Broadridge Financial Solutions Inc (BR) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Broadridge Second Quarter 2020 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.

Mr. Thibault, please go ahead.

Thank you, Dana.

Good morning, everyone, and welcome to Broadridge's Fiscal Second Quarter 2020 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 this morning are Tim Gokey, our CEO; 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.

Thank you, Edings, and good morning.

I'll begin today with some key highlights on the second quarter, which are on Slide 4.

Broadridge continued to execute well in a mixed quarter.

Recurring revenues rose 7% to $648 million, driven by strong revenue from sales as well as contributions from recent acquisitions.

I'm especially encouraged by the second quarter record, $39 million, of revenue from closed sales, which show the impact of our strong backlog and client demand.

Lower market-driven activity prevented an even higher result, and we expect organic growth to pick up in the second half, leading to an 8% to 10% year for recurring revenue.

That said, event-driven activity came in significantly below our expectations leading to a 5% decline in adjusted EPS in a seasonally small quarter.

We now expect a lower level of event-driven activity to persist into the second half of fiscal '20.

Importantly, our recent acquisitions are performing strongly.

Both RPM and TD Ameritrade, which we acquired in Q4, are significantly ahead of last year and ahead of our expectations.

It's great to see the revenue synergies playing out early.

Broadridge's value proposition continues to resonate strongly with our clients.

We posted another strong sales quarter and year-to-date, our sales are up double digits, excluding the UBS mega-deal from a year ago.

Looking forward, we've now entered the more significant second half of the year where we typically generate more than 70% of our earnings.

I'm pleased to say we remain on track to achieve our recurring revenue and adjusted EPS guidance for the full year.

We expect recurring revenue growth of 8% to 10%, driven by stronger organic growth and continued strength in the recent acquisitions.

As I noted earlier, we expect event-driven activity to remain soft with the event-driven revenue decline of 20% to 30% for the full year.

It's a real tribute to the resiliency of our business model that despite that pressure, we continue to expect to deliver within our 8% to 12% adjusted EPS guidance, albeit at the low end.

In sum, we remain confident in our opportunity.

Nothing about the short-term fluctuations in event activity, which we've seen many times before, changes that.

We continue to see strong sales and strong performance and we continue to invest in new products and technology, and we see exciting milestones later this year.

With that, let's turn to Slide 5 to dig a little deeper into our operating results, starting with our ICS segment.

ICS recurring revenues excluding Customer Communications rose 9%, driven by 4% organic growth and the addition of the TD Ameritrade retirement assets and our recent Fi360 acquisition.

The biggest engine of organic growth was mutual funds and ETF interims where we benefited from strong fund flows which helped drive 6% fund interims record growth.

Also contributing to our growth was continued demand for our data and analytics products, which posted another quarter of double-digit growth.

As I mentioned earlier, the business we acquired from TD within our fund processing business is off to a strong start.

That growth was offset by a drag from Customer Communications, which declined 3% due to weaker mutual fund communications, especially lower post-sale prospectus volumes.

We provide prospectuses to broker clients when they purchase their first shares of a new fund or ETF.

During the second quarter, that business was impacted by a double-digit decline in the volume of new mutual fund and ETF sales as we lapped the significant purchase volumes we saw during last year's period of market volatility.

We're also seeing a modest impact from increased suppressions, which we expect to weigh on growth going forward.

The good news is that the larger transactional communications business stabilized with revenue from sales offsetting losses and erosion.

Despite the progress in recurring, the biggest driver of ICS results was event-driven revenues, which declined $17 million or 36% year-over-year.

What was striking was the overall low level of event-driven activity.

As you know, the largest part of event-driven revenue is related to the timing of mutual fund and ETF board elections which take place every 5 to 7 years.

This activity was at a low point for the decade.

The long-term underlying positive driver here is mutual fund and ETF position growth, which has risen at a high single-digit rate for the past decade, driven by the importance of mutual funds and ETFs as savings vehicles for millions of Americans.

A smaller driver of event revenues is activity related to special meetings, which are triggered by public company M&A and/or shareholder activism.

These results are even more volatile and difficult to forecast and were notably weak in the second quarter.

Given both the low rate environment and the money invested in activist strategies, we continue to believe these revenues will grow over any medium-term period.

