Broadridge Financial Solutions Inc (BR) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Broadridge Second Quarter Fiscal Year 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Edings Thibault, Head of Investor Relations. Please go ahead.

Thank you, Andrew. Good morning, everybody, and welcome to Broadridge's Fiscal Second Quarter '21 Earnings 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 this morning are Tim Gokey, our CEO; and our CFO, Edmund Reese.

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. Good morning, and thank you for joining us. I'd like to start with a special welcome to Edmund Reese, our new CFO, on his first Broadridge earnings call. I know many of you were introduced to Edmund during our virtual Investor Day in December, and I hope you came away as impressed as I have been over the past 2 months.

This morning, I'll provide an overview of the key messages from this quarter and give you an update on our progress against the growth plan we discussed in December. Edmund will review our financial results, and we'll close with your questions.

Let's get started. After a strong second quarter, Broadridge is on track to deliver another solid year of top and bottom line growth. We now expect to be at the higher end of our guidance range for both recurring revenue and adjusted EPS growth. That guidance reflects our strong quarterly results. For the quarter, Broadridge delivered 7% recurring revenue growth, continued margin expansion and 38% adjusted EPS growth in a seasonally small quarter.

We continue to execute against the growth plan we outlined in December. I'll highlight later some of the specific steps we've taken on key initiatives across governance, capital markets and wealth and investment management.

Our strong second quarter results and outlook for the second half of the year have given us the opportunity to step up our investment. I'm pleased to see us increasing our investment in our technology, products and people to meet our clients' growing needs as they face accelerating trends towards next-generation mutualization, resiliency and digital transformation.

Finally, our outlook for the year means we are off to a strong start toward achieving our latest set of 3-year growth objectives, including 7% to 9% recurring revenue growth and 8% to 12% adjusted EPS growth. We remain focused on long-term growth, which has helped us deliver consistent sustainable top quartile total shareholder return. Our focus on long-term growth is the reason why I remain excited by our progress against our clear strategy.

Let's turn to Slide 4 for an update on some recent achievements against these goals. I'll start with our governance franchise, where we are delivering next-generation regulatory capabilities, building data-driven solutions for funds, delivering end-to-end solutions for issuers and driving omnichannel communications. During the quarter, we made strong progress on each of these fronts.

First, on next-gen regulatory. We're making strong progress on building a European regulatory communications hub for the shareholder rights directive. Two, we're winning new clients across the EU, including major institutions in both Italy and Spain. We're also working with other technology providers, including a leading Danish bank technology player and a leading French government solution provider to deliver Broadridge's SRD II solutions.

Broadridge also made strong progress against delivering data-driven solutions to mutual funds. A key part of this effort is our growing data and insights business. Based on our unique data, we enable funds to better understand at an aggregate level who and, importantly, where their shareholders are.

The compelling value of these solutions was further demonstrated by a multimillion dollar sale in the second quarter to a leading global fund company. We'll be using our data solutions for multiple use cases, including enabling the repatriation of tens of millions of dollars of dividends to the U.S. shareholders.

On the issuer side, we continue to see strong demand for virtual shareholder meetings. During the past calendar year, we hosted meetings for 83% of the S&P 100, and we're seeing strong renewal rates as we begin the lead-up to the 2021 proxy season.

We continue to enhance our VSM capabilities by rolling out the first phase of an enhanced platform, which will enable corporate issuers to leverage our unique capabilities around shareholder validation, while using the meeting platform of their choice.

Finally, in omnichannel communications, we continued with double-digit growth in our digital communications revenue in the first half, building on last year's strong performance.

Let me turn now to our capital markets franchise, where we continue to drive important mutualization benefits to our global clients. Broadridge is already the leading global post-trade provider for cash securities, processing over $10 trillion in equity and fixed income trades per day.

During the quarter, we took an important step toward expanding beyond cash securities into exchange-rated derivatives. We announced that R.J. O'Brien, the largest independent futures exchange and clearing firm, has selected Broadridge's global derivatives platform. Our scalable and agile solution will enable R.J. out to streamline and modernize its operations with one unified global technology platform.

We're also bringing network value to our clients by extending to the front office and fixed income. As we described at Investor Day, our AI-driven corporate bond trading platform, LTX, remains on track for a broader launch this year. We're now live in the soft launch with select clients, and we continue to receive positive feedback. Full launch with more than 10 dealers and 35 buy-side clients will be later this year.

Turning to wealth and investment management. As we laid out in December, our goal is to build a leading technology and operation provider to the wealth management industry by providing both a growing list of differentiated component solutions and by delivering our next-generation industry wealth technology platform.

