Broadridge Financial Solutions' CEO Discusses F4Q12 Results - Earnings Call Transcript

| About: Broadridge Financial (BR)

Broadridge Financial Solutions (NYSE:BR)

F4Q12 Earnings Call

August 9, 2012 08:30 am ET


Rick Rodick - Vice President, Investor Relations

Rich Daly - Chief Executive Officer

Dan Sheldon - Corporate Vice President and Chief Financial Officer


David Togut - Evercore Partners

Tien-tsin Huang - JPMorgan

Jim Kissane - Credit Suisse

Ian Zaffino - Oppenheimer

Christopher Donat - Sandler O'Neill

Peter Heckmann - Avondale Partners


Good morning. My name is Kanisha 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 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 would like to 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 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 review the earnings release we issued this morning. The news release and slide presentation that accompany 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 risks. These risks are summarized here on slide number one. 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 we closed in the fourth quarter fiscal year 2010, the clearing business is now shown as discontinued operations and our remaining outsourcing business is included in 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.

Our non-GAAP results exclude the impact of the Penson charges, IBM migration costs and restructuring charges. These one-time costs are significant and we believe the non-GAAP information provides investors with a more complete understanding of Broadridge underlying operating results.

Now, let's turn to slide number two 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 highlights for the fourth quarter and fiscal year 2012, followed by discussion of a few key topics.

Dan Sheldon will then review the fourth quarter fiscal year 2012 financial results in further detail. Rich will then return and provide his overall summaries and closing thoughts before we head into the question-and-answering part of the call.

Now please turn to slide three and I'll turn the call over to Rich Daly. Rich?

Rich 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 fiscal year 2012 financial highlights and then I'll provide you with an update on the Penson transition followed by a discussion of our closed sales performance. Next, I will provide you with a brief update on our acquisitions and then I will discuss our fiscal year 2013 guidance.

After Dan provides you more of the financial details, I'll wrap it up with my closing comments.

Let's start on slide four, our fiscal year 2012 financial highlights. Overall, I'm satisfied with our fiscal year 2012 non-GAAP financial highlights.

Revenues were up, a very healthy 11% for the year. The recurring revenue increase was a result of net new business, internal growth, acquisitions and 99% client revenue retention. Approximately 50% of the growth was organic and 50% was related to our recent acquisitions.

I am very pleased with our strong recurring revenue closed sales results due to a greater than 60% increase in closed sales of $5 million per deal, which grew in total to $108 million in fiscal year 2012. I will discuss how we achieved these strong sales results to our increased product offerings in a few minutes.

The revenue was up 6% as event-driven and distribution revenues were essentially flat with fiscal year 2011 results. I am satisfied with our non-GAAP diluted earnings per share results. They were up 13% to $1.55 per share for fiscal year 2012. This increase was primarily driven by higher revenues and our continued focus on cost containment.

Our non-GAAP to GAAP adjustments to our results consisted of Penson impairment charges, IBM data center migration costs and some restructuring. The Penson charges are related to the cost incurred by the company in connection with assets the company held as a result of the sale of substantially all of our security clearing contracts to Penson, and the Penson and outsourcing services agreement.

I will discuss this in significantly more detail on the next slide. The IBM data center migration cost or the cost we incurred in connection with the migration to our new data center. Most importantly, the IBM mainframe conversion was successfully completed on time without any service interruptions. We also incurred some restructuring costs during the year.

Our non-GAAP adjustments to GAAP are significant non-recurring charges and we believe excluding them from our operating results provide a better representation of our operating results in run rate the business. In the case of Penson, which I will speak to later, this should not imply that we were not very disappointed in net outcome.

During the year, we repurchased approximately 1.7 million shares of Broadridge stock at an average price of approximately $23.6 per share to offset stock compensation dilution. In August, the board approved a new stock repurchase plan for up to 4 million shares. With the new authorization, the company has approximately 10 million shares available for repurchase under its share repurchase plans.

Now let's turn to slide five. In May 2012, Penson announced that it had entered into an agreement through Penson Financial Services, it's U.S. broker-dealer subsidiary and PEAK6 investments to form Apex Clearing Holdings, to provide clearing and related services to Penson's U.S. securities correspondence.

In June, 2012, Broadridge entered into a 10-year Master Services Agreement with Apex, under which Broadridge will perform outsourcing services for Apex consistent with the securities processing and back office support services we had previously performed Penson and its subsidiaries.

Broadridge's fees under the Apex Master Services Agreement are based on a percentage of Apex's revenue, and Apex Master Services Agreement provides for a termination fee to be paid to Broadridge any event is terminated by Apex for convenience during its term.

As a result, for the fiscal year ended June 30, 2012, there is $74 million in pre-tax charges related to Penson. The charges included $21 million related to the cancellation of a five-year subordinated note with Penson. $13 million impairment of our investment in the Penson common stock, $47 million impairment of the deferred conversion cost associated with the Penson Outsourcing Services Agreement and other charges of $8 million.

