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Broadridge Financial Solutions Inc. (NYSE:BR)

Q2 2012 Earnings Call

February 7, 2012 8:30 am ET

Executives

Richard Daly – Chief Executive Officer

Dan Sheldon – Chief Financial Officer

Rick Rodick – Treasurer, Vice President Investor Relations

Analysts

Rayna Kumar – Evercore Partners

Jim Kissane – Credit Suisse

Chris Donat – Sandler O’Neill

Tien-Tsin Huang – JP Morgan

Andrew Sloane – Avondale Partners

Todd Simon – Oppenheimer

Stefan Mykytiuk – Pike Place Capital

Operator

Good morning. My name is Nicole and I will be your conference facilitator. At this time, I would like to welcome everyone to the Broadridge Financial Solutions’ Second Quarter Fiscal Year 2012 Earnings conference call. I would like to inform you that this call is being recorded and that all lines have been placed on mute to prevent any background noise. There will be a question and answer period after the speakers’ remarks. Please try to limit your questions to one per participant.

I will now turn the conference over to 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 second quarter fiscal year 2012. 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 view our earnings release that we issued today. 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 broadridge.com.

During today’s conference call, we’ll discuss some forward-looking statements regarding Broadridge that involve risks. These risks are summarized here on Slide No. 1 and we encourage the 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 security 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.

Our non-GAAP results exclude the other than temporary impairment charge recorded this quarter for our investment in the Penson common stock and the impact of the costs the Company expects to incur in connection with the migration of our data center to IBM. These one-time costs are significant and we believe the non-GAAP information provides a better representation of our actual performance.

Now let’s turn to Slide No. 2 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 highlights for the second quarter of fiscal year 2012 followed by a discussion of a few key topics. Dan Sheldon will then review the second quarter and year-to-date fiscal year 2012 financial results in further detail. Rich will then return and provide his overall summary and some closing thoughts before we head into the question and answer part of the call.

Now please turn to Slide No. 3 and I’ll turn the call over to Rich Daly. Rich?

Richard Daly

Thanks, Rick. Good morning everyone. This morning as part of my opening remarks, I’ll talk about the following topics. First I’ll start with an overview of our second quarter fiscal year 2012 financial highlights and guidance; then I’ll discuss our closed sales performance followed by an update on our acquisition portfolio. After Dan provides you more of the financial details, I’ll wrap it up as usual with my closing comments.

Let’s start on Slide No. 4, our second quarter fiscal year 2012 financial highlights. Overall I’m satisfied with our second quarter financial results. Our revenues were up 8% for the quarter versus fiscal year 2011 as a result of net new business, internal growth, acquisitions, and the Penson outsourcing services agreement. Client revenue retention remained very strong at 99%; however, event-driven revenues declined slightly. Year-to-date, revenues were up 11%.

I am pleased with our non-GAAP diluted earnings per share results. They were up 50% to $0.12 for the second quarter and 42% year-to-date as compared with the comparable periods in fiscal year 2011. This increase was driven primarily by higher revenues. Given that the majority of our earnings are generated in the fourth quarter of our fiscal year, our strong year-over-year improvement in the first half of this year is really nice but not as significant to our overall performance as these earnings growth percentages imply.

While our results for the first six months of our fiscal year are solid, event-driven revenues and the related distribution revenues are down slightly. Accordingly, we are lowering our revenue guidance slightly to 8 to 9% growth to reflect the first half of the fiscal year’s actual event-driven revenue results. We are reaffirming our full-year earnings per share guidance of $1.50 to $1.60.

As we have previously discussed, our path to $2 earnings per share for fiscal year 2013 would likely require a return of event-driven revenues to historical normal levels, and without that return, which is worth about $0.20 per share, we anticipate earnings per share of approximately $1.80. Even though we weren’t planning on a significant increase in event-driven revenues this year due to the weak economy and funds still needing investors to return, we would still love to see some improvement in mutual fund proxy activity. We believe that discussing earnings with and without the return of event-driven revenues is the best way to present our future path to strong earnings growth.

