Broadridge Financial Solutions Inc (BR) 2010 Q1 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference facilitator. At this time, I would like to welcome everyone to the Broadridge Financial Solutions first quarter fiscal year 2010 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. (Operator Instructions).

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

Thank you, Stephanie. Good morning, everyone, and welcome to the Broadridge quarterly earnings call and webcast for the first quarter of fiscal year 2010. As usual, this morning I'm here with Rich 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 Monday evening. 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. We've also included a copy of the metrics in the appendix of our webcast for your reference, as they may be helpful during Dan's review.

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

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 first quarter of fiscal year 2010, followed by a brief discussion on a few key topics. Dan Sheldon will then review the first quarter financial 2010 fiscal results and the full-year guidance in further detail, including a review of cash flow. Rich will then return for a strategy update 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. Rich?

Thanks, Marvin. Good morning, everyone. This morning as part of my opening remarks, I'll talk about the following topics. First, a summary of our first quarter financial results followed by a review of our closed sales performance for the quarter and sales pipeline. In this section, I will also cover an overview of the communications services contract signed with Morgan Stanley Smith Barney after the end of the first quarter for statements and other customer communication services.

Next, I'll provide an overview of the Penson transaction, which will enable us to simplify our balance sheet, free up significant capital and transform our Operations Outsourcing strategy from an early adopter initiative into a scalable reality. Then, after Dan provides you more of the financial details on the quarter and these two meaningful transactions, as well as a guidance update, I will wrap it up before Q&A with a strategy update and closing comments.

Let's start on slide number 4. I am very pleased with our overall performance in the first quarter, which includes the efforts related to signing the Penson and Morgan Stanley Smith Barney transaction, as well as our first quarter results that were in line with our expectations.

The performance of our operating businesses are tracking as planned for the year for both revenues and earnings per share before any impact resulting from the closing of the two new strategic transactions I will discuss today. Our continued growth in recurring fee revenues and a rebound in event-driven revenues were more than offset by low-margin distribution fees and the carryover impact of the fiscal year 2009 concessions and losses.

The growth in recurring fees has been led by the Investor Communications segment, which will help the grow-over challenges in revenue in the Securities Processing segment. This fee revenue growth in our largest business segment continues to add to my overall confidence in Broadridge.

Overall, the intensity level of the previously discussed headwinds appears to be easing. Additionally, we are seeing more normalized price negotiations and we are not aware of any new significant client losses.

As anticipated, our earnings were down as we moved through the grow-over challenges in our Securities Processing business from the fiscal year 2009 headwinds associated with the higher-than-average price concessions and the loss of the Bank of America equity processing business.

During the first quarter, we opportunistically repurchased approximately 3.5 million shares under our share repurchase program at an average purchase price of $20.53 per share.

Now let's move on to slide 5. Closed sales for the quarter were $31 million, which was in line with our expectations. Our core sales performance was good and I'm pleased that we were able to repeat last year's strong first quarter performance, which last year included a large sale to Neuberger Berman.

During the first quarter, we experienced strong Investor Communication closed sales activity, particularly with registered mutual funds as event-driven sales performed better than expected and slightly earlier than anticipated. We expect mutual fund sales activity to contribute to revenues in the second and third quarters.

I'm pleased to announce that after the close of the quarter the momentum in our sales pipeline enabled us to close a strategic deal in our Investor Communications business. We signed a seven year agreement with Morgan Stanley Smith Barney to become a customer communications solutions partner. Morgan Stanley Smith Barney will outsource to us production and distribution of account statements, performance reports, tax reporting documents and certain trade confirms, as well as providing prospectus fulfillment services. We expect that when fully converted this relationship will generate greater than $35 million in fee revenue annually.

This transaction has enabled not only to win back the statement processing business that we previously announced we had lost from Morgan Stanley around the time of our spinoff from ADP in April of 2007, but to further expand our relationship with the recently formed Morgan Stanley Smith Barney.

Our sales pipeline continues to be very strong and we still have large opportunities in the pipeline for every segment. As always, we cannot accurately predict any timelines for large transactions. However, we are having real conversations as the need for every company to reduce cost and increase functionality in their operating infrastructure continues to intensify.

As a result of both our first quarter closed sales performance and the sales activity post quarter, I'm feeling very good about our sales performance and its positive momentum. We are raising our closed sales forecast range for fiscal year 2010 to a new range of $185 million to $205 million.

Moving on to slide 6, let's now review the Penson transaction, as I'm sincerely excited to discuss this deal. However, before I get into the details of the transaction, I would like to provide you with some context as to how we arrived at where we are today.

We believe that in order to move our Securities Processing business forward, the core processing business needed more service options than just its ASP service model. It needed to be made available in a broader offering in order to close more transaction in this complex marketplace.

To address this business challenge, in 2004 we acquired the clearing business to obtain the expertise and intellectual capital that would allow us to create a unique Operations Outsourcing offering. We have consistently stated that we are a technology services and processing company and we previously needed clearing to execute our Operations Outsourcing strategy.