First and foremost, we have continued to demonstrate the value of our leading wealth back-office platform by seamlessly processing the recent spike of record trading volumes driven by high volatility and increased retail participation. These volumes have challenged the industry as homegrown systems have struggled to scale, but our performance has continued to drive home the value of a mutualized industry solution.

At the same time, we continue to extend our suite of component solutions, working with multiple partners to bring new and innovative solutions to our clients, and we continue to make strong progress toward the launch of our next-generation wealth management platform with UBS. The net of all of this, across governance, capital markets and wealth and investment management, that we are seeing strong execution on tangible deliverables, coupled with unique innovation that gives us confidence on our longer-term growth is on track.

Let's turn now to a brief review of our recurring revenue results on Slide 5. Edmund will cover our financial performance in more detail, but I want to share my key takeaways from our 7% recurring revenue growth in the second quarter.

First, I was pleased to see balanced growth across both segments, with 7% growth in ICS and 8% growth in GTO. Second, as I look at the drivers of growth in ICS, what stands out is the impact of strong stock record growth, which reached 24% and, even in a seasonally small quarter, drove strong growth in regulatory revenues.

Our business is clearly benefiting from the long-term technology trends that have lowered the cost to retail investors of buying and owning individual shares. These trends, which include the widespread introduction of commission-free trading, are having a broader and longer-term impact on investment behavior that goes beyond the very recent volatility in a few hypo file names.

Stock record growth has been healthy across virtually all of our broker-dealer clients, and it's been especially strong among online brokers who are leading many of these changes. As Edmund will discuss, we expect these growth trends to remain favorable in the second half of the year.

Third, I'm also pleased to see a strong growth contribution from both our data-driven fund solutions as well as our issuer business. Customer communications revenues were flat, with strong growth in digital revenues, balancing modest COVID declines in print volume.

Fourth and last, strong sales onboarding and higher trading volumes are driving the growth in our GTO segment. As I noted earlier, much of the impact from higher trading levels is coming on the retail side, which clearly benefited from our wealth -- which clearly benefited our wealth and investment management business in the second quarter. More important from my perspective is that year-to-date growth in both capital markets and wealth has been balanced at 7% and 9%, respectively.

Let me wrap up my comments with some final thoughts about how to put our strong second quarter and first half in context. Simply put, our performance in the first half of fiscal '21 gives me even more confidence that Broadridge will continue to deliver steady and consistent revenue and earnings growth in the years to come. As we shared at our Investor Day, we have a large and growing $46 billion market opportunity, 3 strongly growing franchise businesses and a clear targeted growth plan to take advantage of long-term trends around next-generation mutualization, resilience and digital transformation.

We are on track to deliver another solid year of recurring revenue growth, margin expansion and adjusted EPS growth at the higher end of our 6% to 10% range. Our strong results and disciplined cost actions have put us in a position to deliver against the higher end of our revenue and earnings guidance for fiscal '21, while making investments that will sustain our growth through fiscal '23 and beyond.

We are investing in our technology platforms and strengthening our product development teams. We're also investing in our human capital by rewarding our associates, increasing our diversity, equity and inclusion and career development investments and upping our recruiting for new talent, all of which will enhance our talent base going forward.

As we enter the seasonally larger second half, Broadridge is delivering in the short term and investing for the long term. That's a great place to be and a strong formula for long-term value creation.

Before I hand it over to Edmund, I want to thank our associates around the world for the important work they do and for their commitment to the service profit chain. Whether they're working from home or socially distanced on the production floor, they are persevering and delivering for our clients at an extraordinary rate. They truly are enabling better financial lives for millions of investors around the globe, and their engagement in this powerful mission is what drives us forward. Thank you.

Edmund, over to you.

Thanks, Tim, and thank you again for the warm welcome to our first earnings call as CFO. During my opening remarks at our December Investor Day, I mentioned my excitement joining a company with such a strong leadership team and growth strategy. Now over 2 full months, and I'm even more excited and more confident in Broadridge's ability to execute our simple but powerful financial model. And our strong second quarter and outlook for the full year are great examples of how that model works.

As you can see here, looking at the Q2 financial summary on Slide 7, this was a strong quarter of top and bottom line growth across all our key metrics. Recurring revenues grew 7%, operating margin increased 150 basis points year-over-year to 11.2%, and we continue to demonstrate our ability to expand margins, even while ramping up the investment spend that Tim highlighted earlier, which we said we would accelerate during last quarter's call. And adjusted EPS grew to $0.73 in the quarter, up 38% over Q2 '20.