We have the infrastructure in place so that when event-driven revenues return, it’s a simple math equation. If the revenues are there, we know how earnings will be impacted. We don’t control the requirement for mutual fund proxy activity nor can we control the revenue. Can event-driven revenues continue to decline? I guess they could; but they are at a historical low level at this time. I believe there will be a point in time in the future where we will be talking about above-plan event-driven revenues. Because we can’t control event-driven revenue activity and because it is at such a low point at this time, my focus is on and will remain on the things we can control. I feel very good about our recurring revenue base and where I believe we can take it to in fiscal year 2013 and beyond.

Now let’s turn to Slide 5. I’m very pleased with our recurring revenue closed sales results. We believe recurring revenue closed sales is the most important sales metric to follow as it is a good indicator of revenue growth. Year-to-date, recurring revenue closed sales of 63 million increased 21% versus 52 million for the first six months of fiscal year 2011. Our investor communications segment continued to have very strong recurring revenue closed sales this fiscal year. It followed up a solid first quarter with very good results in the second quarter. Year-to-date sales of 34 million are more than double the 15 million for the first six months of fiscal year 2011.

Our sales results were very good in the SPS segment also. Year-to-date closed sales were 29 million and they included a meaningful business process outsourcing deal with Bloomberg Tradebook. Bloomberg has selected Broadridge’s consolidated BPO solution to support their equity, option clearance and settlement business. The agreement is designed to help Bloomberg minimize its fixed cost investment in technology and operational infrastructure. We’re also creating new revenue generating opportunities as it transitions from its current fully-disclosed clearing model to self-clearing.

Broadridge’s technology processing platform and integrated products solutions will help to support Bloomberg in its transition to a self-clearing operating model. Our customizable and scalable BPO solution will provide all back office operations and support on a global scale.

Broadridge’s BPO model is ideal for Bloomberg. We worked closely with Bloomberg during the past several months to ensure our unique BPO capabilities will allow for a seamless transition to self-clearing. Our solution can enable Bloomberg to benefit from a highly scalable and customizable offering to support all aspects of its back office operation.

I feel very good about our outsourcing business. The Penson conversion was recently completed and as mentioned on last quarter’s call, Penson signed an additional $8 million deal with us in October which expands the scope of our business process services that they plan to outsource to us. The original Penson transaction gets us to a break-even run rate in our outsourcing business, and we expect the Bloomberg transaction and the additional Penson business will drive the business to profitability.

I am very happy with our closed sales results for the first six months of the year and we are reaffirming our full-year recurring revenue closed sales guidance of 110 to 115 million. Our year-to-date recurring revenue closed sales of 63 million are almost halfway to the midpoint of our sales guidance. We usually have greater closed sales in the second half of our fiscal year, so given where we already are, I feel very good about achieving our full-year guidance.

Let’s turn to Slide 6. I’d like to provide you with an update on the financial performance of our acquisitions. Since our spin, we have invested over 450 million in acquisitions. For fiscal year 2012, we expect our acquisitions to generate over 200 million in revenue and approximately 40 million in EBITDA, and we anticipate EBITDA from acquisitions will be in excess of 55 million in fiscal year 2013. We continually monitor our return on these acquisitions and our early indication of our estimated returns is that we are achieving very close to our hurdle rate of a 20% internal rate of return for our portfolio. Some acquisitions are exceeding their business cases and a few are behind, but the overall portfolio is doing very well with some meaningful upsides.

When we choose to use your cash for an acquisition, it is because we believe the acquisition will derive more value for Broadridge than repurchasing our shares. While we have made a handful of acquisitions over the last few years, we reviewed hundreds of strategic and disruptive opportunities. Our hurdle rate of 20% is significant and we only pursued those acquisition candidates that were a very good fit for Broadridge. We have been successful in finding attractive opportunities, even in a market with difficult operating conditions.

Our acquisitions have helped us grow our business this year, even in this weak economic environment. The success of our tuck-in acquisitions enables our confidence in future growth as we expect them to contribute significantly going forward. Our acquisitions have provided us with more products to sell. They contributed to strong sales this year and we expect even stronger sales in fiscal year 2013 and beyond. While I am pleased with our acquisition results, available cash and debt capacity will limit our acquisition activity going forward.

