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Broadridge Financial Solutions Inc.

F2Q08 Earnings Call

February 7, 2008, 8:30 am ET

Executives

Marvin Sims - Vice President of Investor Relations

Rich Daly - Chief Executive Officer

Dan Sheldon - Chief Financial Officer

Analysts

Tin Jen Wong – JP Morgan

Ian Zaffino – Oppenheimer

[Pete Peckman – Blackthorne]

[Nahas Kapur] – Credit Suisse

[Stephen Miketuck] – Pike Place Capital

Deanna Mitchell – [Aquere Bank]

Vivian Memelak – US Steel Pension Fund

Operator

At this time I would like to welcome everyone to the Broadridge Financial Solutions Second Quarter Fiscal Year 2008 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Marvin Sims, Vice President of Investor Relations.

Marvin Sims

Good morning everyone, welcome to the Broadridge Quarterly Earnings Call and Webcast for the Second Quarter of Fiscal Year 2008. I’m Marvin Sims, Vice President of Investor Relations, this morning I’m here with Rich Daly, Chief Executive Officer for Broadridge and Dan Sheldon, Chief Financial Officer for Broadridge. I’m sure everyone has had the opportunity to review the earnings release we issued earlier this morning. The news release and the slide presentation that will accompany today’s earnings call and webcast can be found on the Investor Relations homepage of our website at www.broadridge.com.

Before we begin I would like to remind everyone that during today’s conference call we’ll discuss some forward looking statements that involve risks and these risks are discussed here on slide one and in our periodic filings with the SEC. During the review of our financial results to provide the appropriate point to point comparison between fiscal ’08 and fiscal ’07 all pre-tax and net earning numbers discussed throughout the presentation are non-GAAP and exclude one time transition expenses and interest on new debt. The actual GAAP reported numbers in comparison are also listed.

During the review of segment results again for the appropriate point to point comparison for revenue and operating profit we’ll discuss adjusted numbers that reflect the change in the methodology that occurred in the third quarter of fiscal 2007 for inter-segment allocations between the clearing and outsourcing segment and the other two segments. A reconciliation to the GAAP numbers is available in the presentation appendix as well as in the press release.

Now let’s turn to the next slide and review today’s agenda. Rich Daly will start today’s meeting with his opening remarks and provide you with a summary of the financial results for the quarter and a discussion on a few key topics. Dan Sheldon will then review the financial results in further detail for both the quarter and year to date. Rich will then return and review the fiscal 2008 guidance and provide his summary before we head into the Q&A part of the call. After Q&A Rich will provide his closing comments.

Now please turn to the next slide for Rich’s opening comments, with that said I’ll now turn the call over to Rich.

Rich Daly

This morning as part of my opening remarks I’ll discuss the following topics; first the results of our second quarter, next the market conditions during the quarter and then a quick update on some key metrics and Broadridge’s overall momentum. After Dan’s update on the quarter I’ll discuss how our second quarter performance and the market conditions are pushing us towards the higher end of our previous EPS guidance of $1.30 to $1.40.

I’m now going to give you an overview of Broadridge’s financial performance in context with market conditions. Let me start by saying I’m pleased with our revenue and earnings for the quarter. We had revenue growth of 8% for the quarter and 5% year to date. We had net earnings growth of 30% for the quarter and 41% year to date, excluding transition expenses and interest on debt. We are now half way through fiscal 2008 with a strong start as internal growth driven by market activity has helped us grow over the two significant client losses we previously announced in fiscal 2007 prior to our spin off.

This quarter our growth was driven more by our Investor Communications segment, in this segment primary component of our positive performance for the quarter was internal growth of 9% which was anchored by higher volume levels in most of our products including event driven activities. We continue to benefit from the increase in trading activity that drove the Securities Processing segment last quarter, this quarter our trading volume growth of 19% was approximately half of what we experienced in our first quarter but given the mix of products this quarter it only drove to net revenue growth in this segment of 2% versus last quarter when twice this volume growth and other activities drove revenue growth by 10%.

We continue to drive positive margin expansion driven by a high percentage of Internal Revenue Growth falling to the bottom line. Our public company infrastructure expenses and investment spend were still below our planned run rate in this quarter. You will see going forward both of these expenses will be ramped up to plan levels in the third and fourth quarter. I’m also pleased with our overall sales results, our sales for the quarter of $39 million up 5% ahead of last year and year to date sales of $68 million are 9% ahead of the prior year.

