Broadridge Financial Solutions, Inc.
Q1 2008 Earnings Call Transcript
Published:
- Operator:
- I would like to welcome everyone to the Broadridge FinancialSolutions first quarter fiscal year 2008 earnings conference call. (OperatorInstructions) I will now turn the conference over to Marvin Sims, VicePresident of Investor Relations. Please go ahead, sir.
- Marvin Sims:
- Good morning, everyone and welcome to Broadridge quarterlyearnings call and webcast for the first quarter of fiscal 2008. I am MarvinSims, Vice President of Investor Relations. This morning I am here with RichDaly, Chief Executive Officer for Broadridge and Dan Sheldon, Chief FinancialOfficer for Broadridge. I am sure everyone has had the opportunity to review thenews release we issued earlier this morning. The news release and the slidepresentation that will accompany today’s earnings call and webcast can be foundon the Investor Relations home page of our website at Broadridge.com. We’vealso posted to our website the key revenue metrics that we mentioned during ourfourth quarter earnings call and an 8-K was filed this morning. Before we begin, I would like to remind everyone that duringtoday’s conference call, we will discuss some forward-looking statements thatinvolved risks. These risks are discussed here on slide 1 and in our periodicfiles with the SEC. During the review of our financial results to provide apoint-to-point comparison between fiscal '08 and fiscal '07, all pre-tax andnet earnings numbers discussed throughout the presentation are non-GAAP andexclude one-time transition expenses and interest on new debt. The actual GAAPreported numbers and comparisons are also listed. During the review of our segment results, again for a point-to-pointcomparison for revenue and operating profits, we will discuss adjusted numbersthat reflect a change in the methodology that occurred in the third quarter offiscal 2007 for the interest segment allocation between clearing and outsourcingand the other two segments. Again, a reconciliation to the GAAP numbers isavailable in the presentation appendix as well as in the press release. Now let's turn to the next slide and review today's agenda,Rich Daly will start today's meeting with his opening remarks and provide youwith a summary of the financial results for the quarter and discuss a few keytopics. Dan Sheldon will then review the financial results in further detail,and review cash flow performance. Rich will then return and review the fiscal2008 guidance and provide a summary before heading into the Q&A part of thecall. After Q&A, Rich will provide his closing comments. Now please turn to the next slide for Rich’s openingcomments. With that, I'll now turn the call over to Rich Daly.
- Richard Daly:
- Thanks, Marvin. Good morning, everyone. This morning as partof my openings remarks, I'll discuss the following key topics
- Dan Sheldon:
- Thanks Rich. I am on slide 4. Our financial results for thequarter, our revenues grew 3% and without distribution fees, grew 7%. Of the3%, think of that as half the growth coming from the segments and the restcoming from our one-time contract termination fee, as well as the benefit fromFX. The contributions, by the way, from sales and losses torevenues were in line with our expectations. With respect to internal growth,it was better than our expectations by $16 million and was driven primarily byincreased trade volumes in our securities processing and clearing andoutsourcing segments, and interim statements and event-driven mutual fund proxyactivity in our investor communications segment. I would also point out thatevent-driven sales are part of our internal growth as they don’t necessarilyrepeat each year. Losses were in line with our expectations, including the twolarge client losses which impacted revenues by approximately $16 million. Turning over to EPS before transition one-time expenses andinterest on new debt, it is up 48% and primarily driven by pre-tax earnings, solet me focus for a minute then on pre-tax earnings. They grew almost 50% thisquarter. Our over-plan internal growth of $16 million I just mentioned had anEBIT contribution of over 60%, which more than made up for our two large clientlosses with respect to EBIT. We also benefited from the termination fees I mentioned andFX. I would also point out that our expense levels are below, as Rich mentioned,our planned rate due to a slower than anticipated ramp up of corporatestructure and incremental investments in the business. We also benefited fromour royalty expense dropping off to the tune of $11 million. A couple of other points I would make on this page
- Richard Daly:
- Thanks, Dan. As I mentioned during my opening remarks, thestrong start to our current fiscal year has prompted us to raise our guidance.We are increasing our revenue guidance to a range of 1% to 4% and our dilutedEPS guidance before one-times for fiscal '08 from a range of $1.17 to $1.25 toa new range of $1.30 to $1.40. In our new guidance, we are reflecting the benefits from thefirst quarter. The low end of the guidance assumes a slight fall off in tradevolumes and less event-driven revenue for the remainder of the year. The highend assumes slightly better trade volumes and modest event driven revenueincreases for the remainder of the year. Our guidance does not contemplate anymajor downturn in the markets we serve that could result in a significant dropin market activity. With respect to free cash going forward, we will continue touse our strong cash flows to pay down debt, pay a dividend, acquire productsand businesses and at least for fiscal '08, we are not contemplating any sharebuybacks. Let's summaries before we go into Q&A. We had a verysolid start to the fiscal year, with strong quarterly earnings driven byinternal growth and continued event-driven activity. As a result of this strongstart, we have increased our financial guidance. Markets are difficult topredict and activity in markets will create both upside as well as downside. Broadridge is in control if its business, butnot of the markets. Our strong cash flows enable us to pay down debt to $533million. We are executing our growth strategy and will drive our service profitchain culture to provide the ultimate client-centric experience in ourindustry. This will ensure we are lined strategically with our clients. Finally, we will continue to invest appropriately in ourbusiness for future growth that will drive greater shareholder value. Now I will turn the call back over to Carol to open it upfor Q&A.
