Broadridge Financial Solutions F4Q09 (Qtr End 6/30/09) Earnings Call Transcript

Aug.11.09 | About: Broadridge Financial (BR)

Broadridge Financial Solutions, Inc. (NYSE:BR)

F4Q09 (Qtr End 6/30/09) Earnings Call

August 11, 2009 8:30 am ET

Executives

Marvin Sims - VP Investor Relations

Richard J. Daly - Chief Executive Officer, Director

Dan Sheldon - Chief Financial Officer, Vice President

Analysts

James Cassan - Bank of North America

Ian Zaffino – Oppenheimer

Tien-Tsin Huang - JPMorgan

Stefan Mykytiuk - Pike Place Capital

Vivian Mamlock - US Steel Pension Fund

Presentation

Operator

Good morning. My name is Stephanie and I will be your conference facilitator. At this time I would like to welcome everyone to the fiscal year 2009 earnings conference call. I would like to inform you that this call is being recorded and that all lines have been placed on mute to prevent any background noise. There will be a question-and-answer period after the speakers' remarks. Please try to limit your questions to one per participant. I will now turn the conference over to Marvin Sims, Vice President of Investor Relations. Please go ahead, sir.

Marvin Sims

Stephanie, thank you. Good morning, everyone, and welcome to the Broadridge quarterly earnings call and webcast for the fourth quarter fiscal year 2009. As usual, 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 earning call and webcast can be found on the investor relations homepage of our website at broadridge.com.

As requested by some, earlier this morning our quarterly key metrics were posted on our IR website as well. We've also included a copy of the metrics in our appendix of our webcast for your reference, as they may be helpful during Dan's review of the financial results.

Before we begin I would like to remind everyone that during today's conference call we'll discuss some forward-looking statements regarding Broadridge that involve risk. These risks are discussed here on slide one, and we encourage participants to refer to our SEC filings, including those on Form 8-K, 10-Q, and 10-K, for a 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 a summary of the financial results for fiscal year 2009, followed by a discussion of a few key topics. Dan Sheldon will then review the fiscal year 2009 financial results and financial guidance in further detail, including a review of cash flows. Rich will then return and provide his overall summary and some closing thoughts before we head into the Q&A part of the call.

Now please turn the next slide and I’ll turn the call over to Rich Daly. Rich?

Richard J. Daly

Thanks, Marvin. Good morning, everyone. This morning, as part of my opening remarks I'll talk about the following topics. First, a summary of our fourth quarter and full fiscal-year financial results, followed by a review of our sales performance for the year and sales pipeline. Then, an overview of our fiscal year 2010 financial guidance, and finally, an update on our capital allocation policy and how we plan to use our free cash flow to create long-term shareholder value.

Let' start on slide number four. Overall I'm satisfied with the fiscal year results as the financial performance for the fourth quarter was in line with our expectations and includes an acceptable year. Our fiscal year non-GAAP EPS of $1.51 and GAAP EPS of $1.58 were both just above the midpoint of our May guidance.

Our revenue decline of 3% was at the low end of our May guidance due to lower equity stock record growth, somewhat offset by higher trading volumes in the fourth quarter.

As I think about revenue growth for the year and I exclude the lower distribution revenues and negative impact from foreign currency exchange, we had fee revenue growth of 2% and fee revenue growth in all three of our operating segments.

Our growth in recurring fee revenues has been one of the highlights for the business this year and was the foundation for growth during this challenging market, as it has helped to offset some of the decline in mutual-fund event-driven fee revenue for the year.

All of our revenues for the year were down. Our non-GAAP earnings per share were up 6% as we benefited from lower interest expense and a lower recurring effective tax rate, related to the work we’ve done since the spinoff, to obtain recurring state-tax credits.

We generated greater than $250 million in free cash flow which enabled us to internally fund two acquisitions, significantly pay down debt, buy back 2 million shares to offset dilution from our equity compensation plans, pay a dividend, and end the year with over $170 million in cash on our balance sheet.

In a few minutes I'll discuss our proposed use of this cash and our future free cash flow when I review our capital policies.

Let me put our fiscal year 2009 financial performance into context. We achieved our full-year EPS guidance, which we first issued last August just prior to the meltdown in the market, and this guidance remained unchanged throughout the crisis.

Broadridge faired better in this down market than it did in previous down markets. This is due to the breadth of products which include a broader registered proxy offering, the expansion of our fixed-income processing capabilities, as well as our unique three-tier securities processing offerings.

We have more products that never before and we add new products every year to create new revenue opportunities, even in a down market.

Going forward, as we drive deeper into mutual fund solutions, take our investor network products to market which include virtual annual meetings and shareholder surveys, we'll even be better positioned both to face down-market cycles and take advantage of stronger markets.

We had record employee and client satisfaction ratings this year, which helped us maintain our annualized 98% recurring revenue retention rate. And this includes the previously announced loss of Bank of America's equity processing business.

Overall, I believe our performance during these challenging markets has yet again proven the resiliency of our recurring revenue model. It's our recurring revenues, new sales, contributions from internal growth, and our high client retention rates that are the primary enablers of our future revenue growth.

