Broadridge Financial Solutions Inc (BR) 2009 Q3 法說會逐字稿

Good morning, my name is Jamaal, and I will be your conference facilitator.

At this time I would like to welcome everyone to the Broadridge Financial Solutions, Inc.

second-quarter fiscal 2009 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 question to one per participant.

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

Please go ahead, sir.

Thank you, Jamaal.

Good morning to everyone on this bright beautiful early Monday morning.

I'd like to welcome everyone to Broadridge's quarterly earnings call and webcast for the third quarter of fiscal year 2009.

As Jamaal mentioned, I'm Marvin Sims, Vice President of Investor Relations.

And as usual, this morning I'm here with Richard Daly, Chief Executive Officer for Broadridge, and Dan Sheldon, Chief Financial Officer for 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 home page of our website at Broadridge.com.

At the end of today's call, as some of you have requested, we'll also post our quarterly revenue metrics on our IR website as well.

Before we begin I'd like to remind everyone that during today's conference call we'll discuss some forward-looking statements regarding Broadridge that involve risks; these risks are discussed here on slide 1 and we encourage participants to refer to our SEC filings including those on forms 8-K, 10-Q and 10-K for the complete discussion of forward-looking statements and risks.

Now let's turn to the next slide and review today's agenda.

Rich Daly will start today's call with his opening remarks and will provide you with a summary of the financial results for the quarter, followed by a discussion of a few key topics.

Dan Sheldon will then review the third-quarter financial results in further detail including a review of cash flow for the quarter end.

Rich will then return and summarize the fiscal year 2009 guidance and provide his overall summary and some closing thoughts before we head into the Q&A part of the call.

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

Thanks, Martin, good morning everyone.

This morning as part of my opening remarks I'll talk about the following topics -- first, a summary of our third-quarter financial results and the reaffirmation of our 2009 fiscal year non-GAAP EPS guidance and the increase in our GAAP EPS guidance; next, an update on the current market dynamics including the latest update on industry consolidation and how to put these dynamics into context for Broadridge; and finally, a review of our closed sales performance and our sales pipeline.

So let's start on slide number 4, given the current economic environment in the financial services market we're satisfied with our results for the third quarter.

Our third-quarter performance for our GAAP EPS and non-GAAP EPS were better than expected.

Our GAAP net earnings for the quarter are up 39% and our non-GAAP earnings are up 15%.

Our positive earnings performance was driven primarily by the growth in the higher-margin recurring fee revenue, the benefit from the state tax credit granted this quarter, lower interest expenses and the positive benefit this year from the grow-overs related to the one-time transition expenses from last year.

For the quarter we had fee revenue growth of 2% with fee revenue growth in all three of our operating segments.

However, when you factor in lower distribution revenues and the negative impact from our foreign currency exchange, our revenues for the quarter were down 4%.

As we look forward for the remainder of the year we are increasing our full-year GAAP EPS guidance range to $1.52 to $1.62 from our previous guidance of $1.49 to $1.59 as a result of the $0.03 EPS benefit related to the one-time true up from the state tax credit from our previous fiscal year.

We are reaffirming our full-year non-GAAP EPS guidance of $1.45 to $1.55 as the negative impact from lower event-driven mutual fund proxy activity and the impact from lower margin balances and unfavorable trade volume mix, primarily in our Clearing and Outsourcing Solutions segment, are being offset by the recurring benefit from our state tax credit.

The state tax credit will lower our effective tax rate by approximately 1 percentage point and will continue for the next eight years.

We're reaffirming our revenue guidance to flat or flat to minus 3%, which reflects the negative impact from foreign currency exchange, lower event-driven mutual fund activity and lower distribution revenues resulting from notice and access.

We're also anticipating higher free cash flow with a new range of $230 million to $270 million, which is $20 million higher on both the low and high end of our previous guidance, and we anticipate lower need of cash for working capital and capital expenditures.

Now let's move on to slide number 5 for an update of the general market conditions.

