Broadridge Financial Solutions Inc (BR) 2007 Q4 法說會逐字稿

Good morning.

My name is Carol, and I will be your conference facilitator.

At this time I would like to welcome everyone to the Broadridge Financial Solutions fiscal year and 2007 earnings conference call.

I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

(OPERATOR INSTRUCTIONS).

I will now turn the conference over to Marvin Sims, Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning, everyone.

I am Marvin Sims, Vice President of Investor Relations for Broadridge.

This morning I am here with Rich Daly, Chief Executive Officer of Broadridge and Dan Sheldon, Chief Financial Officer of Broadridge.

There is a slide presentation that accompanies today's earnings call and webcast.

This slideshow presentation is available for you to print on the Investor Relations homepage of our website at Broadridge.com.

During today's conference call we will discuss some forward-looking statements that involve risk, and these risks are discussed on slide one and in our periodic filings with the SEC.

At the end of the presentation there will be a Q&A session.

Please, during the Q&A session please try to limit your questions to one per participant.

I will now turn the call over to Rich Daly for his opening remarks.

Rich.

Thanks, Marvin.

Good morning.

Please turn to page 2, the agenda slide.

I will start today's call with some opening remarks about our fourth quarter and full-year results.

I will then spend a few minutes on the framework of our revenue contribution drivers.

We are doing this since we have clearly heard from many of you that there is a need to better understand the composition of Broadridge's revenue.

I will then turn it over to Dan Sheldon, our CFO, who will review with you our financial results in more detail.

After Dan, I will come back to review our fiscal '08 financial guidance.

I will also give you a brief update on other key points and my summary before we head into the Q&A part of this call.

Let me first start by saying that we are pleased with the fact that our primary elements of growth, which includes sales, client retention and market trends are all positive for the quarter and for the year.

This excludes the loss of the two large clients previously disclosed in our form 10, which was filed prior to the spin-off.

Generally all trends are in line with our expectations.

I am pleased with our financial results for the fourth quarter and fiscal year 2007 were slightly better than the high end of our previously announced guidance range.

Revenues for the quarter and fiscal year were up 8% and 11%, respectively.

Our revenue growth for both periods was derived primarily from the existing client base.

We continue to drive margin expansion for both the quarter and the fiscal year even with incremental investments in our products.

I will talk about those later.

Our sales for the quarter were strong at $44 million with 70% in recurring sales and 30% in event driven sales.

I'll be providing an explanation of event driven sales in a minute.

The fourth quarter enabled us to finish the year at $123 million in sales.

This gave us good momentum and combined with a solid pipeline gives us confidence in achieving our plan as we head into fiscal '08.

Now let's move to the next slide and discuss how we will classify our revenue component in more detail then we had previously disclosed to you.

During the last conference call and various investor meetings we used the terms recurring revenues and non-recurring revenues when describing and discussing our revenues.

The term non-recurring underestimates and understates the quality of these revenue components.

Although they do not automatically happen on an annual basis, the nature of our markets always generate new events requiring distribution or investor communication.

To help everyone better understand the dynamics of our revenue, I want to talk a little about the components of our revenue and what drives it.

The two terms and definitions we are going to use going forward to describe our revenue are recurring and event driven.

Now as we look at the revenue composition chart on slide 3, let's start with recurring revenue on the left-hand side of the chart.

As you can see from the chart almost 80% of our revenues are recurring in nature.

The composition of these revenues is driven by the number of accounts, positions held on these accounts and frequency of trading activity around these accounts.

These revenues tend to move with the market in the low to mid single digit range.

On the left-hand side you will see examples of these revenues that we reference in our discussion.

Most familiar should be equity proxy and mutual fund interims in our investor communications business, as well as equity trades per day in the securities processing business.

The other 20% of our revenues are event driven and are more dependent on our clients' actions and activities in the market.

Over the last few years these revenues have grown at a rate of 20 to 30% per year, and this includes some market share and provisional growth.