We are now at about 50% of our overall plan which is as I discussed last quarter included the slower summer months. We continue to be pleased regarding our sales results and our pipeline growth. Let’s move on to talk about the general market conditions that were at hand in our second quarter. As I said earlier we always need to keep our financial performance in context with market conditions and that market turns are difficult to predict.

The last time we spoke to you about this topic we identified event driven activities and trading volumes as the two key variables that are impacted during market volatility up or down. During our first quarter earnings call we described how we had trading volumes substantially higher than the prior year’s quarter both of which included two summer months. These volume trends continued during the second quarter but did not have as significant of a year over year quarterly benefit.

Event driven revenue was up 8% for this quarter compared to the prior year and a high percentage fell to the bottom line. As you’ll recall we weren’t planning any event driven growth at the time we shared our fiscal 2008 plan with you given the overall record results we had in fiscal 2007 driven by 30% growth in 2007. Event driven revenue continues to grow at this time, we remain confident it will grow overall in years to come. Planning this on an annual basis is challenging, we suggest that you don’t try to model this on a quarter by quarter basis but we expect over any multi-year planning period event driven activities will raise our overall growth.

Broadridge is in control of its businesses but not the markets we serve. Market volatility is normally good for our business, if this volatility is simply leading to a market correction and not a bear market then there is a short term benefit generally with no material longer term negative impact. However, if this volatility is leading to a bear market we’ll experience a short term benefit where potential longer term negative effects until the market stabilizes and then starts to build to new highs, which it has always historically done.

Before I turn the call over to Dan I wanted to get beyond the specifics of this quarter and generally discuss how I feel about the momentum Broadridge has at this time. There are several key variables that each of our P&O owners try to improve every day. At the top of our list is client retention, I must tell you I feel great about what our team has done to improve the client experience and overall retention. We haven’t lost a major client since prior to this spend and although there have been some small losses our overall retention in all areas feels terrific.

We also look at sales strategies and beyond the growth numbers I already shared with you I’d like to highlight one example relating to notice and access. Broadridge led our industry by rolling out notice and access in a clear and understandable way so that each public company could look at it specifically as it related to their needs. That leadership enabled our sales force to have more conversations with more corporate executives than ever before. This has led to a strong increase in register issuer sales regardless of whether or not they chose to use notice and access.

We of course continue to intensify our investment initiatives to identify new solutions that we can leverage through our distribution channel, arguably the best channel in the industry. Margins continue to improve in each produce level to our disciplined process management and technology investments and finally and probably most important our client center culture where we trust, engage and hold all associates accountable has just been named one of the 30 best companies to work for in New York State.

These key dashboard metrics continue to raise my confidence that we can grow shareholder value over any multi-year period even though as we look forward through the windshield its not clear within the markets we serve whether it will be sunny or stormy for the months ahead. It is clear we are well positioned to take advantage of good markets and weather tough markets by retaining the clients we have getting new clients and distributing more products to all of these clients.

I’m going to now turn the call over to Dan and when he’s finished I’ll be back to review our fiscal ’08 guidance and provide my closing comments before we head into Q&A.

Dan Sheldon

As Rich mentioned this was a good quarter from both revenue growth and EBIT margin expansion of perspective. With that said I’m on slide four our financial results, and as I go through the next few pages I’m reviewing both the quarter and year to date results as well as give you some direction on how we see the second half for the segments, other and our cash flows. On slide four our revenue growth as Rich mentioned grew 8% for the quarter and 5% year to date. The quarter results for all of our segments were better than last year and above our expectations with respect to contributions from internal growth.

The internal growth for Q2 of 7% was strong and above Q1. The Q2 growth was primarily driven by increased Investor Communications activity and to a lesser extent trade volumes. I’ll go into more detail when reviewing the segment. The contributions from sales, losses and other were in line with our expectations for both the quarter and year to date. With respect to our pre-tax earnings net income and earnings per share excluding the one time transition expenses and interest for the quarter and year to date grew significantly due to scale in the business, distribution fee mixes and the impact from some one times especially revenue from contract cancellation fees.

I’m now on slide five with a couple of additional point on the bottom, we paid down an additional $10 million in long term debt and $95 million year to date bringing our long term debt down to $523 million. Our long term debt to EBITA ratio should be between 1% and 1.1% given our full year forecast and cash flow projections which we’ll discuss in a minutes. Our effective tax rate is still estimated at 39% and as Rich mentioned our sales were $38 million for the quarter, $68 million year to date and ahead of our plan in prior year especially around event driven mutual fund activity. By the way, the distribution for that between recurring and event is a split of 40%, 60% respectively.