I want to remind you of our priorities for cash. As I have stated in the past, our first priority is to pay a meaningful dividend; then, our focus is on identifying strategic tuck-in acquisitions that create profitable revenue growth, and those acquisitions will be funded primarily with our free cash flow. Given our stringent criteria for acquisitions and strong cash flow generation capabilities, it is likely we will accumulate cash balances at times during which we will consider opportunistic share repurchases. Again, when we decide to spend your cash on an acquisition, it is because we believe it will generate a greater return for our shareholders than the opportunistic repurchase of our shares; however, I am not aware of any opportunity that would justify losing our investment-grade rating.

Now I’ll turn the call over to Dan who will go into more detail about the second quarter’s financial results.

Dan Sheldon

Thanks, Rich. I am now on Slide 7, our financial highlights. Rich already addressed our quarter, year-to-date and full-year revenue growth on a consolidated basis, so in the next few slides I’ll go a little deeper into the driver and also address the growth and margins in each of the segments.

Recurring revenue added 9 points of growth to both the quarter and year-to-date, and is expected to add 7 to 8 points for the year. About half the growth is coming from net new business and internal growth, and the other half is coming from acquisitions, including the completion of the original 50 million revenue from the on-boarding of Penson Phase 1 and 2.

As Rich discussed, event-driven revenues and related distribution revenues are slightly down for the quarter and year-to-date. So to recap the full year, we expect 7 to 8 points of revenue growth from recurring revenues and additional 1 point from distribution revenues.

Non-GAAP earnings before income taxes margins improved for the quarter by 130 basis points, and we are expecting 30 to 110 basis point improvement for the year. Our non-GAAP results exclude the impact of the following two adjustments: first, IBM migration costs were at $0.02 per share in the second quarter and we are still expecting a negative impact of $0.16 per share to our GAAP EPS for this fiscal year. In fiscal year ’13, given the timing of the conversion, we expect to see around a 15 million recurring savings in that year and building up to the 25 million average annual savings as we move into ’14 and beyond. Second, we did not see a meaningful improvement in our investment in the Penson stock price, so we took a non-cash other than temporary impairment charge of $10 million or $0.05 per share in Q2. Our free cash flow is in line with our expectations for the quarter and year-to-date, and we are still expecting the full-year midpoint to be around 160 million or 235 million, excluding the IBM migration costs.

Let’s move to Slide 8, investor communications segment. Recurring revenues were up 20% for the quarter and are expected to be up 12% for the year. For the year, net new business and internal growth make up about 70% of the growth and acquisitions accounting for the remaining 30%. We were very happy to see the continued 99% client revenue retention rate in this segment. Rich has already discussed event-driven revenues, so moving on to our margins, we’re up for the quarter and year-to-date and are expected to increase 100 to 150 basis points for the year, driven by the scale in the business as well as the Morgan Stanley Smith Barney and the acquisitions adding approximately 30 to 40 basis points for the year.

Let’s move to Slide 9, securities processing. We are really pleased with the continued revenue growth in this segment coming primarily from net new business and acquisitions, including the Penson outsourcing services agreement. We had strong closed sales this quarter, and given the last couple of years of closed sales activity that is now converting to revenue as well as the Penson conversion and our continued 99% client revenue retention rate, we are seeing significant increases in our margins.

To help you understand the margins in this business, the incremental margins on our technology services alone should be in excess of 50%; and if a technology customer also purchases our outsourcing services, the incremental margins should be about 20 to 30% on the outsourcing alone. Therefore, an entity that buys both technology and outsourcing services like Bloomberg and Penson should generate incremental margins of about 40 to 50%, and this includes the amortization of any implementation costs. This analysis applies to both new sales and any client losses.

Moving to trade volumes, in Q2 they were virtually flat versus the prior year and are slightly up in January; but the good news is our clients appear to be doing better than what we’re seeing on the overall New York Stock Exchange and NASDAQ, which were down for the second quarter. As mentioned last quarter, our revenue range of 10 to 13% is based upon what happens to trade volumes in the second half of the year. The high end of the range assumes trade volume growth in the high single digits, and the low end the trade volumes remaining flat to last year. Having said that, we’re still very pleased with the expected 10% revenue growth for the year coming from net new business and acquisitions, and the continued margin expansion in the core business.

Rich, I’ll turn it back to you.