For the most part the headwinds and uncertainty we discussed in our previous quarter remain in the market.

However, we have not seen an increased intensity of these headwinds.

All of the headwinds we discussed in our last earnings call back in February are for the most part playing out as anticipated.

As expected we've also seen event- driven mutual fund proxy activity decline, as well as a reduction in the revenue contribution coming from our trades per day growth.

In addition, we've seen a larger than anticipated decline in our margin lending balances.

It continues to be difficult to predict any short-term increase in margin lending balances or trading activity.

As firms focused on obtaining immediate cost savings the added pricing pressures we had anticipated from the headwinds did materialize.

The impact from this pricing pressure is within our forecasted range for concessions of approximately 5% of annual revenue in the SPS segment.

This annual rate is approximately 2% above our historical average rate of about 3%.

At the end of our current contract renewal efforts we will have 11 of our top 15 securities processing clients under multi-year contracts.

For the other four clients, two more contracts are expected to be signed before the end of the fiscal year, another client contract has about one year remaining on its term, and the last client is Bank of America which I will talk about more in a minute.

Despite the short-term challenges generated by these market headwinds, we continue to see long-term opportunities being created in all segments and we continue to have active dialogues around these opportunities.

However, the sales cycle has been longer than anticipated in our outsourcing services as a result of the complexity created by the economic conditions related to mergers and liquidity concerns.

With regard to the latest news on industry consolidation in the financial services industry, last quarter I told you that we were winning about as much as we were losing, but overall we're in a net revenue and market share positive position, and that the Bank of America and Merrill Lynch transaction was the last unsettled piece of the recent industry loan consolidation activity.

Although Bank of America remains an important Broadridge client, due to its acquisition of Merrill Lynch it had decided to perform its institutional equity securities processing in-house on the acquired Merrill Lynch system.

We're anticipating that on an annual basis this decision will result in a negative impact on Broadridge's annual revenue of just under $20 million.

The Bank of America loss will turn our previously slight net positive revenue gain resulting from financial services industry consolidation into a negative revenue and earnings position.

Despite the negative impact on revenue, our overall net client retention position in our Securities Processing and Clearing and Outsourcing segments is at least as good as it was prior to the recent industry consolidation.

I believe this will continue to position Broadridge well in the markets as we move forward.

Now let's move to slide number 6 and talk about the positive impact being created by some of the tailwinds in the current market.

One of the biggest positives we've seen in this market has been the resilient and positive performance of the Investor Communications segment which represents over 70% of Broadridge's revenue and earnings.

This segment has been able to continue to grow recurring revenue by approximately 7% so far this year despite the challenging economic environment.

As a result we've created a much higher revenue base to grow from when event-driven revenue activity returns as it has always done historically.

We're seeing a leveling off of the decline in event-driven mutual fund proxy activity and we're even having conversations with a few firms about potentially processing mutual fund proxy jobs in this calendar year.

So it's good to see signs that they're at least starting to think about these activities.

We've also seen a slight positive benefit coming from other event-driven revenue areas related to M&A activities.

We continue to believe that we have longer-term upside opportunity here when more merger discussions and subsequent deals come back into the market.

Another tailwind has been the anticipated movement to electronic communications and the reduction of hard copy delivery driven by increasing suppression rates and higher adoption rates for our notice and access services.

As a result we're seeing a reduction in the low-margin distribution revenues being offset by higher margin revenues associated with electronic communications.

This fits nicely into our unique ability to provide a total integrated communications solution for our clients.

An additional tailwind we're seeing is that although most firms initially were focused on obtaining short-term price concessions, they are now in a position to focus on longer-term strategic cost savings opportunity.

We're seeing these opportunities in our sales pipeline and they include the potential of some very promising large deals.

In a minute I'll go into more detail about this during my update on closed sales performance.

Accordingly, with these opportunities in the market and the changes that will undoubtedly occur as a result of more regulation, we continue to make investments in the business.

In our Investor Communications business we've created and are continuing to work on some new and exciting products.