Now let's turn the slide and get into the details of the quarter, starting with some of our key operational metrics. Broadridge's recurring revenue growth benefits from underlying volume growth trends, including record growth. Over the last 10 years, equity and mutual fund record growth has averaged 6% to 8% and is a driver of our regulatory revenues. Stock record growth in Q2 increased 24% driven in part by a few large issuers, and I'll remind you to keep in mind that second quarter volumes historically make up less than 10% of the full year total.

Looking ahead to the seasonally larger second half of the year, we expect low double-digit growth across stock records. Looking further ahead, our 3-year objectives assume that this increased growth moderates and returns to mid-single digits.

Touching briefly on trade volumes, which you'll see at the bottom of this slide, this is the fourth consecutive quarter of aggregate double-digit volume growth. This growth reflects the continued volatility in the markets, which, as you know, spiked last March and April and remains well above pre-COVID levels. As a result, we expect tough trading volume comps for both Q3 and Q4.

Now turning to closed sales, the biggest driver of our recurring revenue growth. Our $79 million closed sales year-to-date are in line with our performance over the same period last year. We continue to see strong demand for our ICS solutions, including virtual shareholder meetings, regulation-driven SRD sales across Europe and continued client expansion, cross-selling data solutions to existing customers. We remain on track to achieve our full year guidance of $190 million to $235 million for closed sales.

Historically, the closed sales performance in the back half of the year has been impacted by large signings. A large signing could propel us to the top end of our guidance range. And conversely, delays could lower our performance. And I'll also note that we continue to feel good about our revenue backlog, which, as of Q4 '20, was 12% of our fiscal '20 recurring revenue and gives us great visibility into our top line growth.

Turning to recurring revenue growth on Slide 10. As I've said, recurring revenue grew 7% in the quarter, well in line with our historical mid-single-digit growth performance in demonstrating the resiliency and consistency of our recurring revenue growth model. With the strong start to the year, we are on track to be at the higher end of our 3% to 6% recurring revenue growth guidance range.

Now let's look at the drivers of the quarter's recurring revenue growth. Slide 11 highlights that our growth was primarily driven by our internal efforts. Organic growth has consistently been the largest component of our recurring revenue growth. In Q2, revenue from new sales drove 6 points of growth and remained the biggest driver of our revenue growth across both our GTO and ICS segments.

We continued our long track record of retaining 98% of existing client recurring revenue, and internal growth contributed 2 points of growth driven by higher trading volumes in our GTO segment. ICS internal growth was neutral as our strong position growth was offset by the impact of lower interest rates and lower customer communications print volumes. The impact of acquisitions made within the last 12 months contributed 1 point. Barring any new acquisitions, we would expect the contribution to growth from acquisitions to be less than 1 point in Q3 and 0 in Q4.

And while we're focused on recurring revenue, let me share some insights on the drivers of growth across our updated ICS and GTO product lines that Tim touched on earlier. These categories were introduced at our Investor Day with the goal to better align our external reporting with our growth strategies.

(technical difficulty)

Excuse me. this is an operator. There seems to be an issue with the current speaker's line. Just one moment, please.

Excuse me. I have Mr. Reese to reconnect. Apologies for the inconvenience. Please go ahead, sir.

Okay. So I apologize for the technical difficulties that we just had. I think I dropped off on Slide 11 of our document. So I'll pick up there. Slide 11 highlights that our growth is primarily driven by our internal efforts. Organic growth has consistently been the largest part of our recurring revenue growth. In Q2, revenues from new sales -- I'm not clear that I'm being heard yet.

Yes, sir. You are coming through clearly, sir. Please continue.

Okay. So in Q2, revenue from new sales drove 6 points of growth and remained the biggest driver of our revenue growth across both our GTO and ICS segments.

We continued our long track record of retaining 98% of existing revenue from existing clients, and internal growth contributed 2 points of growth driven by higher trading volumes in our GTO segment. ICS internal growth was neutral as our strong position growth was offset by the impact of lower interest rates and lower customer communications print volumes.

The impact of acquisitions made within the last 12 months contributed 1 point. Barring any new acquisitions, we'd expect the contribution of growth from acquisitions to be less than 1 point from Q3 and 0 in Q4. And while we're focused on recurring revenues, let me share some insights on the drivers of growth across our updated ICS and GTO product lines that Tim touched on earlier.

These categories were introduced at our Investor Day with the goal to better align our external reporting with our growth strategies. ICS recurring revenues rose 7%, with strong growth across 3 of our 4 product categories. The biggest contribution to growth came from our regulatory revenues, which were propelled by strong 24% stock record growth and 5% interim record growth. We also benefited from additional growth across our international and Canadian proxy volumes.