- Operator:
- Your first question comes from Ian Zaffino – Oppenheimer.
- Ian Zaffino –Oppenheimer:
- Very good quarter. My question would be on the clearing andoutsourcing business. You narrowed loss very nicely. How much of that isactually attributable to progress in that business in and of itself, or reallythe synergies that you’re getting from the other parts of your business as you havemelded in the CNO business into the rest of the company?
- Dan Sheldon:
- Great question. By the way, it’s coming from the businessitself. You’re talking, I believe, about how we look at the fact that we usedto have these cross charges and have any of those cross charges changedanything? We now state the numbers we give you, we wiped all that out,so you are seeing a real period over period, the exact same kind of charge lastyear as this year coming from the SPS business, so therefore every piece ofleverage coming there, that $1 million improvement, is all being generated bythe business itself.
- Ian Zaffino –Oppenheimer:
- Margins have improved very nicely this quarter. How are yougoing to continue to do that going forward? What type of initiatives are youlooking at, if you can talk to that, that would be great, thanks.
- Dan Sheldon:
- Are you speaking again to the clearing and outsourcingbusiness?
- Ian Zaffino –Oppenheimer:
- I am talking about corporate-wide, two of the biggestinitiatives or whatever, and what would be the biggest areas of marginimprovement?
- Richard Daly:
- In all of our businesses, it’s a scale play. By having veryefficient infrastructures, the more volume we can put through thatinfrastructure we will almost always be able to create margin improvement. Wealways manage expenses very, very tightly and we expect to do that goingforward. It’s generating more sales activity across our existing products iswhat generates the best margin improvements for us.
- Operator:
- Our next question will come from the line of Stefan Mykytiuk- Pike Place Capital.
- Stefan Mykytiuk:
- I was glad to see there were no articles on E*Trade thismorning in the Journal.
- Richard Daly:
- So were we.
- Stefan Mykytiuk:
- Can you just elaborate Rich, what’s the status of the of theboard study of long-term compensation for management? Any kind of view of whenthat will get wrapped up, so you guys can be tied side-to-side with theshareholders?
- Richard Daly:
- As I previously stated, we were very, very pleased with thediversity and the strength of the board we were able to put together. A newspin-off though, the company has actually spun before the board is legally inplace, so one of the first things the board did was identify their own outsidecomp consultant, which they have done. They have engaged him to understandwhere Broadridge is relative to its peers. We have an extensive CD&A, asyou will see in the notice and proxy statement, but my understanding is thatthe board work continues. I am not part of the comp committee, as one wouldexpect me not to be, but we believe that they will have more data certainly bythe end of the calendar year. That’s pretty much what I can tell you at thispoint.
- Stefan Mykytiuk:
- Keeping along the line of board-level discussions, youmentioned in your comments stock buybacks not contemplated for the fiscal year.It looks like you are on track to pay down this debt and get to your leveragetargets. Beyond that, is that something that you think would be a priority forfree cash flow? Buybacks, that is.
- Richard Daly:
- The priority for cash flow is to create value, so where weare right now is paying down debt certainly is a priority. We are looking toget to that stated goal of 1
- Stefan Mykytiuk:
- Just going one step further with that then, acquisitions. Arethere larger acquisitions out there that you’ve identified that you think arevery attractive and its just not the right price or the seller is not willingto sell yet? Or are there not really acquisition opportunities at this time?
- Dan Sheldon:
- We originally use the term tuck-ins for acquisitions. We usethe definition there of the $30 million to $35 million range. Because of ourstrong cash flows being slightly better than what we anticipated, we haven’tchanged our position on the type of transactions to do. Meaning, the tuck-inphilosophy is something that, it would be in a space that we would be confidentwe would be very good at. It would be executing within our sweet spot oftransaction processing and would be executing in our sweet spot to a clientbase that knows and respects us and will likely consider us for additionalservices. Because of the strong cash flow though, we are willing tolook at a definition of tuck-in beinglarger than the $30 million to $35 million. Let me make this clear though; we arenot going out there specifically looking to do a deal for the sake of doing adeal. It would have to be something that meets what I’ll call a tuck-incriteria, and probably better said, tuck-in means something we would beconfident that we would have the skill set and the ability to execute well on.