Richard Daly

Thanks, Dan. Please turn to Page 10 for my summary wrap-up. I am satisfied with our operating results for the first six months of fiscal year 2012. Revenues were up 11% as a result of strong recurring revenues driven by net new business, internal growth, and acquisitions; however, event-driven revenues have not returned. Our non-GAAP earnings were up 10 million year-to-date due to strong recurring revenues and our non-GAAP earnings per share of $0.27 were up versus $0.19 for the first six months of fiscal year 2011.

I am very pleased that the Penson conversion is complete. We expect our full-year Penson revenue run rate to be approximately 50 million and we anticipate being break-even or better in fiscal year 2013 in our outsourcing business. We signed two meaningful BPO transactions during the second quarter which we expect will finally drive our outsourcing business to profitability.

The IBM conversion continues to progress as planned. We believe the conversion will be substantially complete by fiscal year-end and we will begin to recognize meaningful savings in fiscal year 2013.

Our acquisitions are being integrated and we anticipate that they will contribute meaningful revenue and earnings to our fiscal year 2012 results. Overall, they are achieving near their hurdle rate targets and we expect stronger contributions in fiscal year 2013.

Our full-year revenue guidance for this year is 8 to 9% growth and we are reaffirming our full-year non-GAAP diluted earnings per share guidance of $1.50 to $1.60.

So how do I feel about Broadridge now and next year? I feel good. The reason I feel good is that we have been very transparent in explaining what we can control and what we cannot control. Our recurring revenues continue to grow due to our strong sales, internal growth, and acquisitions. I really like event-driven revenues; however, the range of event-driven revenues is primarily driven by mutual fund proxy activity and this activity is not predictable. The last couple of years, as you know, event-driven revenues have been weak. They’ve been weak to the point that there really is not a lot of downside left, so irrespective of whether they come or even slightly weaker next year, we believe the $1.80 earnings per share goal for fiscal year 2013 is achievable because of the activities we can control. Accordingly, if event-driven revenues return to near historical levels, we believe the $2 per share is equally achievable.

Broadridge is evolving. We’ve got some new products that I am very pleased with. Some of them could turn into what I like to call hot products. Paladyne’s activities are about what we expected them to be since we acquired them. We are having some very good new prospect dialogues driven by potential clients’ views of Paladyne’s capabilities under the Broadridge umbrella. The assets at Matrix continue to grow and there are some larger opportunities out there for Matrix that could take it beyond its business plan. Access Data continues to have dialogues because of the Schwab activity and other new opportunities like that.

At about this time last year, I asked you to look beyond the attractive earnings value that the Penson, IBM, and Morgan Stanley Smith Barney strategic initiatives would create. I asked you to recognize that beyond those transactions, we had many new product and revenue opportunity activities that were enabled through acquisitions or through our own internal development activities. By the end of this fiscal year, we expect the value of Penson, IBM, and Morgan Stanley Smith Barney to be almost fully in place. As we talk about the future, we anticipate that our recent acquisitions will add an additional 15 million in EBITDA in fiscal year 2013. We believe there are some meaningful upsides from these acquisitions and other internally developed products that could give us even greater growth. We are confident that we will continue to identify revenue growth opportunities that will position us for even more success in the future.

None of this would be possible without our engaged associates. I want to use this opportunity to express my gratitude to them for their tireless efforts to keep Broadridge the market leader. Our commitment to the service profit chain was again recognized as Broadridge was named one of the best companies to work for in New York by the New York State Society for Human Resource Management. It’s the fifth year in a row we have won this award, and we have won it every year since the establishment of the award. Our highly engaged associates have enabled our 99% client revenue retention rate and they have also led the successful integration of acquired products as well as the development of new products. It’s this momentum that will ultimately lead to the greatest value creation opportunities for our shareholders.

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

Question and Answer Session

Operator

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Rayna Kumar with Evercore Partners.

Rayna Kumar – Evercore Partners

Good morning. I’m calling in for David Togut. I have three questions for you. What do you think are the underlying market dynamics that have been keeping event-driven weaker than expected, and why won’t this trend continue?

Richard Daly

Okay, you want me to take them one at a time?

Rayna Kumar – Evercore Partners

Sure.