Revenues of our data-driven fund solutions benefited from strong double-digit growth in our data and insight product revenues and the acquisition last February of FundsLibrary, offset by the impact of lower interest rates on our mutual fund trade processing unit. Customer communications revenues were flat in the quarter as double-digit growth in digital revenues was offset by a decline in print volumes. Looking ahead to the second half of the year, we expect to see the impact of some recent client wins in the fourth quarter, which should put that business on the former track of low single-digit growth.

Issuer solutions revenues rose 14% driven by higher revenues from virtual shareholder meetings, which also helped drive growth across a broader set of issuer products and offset the impact of lower revenue in our transfer agency business.

In GTO, recurring revenues grew 8% driven by strong growth in our wealth and investment management revenues. Both our wealth and capital markets product revenues benefited from new client onboardings and the impact of the 24% increase in trading volumes versus the second quarter of fiscal 2020, with higher growth coming from the retail side of our clients' businesses. As we enter the second half of the fiscal year, we expect the growth in trading volumes to slowly significantly lap last spring's spike in volatility, which, coupled with the lower license activity, will put pressure on GTO growth.

Now we'll turn to Slide 12 to brief in touch on our total revenue performance. As a reminder, on Broadridge's revenue mix, 65% of our total revenue is recurring, about 31% is from distribution revenues and 4% from more cyclical event-driven revenue. This revenue mix has steadily improved since 2017. Recurring revenues comprised 58% of the total.

Our total revenue growth this quarter was stronger than usual, reaching 9%, with distribution revenues contributing 3 points due to the increased mailings we saw corresponding to the high record growth and increased event-driven activity this quarter. Moving forward, we expect the low to no margin distribution revenues to decline over time, as we focus on increasing higher-margin digital revenues across our governance business.

Pausing briefly on the event-driven revenues, we saw another quarter aligned with our historical norms of about $50 million a quarter, and we remain on track to meet or exceed our $180 million outlook for fiscal '21 event-driven revenues. Going forward, as I covered in the Investor Day, we expect annual driven event revenues to return to the approximately $200 million average that we've seen over the past 7 years.

Turning to Slide 13. This was another strong quarter of margin expansion. We increased adjusted operating income margin by 150 basis points over last year. During the quarter, we began to ramp up our level of investment in our technology platforms, product capabilities and people, as we highlighted we would on our first quarter call. While this increased investment is likely to affect margin expansion in the second half of the fiscal year, these investments will support our long-term growth.

And I want to underline that point because it's critical to how we run our business. We're foregoing some of the near-term margin expansion that you get from underinvestments in favor of capturing the larger future margin opportunity that is driven by growth. That formula has been a key factor in Broadridge's ability to drive long-term sustainable growth.

Moving to capital allocation on the following slide. We generated $51 million of free cash flow year-to-date, up $82 million over the first 6 months of fiscal '20, driven by higher earnings and strong working capital management. Broadridge remains committed to a balanced capital allocation policy, which prioritizes internal investment, growing our dividend, M&A and returning excess capital to shareholders, all while maintaining our investment-grade credit rating. During the first 6 months of the fiscal year, we invested $128 million in building out our industry platforms and another $51 million in CapEx and software spending.

Turning to capital returns on the right-hand side of the slide, our dividend has grown and remains in line with our historical 45% payout ratio. Looking ahead to the second half of the year, and we've historically generated most of our annual free cash flow, Broadridge is in great shape to pursue attractive targeted M&A opportunities or repurchase shares.

Now turning to guidance on Slide 15. We expect recurring revenue growth to be at the higher end of our 3% to 6% range, with higher full year record growth from strong first half trading volumes, offsetting the drag that we expect from lower second half trading volumes. We expect our adjusted operating income margin to expand to approximately 18% from 17.5% in fiscal year '20 as we balance near-term returns with continued investments to sustain long-term growth.

And finally, we expect to be at the higher end of our adjusted EPS growth guidance range of 6% to 10%, putting us well on track to achieve our 3-year 8% to 12% adjusted EPS growth objective that we presented at our Investor Day in December.

Finally, as I noted earlier, we continue to expect closed sales in the range of $190 million to $235 million. And looking below the line, we expect our full year effective overall tax rate to remain at 21%, confirming what we shared on our last call.

And one final point on our outlook, we expect third quarter adjusted EPS to be flat or slightly lower than fiscal year '20 driven by increased investment spend and lower license revenues.

So before we begin to take your questions, let me share some final thoughts. I told you at our Investor Day that Broadridge is a simple financial model based on sustainable revenue growth, consistent investment, margin expansion and balanced capital allocation. That model has produced steady and consistent earnings growth over time and helped drive strong top quartile of total shareholder returns. Our second quarter results and expectations for the full year are a great example of how that model works.