Therefore, our last down market in fiscal '03 these revenues dropped by 30% for that year.

However, over the last five years including the down year, they have contributed a 13% compounded annual growth rate to event driven revenues and greater than a 1% CAGR for the consolidated Broadridge revenues overall.

On the right-hand side of the chart you will see examples of these revenues.

On our website in the near future we will include the revenue component and drivers for each of our segments including other key statistics that we hope will help you better understand some of the underlying dynamics of our business.

We'll actually be happy to take follow-up calls to review these materials with you.

As I said before, the event driven revenues have played a significant role in our growth and market share expansion.

Although this growth is not as predictable as our recurring components, it generally grows in strong economic markets and softens or even shrinks in weak markets.

This does make predicting these revenues more of a challenge.

With all that said, I will now turn it over to Dan.

When he is finished I will be back to review our fiscal '08 guidance, a few business updates and provide my closing summaries for Q&A.

Thanks, Rich.

We are now on slide four.

First, providing appropriate point-to-point comparison between our fiscal year '07 and our fiscal year '06, all are pretax and earnings numbers I will be discussing throughout the presentation are non-GAAP as they exclude onetime transition expenses, interest expense on new debt as these expenses did not exist in our fiscal year '06.

For your information the actual 10-K reported (inaudible) numbers and comparisons are also listed.

As we did at the end of Q3 of fiscal year '07, the FY '06 revenues and operating profit for this segment has been adjusted for the changes and the methodology for the intrasegment allocation between our clearing and outsourcing and other two segments.

These reconciliations as we provided before to the 10-K are in the appendix, (inaudible) the press release as well as posted on our website.

Let's move now onto the presentation for the numbers.

Our revenue growth for the quarter was 8% and was slightly higher than our anticipated number.

The drivers behind the additional revenue were primarily related to the additional special events mailings, as Rich mentioned, event process driven revenue and our equity proxy provision came in at 4% growth versus our projection a while back of flat.

With respect to overall the quarter, internal growth again was the primary driver.

Moving on to our earnings per share from continuing operations dropped 14% and also slightly higher than anticipated primarily due to our effective tax rates where we had true up's we completed with ADP post-spin.

This was after our last meeting.

These true up's are onetime, and we expect our effective tax rate to more closely approximate 40% as we move into FY '08.

Our pretax earnings came in slightly higher than anticipated due to the additional revenues offset by some slight accelerated investments in our new product initiatives.

We are also very pleased that we exited the quarter at the high-end of our estimate for the debt paydown of $70 million which now brings our long-term debt to $620 million.

We are also pleased sales for the quarter were very strong, and as Rich mentioned, the higher recurring revenues are very good for us.

You will note we state sales as fee only, meaning we do not include the postage or distribution fee.

To put this in perspective the distribution fee relates only to our investment driven sales and approximate 100% of the fee value for the event driven sales.

With that said, let's move onto slide 5 which are our segment results.

For our investor communications revenue growth for the quarter was 8%.

As already mentioned, the 4% equity proxy growth was good to see given the year-to-date third quarter the growth was negative.

Our event driven revenues continued strong in the fourth quarter with again just over 30% growth, similar to the earlier three quarters' growth.

Moving onto our securities processing revenue, the growth was 4%, was in line with our expectations.

Our net new business added just over 2%, and our internal growth primarily driven by our trades per day growth of 25% added just over 1% to revenue growth.

With respect to our clearing and outsourcing our revenues, improvement in operating losses were in line with our expectations and just jumping back to our investor communications and our securities processing margins, there was good margin expansion even after some of our plans increased prior to the investment.

Moving onto slide 6 for our full-year results consolidated, our revenues were up 11% of which 9% was from internal growth.

Our sales and losses are at growth levels we anticipated in our fiscal year '07 planning cycle.

And we had one small tuck-in acquisition in our fulfillment business.

Our earnings per share were 18% growth, was driven primarily and pretax earnings growth of 14%, and lower effective tax rate for the year of 38.6%.

