPS in a range of $1.45 to $1.55. This excludes the benefit of $0.04 for the one time gain on the purchase of our senior notes during our first fiscal quarter and the $0.03 benefit from the state tax credit related to our prior fiscal year.

We expect our closed sales to be in the range of $160 to $180 million dependent upon closing some larger deals in the fourth quarter. Our effective tax rate will be approximately 38% as we benefit from the recurring portion of our state tax credit. Finally, we’re expecting free cash flow to be in the range of $230 to $270 million. As I stated earlier, this is higher then our previous guidance by $20 million on both the low and high end.

In terms of our use of free cash flow, as I stated during our February earnings call most of our free cash is generated in our fourth quarter. We’ll provide a clearer direction on creating shareholder value with the use of free cash during our fourth quarter earnings call in August. Until then you should continue to think about us looking for potential tuck in acquisitions, continuing to pay a dividend and balancing our liquidity needs accordingly. We clearly understand that by August clearer direction is necessary.

Before we go into the Q&A part of the call let me summarize and leave you with a few thoughts on how I feel about the business as we continue to navigate through these unprecedented times. Broadridge is continuing to weather the storm better than many would have anticipated. Our third quarter EPS was better than expected and we continue to see growth in our fee revenues.

The Investor Communications segment remains resilient and continues to perform well as recurring revenues continue to grow. Bank of America’s decision to perform their equity processing in-house combined with higher then average contract renewal price concessions along with lower margin balances and interest rate spreads will create a drag on our fourth quarter for the Securities Processing and Clearing and Outsourcing segments.

Offsetting the headwind drag is the growth of our Investor Communications segment along with signs of life in the event-driven revenue activity and our growing sales pipeline.

The investments in the business have begun to introduce some new and exciting products into the market like the Investor Network used by Intel to survey its shareholders. I continue to believe that Broadridge is well positioned for the future as we have a great product set led by the strength of our Investor Communications solutions.

We have a strong and growing recurring revenue base, vigilant expense management, a strong balance sheet, the appropriate liquidity, strong free cash flows that will enable us to continue to invest in the business and a strong risk management culture. The deals we have on the table plus the incremental opportunities in the Investor Communications business make me more confident then ever in our long term prospects.

I believe our product strength combined with our strong sales pipeline and our new product initiatives will provide a clear opportunity to take Broadridge to a higher level.

I’d like to take this opportunity to personally thank our associates who remain dedicated, engaged and focused as we continue to find ways to create shareholder value through these challenging times. I’ll now turn the call over to the operator for the Q&A part of the call.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Anurag Rana – KeyBanc Capital

Anurag Rana – KeyBanc Capital

The Outsourcing revenue was down sequentially. Could you please break down the various components that lead to this decline? The Clearing and Outsourcing on a sequential basis was down. I just wanted to see what the components were.

Dan Sheldon

If you look at the third quarter and you see that, you go from the year to date where at about $52 million so revenues are down a little bit slightly but what’s really impacting us here in the third quarter is the margin balances are down almost $200 million as well as we saw in our trade volumes, although you see the volumes up when we look at the mix on the retail side which are the smaller retail folks they were way down and they bring us on a contribution as far as trade per day a much higher rate then what we’ll call more of our institutional side. Think about it as rate in the trade area as well as the fall off in the margins.

Anurag Rana – KeyBanc Capital

I believe it was the exact opposite to the previous quarter.

Dan Sheldon


Anurag Rana – KeyBanc Capital

Are there any other customers that are deciding to make strategic decisions, do you know of any acquisitions that are out there? Things like Bank of America deciding to use someone else’s platform are there any other companies that are making such strategic decisions at this point?

Rich Daly

I used the word specifically that the B of A/Merrill was the last decision we were expecting from the known consolidation activity. In terms of firms that have come together at least in any material way I’m not aware of any other decisions that need to be made at this point in time. Since all the other big transactions not only have been decided but we were actually very pleased the way we came out in those decisions.

We’ve now reached the point though where the initial push for short term cost savings from existing clients has taken place and what I am pleased by is that in our sales pipeline its grown because there are now larger discussions taking place and more discussions taking place with firms that are looking for significant alternatives to lower their run rate infrastructure and are willing to consider both outsourcing their system or even complete outsourcing of their system and the people behind the system.