We generated strong 7% recurring revenue growth, propelled by long-term trends. That growth helped drive the 150 basis points of margin expansion, which, in turn, is enabling us to make incremental investments to drive long-term growth, especially over the second half of our year. The end result is earnings growth that positions us well to deliver on our 3-year financial objectives. It's a great example of how we manage our business to drive sustainable revenue growth, steady and consistent adjusted EPS growth and historically top quartile TSR.

So now let me hand the call back to Andrew to take your questions.

(Operator Instructions) The first question comes from David Togut of Evercore.

Tim and Edmund, 24% stock record growth may actually be the highest stock record growth that Broadridge has posted since spinning out of ADP in 2007, and I hear the message about reinvesting the excess growth in products and platforms. But as we think about the 2021 proxy season, if 24% stock record growth is a jumping off point for proxy mailings, will you actually be able to reinvest this excess revenue growth fast enough in the second half to actually keep earnings growth within the 6% to 10% growth guidance?

And then my follow-up question, which is related, as we think about fiscal '22 and recognizing you haven't given guidance yet, you've got the strong jumping off point with stock record growth, with a lot of secular growth drivers behind that. You've got UBS contract coming on stream this summer. Isn't the setup for fiscal '22 potentially above the long-term growth guide as well?

Sure, David. And thank you for joining us this morning. I'm going to make a couple of comments and then hand it over to Edmund to also comment.

First, I think, certainly, we're pleased with the headline number that sounds like 24%, but I do want to caution that the second quarter is small, and there is some specific names that really drove that. And as we look to the second half, we are seeing certainly very nice stock record growth, but not at that level. So that's just an important starting point.

We are really pleased in the investment side. We think that our opportunity here is essentially unlimited relative to our current size, and we see -- we do see many arenas where we're better positioned than anyone to meet real industry needs. So you will see us continuing to invest within the confines of those 3-year targets, and we do have a lot of ability to invest, Dave. So I do think that we will be able to do that. Really, the only thing that would keep that from happening would be if we had sort of surprising event activity in the fourth quarter.

Let me ask Edmund to just expand on that, and then I'm going to come back to your '22 question.

Thanks, Tim. And I think you're right. David, thanks for the question. We began the investments also in second quarter, and I think we do have the ability to continue to ramp up as we complete the second half of the year. That gives us momentum going into fiscal year '22.

I'll turn it back to Tim and let him talk about '22, but I do think we should expect some modest acceleration in recurring revenue growth and adjusted EPS as we -- if our outlook continues as we expect for fiscal year '21. If we're able to make those investments, they'll contribute to some modest acceleration, as I said, at -- in the Investor Day to '22 and '23.

Great. And then, Dave, with respect to '22, it is certainly very early to comment on that, so we'll be definitely coming back to that later in the year and in the fourth quarter.

We do see some really good secular trends here, and we do feel very confident in our 3-year outlook. I think it's just too early to speculate on anything that's sort of above the long-term trends we see.

The next question comes from Peter Heckmann of Davidson.

I wanted to see, Tim, if you had any early comments on the SEC. Let's say, the NYSE is looking at, I guess, to push some of the regulatory oversight on proxy fees to FINRA, and I've seen a few initial comments there. But can you talk about where Broadridge sits and how you see that shaking out, including a time line?

Yes, absolutely. And Peter, I think this is a really good opportunity to step back and look at the regulatory landscape, and I'll work my way to the fees question. But just I think, as you look into regulatory landscape, we have a long history of working with administrations on both sides of the aisle to promote really effective and cost-efficient disclosure. That's really the foundation of our market. And with the increasing democratization that we're seeing, there's a real -- the need for effective disclosure is greater than ever before.

The democrat administrations do tend to be somewhat more inclined to extend disclosures and protections, and we're already seeing some of that relative to ESG and fiduciary standards. But even with all that background, they -- we don't really see a substantive regulatory update relative to the things that are happening in our space.

So 30e-3 is now live, and it's saving funds money. The comments are in for 498B, and those have been really supportive of the summary concept and -- but people are expressing concerns about drop and prospectuses. So it's not clear whether that will happen.

There is a big push for moving to e-delivery, and that's something that we support, and it's really aligned with the idea of summary documents. And then there continues to be, as you raised this question around fees, ICI continues to push for a fee review and is talking about let's move it away from the NYSE, which the NYSE would like to move it away.

At the same time, FINRA has responded saying they don't want it either as you go to the SEC, so I think there's going to be a lot of back and forth here. We do feel, wherever it ends up, it will be fine. We have a strong relationship with FINRA, a strong relationship with the New York Stock Exchange, a strong relationship with the SEC. And we really believe that when you look at fees, when you bring all parties to the table, not just the funds, but all parties and have good information that we'll get to a very good place on that.

