Broadridge Financial Solutions, Inc. CEO Discusses F4Q11 Results - Earnings Call Transcript

Aug.11.11 | About: Broadridge Financial (BR)

Broadridge Financial Solutions, Inc. (NYSE:BR)

F4Q11 Earnings Call

August 11, 2011, 08:30 a.m. ET


Rick Rodick - VP, IR

Rich Daly - CEO

Dan Sheldon - Corporate VP and CFO


David Togut - Evercore

James Kissane - Bank of America/Merrill Lynch

Tien-tsin Huang - JP Morgan

Chris Donat - Sandler O'Neill

Peter Heckmann - Avondale Partners

Peter Dale - Omega

Stephan McAteer - Pike Place Capital


Good morning my name is [Shyra] and I will be your conference facilitator. At this time I would like to welcome everyone to the Broadridge Financial Solutions Fourth Quarter and Fiscal 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.

Rick Rodick

Thank you good morning everyone and welcome to the Broadridge quarterly earnings call and webcast for the fourth quarter and fiscal year 2011. This morning I’m here with Rich Daly, Chief Executive Officer of Broadridge and Dan Sheldon, Chief Financial Officer of Broadridge.

I’m sure by now everyone has had the opportunity to review the earnings release we issued. The news release and slide presentation that accompanies today’s earnings call and webcast can be found on the Investor Relations homepage of our website at

During today’s conference call, we’ll discuss some forward-looking statements regarding Broadridge that involve risk. These risks are summarized here on Slide number 1 and we encourage participants to refer to our SEC filings, including our Annual Report on Form 10-K for a complete discussion of forward-looking statements and the 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 that 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.

As previously disclosed we entered into an information technology services agreement with IBM in March 2010, under which IBM will provide us with data center services. Beginning with this earnings announcement we will include our results reported on a non-GAAP basis which excludes the impact of the cost related to our data center migration to IBM. These costs are significant and we believe this information helps investors understand the effect of their migration on our reported results.

Now, let’s turn to Slide number 2 and review today’s agenda. Rich Daly will start today’s call with his opening remarks and will provide you with a summary of the financial results for the fourth quarter and fiscal year 2011, followed by a discussion of a few key topics. Dan Sheldon will then review the fourth quarter and fiscal year 2011 financial results and the fiscal year 2012 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 Slide number 3 and I’ll turn the call over to Rich Daly. Rich?

Rich Daly

Thanks Rich. Good morning everyone. This morning as part of my opening remarks I will talk about the following topics. First, I’ll start with an overview of our fiscal year 2011 financial highlights. Then I will discuss our fiscal year 2012 guidance, followed by a review of our closed sales performance. And then an acquisition update before I turn it over to Dan.

After Dan provides you more of the financial and guidance detail, I’ll wrap it up with my closing comments during which I will highlight many of initiatives that give us confidence to create shareholder value beyond this year into fiscal year 2013 and beyond.

Let’s start of Slide 4, our fiscal year 2011 financial highlights. Overall I’m satisfied with our fourth quarter financial results, but disappointed with the full-year results because of previously discussed decline in event-driven revenue from the unprecedented high volume levels in fiscal year 2010 to their start low volume level in fiscal year 2011. The decline in event-driven drove an overall decline of 2% in total revenue despite all other revenue drivers having headed in the right direction.

Recurring revenues were up 13% as a result of our successful acquisition depends on outsourcing services conversion, strong recurring revenue closed sales result and internal growth. Long-term recurring revenue and related recurring revenue sales will be the primary component of creating long-term shareholder value. Event-driven revenue in fiscal year 2010 offset the weak economic environment by adding a benefit of approximately $0.18 per share more than we have planned. In fiscal year 2011, the lower than anticipated even-driven revenues and related distribution revenue cost us approximately $0.25 per share versus what we planned.

Even though last year was our lowest activity ever, we are not planning for an increase in fiscal year 2012. When event-driven revenues come back to more normal levels, our plan will be viewed as being conservative, but given it's almost entirely out of our control, we don’t want to disappoint again.

Our diluted earnings per share from continuing operations were $1.37 per share non-GAAP and a $1.34 GAAP for the fiscal year ended 2011. During the quarter we incurred IBM data center migration cost of approximately $0.03 per share. Dan will provide you with more detailed information in a few minutes. Again, our decrease in earnings per share from fiscal year 2010 was directly related to the decrease in event-driven revenues.

During the year we opportunistically bought back 8.7 million shares of Broadridge stock at an average price of approximately $21.83 per share. These purchases got us to the 128 million weighted average shares outstanding guidance that we provided at the beginning of the year.