Now let's move onto slide five. We had solid sales performance during the quarter and ended the year with closed sales of $156 million. Our annual closed sales were just below the low end of our guidance. However, this performance still represents 5% growth over the record year we had last fiscal year.

Overall I'm pleased with this performance and I'm particularly pleased by the greater than 30% growth we achieved in recurring fee closed sales, as this creates a higher revenue base to grow from in the future.

When event-driven activity returns, as event-driven revenue has historically done after a down-market, this could enable even stronger growth. Closed sales and our investor communications business were $98 million, a decline of 10% over the prior year.

This decline was due to the significant drag created by lower event-driven mutual fund proxy sales. Recurring fee sales in our investor communications business were up 18% to $55 million, which represents higher sales in the transaction reporting, fulfillment, and registered corporate issue of product sales.

With respect to corporate issuers, we've increased then number of clients this year from approximately 1,200 to over 1,500. For the combined securities processing businesses, closed sales increased 47% from $39 million to $58 million. The most significant growth was generated by a securities processing solutions segment where closed sales increased by 66%. This includes a $10 million sale made to a top-tier clearing firm that we used one of our ASP service bureau offerings. We also had solid performance in our clearing and outsourcing business, with closed sales growth of 20%, even though we didn't land any outsourcing deals greater than $2 million.

Our sales pipeline continues to be robust and includes some promising large opportunities in all three segments. I continue to be encouraged by the type of conversations we're having with our clients and prospects, as the conversations around short-term cost cutting appears for the most part to be behind us.

However, the sales cycle continues to be long and closing the larger strategic deals will be lumpy. We know that the length of the sales cycle for large opportunities, particularly for outsourcing deals, lack clarity. So let me provide a little more color around the dynamics in the market for outsourcing.

When we first communicated the targeted market for our outsourcing offering, we had focused on firms that had the capital to be self-clearing, but were clearing for other clearing firms because they lacked the systems and the people expertise to be self-clearing. These firms were small to mid-size firms and the selling process was less complicated as this type of outsourcing was very strategic to the buyer and represented meaningful growth and brand improvement opportunities for them.

These type of transactions are worth in a range of $2-$5 million, each annually, for Broadridge.

The financial crisis, in particular the credit crisis, created a major drag on the mid-sized firms as they became concerned about access to credit. The good news is that the market crisis made our already strong outsourcing offering even more compelling for some of the larger self-clearing firms. However, with larger firms and the resulting larger-sized deals comes a much longer and less predictable sales cycle as you're now dealing with much more complex negotiations and systems conversions.

I believe this dynamic will create more opportunities in the long term, but it will likely require a broader offering, which we are actively working on. Broadridge, due to its unique multi-entity platform, is still the only company with the ability to offer an outsourcing option to the market at this time.

For fiscal year 2010 we expect closed sales in the range of $165 to $185 million, which represents growth in the range of 6%-19%. As we did in fiscal year 2009, we're once again anticipating annuals sales growth as we come off a record year in closed sales.

We expect another year of solid performance in our recurring fee closed sales with growth of greater than 10% in this area.

Sales in any given quarter can be up or down from our internal expectations. Please keep in mind that historically our first quarter, which includes the summer months, can start off slow, and the last quarter, which is generally our best, can vary widely in any given year. We try not to overreact positively or negatively in any given quarter as each year always has its own unique set of twists and turns.

Finally, despite the longer than normal sales cycle we continue to encounter for larger deals, I feel good about our near-term and long-term prospects as our pipeline remains robust with large opportunities for all of our segments. And once again, we were rated the number one outsourcing company in our space by Brown & Wilson's Black Book of Outsourcing.

Let's move onto slide six for an overview of our 2010 fiscal year guidance. Earlier I put fiscal year 2009 performance into context, and this context is important for you to consider as we move into fiscal year 2010. Overall, we expect fiscal year 2010 to be another acceptable year. Our revenues are projected to grow in a range of 4%-8% with modest revenue growth in the first half of the fiscal year and stronger growth in the second half of the year.

Our growth in fiscal year 2010 will be led by our investor communications business, which is our strongest and most resilient business. We believe a continued solid growth of our recurring revenues and the anticipated increase in event-driven activity in the investor communications business will more than offset the revenue grow-over challenges in our securities processing business of $37 million in the first half of fiscal year 2010. Dan will go into more detail around the grow-over challenges.

We're expecting fiscal year 2010 EPS in the range of $1.50-$1.60 which includes the EPS impact from the grow-overs I just discussed. The appropriate point-to-point EPS growth comparison is to compare fiscal year 2010 GAAP earnings with fiscal year 2009 non-GAAP EPS which excludes the one-time benefit from the gain on the purchase of our senior notes and the retroactive benefit of the one-time state-tax credit.

This comparison results in EPS growth in a range of flat to 6% as EPS goes from $1.51 in fiscal 2009 to a range of $1.50-$1.60 in fiscal year 2010.

We expect GAAP EPS growth in the range of -5%-1% or $1.58 versus a range of $1.50-$1.60, since we're not planning on any additional one-time tax benefits or senior-note repurchase gains likely experienced in fiscal year 2009.