Again, as I mentioned earlier, we expect to the effective tax rate to more closely settle around 40% as again, the improvement this year was primarily due to onetime spending true up's.

Sales for the year are in line with our expectations, (inaudible) to everyone during our Roadshow and as already mentioned, strong Q4 results especially around recurring revenues.

Recurring sales is very encouraging.

Let's now move onto our segment results for the year now.

We're on slide seven.

Our investor communication revenues again this year were greater than 10%.

Event driven revenues growth was the primary driver supplemented by internal recurring revenue.

Our net new business here was flat through the impacts from a large client loss we have discussed before and our margins were flat to last year due to the loss of the large client, as well as some small additional planned product investments.

Our securities processing revenue growth at 6% was slightly higher than our planned expectations due to the internal growth being about a point higher than usual given this year and our fiscal year '07, 25% trade per day growth versus what we usually see in the 10% range on average.

Margins in this business were up 150 basis points including our additional product investment here.

For our clearing and outsourcing revenues and margins, they continue to grow primarily due to increased sales of which the pipeline remains very strong, and we are very pleased this year with the addition of 21 new accounts and no new client losses.

And of those 21 two relating to our outsourcing business, which brings us up to four clients now in our outsourcing business.

In closing out fiscal year '07 as we said it is another good revenue growth and margin expansion year.

As we move into fiscal year '08 the biggest negative impact to our revenue growth is from the two largest clients that we've talked before.

With respect to event driven revenue, they now represent almost $500 million in this year alone grew over 30%.

Our challenge as we build our fiscal year '08 plan with respect to event driven revenues was will they continue to grow given that our fiscal year '07 was a particularly strong growth year, or given the uneasiness in the market conditions right now is there a potential downside?

As rich will discuss next our decision was to keep the event driven revenues basically flat for the fiscal year '07.

Depending however on the market conditions and our client actions, there is either upside or downside here with respect to the event driven revenues, and therefore our range of revenue growth we are providing for fiscal year '08.

I will now turn the meeting back over to Rich Daly.

Okay.

Thanks, Dan.

It is now time for our fiscal '08 guidance on slide number eight.

We are reaffirming a fiscal '08 guidance provided at that time of our spin-off from ADP and in our third quarter earnings release.

Revenue growth will be flat, low single digit.

Sales, which we expect to be between $110 million and $135 million, and internal growth from our recurring revenue will contribute in mid single digit growth.

This revenue growth is offset by the loss of the two large clients.

And we are currently planning for event driven revenues to be flat, as Dan discussed.

We are planning lower earnings before interest, taxes and onetime transition expenses of a reduction of 5% to 10%.

The majority of this decline is due again to the two lost clients.

We are increasing our investments in product, and this spend is mostly offset by margin contribution from sales and internal revenue growth.

Our objective is to set the right investment level in fiscal '08 that positions us in the future to drive revenue growth and margin expansion.

Finally, our guidance assumes that market conditions do not vary materially in either direction.

Despite that, again we decided that in it seems prudent not to plan any growth with respect to the total revenues driven in fiscal '08 given the strong increase of these activities in the prior fiscal year.

Moving to slide number nine, let me again point out that our revenue growth is between zero and 3% inclusive of the impact related to notice and access which accounted for a 1% increase in revenues.

Diluted earnings per share and earnings before interest, taxes and onetime transition expenses are within the guidance given previously and discussed with you during the Roadshow.

Interest expense is expected to be in the range between 34 and $38 million.

As Dan said, our effective tax rate will approximate 40%.

There will be an additional onetime transition expense between 8 and $16 million pretax.

We expect to always have strong cash flows with the intent to pay down debt, and as always an expected dividend payout will be subject to Board approval.

We currently are not contemplating any share buybacks in fiscal '08.

Now for your benefit on slide 10, we have given some segment guidance.