With this transaction, we have moved our Operations Outsourcing growth ambitions into a reality so that future growth will add meaningfully to incremental profit, given the scalability we have now achieved. With this significant revenue base, we no longer need to operate a traditional clearing business, which is not aligned with our technology services strategy and that strategy's opportunity to create long-term shareholder value.

So let me start by describing our transaction with Penson and the significant terms of the deal. As a result of the transaction, Broadridge will exchange approximately $75 million in clearing revenue for approximately $65 million to $70 million in Operations Outsourcing revenue. To accomplish this, Broadridge has entered into a 10-year Operations Outsourcing contract with Penson.

Under the terms of the services agreement, Broadridge will provide Securities Processing and (technical difficulty) services (technical difficulty). The conversion of Penson to the Broadridge platform is expected to take 12 to 18 months to reach full completion. Broadridge will exit the clearing business by selling the contracts of our clearing clients to Penson under an asset purchase agreement. This transaction will allow Broadridge to focus on its core competency as a processing company.

We believe that exiting the clearing business will provide for a more efficient use of capital as the elimination of the clearing balance sheet will eliminate the need for regulatory capital and free up approximately $180 million to $200 million in cash.

Broadridge will receive between $60 million and $70 million in total consideration from Penson for the sale of the clearing contracts in the combination of a five-year note and shares of Penson's common stock. We anticipate the deal will close within the next six months.

Since launching our Operations Outsourcing product offering, we have proven through a number of mid-size client wins the value of outsourcing people and technology. Now with this large client opportunity, we have reached the tipping point where we can continue to move our Securities Processing strategy forward and focus on our core competency of being a processor, without managing financing activities and any related balance sheet risk.

We needed the resources of clearing in order to provide an Operations Outsourcing product, but as a processor, we painfully understood the confusion it created by giving potential investors the perception that we were not the simple balance sheet and straightforward technology services company we truly are.

This transaction now simplifies the understanding of our businesses for the external world, including our clients. It will result in a clearer and simpler business model and makes Operations Outsourcing a viable long-term option with the signing of a large client and removing any clearing balance sheet risk, while maintaining the meaningful upside opportunity associated with Operations Outsourcing.

Now I'll turn the call over to Dan, who will go into more detail about the transactions, the quarter and our guidance update. Dan?

Thanks, Rich. I'm on slide seven, continuing with the Penson transaction. As Rich mentioned, when the deal closes, which we expect to be in the second half of our fiscal year, which is January through June, we expect to free up net cash of $180 million to $200 million and eliminate the clearing business balance sheet risk.

The wind-down of the clearing balance sheet should happen rather quickly as the majority of the balances are related to receivables and payables and this significantly reduces Broadridge's need for regulatory capital and, therefore, we free up cash. This also means upon closing the deal we'll exit the margin lending business and, therefore, the need for short-term clearing debt is eliminated.

As part of our mutual client and regulatory capital transition between Broadridge and Penson, we may provide Penson with an 18-month loan up to $50 million if they have not finalized the process of raising additional regulatory capital by the time of the deal closing. The sale of the clearing client contracts will be for between $60 million and $70 million and will be in the form of shares of common stock in Penson, not to exceed 9.9% of total outstanding, and a five-year note.

Let's move on to the next slide, 8. The transitioning of the business will be in two phases. Phase one, as mentioned before, we're selling to Penson clearing contracts that produce approximately $75 million in annualized net interest and clearing revenues. At closing we will begin to receive from Penson approximately $35 million to $40 million in annualized outsourcing revenues for those sold client contracts and phase two has Penson outsourcing their current platform activities to us for approximately $30 million to $35 million in annualized outsourcing revenue. And, as Rich mentioned, the conversion is expected to take 12 to 18 months to reach full completion.

The net of these two phases is $75 million annualized revenue stream sold to Penson and $65 million to $75 million in outsourcing revenues received, in return, to Broadridge. Given the two phase conversion and assuming the deal closes in our third quarter, the clearing segment's revenues will be lower than the guidance we gave in August of between $18 million and $21 million and the pretax loss higher by $5 million to $6 million. I'll further review when I get to the clearing segment section in more detail on this.

By the way, there will be a one-time loss on the disposal of the business of approximately $30 million to $35 million and it's primarily due to the elimination of goodwill, intangibles, restructuring and deal cost, with, of course, the positive offset from the net sales price. This loss appears in our guidance as a one-time item and you can see this in the appendix, page 22.

Let's move to slide 9, Q-1 results and our full-year guidance. As we state on the slide, Q1, in all respects, was in line with our expectations and I shared with you before that Q1 is usually our smallest quarter and represents about 20% of full-year revenues and just over 10% of earnings.

What's important is that Q1 is on track. Sales results in the pipeline are good and the Investor Communications recurring and event-driven revenues are tracking slightly better than our guidance we shared with you in August.

Having said that, let's move on to the full-year guidance so I can give you the big picture before moving into the segments and the cash flow. Please note all the below assumes we close the Penson deal in Q3, but even if we close in Q4 it should not have a material impact on the earnings per share numbers I'm sharing with you.

You'll see that revenue growth of 6% to 8% versus our guidance of 4% to 8%. We moved up our low range due to the improved core Investor Communications business and the impact from the Penson and Morgan Stanley Smith Barney transactions virtually offset each other this year.