We expect to continue to generate strong free cash flow in the range of $235-$270 million. We anticipate that the lower range and high range of our EPS guidance will be driven more so by the key drivers related to event-driven revenue activity, and to a lesser degree by trades per day and margin debit balances.

I believe we're well positioned to meet our goals for fiscal year 2010 and I expect to exit next fiscal year with positive momentum, as I anticipate the performance for the operating segments will continue to be strong and not weighed down by grow-overs as we exit the 2010 fiscal year.

Now let's move onto slide seven and discuss how we're planning to use our strong free cash flows to create long-term shareholder value. Coming out of the spinoff, phase one of our capital allocation plan was to pay down debt to achieve our goal of a one to one debt to EBITDA ratio, a goal which we accomplished more quickly than we had anticipated at the time of the spin.

Phase two of our capital allocation plan is to create greater shareholder value from our strong free cash flow. Given our free cash flow generation during one of the worst markets ever and the strength of our recurring revenues, even in down markets, we believe we're in a position to refine our capital structure.

The framework of our capital allocation structure will consist of first maintaining our existing debt level which we've consistently stated as staying at a one to one debt to EBITDA level. Next we're doubling our annual dividend from $0.28 to $0.56 per share. This payout level equates to approximately 35% of our fiscal year '09 GAAP net earnings.

In addition, our board has authorized a 10 million share repurchase which is approximately 7% of our outstanding shares. This authorization will be used to buy back shares opportunistically, including any equity compensation dilution purchases.

And finally, we'll look to execute strategic acquisitions that leverage the Broadridge brand and distribution channels.

In the investor communications business we'll look for acquisition opportunities where we can leverage our unique position in the marketplace. In the securities processing business we'll look for product acquisitions that further strengthen our offering as we leverage our number one brand and continue to create the tipping point and new reasons that will entice in-house processors to outsource some or all of their back office processing.

Last quarter's acquisition of Access Data is a perfect example of the type of acquisition we're looking toe execute. It represents the strategic type of acquisition that leverages our industry-leadership position and offers a more complete industry solution around mission-critical processing, and at the same time creates a path for us to grow quickly.

I really feel good about this acquisition. I am more confident than ever that in five years this business will generate $100 million in revenue in a market that was signed by independent third-party research to be over $600 million in annual revenue. The integration of Access Data is going very well.

As always, we continue to make the necessary investment in the business in order to drive internal product development and accelerate the launch of new revenue growth opportunities. In fiscal year 2010 we expect our new products to generate an additional 1% in fee revenue growth and account for approximately 15% of our fiscal year 2010 closed sales.

This momentum adds to my confidence for the future. The future will always include regulatory changes in our core communications business. The latest change is the elimination of the 10-day, or so called broker vote. To enable corporate issuers to better manage this change, we're working on new initiatives that will enable greater voting participation by retail investors whose votes will no longer be generated by the 10-day vote.

Most regulatory changes require Broadridge to make changes to its systems, normally requiring us to perform additional functions and often creating new product opportunities. Regulatory changes have generally both increased the importance of Broadridge's role and improved our financial performance. We are expecting more regulatory changes going forward.

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

Dan Sheldon

Thanks, Rich. I'm now on slide eight, our fiscal year '09 results and our fiscal year '10 guidance. You'll note the chart at the top of the page shows how the revenue drivers have, and are expected, to contribute to revenue growth for fiscal years '08, '09, and along with our guidance for FY'10. In fiscal year '09, revenues for both the fourth quarter and the year were down, but they were entirely the decrease driven by FX, distribution fees, and even-driven related to mutual fund proxies. Our recurring revenues from net new business and internal growth were positive for the year.

The trends over the last few years and our expectations for revenue drives as we've move into fiscal year '10 are as follows. Sales and contributions to recurring revenue have been increasing each year due to increases in recurring closed sales from existing products and the introduction of new products.

As Rich mentioned, we had a record year in fiscal '09 with over 30% growth in recurring closed sales and expect to have greater than 10% growth in recurring closed sales in FY'10.

Losses--they've averaged over the last few years 2%, giving us a 98% revenue retention rate, even in these tough economic times.

Internal growth--it does better in bull markets than it does in bear, but the impact is not material on the downside, which we experienced in the second half of fiscal '09 due to the increased price concessions, drop-off in our time and material, and lower net-interest in our securities processing and clearing businesses.

Given this, we expect to experience in the first half carryover headwinds into FY'10, which for the most part should be behind us as we enter the second half of our next fiscal year.

With respect to event-driven, it's been flat to down, but given what we're hearing in the market, we expect to see growth as we move into fiscal year '10, and this is similar to what we've seen after a down year. Distribution revenues were down in the last few years mostly due to Notice and Access, and revenue postage mixes.

With respect to Notice and Access, it created decreases in postage of approximately $60 million combined in fiscal year '08 and '09, but added new fees. And although the fee revenues are less than the postage revenues, the margin dollars are better on fees, so overall, a win for the business.

