Broadridge Financial Solutions Inc (BR) 2019 Q2 法說會逐字稿

Ladies and gentlemen, good day, and thank you for standing by.

My name is Liway, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Broadridge Second Quarter Fiscal Year 2019 Earnings Conference Call.

(Operator Instructions) Thank you.

It is now my pleasure to turn today's call over to your host, Mr. Edings Thibault.

You may begin your conference.

Thank you, Liway.

Thank you, everyone.

And good morning, and welcome to Broadridge's Second Quarter Fiscal Year 2019 Earnings Conference Call.

Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com.

Joining me on the call today are Tim Gokey, our President and CFO; and our CFO, Jim Young.

Before I turn the call over to Tim, a few standard reminders.

We will be making forward-looking statements on today's call regarding Broadridge that involve risks.

A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K.

We will also be referring to several non-GAAP measures which we believe provide investors with a more complete understanding of Broadridge's underlying operating results.

An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings release and presentation.

Let me now turn the call over to Tim Gokey.

Tim?

Thank you, Edings, and good morning, everyone.

Broadridge had a strong second quarter and is well positioned for the full year and beyond.

I also want to share with you this morning my confidence in Broadridge's future and the message I've been delivering to our clients and associates since becoming CEO January 2nd.

Finally, I'll close with a more detailed overview of our second quarter business highlights before handing it over to Jim to cover the financial results in detail.

So let's get started on Slide 4. Broadridge had a strong second quarter and is well positioned for the full year and for 2020.

We recorded a strong 7% growth in recurring revenue.

We signed over $100 million in recurring sales, a new Q2 record that sets us up very well for the year.

And as Jim will describe, we're confirming our full year guidance.

As we discussed in our last call, event-driven revenues declined significantly relative to a spike in the second quarter of 2018, leading to quarterly EPS that is below last year but more than 40% above 24 months ago.

As Jim will discuss, we significantly increased growth investments in Q2 based on our confidence in the full year.

The key takeaway today is we finished the quarter exactly in line with our expectations, and we enter our second half, where we typically earn 70% or more of our annual earnings, fully on track to deliver double-digit EPS growth in line with our full year guidance.

Those are the headlines.

And now before we jump into the business highlights, I want you, our investors, to hear the same message that I have been delivering to our clients and associates since I took my new role.

So let's turn to Slide 5.

First, the work that Broadridge does is important and it matters.

People need to save and invest for the future.

Companies need to raise capital.

Our largest public enterprises need to be governed.

And investors need clear and transparent information to make decisions.

Broadridge powers the critical infrastructure behind investing, governance and communications.

We make our clients stronger, and through them, we enable their financial lives for tens of millions across North America and around the globe.

Our more than 10,000 associates are proud of that role and are highly engaged in delivering on it.

Second, we have transformed Broadridge over the past 7 years.

Broadridge has evolved from a trusted vendor of a few key services into an equally trusted, S&P 500, innovative, technology and transformation partner.

In governance, we've extended our digital capabilities to drive down the cost to communicate to shareholders, saving fund companies alone more than $400 million a year.

In capital markets, we've created the global post-trade platform of the future and are working with multiple leading Tier 1 institutions to transform critical parts of their infrastructure.

We have built or acquired new capabilities around data and analytics, advisers, tax and document management, among others.

And we've invested in people, strengthening technology and other key roles across the enterprise.

It's especially meaningful to see our transformation being recognized by our clients and peers.

2 weeks ago, Broadridge was named the most admired financial data services company by Fortune magazine.

To be rated by executives in our industry as the leader for what we do is a great honor.

More than that, it's a recognition of why our clients stay with us, want to buy more from us, want to partner with us.

7 years ago, we were barely on the list.

To be #1 is a testament to our trusted position and to our evolution as a critical industry partner.

Next, that transformation gives Broadridge tremendous opportunity.

The market for what we do across financial services is large and growing.

Financial services players are moving rapidly to adopt new technologies and evolve their business to face a changing landscape.

To do that, they're seeking to mutualize non-differentiated functions, tap into more and better data and raise the effectiveness of their communications.

Broadridge is a critical partner in helping them to achieve those goals, which means that we're seeing significant opportunities to grow our business.

And finally, to capture that opportunity over the near, medium and long term, I'm focused on 3 priorities.

First, delivering on our 2019 guidance and the fiscal 2020 objectives embedded in the 3-year targets from our Investor Day 14 months ago.

Second, executing against the multiyear growth plans we laid out for our governance and capital markets franchises and building our wealth business.

And third, building on our longer-term capabilities, like culture, product and technology, to support growth now and will make us an even more critical industry partner in the future.

Let me touch on each of these in a little more detail.

I'll start with delivering on our guidance for fiscal 2019 and objectives for 2020.

As I said earlier, with 6 months on the books, we have good visibility and are very much on track to deliver on our full year guidance.