I won't spend the time now, but you should note specifically that the securities processing decline in revenue and margin is primarily driven by the loss of TD Waterhouse.

Let me now speak for a minute about our guidance beyond fiscal '08.

At the time of the spin-off we also provided a directional view beyond fiscal '08.

Providing a view beyond the current fiscal year is something we would not normally do.

But for each year going forward we only expect to give you a view in August for the new fiscal year.

Also, please remember we will not be giving guidance on the quarter.

Before I go into my summary, let me review a couple of business updates.

First, during the fourth quarter our Board approved the $0.06 per share dividend, and we paid down $70 million in debt, as Dan pointed out.

Second, notice and access is now live.

We've estimated that 25% of all equity proxy volume (inaudible) notice and access.

Regardless of volume, we remain confident that it won't have a negative impact on our earnings.

That point is the critical takeaway.

Who will actually elect to use notice and access and for how long they will use it clearly remains to be seen.

Let me now summarize on slide 11 before we go into the Q&A.

We had a solid fourth quarter, and as a result capped off a successful fiscal year.

There were no surprises in the fourth quarter that impacted our (inaudible) into fiscal '08.

Material uncertainties related to notice and access we believe are behind us.

Our fiscal '08 guidance has not changed, and assumes a stable market.

Our sales plan given that pipeline and activities level, we believe is reasonable.

We'll invest appropriately in the business including investing in new market opportunities and products.

At this moment there are no new known large client losses.

I don't know.

We read the same merger rumor articles that you all read.

And finally, from an organizational view, the organization has a spin-off behind it, and we will engage and highly motivated to move the business forward.

So in closing, with the fiscal year 2007 fourth quarter behind us we really have a complete view of our prior fiscal year and our requirement to operate as a stand-alone entity as we transition into fiscal '08.

I said during the Roadshow and investor meeting that fiscal '08 will be only the second year in my career as a down year.

[Lee] and I really hate down years.

We want to do everything we can to grow the business to avoid them.

Beyond fiscal '08 we fully expect to resume revenue growth in the 4 to 6% range mentioned earlier through various market cycles.

I am confident that we are on that path.

Let me state that after 4.5 months of being a stand-alone public company I am feeling good about Broadridge's future and our ability to continue to be leaders in our market.

I'd like to turn the call back over to Carol, the operator, to open it up for Q&A.

(OPERATOR INSTRUCTIONS) Tien-Tsin Huang, JPMorgan.

Good morning.

A question on the event driven revenue.

Thanks for the detail there.

Can you comment on the relative margin profile of this event driven revenue especially in the investor communication division?

The way to look at it is really no different than our other events, sometimes a little bit more profitable, sometimes it's not but also carries postage, and sometimes that postage carries a profit with it or not.

The way that I look at it always is it evens itself out and is pretty much equal to the overall margins that we quote.

Okay, thanks.

Second, can I ask one more question, just know this is a sensitive subject, lots of news out there on E*Trade and a potential merger there.

Can you give us some sense of what the potential loss of this client could mean?

I'm assuming it's going to be larger than the lost business that is impacting fiscal '08 in the securities processing division.

Again, first of all we read today the Wall Street Journal article like I'm sure all of you have.

Now with that said, we don't speculate on rumors, and particularly on rumors that involve clients.

So let me speak a little bit more in general terms.

Losing any large client would be painful, especially if we couldn't offset it with new large elephant sales whether it be in the securities processing space or that space combined with outsourcing.

We are making these product investments as part of our desire and need to grew the business with a clear focus on the better we can support our client the more likely we are to retain that revenue.

In the example that we are using here, we are supporting our clients with extensive multicurrency and international capabilities.

We believe that things like that and the investments we made there give us a better ability to retain clients, particularly for the merger one client has those capabilities and one doesn't.

Now with all that said, losing a client is painful, gaining a client through a merger is always a real joy.

We would always do everything we could to present our value proposition and enhance that value proposition to win in a transaction like this.

But as we know from our experience, there are no guarantees.