I’m now moving on to slide six, the segment results for Investor Communications. Our total revenue for this quarter were up 6% and year to date 2% and in both periods we had great margin expansion. With respect to revenue growth in the second quarter was greatly impacted by a 9% internal growth coming from both our recurring revenues and event driven. Our net new business for both the quarter and year to date is in line with our expectations and the loss is primarily related to the one large client we previously discussed.

With respect to notice and access it is true it had little impact on our first half results but we are gaining share with respect to new registered proxy business and additional business for notice and access services which will give us some benefit in the fourth quarter proxy season. Having said that let me give you a perspective of the second half with some other items. We are still expecting to see an improvement in net new business as the anniversary of that large loss is coming to an end at the end of Q3.

We do expect to see continued growth in event driven activity, especially around mutual fund proxies given our year to date sales. We are also expecting to see continued recurring revenue internal growth from our interims and our transactions statements. Finally, as per equity proxy revenues which represent over 40% of our total revenues in the second half and 60% of our revenues in the fourth quarter we expect a range of between a -4% to flat given that today stock record growth on a year to date basis is at a -4%.

As already mentioned we had a significant margin expansion in both the quarter and year to date aided by the distribution fee mix and some impacts from some one times. We still expect a 50 to 80 basis points improvement in margins for the full fiscal year.

I’ll now turn to slide seven, looking at Securities Processing Solutions. Our total revenues were up 2% for the quarter and 6% year to date and you remember Q1 we had 10% total revenue growth for this segment. As Rich mentioned our internal growth from trade volumes had been the primary drivers behind the growth in both quarters. The equity trades per day continues to average the $2.5 million per day in Q2.

Although there was a great deal of activity in the second quarter both up and down the net for the quarter remained at the same $2.5 million. As we mentioned last quarter we had reached the $2.5 million average trade per day in the third quarter of last year so our second half in FY08 is not forecasted to have much benefit from any trade per day growth. This is the same, by the way, for our fixed income. Our net new business, which is sales less losses has been a drag on revenues for both the quarter and year to date due to the loss of TD which will also continue throughout the rest of this fiscal year.

Having said that the margins for the quarter were negatively impacted due to the increased investment and one time expenses, margins will continue to decline in the second half due to the revenue shrinkage from TD as well as adding back as we mentioned before approximately $5 million in expense to our run rate due to the fact that we have a large R&D project that is coming to an end on a client implementation that will begin to impact us at the end of Q3.

I’ll now move on to slide eight, which is Ridge Clearing and Outsourcing and Other. With respect to the Clearing and Outsourcing revenues for the quarter were up 7% and year to date 10% and operating losses have improved year over year given scale in the business. Sales for both the quarter and year to date contributed 15% to growth and we expect to see double digit revenue growth from sales in this segment for the second half.

The loss of TD negatively impacted us by 13% and it accounted for most of the lost business. The TD loss again will be with us in this segment as well throughout the second half. Internal growth is up for both the quarter and year to date and was primarily driven by clearance fees from increased trade and to a lesser extent net interest on balances. We expect the internal growth in the second half but will be impacted negatively by the drop in interest rate most recently announced. Given forecasted revenue growth in the second half we will exit this year with the business on a profitable trend but will be slightly behind our planed break even.

Let’s move on to Other, revenues for both the quarter of $5 million and year to date almost $8 million are driven from contract cancellation fees and we don’t see much of anything in the second half. Usually we only see a couple of million a year in cancellation fees as we don’t have much in the way of terminations in any year, this however was an exceptional year given the two large losses. With respect to net other expense for the quarter of $15 million and year to date $23 million, 100% of the cancellation fees fall to the bottom line.

With respect to interest expense, there won’t be any significant additional pay down on long term debt or impact from recent interest rate reductions until Q4. Transition expenses are $3 million approximately for each of the first two quarters and are expected to be in with the $12 million to $14 million range we’ve earlier discussed. Corporate and new initiative expenses are at $7 million for the quarter and year to date and as Rich mentioned will be slightly higher in the second half as we continue to finalize our build out.