Now let’s move to Slide number 5. We anticipate strong revenue growth of 8 to 10% in fiscal year 2012. But majority of the growth will come from recurring revenue as we have assumed no growth in event-driven revenues. We expect the growth will come primarily from our recurring revenue closed sales and acquisitions. Also we are anticipating only modest volume internal growth as we continue to be cautious in our expectations for trade growth and limited stock record growth. The recent market environment support this hopefully, conservative yield.

We expect fully diluted earnings per share before continuing operations to be in the range of $1.50 to $1.60 excluding the impact of the IBM migration cost. As anyone who has followed us knows our assets are focused on creating long-term shareholder value and we have been consistently looking out to fiscal year 2013 and beyond.

Our fiscal year 2012 plan still has it's on the path to achieve our long-term shareholder value goals beginning in fiscal year 2012 with much more in 2013 and beyond. Free cash flow excluding the IBM migration cost should be approximately 225 million plus or minus 35 million due to potential variations in working capital and conversion costs. This is a strong free cash flow business.

The company’s Board of Directors declared a quarterly dividend of $0.16 per share payable October 3rd, 2011. The annual dividend was increased approximately 7% to $0.64 per share. This will be the fourth year in a row that we have increased our dividend payout.

Let’s turn to Slide 6. Closed sales for year were 134 million. A recurring revenue closed sales of 113 million were the second highest in our history. While our recurring revenue closed sales were slightly lower than last year, we are still pleased with our sales results given the quality of sales that have taken place. Our Securities Processing Segment sales were up 25% compared with fiscal year 2010 due to an increase in deals greater than 5 million. While Investor Communication recurring revenue closed sales were down approximately 15 million and last year's result included the 40 million Morgan Stanley Smith Barney contract. We feel good about our recurring revenue closed sales results, our pipeline is strong and we have many large opportunities that we are presently pursuing.

For fiscal year 2012 we expect recurring revenue closed sales in the range of 110 to 150 million. Total closed sales which include event-driven are expected to in the range of 135 million to 175 million. However, we will focus our future discussions on recurring revenue closed sales as we believe that recurring revenue closed sales are the best measure of our future revenue growth potential.

Now let’s move to Slide 7, where I will provide you with an acquisition update. Over the last three years we have made five 15 million plus acquisitions in which we spent approximately 370 million. In fiscal year 2011, it has been our busiest year by far as we made three very successful acquisitions. Last August we acquired NewRiver, in December we acquired Forefield and in January we made our largest acquisition since our spin off only acquiring Matrix.

We did not set out to fiscal year 2011 our busiest acquisition year ever. It just happened based on the availability of high quality entity that met our very high standards. You should not expect us have a repeat of this level of activity in fiscal year 2012.

The five acquisitions that I have identified contributed approximately 109 million to revenue, 16 million to EBITDA, and 3 million to earnings before taxes in fiscal year 2011. They will contribute significantly more in fiscal year 2012 as two were closed mid-year and all have been fully converted on to our systems. In fiscal year 2012, we anticipate our acquisitions will contribute approximately 182 million to revenue, 39 million to EBITDA and 22 million to earnings before taxes.

I’m pleased with the financial performance of these acquisitions, when we decide to acquire an entity, we set very high hurdle rate and goals. Our recent acquisitions are Matrix, NewRiver, and Forefield are all performing better than their business plans, while Access Data and City Networks are just slightly behind. I anticipate that all five acquisitions will eventually exceed their business cases.

We utilized four primary key criteria in our acquisition strategy. Number one, the acquisition must be accretive to growth, margin and earnings by year two. Number two, the transaction must generate an internal rate of return greater than 20%. We understand that this is a very high hurdle rate especially given our weighted average cost of capital. However, we know that acquisition provide no guarantees and we want to insure acquisitions of price, recognizing risk and also that we only focus on deals that leverage our brand, scalable infrastructure and skill set. All of which enable greater returns. Number three, our acquisition strategy is focused primarily on tuck-in sized businesses. And number four, that we have the management capacity to successfully integrate the new entity.

Now I will turn the call over to Dan, who will go into more detail about fiscal year 2011 financial results as well as our fiscal year 2012 guidance. Dan?

Dan Sheldon

Thanks Rick. I’m on Slide 8. In our earnings release we disclosed we are finalizing our estimates of the total cost we will incur in connection with the migration to IBM and expect those estimates to be finalized during Q1 of this fiscal year. And we still expect the completion of the migration off of ADP and onto IBM by around the end of June 2012. We believe our annual savings will still be around 25 million pre-tax and that these savings will start during fiscal year ’13. Our total migration costs are now estimated to be 95 million.

The first two bullets addressed what we have discussed before as far as migration, P&L period expenses and capital expenditures to be deferred and amortized over the life of the 10 year service agreement. Now that we are almost done with the migration planning, we believe that 85 million is about where we should end up versus our previous estimates of around 75 million. The approximately 10 million pulled forward is result of our receiving and reviewing our final accounting treatment for all migration cost with the SEC on a pre-clear basis and it determined that there are certain migration activity being performed by IBM that needed to be expensed up front versus part of a 10 year service agreement.