Just recently we announced that Intel launched the use of our new Investor Network product and its shareholder surveyed functionality as well as our virtual shareholder annual meeting capability.

Now let's move on to slide number 7 and talk about the sales tailwinds.

We had closed sales for the quarter of $30 million which was slightly lower than we had expected as the decision timelines for deals in our pipeline were pushed out.

Our year to date closed sales of $110 million are up 5% over the prior year.

We're still tracking to our full-year closed sales forecast of $160 million to $180 million.

Achieving this will hinge on landing some of the exciting larger opportunities that are in our sales pipeline.

Our year-to-date closed sales performance for recurring sales continues to be strong as closed recurring sales of $82 million increased 61% over the prior year.

In addition, closed recurring sales were approximately 75% of our total closed sales.

We believe this trend will continue for the balance of the fiscal year.

This is very good news for the long term given our successful history of client retention and the importance of growing recurring revenue.

Our sales pipeline remains robust and includes some promising large opportunities in the transaction reporting business in our Investor Communications segment as well as in our outsourcing business.

It's again worth noting that for outsourcing sales, we have seen its sales cycle lengthen as a result of liquidity concerns created by the current economic conditions.

Of course it's always difficult to predict when these opportunities will close.

We're also seeing some very encouraging sales activity around our wealth management services which includes the products that we obtained as part of our tuck-in acquisition of Investigo earlier in the fiscal year.

We continue to believe that the combination of our year-to-date sales performance and our robust pipeline puts us in a position to deliver our full-year closed sales forecast of $160 million to $180 million.

So let me tell you how I feel about where we are before I hand it over to Dan for more detail on the third quarter.

After I consider the impact of the headwinds and the tailwinds I believe our Investor Communications business is stronger than ever, but we have some work to do to get the Securities Processing and Clearing and Outsourcing segment to meet our satisfaction.

Overall I remain confident that we'll leave these challenging times in a better position than we entered them.

I'll now turn the call over to Dan who will go into more detail about the quarter and the year-to-date results for each of the segments.

Dan?

Thanks, Rich.

I'm now on slide 8.

So on slide 8, the results for the quarter and year to date, our revenues were down 4% for the quarter and flat year-to-date.

We continue to have a positive impact from net new business while internal growth and event driven pretty much are offsetting each other at this point and, with respect to distribution and FX, they continue to be a drag.

As Rich mentioned, our three operating segments all had fee revenue growth for both the quarter and year to date.

With respect to our pretax margins for both the quarter and year to date were up and driven by lower interest expense, no transition expenses this year and reductions in discretionary spend as well as benefits from lower stock compensation expense due to our stock price in the third quarter.

Our EPS was up significantly for the quarter due to both benefits from pretax margins I just discussed and a $0.05 contribution from our state tax credits.

$0.03, by the way, relate to a retro credit back to FY '08 and $0.02 year-to-date benefit which for the full year will be $0.03 and, as Rich mentioned, contributing a 100 basis points reduction to our effective tax rate which we expect to continue for the next eight years.

We continue to look for federal and state tax incentives as we balance our presence in the US and various state jurisdictions versus offshoring opportunities.

With respect to our credit rating agencies, I'm pleased to report that S&P upgraded us to BBB- with a positive outlook and Moody's maintained our Baa2 with a stable outlook rating.

We meet with Fitch in June but would expect to maintain our BBB with a stable outlook from them.

This means we're at investment-grade ratings with all three of our agencies.

Let's move on to discussions of the segment starting on slide 9.

There are lots of data points on this slide, but let me first focus you on the boxed revenue area.

Fee revenues were up for the quarter and year to date and are forecasted to be up for the year.

Most importantly, recurring revenues were up greater than mid-single digits and we expect that to continue for the remainder of the year.

We've seen year to date and expect full year that all recurring revenue products will have growth and it's a combination from both net new business and internal growth.

With respect to net new business, which contributed 4% to the quarter and 3% year to date, we expect the contribution on a full-year basis to be between 2 and 3 percentage points.

