Broadridge Financial Solutions Inc (BR) 2011 Q2 法說會逐字稿

Good morning.

My name is Tamika 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 year 2011 earnings conference call.

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

There will be a question and answer period after the speakers' remarks.

Please try to limit your questions to one per participant.

I will now turn the conference over to Rick Rodick, Treasurer and Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning everyone and welcome to the Broadridge quarterly earnings call and webcast for the second quarter of fiscal year 2011.

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

I'm sure by now everyone has had the opportunity to review the earnings release we issued this morning.

The news release and slide presentation that accompanied today's call and webcast can be found on the Investor Relations home page of our website at broadridge.com.

During today's conference call, we will discuss some forward-looking statements regarding Broadridge that involve risk.

These risks are discussed here on slide number 1, and we encourage participants to refer to our Securities and Exchange Commission filings including those on Forms 8K, 10Q, and 10-K for complete discussion of forward-looking statements and the risk factors faced by our business.

Before we begin, I'd like to point out to everyone that as a result of the Penson transaction we closed in the fourth quarter of fiscal year 2010, declaring business is now shown as discontinued operations and our remaining outsourcing business is now part of the security processing solutions segment.

Also, as a result of the reporting treatment of the Penson transaction, the financial results discussed today will address continuing operations unless otherwise stated.

Now let's turn to slide number 2, 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 year to date fiscal year 2011 followed by a discussion of a few key topics.

Dan Sheldon will then review the first half of fiscal year 2011 financial results and the full year of financial guidance in further detail.

Rich will then return and provide his overall summary and closing thoughts before we head into the Q&A part of the call.

Now please turn to slide number 3, and I'll turn the call over to Rich Daly.

Rich?

Thanks, Rick.

Good morning, everyone.

This morning, as part of my opening remarks, I'll talk about the following topics --

First, I'll start with an overview of our year to date financial highlights and an update on our fiscal year guidance, followed by a review of our business highlights.

Next, I will discuss our closed sales performance.

Then I'll provide an important overview of our recurring fee revenue, followed by an equally important overview of our event-driven revenue.

I will also provide an update on our latest acquisitions.

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

Let's start on slide 4, our year to date financial highlights.

I am disappointed with our second quarter operating results which were driven down by lower mutual fund event-driven revenues.

While we anticipated that event-driven revenues would be down from the record activity levels in fiscal year 2010, they were still lower than forecasted.

Event-driven revenues were down 51% for the first six months of fiscal year 2011, the majority of which was anticipated in our fiscal 2011 guidance.

While event driven revenues were stronger in the second quarter quarter, they were not at the historically normal levels of activity that we expected.

Through our research with both large mutual fund complexes and leading mutual fund law firms, we are not aware of a secular change in the causes of mutual fund proxy campaigns, which are the main drivers of our event driven revenues.

The timing of event-driven revenue is, by its nature, not predictable.

Last quarter, we reduced our event-driven revenue forecast for the full year but only by the amount of the first quarter miss because we did not have clear visibility beyond 60 days at any point in time.

Because we have no indication at this point from our mutual fund clients of any imminent rebound, we have reduced our full-year revenue forecast to $175 million.

I will be discussing event-driven revenue in more detail in a few minutes.

Recurring revenues were up for the quarter, primarily due to net new business, our recent acquisitions and the Penson transaction.

Net new business, as you'll recall, is defined as sales, less client losses.

I am happy to tell you we no longer are feeling headwinds from the financial meltdown in our recurring revenues.

Diluted earnings per share from continuing operations were down 68% for the first six months of fiscal year 2011, Over two-thirds of which was anticipated in our guidance due to last year's record event-driven revenue increase.

Our year to date performance was $0.10 lower than anticipated and without any clear signs of a change in the second half we are reducing our guidance an additional $0.10 due to the unprecedented cyclical decline in event-driven revenues.

Therefore, our fully diluted earnings per share from continuing operations previous guidance of $1.55 to $1.65 is now lowered to a range of $1.30 to $1.40.

Also included in the $0.25 range reduction is a $0.05 one-time charge.

This one-time charge will lead to expense benefits in fiscal 2012 and beyond.

We believe the $0.25 reduction should be considered a one-time issue, and it should not impair our value creation goals for fiscal years 2012, 2013, and beyond.

I will tangentially support this view throughout my remarks.

Please now turn to slide five, an update on our business highlights.

Our closed sales remain strong, aided by the largest and most profitable transaction at the time of closing in the history of our securities processing solutions segment.

Shortly after the end of the second quarter, we acquired Matrix Financial Solutions for $201 million.

The Matrix acquisition represents our largest acquisition since our spinoff.

Matrix is the leading independent provider of mutual fund processing solutions for the defined contribution market and holds a substantial position in the rapidly growing small and medium-sized retirement plan segment.

Its open architecture solutions enable customers to leverage distribution arrangements with approximately 25,000 mutual funds and nearly 500 mutual fund families.

I'll talk more about Matrix in a few minutes.

In December, we acquired Forefield for approximately $20 million.