Event-driven activity is a core part of our governance business and a contributor to our long-term growth in earnings.

It is lumpier than the rest of our business, which is why we break it out separately.

That said, adjusted EPS guidance shows our business model can withstand a fair degree of pressure here and still deliver attractive returns while continuing to invest for long-term growth.

Jim will touch on investment trends in more detail in his section.

Let's turn to GTO where we're growing our business through a combination of tuck-in acquisitions and delivering on our revenue backlog.

GTO revenues grew 14% to $281 million.

Our recent acquisitions were the biggest contributor to our second quarter growth.

Over the past 3 quarters, Broadridge has made 5 tuck-in M&A investments to help strengthen our capital markets, wealth and investment management product suites.

We're making very strong progress in integrating these acquisitions and are seeing good growth that's ahead of our business plan.

Our clients have reacted positively to Broadridge taking over these products, and we've seen multiple instances where clients upsized new client -- new contracts or extended the term of existing ones from 1 to 2 years to 4 to 5 years.

That's a strong testament to Broadridge and the strategic fit of our recent additions.

The next biggest contributor in Q2 was revenue from sales, which was a healthy 8%, reflecting our ability to translate our strong backlog and sales into recurring revenue.

This was offset, to some degree, by trading weakness in equities and other pressures, and organic growth ticked up modestly from Q1 to 4%.

Looking ahead, the combination of strong revenue from sales and easing of other pressures puts us on track to achieve stronger organic growth in the second half.

I'll close my review of our second quarter operating results by touching on closed sales.

Notable sales in the second quarter included an adviser compensation sale to a leading independent wealth manager and an upsale to a global investment bank.

Excluding the large wealth management sale from UBS that we closed in October of last fiscal year, year-to-date closed sales are up double digits, which speaks to the appeal of Broadridge's value proposition.

Let's move to Slide 6 for a review of regulatory topics and recent strategic initiatives.

On regulatory initiatives, the SEC continues to assess a range of topics that touch on our business.

I'll start with the change that is well underway, rule 30e-3 or notice and access through mutual funds.

This is the rule that was adopted in June of 2018 and that will go into effect in calendar 2021, allowing mutual funds to send their investors a notice that annual and semiannual reports are available instead of sending them the full report.

We're actively engaged with hundreds of fund families to help them notify their investors of the prospective change and capture their preferences.

This regulation will have only a modestly positive impact on Broadridge, but thanks to our work, mutual funds will be able to realize significant print and distribution savings beginning next year.

It's one more instance of Broadridge saving the industry time and money.

At the same time the SEC adopted 30e-3, it also asked for comments on the future client experience for mutual fund communications.

Broadridge and industry participants submitted comments a little over a year ago showing how the current format can be streamlined and that critical information investors need around fees and performance can be better highlighted in simpler, easier-to-understand formats.

We're now seeing some momentum around those topics.

The SEC staff has said in public forums that it's considering options for shorter and a more engaging report.

And in November, this topic of streamlined communications was moved onto the SEC's short-term agenda.

Given the importance of mutual funds to the savings of tens of millions of households, we favor any step to ensure mainstream investors have better access to the critical inflation they need and that streamlined digital communications can deliver this information more effectively at a much lower total cost.

Finally, on the proxy plumbing side, a set of working groups was established last summer on various topics, including end-to-end confirmation, OBO and NOBO, universal proxy, fees and future technology opportunities.

These groups meet periodically and have no time line for issuing a recommendation to the SEC.

That said, Broadridge is working closely with SIFMA and other stakeholders to develop an industry consensus around end-to-end vote confirmation, which is a key priority for the SEC.

Stepping back, the SEC has shown that it is clearly engaged in trying to understand how it can strengthen our corporate governance system and make it more cost-effective.

Thoughtfully moving 30e-3 forward while simultaneously seeking information on how to make communications more effective is positive for Broadridge.

The SEC appears to have a clear goal: use technology to help drive down costs and increase shareholder engagement.

Given our investments in these areas and our long-term focus, we think we are well positioned to help achieve that objective.

Broadridge remains committed to investing in our long-term growth.

Since we reported first quarter earnings in November, we've announced 2 additional acquisitions.

The first, ClearStructure, strengthens the investment management part of our wealth business.