EPS, non-GAAP, which aligns with our GAAP guidance in August, is still $1.50 to $1.60 and this includes the negative impact from both the Penson and Morgan Stanley during the conversions. The core business before these two transactions should deliver $0.04 to our August guidance.

The share buy-back of $3.5 million during Q1 added another $0.03 and the conversion timing activity of Penson and Morgan Stanley reduces our earnings per share by about $0.07. The message here is we're covering the drag of the new strategic transactions with improved business performance and first quarter share repurchases.

Therefore, the difference between our non-GAAP of $1.50 to $1.60 and our GAAP EPS of $1.42 to $1.52 is only related to the one-time loss on the clearing sale and a one-time tax rate benefit from foreign tax restructuring. The run rate of the business is based upon non-GAAP, which, again, is in line with the guidance we gave back in August.

Let's move on to slide 10. I'll now move in to the Investor Communication Solutions segment. In Q1, the overall revenue growth was a negative 1%, but focus on the boxed area where we show that both recurring and event-driven revenues are up and the low-margin distribution revenues, right under the box, are down. And that down is primarily due to a large, one-time job last year and product mix.

When you review the key stats in the appendix, you'll see that equity stock record growth is down 7% for the quarter, which is primarily due to the mid to small cap being down, year-over-year. Our testing for full year shows flat to slightly negative impact, but having said that, our equity proxy reminder mailings are up and sales for registered and international are expected to continue to drive revenues up for the year.

Moving over to the full-year guidance, we expect total revenues to be up 12% to 13%, with increased contributions from both recurring and event-driven. The recurring growth is being driven primarily by internal growth in most of our products, as well as the addition of data access and the Morgan Stanley deal.

The event-driven growth is slightly higher at the low end from what we shared with you in August and that's due to the expected stronger mutual fund proxy activity, which is supported by closed sales and activity to date. Distribution revenues will continue to have less growth than fee revenues due to the continued move from mailed to electronic distribution and this includes notice and access.

The margins for the quarter approximate last year and in Q2 will begin to grow as we add on the mutual fund proxy sales. These sales, as Rich mentioned, will mostly impact our Q2 and 3, given the timing of the jobs.

For the year, we're forecasting the margin range to be up 70 basis points to 150 basis points. The impact from Morgan Stanley Smith Barney negatively impacts the low end and the high end by 100 basis points, so the core business is doing better than our guidance in August.

With respect to the Morgan Stanley Smith Barney deal, it's seven years and includes our transaction processing and fulfillment products. This is a two-year conversion, given the Morgan Stanley timetable, but we expect to generate incremental margins in excess of 20% once the conversion is completed in our fiscal year '12.

Let's move to slide 11, Securities Processing segment. For the quarter, revenues were down 7%, primarily due to the carryover impact from losses and concessions. Equity trade volumes were flat, driven by the institutional activity being down. And fixed income trades were down 8%, primarily driven by the falloff in the mortgage trade activity. With respect to margins, they are better in Q1 than the high teens we expected due to the above revenue mix and delayed investment spend.

On a full-year basis, we're about the same overall revenue decrease of 4% to 6% we talked about in August. The decrease is driven by the first half headwinds due to the loss of the BofA and price concessions, which, for the remaining quarters, are tracking within our expectations. We also don't expect the non-trade revenue to fall of as much as we thought in August.

We have seen in October the trade volumes pick up from the lower summer months, but the trade volume growth we were forecasting in the second half might not be there, so the low range has been adjusted downward from our August guidance.

We mentioned in August that both this segment and the Clearing and Outsourcing segment would have first half headwinds, but once we move into the second half of our fiscal year most of these headwinds should be behind us, so we'll continue to monitor what happens with trade volumes in determining whether we come in at the low or the high end of ranges we provided for both revenues and margins in this segment.

Let's move to slide 12, the Clearing and Outsourcing segment. Q1 revenues and operating losses were in line with our expectations and operating losses were slightly better than last year due to the revenue contribution and some smaller one-time events.

If not for the transition of the Penson deal, the business would be tracking to our August guidance. So let's focus on the impact from this deal, which is in the two phases I mentioned before.

The revised ranges of highs and lows assume the deal closes in Q3. The far right ranges are the original August guidance.

As already mentioned, in this fiscal year, assuming we close in Q3, our revenues and operating losses will be negatively impacted due to the phase one timing between the net loss revenue from clearing clients sold to Penson, which includes net interest and clearing revenues leave, in exchange for Clearing Outsourcing revenues for those client contracts sold.

Then we start to convert in phase two, the business of Penson on to our platform. This conversion is the one we talked about taking 12 to 18 months.

Rich mentioned earlier that, given our $25 million in current outsourcing revenues, our original guidance, and the $65 million to $75 million we'll add due to this deal, we're about back to the $100 million business, once all the conversions are completed. Given the Penson deal and new business we add over the next two years, we expect to be at break-even or better in our fiscal year '12.