Forefield is a leading provider of real-time sales, education, and client communication solutions for financial institutions and their advisers.

Its web-based platform enables financial advisers to deliver current and concise educational and marketing materials to their clients.

This is a good business on its own, which when combined with Broadridge enhances our continued leadership in e-communications.

The comment period for the SEC concept release concluded in October 2010.

To date, the SEC has not announced any of its findings or recommendations.

We are still confident that the value of the efficiency and accuracy, which we bring to the market, was highly recognized during the comment period.

The SEC recently adopted some new rules on executive compensation.

Shareholders will now vote on executive compensation and they will also vote on how often they want to have a say on executive compensation -- that being every one, two, or three years.

Broadridge is prepared to support these new rules for shareholder meetings.

We believe our ability to again flawlessly execute these new regulations will lead to new client growth just as it has in the past.

The Penson Canadian conversion occurred on February 4, with over 100 correspondents.

The US conversion is on plan to be completed in fiscal year 2011.

The IBM ITO integration is on plan and will be dilutive in fiscal years 2011 and 2012 as planned, and then we will reduce our technology run rate by $25 million annually beginning in 2013.

The Morgan Stanley Smith Barney transaction continues to operate as planned and will be profitable in fiscal year 2012.

In January, we entered into an agreement to partner with Pitney Bowes to offer secure digital delivery services.

This is another example of Broadridge applying technology to take out paper and postage costs to the benefit of our customers and our shareholders.

Please move to slide six.

Closed sales for the quarter were $48 million, and year to date sales were $72 million.

Recurring revenue closed sales have been strong for the first six months of the fiscal year.

They were $35 million for the quarter as compared with $46 million last year, and year to date recurring revenue closed sales were $52 million as compared with $55 million for the same period last year.

This year's second quarter closed sales included the largest and most profitable new client contract in the history of the securities processing solutions segment.

The transaction is initially valued at approximately $22 million a year.

We are leaving our recurring revenue closed sales guidance in the range of $110 million to $150 million.

Clearly, large transactions have and will continue to play a meaningful role in achieving and exceeding our sales goals.

The quality of sales and the type of sales this quarter and the ultimate margin contribution of these sales are all at the higher end of the range and support the incremental value-creation opportunity in the securities processing segment.

The proof statement of this transaction for the overall securities processing Broadridge model is very, very high.

Our sales pipeline is strong and continues to have good momentum.

We are lowering our overall closed sales guidance to $140 million to $190 million only due to the week year to date event-driven revenue sales results.

Let's turn to recurring fee revenues on slide 7.

Recurring fee revenues have grown consistently since fiscal year 2005, generating a compounded annual growth rate of 5%.

Our recurring revenues have had positive growth in both up and down markets due to our strong closed sales, high client retention, and consistent internal growth.

The recurring fee revenues in the investor communications segment have been very comforting.

Recurring fee revenues have grown in each of the years presented and have grown at a compounded annual growth rate of 7% for the last six years.

This segment has benefited from strong growth and net new business, consistent internal growth, and extremely strong client retention.

The securities processing segment is in a slightly different market and has experienced industry volatility and turmoil.

However, its revenues have been far more resilient than the market it serves.

Securities processing revenues have grown at a compounded annual growth rate of 2% over the last six years.

In recent years, our acquisition activity has increased.

And as you can see in the chart, the recurring fee revenues from acquisitions has grown significantly to almost 13% of fiscal year 2011 forecasted recurring fee revenues.

The acquisitions will enhance the performance for both investor communications and securities processing recurring revenues.

Recurring fee revenue closed sales have grown at 9% compounded annually between fiscal years 2005 and 2010.

Let's move to slide eight.

Event driven revenues including distribution represent approximately 20% of total revenues and can be highly volatile over any 12 to 36-month period.

The volatility occurs because event-driven revenues are driven by special events at corporate issuers or more likely at mutual funds.

Some mutual fund examples include changes in board of directors, mergers and consolidations, changes in sub-advisers, and addressing investment restrictions.

Event-driven revenues are difficult to forecast to a degree of accuracy beyond the next 60 days.

Historically, event-driven revenues have moved in the same direction as the market.

However, the volatility is much more significant than the rest of our market-driven business.

Historically, the downturns usually resulted in a 20% to 30% reduction in one year followed by a 15% to 25% annual increase until the next downturn.

This year and last year don't seem to be following that trend.

There was a cyclical high last year followed by a cyclical low this year.

We don't believe there has been a secular change as I stated earlier.

Despite the volatility, event-driven revenues are good value creation revenues.

They're high-margin revenue in a growing segment.

The mutual fund revenue growth is driven by the growth in the number of fund investors, which has grown at a compounded annual growth rate of 7% for fiscal years 2005 through 2011.

Our new mutual fund solicitation product should also enable us to achieve market share gains.

Our initial range for event-driven revenues of $230 million to $240 million in fee revenue was based upon a reduction from fiscal year 2010 of approximately $60 million for mutual fund proxies related to the two large jobs last year, American funds and I shares.