Richard Daly

Okay, good. I was ready to write all three down. Okay. I specifically went into detail on how strong everything but event-driven is, and I repeated it a number of times; and previously I’d talked about we had BCG do a study. We expanded that study with our own analyst group here and dug deeper, and we actually went into detail going back over the last seven or 10 years on the top 20 fund complexes. And what’s actually happening right now is they are creating a pent-up demand to some degree, all right, and to some degree there is going to be over—I’ll call it the next seven to 10 years, assuming that markets are normal activity, possibly slightly less activity than there was in total for the prior seven to 10 years.

So let me give you a little bit of explanation here. Historically Dan and I have talked to you about on average about 21 to 24% of funds have—of positions have activity each year, because as you know funds aren’t required to have an annual meeting but a meeting when an event happens that they need to go after shareholder approval. Now, the most significant event is a director reaffirmation where they need to have a certain percentage of their board approved by shareholders. We’ve historically seen that in weaker economic times that that gets managed more tightly, okay, in order to move the expense out. We’re certainly seeing that now.

Now when we reviewed all the activity over the last seven to 10 years, we’ve seen that some funds are reincorporated from—for example, Massachusetts to Delaware, and also made some changes to their bylaws, okay, that would not require them to do or go to market for some of the approvals that they historically went to in the past. When we look at that, even though we’re trying to be more conservative than the original BCG study, that still takes us to about 16 to 19% of positions should go out on average on an average year. We’re right now at about 8, maybe 9%. It’s closer to 8% of positions, so at some point in time these things will need to go out there.

Now, let me give you one last piece here, all right? Although there is not a formal retirement age per se, 69% of funds have formally adopted an average retirement age of 74. The average age of the independent director right now is 65, but again, you need a certain percentage approved by the shareholders; so at a point in time, we can’t stop the clock and people will have to go out there to reaffirm directors or they’d have to go out there and change their policy on retirement age, all right; and the reality is that people retire with or without retirement ages. So I know it’s a rather long answer, but what I wanted to give you insight was the deep depth of the study we did across all the activity of the 20 largest complexes that followed the BCG study. So we’re at what we think is about as low of a point as we can be right now. At a point in time, the activity has to come back, but we’re going to continue to give you a view with and without event-driven revenue, and even when the activity comes back, we’re going to give you a view with and without event-driven revenue because we’re really in no better a position than you are. We can share this data with you, but we can’t control the data.

Rayna Kumar – Evercore Partners

Great. Given the Penson stock impairment, do you still expect Penson to contribute $0.06 to EPS in 2013?

Richard Daly

The stock impairment and Penson’s run rate really have nothing to do with one another, so the short answer is yes.

Dan Sheldon

Right. Agreed, Rich.

Rayna Kumar – Evercore Partners

Okay. And lastly, what are your updated organic revenue growth rates for investor communication and SPS for the second half of 2012 and fiscal year 2013?

Dan Sheldon

Okay, well the guidance we’re giving at this point in time is for ’12, okay? We’ve given you an overall view of ’13. So let’s go back to ’12 – on the SPS side, as I mentioned already, if the trade volumes, the equity trade volumes remain flat, then we’ll see that there is really no internal growth; and if they come back like they did in August in a 10% kind of range, then we’ll see an additional 3 points.

As far as in the investor communications space, right now we’re seeing stock record growth virtually—we’ll call it flat, but we are still seeing the mutual fund interims up 8%, so we expect that to contribute around one percentage point to overall growth in the second half.

Richard Daly

I would add one thing because I didn’t mention it at all in the script. We talk about what we control and what we don’t control, so we don’t control the organic growth rates and we’re also still running at a historically lower level of organic growth than what we have traditionally done. But our path to ’13 and our guidance for this year is still planning on, I’ll call it the current market environment we’re in, and that’s why we are so pleased with the strong sales results and the building momentum that we’ve had in these sales results that you’ve heard in this quarter.

Rayna Kumar – Evercore Partners

Thank you.

Operator

Your next question comes from the line of Jim Kissane of Credit Suisse.

Jim Kissane – Credit Suisse

Hi Rich and Dan. I’m not sure if you’ll answer it based on the previous question, but the $1.80 in 2013, what are you thinking around stock record growth and trade volume? I know you don’t control the organic growth, but is it mostly based on new business that you’ve already signed and that’s in the pipeline, or is it you’re assuming some organic growth there?