I think it's -- in terms of speculating on timing, I think it's going to be a long debate about who is the right place for it to do. And then if there were to be a review, as you know, the last one took several years to unfold.

Got you, got you. And then just can you remind us on the rules that have been formalized like 30e-3 and then potentially maybe some insight on 498B, the -- kind of the puts and takes that Broadridge sees over the next 6 quarters?

Absolutely. So on 30e-3 as -- so that is live now, and that's something that we're really proud of, that we have brought that solution to the industry as a whole. We have, I think, over 130 fund complexes on the solution now. That is a modest benefit to us financially. With respect to -- but not so much as it's really noticeable on the results. It's just a -- it's a modest positive.

With respect to 498B, it had a couple of components. There is a -- the most important component was really around moving some of the long-form communications to summary form. We think that would be good for the industry. We think it would be good for investors, and the economics of that are neutral to us.

There was some conversation about dropping the annual prospectus. There was a lot of mixed commentary on that as the comments came back, so that seems less likely to us. As you recall in -- when we discussed this, I believe, in the summer call, what we said is the -- we saw potentially a downtick from the prospectus revenue, an uptick from the idea of us being able to create the summary documents for people and really provide an industry solution around that, and we saw those balancing each other.

If we're to proceed with the summaries, but not with the prospectus downtick, then that would be a plus, but I think this is going to be quite some time for it to unfold. The new administration is coming in. They have their own set of priorities. And so I think, really, the timing of this is highly uncertain at this stage.

The next question comes from Michael Young of Truist Securities.

Just wanted to ask, you kind of touched on capital return priorities. But in the second half, just wanted to kind of touch on your desire to engage in share repurchase versus maybe looking at acquisitions and kind of what the environment looks like for the acquisitions at this point.

Absolutely. And Michael, thank you for the question. Look, our capital allocation approach is -- has really not changed, and we believe there's almost unlimited opportunity for us to invest on behalf of our shareholders at really attractive rates of return.

At the same time, we believe in the strong dividend. We don't let cash buildup. We only invest when we're confident we can execute well. So that's why you see these priorities around internal investment, dividends, M&A, share buyback in that order.

We are definitely looking at M&A opportunities. We think that's an evergreen strategy for us to supplement our internal product development and bring more value to our clients. In this environment, prices are high, and it's unclear whether any of the opportunities that we're looking at will come through at prices that make sense to us. And we have been on the doorstep a couple of times this year and not been able to go through at a price that made sense for our shareholders.

So I think M&A is something we continue to really look at. There's uncertainty around it. At the same time, we won't let cash build up on our balance sheet. And so if we're not able to execute on M&A, you will see share buybacks.

I'd like to just ask Edmund to add on to that, if there's anything that I've missed, so just -- Edmund will add that up.

The only thing that I'll add to that, because you have the priorities, right, Tim, is that the reason that we're able to execute on that model, Michael, is because of the free cash flow that we're able to generate. That's historically a capital-light business, generate free cash flows that are at 100% over the past couple of years of adjusted net earnings. It's dipped a little bit as we've invested in our wealth management platform.

But the model, as Tim described, is the right one, and we'll continue to be committed to that. If we don't see the attractive opportunities that hit a high bar that we have for M&A, as Tim said, we won't let the cash build up on our balance sheet, and we'll return it in the form of share buybacks.

Great. And for my second question, I just wanted to ask kind of qualitatively maybe where we are now. And looking forward, potentially coming out of this pandemic or a little bit more of a reopening, does that aid sales volume -- closed sales volume?

I know it's kind of episodic in the second half, but just wanted to get a sense of the ability to convert there. And could there be tailwinds if we do get more of a reopening?

So the first thing I'd say is we feel very good about the performance of closed sales so far in the first half of the year coming off of a record 2020, $239 million. I mentioned in Investor Day that, that's been growing at over 11% over the past couple of years. And for the first half, you saw that we're largely in line with the performance that we had at the -- during this time last year.

The back half is always tougher for us. That's not anything new. We still feel good about the range that we have. And this environment might be a little challenging in terms of the focus of some of our potential partners on closing the contracts. And as I mentioned in my prepared remarks, large signing can have us to the top or a delay, which normally means a delay into the next year, not the fact that we won't be able to close the sale can be a challenge for us. But as of now, I think we feel good about the back half of the year and coming in the range that we just mentioned.

The next question comes from Chris Donat of Piper Sandler.