These charges were offset by the elimination of our obligation to reimburse Penson $15 million related to third-party vendor services. These charges resulted in a $54 million impact to our fiscal year 2012 GAAP net earnings from continuing operations after consideration of our tax rate and related loss of net operating carry forward of approximately $7 million.

We anticipate that the new Apex agreement will have a dilutive impact on our fiscal year 2013 operating results of approximately $0.08 per share when compared to where we were with the Penson contract in fiscal year 2012. The Apex fees are based on a percentage of Apex's total revenue, including interest income, so actual results can be higher or lower than planned.

While I am not pleased that the new agreement will have a negative impact on our earnings, it was a right long-term decision for Broadridge and our industry, and accordingly for our clients, shareholders and associates. The decisions that we made were consistent with maintaining Broadridge as a strong market leader.

Our commitment to create long-term value combined with talented associates, great products and unparallel service make it easier to choose among top short-term choices for the long-term greater good.

Consistent with our strong brand and the value we place on our market leadership and long-term value creation, key decisions such as these are based on doing the right thing. The confidence that we have in our outsourcing business and the service profit chain were also supported the decision that we made.

Outsourcing remains a key strategy and has a very significant pipeline. In this case, the market needs the priority. The decisions that we made were also in the long-term best interest of our customers, associates and shareholders.

Part of our confident in outsourcing is tied to the fact that the largest potential transactions in our sales pipeline are outsourcing deals. With that said, we will always challenge ourselves as to which assets and strategies will yield the best returns for our shareholders.

Let's move on to slide six, closed sales performance. While I am certainly very pleased with our recurring revenue closed sales results. We finished fiscal year 2012 with a very strong fourth quarter and our recurring revenue closed sales were up 6% over fiscal year 2011's solid results.

Our Investor Communication segment continued to have excellent recurring revenue closed sales. Full year closed sales of $72 million were up 13% as compared to fiscal year 2011. We also had very solid sales results in our SPS segment. Recurring revenue closed sales of $48 million were down slightly from last year's record results of $50 million. Remember, last year's results included a large $22 million deal.

Our closed sales result included very few large transactions. Of the $120 million in closed sales $108 million were from deals less than $5 million. That is a greater than 60% increase over fiscal year 2011, and was achieved primarily as a result of the company's growing, emerging and acquired products.

We have a very solid pipeline. The ability to have sales not dependent on the big deals is very tangible, because of our product load both organic and acquired. In the past, I talked to you about the growing momentum in the business and that beyond IBM, Morgan Stanley and Penson, there was true momentum in the business. Thank goodness that's true, because Penson offset some of what we were hoping to get done in fiscal year 2012, with the momentum fiscal year 2012 sales going forward (Inaudible) our Penson is the same and real.

In fiscal year 2012, organic and acquired products accounted for approximately 45% of closed sales and we anticipate continued growth in this activity in fiscal year 2013 expecting that they will account approximately 55% to 60% planned closed sales activity. For fiscal year 2013, we expect recurring closed sales in the range of $110 million to $115 million.

Let's turn to slide seven for a acquisition update. Since our spin-off, we have invested approximately $460 million in acquisitions. For fiscal year 2012, our acquisitions contributed approximately $217 million in revenue, $39 million in EBITDA, and $15 million earnings before taxes.

We anticipate acquisitions will generate approximately $250 million in revenue, $50 million in EBITDA and $25 million in earnings before taxes in fiscal year 2013. While we looked at numerous acquisition opportunities during the year, we pursued three and closed one.

On September 8, 2011, we acquired Paladyne Systems the (Inaudible) provider of buy-side technology solutions for the global investment management industry for approximately $72 million. We were attracted to Paladyne, because it was a profitable recurring revenue model in the high growth buy-side customer segment with a proven track record of success.

When we chose to use your cash for an acquisition, it is because we believe the acquisition will drive more value for Broadridge given the halo effect revenue growth creates over all of our outstanding shares.

While we have made a handful of acquisitions over the last few years, we reviewed hundreds of strategic and disruptive opportunities. Our internal rate of return hurdle rate of 20% is significant and we only pursued those acquisitions candidates that were a 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.

Let me 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 strong 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.

Going forward, we will determine the best way to consistently report acquisition results. Amortization of intangibles was approximately $22 million in fiscal year 2012, and we anticipate a similar amount in fiscal year 2013.

The impact on earnings is approximately $0.11 per share in both years. Presently, Broadridge does not add this amortization of acquisition intangibles back to our non-GAAP financial results like many non-GAAP reporting companies do.

Now let's turn to slide to eight, our fiscal year 2013 guidance. We anticipate solid recurring revenue growth of 4% to 7%, and total revenue growth of 3% to 4% in fiscal year 2013. The revenue growth will be driven primarily by recurring revenue from closed sales and some internal growth. Also, our guidance does not anticipate any increase in event-driven or distribution revenues.

We expect non-GAAP diluted earnings per share from continuing operations to be in the range of $1.65 to $1.75, which excludes the impact of restructuring charges. GAAP earnings per share from continuing operations are anticipated to be in the range of $1.60 to $1.70.