With respect to FX, about 12% of our revenues are international, primarily Canada. And the US dollar was on the decline in fiscal '08 and gave us a positive contribution to revenues. The US dollar began improving in fiscal '09 and had a negative impact on revenues and margins. Our guidance here is based upon continued improvements in the US dollars using forward rates, but will have less than 1% negative impact to revenues for next year.

As Rich mentioned earlier, given our revenue grow-over challenges as we move into fiscal '10, we expect modest revenue growth in the first half and stronger growth in the second. Net income is up in fiscal '09 for both the quarter and the year for both GAAP and non-GAAP, and is primarily due to the lower interest expense on debt and the effective tax rate for non-GAAP, and the same plus no transition fees, in fiscal '09 from a GAAP perspective.

Margins are expected to be slightly down in fiscal year '10 due to loss of Bank of America and concessions, which are partially offset by increased margins in the investor communications business.

Let's move onto slide nine, investor communications. FY'09 was a slightly down year for the business, but all due to event driven and distribution fees. So focusing on the recurring under fee revenues, you can see we ended fiscal year '09 at 5% growth and are looking at fiscal year '10 to more resemble fiscal year '08 with contributions from new business, with continued market share gains in transaction reporting, global and registered proxy, as well as our acquisition of Access Data. Additional positive impact is expected from investor network products as well.

Internal growth is also expected to be flat at the low end of our guidance to mid-single digits at the high end. In previous down markets we've seen these types of ranges, and again look for bull markets in the future, where internal growth historically grew greater than 5%.

Event-driven revenues were down 8% in fiscal '09, but all due to mutual fund proxies as other event-driven revenues like proxy contests were up. As for fiscal year '10, the growth of 18%-28% may seem high, but given mutual fund activity and history, this does not seem like an aggressive range.

I would note that we expect the level of activity to begin to show growth in the second quarter and beyond next year. Distribution revenues are expected to be up due to increases in event-driven and US postal rate increases, offset somewhat by Notice and Access where we expect to do slightly better than our current 50% penetration on the low end or move up to 60% at the high end.

Our margins were only up 10 basis points for fiscal year '09, and below our expectations, but this was all due to revenue mix. In fiscal year '10 we are expecting our margins to improve due to product mix and the impact of new products and businesses like Access Data that have hire operating margins.

Moving onto slide 10, securities processing, and if you're following on the key stats slides, that's also number 23.

We finished the fourth quarter with revenues ahead of our May guidance due to increased trade volumes, of which most fell to the bottom line. Revenues were down slightly for the quarter over last year, due to the BofA lost business and increased price concessions. For the year, revenues were up 4% with 8% contribution in the first half and flat in the second.

Our guidance for fiscal year '10 is for revenue to be down 3%-5%, due to the losses and price concessions primarily impacting the first half. Therefore, our first half will have high single-digit negative growth while our second half is expected to be low single-digit growth.

When you look at the revenue drivers, which are listed on key stat slide 23, you can see the following: revenues from sales for fiscal '09 were strong at $40 million, and when annualized, equate to over a 7% contribution to revenues, and this is positive momentum given our historical run rate has been around 5%. We're very pleased to see a $10 million sale close in June as this was one of the large pipeline deals we were working on.

Due to the implementation timing however, the $10 million won't start to hit revenues until fiscal year '11. Concessions and losses primarily impacted the fourth quarter in fiscal '09, so have three quarters of grow-over headwind in fiscal year '10.

Internal growth, primarily trade volumes, is expected to generate a positive $11-$15 million in revenue growth, however these revenues are slightly more than offset by the falloff in our time and material work which we don't expect to see a recovery during fiscal year '10.

As you look at the revenues for next year, most of it is dependent upon what happens with trade volume growth and concessions. At the low end we're assuming low single-digit internal trade growth and some additional concessions. High-end assumes high-single digit growth for trades per day.

Our margins are totally dependent on a mix of trade and non-trade revenues, and new sales have lower margins due to implementation that our internal growth from trades lost business and concessions. This segment is forecasted to begin to have positive revenue on margin growth by Q4 of FY'10, once we grow over our losses and concessions which have the biggest impact in the first half of approximately $28 million and $12 million in the second half.

Let's move to slide nine, clearing and outsourcing, and again, key stat slide number 24. Revenues in this segment were just over the high end of our guidance for Q4, and like with securities processing, it was due to trade volumes. Sales contributions to revenue both in fiscal '09 and '10 are strong with 26% in '09 and between 14%-17% in fiscal year '10. Revenue retention rate, still above 95% with just over a 4% loss rate in both '09 and in '10, and this is a testament to the quality of our clearing clients; they too have weathered the storm.

Our biggest challenge last year, as well as for fiscal year '10, is net interest income, which his impacted by margin balances and fed fund rates. We are not forecasting any real change in either driver for fiscal year '10, and therefore we'll have headwinds in the first half of $7-$8 million, and not expecting to see profitability in this segment until fiscal year '11.

As noted before, every $100 million in margin balances adds $1 million to the top and bottom line, and every 25 basis points change in fed funds rate adds $700,000, again, all revenue falling to the bottom line.