As we mentioned in the earnings release the one-time migration cost are large, and we are still finalizing it. At this time the fiscal year ’11 P&L results were impacted by $0.03 per share or approximately 6 million pre-tax, and the fiscal year ’12 P&L impact will be approximately $0.16 per share or 33 million pre-tax.

Slide 19, 20 and 24 in this deck provides the reconciliation from GAAP to non-GAAP for these migration cost impact to our earnings for both fiscal year ’11 and ’12. And as a report throughout ’12 we will continue to show the on-going business excluding the IBM migration cost as non-GAAP, and then reconcile back to GAAP including the IBM migration cost. Our presentation today for the most part addresses the on-going business non-GAAP.

Let’s move to Slide 9, revenue growth drivers. Our forecast being 8 to 10% revenue growth for fiscal year ’12. 4 to 5 points from recurring revenue sales of which 60% was sold previously in fiscal year ’10 and ’11. Retention is expected to be around 99% as we have not been amazed, aware of any large client revenue losses. Internal growth is expected to add up to 1 point or be flat at the low end. This is all driven primarily by what happened with trade volumes and stock record position. At our low end trade volumes were pretty much stay where they are today at about 1.5 million trade per day. And that the high end would increase to the mid to high single-digits. With respect to stock record the equity side we think is a point or two. And as far as the mutual fund side we still see the beneficial producing in the high mid single-digit range.

Acquisitions providing another two points and this is all carryover as new sales from acquisitions are reported in our recurring sales line above. This brings our contributions from recurring revenue drivers to 5 to 7 points. And as we shared with you before and on slide 23, since the spin we have always had growth in recurring revenues and in fiscal year ’12 the growth is approximately 10%.

With respect to event-driven, we are keeping it as Rich mentioned basically flat. That we expect to see improvements over the next 18 to 24 months, yes, but we are thinking the first of this fiscal year which is fiscal year ’12 will probably narrowed last year and if there is growth we will see it in the second half and moving into fiscal year ’13. By the way we work with the Boston Consulting Group to analyze what’s going on with mutual fund proxies, and if it included the following. As we mentioned before the decline in mutual fund proxies does not appear to be secular, the funds truly have been focused on reducing the level of activity given cost and cost focus as well as what we call shareholder fatigue which means in the fiscal year ’08 and ’09 and into ’10 there was a tremendous amount of activity.

However, looking forward we expect to return to the normalized historical averages in fiscal year ’07 and ’06 which would suggest a 2 to 3 point contribution to revenue growth over the next few years, but as I already mentioned we probably won’t see that until starting in the second half.

Finally, we also expect the activity here to be more volatile with large campaign being infrequent and unpredictable like we saw in fiscal year ’10. With respect to distribution revenues they are expected to contribute 3 points of growth of which a third of this is coming from the pass-through fees the 12b-1 like fees related to the Matrix business. There are almost no profits on any of these distribution fees as the growth here is not coming from our proxies and interim but rather as I mentioned from the Matrix fulfillment and statements which do not provide profits on distribution revenues. Given the revenue growth we are expecting, EBIT margin before the IBM migration cost in the range of 13.8 to 14.4% up from the 13.1% we experienced in fiscal year ’11.

The next two slides have data points related to each of the two segments, I’m not going to go into review them at this time in the interest of time, but they are here for your information for further follow-up.

Let’s move to Slide 12. This is our guidance page for ’12. Quickly repeating what we have stated earlier. Revenue growth 8 to 10%. Recurring revenue closed sales of 110 to 150 million. EBIT growth before interest, taxes and IBM migration costs of 13 to 20%. Diluted earnings per share before the IBM migration cost of $1.50 to $1.60 and including the $0.16 dilution from the IBM migration GAAP EPS of $1.34 to $1.44. Free cash flow excluding the IBM migration cost with a miss point of approximately 225 million.

Side 21 in the deck has additional information, as well this year and last year, we had 20 to 30 million in capitalized conversion costs, not including IBM or any potential new business with Penson. And as we continue to make large sales in our Securities Processing space, you should continue to expect heavy range of 20 to 30 million per year. That’s all good news because it’s generating significant revenue growth for us.

We are refinancing 100% of our outstanding debt with five-year maturity. We’ll renew our 500 million revolving credit facility, our 200 million draw on the revolver, and the 200 million term loan in Q1 of fiscal year ‘12. We expect our interest costs will increase 10 to 15 million on an annualized basis, and we’re pleased to be increasing the dividend.

Let’s move to Slide 13. As we exit ‘12 and move into ‘13, we’d like you to be thinking the following. We expect to exit fiscal year ‘12 with diluted earnings per share of $1.50 to $1.60 without the IBM migration cost. We’ve discussed the 25 million in savings pre-tax we expect from IBM, which on an annualized basis generates approximately $0.12.