Free cash flow should be approximately $225 million. More or less cash flow is tied to potential variations in working capital and conversion cost. This is a strong free cash flow business. This strong free cash flow has enabled to have a strong history of increasing dividends.

The company's board of directors declared a quarterly dividend of $0.18 per share payable on October 1, 2012. As a result, the annual dividend will increase approximately 13% to $0.72 per share. This will be the fifth year in a row that we have increased our dividend payout.

As I stated a little earlier, the board approved a new stock repurchase plan for up to 4 million shares. With the new authorization, the company has approximately 10 million shares available for repurchase under its share repurchase plans.

Now, I'll turn the call over to Dan, who will go into more detail about fiscal year 2012's financial results and fiscal year 2013's plan.

Dan Sheldon

Thanks, Rich. Let me turn to slide nine, the revenue growth drivers and the EBIT margin. You can note on the far right in blue, you can see we're providing the guidance as Rich just mentioned of 3% to 4% for total consolidated revenue growth and by the way again 4% to 7% for the recurring, because as you will see that I'll walk you through, it's all coming from the recurring.

We expect to get four to five points of growth from sales, or 70% is already sold and in the process of being converted. We are still expecting a client revenue loss rate of about 1%. The reduced revenue from the Penson business is about 1 point in revenue, and it is netted into internal growth and that's why you see 0% growth in this line.

We do expect to see some improvement in stock record positions and trade volumes at the higher end of our guidance, which I will go into more detail when I review with your our SPS and ICS on the next two pages.

Acquisitions for the most part had hit their 12-month anniversary dates, so we are currently showing no growth coming from acquisitions. In the second bullet at the bottom, we point out that acquisitions since then collectively represent approximately 10% of our total revenues, 7% of our EBIT and 10% of our EBITDA.

Given that we expect to be acquisitive in the future, we are looking at ways to bring greater transparency to the cash margin benefit, or EBITDA these acquisitions provide by showing margins with and without acquired intangible amortization.

The EBIT margins below include approximately $22 million in intangible amortization, expense, which has a negative impact to EBIT margins of approximately 100 basis points and $0.11 per share impact on fully diluted earnings per share.

Back up to the chart. With respect to both event-driven and distribution revenues, we're currently guiding for no growth here, but I will discuss further whenever (Inaudible). We are expecting margin expansion of 100 basis points to 180 basis points, where IBM and Morgan Stanley Smith Barney make up 80 basis points of that total.

These margins we call non-GAAP and do not include approximately $10 million, or $0.05 per share in one-time restructuring charges related to some right-sizing we are doing in the outsourcing business given the reduced revenue from the Penson transaction.

Let's turn to slide 10. Securities Processing Solutions. We finished fiscal year '12 with 10% revenue growth, where seven points came from the acquisition of Paladyne and the Penson outsourcing agreement. An additional five points came from closed sales, which were offset by client losses and internal growth. Although margins were down 80 basis points, excluding the impact of Paladyne, they would have been up 40 basis points.

In FY'13, we expect revenues to be up four points at the high end or flat if we continue to experience lower trade volumes. Closed sales should generate approximately six to eight points, which is then partially offset by the impact of Penson and client losses.

Penson is expected to have around a three-point negative impact to revenue year-over-year and a $16 million to $20 million negative impact to EBIT, which for the most part is offsetting the $15 million we expect in savings from the successful IBM migration.

Given the lower revenue, we expect from the U.S. Penson Apex arrangement as well as the anticipated lower revenues related to the Penson Canadian business, we have classified this as a price concession and netted into our internal growth statistics.

By the way, equity trade volumes were down seven points in Q4, while fixed income trade volumes were up nine points. We did see increased activity in our non-trade revenues, so internal growth overall for the quarter and the year were down a point and two points, respectively.

Our guidance for the year assume some return of equity trade volumes at the high end and slightly negative at the low end. The margin ranges are primarily impacted by the way by trade volumes and conversion timing.

However, the most important to take away from this page is that closed sales in fiscal year '12 of $48 million and the fiscal '13 outlook for $60 million to $80 million would put this business in a position to add 8 to 11 points in annualized revenues from sales alone, where again in fiscal year '13, we're expecting to get six to eight points of growth from closed sales.

Let's turn to slide 11, Investor Communication. We finished fiscal year '12 with 5% revenue growth and margin expansion of 120 basis points. Recurring revenues were up 11%, two-thirds of which came from organic growth and one-third from the carryover of acquired businesses. With respect to margins, the core business and acquisitions added 98 points of the pick-up and the Morgan Stanley Smith Barney another 30 points.

Our fiscal year '13 outlook has us expecting 4% total revenue growth and margin expansion of over 200 basis points. In fiscal year '13, we expect recurring fee revenue growth of 8% to 10%. This business has had a recurring revenue CAGAR since the spin-off of 9%, which has included four points from acquired business. In FY'13, we expect all the growth to be in the form of organic growth.

Our 4 points of total revenue growth is all coming from continued strong closed sales, including new products and acquisitions about the same level of stock record position growth that we had in fiscal year '12, and a 99% client retention rate.