Also, notice and access fees represent about 2 points of the recurring revenue growth both year to date and for the full year.

Event-driven revenues were down year to date and all due to significantly less mutual fund proxy activity which also has a negative impact in Q4 due to a large job last year that won't happen in FY '09.

On the event-driven positive side, equity proxy contests and other event-driven activity have been up slightly year to date and expected to be for the remainder of the year.

Moving down to distribution revenues, the biggest impact both year to date and full year is related to notice and access and lower event-driven revenues.

We expect, by the way, notice and access to have an opt-in rate of about 50% and this is up from just under 30% last year.

This will mean just over a $30 million negative impact to distribution revenues and an increase of about $11 million in recurring fees with a net upside contribution to margins of around 40 to 60 basis points.

And by way, most of this activity occurs in our fourth quarter during the proxy season.

With respect to margins, the incremental investments we made in the business in the first half had very little impact in the third quarter, but year to date negatively impacted us by just over 100 basis points and will on a full-year basis have a negative impact of about 50 basis points.

On a full-year basis we expect margin expansion between 30 to 90 basis points and this is driven by notice and access, increased suppression rates, the electronic distribution versus mail and lower discretionary spending.

All in all this business has performed well in this down market and we don't see anything that would change the performance as we move into the next few months.

Let's turn to slide 9 -- 10, I'm sorry, Securities Processing Solutions.

As we expected, our revenue growth rate for the quarter was up but has slowed due to less trade volume growth as well as increased losses and price concessions in the second half as compared to the first half which were also expected.

Our non-transaction revenues were up for the quarter due to year end and T&M activity which we expect to see fall off in the fourth quarter given the industry is pulling back on spending.

You can see under the internal growth bullet that we continued to have some equity and fixed income trades per day growth this quarter, but below what we were averaging in the first half, and we expect this lower growth to continue into the fourth quarter.

Last quarter I shared with you that we expected higher contract price concessions and they are now just under 5% of annualized revenues.

This is hitting us primarily in the second half as most of the contract resigns were finalized this quarter.

As well, we had forecasted in the low end of our guidance for this segment last quarter that we would lose the Bank of America equities institutional business and this has now materialized and had the greatest impact to Q4 and into next year.

As Rich mentioned, the annualized value is just under $20 million.

The margins are down from last year for the quarter due to the lower capitalization of conversion expenses we've discussed before, as well as losses and concessions fall 100% to the bottom line where new business comes in at 60% to 80% margins.

Given the year-to-date results and full-year forecast ranges you can calculate we'll end Q4 with less revenue and operating margins than the average of the last three quarters which creates a drag into next year.

Given the current lower market activity around trade volumes and time and material we call T&M, and the fact that large sales take at least 12 months to implement, we're looking at next year being a down year for this segment.

Having said that, I'd like to put this into perspective.

We finished the first half of this year with 8% revenue growth primarily coming from increased trade volumes.

Although not continuing into our second-half or possibly into next year, on a long-term basis trade volume growth has averaged over 10% and this includes up and down markets where in up markets it can be near 20% and down markets near flat.

Having said that, with respect to concessions we said last quarter that over any long period of time we average about 3% negative impact to annualized revenues, in up markets less and down markets more.

This segment is the systems technology foundation for our three-tier outsourcing strategy, so we'll weather the storms during this economic downturn.

Let's turn to slide 11, Clearing and Outsourcing Solutions.

We generated 3% revenue growth for the quarter, 4% year to date and expect 3% to 4% for the full year.

We segregated our revenue in this segment into three categories -- net interest, other clearing and outsourcing revenues.

As you read the bullets you can see that we continue to drive significant net new business in this segment and just over half is related to the Neuberger sale which closed in the first quarter.

Our continued challenge to revenue and margins this year has been the drop in net interest due to lower Fed funds rates and margin balances.

Net interest drops 100% to the bottom line where new business contributes about 50% in this segment.

For the quarter and year to date we're down net interest by $4 million and $12 million respectively and expect to be down for the year approximately $16 million.