ClearStructure broadens our asset class coverage to include more fixed income capabilities.

It's well aligned with our strategy of building a true cross-asset platform to enable asset managers to have a single view into their book of business and optimize their investment workflow on a front-to-back basis.

The second acquisition, which we announced last week, will further our strategy in building a leading regulatory communications business in Europe.

Combining FundsLibrary's capabilities in fund document and data dissemination with Broadridge's existing regulatory communications offerings will strengthen our business in Europe and elsewhere by helping fund managers meet the regulatory requirements across multiple jurisdictions.

Coming on the back of our other recent acquisitions, including Rockall and RPM in the fourth quarter and Shadow and Fi360 early in the second quarter, Broadridge is continuing to push hard on strengthening our core franchise business across governance, capital markets and wealth.

These acquisitions will extend our ability to bring value to our clients and are an integral part of our capital stewardship and long-term growth strategy.

Another key part of our value proposition is helping our clients access new technologies, especially across the ABCDs of innovation: AI, blockchain, cloud and digital.

So we're excited by the launch of the Broadridge private cloud powered by IBM.

By transitioning our global distributed technology platforms to IBM, we will be able to accelerate our hybrid multi-cloud strategy.

Broadridge's private cloud will enable us to more rapidly provision additional capacity and services for our global clients while increasing the overall resilience of our network.

Extending our long-standing partnership with IBM also positions us to use Red Hat technology to containerize our apps, which enables them to run both in our private cloud as well as on AWS.

Accelerating our hybrid cloud strategy will enable Broadridge to further deliver next-generation SaaS solutions.

Investing in new products and capabilities is a key part of our formula for long-term success.

We're funding these growth investments even in a year when we were seeing pressure from event-driven revenues, the technology investments across the ABCD.

These investments are translating into a very healthy pipeline of innovative new capabilities that create additional value for clients and shareholders, driving top quartile results over time.

In governance, we're rolling out modernized proxy template as we speak, we're launching an industry solution for 30e-3 and we've introduced a new global fund analytics platform.

We're bringing enhanced digital capabilities to our communications clients, and using distributed ledger technology to enable European banks and brokers to meet the requirements and the Shareholder Rights Directive.

Capital markets.

We continue to strengthen our global post-trade management platform.

We're also expecting a soft launch over the summer of our AI-driven fixed income trading capability and are launching a repo market solution based on blockchain in fiscal '21.

We expect both of these internal builds to contribute meaningfully in the future.

And of course, we're making very good progress in building a next-generation industry platform for the wealth management industry, which we expect will come live in 2021.

Earlier this week, we named Mike Alexander, as head of our newly combined wealth business, an important milestone in the creation of this new franchise.

Since January 2, I've met with more than a dozen CEOs and other senior leaders at our largest clients.

These conversations leave me more convinced than ever about the opportunity we have in front of us.

It's clear that financial services CEOs are very engaged in driving technology and business transformation.

And they're excited about Broadridge as a key partner with them on industry solutions, with next-generation technology that will simplify and improve their operations.

For all these reasons, our technology leadership, organic product investments, continued tuck-in M&A and a healthy sales pipeline, I'm confident and excited about how Broadridge is capitalizing on a strong and growing market opportunity to create sustained growth, not only in the second half of fiscal 2020, but well into the future.

Before I turn the call over to Jim, I want to thank our associates for the work they do to help our clients and enable better financial lives for millions by powering investing, governance and communications.

It's making a real difference.

Let me now turn the call over to Jim to walk through our financials.

Jim?

Thanks, Tim, and good morning, everyone.

Our Q2 financial results had some very positive signs, but were below our own expectations.

However, we are on track to deliver against our fiscal year 2020 guidance and long-term objectives.

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

First, event-driven activity.

Event fees declined notably from Q2 a year ago, driving a decline in our second quarter earnings.

Event fees were also much lighter than our expectations.

We now expect full year event-driven fee revenues to be down 20% to 30% versus last year.

Second, recurring growth.

Recurring growth for the quarter was 7% with strong contributions from new sales and acquisitions.

Third, organic growth.

Organic recurring fee growth was light at 1.5% in the quarter.

New revenue from sales contributed a Q2 record $39 million or 6 points for organic growth in the quarter.

That strong result was offset by negative internal growth.

