Good morning my name is Suzan and I will be your conference facilitator. At this time I would like to welcome everyone to the Broadridge Financial Solutions first quarter fiscal year 2011 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’ remark. (Operator Instructions). I will now turn the conference over to Rick Rodick, Treasurer and Vice President of Investor Relations. Please go ahead sir.
Thank you good morning everyone and welcome to the Broadridge quarterly earnings call and webcast for the first quarter of fiscal year 2011. This morning I am 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 this morning. The news release and slide presentation that accompanies today’s call and webcast can be found on the Investor Relations homepage of our website at broadridge.com.
I’d like to remind everyone that we’ve also included a copy of the key metrics on pages 23 and 24 in the appendix of our webcast for your reference. You may find these metrics helpful during Dan’s review of the financial results for each segment.
During today’s call, we’ll discuss some forward-looking statements regarding Broadridge that involve risk. These risks are discussed here on slide number one and we encourage participants to refer to our SEC filings, including those on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and risk factors faced by our business.
Before we begin, I’d like to point out to everyone that as a result of the Penson transaction we closed in the fourth quarter of fiscal year 2010, the clearing business is now shown as discontinued operations and our remaining outsourcing business is now part of the Securities Processing Solutions segment. Also, as a result of the reporting treatment of the Penson transaction, the financial results discussed today will address continuing operations unless otherwise stated.
Now, let’s turn to slide number two and view 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 first quarter of fiscal year 2011, followed by a discussion of a few key topics. Dan Sheldon will then review the first quarter of fiscal year 2011 financial results and the fiscal year 2011 financial guidance in further detail. 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 to next slide number three and I’ll turn the call over to Rich Daly. Rich?
Thanks Rick. Good morning, everyone. This morning as a part of my opening remarks, I’ll talk about the following topics. First, I’ll start with an overview of our financial performance, followed by a review of our closed sales performance and sales pipeline. Then I will provide an update on our key strategic initiatives and then a detailed regulatory update. After Dan provides you more of the financial details on the quarter, the full year and a guidance update, I’ll wrap it up with my closing comments.
Let’s start on slide number four. Overall I am satisfied with our first quarter results. All the results were lower than the last year primarily due to the expanded reduction and event driven revenues, expected reductions. Our recurring revenue closed sales were up 94% and as we maintained a recurring revenue retention rate of 98%.
The revenue decline was primarily due to lower venture in revenues partially offset by revenues from net new business and acquisitions. You need to keep in mind that due to the seasonal nature of our business, the first quarter is historically the quarter that contributes to the least amount to our annual results and it is way to early to assume, that our event-driven revenues will not rebound to the level it is needed or even beyond that.
Diluted earnings per share from continuing operations were down from last year as expected, primarily due to the decline in event-driven revenues coupled with costs related to our strategic initiatives and acquisitions. We acquired NewRiver during the quarter. NewRiver is a leader in mutual fund electronic investors disclosure solutions and was an important supplier to Broadridge for nearly a decade.
This acquisition will strengthen our capabilities as the industry leader in compliance communications and intelligent documents fulfillment. NewRiver's data warehouse of regulatory disclosure documents and productivity tools will enable Broadridge to offer additional solutions to its brokerage, mutual fund, variable annuity and retirement plan clients. Furthermore, the integration of additional data technology accelerates Broadridge's overall e-strategy with a broader set of solutions to assist our clients in the transformation from paper to electronic document delivery.
We repurchased approximately 4.5 million shares during the quarter and an average purchased price of $20.91. On to our existing approved repurchase plans we have Board authorization to repurchase approximately 11.8 million shares.
Now let's move to slide number five, closed sales for the quarter were $24 million, while closed sales were down 21% as compared with the first quarter of fiscal year 2010, I am very pleased that our recurring revenue sales were up 94%. Closed sales in our securities processing segment are off to a very strong start and they are more than double the amount they were to the first quarter of last year. Recurring revenue sales are also up to a strong start in our investor communication segment as they were up almost 30%.
Event-driven sales were down as compared with last year as anticipated due to the very strong first quarter event driven sales in fiscal year 2010. Our sales pipeline is strong and continues to have very good momentum. We are reaffirming our closed sales guidance for fiscal year 2011, we expect closed sales in the range of 160 to 215 million which reflects the less predictable large sales process. Achievement of the higher end of the range will be dependent on the quantity of large deals signed.
Let’s move to slide 6. During fiscal year 2010 we signed three strategic initiatives. All three are in the process of being implemented and each of them impacts our fiscal year 2011 results. All three are currently on track for their planned implementation. In October 2009 we signed seven-year agreement to provide customer communication services to Morgan Stanley Smith Barney. There services include the production and distribution of account statements, tax reporting documents and certain trade confirmations as well as the provision of prospective fulfillment services. For the first two years of the agreement, we will utilize Morgan Stanley Smith Barney’s facility in providing our services and in fiscal year 2012, we will transition to our facility.
During the last 12 months, we have continually exceeded the agreed upon service level standards and we are on track to achieve our revenue and profitability goals.
In November 2009, we announced that we were exiting the clearing business and had entered into an agreement with Penson worldwide that provided for the sale of our clearing client contracts. We also announced that we are entering into a long-term outsourcing contract under which Broadridge will provide certain securities processing and back office support services to Penson. We closed the transaction this past June 25, and announced the execution of an 11 year global outsourcing services contract that is expected to generate $50 million to $55 million in annual revenue when all the Penson's clients are converted onto Broadridge's securities processing platform.