I wanted to go back to the equity position growth issue and ask if you can help us sort of unpack what are maybe some of the longer-term trends going on there and some of the things that are more near term. And I caught the commentary about how maybe we see a deceleration in growth in the future on the positions. But in terms of -- I get that the volatility right now is a serious driver of position growth, but like the 0 commission trend is certainly something that's going to be with us forever or there are position phenomenon.

And then is there anything else going on, on the sidelines, like the number of SPACs? Is that creating new positions that's a tailwind? Or are you seeing particular activity just around certain issuers? Or is it certain brokerage firms that makes you think that it might be more temporary or more permanent? Just kind of help us understand the factors moving here on position growth.

Sure, Chris. Thank you for calling in. I think on the SPAC side, it's an interesting question. I'm just going to give a couple of comments here and turn it to Edmund.

But I think on the SPAC side, it's is interesting. I think it's maybe too early to us to see the impact. But clearly, when there's lots of IPO activity, which is a substitute for, that does help over time. So it's a little bit early on that one.

I think we're clearly seeing the extension of healthy trends around the democratization of retail shareholding, and that is building on the prior trends that are still there towards managed accounts and model-based investing. So I think those 2 are building on each other. And -- so I do think that it's going to be something that is longer term.

Now the outlook does have elevated growth for this year and a return to more typical growth thereafter. But I know, Edmund, you've been looking into this in a lot of detail. So...

Yes, I mean, I think that's exactly right. Chris, I'd like to just back it up a step from what Tim just said. Historically, as I mentioned, 6% to 8% growth in equity positions or so. That's accelerated for the reasons that Tim just mentioned. So the managed accounts and the model-based investments, that was in the mid-single to high single-digit growth previously, and I don't expect any change there.

The 0 commission trading, I think you mentioned more retail investors coming in. I think that's good for Broadridge. In fact, they want to engage and interact digitally. So I think that's also a tailwind for Broadridge. And hopefully, that's stable going forward.

The newer things, the coordinated buying efforts, the SPACs, don't exactly -- yet know exactly how stable that is, and we're not counting on that as we look to our outlook going forward. But as Tim mentioned, that higher growth that we saw Q4, Q1 and Q2, we expect to moderate, but still be in the low double digit for the rest of this year. After that, our assumptions are that we return to mid-single-digit growth.

Okay. All right. And then sort of related issues. Just yesterday, we saw January volume from interactive brokers, so one brokerage firm putting up pretty impressive numbers.

And anyway, just as we think about GTO revenues and your sensitivity to volumes there, anything you'd say is -- if we think we're in a period of elevated volume, what that could do for revenue or just how you think about equity volumes feeding into GTO revenues? What's sort of fixed versus what's variable on the revenue side?

Yes. It continues to be -- I mentioned in the opening remarks that we saw, during the March and April time period, a spike in the equity trading volumes for GTO. And I think I showed a slide that showed the equity and fixed income volumes combined there for GTO.

But it's continued to be at an elevated level through Q2. And even after the environment that we're in right now, so it's continued to be elevated. But I think as we go into Q3 and to Q4, growing over that high performance in Q3 and Q4 of last year, we will -- that will be a tough comp for us. And so as I mentioned, the Q3 outlook will be overall flat to slightly lower relative to where we were last year, and that part of that is driven by the trade volumes in the GTO business.

And just one thing I do want to add on top of that, Chris, is just to build off this for a second, which is, certainly, the volatility in January, it was -- it did exceed the peaks of last March. And as we look at our wealth strategy, we've executed really well through that. And some others have been challenged, and I think it just reiterates the power of an industry solution for some of these critical but non-differentiating functions.

The next question comes from Andrew Bauch of Wolfe Research.

This is Andrew on behalf of Darrin. Nice set of results here, and I kind of want to dig into the investments into potential new product adjacencies. Clearly, derivative activity from a retail perspective has driven a lot of the recent headlines, and it's nice to see the GTO brand announcement from last year.

But I guess my question is how well positioned is Broadridge to step into really these derivative adjacencies? And just wondering how many more of those types of deals you think are winnable. And how should we think about the opportunity to take share in that arena, outside of typical cash equities?

Absolutely. And we think that the opportunity derivatives is a really nice one that plays on our whole theme of simplification because it's -- what we've been working on is simplification within cash securities across geographies. So bringing derivatives into that allows people to simplify the number of platforms. And so it's really cost-effective for clients.

I think that, that is a very nice opportunity for us on top of the cash securities opportunity. It is -- I think it will take some time for it to unfold, as people will be looking for us to bring R.J. O'Brien live. And so I'm not looking to have an immediate impact on this, but I do think that, over the longer term, it's going to really increase the power of our argument around global simplification. And it will help on both the opportunity derivatives and will help with sales on the cash side as well.