Given normal periods, where fed funds average 4%-5% and margin balance is more in the +$800 million range versus $500 million today, there would be an additional $14 million to the top and the bottom line. As I've said before, I do look forward to more normal times.

Our operating losses are expected to be greater in FY'10 due to the lower net interest revenue, all falling to the bottom line, and contributions from net new business, again, sales less losses, have margins in the 20%-50% range.

Also, Q4 of '09 had a $2 million in what we call year-end activity, so the run rate is a -$4 million per quarter for this business at this time.

Let's move to slide 12, our other and FX. We're note expecting any termination fees in fiscal year '10, just like we did not see any in '09, so therefore, other fee revenues are zero. For FX, revenues and margins were expecting to have additional negative impact given the forward rate. As mentioned in the beginning, 12% of our revenues are international, mainly Canada, and forward rates indicate continued improvement in the US dollar.

Sensitivity here for us is for every 5% change in the US dollar to the Canadian dollar is plus or minus $13 million for revenue and plus or minus $4 million for EBIT. When you move down to interest and corporate expenses they were in line with our forecast for the fourth quarter, and run rates approximate the midpoint of our fiscal year guidance. The low and high end for corporate expenses reflect variable investment spec.

Let's move onto cash flow, slide 13. I've reviewed before why we segregate out the clearing business financing from cash flow from processing business, so let's focus on the shaded column starting with the second column, fiscal year '09 — all other processing activities, where we ended the year at $252 million of free cash flow, which was the midpoint of our May guidance.

Moving down into the investing and financing section, during the year we used $114 million in cash to pay down debt to $324 million, which puts us in line with our debt to EBITDA ratio of one to one, including a cushion for short-term borrowing at clearing — so not expecting to pay down additional debt in the near future.

We're also pleased with the recent increased of $75 million income netted bank lines, bringing our committed lines to $575 million. We did buy back 2 million shares during the year which was in line with the loosen created by stock-compensation plans.

Let's move to fiscal year '10 and the guidance range, which are the shaded areas to the far right. In arriving at free cash flow, the net income range is a derivative of the lows and highs I discussed as we went through the segments in other. Working capital range based upon timing of receivables and CapEx range mostly tied to new sales and timing of those sales.

This brings me down to the investing and financing activities. Our dividend, 2X last year, and approximately 35% of our fiscal '09 GAAP net income. We do not give guidance on future acquisitions or amount of paybacks, and therefore you see no ranges for these line items.

Let's move to slide 14. This slide contains the major assumptions in our fiscal year '10 guidance and since either Rich or I have already covered the various parts of this presentation, I just won’t repeat them here, but give them here for your information. I'll now turn the meeting back over to Rich. Rich?

Richard J. Daly

Thanks, Dan. Before we go into the Q&A part of the call, let me summarize and leave you with a few more thoughts on how excited I feel about the business as we look to our new fiscal year. I'm on slide 15.

We had solid performance during fiscal year 2009 whereby we maintained an achieved EPS guidance that we issued last August before the financial crisis hit. We had another record year in closed sales. We had great growth in our recurring fee closed sales, and our pipeline continues to remain robust with promising longer opportunities in all of our segments.

As we exit fiscal year 2009 with positive momentum driven by the investor communications business and strong sales contributions in our securities processing and clearing businesses, we're well positioned for fiscal year 2010. We're anticipating revenue and EPS growth in fiscal year 2010 with modest revenue growth in the first half of the fiscal year and stronger growth in the second half.

In the first half of fiscal year 2010, we expect to experience a tougher compare as a result of a crossover impact of price concessions, the Bank of America equity processing business loss, and the impact that lower interest rates and widened balances will have on net interest income.

Our capital allocation policy will return meaningful cash to shareholders as we've doubled our dividend and have authorized a 10 million share repurchase plan. Even with the doubling of our dividend to $0.56 and share buybacks, our strong free cash flow generation capabilities enable us to continue to pursue value creation by building or buying profitable revenue growth. We'll look to create greater shareholder value as we execute strategic acquisitions that will leverage the Broadridge brand and distribution channels.

Our focus in fiscal '10 will be to diligently protect and grow our market position across all segments, drive and grow sales by landing some very large deals across all segments, execute our operating plan and continue to drive strong internal growth in all of our businesses.

Take to market the investor network which includes virtual shareholder meetings and other electronic investor products, accelerate the execution of our mutual fund strategy, and finally, in our securities processing businesses, we'll look to drive to a better proposition that will provide our clients with more flexibility and how they can take advantage of the efficiency and feature-risk functionality benefits of all of our offerings.

Broadridge is well positioned for the future as we have a great product set led by the strength of our investor communications business that drives a strong and growing recurring revenue base. I believe our investor communications business is stronger and more resilient than ever, and although we still have some work to do in our securities processing and clearing and outsourcing segments, I also believe we have the right strategic focus and direction as we continue to execute our unique processing strategy.

In addition, we have diligent expense management, a strong balance sheet, the appropriate liquidity, strong free cash flows that will enable us to continue to invest in this business, and a strong risk-management culture. Our product set combined with our strong sales pipeline and our new product initiatives will provide a clear opportunity to take Broadridge to a higher level.