Our second quarter results were slightly better than the first quarter, but not enough to give us confidence that the second half will be materially better than the first half.

Therefore, we're forecasting event-driven fee revenue to be down to $175 million.

As you can see, in the distribution revenues chart, distribution revenues peaked in fiscal year 2007.

They should continue to be flat or down going forward as electronic delivery of investor communications, which has higher margins, continues to grow and replace paper communications.

The volatility in distribution revenues will be driven by the volatility in event-driven revenue.

Let's go to slide 9.

On January 7th, 2011, we acquired Matrix Financial Solutions as part of our strategy to bring new solutions to the mutual fund industry.

The acquisition of Matrix will significantly expand our position as a provider of data and distribution channel solutions to the mutual fund industry.

It will enable Broadridge to bring Matrix's unique turnkey retirement solutions to our broker-dealer client base, increase Broadridge's product offerings to the bank trust and third party administrator markets and will deepen our relationship with nearly 500 mutual fund complexes.

Matrix's reliable, operationally efficient solutions are a natural extension of the core competencies Broadridge has developed over the past four decades.

Matrix is expected to generate approximately $41 million of revenues during fiscal year 2011 for Broadridge, and we anticipate Matrix will be neutral to our GAAP earnings and $0.04 accretive to our non-GAAP earnings this year.

We anticipate that Matrix's revenue will grow approximately 15% annually and in fiscal year 2012, it should contribute approximately $0.04 to GAAP earnings and $0.09 to non-GAAP earnings.

The Matrix acquisition emphasizes Broadridge's commitment to the mutual fund industry and is consistent with our strategy of selectively acquiring related token businesses where we expect to earn returns on investment in excess of 20%.

The management team we acquired is very energized and engaged.

Our sales planning efforts in regard to the third-party administrators, bank trust, and in particular the broker-dealer markets are already in full swing.

Additionally, the Matrix team has already introduced us to a new opportunity to offer cost-effective mutual fund processing to the insurance industry.

We're now on slide 10.

On the previous slide, I explained what Matrix does.

On this slide, I would like to discuss what Matrix means to Broadridge and share with you how we believe we can leverage the business.

Matrix provides us with an entry into the attractive post-trade mutual fund processing market.

Post-trade processing is a large and growing market, and Matrix is well positioned competitively.

We believe we can take that business to the next level by leveraging Broadridge's infrastructure.

Our brand halo and sales force positions us exceptionally well to provide an immediate uplift to Matrix's entire product suite.

We believe we can grow the Matrix revenues 15% annually as we win additional sales to TPAs and bank trusts.

We are extremely excited to take the 401K product to our broker clients.

We believe we will be able to leverage Matrix's client base and relationships to accelerate our mutual fund strategy.

Matrix does business with 146 TPAs, 200 bank trusts and 500 mutual fund families.

It also has connectivity to 800 ETFs.

These relationships afford Broadridge with immediate cross-selling opportunities to sell proxy solicitation, access data solutions, statements, fulfillment, and other products.

Now I'll turn the call over to Dan who will go into more detail about the first half of the fiscal year 2011 financial results, as well as our full-year guidance.

Dan?

Thanks, rich.

I'm now on slide 11.

This slide has the bullet points on what happened in our first half and our expectations for the second.

However, I believe you'll find it useful to follow on slide 12.

As well, where we reconcile fiscal year 2010 to 2011 first half and second half financials and also discuss how we see some of our key initiatives playing into fiscal year 2012 and 2013.

Slide 12 was also included as an attachment in the earnings press release.

First, let me begin by reminding everyone that the second half of our fiscal year is always our strongest given the seasonality of the highly predictable equity proxy activity.

And this activity generates approximately $250 million in fee revenues, and when combined with distribution fees, around $375 million, of which the majority is recognized in our fourth quarter.

Focusing on the first column year to date, you can see our revenues and earnings per share from FY 2010 at the top of the page dropped significantly by $104 million and $0.38 respectively.

As Rich has already mentioned the primary cause was a falloff on event driven revenues as well as the previously announced rollovers related to Bank of America losses, Penson conversion, and one-time tax benefit in fiscal year 2010.

I'll now have you focus on the second and third column, and please note we are using the midpoint of our ranges in this presentation.

And, by the way, for estimating purposes, each $0.01 in EPS equals approximately $2 million in EBIT.

Let's move to the green shaded area labeled Recurring.

In the second half of the year, we expect to generate an incremental $27 million in revenue and $0.11 in earnings per share from our net new business and internal growth.

The sales contribution of $30 million is 70% already sold, and the remaining 30% are results we usually see in the second half, especially in the investor communications business.

Margins, by the way, can range between 20% to over 60%, depending upon the product types.

For the second half we're expecting most of the growth to come from our higher margin products.

Losses are known, and we have not been made aware of any new large losses.

And internal growth represents some improvement we're seeing in stock record growth and trade volumes, especially in the last couple of months.

The high and low ends of our guidance, by the way, are primarily predicated on the activity here with respect to the trade volumes and stock record growth.