As already mentioned, we are not including any growth for event-driven or related distribution revenues in our outlook, however we did at least see some improvements in Q4 of last year. We will continue to monitor this as we move through the first half of fiscal year '13.

We anticipate significant margin improvements of well over 200 basis points in fiscal year '13. Let me put this into perspective. The core business, including acquisitions in fiscal year '13, is expected to provide over 100 of those basis points as the acquisitions in this segment are now fully integrated. The rest of the improvement is expected to come from the completion of our Morgan Stanley and some selective restructurings we did last year.

I'll now turn the call back over to Rich.

Rich Daly

Thanks, Dan. Please turn to page 12 for my summary wrap up. I am satisfied with our non-GAAP operating results for fiscal year 2012. Recurring revenue was 11% and total revenues were up 6% as a result of strong recurring revenues driven by net new business, internal growth, acquisitions and excellent client retention. Event-driven revenues were flat with fiscal year 2011. We also had very good recurring revenue closed sales of $120 million due to the growing success of our emerging and acquired products.

As I said earlier, I am not pleased with the new Apex agreement as a result of the Penson transaction and that it will have a negative impact on our earnings. This was the right long-term decision for Broadridge and its shareholders.

Outsourcing remains a key strategy and is a large component of our sales pipeline. I am confident in the future growth of our outsourcing business. Strategically, we believe that our outsourcing assets will position Broadridge to pursue new financial service opportunities. The business that we spun-off five years ago was very different from our business today.

In the past, we were generally relying on stock record growth, trade growth and event-driven revenues, but today the driver that has enabled us to perform through the market downturn has been product, and a lot more of them.

Therefore, we maintain our confidence in the future, but it is not because we are banking on stock record growth, trade growth or event-driven revenues returning. It's all about new and enhanced product, increasing brand strength and Broadridge's ability to sell and execute to the new needs of our marketplace.

We have a broader product portfolio and more potential right now than we've ever had in our history. We have a sales plan that gives us multiple ways to succeed and multiple paths to take because of these expanding products.

The momentum that Broadridge has achieved is real and sustainable. Everything you (Inaudible) about our future revenue and earnings growth opportunity is tied to our expanding product breadth. The bottom line is that the markets have been down for a prolonged period of time, however we are growing our business regardless of when they improve.

Broadridge is well positioned in large markets and we have a clear proven sales strategy for growth. Our strategy is to be the leading provider of investor communications and technology driven solutions to broker dealers, mutual funds and corporate issuers.

We have a balanced and diverse portfolio across our two business segments with over 160 product offerings now. The bank broker-dealer communications, we will reinforce our role as the industry leader by accelerating the Broadridge-driven transition to eDelivery, and we will drive growth in adjacent markets through new, organic or acquired solutions.

This is a new growth opportunity made more tangible by the New York Stock Exchange, Proxy Fee Advisory committee report and it's recognition of a value of the Broadridge investment Mailbox solution.

For mutual funds, we will leverage our unique data hub position and the bank broker-dealer market and we will grow retirement trade processing, data aggregation and marketing communication services.

For Issuer Solutions, we will capitalize on our experience and beneficial processing to expand direct relationship with issuers and also expand registered proxy, transfer agency and enhanced issuer services. For broker-dealer technology and outsourcing, we will leverage our market leading global platform to expand current relationships and also grow global processing, business process outsourcing and selectively pursue new agencies.

We will grow both segments by leveraging our unique network, our client relationships and our brand and service reputations. We will do so with a combination of continued strong sales growth across both segments, potentially enhanced by strategic tuck-in acquisitions.

We will stay the course on the successful path we charted over the past few years by expanding product offerings and their related sales. If there is one takeaway I would like to have you leave this call with is that irrespective of our markets and clients' challenges, Broadridge has proven that we can create and acquire products that will grow revenue. The most significant true statement is, our fiscal year 2012 closed sales results was a greater than 60% increase in sales than $5 million per deal.

The New York Stock Exchange (Inaudible) deserves more commentary since this once proceed challenge now screens opportunity. In May 2012, the Proxy Fee Advisory committee to the New York Stock Exchange issued its recommendation on fees for beneficial shareholder distribution.

The report was a combination of work and analysis, which began in September, 2010. The report makes recommendations to changes in fees, however at this time it is not a formal proposal to changing New York Stock Exchange rules pertaining to fees. Such changes would be subject to public comment and SEC approval.

The report acknowledges that the current system to beneficial shareholder communications and proxy distribution is reliable, accurate and secure. The report makes recommendations for changes that would better align fees to the work involved and provide greater transparency some fees would increase, others would decrease.

The report estimates that there would be a modest decrease of 4% in fees overall spread across the entire industry. The fee impact on any one participant in the process will vary by individual circumstances such as for example the number and type of positions held the extent to which physical mailings are eliminated et, cetera.

The report discusses the upside associated with future cost reductions to issuers and greater use of technologies by retail investors. Overall, I believe the net impact to Broadridge of any potential changes would be slightly positive.