Moving to slide 13, other and FX, this page is in the deck to assist you in your analysis and nothing has materially changed since August guidance, so let's move on to slide 14, cash flow. On slide 14, although this slide is called non-GAAP, it's because we segregate the clearing activity from the core processing activity, as well as we use the term free cash flow, which is cash flow from operations less CapEx and intangibles. We do definitely start with GAAP net earnings and that is the first line.

And, again, we'll focus on the core processing activities columns that are shaded in blue on the slide. For the quarter, the free cash flow is in line with our expectations and under the caption, "Investing and Financing," you can see for the quarter our stock repurchase line is $58 million, which is repurchases net of proceeds received from stock exercises.

Moving over to the full year, we're maintaining our free cash flow guidance of $235 million to $270 million. Moving down the slide, you can see we're including the benefit to cash of the $180 million to $200 million for freed-up capital due to the sale of the clearing business and the dividend that is expected to average about $19 million a quarter going forward.

We, therefore, should end the year with $462 million to $517 million in cash and cash equivalents and this does not include the effect of any future acquisitions, additional debt activity or share repurchases beyond what we did in Q1.

Let's move to slide 15, the financial guidance. Quickly hitting the highlights from the slide and you'll find additional information on page 22 in the appendix, the revenue growth is in the range of 6% to 8% and is a combination of both recurring and events and driven primarily by the Investor Communications segment.

Closed sales forecast for the year has been increased to $185 million to $205 million. Non-GAAP EPS is still in the range of $1.50 to $1.60, with GAAP EPS at $1.42 to $1.52, which does include the $0.08 impact from the one-time items.

And our effective tax rate is approximately 37.5%, without the one-time impact from the foreign tax credits we'll see this year.

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

Thanks, Dan. Now let's move on to slide 16 and the strategy update, staring with our largest business, Investor Communications. The core proxy business remains solid, with good growth opportunities surrounding it.

We believe we will continue to leverage growth opportunities in the core Communications space. The potential new regulations, such as access to proxy, the change in the broker vote, and any modifications to notice and access, will add more complexity to the process. This will create the need for developing new products and solutions that will make the shareholder communications and corporate governance process more transparent and efficient.

Broadridge will continue to lead the market in all of these solutions. We have momentum in the mutual fund piece of the Investor Communications segment to capitalize on meaningful growth opportunities as event-driven revenue activity returns to its historical growth patterns.

We are well positioned to leverage our data aggregation strategy in the mutual fund space through our acquisition of Access Data and other mutual fund products. This business is moving along nicely and the integration is going well. As we have discussed before, we estimate the market size to be greater than $600 million and we believe we can grow our business to $100 million in five years.

We will continue to expand our leadership in the broker/dealer space and continue to take market share and grow our transaction reporting and fulfillment business by leveraging our industry-leading, data-secure processing and e-delivery capabilities. The Morgan Stanley Smith Barney engagement is a strong proof statement about the leadership role we play in the broker/deal transaction reporting space.

Let's spend a few minutes on the Securities Processing strategy on slide 17 and discuss how we'll continue to move the business forward. First, let's quickly review our Securities Processing model and discuss how the Penson deal simplifies the model while still providing the Operations Outsourcing upside.

We have believed and we continue to believe that our core ASP model for Securities Processing needed a broader offering to close more deals and drive more processing volume through the most efficient securities processing platform in the industry. In our three-tier processing model, Ridge Clearing has effectively been replaced by Penson, who will use the Broadridge processing platform and will outsource their technology and operational infrastructure to us.

The third-party clearing firm is responsible for the financing activities and the related balance sheet activity. Broadridge will no longer be involved in the financing activities and will be able to significantly reduce our regulatory capital.

Our processing model has evolved into a pure technology play, as we now have the operating scale and needed transactions to solely focus on Operations Outsourcing, without relying on the revenue support of our clearing business.

Words can barely describe how pleased I am, in both reality and perception, that we have evolved into a pure technology services company. We expect the Operations Outsourcing segment to have approximately $100 million in revenue after Penson is fully converted.

We also expect the Operations Outsourcing business to be at scale at the completion of the Penson conversion and we are optimistic about our sales pipeline and the associated incremental revenues. Our Securities Processing business, which will include Operations Outsourcing, is a better business with better growth potential because we began the journey to reinvent the way the marketplace can acquire securities processing services. We believe that leading the market with this innovative solution will remain a strategic imperative for our success.

Let's turn to page 18. Before we go into the Q&A part of the call, let me summarize and leave you with a few more thoughts on how excited I feel about Broadridge's future.

To start, simply stated, today is the first time I've ever taken the formal position that I'm very pleased. We have had a solid start to the year. Our financial performance was in line with expectations and I feel very good about the remainder of the year. Recurring fee revenue is growing and event-driven mutual fund proxy activity is returning.

I'm excited about the momentum we have in sales. Our first quarter sales were good and our sales pipeline is very strong. We closed a meaningful transaction post-quarter and we have many other large opportunities in our pipeline.

Our Investor Communications segment is stronger than ever and the Securities Processing business is now on the right path, as Broadridge is well positioned to leave these challenging times much stronger than we entered them.