We’ve also disclosed before the additional benefits we expect from the completion of Morgan Stanley Smith Barney and other restructurings, where we expect to benefit by approximately $0.06.

As mentioned before, the return of event-driven revenues to normalized historical levels would add another 30 to 60 million in revenue or $0.10 to $0.20, which includes both fee and postage. And we expect recurring revenues to grow and margins to expand given the 110 to 150 million in forecasted recurring closed sales, plus the carryover from fiscal years ‘11 and ‘12 for those year's’ sale, a retention rate of 99% and benefits from market-driven trade volumes and stock record growth as well as contributions from possible future acquisition.

Rich, at this point I’ll turn it back to you.

Rich Daly

Thanks, Dan. There is no question Page 13 is my favorite page. Please turn to Page 14 for my summary wrap up. Fiscal year 2011 results are not reflective of a value creation progress that has transpired over the last two years.

Event-driven revenues were down meaningfully and masked our strong recurring revenue growth. Our recurring revenue closed sales were strong, the second highest in our history, and our client revenue retention rate continues to be excellent.

These are some of the reasons why I’m so confident about Broadridge’s future. We have never had better recognition of the importance of what we do and the value we provide to the proxy process by the New York Stock Exchange and the SEC. It’s recently been clearly established that the free market for proxy fees is more than double what the New York Stock Exchange, SEC regulated proxy rates are. This is a significant recognition accomplishment for Broadridge. We have made three very successful acquisitions during the fiscal year. They contributed to our revenue growth and we anticipate that they will contribute to meaningful revenue growth and earnings in fiscal year 2012 and beyond.

We continue to make excellent progress on our key initiatives. The Morgan Stanley Smith Barney transaction contributed to revenue growth and earnings improvement in fiscal year 2011. We made significant progress in the implementation of the Penson outsourcing agreement, and we anticipate that we’ll be fully converted in the second quarter of our fiscal year.

Finally, we are beginning the implementation of our conversion to the IBM data center. We plan to be fully converted around June 30, 2012.

I’m confident about our future. Since the spin, we’ve consistently been looking at our business model and pruning and changing underperforming businesses with the view that it is all about creating long-term shareholder value.

We really like the portfolio we have right now. We like the portfolio because of the many opportunities that enables us to pursue.

Although we hope that the economic turmoil that our markets experienced over the past week or so will dissipate, we are confident we can grow our market shares regardless. However, our success and value creation will be even stronger in better economic environment, particularly when our clients perform better.

But let’s get back to our strong product portfolio. Those of you that heard our Investor Day presentation in June will remember we talked about being a market disruptor in $1 billion equity transfer agency market. We will do so by leveraging much of our world-class infrastructure that we built for the communications business as well as our back office brokerage operations to create greater efficiency for issuers.

More importantly, we can create uniquely better alignment for issuers and their registered shareholders by allowing them to have the opportunity to move their registered accounts to street accounts simply and easily if they choose to do so.

We already provide registered proxy services for more than 1,800 issuers and if all of them were to convert to our transfer agency platform, it would be worth a minimum of 100 million in revenue. As proof of our value proposition, we just recently signed Spectra Energy.

The market opportunity for our global and emerging product is almost 1 billion. We have developed or acquired several new products and services over the last few years. We provide numerous services including services for advisors, global proxy communications, tax reporting and outsourcing and securities transactions.

Through our global and emerging products, we’re driving about 24% compounded annual growth rates with robust margins off of a revenue base of 75 million. The 401(k) market is a large and attractive market.

Matrix is an $80 million business, growing at approximately 20% annually, providing services in that space. Through Matrix, we provide the connectivity for over 130 third-party administrators and over 200 bank trusts to do business with over 500 mutual fund families representing 25,000 different funds.

Under a Broadridge umbrella with our relationships, our technology, our sales organization, we can support the course Matrix is on and take it to the next level. It has three key areas of growth; organic growth, lift-outs and share expansion, and we have just begun to tap what we believe will be a terrific value proposition for the broker/dealer communities.

Access Data provides us with the opportunity to grow data aggregation, management and reporting services. Brokers have always made data available to their fund partners, but the process is extremely inefficient. The market desire for more insightful information is not currently being served.

Through Access Data, we bring technology and scale to this process through cleansing and normalizing data in a consistent manner, which create efficiencies for our clients. We recently entered into an agreement with Charles Schwab to expand our sales, reporting and data exchange capabilities that Schwab offers to its mutual fund partners.

Let me share with you why Schwab is a great opportunity. In the first 10 years of existence, Access Data grew to 30 clients and in the past two years that we have owned it, they’ve double to 60 clients. By signing the deal with Schwab, we now have the opportunity to increase the population of clients to 600 on the Access Data platform, since we now have become the exclusive data aggregator for Schwab to service their fund partners.