I want to end and take this opportunity to personally acknowledge our associates, who remain dedicated, engaged, and focused, as we continue to find ways to create shareholder value through these challenging times. This past year, their commitment to the service profit chain and personal sacrifices to do more with less, have given us the foundation to provide customers better services, shareholders higher returns, and associates a more stable environment with a better future.

I'm now going to turn it over to Stephanie the operator for the Q&A part of the call. We look forward to your questions and comments.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of James Cassan, from Bank of North America. Your line is open.

James Cassan - Bank of North America

Great, thanks, and congratulations on the results. Rich, can you give a little more color on the 4Q processing win? Was this customer previous in house or was it a competitive takeaway?

Richard J. Daly

This customer was using a different vendor and because they have asked not to have their name disclosed, Jim, it's going to be a little tough for me to provide a lot more color. We are excited by this because the value proposition we offered them was more around the features and functionality that will enable them to run their business and grow their business better, which is what led to the decision. So it is adding all the new acts that we continually do, we have reached the tipping point here in this particular case.

James Cassan - Bank of North America

Okay, and Dan, a quick question; your confidence levels in the event-driven revenue for fiscal '10 sounds very high and it seems like it's all based on mutual fund activities. So you're not assuming any uptick in M&A activity until you sense that you could have faster acceleration or improvement in the revenues there? Is that the case?

Dan Sheldon

The event-driven, Jim, is focused on mutual fund activity. It is tied directly to the discussions we're in right now. The activity of those discussions is much stronger than it was last year.

Richard J. Daly

Yeah. And Jim, I would add to that piece is when we are actually in dialogues with people, and then we know the large funds, and two of the largest ones are in active dialogue with us and even have scheduled jobs — that's what gives us the confidence.

What I would share with you, as I mentioned is, it'll be more in our Q2, Q3, and Q4, than you'll see anything in our Q1.

James Cassan - Bank of North America

Great, okay. Thank you very much. Congrats.

Operator

Your next question comes from the line of Ian Zaffino from Oppenheimer. Your line is open.

Ian Zaffino - Oppenheimer

Hi, thank you, good quarter. Question is on the CNO business, what is the profitability we should look at? I mean I know you gave us some sensitivity as far as 25 basis points, $100 million change in margin balance, but we've been waiting a long time for this thing to become profitable — it's not profitable and you're not protecting any profits going forward for some time, and I understand we might be in a kind of a unique interest rate environment, but at what time do you — or at what point do you really fish or cut bait and just get out of it or look for some other alternative?

Dan Sheldon

Okay. So I'll handle the first part which is more or less the numbers and profitability, and I'll turn it over to Rich for more the strategy. You're absolutely right. When you look at the interest and it's all from the net interest and it's a combination of the fed funds and the margins, and that's why I gave the statistic. We don’t' expect anything to move there for the next year, so therefore we're saying it's going to be sometime in fiscal year '11 we expect profitability.

I think the most encouraging thing, besides just what I call those internal growth features, is the fact that we talked about the $10 million deal we just signed. That is both the combination for the securities processing business of technology, and very important for new business into our clearing and outsourcing business. And again though, the implementation timing which all large deals take--it won't hit profitability again until fiscal year '11.

So I say to you that fiscal year '11 is the year that we're looking at to start turning around, and as we said before, when you look at this business, clearing brings in about a 50% margin, the outsourcing brings in 20%-25% margin, and overall the rest is internal growth which we'd expect to see some improvement also on fiscal year '11.

Rich, I'll turn it over to you for the strategy.

Richard J. Daly

Ian, I absolutely respect and appreciate your comments. Our mission is to create shareholder value and any of our pieces that don't ultimately lead to greater shareholder value, we're certainly not wed to. With that said, the pipeline and the clearing and outsourcing space is more than 2X the total revenue of the clearing business right now. It's certainly the growth opportunity in the securities processing space that we have so we will continue to look for ways to accelerate growth, and if there is an opportunity out here to do something that would minimize these losses or move it to profitability more quickly, we're going to be aggressive in pursuing that.

But our strategy here is to take the industry and create this opportunity at the next level which provides the overall industry to a higher level of efficiency, and despite others trying to get into this space, we're still the only one that has this offering out there. So it's been tough, but we're still staying with the outsourcing strategy.

Ian Zaffino - Oppenheimer

Okay. So it seems to me that you view this as an integral part of your strategy, so what type of losses are you willing to sustain?

Richard J. Daly

We're not pleased in the position we are. In the last call I clearly stated in the processing space that we're not meeting our performance goals. We've done an awful lot of work since that call. In this call I stated that we've now identified ways to expand offerings and we believe we're on the right path. So I'm not really willing to sustain losses ever. I'm certainly not willing to sustain them for any sustainable period of time.

So we recognize the appropriate — and certainly your impatience, and we feel the same way here, but at the same time if there is an opportunity to get this to a tipping point and create meaningful value, we don't want to pass on that.

Ian Zaffino - Oppenheimer

Okay. All right, thank you very much. Good quarter, again.

Richard J. Daly

Thank you.