The transaction is progressing on plan and we anticipate that the earnings for the outsourcing business will be a breakeven or better as we exit fiscal year 2011. In April 2010, Broadridge and IBM announced an information technology services agreement under which IBM will provide Broadridge with datacenter and information processing services.
It is anticipated that the data center agreement will net Broadridge approximately $25 million annually over the 10-year contract beginning in fiscal year 2013. The data center conversion is in the early stages of implementation and is proceeding as planned. Broadridge and IBM also signed a business alliance agreement in April. The business alliance is structured to deliver a comprehensive portfolio of technology-based solutions and services to the financial services industry. The alliance has joined go-to-market strategy as a technology list by IBM and an application shift by Broadridge. The Combined Solutions Suite will enable firms to outsource more than non-core technology operations functions to IBM and Broadridge. We have meaningful opportunities in our sales pipeline that will utilize our alliance with IBM
Now let’s turn to the regulatory update on slide 7. The Securities and Exchange Commission issued its concept release on the US proxy system in July. The concept release was seeking public input on three major topics, first ensuring the accuracy, transparency and efficiency of the voting process; second, enhancing shareholder communication and participation, and third, addressing a relationship between voting power and economic interest. The comment period closed on October 20.
We believe the current system works well. However we encourage periodic evaluation of the system with a view towards enhancement. Broadridge submitted three comment letters and also submitted a summary letter. Our first comment letter addressed vote accuracy. Accuracy, reliability and transparency should be central consideration in any discussion regarding shareholder communications and proxy voting.
This is particularly important in light of the complex requirement and at times different interest of the various participants in the proxy process including shareholders, corporate issuers, brokers, banks, transfer agents and regulators. In this regard, there were significant benefits including higher levels of participation from a voting process that is operated by reliable and neutral third parties.
It’s given that if shareholders do not believe the proxy process is impartial, they will be less likely to participate because no one wants to play a game that lacks clear rules or if the referee is also one of the contestants. Broadridge helped achieved goals of vote accuracy, process integrity and transparency, and it’s consistently has been found to be extremely reliable.
The aspects of the US proxy system administrated by Broadridge have been reviewed on numerous occasions over the past ten years. On every occasion, Broadridge's systems and processes were found to be reliable and accurate.. Broadridge's systems and processes undergo extensive testing and regular independent review.
As a practical matter, the investment Broadridge makes in process performance and transparency benefit virtually all participants. The aspects of the US proxy system administrated by Broadridge are tested and reported regularly by internationally recognized firms such as the Deloitte & Touche and Grant Thornton as well as other respected independent third parties.
Some examples include a big four accounts report on board accuracy is provided on a quarterly basis attesting to at least a 99 plus percent voting accuracy rate and a separate SAS-70 type two annual review of compliance with all New York Stock Exchange and SEC proxy rules. As with any process, there is always room for improvement and Broadridge is committed to contributing to such improvement.
We believe several technological opportunities could improve the US proxy system as a whole. One example is end-to-end vote confirmation which is provided by Broadridge while we are both the registered account processor and overall tabulator for over a 1000 issuers today. We can expand this application to all issuers and can readily achieve this without changing shareholder privacy rules. Another example of the technological opportunity, is expanding industrywide, independent testing and reporting beyond Broadridge for all industry participants. Most importantly, all tabulators for systems accuracy and process performance, this will engender even greater levels of integrity, confidence and trust.
Our second comment letter address process efficiency. The US proxy system was not designed in isolation. It supports the need of the most efficient and liquid markets in the world and ever evolving and expanding regulatory requirements. Broadridge’s systems and technologies which support the current industry clearance and settlement environment, create numerous significant efficiencies and conveniences for all constituencies involved in the proxy process.
Some have argued that if they were simply provided with a list of an issue with shareholders, they could duplicate what Broadridge does. That is just not possible. The current Street clearance and settlement process has fluid reconciling items and omnibus relationships at any point in time which significantly complicate the proxy distribution and voting process. The current street clearance and settlement process is regarded as the most robust in the world and allows levels of participation at multiples of any other system in existence. The current proxy process was designed to support this and any recommendation that fail to recognize the rule of the Depository Trust & Clearing Corporation, any participating broker and bank nominees will be digging a black hole.
I would encourage anyone with additional interest or concerns regarding the accuracy and efficiency of the current process to review Depository Trust Comment Letter regarding the SEC's concept release dated October 25, 2010 which accurately details many of the criticisms of the current process are either not well founded or are factually incorrect.
In their conclusion, Depository Trust states, “We believe the current proxy system functions well". We have invested over $1 billion in systems, technology and processing for shareholder communications and proxy voting over the past decade. The infrastructure Broadridge provides is state of the art. Every issuer large and small has afforded in advanced technology infrastructure. Every participant including custodian banks, broker dealers, institutional investors and individual investors as well as large and small corporate issuers is afforded robust information security and management.
Corporate issuers are afforded numerous efficiencies and conveniences of technological innovation and processes that exceed the requirements of applicable proxy rules and the majority of these are provided to issuers at no additional cost. As a practical matter, the plumbing as a whole benefits from brokerages commitment to the investments in technology and service operations necessary to effectively support evolving proxy regulations, integrate levels of scale and integration that saves issuers and another partners, significant ongoing expense.
Corporate governance cannot happen without the system that Broadridge has built. Our systems connect the vast majority of active investors with the vast majority of active registrants with incredible levels of accuracy and cost efficiencies.