Anurag Rana – KeyBanc Capital

Any discussions with the Government regarding Securities Processing, fixed income?

Rich Daly

We have not had any discussions with the government. We’re still waiting with great anticipation for what regulations will come out from the government due to the unprecedented times we’ve gone through.

Anurag Rana – KeyBanc Capital

I think I remember that you talked about a 60% option rate of Notice and Access in the previous quarter and I think you just mentioned 50%.

Dan Sheldon

What we said last quarter was the range would be 50% to 60% and we’re now giving the fact that we pretty much know what’s coming in the door we’re at the 50% range.


Your next question comes from Ian Zaffino – Oppenheimer

Ian Zaffino – Oppenheimer

What’s up with the investment grade rating, can you give us an understanding of what an investment grade rating does for your business, obviously lower borrowing costs but help us understand the rest of that. What type of metrics when you speak of the ratings agencies are they looking at for you to maintain that type of rating and what type of flexibility will you have going forward?

Rich Daly

With regard to the investment grade rating we stated from the time of the spend that given the fact that we were providing mission critical services to the industry we viewed having an investment grade as being a strategic imperative. We didn’t say it needed to be AAA or anything super high but we said we wanted a solid rating a solid investment grade rating which I believe we’ve now attained again. Its mission critical functions and I have had dialogues with many prospects about the comfort that they get from us having that investment grade rating.

Dan Sheldon

With respect to metrics let me give you a couple of pieces here. Most of them follow us as far as the type of industry we’re in, concentration of clients as well as business metrics we’ll call those the financial. In the first two they’re very happy all of them in saying you hold your own you’ve got good high retention rates and you bring in new business. As far as internal growth they fully get it, that there will be high periods when the markets are up and lower periods when they’re down.

With respect to the financials again with our recurring revenue base very happy with. The only place they really spend a lot of focus on is with respect debt to EBITDA. What I’d share with you is the agencies for the most part do not include cash on the balance sheet when they come up with their debt to EBITDA so what they’re looking for is we’re already there now but over any long extended period that we would keep that one to one debt to EBITDA.

Will we be allowed to at times go lower then that or above that? Absolutely, but they’re looking for our long term commitment which we are to a debt to EBIDTA one to one. Equally so the reason we said before why we needed the investment grade as Rich mentioned was our clients are also looking that we’re going to be very prudent with the amount of debt that we put onto our books.

Ian Zaffino – Oppenheimer

The way I understand this is the flexibility you’ll then have is more just through growth of either EBITDA or the free cash flow so we’re not expecting it levering up of the balance sheet going forward. The only way you would do that is with commensurate increase in EBITDA?

Dan Sheldon

Over a long period. For example let me just say that obviously they wouldn’t look for us to go into any kind of debt position for either share buy backs or dividends, that’s just exactly they would be. However, if we were to do an acquisition or whatever and it should put us below the metric that they were looking for we also know and they know that we have the cash flows over any period of time to really provide for that. So therefore I hope that helps with answering the questions of how to look at it that in the short time period we could be below the metrics I just gave you.


Your next question comes from Tien-Tsin Huang - J.P. Morgan

Tien-Tsin Huang - J.P. Morgan

On the Bank of America I just wanted to make sure, are there any termination fees tied to that, it didn’t look like it. When exactly did the conversion happen, what month?

Rich Daly

There are not conversion fees. It took place very quickly and it will be in this quarter and what they’ve simply done is my understanding is taken the largest volume provider of any product and put both businesses on the highest volume provider. We’re also looking forward to having continued dialogues about once they’ve stabilized the environment what’s the best way for them to go forward.

Dan Sheldon

From a numbers perspective be thinking of the $20 million that it would average out to be of course then the $4 million a quarter almost nothing in the third quarter and then of course the fourth quarter getting impacted by about $4 million and then the rest continuing into next year.

Tien-Tsin Huang - J.P. Morgan

On the equity side, are the other decisions with Bank of America basically done?

Rich Daly

That was the only decision that impacted us was the institutional equities that we were performing for B of A.