By this point in the year, achieving our recurring revenue guidance is more about executing against our revenue backlog than about winning new business.

So our focus here is on client onboarding and balancing our investments and earnings commitments.

We're also very focused on 2020.

We are in a strong position and driving actions now across our business to ensure our success over the next 18 months.

My second focus is on growth execution, specifically around the growth strategy across governance, capital markets and wealth management I laid out at our Investor Day.

In governance, we're creating the next generation of regulatory communications to continue to drive down our clients' costs while enabling them to strengthen governance and communicate more effectively with their shareholders.

And at the same time, we're growing data and analytics, our ability to serve leading corporate issuers in and around their annual meeting and the omnichannel communications capability of the future.

In capital markets, we're continuing to help leading institutions simplify and improve their global technology and operation footprint.

We're in implementation at multiple Tier 1 institutions, have a strong sales pipeline for continued growth.

We're also investing to deepen the value we provide at delivering more network value, integrating artificial intelligence to gain insights in the clients' transactions we process to enable our clients to improve liquidity and grow their business.

In wealth, we're building on a strong and growing $400 million business to again help our client simplify and improve their front-to-back technology and operations.

Our comprehensive set of individual solutions puts us in a strong position to do this, and our engagement with UBS to implement a single platform linking applications across the front, middle and back offices is a game-changer for the market with positive reactions from others.

I spoke to a gathering of UBS' field leadership recently to share the industry-leading capabilities our platform will enable, and their excitement was very real.

My third focus is on securing the future by building on the world-class capabilities that make us the right partner now and for the long term.

This starts with building on what has made us great.

We will continue to build on the client-focused culture embodied in the service-profit chain, engaged associates and in our 97% revenue retention rate, which has been a key driver in our success.

We'll also build on our strong approach to capital stewardship.

We have low capital intensity and strong free cash flow.

Managing our shareholders' cash will continue to be a key priority for me.

We will continue with a strong dividend, and there's meaningful opportunity to continue to drive growth and capability through tuck-in M&A.

In addition, we will continue to evolve and strengthen our world-class technology and product capabilities to continue the transformation I described earlier.

We recently completed a Gartner benchmarking exercise that showed us to be at the top of their benchmark in almost every category.

And we intend to extend our leadership to deliver on being the on-ramp to new technologies for our clients across artificial intelligence, blockchain, cloud and digital.

Speaking of blockchain, I want to congratulate our team on executing the first blockchain proof of concept on proxy voting in Japan last month.

This great work continues to highlight Broadridge's commitment to driving innovation.

So delivering on our promises to shareholders today, executing against our growth strategy for tomorrow and strengthening our products and technology capabilities for the long term.

That's where my focus is as I begin my tenure as CEO.

It's a full list, but the good news is that our second quarter results offer a solid springboard as we take Broadridge forward.

So let's turn to Slide 6 for a quick review.

One question I've got increasingly from our associates and from investors, especially over the last 2 months, is about the impact the decline in the market could have on our outlook.

My answer is very little.

Stock record growth changes much more slowly than trading activity since for every seller, there's a buyer.

And in our technology business, we've moved a high proportion of our per trade fee into fixed percentage [based] fees since the financial crisis.

Recent market volatility has only reinforced the critical role we play in helping our client adapt to changing market conditions.

The best evidence for that is our second quarter results, especially closed sales.

We reported closed sales of $106 million, setting a record for the second quarter.

Even without the impact of the UBS wealth deal, sales were well ahead of second quarter of last year.

Of particular note, with the sale of our global post-trade management platform to a leading Asian bank and another deal to move out of customer communication services to a large North American bank, even after our record second quarter, our pipeline remains full.

So demand is as strong as ever, and we've seen no change as a result of the market volatility over the past few months.

Our investor communications segment delivered very strong recurring revenue growth.

Excluding customer communications, recurring revenues rose 25%, with most of that coming from organic growth.

The biggest driver of growth came in mutual fund ETF interest.

Interim record growth rose close to above 20%, the highest quarterly figure since 2006, powered by growth in passive and model-based investing.

Equity record -- equity stock record growth rose 15%, albeit on a relatively small base of equities.

We also saw strong growth in our data-driven products, driven primarily by new client wins and recent acquisitions.

Remember that 80% of equity proxy activities occurs in the second half of our fiscal year.

Looking ahead, we expect more moderate growth in both proxy and interims.

ICS event-driven revenue was a healthy $48 million as we benefited from some smaller activist campaigns and fund proxies.

The approximately 50% decline relative to last year was related to a period in which we benefited from a proxy campaign by the world's largest fund manager as well as 2 large equity proxy contests.

So the decline was very much in line with our expectations.

Distribution revenues, which carries low, or in many cases, no margin, declined, driven primarily by lower event-driven activity, and to a lesser extent, by lower customer communications volumes.

The outlook for our GTO segment is strong, with a significant backlog that has only grown higher with the recent closed sales wins.