As we have discussed in prior presentations, we estimate that Broadridge today saves issuers approximately 1 billion annually in paper and postage costs through our extensive investments in technology. The total annual fees paid by issuers for street proxy services today are approximately $500 million or half the amount they save, that is why I confidently state, if someone will be willing to build it for free and run it for free, on day one it would only across the industry a half a billion dollars more than it does today.
The proxy delivery and voting systems in place today to beneficial shareholders are a result of significant private sector investment. Broadridge is committed to making the significant ongoing investments necessary to maintain and build upon the extraordinary level of efficiency afforded to participants and the US proxy system. Our proxy processing system is supported by over a 150 dedicated programmers or continually improving and enhancing the system without any regulations requirement.
The execution of this vision has created a significant chasm between where Broadridge is today and others who want to eliminate today’s street environment, but they cant even verbally pontificate what it would be.
Our third comment letter address voting participation, affected participation requires a provision of communications and voting and ways that reflect beneficial shareholder preferences and choices. Broadridge's systems accurately and consistently tracks and applies shareholder delivery preferences to all investment and investor accounts.
For example, if you sign up once for e-delivery every other investment in your account that you have today or in the future can be delivered via e-delivery. Issuers are afforded a variety of message to communicate, shareholders are provided a variety methods to vote without sacrificing privacy preferences. The technologies and processing applied to beneficial shareholder communications result in voting rates that are higher than those of registered shareholders.
Overall voting rates among beneficial shareholders are high. However, voting participation among retail shareholders remain a technological opportunity. Broadridge and nominees have recently implemented several technologies that provide additional methods of communication that has a potential to foster greater participation. Broadridge has pioneered a client-directed voting solution being considered by the SEC in the concept release, a tangible example of how Broadridge innovations raise investor participation.
We are continuing to explore other option such as enhanced broker internet platforms, investor to investor social network communication and pre-established individual investor of voting instructions similar to those used by institutional investors. Additional technologies are always being explored, the potentially most significant is Broadridge has developed a unique social network solution that we are highly confident will increase levels of participation, transparency and efficiency beyond what is viewed as attainable today.
Through this unique social network, management could communicate with shareholders virtually and instantly at a lower cost than anything being discussed or in vision today. Boards could have a clear understanding of investor views and investors could participate on an information playing field, more level than anything ever discussed but certainly desired.
In our final comment letter, I summarize our three previous comment letters and suggest that the hundreds of comment letters that have been submitted could be classified into three groups. First, there is some that believe with the SEC should move in the process back 45 years to when it was a direct issuer to investor model. Despite the fact that Street ownership was created to fix the scalability and accuracy issues of that model at a time when volumes were a small percentage of what they are today.
For example, a conceptual proxy reform plan is rigorously promoted by some service providers who want a bigger piece of the pie, irrespective of the fact that the most impacted brokerage trade association, the most impacted issuer trade association and the industry’s clearing utility along with leading economists regarded this fluid and economically incoherent and indicate even as it could be executed it would result in higher cost of issuers, shareholders and nominees.
Second, there are other participants that recognize that the US proxy system is fundamentally sound and that the system as a whole may benefit from certain tweaks or incremental improvements. Finally, there are those like Broadridge that recognize that the US proxy system is on the cusp of vast changes in the world around us, in demographics and technology. Technologies that address the needs of a highly mobile society and that create appropriate environment for social networking hold transformative potential. This can be made possible and make possible levels of participation, transparency and efficiency beyond what is viewed as attainable today.
Broadridge is confident that it can make these possibilities a reality and as always we will verify its success and accuracy through leading independent audit firm reviews. For the past two decades, Broadridge has continually identified ways to improve the proxy systems accuracy and efficiency and implement these process improvements. The most significant thing you should take comfort in of everything I just said or the comment letters from the leading broker trade association, the securities industry and financial markets association, the leading issuer trade association on this subject, the Society of Corporate Secretaries and government professionals and of course Depository Trust.
All support the current environment which leads open only the question of how quickly Broadridge will be able to further advance the process and what will be the fair return for our shareholders. It’s a when question, not an if. I will now the turn over to Dan who will go into more detail about the first quarter of fiscal 2011 financial results as well as full year guidance. Dan?
Thanks Rich. I am now on slide 8, revenue drivers. Rich has already mentioned that historically, Q1 is our lowest revenue in earnings quarter. Having said that for the quarter we were pleased with our net new business growth as contributions from sales and losses are in line with our expectations. We are forecasting as Rich mentioned, a 160 to 215 million in closed sales this year of which a 110 to 150 million relate to recurring sale. Historically, about 25 to 30% of this value has impacted the current year, so most of the 3 to 4% contribution to revenue for the year we are looking for comments from prior year closed sales or another words, sales already closed.
With respect to the forecasted loss rate of 1% or more appropriately, the approximately 99% client revenue retention rate, we have not been made aware of any new large client losses at this time, so we expect we will achieve our forecast. Internal growth in Q1 was at the lower end of our expectation. We experienced a pick up from the prior year with respect to all internal growth drivers except equity trade volumes and I will discuss in more detail when reviewing the segment.
Event driven revenue, all in domestic communications space were expected to be down in Q1 and I will give more insight when reviewing the ICS segment. Distribution revenues which are primarily postage are directly tied to event-driven activity in the first quarter. Acquisitions this year should contribute over three points of growth and most of it coming from Penson and City Networks in the securities processing space and primarily NewRiver in the investor communication space.
FX has been favorable and we are looking forward to continue for the rest of the year. And margins were down for the quarter due to the fall off in higher margin event-driven activity as well as the conversions of Penson and Morgan Stanley Smith Barney. On a full-year basis, these same items along with the IBM IPO conversion cost of between 5 million to $10 million negatively impacts margins this year by almost 300 basis points.