I’ll now turn over to slide nine for our cash flow, last quarter we reviewed with you why we look at our cash flows with and without the Ridge, Clearing, Outsourcing Segment and that’s why we’ve now displayed all three of those columns for you both Ridge, without Ridge and our grand total. With respect to Clearing, the large change in that asset was related to primarily one transaction that has since cleared. As mentioned before this business always uses short term financing as part of its normal business.

With respect to the other segments, depreciation, amortization and stock based compensation are in line with our prior years and expectations. Working capital change is always primarily related to timing of receivables so therefore can be plus or minus in any given period. I will make an important note here that capital expenditures year to date of $16 million is closer expected to be for the full year at $50 million to $55 million and given the investments and projects we have in the pipeline is the reason for that increase. This year is expected to be slightly higher than previous years and again primarily related to spin related new facilities both domestically and internationally.

To wrap this up free cash flows generated in the last six months $123 million and used primarily in the last six months to pay down debt and pay dividends. We do expect to generate between $90 million and $120 million in free cash flows in the second half and with that I’ll now turn it back over to Rich Daly.

Rich Daly

Let me start by reiterating that our previous guidance from the first quarter has not changed. However, as I mentioned during my opening remarks our second quarter performance and volume trends have led us to believe we are moving toward the higher end of our EPS range. During our first quarter earnings call we communicated that we would have earnings per share excluding one time transition expenses in the $1.30 to $1.40 range. When we created this guidance the performance you saw in the second quarter and the benefit from volume trends were contemplated into the higher end of the guidance.

Given the fact that, as Dan said, for the last four quarter our trades per day have been flat at 2.5 million trades, baring any major shift in current volume trends we don’t expect to see the same level of over performance in the second half of the fiscal year that occurred in the first. With that said I’d like to remind everyone of how in our first quarter earnings call we supported how to interpret the low end and the high end of our guidance range.

The low end of the guidance range assumes a slight blow up in trade volumes and less event driven revenues for the remainder of the year. The high end assumes slightly better trade volumes and modest event driven revenue increases for the remainder of the year. Our guidance does not contemplate any major down turn in the market concerned that could result in a significant and immediate drop in market activity. As you think through our guidance you should keep in mind that our fourth quarter is our biggest quarter. Historically represents somewhere in the range of 50% to 55% of full year earnings.

Let me talk a little bit about free cash flow, Dan went through the numbers, we will use our free cash flows to add value, we are going to pay down debt, we are going to pay a dividend, we’ll look to acquire products and businesses and again, at least for fiscal ’08, we are not contemplating any share buy backs.

Let me summarize quickly before we go into Q&A. We had another solid quarter and continue to have a nice start to the fiscal year with strong quarterly earnings driven by internal growth and continued event driven activity. As a result of the strong quarter and current market trends we believe our EPS will be toward the higher end of our EPS range. Markets are difficult to predict and activity in the markets will create both up side as well as down side.

Current market activities present short term opportunity but if a bear market occurs it could present some challenges or opportunities beyond the next month or quarter. Broadridge is in control of our businesses but not the markets we serve. We remain committed and confident that we can grow our business over any multi-year period. I’m now going to turn the call back over for Q&A.

Question & Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Tin Jen Wong with JP Morgan.

Tin Jen Wong – JP Morgan

On Securities Processing I was hoping to get a little bit more detail on the mix issue that drove less revenue growth in relation to trading volume, I didn’t quite catch that, could you run through that again?

Dan Sheldon

If you think about Q1 where we had the 10% growth, think about that more from trade volumes at that point in time of the 38% drove around $5 million or $6 million and then the remaining increase, which was probably another $4 million or $5 million, came. If you remember we talked about T&M which was the time and material and some one time activity that we were fortunate to come end of some jobs on. Putting that in perspective if you think about 38% drove about $6 million in Q1 and then you put the same perspective on Q2 that we had 19% driving approximately $3 million I think it puts it in the right perspective how to think about the volume.

Tin Jen Wong – JP Morgan

On the investment side, I’m not sure if I caught this, how much of the $10 million planned investment for the year did you end up spending in Q2?

Rich Daly

We committed to ramp up our investments, first of all I don’t want anyone to believe that we are only spending or investing $10 million in the business. We made a conscious decision at the time of the spend to increase that. We are doing it prudently and in the first half we were not at the full planned rate and the second half we expect to be at the full plan rate maybe even slightly better and I’m pleased about that because ultimately this will generate activity for future use.