Operating losses for the quarter of $2 million are really closer to about $4 million given the offsets of some one-time benefits we had this quarter.

Having said that, our Q4 projections for revenue and pretax are around $24 million in revenue and $4 million pretax and are fair representations of the run rate for this business before we had any new business or any other plus or minus impact from changes in margin balances or Fed funds rate as we move into fiscal year '10.

As I mentioned last quarter, I look forward to an up market where we should benefit from increased margin balances and interest rates since we've maintained our client retention in this business at over 95%.

Let's move to slide 12, Other and FX.

Again, we're giving you a lot of data points you've asked for, but I'm only going to focus on just a few.

FX continues to be a drag on both the revenues and the margins and we expect this to continue into the fourth quarter.

Corporate expenses are shown at $7 million for the quarter and $23 million year to date with a full-year range of $29 million to $35 million.

Once you adjust for pluses and minuses in one-time activity, primarily this quarter benefits from stock compensation expense, given our low stock price for most of Q2 and into Q3, the run rate is about $9 million a quarter or $36 million on an annualized basis.

Let's move to slide 13, grow-over discussion.

Again, nothing new and only some changes in the timing with stock comp expense between Q3 and Q4 along with an additional benefit full year given some stock comp expense I mentioned on the previous page.

Let's move to slide 14, cash flow.

For the nine months you can see that the clearing business is in a positive cash position and our balance sheet at March 31 has no short-term debt.

As mentioned in the clearing section, margin balances are down significantly so little need for short-term borrowings at a quarter end.

With respect to all other processing activities, earnings contributions were $106 million year to date and represent around 50% of our full-year forecast.

There's nothing really new this quarter versus last quarter with respect to changes in line items year to date for free cash flows, investing or financing activities.

As Rich mentioned, for the full year we've increased our free cash flow forecast for both the low and the high end by $20 million due to reductions in working capital and CapEx needs for this year.

But I'd also point out that these are all timing differences; for the long-term projections I still consider that working capital uses will grow in line with revenue and CapEx and software purchases will approximate $50 million in the near term.

As I said last quarter, this is my favorite slide and is always going to be a good news slide given our recurring revenue model and over 97% consolidated client retention rate.

I'll now turn it back over to Rich.

Thanks, Dan.

I like your favorite slide too.

Let me review and summarize our fiscal year 2009 guidance on slide number 15.

We're reaffirming the revenue growth guidance we gave last quarter which was in the range of flat to minus 3%.

We're anticipating revenue growth at the lower end of the range, primarily as a result of lower event-driven mutual fund proxy activity, a reduction in distribution revenues, lower growth related to trade mix and volume as well as lower customer margin debit balances.

Despite this we're still expecting overall fee revenue growth in the low single digits and mid single digit growth and recurring fee revenue in our Investor Communication Solutions segment.

We're expecting our earnings margins before interest and taxes in the range of 16% to 16.9%.

As I mentioned earlier, we expect GAAP EPS in a range of $1.52 to $1.62 and non-GAAP EPS in a range of $1.45 to $1.55.

This excludes the benefit of $0.04 for the one-time gain on the purchase of our senior notes during our first fiscal quarter and the $0.03 benefit from a state tax credit related to our prior fiscal year.

We expect our closed sales to be in the range of $160 million to $180 million dependent upon closing some larger deals in the fourth quarter.

Our effective tax rate will be approximately 38% as we benefit from the recurring portion of our state tax credit.

And finally, we're expecting free cash flow to be in the range of $230 million to $270 million.

As I stated earlier, this is higher than our previous guidance by $20 million on both the low and high end.

In terms of our use of free cash flow, as I stated during our February earnings call, most of our free cash is generated in our fourth quarter.

We'll provide a clearer direction on creating shareholder value for the use of free cash during our fourth-quarter earnings call in August.

Until then you should continue to think about us looking for potential tuck-in acquisitions, continuing to pay a dividend and balancing our liquidity needs accordingly.