In the quarter, recurring revenues rose 4%, down from 6% in the first quarter.

Many of our recent sales wins in GTO are both bigger and more complex, and the longer implementation time to bring on some of these new clients has created a modest lull in our growth.

Profitability declined here as a result of significant investments we're making to build network value.

Looking ahead, our revenue backlog was at record levels and we're in active dialogues with clients around exciting opportunities.

We anticipate stronger revenue growth as we exit the year and into fiscal 2020 as some of these larger wins come more fully online.

These solid second quarter results, especially the strong growth in recurring revenues and record closed sales, give me confidence in our ability to deliver on the 2019 guidance we set at the beginning of the year and are reiterating today.

They also set the stage for longer term growth.

Our goal is to generate total shareholder return equal to or better than the top quartile of the S&P 500.

And I'm pleased to note that due to the underlying strength of our business, we met that objective again in the 12 months ending in December.

We also became an official member of the S&P 500 this past year, which is an important milestone for all of us.

Let me stop there and turn the call over to Jim for a more detailed look at our financials and an additional insight on our outlook in the third and fourth quarters.

Before I do so, I want to thank my more than 10,000 fellow associates all over the world for their hard work and dedication to our clients.

Thank you for the important work that you do.

Jim?

Thanks, Tim.

And good morning, everyone.

Before reviewing our second quarter results, I'll make a few call-outs.

First, we had a strong second quarter.

We notched record sales and strong recurring revenue growth.

And EPS, while lower than last year, was in line with our expectations.

Strong recurring revenue growth in Q2 was powered by exceptional position growth in our ICS business.

Thanks to a company-record second quarter, we posted record first half sales of $124 million, up 102% over the first 6 months of last year, and still up nicely even without the UBS wealth win.

The pipeline remains strong.

Second, profit growth.

Second quarter adjusted EPS fell 29%.

The decline was driven by the impact of lower event-driven revenue and higher SG&A spend, much of that driven by higher growth investment in what is a seasonally small quarter for our earnings, which brings me to my third call out, guidance.

With the first half results in line with our expectation and approximately 70% of full year earnings to go, we are reaffirming our fiscal year 2019 guidance.

I will also detail our expectations for Q3 as we expect a significant shift in quarterly revenue and earnings from the fourth quarter to the third quarter as a result of the new revenue accounting standard.

This is something we flagged in the past, but we're providing additional revenue and adjusted EPS guidance in order to help you understand both the top and bottom line impact of the change.

I'll address each of these in more detail in my commentary.

Before we turn to the slides, a quick reminder.

All current period numbers are on an as-reported basis under ASC 606.

Unless otherwise noted, all growth rates are calculated using prior year as reported under ASC 605.

This is consistent with the approach we followed in the first quarter.

In the appendix, we have provided a pro forma revenue view of fiscal 2018 under ASC 606 by quarter, by revenue type and by segment to illustrate the impact this new standard would have had on FY'18 revenues.

The impact of this change would have been immaterial.

So in summary, current year, new GAAP; prior year, old GAAP.

Let's turn to Slide 7 for a quick review of our second quarter revenue drivers, starting with total revenues and then recurring fee revenues.

Total revenues declined 6% to $953 million in the second quarter as a result of the large decline in event-driven activity.

Overall, the decline in event fees and associated distribution revenues accounted for approximately 8 points of negative growth.

Five points of total revenue growth declined directly from the almost $50 million drop in event fees, and an additional 3 points in related distribution revenues.

The balance of the distribution decline is lower distribution revenues and BRCC, which carry no margin.

As a reminder, unlike the more predictable seasonality of our recurring revenue base, event-driven activity does not reoccur on a predictable quarterly or annual cycle.

Also keep in mind the $48 million in event fees in Q2 is a healthy level of event fees on a historical basis and consistent with our multiyear assumptions.

While FX was slightly negative in the quarter, our full year forecast now assumes a more significant drag from the weaker Canadian dollar and British pound.

Let's move down to the recurring fee revenues, where you can see the components of the 7% growth in the second quarter.

Organic recurring growth was 6%, up from 4% in the first quarter.

Onboarding of new business, or closed sales, as shown here, was the largest contributor.

Internal growth contributed an additional 3 points, as both the ICS and GTO segments continue to see strong position growth and trading activity, respectively, in the quarter.

Overall, a strong recurring revenue result.

Let's jump ahead to Slide 9. Adjusted operating income declined $37 million or 27% and adjusted EPS fell 29%.

The biggest driver of the decline was the fall in event-driven revenues, and SG&A also impacted growth.

I will discuss how each impacted our quarterly income and explain why they don't have an impact on our full-year margin and adjusted EPS outlook.

Let's turn to Slide 11 for this discussion.

First, as I discussed earlier, the absolute decline of event-driven fee revenue, plus associated distribution revenues, more than offset the impact of healthy recurring fee revenue growth.