Also, given the positive growth expected here in the second half, as well as achieving our recurring closed sales of between $100 million to $150 million, we believe this positions us for continued growth in fiscal year 2012.

Moving to the yellow shaded area, this is the continued falloff we expect in the event-driven activity in the second half.

Although less than the first half, please remember that last year we had two very large mutual fund proxy jobs in the first half.

As we mentioned in the earnings release, our guidance is down primarily due to weak mutual fund proxy activity, or more specifically, the number of jobs, and not due to the falloff in the number of stock record positions, which have been growing at a 7% CAGR.

We also said we believe the falloff to be a cyclical event and not a secular change.

We're pretty sure with our forecast of $175 million for the year, that we should be near the bottom.

Therefore, from this low point, we should expect to see growth as we move into future years.

The good news here is that mutual fund stock record positions, as I mentioned, continue to grow at a compounded rate of 7% per year over the last few years, and over fiscal year 2011 both year to date and full year are around 10% growth.

So we still expect good growth in event-driven over the long run.

Moving down to acquisitions, without Penson, which is classified, by the way, as a key initiative here, they are expected to contribute four points of growth to revenue and are slightly accretive this year and we expect to get both carryover and organic benefit growth as we move into fiscal year 2012.

We discussed our key initiatives every quarter and we're happy to report they are on track.

And we provided guidance for fiscal year 2012 and 2013, given that in 2012, the positive contributions from Penson and Morgan Stanley Smith Barney are offset by the integration of IBM.

But then in 2013, we see the positive earnings and earnings per share benefits of $0.27.

On to the label Other, we've listed the impact of both fixed and variable expense reduction actions.

We've taken or are in the process of taking and also indicated they will have positive contributions into fiscal year 2012 and beyond.

And then we also have the positive impact from share repurchases primarily benefiting the second half which are somewhat offset by first year tax benefits of fiscal year 2010 rollover.

In conclusion here, I hope you can see we believe our second half is promising from a future growth perspective and it's based on deliverable results, not aspirations.

Since I've hit the highlights on this page, we moved the investor communications and securities processing segment update to the first few pages in the appendix.

So in the interest of time, let's move to slide 13, our guidance summary.

On the reconciliation slide, I pointed out I was providing the midpoint of our ranges.

On this slide, you can see we're expecting revenue growth range of minus 2 to minus 1, closed sales of $140 million to $190 million, with recurring at $110 million to $150 million Margins are down due to revenue decline, and diluted earnings per share range of $1.30 to $1.40.

We're forecasting free cash flow in the range of $130 million to $190 million and a change from the last call mainly due to fall off in event driven revenues.

And you can see the details behind this in appendix slide 23.

However, I would point out that the two one-time items amount to $75 million.

So free cash flow on a normalized basis this year would have been between $200 million to $265 million.

So if mid single digit recurring revenue growth, our accretive acquisition, and the return of event-driven revenues to $230 million level, we would be well over the $250 million we've been experiencing for the last few years.

And at this point, I'll turn the call back over to Rich.

Thanks, Dan.

Please turn to page 14 for my summary wrap-up.

Today you've heard how disappointed we are that the event-driven revenues are these unprecedented low levels.

What we have tried to do today is give you a deeper insight into the components of our business than we have before.

My confidence to create shareholders value going forward remains in place for the following reasons --

First, our strong recurring fee revenues.

Even during the market downturn, we have continued to grow our recurring fee revenues due to our excellent client revenue retention, strong sales, and recent acquisitions.

Second, we continue to have excellent client retention.

Our client revenue retention of 99% has never been higher.

Third, our strong closed sales results.

We signed the largest, most profitable deal at the time of closing in the history of our securities processing segment, and we have many other significant opportunities in our sales pipeline.

Fourth, we are successfully implementing our previously disclosed key strategic transactions, the Morgan Stanley Smith Barney implementation, the Penson conversion, and the IBM ITO transition are all on plan.

Fifth, we're in the process of integrating a large number of acquisitions, most notably Matrix and NewRiver.

We expect that the accretive benefit of these acquisitions will contribute positively the full year fiscal 2011 results and, of course, beyond.

And sixth, our continued commitment to drive cost efficiencies through the organization.

During the second quarter, our entire organization has been involved in a careful examination of our entire expense structure in order to optimize our current period performance and also to find ways to increase our expense variability in order to reduce earnings volatility in up and down cycles in the future.

A $0.05 charge to earnings is one of the results of this review.

The charge will lead to expense savings in future years.

Our fiscal year 2012 and 2013 confidence only requires event-driven revenue to return to its mean level of activity of $230 million and only over the next couple of years.

You know I always acknowledge the contributions of our associates.

There is no question in my mind that Broadridge is busier than it's ever been in its existence, that being implementing new clients, creating new products, or integrating acquisitions.

And we're doing this all in the midst of now, thank goodness, the declining economic effect of the economic crisis.

During this period, we've not only asked our associates to do more for less, but we've done it with great intensity.

This message is as important for them as it is for you, our investors.

Since I hope they, like you, will recognize the opportunities that their efforts is have created to enable us to be in a far better position in fiscal years 2012, 2013, and beyond.