Dan Sheldon

Yes, so the way to think about it, Jim, is as follows – it’s primarily think about it as net new business, which is maintaining the 99% retention rate, as well as the business we’ve already signed and that’s already in our backlog as well as what we plan on doing for the rest of this year. We’re of course assuming, like we think about it today, one or two points potentially for internal growth overall across the Company, but not just specific to equity trade volumes.

Richard Daly

Jim, you’ve followed us for a long time, even pre-spin; so there are two interesting dynamics. One, we’ve never had to my recollection across both segments, across the breadth of products the amount of net new business activity we’re experiencing, which is a very positive thing. We’ve also never had this long of a period of time where the organic growth has been this weak, and again given that we don’t control it, we’re not planning in what we can do for it to come back but we are planning to create greater shareholder value with the things we can control.

Jim Kissane – Credit Suisse

Yeah I mean, the new business is outstanding. Is it a function of the overall pipeline is bigger, or is your win rate better relative to your competition?

Richard Daly

Well Jim, one of the things we’ve talked about from the time of the spin is we’ve got 99% client retention, we have highly satisfied customers; and so one of the things we wanted to do both through our own development efforts and acquisitions efforts is broaden our product breadth, and we feel good about that. So an awful lot of this is coming from new products, acquired or self-developed.

Jim Kissane – Credit Suisse

And just one last question – you mentioned that the trading volume picked up in January. Was that both retail and institutional, or was it skewed one way or the other?

Dan Sheldon

It was pretty much on the institutional side.

Jim Kissane – Credit Suisse

All right, thank you very much.

Operator

Your next question comes from the line of Chris Donat with Sandler O’Neill.

Chris Donat – Sandler O’Neill

Hi, good morning everyone. Just one question on the EPS guidance for fiscal 2012 – with that being unchanged but the revenue guidance taking out roughly $30 million, I’m just trying to square the circle and understand is it expenses that you’re able to reduce here and you have maybe more flexibility than we thought, or how are you making up for the shortfall in expected revenue and keeping EPS the same?

Dan Sheldon

So Chris, think about the $30 million all related to event-driven, which means 20 million of it is postage, which doesn’t carry much profit at all, and the other 10 million is what we would call fees. We do have variable comp, and that variable comp as well as our holding back on some expenditures, is what’s creating us not changing our guidance of the $1.50 to $1.60.

Chris Donat – Sandler O’Neill

Got it, that’s helpful. And then I’ll try on this and we’ll see how successful I am – you mentioned, Dan—or no, sorry, it was Rich who mentioned that the contribution from Bloomberg could be meaningful. I’m wondering if you could put more color on there. Is it something of the same sort of magnitude as a Penson or an IBM, just in terms of the effect on the bottom line? And then in terms of the timing of when we’ll see a major earnings contribution, would it also be similar to Penson where it takes a year or two, you have some investment and then the revenues don’t really drop to the bottom line for two, maybe three years. Anyway, just how to think about how Bloomberg contributes to earnings.

Richard Daly

Okay. My answer here is going to be limited primarily through the normal agreements we have with clients on what we can and can’t say. So once a client trips where we need to disclose them in our Top 15, from a FB point of view what we can and can’t say gets to be much easier. Bloomberg initially will not be a Top 15 client. Now, if you think about Bloomberg Tradebook and the limited time that that model has been out there and the success of the model, we’re really, really excited – one, because of the strong brand of Bloomberg; and two, because of the strong growth potential, all right? But if you look at the Top 15 clients, it’s going to fall below revenue on all of those clients and I really am not at liberty to provide any more clarity on that.

In terms of margins, Dan pointed out if you have somebody who is coming on for both processing and outsourcing, you’ll be thinking 40 to 50% incremental margins on a new client like that coming on, okay? And so that’s what I talked about in terms of meaningful margins, but we are more than just mildly pleased—you know, I’m ecstatic at this transaction because of the—I’ll call it the affirmation it gives our outsourcing model. That’s the primary thing I wanted you to hear in here.

Dan Sheldon

Yeah, I would agree, Rich. That’s the primary focus.

Chris Donat – Sandler O’Neill

Okay, that’s helpful. Thank you.

Operator

Your next question comes from the line of Tien-Tsin Huang with JP Morgan.