That impact, plus a little bit of pressure from weaker FX, led to a $59 million decline in total revenues.

Second, as I've discussed before, those event-driven revenues carry significant levels of incremental profitability as they leverage an existing cost infrastructure.

Gross margin, which for us is total revenues less cost of revenue as a ratio of total revenue, ticked down a full 100 basis points from 24% to 23% in the second quarter, reflecting the loss of that higher-margin event revenue.

Taken together, the impact of lower revenues and gross margin led to a $24 million decline in gross profit.

Another significant factor in the second quarter was SG&A.

The impact of the decline in gross profit was compounded by growth in SG&A, which we manage on an annual basis and is more fixed in nature.

In the second quarter of 2019, SG&A grew 6% sequentially and 11% year-over-year.

The increase reflected higher levels of investments in our product and technology initiatives and more investment in our sales organization.

So net-net, the combination of lower gross profit, driven by event-driven revenues and higher SG&A from investments resulted in a 27% decline in adjusted operating income in the quarter.

Looking ahead to the balance of the year, these 2 pressures will ease significantly.

Importantly, we are not lapping at $97 million event revenue quarter in the second half, so we do not expect the same level of contraction on event-driven fees in either the third or the fourth quarters.

That means we'll see the positive impact of higher recurring revenues flow through to the bottom line when recurring fee revenues make up a larger component of our total in the second half of the year.

Further, we anticipate the rate of SG&A growth will moderate significantly over the second half of the year with full year growth in the range of 3% to 5%, leaving us on track to deliver our target of 70 basis points of margin expansion for the year.

As I noted earlier, much of the outsized impact of the decline in event-driven revenues is driven by the seasonality of our business, specifically our proxy revenues.

To illustrate this point, let's turn to slide 12, which shows our historical adjusted earnings contribution in the first and second quarters and the first half.

This shows the 4-year average for fiscal '14 through fiscal '17, for first half earnings contribution was 26%.

Last year was extraordinary, with record event fees in the first half, which resulted in 32% earnings in the first half.

Now looking at FY'19 and using the midpoint of our guidance, Q2 at 12% of earnings was in line with historical average, but far below the unusual 19% a year ago.

All in, the first half of FY '19 was above our historical average, but well below the record first half a year ago.

So what does this all mean?

It means small first half quarters with big event activity movement and modest expense changes can result in big earnings percentage growth swings.

It also means, given the seasonality of our business, that it's not overly material to the full year.

The first half result, 2% adjusted EPS growth, is very consistent with our expectations, and we are well positioned to deliver on double-digit earnings growth.

I will round out the income statement for the quarter with a discussion of our tax rate.

Our effective tax rate was 22%, down from 40% a year ago, but higher than our full year expectation of approximately 20%.

The biggest driver of volatility relative to our full year expectations is the impact from the stock compensation excess tax benefit, or ETB.

After a healthy $7 million in Q1, ETB fell to less than $1 million in Q2.

For the first half, ETB was $8 million, up from $3 million last year.

For the full year, our forecasted tax rate, excluding ETB, remains 24%.

Our forecast assumption for ETB remains $25 million, which we expect will lower our full year effective tax rate to 20%, noting that ETB is highly variable.

This can all be seen on slide 18 in the appendix.

Before turning to the balance sheet, I'll make a couple of call-outs on the performance of our segments on slide 13.

The investor communications segment, and beyond the event activity story, the big call-out is the 10% recurring revenue growth, 25% excluding customer communication.

There were a number of contributors to this strong growth.

Mutual fund and ETF revenues grew 29%, driven by 20% interim record growth, new sales win and a movement of approximately $4 million in revenues from event-driven to recurring.

Equity proxy revenue was also up an impressive 24% as stock record growth was up 15% and new business editions helped fuel growth.

Other ICFs also chipped in with higher organic growth from continued strength in the data and analytics business, among others.

So all in, a very strong performance.

As Tim noted for GTO, longer implementation times resulted in more moderate revenue growth of 4%.

Equity trading volumes growing 16% continued to be a nice contributor.

On the earnings side, increased investments in network value caused earnings to decline.

Importantly, GTO continued to build its revenue backlog with a strong sales quarter and has lots of implementation activity underway.

Now to the balance sheet and turning to Slide 14.

Broadridge generated $163 million of free cash flow in the second quarter and $52 million in the first half of the year.

Broadridge's annual free cash flow generation is typically weighted to the second half of the year, and I expect fiscal 2019 to follow the same pattern as we remain on track to hit our guidance range.

Capital deployment.

Total capital return to shareholders was just over $200 million in the first half of the year, including $101 million of share buybacks in the second quarter as we saw the market sell off as an opportunity to accelerate our repurchase activity.

In total, we repurchased 1.1 million shares at an average price of $104 per share.

Broadridge's current adjusted leverage of 1.7x remains below our long-term target of 2.0x, which gives us the flexibility to pursue attractive tuck-in M&A opportunities and/or repurchase additional shares.