Got it. And then just a housekeeping point, a lot of conversation about balancing investment and growth here. So I guess, was there any -- and how should we think about the margin benefit you saw from your previously announced cost alignment initiatives? And has anything changed from an investment strategy from just even one month ago, at the Investor Day, on how you think about the investment growth trade-off here?

So it's great question. Two things I'd say about it. The higher performance on the revenue side and our ability to be able to get the efficiency gains, expand operating margins through the initiatives, which I'll touch on that we mentioned in Q1, is what allowed us to to make these investments.

And so in Q1, we talked about -- roughly about $80 million in cost initiatives, real estate, cloud migration, product realignment, and I think we're well on track. You saw 150 basis points of margin expansion in the second quarter. And I think it's that efficiency that gives us the capacity to be able to make these investments.

The second point I'll make, and then I'll turn it to Tim to see if he has anything, is that the investments has been a key part of the financial model in strategy for growth, a key part of our capital allocation program prior to my joining, and it's going to -- we're going to continue to remain committed to it to support the future growth.

And I think we have -- Tim mentioned some of these, we have a number of high-returning investment opportunities, as we look across our post-trade platforms, our wealth management platforms. As we look across products and SRD II and VSM and, obviously, our people with our broader sales market strategies. These things help us with growth long term. Might be a little margin compression in the short term, but they help us with long-term growth.

So this leadership team is going to stay committed to investing, using the efficiency gains that I just talked about and still delivering the steady and consistent earnings growth that we were able to post and guide to for the rest of this year.

The next question comes from Mark Palmer of BTIG.

First question, we're already getting a couple of inquiries from clients about this. Just given the environment and some of the frenzy that we've seen over the past week, plus with the [Radix revolution] and what have you, what impact, if any, are you seeing on the GTO side from anything that's going on there? And then I have one follow-up.

Yes. Mark, I'll just jump in on that, which is, certainly -- and we are seeing record volumes and volumes that are above what we saw last spring. And the broad point is that we are -- just operationally, we're handling those really well, and that's been a challenging week for the industry. And as I said, a few minutes ago, I think that really reinforces the logic of a mutualized industry solution.

With respect to what we think the results -- the impact on the results will be, I'm not sure that we're thinking that these really frenzy things will be sustained, and we think that's a short-term phenomenon. And as Edmund remarked, as we get into Q3, we are going against comparables last year, where there were absolute record volumes.

And so we're not seeing -- we're not expecting significant year-on-year growth in -- from trading. And GTO, obviously, we saw revenue from sales and other things. But even with this activity, we think the activity will moderate and will be against tough comps.

The next question comes from Puneet Jain of JPMorgan.

Tim, given that we are almost into this new environment, are you seeing any long-term changes in retail consumer behavior as it relates to physical versus digital delivery of communications or investing through an adviser versus on their own?

Yes. Absolutely, Puneet. So I think that we are certainly seeing -- relative to physical versus digital, we saw very strong growth in our digital communications in the first half. I remarked on that, and that builds on a very nice year last year. And we're seeing very strong interest from our clients in terms of digital transformation and working with us to upgrade their infrastructure for digital communications.

I think I was a bit surprised to see the increase in distribution revenues this quarter, and that's not something that we generally expect. That was really due to increase in both regulatory and event communications. I think we continue to expect that, over the long run, that physical piece will be a smaller part of our business model, and the digital piece will be a bigger piece.

Relative to adviser versus digital channels with the sector investing, I think we're just -- we're seeing both. We saw very good position growth across all of our broker-dealers, including both adviser and online. I think, perhaps in terms of number of investors we're seeing with this democratization, the new investors being on the digital side. But if you look at where the money is, it's still definitely on the adviser side.

And those underlying trends that we've been talking about for the past couple of years, we don't see any change in terms of move to managed accounts, move to model-based investing. So we think that trend will continue. We do think there's an overlay of a new trend around democratization that will add and bring new investors in, which is why we highlighted the fact that with all these new investors, really, the need for strong disclosure is higher than ever.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Gokey for any closing remarks.

Great. Thank you, Andrew. Thanks, everyone, for joining us on today's call and persevering through our technical difficulties. Just knowing this was not conducted on the Broadridge platform, so we'll put that plug in.

I just want to say that, as we finish up here, I think my conclusion looking at this quarter and the half is that we are executing on our growth strategy. I think you heard us talk about it multiple times that we are investing for future growth. And we're on track to deliver at the higher end of our recurring revenue, adjusted EPS growth -- range. We feel really good about the 3 years as well.

We appreciate your support for Broadridge. We look forward to updating you in April on our third quarter call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.