The Penson transaction provides a clear executable securities processing strategy and removes the clearing stress from our balance sheet. It also frees up an estimated $180 million to $200 million in trapped cash.

Let me conclude with an update on our commitment, detailed last quarter, to use our strong free cash flow to create greater shareholder value. We already increased our dividend. Last quarter we repurchased approximately 3.5 million shares opportunistically and continue to pursue strategic tuck-in acquisitions that will create value and leverage our leadership position.

We will use the $180 million to $200 million in cash we expect to free up when we close the Penson transaction to create greater shareholder value. I will share our specific plans for this cash after the transaction closes.

Before I turn it back to Stephanie, the operator, for what Dan and I expect to be a dynamic Q&A part of the call, I must acknowledge the continued commitment of all of our associates who keep us on our upward path forward and, in particular, all of the associates that worked so diligently on the two strategic transactions discussed today.

Stephanie, I'm now going to turn it back over to you.

(Operator Instructions). Your first question comes from the line of James Kissane with BoA-Merrill Lynch.

Congratulations, Rich. This is a great deal, I think. Can you comment on the margins on the Penson outsourcing revenue when it comes on stream? Will it be in line with the Securities Processing business?

And then just a quick followup to that, maybe a little more color in terms of how you'll be going to market with Penson to sign up new outsourcing deals? Thanks.

Okay. So, Jim, I hear two questions. Margins and then market.

Go-to-market.

First on the margins, what I tried to articulate in the call, Jim, is that this now gives us the scale and then as we add business going forward, we expect this to be in line with Securities Processing type margins because of the scale we've achieved now, all right? In essence, what we've done is we've replaced the Clearing revenue with Outsourcing revenue and that's why this is such an exciting transaction for us.

In terms of going to market, what I said was that we now, in our three-tier processing model, the part that was clearing is now Penson. So if there's a clearing transaction out there, seeing Penson win that transaction, we would view positively.

Yes, Rich. The only thing I would add to that piece of it on the margin piece was, we said, if the client is already with us, operating in the Securities Processing Group, those margins will be more on the 20% and, obviously, as we bring in business that has both the not-current client and has technology and what we call the people side of it, the outsourcing, that should be much more in the 35% to 60% range.

Would those contracts be in the broker/dealer's name or in Penson's name?

The transaction we entered into is in Penson and that's typical with every clearing firm that we have and Penson, going forward.

Okay, great. Thank you.

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

Congratulations on the sale. Rich, I know you mentioned a little bit on the last bullet of slide 18 about those details that are to come. Can you give us a little bit of a preview on what you might say as far as-- you have a lot of cash on the books now, also a lot of free cash flow, which I'll get into in my next question. What do you view as-- and I believe there's probably limited acquisition targets out there that are of the size of your cash balance or of your free cash flow.

So what are you thinking about doing here? Is this going to be, let's just say, a one-time special dividend? Would it be a boost to the ongoing dividend or just kind of a Dutch tender or something like that? I'll just kind of throw that out to you.

Okay, Ian, thank you. You're right. I did deliberately give a preview. Ian, you know our policy has been that until we're in a position to execute we really don't comment. I think we've demonstrated to do, particularly since we've been in phase two of our capital allocation plan, since August, our commitment to use our strong cash flows to create shareholder value.

When the transaction closes, when we have the cash in hand, we will provide a clear view. Until then, we're just going to remain with the preview of a commitment to create greater shareholder value.

Okay. And then the question would be for Dan. On slide 14, I know you've always talked about free cash flow being in line with net income, it seems like it's well above that. Part of it is the difference between depreciation and working capital, but a lot of just seems like it's a permanent-- it's permanently higher. Or is that CapEx is too low right now? What are the thoughts there?

Well, let me give you a couple of the pieces, Iz. Right now, if you kind of look at it, CapEx you'll see this year is in that $60 million kind of range. And what traditionally we've said is anywhere between $50 million and $60 million-- I'm sorry, the depreciation. When go down and look at the CapEx, it's going to be slightly lower. But I would tell you, they virtually offset each other.

And there isn't really permanently anything that I would say is different, because sometimes we're higher, sometimes we're a little bit lower and this time we've got a positive impact, although small, in that other category we're talking about and that's primarily related to the one-time kind of items.

But, Ian, the way go forward is really saying it might be slightly higher, okay, but the ranges are pretty much equal to net earnings.

Okay, great. Thank you very much and congratulations again.

Thank you.

(Operator Instructions). Your next question comes from the line of Leon Cooperman with Omega Advisors. Your line is open.

Thank you, good morning. Just two questions. On slide page 14, you show at fiscal year '10 a low to high cash and equivalents of between $462 million and $517 million. What would you say is the required cash to run the business, the low-end cash that you would feel comfortable with?

Well, what we've said, Leon, is during any kind of period of time, especially during what we call the credit crisis going on, we're going to average about $100 million in cash. The rest of it we would look as what we call putting back into the business or returning to shareholders and that's how we've gone about talking about that.

So you're saying that you have as much as $400 million, roughly, of excess cash at the present time, at the end of the fiscal year?

I would-- yes.

It will be. It's not the present time.