Broadridge welcomes the opportunity to provide additional information to the Proxy Fee Advisory committee in connection with open items such noble list stratification and the appropriate level of success fees for Investor Mailbox-like solutions designed to increase retail participation.

Long-term, we believe this acknowledgement of Broadridge technology hays way the way for more efficient investor communications, greater retailer participation and appropriate shareholder returns.

Our data center migration to IBM was substantially completed in June 2012 with the last portion of the migration scheduled to be completed in august. The migration will lead to an anticipated $15 million in cost savings in fiscal year 2013 and $25 million for the nine subsequent years beginning in fiscal years 2014.

The Morgan Smith Barney conversion was fully implemented in fiscal year 2012, as anticipated and will generate earnings right in line with our expectations. For fiscal year 2013, we anticipate solid recurring revenue growth of 4% to 7%, and total revenue growth of 3% to 4%. The revenue growth will be driven primarily by recurring revenue from closed sales and some internal growth. Also, our guidance does not anticipate any increase in event-driven or distribution revenues.

We expect non-GAAP diluted earnings per share before continuing operations to be in the range of $1.65 to $1.75, excluding the impact of Penson charges. Broadridge's product breadth, ability to grow revenue recognition by our industry for leadership as an excellent provider of mission-critical services has increased dramatically over the last five years.

To-date, this has only enabled us to maintain shareholder value. We remain committed and confident that our long-term focus will finally lead the sustainable increases in earnings that will provide our shareholders with the returns they deserve. Finally, I'd like to take this opportunity to personally acknowledge our associates who remain dedicated, engaged and focused as we continue to find ways to create shareholder value through these challenging times. Because of their reference, our future for our associates, clients, shareholders and industry is very promising.

I'll now turn the call back over to the operator and we welcome your questions as always. Kanisha?

Question-and-Answer Session


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

David Togut - Evercore Partners

Rich, you've characterized fiscal recurring revenue closed sales of $120 million as strong, but that's at the low end of your guidance of 1.10 to 1.50, so I really have two questions. Number one, where is sales force quota set relative to your recurring revenue closed sales guidance? Then second, if you could give us more insights into the demand environment, both for ICS and SPS, and what you are seeing in terms of unit pricing trends in both businesses.

Rich Daly

Sure. David, I think it's a great question and I appreciate you asking me to put it context. The reason I am pleased is that we have always been dependent on a couple of large deals, at least a large deal to even get into our range, and large deals have throughout our entire history always been lumpy just because of the long-term nature of getting us closed.

For us to have had an increase of 60% are what I'll call the bread-and-butter deals, the basics to the point that we have confidence in those to be able to make the range and the large deals, which we are confident will continue to happen albeit on a lumpy basis to even enhance our ability to grow revenue more so is why I was so pleased with the results for this year.

Because of product, we have more control of destiny, okay? Without the dependence on the large deal, we think the large deals, when they happen, we'll make it much easier to get into the range and even take us to the higher end of range as we go forward, because of our confidence.

In terms of the pricing, I would say that the pricing of the deals that we did this year were pretty much in line with the expectations that we had, and we feel good about the value proposition and we feel good about the differentiation we have of our products versus the products in the market, because, one, we're viewed as the industrial strength reliable player. Two, because the value propositions and the efficiency we bring to our client is very tangible and real.

David Togut - Evercore Partners

Rich, if you could perhaps address my question on sales force quotas, are those set at the low end of your guidance or the high end? I am just trying to understand that you are setting stretched goals for the sales force.

I mean are you expecting them to be at the high end of closed sales for FY'13? Are expecting big deals to actually close in FY'13, or should we expect kind of small deals singles and doubles to get you to kind of the low end of the range, but needing big deals to get more towards the high end?

Rich Daly

David, I apologize for not picking up that part of the question. It's a great question not only for the sales force, but for management including me. The quotas are generally set higher, so even though I am saying that I am so pleased, when the proxy ultimately comes out, my quota performance versus sales is slightly below what the target would be, okay? But, at the time we set the plan up, we never anticipated the success of the deals on the $5 million and we never anticipated the increased market acceptance of our new and acquired products at the level in particularly that we achieved this year.

Dan Sheldon

In answering the last piece of that which was how should you think about hitting the singles and doubles? That's pretty much in a $100 million range. Okay? Then above that is the greater than $5 million.


Your next question comes from Tien-tsin Huang from JPMorgan.

Tien-tsin Huang - JPMorgan

Hi, thanks. Good morning. Just wanted to ask about the visibility into the new Apex agreement and how evaluate that the $0.80 delta from the prior deal?

Dan Sheldon

Okay. The way we looked at that was is that, because it's on a variable pricing and that we looked back in time like the last few quarters how they were doing as well as made some projections out there, we were able to say you know what? We think that right now when we say the $0.08 difference would more come into the high end of our guidance and then those maybe $3 million or $4 million worth are at the lower end of our guidance if there was any problem, call it, any of their volumes or revenue.