Dan Sheldon

Just helping you out, when we talked about the incremental $10 million be thinking about that much more and we’ll look at the other space because those are long term kinds of initiatives. We also had made investments inside our field including the Securities Processing for some of the products they were already starting to work on. To put it in perspective for you as you are trying to think about your numbers you should be thinking year over year even in the second quarter that’s slightly up $2 million to $3 million, just for that period and that includes some one times in there so that will not necessarily carry forward.

Tin Jen Wong – JP Morgan

It sounds like the sales in the pipeline still quite good, could you give us a little bit more detail on the new sales environment, how does it feel out there relative to prior quarter, do sales cycles feel longer, we get that question quite often so I thought I would ask it on the call?

Rich Daly

It breaks out because of the breadth of our products it really covers the full horizon. On the large mega outsourcing deals, call it $5 million plus, those will always be long sale cycles and as I’ve said often it’s not over till its over. We feel very good about the segment that we’ve identified in our Securities Processing area and Outsourcing where it’s companies that are clearing through others have the capital to be self clearing and we believe these 100 entities we’ve identified could probably generate about, on average $3 million.

We’ve closed one this quarter, we had previously closed one but we think it’s a very good value proposition. In the Communication space as I said, because of our leadership in notice and access we are getting to meet with more corporate executives and we are going to be ahead of plan. Right now I’m thinking around $5 million, maybe a little better in terms of activities that were driven and registered sales because of the leadership we’ve demonstrated in notice and access. With all I’ve said, the momentum feels very, very good.

Operator

Our next question will come from Ian Zaffino with Oppenheimer.

Ian Zaffino – Oppenheimer

One question about the M&A outlook and what you are seeing there. Is anything imminent or what are you looking at as far as spend? I know you had alluded to $35 million before, what are you looking at now?

Rich Daly

First of all we won’t comment on any deals until they were over and there’s good reason for it because this again, it’s not over till its over. Second, the $35 million was our original plan around tuck ins up to that size and I said during the last quarter and is worthy of repeating now that given our strong cash flows and the fact that we paid down debt faster than we originally anticipated we are looking at the right opportunity to expand that range. It certainly is going to be in context with our commitment to remain investment grade and our commitment to have the right opportunity.

Beyond that I want to cover one last point which I think will give you the last piece you are missing. I talked about the distribution channel on my comments today. We really have a great distribution channel; we have a sea sweet relationship with every firm because of the Communications business. If there is a right product set out there that we can help drive the market we are going to look to take advantage of that and we’ll look to do that through partnering or acquisitions going forward.

Ian Zaffino – Oppenheimer

As far as new business, are there any elephant deals out there that you are looking at? How is the fall out of the sub-prime market and how it’s less than some of the bigger broker dealers in their current state, how is that affecting your business or the likelihood of winning additional business or them outsourcing?

Rich Daly

In my 18 plus years I’ve seen it go all ways. I’ll break it down to two things; changes in market creates new dialogues in firms and sometimes those dialogues are helpful, sometimes they are not. We clearly can provide our client a better cost model; we can clearly provide them a more efficient, more reliable model. They still need to be willing to go through a conversion. The sub-prime activity is certainly creating lots of dialogue and that can work to accelerate a dialogue we are in or that can work to delay a dialogue we are in.

I’m going to go back to my standard comment on all of these deals, it’s not over till its over and we are always in dialogues with someone because we have such a strong value proposition.

Dan Sheldon

Part of your question was how should we think about more of our base being impacted by sub-prime so let me add a little bit of color to that piece. When you think about the Securities Processing business that’s were the sub-prime would be primarily impacting on trade volumes but to give you a clear picture of that, thinking more of our fixed income which is about a $50 million business and then inside of that sub-prime is about a $10 million to $15 million kind of product. As we’ve talked with our clients and believe me we’ve spent a lot of time with our clients.

As Rich mentioned some of them might be looking to get out of it and some of them might be looking to absolutely enhance either acquisitions or expanding their business. From an impact as we look at it today, from what we’ve heard, again we are speaking today from what we know. Sub-prime by itself would not have a material impact to us for any kind of change that’s going on in that world.

Rich Daly

Even on a trading mix what we’ve seen is people who shift from mortgage backs over to treasuries so we’ve seen a little bit of drop in activity in one place offset by an increase in activity in the other place. Will there be a negative impact? There could be, we aren’t expecting it to be material based on what we’ve seen so far.

Operator

Our next question will come from the line of [Pete Peckman with Blackthorne.]