We now have explicit authorization to provide our core product set of services to 600 mutual fund complexes, using Schwab’s data to enable Schwab and their fund partners to accurately meet both of their compliance responsibilities. This opens the door for funds to hire Broadridge directly and capitalize on a host of data analytics that we can now offer to them to better understand the efficiencies of their relationship and the effectiveness of their relationship with Schwab and their IRRs.

As we have said in the past, while we see the revenue opportunity by providing Schwab’s fund partners, these additional modules and services, this is not our end game. As funds experience the benefits of our centralized industry approach for Schwab, we expect them to have great interest in seeing this approach taken with all of their broker distribution partners.

Due to the Schwab relationship, we will be able to tangibly prove to 600 fund families that for the Schwab piece of their business, Broadridge can provide SAS 70 verified 12b-1 breakpoint reviews with extensive market distribution analysis beyond anything they can create internally today at a lower cost and absolute accuracy levels unquestionably better than previously attainable.

We estimate the market for coordinating all data management, including the applications that use this data is approximately 400 to 500 million. Earlier this year, Pitney Bowes announced that Broadridge would be their exclusive channel partner for investment industry content and a new digital mail service called Volly.

Digital mail is an emerging technology that aims to improve e-delivery rates by creating a single site that consumers can use to receive statements, bills, and other documents across all consumer accounts. We have the opportunity to turn more than 1.5 billion communications into electronic format.

Broadridge will exclusively market Volly at a digital platform and Pitney Bowes will exclusively market Broadridge for investment-related communications in the broker-dealer market. The launch of Volly is scheduled for early next year and we believe it is a great opportunity to issuers and brokers to further reduce their costs.

Broadridge continues to lead in converting traditional paper communications into digital communications to the benefit of investors, financial institutions and our shareholders.

We have the only live business process outsourcing solutions for brokerage backlogs clearance and settlement functions in the United States. As thought leaders, we introduced that model. Our portfolio of ASP and outsourcing capabilities had strong growth last year, including a new global investing offering for Schwab, which they announced in a press release on July 13th. We expect to both successfully execute the 75 million backlog of implementation as well as adding significantly to new sales to it during fiscal year 2012.

In fixed income, we serve the majority of large global banks to our long-term contracts. The market size is approximately 200 million and we are experiencing low double-digit revenue growth. We process approximately 55% of all fixed income trades, which equates to about 4 trillion in market value on an average day. We play a very significant role in the settlement activity of the financial services industry every day.

Securities Processing Solutions is the right business with the right skill set to go out and add more revenue from existing clients to help them be more efficient and to expand the services they run through that model. We had excellent closed sales result in fiscal year 2011 and we are having more discussions about significant opportunities with existing and new clients.

As you can see, we have a lot going on and we have a lot of opportunities. We have never had this much opportunity to go out and execute on. We’re good at execution. We have the right values, right people, and a proven track record of execution success. That’s what we do and that’s our culture.

Finally, I want to reiterate our priorities for your cash. We will continue to pay a meaningful dividend, look for strategic acquisition opportunities, and repurchase shares opportunistically. However, maintaining our investment grade credit rating is very important to us and in particularly the markets we serve, and we’ll continue to pursue a path that ensures we maintain that rating.

Before I take your questions, I would like to acknowledge the contributions of our associates. This has been a challenging year and our associates have never worked harder or performed better. I’m proud of the effort they gave in fiscal year 2011 and I’m looking forward to fiscal years 2012, 2013, and beyond when we believe our shareholders and associates will both receive the respective returns and rewards they deserve.

I’ll now turn the call over to the operator and, as always, we welcome your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Togut with Evercore.

David Togut - Evercore

If I’m reading it right, it looks like SPS hit the high end of your recurring revenues, new sales guidance for the year and ICS fell below. If that’s correct, if you could just walk through some of the dynamics of the new bookings to give us some insights into end market demand?

Rich Daly

On the SPS side it was our strongest year ever. We had a number of large transactions. We had a number of outsourcing transactions. We feel very good about the pipeline. We feel very good about the value proposition. I think it would be of interest to read the Schwab press release on July 13th. We live in a global world. North American investors need to invest globally and Broadridge is fairly unique in our ability to provide that offering to the market. So on the SPS side, I tell you that we feel good about last year and the opportunities we are looking at. At the ICS side, we did anticipate doing a one larger transaction, reporting transaction, which we still are going to be in discussions with, but it didn’t take place. The processing deals are at higher incremental margin and that’s why overall, even though it was our second highest year in recurring revenue sale, as Dan and I saw through the numbers, it was probably the highest year in margin and earnings contribution capabilities that we had and we look forward to 2012, and we look forward to staying focused in giving you a clearer view, Dave, on the recurring piece, because that’s the part that’s going to create the long-term value as we go forward.