Tien-Tsin Huang – JP Morgan

Hi, thanks. Good morning. I was curious, Rich, given your commentary around fiscal ’13, are you conceding that event-driven revenues will not bounce back in the midterm and possibly in ’13, or are you just being conservative?

Richard Daly

You know, Tien-Tsin, I love you for asking that question. I was reading this morning as I got up. I looked at my notes and I said, oh boy, I hope no one’s going to interpret it as anything other than just trying to add the clarity of with and without event-driven. I was so pleased when Rayna asked her first question because I wanted you to hear that event-driven can’t stay at this low level forever; I just can’t tell you when it’s coming back. This is the longest run for it to be in the trough, in the bottom of the trough. So no, we are not conceding the event-driven, all right; and one of the things I said in there is that there will be point in time that we’ll be talking about our earnings are ahead of plan because of event-driven beyond what we could have anticipated. And when that time happens, we’re going to give you the with and without event-driven for the next year which says if the event-driven dropped back down, it wouldn’t be the growth year-over-year only so you can model it the same way we’re going to model it, meaning we expect event-driven to eventually get to 16 to 19% of positions but that could be years. Who knows? Is it going to back to 15% in one year? I guess it could. Could it go to 8 or below 8? I guess it could. But with the average statistical mean being 16 to 19, us being at 8 right now and us being at, like, 9 last year, there is—and BCG’s study was there is a pent-up demand that’s going to build that has to come out at some point in time.

So no – this is so you look at it the way we look at it. I fully expect it to be contributing and I fully expect to be talking about a point in time that I love event-driven revenue.

Tien-Tsin Huang – JP Morgan

Okay, understood. I guess in the spirit of—I mean, I understand all that and I—you know, plus the compounding effect, obviously there’s a lot of earnings power there. I guess I’m asking because from a visibility standpoint based on the conversations that you’ve had recently, I didn’t know if there was any movement potentially on the up or if it feels more flat to down to you.

Richard Daly

If you look at the funds’ earnings performance, this is not their favorite period of time, right? And so by the way, Dan talked about $10 million and our need to manage expenses in response to Chris’ question. Think about the funds’ need right now, and if this is something where you can encourage a director to hang in there so you don’t need to go out to shareholders, I know if I was the CEO, if Dan was the CFO, what we’d be doing right now to try to push out that expense to a better time.

Tien-Tsin Huang – JP Morgan

Yeah, yeah, that makes sense. Maybe if I could just ask one more to Dan – just the IBM path now, what changed exactly? It came in a little bit lower than what we expected. What’s sort of the path here for the next quarter or two in terms of expense?

Dan Sheldon

Right. So if you think about it, we’ve got about $7 million spent year-to-date, and we’ve got 33 that we’re planning on; so the remainder is going to hit us in Q3 and Q4, and pretty much a lot of it will be in Q4. All of our mainframes and everything that’s large will be pretty much done by June 30, so it’s some carryover expenses that we still have with ADP, and then with the savings we’ll ramp them up. That’s why we said look for the 15 million in savings recurring run rate to hit us next year and then our way to 20-plus as we go forward into ’14.

Richard Daly

And Tien-Tsin, an additional comment – the IBM transaction here is one very meaningful transaction. I mean meaningful in terms of the effort and the significance of getting it done. The team doing it here is well experienced at it because we converted from the brokerage group data center into a common ADP center a year or two before the spin. We will be off the mainframes and we have every expectation of being off the mainframes by the end of June – that’s the plan right now. There is some server clean-up activity that’s probably going to take us to about Labor Day, a little bit before that, all right? And so we’ll have – and I mentioned this last time – I said less than 10, I guess we’re sizing it in the 5 to 7 range right now in terms of what that expense is. But I’m feeling very proud of the diligence of the team. Think about the number of clients we need to interface with, including everything we do for a JP Morgan, and then multiply that by all of our clients out there. So this project is well underway. IBM is fully engaged; we’re fully engaged. The ability it gives us to scale as we go forward with IBM, beyond the initial savings, is one of the things I find even more exciting.

Tien-Tsin Huang – JP Morgan

Good, good. Thanks for the update. Appreciate it.

Operator

Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Andrew Sloane with Avondale Partners.

Andrew Sloane – Avondale Partners

Good morning. This is Andrew for Pete Heckmann. We were wondering if there was a regulatory change for mutual funds such as those being discussed around 12B-1 fees and money market funds, would that necessitate a lot of mutual fund proxy activity?