Operator

(Operator's Instructions) Your next question comes from the line of Tien-Tsin Huang from JP Morgan. Your line is open.

Tien-Tsin Huang - JP Morgan

Good morning. It's Tien-Tsin, and thanks for all the disclosure once again — very helpful. I just wanted to ask once again about, I guess pricing, on new sales in the fourth quarter and in general what your expectation is on pricing on new sales and renewals in fiscal '10 — if we could get some more color on that?

Richard J. Daly

All right, the pricing for the new sales was not material up or down in terms of any historical pricing we've done. The benefit we have is that because we're a skill business, any incremental revenue provides significant benefit, as we saw with BofA, any less of revenue provides a dramatic reduction to the bottom line as well. So I think I'm answering the question here. I'm not seeing anything materially different in pricing in the last quarter or as we're going forward.

Dan Sheldon

And if I could just add to that, I don't think it's so much of our pricing having to do with sales, the pressure we've gotten were on existing clients which we talked about before and we called those the price concessions. And as I mentioned, and I think this is very important and I want to stress it well, we said that over any period of time — we have seen this time and time again, when you go into a down market your concessions are higher than when you're in a bull market.

And when we looked at our concession this time we said we've resigned the majority of our clients, yes, we saw an increase to our concessions, but when I looked at when we get through that growth in the first half of next year, I expect to see the concessions really drop a little bit, and as a result still average our overall what we call, historical trend, of about a 3% annualized basis. Some years 1%, some years 4%-5%, and that's where we've seen the pressure. But again, not unusual in a bear market.

Tien-Tsin Huang - JP Morgan

Sure, totally understood. I guess this is a follow on to that, what does it take then to get some of these new sales and that's in the pipeline — it sounds like in general it's quite strong. What is it going to take to get these deals across the finish line? I mean is it really a question of just focus or is it pricing that we're trying to negotiate — I'm just trying to understand that.

Richard J. Daly

For the large clearing and outsourcing deals, or I should say ASP and outsourcing deals, Tien-Tsin, the challenge is that the client needs to go through an internal conversion as well, and these are complex activities that require lots of senior management focus.

The reason I say we're encouraged by the dialogues is because after the initial dialogue that they have with all their vendors about I need a price reduction, if you're not satisfied with your performance in your run rate, things like going to a conversion, if it can dramatically take out nine digits of expense from your run rate, is something you're more willing to have than with a bull market where the conversation is more around just keeping up with all the revenue growth opportunity you have and pushing your existing providers or in-house providers to give you new apps to take advantage of revenue opportunities.

Right now the focus is still very, very strong across the industry on expense management.

Tien-Tsin Huang - JP Morgan

Gotcha, okay. So I'll be looking out for the deals. My last question is just if you could just walk us through your expectations again for the stock record growth and trade volume? I just wanted to better understand the visibility and the confidence level there. Thank you.

Dan Sheldon

Okay, so let me answer that one. When we looked at July and going into August and I’ll start with the stock-record growth — I think first of all I'm going to take you back to the fourth quarter. When we looked at the stock record growth, and yes, we were down a few percentage points. When we kind of break that into the tiers of we'll call it the large caps versus the mid or small, the large caps were actually up and it was the small and mid-cap that were down. And we've seen a little bit of that carry forward here, but we also have seen where the large caps have continued to be strong. So therefore that's why we say okay, last year was a -2, we're looking at next year anywhere between flat to a +2 and nothing more or less.

And moving onto the trades per day, the biggest thing there is to be thinking about we've said at the low end in the 4%-5% kind of range and at the high end the 8%-10% kind of range. And again what we've seen is in the summer it's very difficult to gauge because in the summer months trading always falls down or off, however, we feel pretty comfortable that we at least at the low end would definitely make.

Tien-Tsin Huang - JP Morgan

Great. Thank you so much.

Operator

Your next question comes from the line of Stefan Mykytiuk from Pike Place Capital. Your line is open.

Stefan Mykytiuk - Pike Place Capital

Good morning. Just I guess a few questions. You addressed the visibility on the mutual fund event driven, those are really — your optimism really is based on concrete discussions as opposed to just hoping it materializes?

Richard J. Daly

Absolutely.

Stefan Mykytiuk - Pike Place Capital

Okay, terrific. The clearing and outsourcing business, maybe I remember this wrong, but it seems to me like despite the fact that the way you break this out you're actually losing money in clearing and outsourcing, I seem to recall that you guys really from a strategic point of view look at this as part of the securities processing offering and therefore we really should look at those businesses combined because it's part of the strategy of how you go to market and how you approach clients and the breadth of the services you offer them. Am I remembering that wrong or--?

Richard J. Daly

You're absolutely remembering that correctly. We view it as running two businesses; a communications business and a processing business. Right now we're at a point where the losses that we have in the clearing and outsourcing space are somewhat offset by revenue that's in the processing space, but in context with the other statements made, we at this time when we disused this in our original strategy, expected to be further along and have profitability contributions in both reportable segment, the clearing segments and the SPS space, by this point in time, which we don't have.