The good news is that event driven should at some return and the other strategic initiatives except for IBM are accretive as we move into fiscal year '12 and IBM in fiscal year '13. as we stated in August and I refer you to slide 22 in the appendix, that the first half of fiscal year '11 would be significantly below the fiscal year '10 revenue and earnings due to the above mentioned items.
So lets go to the next couple of slides where I will go little deeper in the revenue and margins for the second. I am now on slide nine, investor communication and for details slide 23 which has a key stats I'll be referencing. As expected, total revenues in margins were down for the quarter and as previously discussed will down for the second quarter as well primarily due to the fall off in the event driven mutual fund proxy activities. With respect to recurring revenues, the quarter and expectations for the full year remain positive and that revenue drivers expected to attribute positively to grow for the year.
We picked up three points of revenue growth from sales and are looking to continue this rate given our pipeline where we expect to add $40 million to $50 million to revenue for the year of which almost 60% has already been sold.
Clients revenue retention rates remain over 99%. Stock record growth for both equities and interims were up over the prior year. We experienced a very strong quarter with interims, up 11% of which mutual funds contributed nine points and ETFs two points. Equities are flat to last year, but this is positive news and that last year at this time, they were down 7 percentage points.
Our acquisition of NewRiver in September will add a point to revenue and is accretive this year even with the transition expenses. Although not pointed out in this slide, both access data and the stock transfer agent acquisitions are performing as our expectation and represents over 10% of our expected recurring sales contributions to revenue I mentioned just before.
Now for the elephant in the room, and by elephant I mean it’s great when it’s up, but it’s tough when it’s down. Event-driven revenues were expected to be down this quarter, mutual fund proxies had the biggest impact for proxy contest and specials as well as corporate actions were down year-over-year. Total event-driven revenues came in just under 40 million for the quarter and we are forecasting full year revenues to be between 220 to 230 million.
Our focus is primarily on mutual fund proxies as we move through the rest of the year as both mutual fund supplemental and pre-sale fulfillment look to be running at our estimated rate and we are expecting contest and specials to pick up as M&A activity increases.
In August, I shared with you that our historical experience for mutual fund proxies was at the high end, a 100 million per year and at the low end 50 million per year. With Q1 at 6 million, some might just do an extrapolation and get very concerned. I don’t extrapolate for two reasons. First, quarters have never extrapolated, just look at last year when blew away even our expectations in the second quarter and there’s years of history to support extrapolations are not a good indicator. Second, there are larger deals in the pipeline that give me some comfort we should see better results over the next few quarters.
We have lowered our midpoint by 10 million to 65 million with the same plus or minus 5 million in the ranges. Net-net, it comes down to we are one quarter into the year and way to soon to draw realistic conclusion for this fiscal year. We’ll look in February to better update you. Margins as expected were down in Q1 by just over 500 basis points and negatively impacted by the reduction and the event-driven fees which cost us almost 400 basis points and the impact from the Morgan Stanley Smith Barney conversion which cost us another 150 basis points.
We are still forecasting a 20 to 60 basis points improvement for the year.
And let's move to slide 10, securities processing and the key stats are again on slide 24. Q1 revenues were in line with our expectations with growth primarily coming from new sales and the two acquisitions and Penson and City Networks, offset by the carryover losses related to the Bank of America which accounted for the majority of the losses and do remember this is a loss that started two years ago.
The two acquisitions added nine points of growth in Q1 and expected to add about 10 points for the year. Net new business which is sales less losses, slightly negative in Q1 and will be in Q2, but begins to build in the second half. Closed sales from last year and the first quarter of this year are being implemented and the losses begin to have less impact as hitting their anniversary date, so for the full year we are expecting net new business to contribute one to two points to our revenue growth.
Again we have not been made aware of any new large losses. Internal growth for the quarter slightly positive impacted from some higher non-trade revenues and a pick-up in fixed income trades of 7% growth, but this was offset by a negative 3% impact on the equity trade volume. Margins for the quarter were in line with expectations and essentially unchanged from the prior year when you exclude the impact on the acquisition primarily the Penson conversion. We still expect to be at a breakeven run-rate as we exit our fourth quarter this year for the outsourcing business and should therefore pickup 14 to 16 million in EBIT in fiscal year 2012 over fiscal year 2011 forecast.
Full year guidance at the high and low ranges for revenue and EBIT are all tied to internal growth being flat for the year or up around four percentage points driven by equity volumes. During October, we did see a slight improvement in equity trade volumes and we will revaluate at the end of Q2.
Moving to slide 11, our full-year continuing operations guidance. We are reaffirming our guidance that we shared with you in August. For revenue growth in the range of 1 to 4% and as mentioned the biggest open question is around an expected rebound in event-driven revenues which will monitor over the next few months. Closed sales at a 160 to 215 million with recurring in the range of 110 to 150 million, margins of 14.6 to 15.2% and earnings per share of $1.55 to a $1.65, free cash flow in the range of approximately 170 to 220 million with 75 million in one-time activity from the reversal of significant positive working capital at the end of fiscal year 2010 and the additional capital for Morgan Stanley Smith Barney, IBM and Penson implementations which we did share with you back in August.
And our guidance does not include the effect of any future acquisitions, additional debt or share repurchases in excess of what's required to hit our 128 to 130 million weighted average outstanding share guidance. Rich, I will now turn it back to you.