Richard Daly

It’s difficult to speculate whether or not proxy activity would be required. Regardless, regulation is a friend of Broadridge’s; so at the time of the spin, let’s go back to the (inaudible) notice and access dialogue. When I was saying—you know, historically I’m not aware of a regulation that ever hurt us. Some are neutral; most actually help us. Some people were thinking notice and access would be a bad thing for Broadridge, and we wound up making 17 million or so more in profit.

Given what we’re doing with data management now through our Access Data unit, given some of the really neat dialogues – and I talked about Access Data potentially being a hot product as we go forward – this type of mutual fund regulation, particularly given what we’re really doing is helping funds manage the Street-side activity and given that that’s about 85% of the distribution channel right now, we don’t see how any activity there could hurt us that we’re aware of. It could help us and if it created proxy activity, that would be very nice; but we’re not planning on it in anything we’re forecasting here right now.

Andrew Sloane – Avondale Partners

Okay, thank you.

Operator

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

Todd Simon – Oppenheimer

Hey guys, this is Todd on for Ian. You briefly touched on some of the discussions you’ve had with new customers of Paladyne and Matrix. Could you maybe go into that a little bit more?

Richard Daly

What I was really saying is that—so for example, we already have a BPO capability that you’ve heard about in our processing business. Expanding that BPO capability to do more services across Paladyne, helping Matrix get more into the sell side where we really have such strong relationships, and expanding beyond their focus on the TPA model are things that are naturally evolving around here. That’s really where I was. I would say that the leadership of both those organizations is very pleased with the fit and the exposure we’re able to give them to opportunities that prior to be part of the Broadridge family wasn’t readily available to them.

Now, we need to close them. These are larger transactions, and until you close them, as I pointed out to the leadership in these transactions, all we’re doing is taking up their time. But we do feel very good about the dialogues and the activity.

Todd Simon – Oppenheimer

So when you talk about that 55 million in EBITDA in 2013 from acquisitions, what is included in that? What assumptions (inaudible) in included in that?

Richard Daly

The traditional business that we have right now and the traditional growth of the traditional business we have planned right now. It doesn’t have anything related to what I was referring to as this becoming a hot product.

Dan Sheldon

Yeah, these are just the normal sales with the nice margins attached to them, greater than 30%.

Todd Simon – Oppenheimer

Okay. Great, thanks.

Operator

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

Stefan Mykytiuk – Pike Place Capital

Hey, good morning. Kind of late in the call so I’ll keep it quick. Just to clarify – Dan, you said the IBM, the 4 million of costs is in cost of sales?

Dan Sheldon

No, the IBM piece is in the cost of revenues, so the $7 million right now is sitting and the 33 million will be in there – cost of revenues. And by the way, the Penson piece is in other.

Stefan Mykytiuk – Pike Place Capital

Right, that was my next one. And the 7 is year-to-date, though, right?

Dan Sheldon

Yes, it is.

Stefan Mykytiuk – Pike Place Capital

Right, it was 4 million in the quarter. So why did—SG&A was up quite a bit both year-over-year and sequentially. What was causing that?

Dan Sheldon

Primarily the acquisitions.

Stefan Mykytiuk – Pike Place Capital

Okay. And is any of that kind of integration costs that were going to go away, or is that really a new run rate for the SG&A level?

Dan Sheldon

It’s really the new run rate because the integration costs are just a few million dollars.

Stefan Mykytiuk – Pike Place Capital

Okay. A few million in the quarter or a few million--?

Dan Sheldon

Oh no – for the year. For the year.

Stefan Mykytiuk – Pike Place Capital

Okay, a few million for the year as a whole.

Dan Sheldon

Right.

Stefan Mykytiuk – Pike Place Capital

Okay. All right, thank you.

Operator

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

Richard Daly

Well, as always, Dan, Rick and I are pleased to hear from you all. We will look forward to seeing you in the near future; and as always, I’m going to encourage you to choose to have a great day and try not to get hurt at the parade today. Take care.

Operator

This concludes today’s Broadridge Financial Solutions Incorporated Second Quarter of Fiscal Year 2012 Earnings conference call. Thank you for your participation. You may now disconnect.

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