[Pete Peckman – Blackthorne]

I wanted to ask a question as regards your commentary on bear markets and whether or not we are going into a bear market remains to be seen. Clearly the market is correcting quite a bit and going back and remembering how that affected some of your peers, more specifically Sungard Security Processing segment in the ’00 to ’02 area. It seemed like the trade volumes hit them most dramatically but then also they saw a slow down in decision cycles and a pull back in kind of the discretionary projects that were around and supplemented the longer term security processing deals. Would you say those are the three areas that you have most exposure in a bear market? Can you talk about what type of magnitude you’d expect trades per day to fall? What they did fall in that environment.

Rich Daly

First of all each market has its own unique features based on the way our clients and our potential clients react to what they need. One thing I will comment on though is that as I’ve said before the last down market we had when the bubble burst we had a model in which trading far more impacted our revenues than it does today. We’ve given our clients the benefit of our scale on the up side which means on the down side our revenue doesn’t drop on a percentage basis related to trade volume just like as you heard in our growth of trades of 19% this quarter it really drove 2% in revenue increases.

I think that discussions are always good and I think whatever drives discussion is always good and the stronger we make our value propositions the more likely when firms are willing to have a discussion to say is what we are doing making sense. The stronger our value propositions are the more likely we are to get someone to engage in a dialogue about considering outsourcing who may not have considered it before.

As far as discretionary spend goes, without question, we do very little of what people would consider to be P&M and consulting and so I don’t see what we do on the discretionary side as being material. What you didn’t cover was the event driven activities and that’s the last piece beyond trading that would really be significantly impacted and what we historically saw in the past was our event driven revenue particularly in the mutual fund space people who had decided to do a full proxy or folks who were considering doing a full proxy.

They said we are going to wait a little bit longer, we are not looking to incur the expense at this point in time and some M&A activity on the event driven side. We also saw a slow up and generally it comes back at a much higher rate as the market stabilizes and people find M&A opportunities out there.

Dan Sheldon

I would add one other piece to that. Also back in that period of the last down turn we were at 70% retail versus 30% institutional in that Securities Processing space and today when you look at our trade volumes you have to be thinking much more very large institutional making up over 70% of that trade volume.

[Pete Peckman – Blackthorne]

That’s a helpful distinction. Yes that’s also from the event driven side, that scenario had not been exposed to in previous down turns. One more follow up, on the contract termination fees, did those typically come through at high margin or are there a lot of de-conversion costs on your side that tend to offset the benefit?

Dan Sheldon

They are 100% of the bottom line. For those kinds of contracts, for instance, they were already at the end of their contract terms so there was nothing on the balance sheet and no other costs. All the $9 million falls to the bottom line.

[Pete Peckman – Blackthorne]

What would that have equated to on an EPS basis?

Dan Sheldon

On an EPS basis that would have been approximately $0.04.

[Pete Peckman – Blackthorne]

In this quarter?

Dan Sheldon

It’s a combination of the two, you had both quarters there.

Operator

Our next question will come from the line of [Nahas Kapur] with Credit Suisse.

[Nahas Kapur] – Credit Suisse

I wanted to get a sense from you guys about the Clearing business that you talked about the Clearing Outsource have been slightly behind your plan but you expect to be slightly behind your plan for the year. Can you give some more color on that and what’s falling short versus your plan?

Rich Daly

The simple answer is that as rates come down the spreads that we retain on margin comes down. Business is performing in essence on plan primarily with that one piece.

[Nahas Kapur] – Credit Suisse

Are there any ways to offset some of that revenue loss? Rates are going to come down a bit more what are the things you guys are thinking of?

Rich Daly

We will be at break even as we exit the year on that business and that’s our highest sales growth opportunity and without the Clearing business we wouldn’t have the opportunity to go after those 100 firms and that outsourcing segment with an average revenue of $3 million each. As I look at our ability to create value going forward I feel great about our outsourcing capabilities in our Clearing business that provides that capability.

Dan Sheldon

To put some perspective to that, the reason we even raise that up is because that business, everyone we had talked to was going to be at a break even position so the impact from the interest for that business is a few million dollars. I want to put into perspective from the overall business and the reason we’ve even raised it. It’s certainly not a huge number for the overall company but it’s an important number because again it’s a net interest impact.

[Nahas Kapur] – Credit Suisse

From a margin standpoint, a normalized run rate environment what do you think that this business should be operating at? Is it a mid single digit margin business or is it a high?