Tien-tsin Huang - JPMorgan

So, based on what you have seen sort of through July, what's been the sort of the run rate or the appetite of clients staying with Apex? Have you seen any big change or is it still to come?

Dan Sheldon

For our visibility that we saw pretty much through June, okay? And in July, it wasn't a client retention issue that they were facing. It's like everyone out just like we're facing trade volumes and clearing.

Tien-tsin Huang - JPMorgan

Great. Okay. Then I just wanted to see if the retention has changed at all yet. Then just as a follow-up and just maybe can you just walk us from the prior $1.80 view that you gave us, I guess now to the mid-point of $1.70. It sounds like $0.08 is Penson. I think there were restructuring, savings as well, so what's the delta there?

Dan Sheldon

The way to think about the $1.80, what we just gave you on the $0.08 was year-over-year, so at last year, okay? We had $42 million from Penson, and now I gave you the range, call it, 24 to 27 type of thing. The way to be thinking about the $1.80 was, we were anticipating $50 million from Penson, so if you just do the math, you can get down to the difference, okay? Which is 23? Right? or 53 to 27? Okay?

Then most of that all fall into the bottom line, and then we also have some transitioning costs that are ongoing. This is not part of that $10 million what we're calling restructuring charge, okay? This is dollars that we agreed to, to help through a transitioning which will go on for a couple of years, and that's what makes up the difference, so what we have really said is they are somewhere between $0.10 and $0.11 of off our $1.80.

Rich Daly

Tien-tsin, this is Rich. Given what JPMorgan does and the fact that you have a clearing business, you are probably very familiar with the challenges for projecting our business. In putting together the plan for this year, we try to anticipate some of the current challenges of the business, including clearing firms' ability to retain their client.

We also did not anticipate any return of interest rates. This new transaction for us is a new economic model, because it's a percentage of revenue deal which includes interest rates as I said in my comments, and even though interest rates are at a 60-year stock low from what I understand, we have nothing in there that anticipates rates coming back during our planning period.

Tien-tsin Huang - JPMorgan

Okay. It's good to know. Last one for me. I guess, acquisition appetite here I know your long-term guidance you've talked about adding one or two points in tuck-ins. You are assuming zero here. Is there stuff to buy that's close? I am curious what the status is there.

Rich Daly

Like with large deals, acquisitions fit into the same category, but it's not over until it's over, so let me refer to last year, which will give you a better view in terms of the future. I said we pursued three transaction.

I was highly confident, we would have closed as we were proceeding through it, so we will not put anything into a plan until it's closed, and because of our what we believe is very high hurdle rate that we have internally for acquisitions and our really strong discipline not to back away from that, I wouldn't plan on any new deals being there until we announced to you that we have actually successfully closed them, but you should believe based on the success that we've had in doing transactions and we think the very strong contribution and impressive returns we are getting, you should believe we're working very hard to identify and close.


Your next question comes from Jim Kissane from Credit Suisse.

Jim Kissane - Credit Suisse

Rich, if you look at the $60 million to $80 million that you are assuming for SPS closed sales in fiscal '13, how much of that's coming from outsourcing and what's the margin profile on that? Just following up on that, presumably the smaller deals that you had success on in fiscal '12, they'll have somewhat higher margins than say the corporate average?

Rich Daly

Jim, because of the large deal challenges, okay? Even the large deals we put in there, we cap the amount that we put in, so yes there would be one or two large deals, but they're not in our plan at the value we expect them to bring. It's a way hedging it. This year, the way we managed successfully through that hedge was by having more basic transactions the less than $5 million close than we would have expected to be successful at.

We're building off of that success and I put that over the number that we have overall for sales next year, we're expecting 55% to 65% of the growth versus the 45% growth we had this year to come from that category.

Dan Sheldon

Yes. Let me just help with just adding onto that. If you think about that number that we've just talked about, okay? Then think about this, so last year we had about just over $10 million in outsourcing and there was one large deal in there just slightly over $5 million.

As we look at next year, the thinking in our numbers we are kind of giving you for guidance, they could be anywhere between $10 million and $15 million, but Rich is right. Everything we are looking at isn’t really just outsourcing alone. This is really going to be a combination of outsourcing as you think about people and technology

When we think about margins, we’re still in that we'll call it 35% kind of range, blended range for that, okay? And then there’s other things that could be out there that are much larger.

Rich Daly

Jim let me see if I can clarify what I said a little better. In my formal comments I said that organic and acquired was approximately 45% of closed sales, and that in 2013 we are expecting they will account for approximately 55% to 60% of closed sales, so if you go back at any point in time over our history and even just a couple of years ago, we did not have that confidence and momentum in that new organic and acquired product activity.

Jim Kissane - Credit Suisse

I think you said what portion of sales in fiscal '12 came from acquisitions that you made since the spin or since maybe '08?

Rich Daly

Self-generated new products and acquired was 45%, approximately 45% of closed sales. The plan we are putting together are planned activity. Now, we’re thinking it’s going to be 55% to 60%. Let me give you an example. If we had the fortune of having multiple launch deals then it wouldn’t be because the overall sales number would be up.