Thanks, Dan. Please turn to slide 12, before we go into the Q&A part of the call, let me summarize and leave you with a few more thoughts on how I feel about where we are and Broadridge's future. The businesses recurring revenues still remains a lagging indicator in this difficult economy, what is charting past to new clients and product opportunities. Across our product set, we have very good momentum, both in new product generation and successful sales execution. For example, we entered into the mutual fund electronic disclosure solution space with the acquisition of NewRiver.
We are disrupting the stock transfer agency business with the acquisition of StockTrans and we recently announced an enhanced mutual fund proxy solicitation solution. Finally, even though the market conditions are difficult, we reaffirmed our full-year guidance for both earnings and closed sales. The SEC issued its concept release in July and the comment period has ended.
Many have asked what the potential impact is on Broadridge. Notice and access and many other changes have historically had a positive to neutral financial impact on Broadridge. We are uniquely positioned to implement any process changes that the SEC chooses to implement. Today we are an indispensable partners of the process and we intend to continue to add more value in the future.
By connecting the overwhelming majority of active investors, the overwhelming majority of active custodians and investing heavily to enable governance to take place beyond what the regulations require. Broadridge has put itself in an indispensable position which we are confident will evolve to the benefit of issuers for investors, regulators and our shareholder. The key broker, issuer and clearing corporation’s comment letters support of this view. Virtually all of our past success and future opportunities can be tied to culture, culture matters.
We have tangible proof of having the most engaged associates in our space. We are consistently being recognized by independent organizations of having an engaged and motivated work force. Our existing business model and management are positioned to execute on our current communications and processing product set and build or buy additional mission critical functionality as the industry’s number one trusted partner.
Broadridge is financially strong, we pay a meaningful dividend and we have opportunistically repurchased shares over the last two years. We have strong free cash flows and a low debt ratio that affords us the flexibility to look for strategic acquisition opportunities that will enhance our business. I would like to take this opportunity to personally thank our dedicated associates who worked so hard to ensure our success. We have the best associates in the industry and I sincerely appreciate all they do to make Broadridge number one in all we do. I will turn the call over to Suzan the operator and I welcome your questions.
(Operator Instructions). Your first question comes from the line of Peter Heckman with Avondale.
Peter Heckman - Avondale
Listen, I guess based on the research that I've done, it's clear that Broadridge is doing a very good job in the proxy process, and I think you come to the conclusion that any major overhaul of the system would involve expense and risk. Now, that said, it appears that the SEC can lower costs for issuers by 20 or 30% with the stroke of a pen though by reducing the regulated fee structure and it's been 10 years since they've done that. In that time, there's been significant advances in automation, as well as a lot of proxies have gone electronic. So what do you see there? What do you see in terms of likelihood of a reduction in the regulated fee structure, and can you give us some idea of the magnitude and the timing of when that might occur?
Sure, first of all Pete this even though from possibly your perspective this is a current dialog. For me this has been a dialog I participated in now for three past decades. So, the first thing you need to recognize here is the stroke of the pen of the SEC changes the broker fees, Broadridge charges the brokerage fee for the vast majority of what we do outside of the brokerage thing, so we charge them a fee for services and that fee for service is less than the SEC’s approved fee, the broker is entitled to retain and does retain that difference, but if the SEC lowers that fee, for the vast majority of what we do, it doesn’t change our fee or our contract.
Now that’s a technical legal definition, practically it does have some impact in terms of our negotiations with those clients going forward, but here is the real thing you need to be thinking about. There is no one who can represent that the fees are always stated with any real support. Registered fees run at a multiple of which street fees run. In the free market we charge a multiple of what we charge in the street environment. The New York stock exchange who has the most oversight in this role before it gets to the SEC is paying us call it 10 times in the registered side per account then what they are paying us on the street side and they are doing that voluntarily versus using the services for their transfer region.
Now we have been a very good corporate citizen and enabling corporate governance, transparency, efficiency accuracy to get to extraordinarily high levels, but our job here is to represent our shareholders and create shareholder value. When you have three fees that cover dozens and dozens of functions, most of which don’t have fees associated and many of which if not the majority don’t have a regulation requiring it. When we sit down at the table, we are looking to be appropriate but someone just saying well I can't prove to you that the rates are too high. As a matter of fact there is tangible proof the rates are artificially low, well we are going to arbitrarily lower them. In regards to protecting our shareholder, we have an obligation to say well we’d have to look at other things like things we are doing today that aren’t covered by regulation.
I don’t expect it to get to that, our approach has been let’s talk about the total cost of the process, and the total cost of the process includes that billion dollars we already save people and there’s close to another billion we can take out with technology. Now most business people would say if it’s a $0.5 million in fees and we increase that $100 million or $200 million and you could save me another billion that’s a pretty good deal.
That’s really the way I am looking a the world, there is opportunity both from a cost point of view, an investor participation point of view, but the execution and implementation on those technologies cost real money and our shareholders are entitled to a return.
Peter Heckman - Avondale
Can you give us an idea of what the timing might be for when the SEC might come out with some conclusions?
I think the SEC is doing an extraordinarily good job here. They are teaming up the opportunity to apply technology. Before you make any changes, it’s always appropriate to say does what we have today work and work well. So I think they asked all the right questions, I think they have gone to the right process and overall I am very pleased with the comment letter they got back particularly as I pointed out in the call the comment letter that matter the most.