My concern for investors and the ability to deliver to them is no greater than my concern for our associates, which is absolutely in line with our unconditional commitment to the service profit chain.

What we just told you is not "We hope things will work out." Is there going to be another financial meltdown?

Well if there is, it will impact what I and you think.

If it is only event-driven revenues we need to deal with, that will not shake my confidence in Broadridge's future.

The core fundamentals of the business are better than they have been in the last two years, and this has raised my confidence going forward.

I want to conclude by saying we remain committed to the service profit chain.

The investments we're making in the business, the commitment to product, the benefits to our clients which is being executed, whether it be through integration or implementation by our highly engaged associates will ultimately lead to the greatest value-creation opportunities for our shareholders.

Since we have a clearer view than ever into fiscal years 2012, 2013, and beyond.

It's an unusual feeling to be simultaneously both disappointed and, yet, more confident than ever in our future earnings and value-creation potential.

The rising tides of fiscal years 2012 and 2013, through our commitment to the service profit chain, will provide me the greatest sense of satisfaction when we deliver the environment and results that both our associates and shareholders deserve.

I'll now turn the call back to the operator.

We welcome your questions.

(Operator Instructions).

Your first question comes from the line of Rayna Kumar.

Hi Rich, and Dan.

Good morning.

I work with David Togut over here at Evercore.

Thanks for taking our questions.

What do you -- what is your latest thinking in the share repurchase program and how do you compare it to buying stock at current prices versus acquisitions?

Well, first of all, thanks for stepping in.

The acquisition decisions are not based on we have a commitment to acquire but based on reviewing opportunities of what we believe is a very high hurdle rate for deals to be ultimately entered into by us.

The most significant being a 20% return.

Matrix is a larger transaction, and I went into great detail to explain it.

But it's not that we decided this year we wanted to do a transaction of that size.

It's that this is the first time in almost four years a transaction of that quality, meaning our hurdle rate, has come forward.

So this advertise to our overall commitment to use our strong cash flows to the benefit of our shareholders.

That should be recognized through our meaningful dividend, our history now of buying back shares opportunistically.

And if and when a transaction which will create greater shareholder value is available and we think they're rare, we will pursue them to the benefit of our shareholders.

Okay.

Thank you.

And your next question comes from the line of James Kissane.

Hi Rich and Dan and Rick.

Just a question on the new SPS contract -- first, congratulations on it.

Is it with an international firm and does that firm operate in the United States today?

And what portion is equity what portion is fixed income?

Is it an in-house conversion or a competitive takeaway?

And maybe just the pipeline of potential SPS business going forward.

Thanks.

Okay.

It's a large global bank head quartered in the U.S.

It is replacing an in-house system.

And it really covered the full breadth of their activities.

And so the breakout between fixed income and equities is probably in line with our normal mix there, being more equities than fixed income.

But -- but this -- what I love about transactions like this, Jim, is I view it as a starting point.

That's why I emphasize it's the largest transaction at the time of signing.

We have larger clients than this at this point in time, but never a client this large at the time of signing.

Yes.

But can you also add about the fact of the pipeline as we look forward?

Yes.

Thank.

Absolutely

What I'd like to share with you is the pipeline has large deals in it but I'd like to stress we have deals we call under $5 million that by the way have traditionally brought in to us somewhere between $60 million and $70 million a year.

And you should also be thinking that pipeline also remains fairly strong.

And since I'm here maybe an update on your visibility that's event-driven.

Typically what kind of lead times would you have?

Would you have visibility into the early part of fiscal 2012 at this point or are you still kind of looking at F2011 event-driven type business.

Jim, the most important thing we shared with event-driven -- is we virtually have conversation with every large mutual fund complex.

And the top -- what we believe are the top four law firms that support the fund industry on these related activities.

And no one has given us a view of a secular change.

Everyone has given us a view of the need for expense management as they are also seeing signs of improvement.

But it's been a difficult economic period for them, as well.

So we have seen event-driven drop off.

We've seen event driven be a lagging indicator in the past.

The unusual thing was the peak we had last year, and that seems to be more the anomaly driven by the two large jobs, which had -- their timing had nothing to do with the financial crisis.

So as we look forward, the visibility is not clear beyond 60 days because we generally will hear it and then be performing some activity starting at about 60 days.

And that's kind of the prep time.

So I'm not saying we clear visibility, but we're here recognizing that it is certainly lower than we anticipated, and as last year was certainly higher than we anticipated.

But we're not believing that there is, again, a secular change to what took place in this phase and we expect this to be good revenue going forward.

One last thing, as Dan pointed out, we're at a very low point as we go forward here.

And, yet, we've adjusted the business because we're at that low point, which really gives us significant upside as we go forward.

Yes, Rich.

I totally agree with what you said there.

And I think as you and I wrestled with this in Q1 we said Q1 was lower -- we would definitely be back at the end of Q2 and say "What do we see?"You're absolutely right on this.

I think 60 days out -- what's very important for everybody to know and we stress this is it's the job.