Now, margin balances are down, the trading activity is down, we have the things going on here, but nonetheless we are in business to create shareholder value and in this space we have not accomplished that yet. We have made changes over the last quarter in the way we're going to approach this and we hope those changes will bring value.

Stefan Mykytiuk - Pike Place Capital

Okay. But what you're saying is that your big opportunities from your revenue growth point of view for the combined securities processing and clearing and outsourcing really is coming from that outsourcing business.

Richard J. Daly

Right, that's correct. Without the people from clearing we can't offer the outsourcing. And those are our — in the total pipeline of the large deals that we have across all the segments, the largest amount of pipeline is because we have the outsourcing capability.

Dan Sheldon

Yeah. And I would also add to that piece of it, I think what's very important — and the reason we break out sales, losses, and internal growth for everybody is when you ask the question strategically and you look at this business and it's driving 26% revenue growth, call it from sales, and next year somewhere between, as we called it, 10%-14%, and we only have losses of 4%, that's the real value that we look at because we know the internal growth piece will come back when the markets come back.

Stefan Mykytiuk - Pike Place Capital

Right, okay, great, thank you for clarifying that. Lastly, just in terms of the — I think Rich made a comment that you had $177 million of cash on the balance sheet at June 30 and I'm seeing 280, are you just kind of stripping off the cash sitting in the clearing and outsourcing business?

Dan Sheldon

Absolutely. The correct way it was 172 call it what we have available to use, and the other 109 is all related to the clearing business.

Stefan Mykytiuk - Pike Place Capital

Okay. And so it brings me to the last piece which is if you generate, call it 250 in free cash flow again, you're going to spend, call it 70, on the dividend, and be left with 180 — assuming you do some buyback, I guess if you did the whole buyback in a year then that would be all the free cash, but how should we think of — I mean if you’re not able to find acquisitions, what are you going to do with the surplus free cash flow?

Richard J. Daly

The commitment is to generate shareholder value through our free cash. So I would be disappointed, Stefan, if we didn't find any acquisition. So as a matter of fact, internally I would use a different word that disappointed. And so we believe we're well positioned right now with a far clearer policy as we go forwards, but acquisitions we expect to be a part of that. Think in terms of the type of acquisition we did with Access Data.

Stefan Mykytiuk - Pike Place Capital

Okay. And in terms of how it affects the business and also in terms of how much money you're spending?

Richard J. Daly

Yeah. You shouldn't be thinking we're going to go out and do a mega deal. You should be thinking that we're looking for things that when we put it into the Broadridge engine through our distribution channel and our processing capabilities and our brand recognition, that we should be able to take a good product that the market needs that doesn't have significant market penetration and accelerate it for the benefit of our shareholders.

Stefan Mykytiuk - Pike Place Capital

Right. Okay, great. Thank you very much.

Operator

(Operator's Instructions) And your next question comes from the line of Vivian Mamlock from US Steel Pension Fund. Your line is open.

Vivian Mamlock - US Steel Pension Fund

Hi, good morning. Could somebody walk me through what your implementation process is for outsourcing, what the up-front commitments are from a capital perspective and how that works along the timeline until you get to a point where everything is up and running and you get to the 20% and 50% margins that you were talking about.

Richard J. Daly

Sure. I think the most significant thing about this, Vivian, is going to be the timing. So if someone was to sign a deal today, then we're going to need to understand in detail what the conversion plan is. We put significant effort into understanding exactly what their system does and what pieces of their system, for example the desktop, are they going to leave in place. We do all the mapping to enable a desktop to stay in place so that the brokers the day after the conversion won't see any disruption. It will look exactly as it did the day before the conversion.

Those things take time. In some cases they want us to do work to give them a better desktop. In some cases we're making investments to do that. In all cases we are making investment as it relates to getting the conversion accomplished. So the timing on this can go back in history when we did the lean-in conversion — that was a rather large transaction, that took nine months. Some conversions can take 18 months depending upon the gaps and the functionality that the client is looking to add. The more functionality they are looking to add, the more investment we're making until we actually start to generate some revenue.

Dan, why don't you talk about the accounting of that a little?

Dan Sheldon

Yeah. Well, let's talk about the cash flow, which I think was the real question in that piece of it. So, Rich has already mentioned that the deal can take up to a year to implement and I’m using a year because it can be the six months or the 18. This one, (inaudible) we're talking about at $10 million is going to be about a year out. Those type of deals at $10 million do not require significant cash on our side to implement.

If we ever did a significant large deal, or I should put it more appropriately, when we ever get a very large deal like we did when we talked about RBC, as we're talking about that deal we'd also share with you could that be using up $10-$20 million worth of our free cash flow, and the answer would be pretty much yes. If you think about that, it would be in the same kind of frame thinking of a major acquisition call it a $45-$50 million kind of acquisition. That's how we think about some of those very large sales and that's how you should be thinking about a $10-$20 million usage of cash.

Vivian Mamlock - US Steel Pension Fund

Okay. That's helpful. Thank you.

Operator

Mr. Daly, I now turn the conference over to you.

Richard J. Daly

Well, we certainly thank you for your participation. Dan, Marvin, and I, are going to look forward to seeing you over the next month or so and thanks again for being with us today. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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