So I am hopeful that the SEC is going to view this the way we do that there is a opportunity with the technologies available today to go out and implement these technologies to really create those transformative benefits, I mean the social network where investors can talk to other investors, boards can truly understand what shareholder’s views are and represent shareholders and not be as impacted trying to represent public sentiment, is really what capitalism is about and anything can now transform the benefits, forget our Broadridge. I am talking about to our markets overall. So I am hopeful that SEC will view this as a unique technological opportunity and move faster rather than slower, but history says that these things can move at a wide range of speeds.
Your next question comes from the line of Lee Cooperman with Omega Advisors
Lee Cooperman - Omega Advisors
Just I want to focus in on share count and the strategy behind the buyback. On July 30, according to SEC filing, you had 126,733,000 shares outstanding and I was wondering what is the share count presently? And you mentioned your authorization, but it wasn't clear to me what is left on your authorization, so that would be the first question. What is exactly the share count presently and maybe add to that the dilutive effect of options outstanding, and what is the status of the current authorization in terms of what is left?
The second question really is as important, or more important, and that is the number of companies in the last half a dozen years have made serious miscalculations in their repurchase decisions, and they've turned out to be, in retrospect, bad decisions. And I'm just curious, how comfortable are you in your decision to channel the money we're channeling into repurchase, if this is the right decision for those shareholders like myself that are not selling and therefore, enlarging our ownership of the company? And to give you a little hint and my view in this area, and we've discussed in the past, it only makes sense if you're buying back shares at a significant discount to what a strategic or financial borrower would pay for the whole business, or what you believe the business is worth based upon a, say, five-year budget that you have for Broadridge in your mind in terms of our growth expectations? So it's kind of both areas, if you can kind of elaborate on them.
Okay. Lee, I am going to split the first question with Dan. I may have dropped a word I intended to use so we have 11.8 million additional shares available at this point in time.
Yes, I drop the word additional and I apologize for that. I’m going to have Dan come back to share count but let me continue on the second part of your question which is as CEO my confidence in repurchasing, I am going to give you two points here that give me great confidence about Broadridge's future and our ability to create value or support, your question with two points.
The first is when we look at what we did with IBM? What we do with Penson? What we do with Morgan Stanley? We make clear decisions to make investments today that although they are either hurting us today or not contributing today. They are going to start to give us meaningful benefit in 2012 and beyond. All right? I also believe at some point in time although our lagging indicator, we are going to catch up with a better economy, but most importantly when most of you have modeled out 2012 and beyond, it’s certainly a positive view based on what we know today.
I will tell you another thing, Lee because you and I have had this conversation, when I look at the potential of acquisitions whether be tuck in or other, if the team comes to me with a I will call it a nice modest return of 15%, my comment here is not interested, I will go buyback shares because I am confident on our ability, on the path we are on to great value. I look at transactions going forward as a way to accelerate that, not just as a same old same old.
So when we repurchase shares, we believe we are doing the right thing in the long-term interest of our shareholders as you know which I happen to be one and as you know I haven’t sold any shares,
Lee Cooperman - Omega Advisors
Now back to the videotape. Dan, what have you got?
Yes so at then end of the quarter we will be at a [125.5] million shares and then there’s 3 million shares what we call the delusion aspect, stock options and restricted share.
Lee Cooperman - Omega Advisors
So unless you guys stop buying, you’re already, within your guidance, you've got 11.8 million left to go.
Yes, that’s pretty much way to look at it. So let’s just say we are about a million to 2 million short of our goals because if you look at the 128 to 130, you have to know that also in February and March of every single year, we have more shares that come out.
Lee Cooperman - Omega Advisors
You may not want to respond to this, but if the stock was trading tomorrow at below the average price you paid and somebody wanted to sell you 11.8 million shares, do you have the financial resources and the appetite to buy it?
As I have told you in the past, I am not going to tell you what the price is.
Lee Cooperman - Omega Advisors
You told me the price. You disclosed what your price you've paid to date
I told this and I am not going to tell you what I am going to do with it as well. I certainly don’t want to enable anyone to have front runners. Okay. So my position is on what we do, we give you a clear view of what we did, why we did it and why we believe it was the right thing and I am going to leave it at that.
Your next question comes from line of Jim Kissane with Bank of America Merrill Lynch.
Jim Kissane - Bank of America Merrill Lynch
Dan, just a quick question on the event-driven and kind of pushing you on your visibility there, so the 220 to 230 million, how much of that is actually dependent on M&A activity picking up in the balance of the year because it sounds like you've got pretty good visibility on the mutual fund side.
Yes on the mutual fund side, I will tell you that on the M&A side there is another 22, to go is another 15 to $20 million. We are thinking that there is going to be 20 to $25 million for the year. And we came in at about $4 million this last quarter.
Jim Kissane - Bank of America Merrill Lynch
Okay. And if you go to Slide 22, it looks like the grow-over in the first quarter was bigger than you had originally thought. What happened there? And I am the first to admit that I missed it in the last slide for the fourth quarter.
Yes, the way to think about that is where you see we call it the mutual fund, in the mutual fund space it was greater than what we had thought.
Jim Kissane - Bank of America Merrill Lynch
Okay. So it was activity from last year or was it activity that didn't come through this year?
It’s activity that did not come through this year because we already knew what we are going to pick up and what we are going to pick from the prior year primarily was going to head us in the second quarter and we knew that was going to be light anyway in the first quarter and it came in lighter than what we have said as we’ll use it, as we have said we have a low point and a high point, we are hoping it would come in the middle and it came in at the low point.