So the number of jobs coming up, which means they go up for proxy, is what creates this spike up or spike down.

We all feel very good about is you think about some of the other statistics we've given you, is that the position growth are continuing to grow in mutual funds.

So when they do have the proxy again, we should be seeing an increased level of revenue contribution to us.

It's just the timing becomes very hard to figure out.

That's helpful.

Thank you.

Your next question comes from the line of Ian Zaffino.

Hi you guys, it's Brian Bittner in for Ian.

I just want to focus on the segment profit line for the IT business here.

Now, you did a couple million dollars in profit basically break even first last year had you did 51, keeping in mind you had an unprecedented amount of event-driven revenues.

But with this question what I'm trying to do is I'm trying to better understand the nature and profitability of your recurring business.

Your recurring business was up 10%.

So it almost like your recurring business breaks even.

I'm just -- can you just maybe bridge the $51 million to the basically break-even number or just help me understand this concept a little bit better, keeping in mind that I'm trying to understand the recurring business a little bit better here.

Right.

So this is Dan.

The way you have to think about this, first and foremost, on that business is that, by the way, in the first half of the year because of the low contribution of any revenue, it has very low margin.

Remember what we talked about in the fourth quarter and even into the third where we pick up all of that equity proxy business.

So that's what I want to put on the table first.

The second way to think about this is both the acquisitions as well as event driven virtually broke us down to the deterioration that you saw in those margins.

So, for instance, the margins you saw at the end you pretty much saw that on a year to date basis were down 900 basis points or 9 percentage points at 1.6.

The recurring is still bringing in a contribution.

So when you take out the acquisition, which, by the way, are accretive but they don't help the margins at this point.

You put in the Penson -- I'm sorry.

You put in the Morgan Stanley Smith Barney inside of there, which by the way we're done with now we should start to see more accretive basis on there you'll see from the chart we've given and then you take the event driven that's where it stands.

So it is still the recurring is brining in profitable margins.

So the recurring fee business even in seasonally weak quarters makes money?

Yes.

Okay.

We always had traditionally in the first half we had enough event-driven to really move those margins up because the proxy business is like at less than 20% for the full year, of just plain equity proxy business.

Got you.

Thank you, Dan.

And your next question is from the line of Tien-tsin Huang.

Hi.

Thanks so much.

Good presentation.

I won't dwell on event-driven stuff.

I want to follow up on what Jim asked, which was on the large securities processing win.

I know that you mentioned that it was not only large but the most profitable win you had.

So I'm curious what the margin profile of that business would be and as you ramp it up if we could see some decay in the margin during the implementation period?

Well, the reason as I said the most profitable is that on the pure technology transactions is where we have our greatest margins.

As you know, Tien-tsin, the infrastructure is in place.

What's the cost of the last transaction anywhere through Broadridge but, in particular, the last transaction or the last trade through our processing systems is very, very high margins.

So we've actually been working on the implementation for this transaction, somewhat uniquely, before we actually even signed the contract.

So the efforts to implement this deal are already in the structure that we're running today.

And we expect to be converting pieces of this transaction, albeit small, some of them even by the end of this fiscal year, the bulk of which should take place over the following year.

All right.

And towards the latter part of it.

So the reason that we can say it's the most profitable is because it's all technology and it's the largest single technology deal we've ever signed at the time of signing.

And as I also pointed out, we have certainly encouragement and confidence that this transaction and this relationship will grow beyond where it is.

And we view this as a good starting point.

Yes, Rich, let me just add onto that piece of it.

Rich talked about the timing and I'll come back to the margins.

There's a few million dollars that will happen rather quickly but the majority won't start kicking in until the end of our fiscal year 2012.

With margins, by the way, because it's a primary technology both in our fixed income as well as in our equity side.

We've gone in before saying those deals bring in greater than 50% kind of margins, so you should be putting that down for that piece.

And as far as thinking about margins ramping up, Tien-tsin, one thing we talked about before, is that anything that is called I'll call it incremental costs pretty much gets deferred up on a balance sheet.

So you won't see any degradation in margins when it's by the way getting on board as well as when it's fully on board we will fully see the greater than 50% as the bottom line.

Got it.

That's good to know.

This is a follow-up, if you don't mind.

The $0.05 charge that you called out, I didn't quite catch what that's going to cover.

It sounds like you're going to be variablizing some of your costs.

Can you give us a little more detail on exactly what that entails?

That's a great question.

There's actually two components to it.

So the first component is the $0.05.

And that's -- obviously when you're confronted with the disappointment of the event-driven revenue, you do a very deep dive to look into what things we can address from an expense point of view.

And we've identified, you know, things that this year will take a $0.05 charge on that are going to give us a $0.05 or better as we go forward.

As -- and for a long period of time, obviously.

The variability, I wanted to, you say heard me do in the past, when there was an aspect of Broadridge which -- which I think presents us from getting full recognition of the strong revenue and value it has, I put a challenge out there to the organization to say event-driven revenue is good revenue, but the volatility of it, both up and down, makes people less confident in it.