The organic and acquired would be a lower percentage but still come in about the same number that we're planning, the dollar amount just not the same percentage amount. That would be a great problem to have.

Dan Sheldon

The question was acquisition, so let's put that in perspective of the 45% which was just under $30 million came from the acquisition. Slightly over $10 million came from the outsourcing and the rest then came from emerging product, I think that’s the right way to put it in perspective.

Jim Kissane - Credit Suisse

I don’t want to get into too much detail, but any particular acquisition accounting for disproportionate amount of their sell success?

Rich Daly

We've had pretty good success and very close to our original plans that we put together overall across the board. The blended portfolio that’s how we’re going to be talking about it, but there is no disappointments on any of the sales. The point of the matter is, some are going to do better and lot of it has to do with two, when the deal closes because some of them are little bit larger than some of the other ones.

Jim Kissane - Credit Suisse

Okay. Rich, is it safe to assume given the new authorization that you buyback more stock in fiscal ’13 than you did in fiscal ’12?

Rich Daly

Jim you know my position on this is that we’re never going to say before we do something what we may or may not do, but we’ll report on a very timely basis after we do it.

Jim Kissane - Credit Suisse

Got you. Thank you.


Your next question comes from Ian Zaffino from Oppenheimer

Ian Zaffino - Oppenheimer

Hi. On the subject of deals, what areas you are looking at right now? From our perspective it's great to make those acquisitions versus buybacks or dividends et, cetera. You know what type of criteria you are looking at for deals or I know you talked to someone about the amortization, but what's the best way to assess how good a deal is when you first do it? Just help us out a little bit. Thanks.

Rich Daly

Ian, without repeating, we hope transparent data we gave you on the performance of our acquisitions to-date and even breaking out the intangible amortization amount there. That we believe gives you a pretty clear view of the acquisition performance to-date, and I would tell you that we would look for additional transactions to fit in the same category. By the setting the internal rate of return hurdle rate of 20%, we believe when we identify a transaction that meets our criteria, that gives us the ability to create that level of performance.

In terms of the areas both, in my wrap up and when we talked about the strategy of the business, across our Investor Communication segment where we've had transactions, access data, NewRiver, also Matrix in our expanding products in the mutual fund world, okay? Paladyne, going, expanding our Securities Processing segment into the buy-side where we believe we’re well positioned.

Those segments that we are servicing, those segment that we believe will recognize as a very good vendor partner, and a very good market leader and as a very reliable and cost-effective player, it’s leveraging that brand which is what we have a very strong desire to continue, so you should expect us to go out of our natural areas, where we are a proven success company.

You should expect us to look in those areas, where we can leverage our brand, leverage our distribution channel, leverage our infrastructure, leverage our sales force and have a far better hedge than buyers of the same property, because of our strength in our markets.


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

Christopher Donat - Sandler O'Neill

One quick question on the expanded repurchase authorization. If I take the 10 million shares at current prices that's over $200 million worth of stock you would be buying back and that’s a pretty large chunk of the $225 million of projected free cash flow.

I’m just trying to get the rationale for why the Board went from 6 million to 10 million. Is that really to say, hey, if we don’t do any acquisitions then that gives us the ability to buy back shares?

Rich Daly

Chris, this is Rich. Again, when it comes to repurchases, we recognize that we have no desire to hoard cash which I said in my comments. We’ve recognize that there will not always be the opportunities we want for tuck-ins.

We’ve recognized that there are appropriate times when it is opportunistic to buyback and we will absolutely consider all those factors as we analyze what's the best use of our shareholders' cash to provide greater returns to them, so we will always consider those variables and in considering those variables, having an authorization, gives us the flexibility if and when we determine that it's appropriate that the best use of our shareholders' cash at that point in time and the best opportunity to create returns for our shareholders.

Beyond that, all right? I wouldn't be comfortable going into any of the dialogue that I've had with the board because I'm not looking to telegraph anything one way or the other, all right? But I will always be very timely in a call explaining exactly what happened if and when we do something and why we did it.

Dan Sheldon

Yes. The only think I would add to that is let’s not forget the cash balances we have on hand as of June 30th, okay? Which is over $320 million. We want to keep in like $150 million of that and at the same time our debt capacity now, keeping to our 2 to 1, so those are all levers that we can in order to do the various thing Rich talked about, invest in the business acquired, dividends and buybacks.

Rich Daly

Rest assured every decision that I discuss with the board and that we will ultimately execute is tied to a relentless contentment to the need to create shareholder value.


Your next question comes from Peter Heckmann from Avondale Partners

Peter Heckmann - Avondale Partners

As regards the outsourcing business, can you dive it a little bit in terms of the revenue level and the expected losses post the change to Penson/Apex. Then what you're estimating in there in terms of potential future changes.

Rich Daly

Right. The outsourcing business, when you go back to our key steps pages is what we'll call the $82 million ending last year. There is new business coming onboard as well as you know we have now the down tick from the Penson business.