No, I understand. It's for the forecast of June of 2010.

Right.

The second question is you said that the money would be used to create shareholder value. Just to make sure the repurchase that you've done thus far, I assume, also was done to create shareholder value and the stock is presently in line with the price you paid. So one would logically assume, unless you change your mind on the business, that there would be significant additional share repurchase. Is that a logical conclusion?

The-- what I don't want to do, Leon, is go beyond what I've stated already, which is that there are different options we'll have to use this cash to create value and so we are in a position right now where we are very excited about where we will be when this transaction closes. We'll provide a clear view when the transaction closes, and I'm not looking to comment beyond what we've said in the past, which is through the use of dividends, opportunistically buying back shares and strategic tuck-ins, we think we're well positioned to create value.

In terms of strategic tuck-ins, if your wish was executed, without asking what the candidates are, what would the aggregate requirement be to achieve those tuck-ins that you so desire?

What I've said in the past, Leon, is that we are not looking at any transactions that go beyond the range that we discussed in the strategic transaction area of the $50 million or $100 million range.

Got you. Thank you very much. Good report.

Thank you.

Your next question comes from the line of [Todd Nunnelee] with Harvard Management.

Great. I wanted to try to clarify my understanding of the Outsourcing business. Pro forma for the transactions, did you say it would be about $100 million of revenue, assuming no significant additional contracts, at about a break-even level?

Yes, what we said was is we currently have $25 million in annualized revenues today. This transaction should bring on the $65 million to $75 million we talked about over the next two years and then we said that with some additional new sales we'd expect to be at, at least, break-even, if not positive. That's how we framed it.

Okay. And if I could just ask one quick additional question, can you discuss the implications of things like the access to proxy in more detail and what-- how that could affect you?

Sure. Access to the proxy would take the existing proxy environment and certainly make it a more intense process for corporate issuers, with a possibility of people not on their recommended slate joining their board.

The only way that can happen today is through a proxy contest. Now when that is a possibility through a proxy contest today, the amount of activity we provide companies in those environments is far more intensive and far greater in terms of the economics.

So we don't comment on policy decisions like whether access is good or bad. We do believe if access was to go forward there would be more work we would be required to do to enable companies to run the annual meeting process and we expect that work would require systems development on our part and we'd also expect that it would lead to more transactions and, therefore, more revenue activity.

Okay, thanks.

Your next question comes from the line of Tien-Tsin Huang with JPMorgan. Your line is open.

Hi. Good morning. This is David Cohen for Tien-Tsin. With the Morgan Stanley deal, was that contemplated in the initial sales, closed sales guidance?

Hey, David. No, it wasn't. We don't include elephant transactions or the very large transactions when we put together our original guidance. It was in the pipeline I discussed at the time. We discussed the guidance in the pipeline.

Well, but I think, to put it in perspective, when we gave the original range, there can be some larger deals inside those ranges. What we've done is now increase both the high and the low by $20 million to reflect that. This deal, obviously, is contributing greatly to the increased guidance.

Dan and I completely agree. So when we put together our sales plan, although we don't include that in our internal plan, there are always gives and takes in the plan. In some cases, like this year, it is the benefit of a large deal in there as well, the actual results.

So is the closed sales guidance excluding the Morgan Stanley deal higher now than it was when you first gave it?

Yes. We gave out the $160 million-- $165 million to $185 million. We have now raised by that by $20 million, both on the low and the high end.

But the Morgan Stanley deal was $35 million.

Right. So what we're saying is, in the original guidance, that's what I mentioned, which was in that original guidance we always know there's going to be some larger deals. This was a very significant large deal, so probably that's why we did increase both the low and the high end.

David, I understand your point. I don't think you should be reading too much into this. So, for example, last year we didn't have in our sales guidance that we provided anticipation of a lot of things, including the markets, and also the Neuberger transaction. So as the year moves forward, there are gives and takes that go in there.

We feel very good about our core sales. We feel very good about where we're positioned right now and we felt a need to raise that guidance. You shouldn't be reading an awful lot more beyond this being positive momentum, though.

Yes. We had positive going into the year, when you think about it. We said we were going to have increased sales even in this down kind of market. What we felt even better about is we won back from the competition a very large deal and feel good about it and hope there's many more to come.

Okay. And with the Morgan Stanley transaction, with the contract, was that a competitive, RFP-type bid? And what were sort of the key drivers for you to win that business?

Okay. So, first, yes, it was a competitive bid. We were very impressed with the process they ran. And the key drivers, really, were quality, ability to enable them to offer the best solution to their customers, and the ability to do it in a very efficient environment and structure.

Okay. And then switching to the sale of the clearing business, you've now got sort of a much tighter relationship with Penson and arguably have somewhat less control over the clearing piece of the offering. Would you just talk about how that factored into your thought process in terms of how you decided to structure the deal? I mean, you're going to own a stake. You're going to hold the note and then, presumably, some of the sales effort is going to have to be driven by them, as opposed to by you. Would you just talk through some of those points?

David, as you've heard me consistently say, we are a processing company, a technology outsourcing company and the Operations Outsourcing piece, we believe, was a unique opportunity which right now we're only providing to the market and getting that business to scale was our primary objective.