Jim, this is Rich. Having done this for a long, long time, the windows that we get to see how far out event-driven is going to happen, is only about 60 days. So I have been a hero and I am going to go at anytime in my career over the event driven activity, but as I have said and it’s worth repeating here, I really like even-driven activity because it’s a very good CAGR over any period time, it’s just in particular quarter, you can feel really, really good or really, really bad but it really isn’t tied to the performance of the business.
Mutual fund positions for the record also still continuing to grow and it’s slightly above 10%, so my confidence in event-driven revenue and that CAGR continuing as we go forward is very high, I just can’t tell you in which specific quarter
Jim Kissane - Bank of America Merrill Lynch
And Rich, can you touch on the M&A pipeline, and I guess is 15% the hurdle rate that you've got to generated? And in that context how does the pipeline look?
I will give two views here Jim, there are certain deals that we do that are so strategic, that it’s the 15% is a good number, but you should view them as being pretty small. I will call it at the smaller end of a tuck-in. If we are talking about spending, at the higher end of the tuck in or even a little beyond that, I am not accepting 15% of buyback shares. It’s about accelerated revenue not just a little bit above what we have the ability to do.
When we are looking at larger deal, we call these larger tuck-ins, we would absolutely be looking for also besides the higher hurdle rate, if you are looking for accretion.
(Operator Instructions) your next question comes from the line of David Togut with Evercore Partners.
David Togut - Evercore Partners
Rich, what do you expect the SEC's final recommendation to be?
I am going to answer that slightly differently because I have received call making me a commissioner as of this moment. The opportunity for the SEC to apply technology and address so many things that in realty the 143 new regulations don’t address, in terms of transparency is extraordinary. Think about what technology happens here in terms of the world we live in, we think about the way we get information, think about the way we disseminate information, the SEC has the opportunity to provide this to investors and in particularly around the social network, this would be the only meaningful network I am aware off, where only shareholders would be on and when you are speaking to another shareholder on the network whether it be investor-to-investor, management-to-investor or board-to-investor, okay?
You would be doing it highly confident that you were talking to a joint investor. So we can achieve and also show network well we can achieve for our kids when they think that’s working to another 13 year old and could be talking to someone who isn’t 13 year old. So I think the opportunity is here, I am hopeful that the SEC will view it in the same way and I am very, very encourage by the way they positioned their concept release
David Togut - Evercore Partners
What is your sense for the retail investors and when do you think the retail investor comes back to the market?
We had a few moments of encouragement over the last six months, the (inaudible) crash killed the first one and subsequent to that there’s been points here as well. I always say that’s a question I am thinking, that in your job you have got better insight to than I have in my job. I do talk to lots of clients, what I am encouraged by is that they are talking about all the products all right more actively, than involve communication products and processing capabilities as well 401-ks, annuities, et cetera, et cetera. So to think about this, this has been a really bad environment and more than 98% plus retention rate on a recurring revenue.
When I said at the end, that was still a lagging indicator what we are not getting is a normal couple of point benefit from our recurring revenue, but we are certainly retaining our recurring revenue. I think we are well positioned and at some point in time, the markets have to come back unless people are going to be investing it with some 1% and putting case through college, saving retirement and buying houses.
Your next question comes from the line of Tien-Tsin Huang with JPMorgan.
Tien-Tsin Huang - JPMorgan
Thanks a lot. Also appreciate all the disclosure. Just on the event-driven revenues, just a follow-up to Jim's question, just need a little more color on the pipeline it sounds like, there are some large mutual fund deals in the pipeline. So I'm curious, should we expect those decisions to be made sooner in the fiscal year rather than later? I'm just trying to get a better sense of when that might come through?
When you think about what's left in the year and I am breaking both between the mutual funds and the overall event driven. We got to generate about on the total event another $100 million to $190 million to hit our goals for the guidance we give. By the way and this excludes last year's huge large two deals. We have average between a $180 million and $190 million in one year and that was back in 2009, did we see it as we are dropped of $20 million from that number. So that’s the worst we have ever seen.
Going back to the mutual funds, what I would say to you is that I would expect we will start hearing some news in the second quarter and it will carry into the third and fourth quarter. So I look into the second quarter and say do I hope it's up a little bit we are tracking, we know some deals that are in there. But I think its going to be more heavily awaited for, when we get back together in February and talk we have a much clear idea as far as what ideals were out there, and what actually got closed because the thing we have to remember to it and again I want to come across positively.
We hear a lot of noise out there and talk and people will then say I am going for with it or they may say I am going to put it on hold. For them to come in just stated last year in the second quarter I would say well we decided to ask all of our funds versus just a few day might have been discussed. What I will tell you is that’s not been in the pipeline and that’s why we pulled it out of this year's guidance anywhere near the high shares that we talked about last year. Okay or the other one time large deal. Once we are thinking we talked about larger deals are somewhere between $1 million to $2 million in revenue.
And then there are two Dan I completely agree with everything you said and even though here at my level at the sales level, the sales commissioned level you are never comfortable and so its behind you historically because of all the funds out there, it was only about a third of the firms that will participate at any point in time but beyond that there are two additional hedges which really should give you long-term comfort, just not any particular quarter comfort, the two hedges are that the number of position is growing, so when the job does happen, it should be up 11% just from last year of the same job at the same time.