Dan Sheldon

One additional thing that's not specifically related to the numbers, Pete, but if you think about the market and even some of the press releases that are client who aren't live yet, have enabled us to issue with them.

Schwab announced about their international offering and we anticipate that going live in the very near future. Bloomberg announced that they are going to be moving trade book on to it and we anticipate that going live in this fiscal year.

Although we're not privy to all of their internal dialogues and we're not privy to their growth plans specifically both of those organizations as an example have proven track records of being market leaders in what they do, and so we're very excited about the fact that the outsourcing opportunity enabled us to enter into a relationship with those two very, very brand name organizations along with the dozen plus other clients that we've entered into the relationship with.

Although it's not in the plan to say they are all going to drive inherent growth, okay? As we go forward, I would be stunned if the transactions we entered into with just all these very strong organizations, there are so many strong organization in the outsourcing space, didn’t create inherent growth beyond what we are going forward.

Rich Daly

Yes. Just kind of going back on the perspective of kind of things we've talked about a lot. I told you add just over $80 million, obviously it is around $20 million as well as the new business that we've been talking about this in the backlog et, cetera should drive us above $70 million.

We did say that by the way with no huge deals that we should be doing 10 to 15 in sales next year, but what I will tell you is in our pipeline the largest amount of activity that we're excited about is in the outsourcing space. Let's see if we land it, but the point of the matter is, I haven't seen as high of a level of interest in the pipeline in any of the past years as I have seen to where we are today.

Peter Heckmann - Avondale Partners

Okay. That's great. Maybe we are not specifically drawing a roadmap, we get an indication that while that business may have fallen back to generating, operating losses. We should be in a good position to get it back into the black and potentially reach those target margins over a reasonable period of time?

Rich Daly

One of the things that we are dealing with is the difficulty in projecting these mega large deals Dan's comments support the formal, comments that I made about where the most significant opportunities, we have in the pipeline are I'll also say that the one product that consistently enables Broadridge and myself to not only have meaningful dialogue in the C suite, but at the absolute highest level being the CEO in the C suite is the outsourcing opportunity.

Peter Heckmann - Avondale Partners

Great. Then just one further question on the event-driven piece. I guess I am little bit unclear if there change in control at a mutual fund firm does that automatically then require some proxy activity, or does it kind of dependent on how that change of control goes when there is going to be fund that emerge?

Rich Daly

It does depend on how it goes, but in the majority of cases, historically a change of control require shareholder approval and things that require shareholder approval have to involve Broadridge because we handle the vast, vast majority of the street side and of course because of our strong technology we win a very high percentage of the registered site as well, and we certainly intend to continue that.


Your next question comes from Leo [Schmidt].

Unidentified Analyst

Hello, gentlemen. I wanted to clear up something in mind here. You were saying that you had a very large percentage last year of about 45% of the under the $5 million deals. I thought I heard you say lot of that is having to do with your new should I say product offerings that have come with the acquisitions, and I wanted to make sure that's the case

If it is, is this changing some of the character of your growth, meaning that you’re going to be able to have a lot more the smaller, possibly more profitable under $5 million opportunities that will just drive growth may be in a more consistent and profitable way.

Rich Daly

Leo, I am delighted you are asking for clarification, because what you're really leaving with is a key takeaway that we were hoping you would leave with which is, because of our success in organic and acquired products, okay? We were able to have a strong fourth quarter in sales and we were able to get further into the range than we would have anticipated getting into without a large deal.

Going forward, in our plan for next year, yes. We are intending to continue that. We have very detailed sales plans by product, by business unit, by sales head, by sales individuals which reconciles back to all of this and so we are expecting Broadridge overall to be able to sell more of these organic we develop new and acquired products as we go forward into fiscal '13.

Unidentified Analyst

As I think about this as conceptually, this should give you a more consistent growth rate meaning that you can add these lumpy outsourcing deals that would accelerate the growth rate, but you are not necessarily counting on that as you move forward. Am I putting words into your mouth there or is that what's the message I was supposed to be taking away?

Rich Daly

Leo, I like the way you stated that, and because sales can never be something as guaranteed, all right? I said specifically that the one takeaway I'd like you to leave the call with is that irrespective of our markets and clients challenges going to right what you said? Broadridge has proven that we can create and acquire products that will grow revenue.

The proof statement this year, from the 60% increase we had in sales of less than $5 million per deal is exactly what you're referring to. We believe that going forward we can maintain that momentum and have at least to the low end of the range more control of destiny in achieving our sales performance than we've historically had.


(Operator Instructions). Thank you. There are no further questions at this time. I'll now turn the call back to Mr. Daly.

Rich Daly

Thanks, Kanisha. Well, thank you for your active participation today. It is truly sincerely appreciated. Dan, Rick and I are going to choose to have a great day, but I will tell you we are also going to choose to continue on the path to find multiple ways to create the shareholder value you deserve. Thanks so much.


This concludes today's Broadridge Financial Solutions Incorporated fourth quarter and fiscal year 2012 earnings conference call. Thank you for your participation. You may now disconnect.

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