Moving to slide 15.

As I noted, we closed the first 6 months of fiscal 2019 in line with our own forecast and we are reaffirming our fiscal year 2019 guidance.

We continue to expect recurring fee revenue growth to be in the range of 5% to 7% with total revenue growth to be in the range of 3% to 5%.

Total revenue guidance assumes event-driven revenue fees down 10% to 20% for the year and incorporates current forward rates for the Canadian dollar and the British pound.

We expect our adjusted operating income margin to be approximately 16.5%, which is 70 basis points higher than fiscal 2018.

We expect adjusted EPS growth to be 9% to 13%.

We expect free cash flow to be in the range of $565 million to $615 million.

Finally, we expect closed sales to be in the range of $185 million to $225 million.

The change in accounting standard from ASC 605 to ASC 606 impacts the timing of when we recognize recurring fee proxy revenues in the third and fourth quarters.

Given that significant quarterly impact, we think it makes sense to provide some additional revenue and adjusted EPS guidance in order to help you correctly capture both the anticipated revenue and profit impact this will have on our quarterly results for the second half.

The context, again, is that much of our annual equity proxy work falls in March and April.

Under the previous ASC 605, we deferred revenue recognition 30 days from the distribution date, which meant that proxies sent out in March were recorded in revenue in the fourth quarter.

Under the new standard, those proxy fees, along with their associated expenses, will now be reported in March.

This is meaningful because so much proxy activity happens in March and April, so the new standard will shift a good chunk of that proxy revenue from the fourth quarter to the third quarter.

This also makes forecasting each quarter precisely more challenging as distribution dates frequently move between months due to relatively small shifts in corporate calendars.

By the time we hold our earnings call in May, we will have pretty good visibility into the Q3 and Q4 split.

So with that introduction, let me review our guidance for the third quarter, shown on Slide 16.

We expect recurring revenue of $755 million to $780 million, total revenue of $1.195 billion to $1.245 billion and adjusted EPS of $1.40 to $1.56 per share.

Another impact of the change is that it will cause our reported growth rates in Q3 and Q4 to be somewhat meaningless.

To put our outlook in context, our third quarter recurring revenue guidance implies 18% to 22% growth relative to reported numbers and 3% to 6% growth for a like-for-like or pro forma basis.

These comparisons are only helpful in measuring recurring revenue because the event activity is not seasonal and is inherently volatile.

So let me close by summing up.

With strong results, with record closed sales and strong recurring revenue growth, the decline in adjusted EPS was driven by the combination of significant decline in event-driven revenue in a seasonally small quarter and increased investment.

And we are on track to achieve our full year guidance, fueled by continued recurring revenue growth and a very healthy sales pipeline.

With that, we are going to open it up -- open up the line for questions, Liway.

(Operator Instructions) And your first question comes from the line of David Togut from Evercore ISI.

Appreciate all the helpful call-outs on the quarter, especially the moving pieces within event-driven and distribution.

Could you drill down a little bit more into the drivers of recurring revenue fee growth for the second half of fiscal '19 and into FY 2020 both for ICS and GTO, perhaps those also that might not be apparent to us?

For example, we know you have a very large brokerage client onboarding equity and fixed income trade processing in the next 6 months.

What's the materiality of that?

How can we think about that from a modeling perspective?

Sure, Dave.

It is Tim, and then I will -- I'm going to say a couple of things and then hand it to Jim to give any additional color.

So we feel very good about our recurring fee revenue growth over the second half and into 2020.

The -- we certainly don't expect the same level of stock record growth that we've seen in the first half of this year.

We expect some moderation in that, obviously in the equity side, it was a very small quarter.

And as we look forward, we see that being in mid-single digits.

On the interim side, we see that being more in upper single digits.

When we then look at the onboarding of new clients, we are taking on, particularly on the GTO side, some -- have the great honor of taking on some larger, more complex, more transformational deals.

And I think that will create that modestly additional lumpiness in terms of the way that new members come on in terms of the growth rate that we might see in any individual quarter.

The significant deal that you mentioned related to an important Tier 1 client of ours is on track, and we would expect that to be coming online either at the very end of this year or some time early in next year.

That will be a nice positive for us.

It's not going to be something that is transformational and creates outsized change in our growth rates, but I think it's just an indication of the good head of steam that we have.

I think, just more broadly before hand it to Jim to give any additional color, we've talked about the $300 million revenue backlog that we have, and that is something that really gives us confidence, and we've added to that as we've had the very strong closed sales this quarter.

So that really gives us confidence about our ability to continue to drive our recurring revenue growth by bringing on these clients over the next 12 to 18 months.

And it really is a nice position to be in to have that revenue visibility going forward.

With that, I'm going to give it to Jim for any additional color.

Tim, I think you covered it well.

I would just maybe round out with event fees.