David Togut - Evercore

Okay. Just as a quick follow-up for Dan. If you fully allocate the IBM migration cost in fiscal ‘12, how will the expenses be allocated on an EBIT basis between ICS and SPS?

Dan Sheldon

We’re still going through that piece of it. So I would say we will get back to you at the end of Q1, so I’d say stay tuned. Okay, obviously, we would think that a lot of the savings would go into the SPS business.

Rich Daly

There is no question about it, but there is also no question that both businesses leverage that infrastructure more efficiently together and dramatically more efficiently together than they could possibly ever do it separately. The key is, if you look at the processing peaks that the communications business needs and things like (inaudible) versus the processing peaks that the processing business requires in market openings and the trade settlement activity, those peaks are very different and enable us to leverage our scale far better.


Your next question comes from James Kissane with Bank of America/Merrill Lynch.

James Kissane - Bank of America/Merrill Lynch

Rich, does the guidance for closed sales in fiscal ‘12, I assume that it excludes mega deals like I think the $22 million deal that you signed in fiscal ‘11. I'm just trying to get sense are there deals like that in the pipeline that you can potentially hit over the next, say, 12 to 18 months?

Rich Daly

We would anticipate in that range of 110 to 150. So, that gives you a mid point here of 130. Now 130 would be a record year and that would include large transactions. We’re probably anticipating greater than 25, it could be a range of 35 to 50 in there, but we’re happy with the dialogs we’re having right now in the marketplace, Jim.

James Kissane - Bank of America/Merrill Lynch

Are there 20 million plus type deals in the pipeline?

Rich Daly

There are.

James Kissane - Bank of America/Merrill Lynch


Rich Daly

They have been for a long time. But what we do internally, and I’m not going to go into this level of detail of where the pipeline is, but we go through on a very regular basis at least monthly, all right and I go through that more on a personal basis and we rate the likelihood of deals, okay, by the size of deal. So, the probability of where we are in the sales cycle and what the hurdles are between where we are in closing. So, we feel good about the range of the 110 to the 150 and we feel good about the contributions that we’ll make to ‘13 and beyond.

Dan Sheldon

Yes, Jim let me just add on to that because you and others have asked us the question that says can you help us understand better how you come up with your 110 to 150. So, just to put it in perspective, this year as in prior years about $65 million came from less than $5 million deals and you’ve heard us talk before about $5 million in greater deals on what we’ve called the (inaudible) and that was $45 million this year, that’s how you get to just over the 110. When you’re looking forward and as we look forward, we also know the acquisitions should be incremental of that; we also have some newer products. So, when I talk about the 65 of the 5 you should be thinking much more in a range of 75 to 100 which as I mentioned acquisitions in new products, then add on top of that for your low end around 35 million and your high end 50 million for deals greater than 5. I don't want you to think that there are all $20 million deals; they are greater than $5 million deals. And again, historically, we had averaged 25 and in the last two years 45 to 55. I think that puts it in perspective.

James Kissane - Bank of America/Merrill Lynch

And then (inaudible) in your slides you indicated that Access Data and City Networks are sort of running a little bit behind plan. Obviously, the Schwab deal bring us lots of potential but just trying to get a sense to-date what have been some of the challenges, especially given that you’ve stepped up the acquisition activity over the past couple of years? Thanks.

Rich Daly

In both of those transactions Jim, I’m very pleased we have these properties. I think we are the right owners. I think they meets the four criteria I laid out during the call. I expect both of those transactions that are going to add meaningfully. So, Access Data running behind without Schwab, my tone will be very different. Access Data running slightly behind on its numbers, but we’re now building relationship from the 30 fund families, funds that Access Data dealt with when we acquired them to 600 now really provides us very, very meaningful opportunity. I almost feel the same way I thought about proxy in the early days. Once we prove the people that something is so much better, we really have significant opportunity. City Networks gives us a reconciliation capability, both in the U.S. and Europe, which we didn’t have before. Reconciliations is a big business. Reconciliations is a big activity, particularly for the BPO activity. So, when you take our BPO capabilities and having that application capability, I feel good about the dialog, the sales force momentum on that. It wasn’t that big of a transaction. That’s an easy transaction for us to get a very good return on given the small size that it was. So, that one I’m putting into what I hope is going to be lay-up category.


(Operator Instructions) Your next question comes from Tien-tsin Huang with JP Morgan.

Tien-tsin Huang - JP Morgan

I just wanted to ask if your fiscal ‘12 guidance changed at all internally since the Investor Day in response to all the weak market activity we’ve seen, and aside from the change in the IBM cost that you talked about there, Dan?

Dan Sheldon

Really, our guidance hasn’t changed because when we gave you the range of 6 to 9, at the lower end we weren’t counting on a lot coming from the internal growth, call it, like a point.