Okay, can you remind us of the change of control provisions on your typical securities processing contracts?

That's my last question.

Thanks.

Most of our contracts or largely all of our contracts have a term, and if the contract is terminated early in the term, there are economic ramifications to that.

We don't specifically discuss any individual client contracts or terms, but that is something that is considered in all of our contracts because there is normally the significant investments we make to support those clients.

Rich, what I would add on to that piece, though, is we do have a what we call deferred expenses, our net deferred expenses up on our balance sheet, our contracts are such that they cover those that in the event that any client were to leave us or be acquired that those fees would have to be paid in order to cover any of those expenses.

So from an exposure standpoint beyond if you lose a client your revenue and your bottom line, there is nothing on the balance sheet that would be excessive.

Stefan Mykytiuk, Pike Place Capital.

Good morning.

Rich, can you just comment I think you said notice and access provided 1% of revenue growth in the year, or maybe I misunderstood that.

But kind of built into that question is also have you had success selling other services to your clients who have decided to adopt notice and access?

Okay, so I will break that into the two parts you gave me.

Of our estimate for notice and access, which is truly an estimate, is that the 25% of the volume that we are estimating we use notice and access causes an overall 1% decline in revenue, not an increase.

We have, and our team has had extensive meetings throughout the country, and we're doing it geographically where we are presenting the issue of community exactly what the notice and access rules are and what it means to them.

We are giving them a worksheet calculator, they will be able to do this online so that they can estimate for their Corporation the impact of notice and access could mean from an economic point of view and how they can try to estimate from a voting point of view, what it could mean which is also critical to the decision process here.

We have through these activities, are encouraged by the reaction that we've gotten from the issuer community in terms of their willingness to discuss using us for other services.

It is way too early to tell, though, exactly what that encouragement will lead to in terms of actual new revenues.

But directionally we feel good about where we are with those activities.

Okay, and the 1% revenue decline, is that including postage or that is fee-based?

That is including postage.

I'm sorry, what?

Postage comes down, fee goes up slightly.

We are losing the postage because we are losing the ability to mail, but we do have fees as Rich mentioned that we will charging for some of the work we're doing for the notice and access so the net of it comes to the 1% of revenue or $20 million.

And Dan, to just clarify that the mail we're losing is a lighter weight piece going out, but it will be the same number of pieces distributed.

I totally agree, Rich.

Okay, but the $20 million is net on a profit basis is that -- I mean do we just apply the margin against the 20 or is it less of a profit impact because some of that is really the postage revenue you are losing where you get a much lower margin than the fee?

What I was trying to state, and let me repeat it, is not we are not anticipating any negative impact or notice an impact on it.

So what Dan pointed out is that there will be less postage revenue, it will be slightly more fee revenue.

The net of it we believe will not regardless of the volume usage, will not have a negative economic impact on it.

Okay, and any upside would be if you can sell these other services to clients who adopt notice and access and therefore that net revenue impact is actually less than you are estimating?

I would agree with what you just said, yes.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS) Charlie Murphy, Morgan Stanley.

Thanks very much.

I think last quarter we talked about maybe $30 million or so in pretax, public company expenses for '08.

You called out 8 to 16 being onetime.

Is it fair to say that 14, 22 other will just be worked into the segments during '08?

The way to think about is yes, our incremental corporate costs is the 30 and it was offset again by the royalty of the 35 that's going to go away.

So I think we are in sync there.

And when you mention the onetimes, the onetimes we are recording right now which is between on a pretax basis, the 5 million to 10 million which is an after-tax, but before tax is the 8 to 16.

That are going to show -- it is not going to be allocated back to our segment -- we're taking that as what we call in our other.

Okay, great.

And did you disclose pieces delivered in ICS for the quarter?

We haven't disclosed that at this point in time but I can give you that information; we will be putting that out on our website.

If you take the -- I am going to break it into some pieces for you because we used to give you that giant billion dollar number (multiple speakers) pieces, but for our proxy business it is going to be approximately $450 million.