We expect organic growth to pick up in the second half as sales contributions remain strong and internal growth flips to positive.

Fourth, capital.

Two updates here.

The first is M&A.

Since our last call, we have announced 2 additional tuck-in acquisitions, ClearStructure and FundsLibrary.

That brings our fiscal year-to-date M&A investments to approximately $310 million.

The second update is our debt offering.

We issued $750 million in 10-year senior notes at a 2.9% coupon in early December, highlighting the value of our strong capital structure.

The fifth call-out is the Broadridge private cloud.

In the second quarter, we recorded charges of $33 million, representing a noncash loss on hardware assets to be transferred to IBM and other related charges.

Sixth and final, guidance.

Our overall guidance remains broadly unchanged.

However, given the slow start to the year organic growth, we expect organic growth to have less of a contribution to our total recurring fee growth of 8% to 10% versus contributions from acquisitions, with full year organic growth of 3% to 4% versus our prior view of 5% to 7%.

Additionally, we expect the weakness in event-driven activity to continue into the second half.

However, we remain on track to deliver 8% to 12% adjusted EPS growth, albeit at the low end given the event pressures.

Let's turn to Slide 7 for a review of our second quarter revenue drivers.

I'll start with recurring fee revenues.

Overall, our recurring fee revenues rose 7% in the quarter.

Within recurring fees, we are especially pleased with our sales-driven growth contributing 6 points to growth.

This is a Q2 record as we continue to make progress against our healthy revenue backlog.

Acquisitions also contributed 6 points of growth as a very productive 9 months of tuck-in acquisition work are yielding meaningful revenue additions.

Internal growth, which has been a consistent contributor, was notably negative in the second quarter and a drag on organic growth.

As Tim noted, lower customer communications volumes and lower trading volumes were the chief contributors here.

Again, this negative 3 points of growth dampened an otherwise good quarter on sales-to-revenue conversion.

We expect organic revenue growth to improve in our seasonally larger second half and to exit the year at a healthy clip.

The improvement should come from the combination of sustained strong sales-to-revenue performance and internal growth flipping to positive territory.

Moving down to total revenue.

Total revenues grew 2% to $969 million in the quarter.

Strong gains in recurring revenues were offset by declines in event-driven fees, which also impacted distribution revenues.

And finally, foreign exchange impacts related to growth in our international businesses from acquisitions, most notably RPM, lowered revenue growth by 1 point.

Next, I'd like to put some context around Q2 and year-to-date event activity.

Let's turn to Slide 8. The biggest driver of event volatility is the timing of when large mutual funds go out for proxy.

Another driver of volatility is large, high-profile equity contests, which are generally episodic and unpredictable.

We've experienced both large funds going out for proxy and big contests in recent years, especially fiscal '18.

Year-to-date, we have had no such large events, and at the same time, saw very light activity across more run-of-the-mill requests like special meetings, various types of mutual fund shareholder communications and capital markets transactions.

To put that in context, comparing our fiscal '20 results to our 5-year history shows that Q2 total event fees of $31 million were 36% below last year, 42% below our Q2 average and just above the 5-year low in fiscal '17.

The story is largely the same across both equity and mutual fund types of event revenue.

The mutual fund activity slowdown is certainly more pronounced, especially as we are not seeing any large campaigns.

We believe this represents cyclical softness and not some broader secular trend.

Looking ahead, we expect that period of softness to extend into the second half.

We are expecting activity to pick up sequentially in the second half, both as a result of normal seasonality as well as our visibility into a few small- to medium-sized mutual fund proxy campaigns.

For the full year, we expect event-driven fee revenue to be in the range of $175 million to $195 million, down about 20% to 30% from last year, well below our 5-year average and closer to the 5-year low.

That implies $104 million to $124 million for the second half.

This is down considerably from our outlook a quarter ago, but still at a manageable level.

Next, I'll cover the performance of our ICS and GTO segments on Slide 9. I'll start with ICS.

I've already covered event-driven revenues, so I'll focus on recurring revenues, which grew 3%.

Looking at the drivers behind the 3% increase, solid net new business gains contributed 3 points.

Internal growth dipped negative largely from the impact of lower customer communications volumes, offset by higher mutual fund interims.

Recent acquisitions contributed an additional 3 points of growth with TD outperforming.