Tien-tsin Huang - JP Morgan

Okay. Good to know. And then just a correlation of event-driven revenue with the direction of the stock market. I think flat, seems conservative for sure. I think this is the right thing to put in the guidance, but I’m curious, could it move lower given weaker markets resetting lower recently and this bad social mood that everyone has now with interesting. I'm just curious if that’s still on the table as a risk.

Rich Daly

There’re two things that drive event-driven revenue, business opportunity and then regulatory need. The business opportunity is something that people can manage more than they can manage the regulatory need. So, we had a study done beyond all the work we’ve done this year to really get behind what drove all the prior transactions and what’s going on in the marketplace. There is an economic desire to minimize cost by the industry, given the challenges that the mutual fund industry is having. There is not a secular change in the reasons that are driving the need to go out in the market. And I have a lot of history just going back well over two decades. Historically, we have never been right on the turns up or down, all right, but this is the lowest activity levels we have ever forecasted. We’ve never had activity levels below where we are right now. So, although it’s possible that it could go even lower, when you’re dealing with low double-digits of activity versus historical norms, call it, in the low 20s, all right. In ‘10 we were almost at 50% of activity of all the possible positions. There is a heck of a lot more upside here than there is downside. I would put the downside into a normal manageable event and I would put the upside into it could be very meaningful, but we don’t want to be planning on it. We can get to the value creation that we need to get to by managing this through ‘12 and just looking for normal activity when we get to ‘13.

Tien-tsin Huang - JP Morgan

Understood. That’s helpful. I mean, your historical perspective is always more valuable than my view. Just the last one, just sounds like acquisitions, we shouldn’t expect as much this year versus last year. So, should we assume then, I know it’s not in your guidance, should we assume more in the way of share repurchases?

Rich Daly

When I laid out the use of our shareholders’ cash, I was very, very focused and pointing out again dividends and expressing to the market our confidence and our strong cash flows and then our very strong future. We believe raising the dividend and our Board believes raising the dividend was the right thing to do. I wanted to clearly signal, so you read it exactly right that you should not expect the same level of acquisition activity this year as last year. One, we don’t believe that we will be as fortunate in the properties, and two, we have a lot going on here and I want to be very, very careful about execution. Three, in terms of the buybacks, I mean this recent market activity is recent for all of us and we got to the share count that we believe those are right share count and that we signal to you last year. We’re not providing any signaling in that regard at this point and we’re certainly going to look very carefully what’s going on in these markets and what’s in the best interest of our shareholders.

Dan Sheldon

Yes, Rich the only thing I’d like to add on to that is our debt levels are very important to us as well. We talked about investment grade. Right now, we’re sitting at 1.9 to 1 and our limit is 2. We’re very aware of what we’re allowed to do. So, when you think back a year ago, we had well over $400 million of cash and significantly below the 2 to 1, we’ll call it, debt-to-EBITDA ratio. Sitting right now, I just shared with you 1.9 is level of debt and we’ve got about $240 million plus of cash on the balance sheet.

Rich Daly

Yes, Dan, you’re absolutely right and that’s why Tien-tsin when you go to that section where I talked about the use of cash I emphasized maintaining an investment grade is not emotional thing for us. These large transactions that we’re talking with large clients about right now without question the dialog in their organizations, by the way including yours Tien-tsin comes up that if they’re going to rely on us for mission critical services, they want to have a high level of confidence and our ability to perform throughout all markets.


Your next question comes from Chris Donat with Sandler O'Neill.

Chris Donat - Sandler O'Neill

Just one quick one on Penson. They announced the extension of the relationship with you from 11 to 15 years. Does that have any implications for you from a revenue or earnings perspective or how does the accounting work on that?

Dan Sheldon

No, we’re extending the contract isn’t going to do anything with any kind of amortization, etcetera. So, the point of the matter is what we’re looking for that is it's a longer term deal as well as new opportunities we talked about that Rich will speak to that they mentioned on their call.

Rich Daly

Yes, I put what we’re doing with Penson right now. They announced a letter of intent to expand their relationship with us. The size and services that we’re talking about here, particularly in the BPO side are very routine for us. We’re in what I’d call the normal GAAP analysis we go through to finalize terms and this is I would put it into the category of business as usual and it's not dissimilar to the conversions that we’re having with many of our other existing clients looking at expanding services of BPO opportunities. We don’t, at Broadridge, announce letters of intent until we have a signed deal, final deal finalized. I would expect us to be able to finalize this over the next 30, 60 days or so.

Chris Donat - Sandler O'Neill

Then just one follow-up to that. In your sales process is that one you went to them and said, we can do more for you or do you always do that? Or did they say, hey, what else can you do for us?

Rich Daly

I will go anywhere anytime to explain to a client that we can do more for them. That’s SOP for us for sure.


(Operator Instructions) Your next question comes from Peter Heckmann with Avondale Partners.