Obviously, we continue to guide to 10% to 20% down for the full year, which implies a much more moderate compare year-over-year for event fees.

So I think that gives you good insight as to how that plays out.

And as Tim said, the recurring revenues are really on track.

And when you look through the reported versus the pro forma, it's a pretty smooth growth performance, continuing on with incremental absolute additions to our recurring revenue from all of our new sales.

So that continued on with bringing that backlog live.

Great.

And then to the extent event-driven ends up being a little bit more volatile than you expect in the second half potentially to the downside, do you have some levers you can pull on the cost structure to protect earnings?

David, obviously, you know event is part of our lives here.

So obviously, we planned for all eventualities that we can foresee.

Usually, with event, we've got pretty good visibility for 2 to 3 months out, and then some sort of good analytical insights into how things play out.

Specifically, we enter every year with a commitment to try to deliver on our plan, which for you, it means our guidance.

So we think through kind of all the puts and takes.

Just finally, closed sales growth excluding the UBS booking in the second quarter.

Yes, Dave.

Thanks for asking that question.

Clearly, sales was very strong for the second quarter, and UBS, very landmark deal, it is the largest deal in Broadridge history.

But sales increased nicely without the UBS deal.

And beyond the UBS deal, we feel great about important deals, like the very significant GPTM deal with a large Asian bank, a large communications deals with a North American bank.

So we saw good sales, we have a strong pipeline.

And what we're really seeing is that the themes of mutualization are really resonating with our clients, and that really, for us, reinforces the long-term growth opportunity.

And your next question comes from the line of Oscar Turner of SunTrust.

So first question is another one on referring -- recurring fee growth.

Based on the 3Q outlook, it seems like the F'19 recurring fee revenue growth is on track towards the lower end of your 5% to 7% range for the year.

I was just wondering, is that the right way to think about it?

Or should we expect to see a acceleration in 4Q '19, based on either new GTO business or other tailwinds?

Oscar, obviously, we sit at 6% recurring revenue growth today with reaffirming our guidance of 5% to 7%.

So I think you should take it straight as we're reaffirming our guidance of 5% to 7%.

If you ask us how we're feeling at the midway point, we feel awfully good when sort of the core drivers of the business are going so well.

As Tim mentioned, not only when you've got ICS clicking and then you've got the level of backlog and active implementation going on with GTO, you can't help but feel confident in both this year and as we look out in the future years.

So very much in line, more of the same performance.

Okay.

And then just on the incremental investment spend.

Was wondering if you can parse out how much of that spend was related specifically to the onboarding of new GTO clients as opposed to other technological initiatives?

Yes, Oscar.

Look, the investment spend, we feel very good about.

Onboarding of clients doesn't fall in that category because that becomes -- capitalizes what you do until those go live.

But when you look at the things that we are investing in, we are investing significantly in network value and in applying artificial intelligence to help our clients get more value from the work that we do for them and to improve liquidity in the fixed income market.

We're investing across blockchain, cloud, digital.

All of those are investment areas in the first half, and it's related to -- more to that than it is to GTO onboarding.

And I'm going to give it to Jim for some additional color.

And Oscar, just keeping it -- Tim's color was spot on, and just to give the context.

Remember, we're talking about we manage our SG&A and investments over a full year, not in any one particular quarter.

So as we look at the full year and 3% to 5% SG&A growth, this is all normal coursework for us.

Although as Tim pointed out, we really like the quality of the spend in this given case.

Okay.

Appreciate that clarification.

And last one, just on the wealth management platform, any commentary on the progress there?

And also, do you have any commentary on discussions with other wirehouses?

Sure, thank you for asking about that.

I think the important thing for people to know is that we have a robust and healthy wealth management business today.

It's nearly a $400 million business with a lot of different solutions, all of which have their own head of steam in terms of the sales pipeline and client onboarding and all of those things.

The vision going forward is how to take those things and make them interoperate better and create the front-to-back platform of the future, which is what we're working together with UBS on.

The early stages of that are right on track, going very smoothly between ourselves and UBS.

It is a large and complex project and won't come online for some time.

But there's been strong industry interest in that.

And definitely, other significant players, you look at the -- we really view the market for this as sort of the top 20 broker-dealers.

And the interest among that group has been gratifying.

And so we'll have future discussions.

But for the moment, we're focused on UBS and on the other portfolio of strong products we have today.

And your next question comes from the line of Peter Heckmann of Davidson.

Wanted to check in, just talk a little bit more about your bookings forecast for the full year.

Probably a little ahead of where you would normally be, I think, at the 6-month point.

Does that bookings number start to look potentially somewhat conservative?

Or could you say that maybe perhaps the high end is maybe looking more likely at this point?

Peter, thank you for asking that question.

We are definitely in a very strong position relative to where we usually are at this time of the year, and that is very gratifying.

We don't typically comment on our guidance here until we have -- in sales until we sort of get there because, as you know, things can be lumpy and timing of things can be uncertain.