So if we could arrange to create some variable expense tied to the ups and downs of the profit-related activity of that volatility, I think what we could do is create a smoother line as we continually move Broadridge higher.

And so the goal is to take some of the volatility out of the results through variable expenses and aligning variable expenses to that volatility.

You should view this as a directional activity similar to some of the directional activities we gave you in the past which led to the Penson transaction and other things we've done.

Having this revenue, we believe, is a great thing and having investors be more confident it's a value to consistently create value as we go forward is the goal I'm setting out here.

Good.

Thanks for being candid on the results.

Appreciate it.

Your next question comes from the line of Peter Heckmann.

Good morning, gentlemen.

As regards the Penson transition and timing, so it sounds like the US portion of that conversion should occur May, June of this year.

And has there been any change in your thought process in terms of where you can get the outsourcing business in terms of revenue sizing, as well as margins?When I look at your fiscal 2011 financial guidance, and the bridge into 2012, I know there's some expense going away.

But we don't see any contribution in 2013, any flow-through in 2013 on profitability.

So is it still a thought process that outsourcing is essentially a break-even endeavor in 2012 and 2013 unless you sign some new major pieces of business?

Okay.

I'm going to take the first part.

The Penson May, June, is a reasonable perspective.

Certainly we intend for it to happen this fiscal year.

With regard to the outsourcing piece, once Penson is fully converted, that puts us at a break-even run rate in there.

I will tell you, Pete, I'm very excited about the outsourcing capabilities because I view it as almost an ace in the hole where we really have the ability to then be supporting our own business, talking with new clients and large clients about giving them more options, including the outsourcing piece, but specifically looking at all the functions across the brokerage industry where we can do a BPO on any one of those functions now on a specific function basis for any firm because we have the capabilities across all the brokerage processing.

Internally I point that out to people -- our very first BPO, okay, was proxy.

And I've had people say to me, well, I'm not an proxy -- well, proxy is a BPO.

And before we did what we do, every brokerage firm had a proxy department, just like they had a dividend department and new accounts department, et cetera.

So even as we look at the new transactions we went into, we have a built-in PR capability through what we do in our outsourcing unit when we look at the PA business and we look at the mutual fund processing business.

Yes.

Let me just add one thing onto that, Pete.

You bring up a great point and what I would do is bring everybody back to page 12 because we purposely kind of left some things, as I called it, leading statements where I told you about the recurring revenue.

And on the recurring revenue, remember, that's our sales, that's our losses plus our internal growth.

What you should be thinking about the sales, when we deliver on the $110 million to $150 million of new sales, that brings in between four and five points of revenue growth with the margins I talked about, anywhere between 20% and we'll call it the 60% kind of range.

So you should be expecting as long as we're full expectations to hit those goals and we continue to do that, you should know in 2012 we'll pick up.

And we also talked about these larger deals taking over 12 months to implement also benefits 2013 as well.

Then I'll go right down to my favorite event driven.

Okay we're down at $175 million, we've been averaging $230 million.

You bring back in that kind of $55 million with greater than 60% margins you have a very significant pickup over the next few years which we would expect over the next few years to recover at least back to where it was.

And again we gave you the key initiative and I think you can put some modeling together and get to the same place we do which is hitting our expectations longer term.

Dan, I want to add one thing.

I completely agree with everything you said.

In the earnings release, we deliberately tried to give you a deeper context than just the dollar amounts.

Because if you look back to the 2005 number, 160, it was a much higher number of positions and actual fund activity than what we're looking at this year.

And the reason, of course, is because of the compounding of these fund positions.

So even when we talk about 2013 and the $230 million, well, it's only $230 million in 2013, it's going to be much lower than the mean that we've experienced in terms of activity because of that compounding of positions that takes place historically every year.

Yes.

I think we answered the Penson question as to what Canada's in.

And we're looking by the end of this year to have the USfully implemented.

Right -- and the end of this year, June, July, but the benefit will be there for fiscal 2012 and beyond.

Got it.

Okay.

And one further question, on Matrix, I was having trouble understanding the revenue model.

It looks like there's a couple different pieces.

Could you explain the revenue buckets there including how much is coming from [12E1]?

Sure.

The primary piece there is Matrix makes their clients highly, highly efficient.

And so there -- it's a combination of some basis points [12E1] comes into play but not nearly to the degree that it would if you were using a competitor of Matrix.

They have built a remarkably efficient model to enable larger organizations to deal with smaller clients and all the processing complexity very beings very efficiently.

And they've also enabled larger organizations to retain the majority, if not all of the [12E1] just by paying fees directly to Matrix.

Yeah, Rich, I would add to that piece if you think about we told you about $41 million for half a year so think $80 million plus on an annualized basis and to be thinking that greater than 50 percent comes from assets under management -- the rest are more or less the fees, which include the [12E1] et cetera.

Okay.

Okay.

Thanks much.

Your next question comes from the line of Rob [Hill].

Good morning, guys.

Good morning.

Both Rich and Dan, you both mentioned a couple times and I think we talked about it with a few of of these questions that you're talking about the event driven business and you're highlighting the growth of 7% in mutual fund records, I guess, over time.