- Operator:
- Your next question comes from Tien-Tsin Huang - JP Morgan.
- Tien-Tsin Huang:
- Congrats on the results as well. Question about securities processing.Relative to our model, the securities business drove nearly all of the upsideand I am pretty surprised by the margins; specifically, the implied incrementalmargin as the profit increased by the amount as the revenue increase. It soundslike volume, incremental margins around the trade volume is very high. Anythingelse that drove that outcome that we should consider? It sounds like contracttermination fees are not in the segment.
- Richard Daly:
- Let me first comment on the securities processing piece.That business is virtually entirely computer-based, and therefore anyadditional activity that we process in that business will have very highmargins and we’ve experienced this type of contribution from better thanplanned volumes throughout our history. I’ll let Dan comment, as he did during his update, on someother pieces that impacted us.
- Dan Sheldon:
- Thanks Rich. Just to be clear on that, you’re absolutelycorrect Tien, that we did not includeany termination or really any kind of one-times in our segment, because wethink that distorts the picture. So those will always be in the other. Nowcoming back to when you are thinking about the Trade Processing, once you getbeyond about 5%, 6% growth, in what we call trade processing, you cover yourfixed costs or any increase to those fix costs in the business. So to that point, anything above that pretty much does fallto our bottom line. And in any given year we can always have what we callconcessions that might run a little bit higher than the prior year, a littlebit less than the prior year. But right now going forward anything that we callthe incremental piece above 5% or 6% should pretty much fall to the bottomline.
- Tien-Tsin Huang:
- I’m just thinking on a go forward basis, as we model out,obviously we know about the client loss so we assume some kind of growth rateon the organic. It feels like we should be assuming, like you said, somethingcloser to 80%, 90% incremental margin. Am I wrong in thinking that way, interms of aligning incremental revenue growth that just dropped through to thebottom line?
- Dan Sheldon:
- I’ll just give you an example, say that we’re going to grow10% of the internal growth for the trade volume, so just as an example. That first 5% really is eaten up in what wecall any of our what we’ll call incremental costs or fixed cost like meritincreases, other kinds of expenses like that. Then the remaining really fallsto the bottom line. I still look at it somewhere between a 50% and 75% in anaggregate.
- Dan Sheldon:
- Once I’ve gotten over my what I call fixed cost piece ofincremental, then it really all drops to the bottom line; so I still put it inthe 50% to 75%, I wouldn’t let it all drop.
- Richard Daly:
- For those of you on the call who heard us during the roadshow, our early presentations, when I described the securities processingbusiness, I’ve historically said the cost of that first transaction that goesthrough the system is really ugly. The cost of the last transactions goingthrough our systems, it’s difficult to find cost. So it’s a largeinfrastructure, significant systems and infrastructure cost upfront, but very,very, very scalable.
- Tien-Tsin Huang:
- That is the beauty of scale. Two other quick questions,maybe Dan if you can comment on stock comp going forward? What should we expect?If you could also comment on this pipeline for clearing and outsourcing. How isthat shaping up? Are there any changes in the broader demand environment?Thanks a lot.
- Dan Sheldon:
- How we think about stock comp. What we’ve really said outthere is that we have an expense rate of about $25 million. The way that wouldincrease over time is it is highly gauged to our stock price, and I think youunderstand what I mean there. So, if our stock price went up or down by 10%that is very much a factor in whether that stock comp would move up or down.It’s not a factor, the $25 million is not impacted by we are going to add morepeople necessarily to it or that we are giving more shares to people. The derivative that drives that is the value of the stock. Thenyou have to figure out the value of that you have to put through as far as theexpense. Does that help you there?
- Tien-Tsin Huang:
- Got you. Yes.
- Richard Daly:
- Tien, I am sorry. Could you repeat the second part of thatquestion?
- Tien-Tsin Huang:
- If you can just broadly comment on pipeline for clearing andoutsourcing business, and if there has been any change in the demandenvironment given the economic backdrop?
- Richard Daly:
- Sure. I didn’t cover this in my comments, so I am gratefulto you to ask the question. I had stated in the past that we were pleased withour pipeline. We absolutely do remain pleased with the pipeline. We have putmore assets into identifying new activity for pipeline as we go forward, and Iam pleased with those efforts as well. So overall that’s why I used the termvery pleased because between the actual results and the pipeline, we arefeeling good right now about where we are with sales.
- Operator:
- At this time, I am showing that we have no furtherquestions. I will now turn the call back for closing remarks to Mr. Daly.
- Richard Daly:
- Thank you. I want toend by saying that we first of all appreciate your participation. But mostimportantly I want to say that I am feeling good about Broadridge and about ourfuture. I am confident that we are on the right path and we will continue to beleaders in our markets. Again I want to thank everyone for participating. Dan,Marvin and I look forward to speaking with all of you whether it be throughoutthe next quarter or after next quarter. Thanks again, and choose to have agreat day.
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