Peter Heckmann - Avondale Partners

With regard to the Penson conversion, I guess what we’re looking at now is November-December rather than more of a July-August final conversion. Can you talk about what’s taking a little bit longer as well as doing that some of your guidance for fiscal 2012 contemplates that the BPO outsourcing business will be running losses for a relatively larger part of the year and won’t be kind of getting towards that breakeven that you want to get towards when you fully implemented the $55 million from Penson. Is that correct?

Rich Daly

It is correct. Let me give you some context, Peter, because there were two phases to Penson; phase one was the business which we sold them, which is on our outsourcing platform right now, okay, and that’s a little over 20 million. Then phase two there was Canada and the U.S. pieces. Canada was probably about 40% about that call it 12, 13 million, that’s done, all right. Then the remaining U.S. piece is a little more than 15 million or so, and that’s the part that is going to be taking place in the second quarter. So, a lot has transpired. We with Penson and one of their clients who is converting off their platform, okay, which was announced deal, everyone is aware of it. They had a strong need to do that. There were economic considerations between the three of us to allow that to happen. So, we delayed our conversion slightly to allow that conversion to take place prior to our final piece happening. We made a lot of progress and we expect the rest of the progress to go, I’ll call it fairly routinely, which is there is always challenges. But as I even pointed out in the script and in other place, execution is what we do. We’re very good at it. It’s our culture and I feel confident in our ability to end this transaction as planned in the second quarter.

Peter Heckmann - Avondale Partners

Dan, you went through it pretty quickly, and I was trying to catch up. The difference between the IBM costs and their timing, and whether they would be expensed or capitalized as you described it at the June Analyst Day versus now, what was the change there? It sounds like some costs were pulled forward and some that were planned to be capitalized are going to be expensed, is that correct?

Dan Sheldon

Yes. So if you’d looked at the two first bullets where we said it’s now 85 million for what we normally would have thought about expensing capital, which we said before was going to be like 75. That’s just us refining our estimates. It’s that next piece where we talked about the fact that said in our contracts with IBM starting a year from now, we were going to pay them every single year approximately 2 million for what they called transition fees. The SEC as well as our auditors worked with us and said you know what, you’re going to have to take a part of that and absolutely recognize those expenses in that $10 million that we said was a bit of a surprise, but, you know what, we did everything at a time instead of doing it just it’s a big deal and we’re just going to book it the way we think it was, we actually (inaudible) sought out advice on that. So that’s the only difference is the 10 million.

Peter Heckmann - Avondale Partners

It’s not 10 plus 10, it’s 10 million in total?

Dan Sheldon

Yes, it’s $10 million for that piece that we call pull forward and I’m just sharing with everybody we use to tell you 75 million for capital and expenses, that’s now 85. So the real answer is, it’s 10 and 10 is 20.

Peter Heckmann - Avondale Partners

Right, and that 10 it’s not a cash cost in ‘12. It will be paid out over a period of years?

Dan Sheldon

Yes. That’s exactly the right way to look at.

Rich Daly

Now, Peter, when we get to ‘13, it’s in essence exactly the same with slightly less amortization because of some of the expense we’re having upfront here.


(Operator Instructions) Your next question comes from Peter Dale with Omega.

Peter Dale - Omega

Gentlemen, listen, it’s a follow-up along Tien-tsin’s question, which is if I look at your free cash flow and it’s about share buyback again, if I look at the midpoint of the free cash flow number of sort of 225 million and then I look at dividend payment of about roughly 80 million, I guess what I’m trying to get at here, gentlemen, is how much cash you need to run the business, which then might be available or what’s left over to buy stock in the open market and share repurchase? Can you help me with some guidance there?

Dan Sheldon

Yes, Peter, it's Dan first and then I’m going to turn it over to Rich. On Slide 21, what we’ve tried to do is share with everyone, okay, what our cash flow and you have it write-down, is you’ve got the midpoint of 225, you’ve got about $80 million let’s call it for the dividends, okay, and that leaves the remainder, I mean we’ve always said around we have to always maintain $100 million. That’s what we've always said, because part of that is locked up in capital in our what we call the ridge business still as well as foreign cash that unless we use the cash outside of the United States, which you can’t use to buy back shares because you will get a tax impact on that. So, we’ll be thinking that that’s why we’ve always said 100 million.


Your next question comes from Stephan McAteer with Pike Place Capital.

Stephan McAteer - Pike Place Capital

All my questions were asked. Thank you.


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

Rich Daly

Well, as always, we want to thank you for your participation. Dan, Rick and I do look forward to meeting with you in the near future, and certainly in times like this, we all need to choose to have a great day. Thanks so much.


This concludes today’s Broadridge Financial Solutions, Inc. fourth quarter and fiscal year 2011 earnings conference call. Thank you for your participation. You may now disconnect.

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