Tien-Tsin Huang - J.P. Morgan

We shouldn’t think about any other potential changes in the near run?

Rich Daly

No affecting Broadridge. Remember, the communications business we were providing proxy processing as the best example for both B of A and Merrill and we’ll just continue to provide it for the new combined entity.

Tien-Tsin Huang - J.P. Morgan

On the IC side, when do you expect the mutual fund proxy activity to trough if that’s a good term or not and could we see the step up in the M&A activity potentially offset this or even overcome it?

Rich Daly

I think that the mutual fund activity is at the bottom of the trough right now. We’re, as I said in my comments, having conversations right now with more than one reasonably large fund groups that are talking about the need to do something in the near term. I would be disappointed if we didn’t have again more than one reasonable size mutual fund proxy job taking place during this calendar year.

The M&A activity is less predictable but we have seen some of the M&A activity because of the events that we know in our own industry that took place, other activities that are taking place that are well publicized proxy contest etc.

Dan Sheldon

We do know in our fourth quarter, as I mentioned, that we did have a large job last year approximately $15 million that won’t repeat itself. That’s all in our guidance and would totally agree with Rich. We think we’ve hit the bottom.

Tien-Tsin Huang - J.P. Morgan

The tax rate, the 38% is that a good number to use for non-GAAP purposes as well?

Dan Sheldon

GAAP and non-GAAP and going forward.


Your next question comes from Stefan Mykytiuk - Pike Place Capital

Stefan Mykytiuk - Pike Place Capital

Can you maybe give us; I know it’s early, some sense of the revenue opportunity with this investor network?

Rich Daly

It is absolutely early. The fact that we’re starting with Intel I find very, very exciting. If you think about the number of challenges going on today for companies around the, for example executive comp area, this is something where managements, Boards, etc. have the opportunity to reach out and survey shareholders and include their views in things like CDNA analysis going forward.

If you think about the expense that companies go through for an annual meeting the idea of having a virtual annual meeting which will allow access to more shareholders with less expense and less logistics cost and concerns these are pretty exciting opportunities now.

I don’t have firm numbers but we’d like to think that these types of activities for a good size company should be worth between $20,000 and $50,000 an activity. This could be very, very exciting in terms of taking our position to an even higher level from the very high level we’re at already today. We’re excited.

Stefan Mykytiuk - Pike Place Capital

Is there anything else, I was reading something about the New York Stock Exchange might be trying to make a decision on this Rule 452 again, I know they’ve been kicking that around for a long time. Any other kind of regulatory actions that are in the forefront today that you think can have a positive impact on the business?

Rich Daly

There are no other regulatory changes that I’m aware of right now. We do believe that given what took place in this recent environment that transparency to investors will remain a very high priority for the SEC. We believe that that will work well since we enabled the SEC to achieve those higher levels of transparency to investors.

The 452 change is something that we don’t see given where it’s at right now having a material impact on us. We would expect that with 452 going away there might be more volumes as people need to get tough proposals passed. For example, an equity comp plan. We’re not really planning on anything material at this point in time, any material benefit.


Your next question comes from Anurag Rana – KeyBanc Capital

Anurag Rana – KeyBanc Capital

Are you seeing valuations for acquisitions come down in the marketplace at this point?

Rich Daly

Our valuations for marketplace for acquisitions came down. I actually do believe that what took place in the marketplace has effected just about everything as well as what buyers are willing to pay although not initially what sellers were willing to sell for. I’m encouraged though that the market I think is coming together and I’m encouraged by some of the dialogues we’ve had with properties that we believe would meet our definition of a tuck in and really be far better positioned under the Broadridge umbrella with our distribution channel, our credibility and our ability to go to market then they are in their current environment.


I’m showing that we have no further questions at this time. I will now turn the call back to Mr. Daly.

Rich Daly

We certainly appreciate everyone being with us early on a Monday morning. We thank you for your participation. As always, Dan, Marvin and I will look forward to seeing you in the near future. Thanks so much and choose to have a great day.


This concludes today’s Broadridge Financial Solutions, Inc. Third Quarter Fiscal 2009 Earnings Conference Call. Thank you for your participation and you may now disconnect.

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