This is a win/win transaction. I mean, Penson is solely in what they do. This now puts us solely in what we do and so we're very pleased with where both organizations have wound up and we think, going forward, this gives both organizations greater opportunities to do what they do better.

Yes and just to add on to that, your question was also, Penson and their contribution versus our own outsourcing. The way to think about it is, obviously, as Penson grows, so we do benefit from those transactions that get processed through our systems and the people that do the work.

Equally so and above, too, is the outsourcing we've always talked about was mid-sized, regional kind of firms, as well as some of the larger companies still coming on board into our primary just outsourcing to us.

Okay, great. Thanks very much, guys.

(Operator Instructions). Your next question comes from the line of Stefan Mykytiuk with Pike Place Capital. Your line is open.

Thanks. Good morning. Congratulations on this deal. Just a quick question. Dan, on the-- going back to an earlier question about the difference between free cash flow and net income, isn't the stock comp kind of a permanent difference between those two? I mean, it's $30 million. It seems like that's clearly non-cash. Wouldn't that be one reason why free cash flow will remain higher than net income?

Yes. Stefan, that's a great point. What we have said-- you're absolutely right. That would fall down below in what we call our investing activities or financing activities.

What we have said before -- and I guess that's the reason I keep drawing everybody back to the net income -- is we've also said we would look to buy back at least to a level that would avoid dilution. So it's a great point on the free cash flow will always be permanently different, but one of our objectives always was not to allow the share-- what we'll call stock comp plan to create dilution for the business.

Right. You're just talking about you'll use the buy-back to offset that?

Yes, we said that would be one of our objectives.

Okay, fair enough. And then post this Penson deal, I guess, why continue to break out Outsourcing as a separate business? Because I thought it was-- the only reason why you really broke out the Clearing and Outsourcing business was because Ridge was this separately regulated broker/dealer and it would seem like, in a sense, you're kind of getting out of the broker/dealer business go forward, aren't you?

Yes. The way to answer that question is, it is our objective to absolutely combine these two segments and as we work through in closing the deal, we hope to get closer to that. Obviously, for reasons right now, they are separate segments.

Okay. And then lastly, how do you view leverage? I think post the spin you've always said that you would go to maybe max 1.5 times debt to EBITDA. Clearly, you're well below that now and on a net basis will be way-- net cash after this deal. So giving that you're getting out of this clearing business that was a user of capital and also a reason for the rating agencies to kind of-- to keep a higher level of kind of oversight on what you're doing with your balance sheet, go forward do you think differently about your potential for leverage on the balance sheet if you get out of the clearing business?

Stefan, this is Rich. The position that we took in the past and we still have is that because we provide mission-critical services the customers that we're talking to we absolutely have a need to make them feel very comfortable about the viability to perform in any market condition. So we've set an investment grade rating and a 1 to 1 ratio kind of as the standard out there. Right?

You shouldn't be thinking us taking a materially different position than where we've been on that in the past. And when I talk about my excitement about the pipeline out there and that there are large transactions in every segment, certainly that focus on our part is tied to that excitement that we have around the pipeline, as well, in giving potential customers and existing customers the level of comfort they should have about doing business with us.

Okay.

I think the only thing that I would to that piece was, I don't think we've ever said anything about 1.5 times. I think what we've said -- and our agencies are very supportive on this -- is that should we ever do anything that would push us above the 1 to 1 that because of our free cash flow, and the predictability about those, we would haven't a problem saying, okay, for a short period of time we'd be over that 1 to 1.

Okay, fair enough. Thanks.

Thank you.

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

Great. Some of my questions were answered by the last person that asked the question, but mind would really be getting even further into this. Rich, you mentioned that there's mission critical things you're performing for customers that require an investment grade rating. Can you explain that a little bit more, maybe give me an example of that?

Yes, absolutely. Broadridge processes, on average, between $2 trillion and $3 trillion a day in fixed income. If you're going to be outsourcing your equity processing or your fixed income processing, that's not something that's just going to the store and picking up a new one off the shelf. You want to be very comfortable with the viability of the entity you're doing business with. We are an entity that people should take comfort in and part of that comfort comes from the solid management we have of our balance-sheet-related activities.

Yes and we-- by the way, it's beyond even the fixed income. When you think about any of our businesses--

Oh, absolutely. Communication--

--whether Investor Communications or anything--

Absolutely.

--given who our clients are and what they expect, absolutely that's why we do what we're doing.

Okay. Because I just figured with the contractual nature of this business and the steady cash flow, the business could certainly support, maybe, a 3 times leverage, net leverage number. But I guess that's just my opinion.

You probably shouldn't be thinking-- be talking about a 3 times leverage, Ian.

Okay. All right. Thank you, again. Congratulations.

Thank you.

Your next question comes from the line Milan Gupta with Southpoint Capital. Your line is open.

Hey, guys, great quarter and congrats on the deal. Could you just talk a little bit more about the outsourcing services that will be provided pro forma for the Penson deal? What exactly are you guys providing? Are you basically taking over their employees? Is it more of a software conversion? Is it a little of both? And if you could, just describe the basic nature of what's being provided on your end?