Rich Daly

We expect that to be 10% to 20%. Again, we are in the clearing business to leverage our ASP model and to feed more transactions into the ASP model our SPS segment. That’s the strategy and we are pleased at the execution of the strategy to date.

Dan Sheldon

We’ve said, by the way, the way to think about that and you can see the leverage over the last few years of scalability as we drive that revenue and we’ve expected that revenue to grow north of 10% every year given our sales and you can see what we are accomplishing there. You’ll see anywhere, depending upon the mix of business, whether it be outsourcing or the clearing side of between 20% and greater than 50% in contributions to the bottom line for that incremental revenue. I think that’s the only way you can put it into perspective as you try to build out as we also try to say longer term we’ll get to these higher margins.

[Nahas Kapur] – Credit Suisse

On the capex, what’s a run rate to look at going forward, because this year is obviously a little elevated, what’s that number look like in a more normalized environment?

Rich Daly

The more normalized, great question is to be thinking in the $40 million to $50 million range, and by the way, and equally so does what we call the depreciation and amortization so about equal the same. If you think even longer term be thinking again of 2% to 2.5% of our revenue overall goes to capex/intangibles.

Operator

Our next question will come from the line of [Stephen Miketuck] from Pike Place Capital.

[Stephen Miketuck] – Pike Place Capital

Back to the registry business, can you just give us a sense of how much of Investor Communications is registry versus the beneficial business?

Rich Daly

The vast majority of our Communications business is beneficial. That’s the contractable broker dealers. The market on the registered side I estimate to be about $100 million, probably slightly less. There are 14,000 issuers out there 7,000 that would really make up the bulk of that revenue and we have about 1,000 maybe slightly better at this point of those issuers.

[Stephen Miketuck] – Pike Place Capital

You are saying the $100 million is the total market opportunity if you continue to go after, it sounds like the notice and access is just giving you another entrée to get in front of these people and tell them what you are capable of doing?

Rich Daly

That’s correct; we’ve clearly been able to demonstrate our leadership here.

[Stephen Miketuck] – Pike Place Capital

The SG&A went up quite a bit sequentially, was that the beginning of this increased investment and it was also down in the second reporting that other category on the EBIT line went up quite a bit sequentially, what caused those?

Dan Sheldon

Let me put it in perspective, the majority of Other does fall into SG&A. You know how you do the fate of the financial statement, that Other on the base of the financial statement which is the $9 million, call it $18 million year to date is all the interest. Think about everything else in other as going to SG&A from an expense standpoint and you’re absolutely right, that’s the build up that we were previously talking about.

[Stephen Miketuck] – Pike Place Capital

The number I was actually referring to Other was back on the segment data where it’s Other $15.2 million in the segment on the EBIT line. That was against $7.8 million in the first quarter so is that still the same thing in terms of the investing that’s going on for new products and R&D.

Dan Sheldon

The way to think about that was in Q1 we hardly had any corporate build out even, not just investments but corporate build out, I mean building your corporate headquarters, staff, treasury, tax, audit etcetera. That has now built up as we mentioned to the $7 million versus flat in Q1. That is hitting the Other line.

[Stephen Miketuck] – Pike Place Capital

Up in the consolidated numbers you are saying that’s in SG&A.

Dan Sheldon

Yes it is as well as any one time transition costs are also in that section.

[Stephen Miketuck] – Pike Place Capital

Did you break out the transition costs, is that in, that was the $3.5 million back in the non-GAAP?

Dan Sheldon

Yes, that’s absolutely correct, if you go to the non-GAAP you will see the $3.5 million in the year to date over five.

[Stephen Miketuck] – Pike Place Capital

When we get into fiscal ’09 do the one time transition expenses fall away?

Dan Sheldon

Yes they do, they fall away and we’ll still have a slight corporate build as we call it in Q1 because it wasn’t there.

Operator

[Operator Instructions] Our next question will come from the line of Deanna Mitchell with [Aquere Bank].

Deanna Mitchell – [Aquere Bank]

I have two questions, you talked about leverage and you’ve had a few questions about bear markets, I’m just curious to know as to what flex you’ve got in your cost space in the event of a bear market and you do start to see pressure on the revenue line?

Rich Daly

The good news about the leverage is that we can add volumes and push a good portion of that to the bottom line. Certainly in our Processing business and also to a strong degree our Communications business but if the markets were to turn we certainly have a high percentage of fixed costs as well related to that and so we would not be able to take down our expenses in the same line as the drop in revenue.