We clearly understand that by August clearer direction is necessary.

So, before we go into the Q&A part of the call, let me summarize and leave you with a few thoughts on how I feel about the business as we continue to navigate through these unprecedented times.

Broadridge is continuing to weather the storm better than many would have anticipated.

Our third-quarter EPS was better than expected and we continue to see growth in our fee revenues.

The Investor Communications segment remains resilient and continues to perform well as recurring revenues continue to grow.

Bank of America's decision to perform their equity processing in-house combined with higher than average contract renewal price concessions, along with lower margin balances and interest rate spreads, will create a drag on our fourth quarter for the Securities Processing and Clearing and Outsourcing segments.

Offsetting the headwind drag is the growth of our Investor Communications segment along with signs of life in the event-driven revenue activity and our growing sales pipeline.

The investments in the business have begun to introduce some new and exciting products into the market like the Investor Network used by Intel to survey its shareholders.

I continue to believe that Broadridge is well positioned for the future as we have a great product set led by the strength of our Investor Communication Solutions.

We have a strong and growing recurring revenue base, vigilant expense management, a strong balance sheet, the appropriate liquidity, strong free cash flows that will enable us to continue to invest in the business and a strong risk management culture.

The deals we have on the table plus the incremental opportunities in the Investor Communications business make me more confident than ever in our long-term prospects.

I believe our product strength combined with our strong sales pipeline and our new product initiatives will provide a clear opportunity to take Broadridge to a higher level.

I'd like to take this opportunity to personally thank our associates who remain dedicated, engaged and focused as we continue to find ways to create shareholder value through these challenging times.

I'll now turn the call over to Jamaal, the operator, for the Q&A part of the call.

Jamaal?

(Operator Instructions).

Anurag Rana, KeyBanc.

Good morning, everyone.

Dan, the outsourcing revenue is down sequentially.

Could you please break down the various components that led to this decline?

You're going to have to repeat that for me because I heard you say the outsourcing, but --?

Yes, the Clearing and Outsourcing on a sequential basis was down, I just wanted to see what their components were?

Oh, the components of it?

Yes, please.

Okay.

So if you look at the third quarter and you see that we're -- you go in from the year-to-date where we were (inaudible) about $52 million.

So revenues are down a little bit slightly, but what's really impacting us here in the third quarter is the margin balances are down almost $200 million as well as, as we saw in our trade volumes -- although you see the volumes up, when we look at the mix on the retail side, which are the smaller retail folks, they were way down and they bring us on a contribution as far as trade per day a much higher rate than what we'll call more of our institutional side.

So think about it as rate in the trade area as well as the falloff in the margins.

Thanks.

And I believe it was the exact opposite in the previous quarter?

Yes.

Great.

And Rich, are there any other customers that are deciding to make strategic decisions -- [and do you know of any] acquisitions that are out there?

Repeat the last part, strategic?

Yes, things like Bank of America deciding to use someone else's platform, are there any other companies that are making such strategic decisions at this point?

Understood.

I used the word specifically that the BofA/Merrill was the last decisions we were expecting from a known consolidation activity.

So in terms of firms that have come together, at least in any material way, I'm not aware of any other decisions that need to be made at this point in time since all the other big transactions not only have been decided but we were actually very pleased with the way we came out in those decisions.

We've now reached the point though where the initial push for short-term cost savings from existing clients has taken place and what I am pleased by is that in our sales pipeline it's grown because there are now larger discussions taking place and more discussions taking place with firms that are looking for significant alternatives to lower their run rate infrastructure and are willing to consider both outsourcing their system or even complete outsourcing of their system and the people behind the system.

Any discussions with the government?

With the government regarding --?

Securities Processing, fixed income?

We have not had any discussions with the government.

We're still waiting with great anticipation for what regulations will come out from the government due to the unprecedented times we've gone through.

Thank you.

And Dan, just one last one.

I think I remember that you talked about a 60% adoption rate off notice and access in the previous quarter and I think you just mentioned 50%.