Sure. The-- one of the things that was very attractive about Penson is they were not already on a securities processing platform. So that will be the phase two part of the conversion. In the phase one part of the conversion, we will be-- the services we're providing right now for Ridge, we will continue to provide for Penson, which will be both the technology for the Ridge contracts, as well as the people to support those contracts, but it won't involve any of the financing activities.

As we go to phase two of the transaction, we will then convert Penson's technology for their existing customers on to our platform and then the people functions to support that, as well. Penson is, in essence, buying from us every product that we support in Broadridge today, ex the clearing, financing-related activities.

Yes, Milan, if you look at page 28, we've provided you kind of a chart. We've kind of talked about this before, but now we've updated it, to show exactly what we will continue to do and what we do going forward on any of our Outsourcing technology deals, as well as what will be a third-party, call it clearing firm, would be doing.

Got it. Got it. You anticipate your headcount in the Outsourcing operation increasing as a result of bringing this Penson revenue on to your platform?

It's slight, okay? So there will be some increases in headcount. There will be some increases in some of the costs, but you should still be thinking of the fact that we had a primary base of fixed costs there, able to absorb a great deal, then, of the deal and there's always going to be some incremental kind of costs along with it.

That's very helpful. The last question I had is if you could comment on your thoughts around any proposals in front of the SEC to alter the OBO/NOBO structure that exists currently?

Sure. There has been a request for quite some time from the transfer agent community to eliminate the NOBO/OBO distinction. The-- for those of you not familiar with it, NOBO is people who don't object to giving up their name to an issuer and OBO is people who are looking for confidentiality.

It-- even when it was proposed well over a decade ago to give up confidentiality rights, most people and particularly the broker/dealers that are responsible for the confidentiality rights of their customers, viewed this as being in conflict with the current times we live in. And certainly concerns about confidentiality at every level, including, I think, the SEC's level, are higher, not lower.

So I expect this to continue to be discussed. I personally would be surprised if people were forced to give up confidentiality rights.

Got you. Thanks.

(Operator Instructions). Your next question comes from the line of [Peter Dale] with Omega Advisors. Your line is open.

Gentlemen, good morning. Could you please update us on recent trends at Access Data?

Peter, how are you? This is Rich. Good morning.

Good morning, Rich.

The transaction is a little more than 100 days past closing. We have had-- well, first of all, the integration of the people, the staff, the retention of the staff, have all gone on plan, maybe even a little better than plan. And we're in very good dialogues about what we can do with their capabilities, the modules they've built, to better work the results of accurate 12b-1 reporting and 22c-2 reporting, combined with the data that we uniquely have access to and we're having some very good conversations with large fund families about how we can take this process to the next levels of transparency and accuracy, to the benefit of all participants, whether it be the fund or the investor or the nominee broker/dealer behind it.

So I remain optimistic and that's why I repeated the commitment of generating $100 million in revenue over five years in today's call.

Thank you, Rich.

Thank you, Peter.

Your next question comes from the line of Vivian Mamelak with US Steel Pension. Your line is open.

Thank you. Rich, I need a point of clarification here. So the $75 million that you're transferring, clearing revenue to Penson, you said you're going to then get-- you expect $65 million to $75 million going forward. Is that phase one revenue or phase two revenue or both?

No, that's both phases and what it is, is that the immediate transfer of the $75 million, using those numbers, would generate somewhere between $30 million and $35 million of what we provide in outsourcing back for that. Then when Penson converts their platform over, all right, we would have another $30 to $35 in both the systems piece and the outsourcing-related piece to that, as well.

So it comes--

The last piece is $30 million to $35 million and the first piece we get over, which is the clients that are currently on our system, we'll get paid the $35 million to $40 million. That's how you get to the $65 million to $75 million.

Okay. So is another way to think about it, the first $30 million to $35 million comes in at incremental higher margin and then the second piece comes in at significantly higher margin?

No, the way to think about it is -- and that's why we tried to frame it this way -- is we already have in this business the $75 million in revenue that we've gotten for the net interest, clearing, et cetera. And we've already said we're running at a negative bottom line.

Therefore, there's a lot of fixed costs in this business we don't have to add incrementally to. But when the revenue goes out and the new revenue comes in -- virtually about the same -- the cost structure is there to support it and will be virtually about the same, although different. Certain bank fees and some other things go away and there's some incremental costs to support it. You should be thinking that this deal, when fully implemented, is about break-even for us and then as we add additional business, that's where get the leverage or the scale, as we call it, of anywhere between for every dollar of revenue coming on, about 20% to 50% on the bottom.

Got it. Thank you.

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

Stephanie, thank you. Well, I certainly want to thank everyone for their participation. I certainly hope that Dan and I communicated just how enthusiastic we are about where the business is and the two transactions we discussed today. We're expecting to see many of you over the next couple of weeks and we're certainly looking forward to it.

Choose to have a great day. Thanks so much.

This concludes today's Broadridge Financial Solutions Corporation first quarter fiscal year 2010 earnings conference call. Thank you for your participation. You may now disconnect.