For our interim business approximately $280 million.

For a grand total of $1 billion and before we used to also include what we call our -- I'm sorry, our other pieces as well as our post sales and pre-sale fulfillment.

And if I include those, it brings us to 1.2 [billion], and that will be familiar in relationship to a year ago where we used to talk about one billion pieces.

Okay, so be thinking 1 billion for our proxies and interims, another 200 million for the fulfillment and other and that is comparative to the 1.2 to the last year to 1 billion pieces that we post.

Thank you.

Peter Heckmann, A.

G.

Edwards.

A couple follow-up questions here.

When you talk about notice and access and talk about 25% of equity volume adopting notice and access in 2008, what is that as a percent of issuers?

That's a great question.

And the reason we use volume versus issue is we really do anticipate that it is going to be the larger issuers who are having a routine meeting that will likely be more likely to take advantage of it.

And even though smaller issuers generally are routine meetings we anticipate many of them won't be able to meet the 40 day criteria where they have to have their materials available, to be posted 40 days before the meeting.

So it is a much lower percentage of issuers than the percentage of volume is the way to think about it.

Plus there are so many moving pieces here though and because we are really so early into this with such a small sampling, and are no longer in dialogues with virtually all of the very large issuers.

There is a lot of things that they are working through to determine whether or not they could even consider using it on their own.

I really would rather keep it more as general as possible because we really are working with broad numbers.

Okay, and in terms of timing here if we are working with this new fee schedule talking about some fees being raised, some fees being lowered, who has to approve that new fee structure?

Is it the issuers or the brokerage firms that go as a conduit?

And when should we know from a timing perspective, let's say 80% of the issuers have approved that new fee structure?

It is a terrific question, and the answer here is actually a little more unusual than I would have expected to be giving you.

The New York Stock Exchange at this point in time has elected to leave this to the market to determine.

Now in working with our broker client we've been having extensive dialogues with the Stock Exchange and the SEC to ensure that they are comfortable with the logic behind this, and what the thought process is and the value proposition.

What I can tell you is that on average we think somebody will elect to use notice and access, will get eight times the benefit in cost savings versus any additional fees they may pay.

We are also pleased that particularly in our meetings down in Washington the reaction was that because we have made this a straightforward decision for the issuer community -- and by that I mean we've eliminated the risk for them and we've moved things like the percentage of fulfillment which could change the (inaudible) up or down, we moved that risk to our pricing model and taken that risk away from the individual issuer making that decision.

So that they have a very straightforward model to say pretty much here is what we think it is going to cost me, versus here is the savings (inaudible) generate and then they can make a cost versus benefit decision.

So with all that said, there really hasn't been a formal approval process.

We don't expect there to be a formal approval process, but all of the regular participants that would have been involved in that process we've actively included.

We are working with our broker client, and we are thinking the fee schedules that we've proposed out there are certainly going to be the ones that will be in place for this next year.

Okay, great.

And I just have one more follow-up question.

You want me to get back in the queue, or can I go ahead?

Go ahead.

We had talked in the form 10-K there is roughly five customers that are accounting for somewhere between 25 and 28% of total revenue.

In terms of identifying customers, I know you don't want to talk about too many specifics, but would we put E*Trade as a top five customer for fiscal 2007?

E*Trade would be in the top five from a perspective of part of the business but of the overall total business consolidated, it is not in the top five.

Okay.

I appreciate it.

I am showing we have no further questions at this time.

I will now turn the call back to Mr.

Sims.

Okay, thank you for participating in the call.

And that's it.

I made the statement earlier that we are here to answer questions.

We really do want to be proactive in adding clarity.

So please don't hesitate to call Marvin, and we will get back to you with clear answers on a timely basis.

Thanks so much for your participation.

This concludes today's Broadridge Financial Solutions Inc.

fiscal year and 2007 earnings conference call.

Thank you for participating.

You may now disconnect.