(multiple speakers)

What we said last quarter was the range would be 50% to 60% and we're now, given the fact that we pretty much know what's coming in the door, we're at the 50% range.

Great.

Thank you, and congratulations on a good quarter.

Ian Zaffino, Oppenheimer.

Great, thank you very much.

I wanted to talk about the investment grade rating.

Can you guys give us an understanding of what an investment grade rating does for your business, obviously lower borrowing costs, but help us understand the rest of that?

And what type of metrics, when you speak to the rating agencies, are they looking at for you to maintain that type of rating and what type of flexibility will you have going forward?

Thanks.

Okay.

Dan and I are both going to take this, Ian.

With regard to the investment grade rating, we stated from the time of the spin that given the fact that we were providing mission-critical services to the industry we viewed having an investment grade as being a strategic imperative.

We didn't say it needed to be AAA or anything super high, but we said we wanted a solid rating and a solid investment grade rating, which I believe we've now attained again.

So it's mission-critical functions and I have had dialogues with many prospects about the comfort that they get from us having that investment grade rating.

Dan, why don't you answer the other part?

Okay.

So with respect to metrics, let me give you a couple of pieces here.

Most of them follow us as far as the type of industry we're in, the concentration of clients as well as business metrics, we'll call those the financials.

And in the first two they're very happy, all of them, in saying you hold your own, you've got good high retention rates and you bring in new business.

And as far as internal growth they fully get it that there will be high periods when the markets are up and lower periods when they're down.

With respect to the financials, again, with our recurring revenue base, very happy with.

The only place they really spend a lot of focus on is with respect to debt to EBITDA.

And what I'd share with you is the agencies for the most part do not include cash on the balance sheet when they come up with their debt to EBITDA, so what they're looking for is we're already there now, but over any long extended period that we would keep that one-to-one debt to EBITDA.

Now will we be allowed to at times go lower than that or above that?

Absolutely.

But they're looking for a long-term commitment, which we are, to a debt to EBITDA of one to one.

And equally so, the reason we said before why we needed the investment grade, as Rich mentioned, was our clients are also looking that we're going to be very prudent with the amount of debt that we put onto our books.

Okay?

Great.

So the way I understand this is the flexibility you'll then have is more just through growth of either EBITDA or the free cash flow.

So we're not expecting any type of let's call it levering up of the balance sheet going forward and the only way you would do that is with a commensurate increase in EBITDA?

Over a long period.

So, Ian, for example, let me just say that obviously they wouldn't look for us to go into any kind of debt position for either share buybacks or dividends.

Okay?

That's just what exactly there would be.

However, if we were to do an acquisition or whatever and it should put us below the metrics that they were looking for, we also know and they know that we have the cash flows over any period of time to really provide for that.

So therefore I hope that helps with answering the question of how to look at it that in a short time period we could below the metrics I just gave you.

Okay, great.

Thank you very much.

(Operator Instructions).

Tien-Tsin Huang.

Just a couple of questions, first on the Bank of America side.

I just want to make sure; were there any termination fees tied to that?

It didn't look like it.

And also, when exactly did the conversion happen, what month?

Okay, so there are not conversion fees; it took place very quickly and it will be in this quarter and what they've simply done is my understanding is taken the largest volume provider of any product and put both businesses on the highest volume provider.

So we're also looking forward to having continued dialogues about, once they've stabilized the environment, what's the best way for them to go forward.

Just from a numbers perspective, be thinking of the $20 million, that it would average out to be, of course, and the $4 million a quarter, almost nothing in the third quarter, and then, of course, the fourth quarter getting impacted by about $4 million and the rest continuing into next year.

Okay, great.

And then just -- this is just on the equity side.

So are the other decisions with Bank of America basically done?

That was the only decision that impacted us though, was the institutional equities that we were performing for BofA.

Okay, so we shouldn't think about any other potential changes in the near run?

Not affecting Broadridge.

Remember, the communications business is -- we were providing proxy processing as the best example for both BofA and Merrill and we'll just continue to provide it for the new combined entity.