The other piece is one of the key product initiatives that I mentioned, is that we have a new mutual fund solicitation product which is a proxy predictor model where we have a very small percentage of mutual funds solicitation, we think we will enhance our revenues significantly from that because we have a value proposition to the market place which will get them to climb faster, less anxiety than they have today and it’s really in the Broadridge model which is supplying technology to make the process that much more efficient, so again on a quarter-to-quarter basis until in any given year, over the goal line, we are all going to have some degree of anxiety. When you step back and look at the business fundamentals, it’s really something that should be growing and consistently growing over any period of time
Tien-Tsin Huang - JPMorgan
Understood, understood. The SEC stuff obviously, a lot of questions have been asked already. I guess I'll just ask just the social network solution. I'm curious, what are the regulators, what is their response to this product? I mean, it seems like it cures a lot of the issues that are out there that some folks have, so I know you talked about it at length, but what is their response to it?
I have actually had conversations directly and I was just going through my mind, I am relatively certain with every commissioner and of course Mary, the chair, Mary Shapiro. When you grow out something like that is always, this could be transformative but like any change or things that you say well gee maybe this could create too much dialog, may be this would allow an appropriate dialog, right? I believe that the upside is overwhelming and that through technology we can manage any of the concerns that have been raised to us. But the real benefit Tien-Tsin, is by taking out a billion dollars is great, and it could lead and certainly we get us closer to taking out the next billion.
But if you think about the overall markets a $1 billion versus over the trillions of investments out there is not the meaningful thing. The meaningful thing here is everybody talks about the last financial crisis, the financial crisis before that, so Sarbanes-Oxley the 143 new regulation and they always talk about transparency. Where is the transparency in any of that? Its regulation, okay. this would create transparency that would be available to shareholders that would be available to management and will be available to boards.
So think about if something goes wrong in the world today, how quickly the world knows. Or something goes right or wrong today? How quickly the world knows through social networking technologies, twitter et cetera. We are applying the same technology except if someone made the statement you make it only of the shareholder and if you made a statement we would know who you are and you would be accountable and if you made a deliberate false and misleading statement, you would be held accountable. That is so far beyond another network out there. So as you know I am very pumped about this.
I will say I put this is in the win not just category because the benefits are so overwhelming and the world is already here, we are just trying to get corporate communications at the level with the rest of world already winter.
(Operator Instructions) Your next question comes from the line of Justin Hughes with Philadelphia Financial
Justin Hughes - Philadelphia Financial
Good morning. I think we've touched on this a little bit, but I just wanted to follow up on last quarter, you guys were pointing to $0.33 of grow-overs and then this quarter, you're pointing to 39. Why has that increased? And then second of all, you've maintained guidance. So I just want to understand what's making up that $0.06 difference? Is it the buyback or is it that the pipeline has improved in the last three months?
I will give you the answer the first one, just the first quarter it is, the lower number is primarily due to lower than what we said or thought was going to happen in August, okay primarily event-driven, that’s what’s driving the difference, when we say why aren’t we changing our guidance, we will give you two pieces there, one is it is a bit to do with the share buyback, but very little. Most of it has to do, you heard us talk about NewRiver acquisition.
Well I also mentioned that NewRiver is accretive. So therefore that helped pick up some of our business there as well very importantly as with most companies you go in there and you look and you say, okay, we can fix some risk, even take some of your expenses and maybe some of your expenses that you wanted to do, but you are not going to do, so we pulled those back in the remaining three quarters. That’s how we are still holding to the guidance. And very importantly we are still looking at this and saying an event-driven, we believe we will still pick up in the remaining three quarters, a 160 to 180 million in revenue, which historically has been there. And of course it's also the relative size of the first quarter versus Broadridge.
Justin Hughes - Philadelphia Financial
Okay. So it's $60 million to $80 million of event-driven revenue in the last three quarters of the year that you didn't have before and that's what's going to offset it?
Actually you are right. What I am saying is if you look at history, we generated a $160 million to $180 million or $180 million to $190 million. So therefore we are saying we think that’s going to repeat itself and therefore not really higher than the prior year.
If it's higher than Q1, the answer is yes.
Justin Hughes - Philadelphia Financial
Okay. And then my last question is a lot of us have seen the results out of Penson recently and especially last quarter. If Penson were to sell, let's just say they were acquired by a larger competitor, then what happens with your contract and your relationship with them?
While we would expect very little since we have a 10 year contract. And the contract recognizes the importance of the relationship between Penson and us and the acquirer would be in a position where they would need to address a majority of the aspect of the contract.
Justin Hughes - Philadelphia Financial
So they'd have to buy you out of it. There's no change in control provision in the contract?
(Operator Instructions) you have a follow-up question from the line of Peter Heckman with Avondale.
Peter Heckman - Avondale Partners
Hi, thanks for taking another question. I'm going to have to do some work here on these grow-overs. It's a little bit confusing. Just from a guidance perspective in the second quarter, the consensus is currently $0.19. Is that kind of within a range of what you are comfortable with?
What I am saying is the way to look at this is to say that we said in the first half that we aren’t going to see much growth and you had to back out then what we showed on the grow-overs. So that’s how I would answer that question.
Peter Heckman - Avondale Partners
So last year, you did 30. Well, I'll have to, so you're basically thinking whatever you did last year, take out $0.23 and that's where we should be?
And we will be plus or minus to that depending upon whether we see a pick up or somewhat of a slowdown. That’s the right way to look at it.
At this time we have no further questions. I will now turn the call back to Mr. Rich Daly.
We certainly thank you for all your questions. Dan, Rick and I expect and look forward to seeing you in the future. I am going to encourage you all to choose to have a good day. Although at the Lake Success will be a good day, but a wet and cold one. Thanks so much.
This concludes today’s Broadridge Financial Solutions Incorporated first quarter fiscal year 2011 earnings conference call. Thank you for your participation. You may now disconnect.
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