That said, when we look at the pipeline of conversations that we have, are in the midst of, and how those are going to progress through the year, we feel very, very good about this year.

That makes us feel good about next year as well.

And it really, again, sort of reinforces for us how the themes of mutualization and of helping our clients transform to new technologies are resonating so well.

And so we do feel we have a good head of momentum here.

Great, great.

And then as regards the print mail and fulfillment business, how do you look at it?

And then as well for postage, how much of a drag do you think -- the secular move to electronic from paper, how much drag do you think there is on that portion of the business?

And then what does that translate into in terms of drag on total organic revenue growth?

Yes, let me take those 2 questions in reverse order.

So let me start with the distribution and then come back to customer communications.

So as you know, distribution carries low, or in many cases, no margin.

And as we move from paper to digital, the growth of that will slow and eventually shrink, leading to higher margins for Broadridge overall.

And so those are all the reasons that we always encourage people -- I know, Pete, you know this.

But we always encourage people to focus on recurring revenue or on total fees.

And for this quarter, distribution shrinkage, $48 million, it definitely was a drag on our top line.

In this particular quarter, about 2/3 of that related to event and about 1/3 related to customer communications.

Coming back and just talking about where we are on customer communications.

When we took this on a little over 2.5 years ago, there were really 3 primary goals that we had.

One was around achieving strong synergies, and at this point, we have either implemented or have line of sight on synergies that are twice what our goal was.

And while we aren't necessarily where we would like to be on the top line with that business, it is -- those synergies are driving nice earnings growth within that business.

The second piece was around being the consolidation point for large in-house players as they began to lose volume.

That is taking more time to materialize.

We had good conversations, but they haven't materialized.

What we are seeing is stronger than we expected core sales of smaller deals, and we have a very nice revenue backlog to onboard in that business.

At the same time, there is this large client that we talked about at the time of acquisition that is in the process of leaving us.

That has taken longer than we expected, but that continues to put top line pressure on the business overall.

And at some point, we'll reach the crossover where the new sales outweigh the ongoing departure.

And then the third piece was around creating network value in digital.

That has emerged more slowly than we expected.

We're not seeing anyone else that is ahead of us in that, but it is emerging more slowly.

We do have some interesting early engagements that could be proof points in terms of carrying things forward.

So all in all, we're seeing earnings growth, slower top line than expected, slower digital than we expected, but with some good underlying indicators in all 3 of those areas.

Okay, okay.

So in the aggregate, we should see relatively more of the decline come from the distribution side, and just to move away from print is -- maybe keeps customer communications more, would you say, flattish?

Or do you think it gets -- if you're able to win some of these new clients and maybe drive some new opportunities, but you still have this secular conversion to electronic, where some of that stuff may just go away forever, do you think that, based on what you're seeing in your book of business, is that rate at 1% or 2% or 3% a year?

Yes, Pete.

When we think about the opportunity there, there is no question that there is, within the current client base, there's going to be -- and we're going to be working people to drive, a sort of an almost negative organic from a conversion to digital standpoint.

And so you'll see people moving out of the print into the digital, which we're hoping to capture and create a nicely growing digital business.

So that will be a headwind in the overall, even on the fee revenue side for that business and clearly on the distribution revenue side of that business.

I think the question for us will be what is the rate that we can bring on new clients?

Because there's a very strong value proposition for -- when you look at the market opportunity, 75% of it is in-house players.

And as they lose scale, they lose -- their per unit costs go up, and we have the ability to bring those onto our platform, which is at this point, the most scaled, the most technologically advanced platform in North America.

We have the advantage to bring them on and give them benefit and help them manage that wind down on their side.

So we think this can be a modestly positive business, we would say low to mid-single digits.

And then within that, a nice conversion from print to more attractive digital.

And Pete, as Tim just mentioned in all of that.

This, obviously, we've owned this for a couple of years, all embedded in our full year guidance, always embedded in our multi-year numbers in sort of the way we think about the growth of the business.

So we've -- anticipate all these dynamics.

As Tim said, there's some chances for some nice contributions.

Your next question comes from the line of Chris Donat from Sandler O'Neill.

I wanted to ask one question -- or a couple of questions on third quarter guidance.

Just thinking about the total revenue number and the $50 million range there.

Should we be thinking about, like, the high and low end is timing with the revenue recognition?

Is the swing factor there?

Or there are just a bunch of other swing factors in that number?

Pete, you've got it exactly right.

One of the things that's new for us is exactly that, is the split between Q3 and Q4.

As I mentioned, historically, all this March and April activity, it didn't require precision by the quarter because it all fell into the fourth quarter.

Now we're going to have this split between the quarters.

And it historically moves between March and April with corporate calendars, so that's exactly right.

We want to make sure that as our first quarter sort of having to line that up.

And obviously, we're not a quarterly guidance company in that respect.