Deanna Mitchell – [Aquere Bank]

The second question is just in terms of you mentioned that interest rate sensitivity we are obviously seeing quite material changes in the cash writing in the US, can you give us a feel if you’ve got a sensitivity analysis, for example a 25 drop will equate to on your profits?

Dan Sheldon

What I can say to you is that it’s all going to be concentrated with any kind of interest in our Clearing business and I just kind of mentioned to you that the last 125 basis point is going to cost us a few million dollars on an annualized basis, that’s the way to think about it.

Deanna Mitchell – [Aquere Bank]

The last question is in terms of you mentioned you’ve been picking off market share in the registry space, is that from the big players like Barney and Miller and Computer Share or is it more from the smaller players which are kind of struggling to keep up to date with all the changes of IRS and notice and access, etcetera.

Rich Daly

I don’t have an exact view of that but everything I sense and hear is that it’s evenly distributed over the various providers out there.

Operator

Our next question will come from the line of Vivian Memelak from US Steel Pension Fund.

Vivian Memelak – US Steel Pension Fund

I just want to follow up on the investor communications share gain question. I curious as to mix there, what you are seeing from clients in terms of electronic versus print, are they doing both a mixture. What has the trend evolved into with notice and access?

Rich Daly

Because of all the moving variables here it’s tough to say what the trend is right now. The reason we’ve been effective in meeting with corporations is we can show them what the new notice and access rules, give them options to do and then by profiling their prior annual meeting and their current needs in their current annual meeting let them select, if there is a cost opportunity, do they have tough proposals they need to get through and how would they manage this with a new process which may have lower voting returns etcetera.

Its not an across the board answer, what it is though is that if you were making this decision we would be there with clear models showing you for your meeting how you can most effectively run it and it’s that reason I said even if they haven’t chose notice and access our win rate is up because I think we are clearly demonstrating that we are the best provider in this space.

Vivian Memelak – US Steel Pension Fund

As a follow up, in terms of Investor Communication you also mentioned that there were some small losses, if you could just comment on that?

Rich Daly

I was not talking specifically about Investor Communication when I was speaking of small losses.

Dan Sheldon

When he spoke to the small losses they were primarily in some of the small start up clearing kind of firms, very small revenue and also very little impact.

Operator

[Operator Instructions] Our next question will come from the line of [Stephen Miketuck] from Pike Place Capital.

[Stephen Miketuck] – Pike Place Capital

I just want to beat this bear market horse to death hear a little bit. Just to clarify when you talk about a bear market you are coming from the perspective as you said of during the internet bubble 70% of your trading volume was coming vis-à-vis retail brokers and now that’s flip flopped that its 70% institutional, correct? In other words the fact that the stock market has gone down over the last nine months some people would call that a bear market but that hasn’t hurt your business so far it’s actually kind of helped in terms of trading volumes.

I’m trying to get this proverbial bear market that would hurt your business, you are saying if people just stop trading equities or pull their money out of the stock market and went and did something else kind of like they did after the internet bubble, people went to try and trade houses instead of stocks. Is that a fair characterization?

Rich Daly

I think it is, 70% comment flip flopping is correct and for us our definition would be a sustained reduction of activity across our various products for a multi-month period of time.

[Stephen Miketuck] – Pike Place Capital

In other words a lot of money comes out of the stock market, people stock trading stocks or bonds and they sit in a money market and do nothing is kind of the negative scenario, is that right?

Rich Daly

That would be a fair assumption.

[Stephen Miketuck] – Pike Place Capital

I just want to clarify that because again a lot of people would say we are in a bear market right now and so far it doesn’t seem to be hurting your business. I just want to make sure understand.

Rich Daly

Equating the negativities of a bear market to us directly is a little more complex because as you pointed out the current market some people may not feel great about, it hasn’t impacted us to date, that’s correct.

Operator

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

Rich Daly

Thanks to all of you for participating. I hope we express that we are feeling good about the long term future of Broadridge. I am confident we will continue to be leaders in our markets. I want to thank everyone for participating; Dan, Marvin and I look forward to speaking with all of you over the next quarter. Thanks and choose to have a great day.

Operator

This concludes today’s Broadridge Financial Solutions Inc. Second Quarter Fiscal Year 2008 Earnings Conference Call. Thank you for your participation you may now disconnect.

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