Okay, good.

It's good to get that out of the way.

Just on the IC side, when do you expect the mutual fund proxy activity to trough, if that's a good term or not?

And could we see the step up in the M&A activity potentially offset this or even overcome it?

I think that the mutual fund activity is at the bottom of the trough right now.

And we're -- as I said in my comments, we're having conversations right now with more than one reasonably large fund groups that are talking about the need to do something in the near-term.

I would be disappointed if we didn't have, again, more than one reasonable size fund job, mutual fund proxy jobs taking place during this calendar year.

The M&A activity is less predictable, but we have seen some of the M&A activity because of the events that we know in our own industry that took place, as well as other activities that are taking place that are well-publicized, proxy contests, etc.

Yes, Rich, what I would add on to that piece of it is that we do know in our fourth quarter, as I mentioned, that we did have a large job last year of approximately $15 million that won't repeat itself.

But that's all in our guidance and I would totally agree with Rich, we think we've hit the bottom.

Good.

Just a housekeeping one for you, Dan.

The tax rate, the 38%, is that a GAAP number -- is that a good number to use for non-GAAP purposes as well?

GAAP and non-GAAP and going forward.

GAAP and non-GAAP, great.

Thank you.

Stefan Mykytiuk, Pike Place Capital.

Good morning.

Just a couple things.

First one, can you maybe give us -- I know it's early, but give us some sense of the revenue opportunity with this Investor Network?

It is absolutely early.

The fact that we're starting with Intel, Stefan, I find very, very exciting.

If you think about the number of challenges going on today for companies around the, for example, executive comp area.

This is something where managements, boards, etc., have the opportunity to reach out and survey shareholders and include their views in things like CD&A analyses going forward.

If you think about the expense that companies go through for an annual meeting, the idea of having a virtual annual meeting which will allow access to more shareholders with less expense and less logistics costs and concerns, these are pretty exciting opportunities.

Now, I don't have firm numbers, but we'd like to think that these type of activities for a good sized company should be worth between -- somewhere between $20,000 and $50,000 an activity.

So, this could be very, very exciting in terms of taking our position to an even higher level from the very high level we're at already today.

We're excited.

Okay.

And then is there anything else?

I was reading something about the -- I think the New York Stock Exchange might be trying to make a decision on this Rule 452 again.

I know they've been kicking that around for a long time, but are there any other kind of regulatory actions that are in the forefront today that you think can have a positive impact on the business?

There are no other regulatory changes that I'm aware of right now.

We do believe that given what took place in this recent environment that transparency to investors will remain a very high priority for the SEC.

And we believe that that will work well since we enabled the SEC to achieve those higher levels of transparency to investors.

The 452 change is something that we don't see, given where it's at right now, having a material impact on us.

We would expect that with 452 going away there might be more volumes as people need to get tough proposals passed, for example, an equity comp plan.

But we're not really planning on anything material at this point in time or any material benefit.

Okay, great.

Thanks.

Anurag Rana, KeyBanc.

Rich, are you seeing valuations for acquisitions come down in the marketplace at this point?

Our valuations for marketplace for acquisitions came down.

So I actually do believe that what took place in the marketplace has affected just about everything as well as what buyers are willing to pay, although not initially what sellers were willing to sell for.

I'm encouraged though that the market, I think, is coming together and I'm encouraged by some of the dialogs we've had with properties that we believe would meet our definition of a tuck-in and really be far better positioned under the Broadridge umbrella with our distribution channel, our credibility and our ability to go to market than they are in their current environment.

Thank you.

(Operator Instructions).

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

I will now turn the call back to Mr.

Daly.

Thank you.

We certainly appreciate everyone being with us early on a Monday morning.

We thank you for your participation.

As always Dan, Marvin and I will look forward to seeing you in the near future.

Thanks so much and choose to have a great day.

This concludes today's Broadridge Financial Solutions, Inc.

second-quarter fiscal 2009 earnings conference call.

Thank you for your participation and you may now disconnect.