So we wanted to make sure we gave ourselves some room for that.

No impact on sort of how we look at the second half or the full year, but obviously, as we try to give you direction on Q3, which was as much about trying to get you guys the appreciation for the shift of a lot of this recurring regulatory work falling into the third quarter.

So long-winded answer to your exactly phrased question.

And just, Chris, to add on that.

It's a lot activity and it's just -- as it happens, that those days right at the end of March are amongst our heaviest mailing days of the year.

And so a day here and there can make a difference.

So that's why we wanted to give such a wide range.

Yes.

Appreciate that.

We've actually looked at some of the SEC data and can sort of see that happen.

And then, I guess, related to the third quarter guidance because we can now back into your implied fourth quarter since we've got first half of the year, third quarter and full year, it looks like you're implying EPS growth, like, quarter-on-quarter in the fourth quarter of, call it, 15% to 30%.

And when we look back at fiscal '18, you grew 86% going third quarter to fourth quarter.

Is sort of that 15% to 30%, is that what you're thinking?

I'm making sure I'm doing the math sort of right here.

Yes.

We can follow up on sort of the specifics.

But remember, 2% year-to-date, guiding to 9% to 13%.

So the second half squarely double-digit growth.

Clearly, on a reported basis, heavy growth falling in the third quarter; and less growth contribution, obviously, in the fourth quarter.

So happy to work through any sort of true-up on that.

But clearly, calling for nice double-digit earnings growth in the second half with a wide disparity in the growth numbers between Q3 and Q4.

And your last questions comes from the line of Puneet Jain from JPMorgan.

So just continue on margins.

So your second half, like, in the first half, margins are down about 100 basis points year-on-year, and you obviously expect significant expansion in second half.

So is second half expansion going to come mostly from somewhat easier comps?

And also if you can also comment on incremental margin drivers in the business model over the medium term.

Yes.

So Puneet, this is Jim.

Starting with the second question first.

We've obviously spent a lot of time this morning sort of talking about the event margins which come in and out at very high margins.

As we saw last year, when we had EPS up 103% with event fees up to 220%, and then seeing the inverse this quarter.

But if you take that out, those are always going to be good, and we think those are nice contributors over the long term.

But when we think about our model, our regulatory communication business continues to be a really healthy-margin business, and that's really what drives our profitability for the full year, especially in the back half, we have both those regulatory communications lifting margins.

Obviously, on the GTO side, we continue to add clients at margins well above our -- both GTO segment average and our corporate average.

So those contribute nicely.

And then obviously, some of the newer products around data and analytics, for instance, come in at very high contribution margins, very accretive to the overall business.

So again, we continue to like the mix.

We've obviously said for a long time that we feel very comfortable with 50 basis points of margin expansion per year.

We've more than delivered on that over the last 3 years.

And certainly the last 6 years, well above that.

Obviously we're calling for somewhere in the neighborhood of 70 basis points this year.

As is often the case, we pick up a lot in the second half just because that's where you've got the bulk of the recurring revenues, which is really, really where we make our money.

So at this stage, we feel really good about where we are in our margins and levers.

And I think we've got a pretty good track record of delivering on that margin expansion.

And I'll -- Puneet, I'll just add on to that.

Just this model of 50, in this case, 50 or 70 basis points per year.

That’s something that we do feel really good about.

Between, as Jim said, the business mix, obviously, there's a long-term driver there in terms of the mix of fee revenue versus distribution revenue; but even within fee revenue, we have some nice ongoing mix; operating leverage as we grow; and just the ongoing organic efficiencies that we are always pursuing.

So the combination of those things, I think, really gives us a lot of ability to continue to drive that increased margin for the long term.

And can you also comment on your backlog?

And how fast pipeline is converting into new signings?

Yes, thank you for that.

The backlog, we go into that in detail once a year.

When we last talked about it, it was just under $300 million.

With the success that we've had in sales, that has grown since then.

And the timing of the onboarding of that, it really varies by product area, Puneet.

There are certain simpler and sort of smaller projects that onboard within -- even within 3 months.

There's a whole group of things that are 6 to 12 months.

There are some longer and more complex projects that can be out as far we've seen, in some of the larger and more transformational, as we've talked out, that can be as long as 24 to 30 months.

So it really is based on the product mix.

And I always think of it as there's a certain percentage that comes in the first year and then a big chunk in the second year and sort of almost all done in the third year when you look at the overall basket in terms of trying to take our new sales and translate that into future revenues.

Thank you so much.

And presenters, there are no further questions at this time.

You may continue.

Okay, that concludes our questions for the day.

I want to thank everyone for listening in today and for the call.

We are really excited about the momentum this quarter that it showed for the things that matter and that will benefit our long-term investors.

And so we thank you for listening in today.

Thank you, presenters, and thank you, ladies and gentlemen.

This concludes today's conference call.

We appreciate your participation.

You may now disconnect.

Have a good day.