I guess I'm thinking about it more based on the number of maybe mutual funds out there and those funds having to solicit or proxy activity with those funds.

Is that -- is that not the right way to look at it, more than just the number of, I guess, actual records or mutual fund holders out there?

Rob, that's correct.

And that's why we saw normally between 22% and 26% of the activity, because as you implied, funds don't need to go on an annual basis, they only need to go out when they have an event that causes them to go out, the number 1 reason being director approval.

Right.

But -- so as there's consolidation, perhaps, maybe there might be growth in the number of records, but, yet, the number of funds that actually, you know, have changes or, you know, changes in boards or whatever, they may not need to actually solicit a proxy or go out to their shareholders.

So isn't that more the thing that we should be looking at, obviously, from a secular issue?

I agree, Rob.

The merger activity actually required them to go out to their holders.

So it was an uptick in merger activity.

Yes.

We would actually be getting a benefit from that revenue very similar to on the equity side when there's a merger activity, we would get the benefit from that, as well.

Bear in mind, in merger activity, both in equities and in mutual funds, if you own a position in fund A that's merging with fund B, okay, unless they actually merge the funds themselves, you're still two positions on our records.

Okay.

So if they're just leveraging the management infrastructure but keeping the funds out there, okay.

So it's still the same number of positions.

It would only be if you owned a position in fund A, fund B, they then merge the two fund families, and then they consolidated the individual funds into one fund, and you happen to be in both, that's the only time we lose a position.

So merger activity is actually more of an uptick for us than it is a downtick in this space.

Rob, what you just said, those are the two components.

I call it the number of jobs.

We call it the number of funds.

The point being that could also create more volatility up or down for us.

But what's very important is we're paid on a position basis.

And those positions have grown consistently.

So had you finally get the proxy, you're going to get incremental revenue.

It just may be more erratic as we go from year to year.

Okay.

Thank you.

(Operator Instructions).

And your next question comes from the line of Stefan Mykytiuk.

Hi.

Good morning.

A couple quick questions.

One, on slide 12, Dan, I think this is very helpful, I just want to make sure those two columns for FY 2012 and 2013 are the incremental change for that year ; correct.

Absolutely.

So you'll pick up $0.10 effectively in 2012 and another $0.30 in FY 2013?

That's exactly how to look at it.

Right.

And then we pick up some portion of the $0.38 of the event driven as that business normalizes and we pick up I guess $0.04 next year in Matrix.

Yes.

Okay.

Terrific.

Just can you just comment, you know, the stock's obviously getting hit today -- your appetite for buy back and how that factors in with acquisitions?

The -- I guess I'm going to be repeating what I said earlier, Stefan -- the position on returning capital, all right, through dividends, through opportunistic buy backs which you heard we have done quite a bit of over the last couple of quarters, and -- and if we can find a transaction, and I tried to emphasize in the Q&A here that Matrix was not -- we went out it find a large deal.

Matrix was -- we finally found a deal that we thought could move the needle, give a great return to our shareholders, and by the way, naturally fit within our DNA as to what we do.

So our commitment to use our strong cash flows to create shareholder value through both dividends, opportunistic buy backs and strategic tuck-ins remains consistent and in sync.

Okay.

That's good to hear.

Thanks very much

(Operator Instructions).

And your next question comes from the line of Vivian Mamelak.

Good morning.

I just want to could back to the $0.05 charge for a second.

You're saying that this is primarily variable costs that you're going to try to take out of the communications business.

But maybe you can provide some detail about the timing of the cost saving or some other color?

Because right now to me it's a bit of a black hole.

Vivian, I apologize.

I in the same part of the presentation raised the one-time $0.05 charge, and then I separately raised setting a goal to create more variable expenses tied to the ups and downs of profitability that could be caused by event-driven revenue.

Okay.

All right.

So, Dan, why don't you take a shot at the one-time charge and the variability at this time.

Yes.

So Vivian, if I take you back it my favorite chart, which is slide 12, you'll see that the one-time charge is truly, if you think about that clause, we're going to take some expense this year to benefit ourselves.

Not only do we have the $0.05 back but an additional $0.06 which is why you see $0.11 incremental pick up on that slide.

That is permanent.

That has nothing to do with variable -- it's things we're doing to the business to make sure we can take our fixed costs down to a level.

And then what Rich was talking about with the variable -- we have not discussed what that could really mean to us.

I think that Rich has challenged the entire organization with looking at to see if we can't help smooth out when we see these huge swings in event driven a better ability to match up some variable cost changes with that.

Okay.

Okay.

That helps.

Thank you.

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

I will now turn the call back to Mr.

Daly.

Well, Dan, Rick, and I sincerely appreciate your participation.

I suspect and hope we'll see some of you this week.

And we certainly appreciate your continued interest and support in Broadridge.

Choose to have a great day.

Thank you.

This concludes today's Broadridge Financial Solutions, Inc.

second quarter fiscal year 2011 earnings conference call.

Thank you for participating.

You may now disconnect.