We expect ICS organic revenue growth to pick up over the balance of fiscal '20 as we benefit from the full weight of higher proxy volumes in the second half of the year, but to be a little below our historical 4% to 6% annual growth rates as the decline in mutual fund communications that Tim referenced will continue to be a drag on growth over the balance of fiscal '20.

ICS total revenues declined 2%, driven primarily by the decline in event-driven revenues and related distribution revenues.

We expect the distribution revenue decline to abate in the second half of the year, driven by expected higher regulatory communications and other mix shifts.

Turning to GTO.

Revenues rose 14% driven by the acquisitions of RPM and Rockall, and more recently, Shadow and ClearStructure.

Organic growth was 4%, driven by new revenue from sales, which drove 8 points of growth as we onboarded new clients onto our platforms.

This was offset in part by a decline in equity volumes.

Looking ahead, GTO is well positioned for accelerating growth.

We expect the continued benefit of strong sales-to-revenue growth as we continue to work through our large revenue backlog.

We also expect internal growth to turn firmly positive on easing pressures.

Net-net, we expect GTO organic revenue growth to be mid- to high single-digit range in the back half of the year.

Combined with acquisitions, we expect strong teens total growth for GTO in the second half.

Let's turn to profits, on Slide 10.

Adjusted operating income declined $7 million or 7%, driven by a decline in event-driven revenues.

As most of you know, event-driven revenues are highly profitable, so they tend to have an outsized effect on our income when they decline.

Adjusted EPS benefited modestly from a lower tax rate due to the relative size of the excess tax benefit for equity compensation, which was $2 million.

With $8 million year-to-date, we continue to expect a full year ETB benefit of $20 million.

Pausing to look at our GAAP EPS, you can clearly see the effect of the $33 million charge associated with the Private Cloud Agreement with IBM this quarter.

We've excluded this charge from our adjusted results.

Next is cash flow and the balance sheet on Slide 11.

Broadridge generated free cash flow of negative $32 million for the first half of the year.

This is not uncommon for our seasonal cash flow, especially with major boardings and flight.

We continue to expect healthy free cash flow for the full year, a big contribution from the seasonally stronger second half of the year.

An important benefit of the Private Cloud Agreement is the reduction in our overall capital spending related to technology infrastructure as we move to a more consumption-based model.

We expect to see some benefit from that in the second half.

Rounding out free cash flow, and as we discussed in August, we are seeing continued investment commensurate with our revenue backlog related to client-driven work we are doing to build out our global post-trade management platform and our new wealth product, along with more general client onboardings.

This anticipated pickup is evident in our first half free cash flows.

As noted, we remain active on the M&A front this quarter.

And with 3 acquisitions representing an aggregate purchase price of about $230 million, that brings our year-to-date investment in M&A to approximately $270 million.

This does not include our acquisition of FundsLibrary for approximately $69 million announced last week.

Given 2 dividend distributions, our capital return to shareholders this year has been $117 million.

Finally, on capital, our senior notes issuance gives us liquidity to refinance our upcoming $400 million bond maturity in September of this calendar year, fund additional acquisitions if the opportunity arises and/or return capital to shareholders.

Let's turn to guidance on Page 12 and starting with recurring revenues.

We continue to expect recurring fee revenue growth to be in the range of 8% to 10%.

After a slow start to the year, we now see organic growth for the full year at 3% to 4%, down from 5% to 7%.

We expect organic growth to pick up in the second half of 2020 as a result of healthy proxy revenue as we enter the heart of the proxy season, continued good growth in mutual fund and ETF interims and GTO acceleration as we see continued benefit from new sales additions and an easy -- an easing of internal growth comps.

These drivers will be partially offset by continued weakness in ICS Customer Communications revenues.

In addition, we expect our acquisitions to contribute 5-plus points to Broadridge's overall recurring fee growth rate for the year.

Total revenues.

We expect total revenue growth to be in the range of 3% to 6% even with this latest outlook for event activity.

Adjusted EPS.

Our guidance for adjusted EPS growth of 8% to 12% is unchanged.

However, given lower event-driven revenues, we expect to be at the low end of that range.

Closed sales.

We continue to expect closed sales to be in the range of $190 million to $230 million.

Finally, we have adjusted our guidance for both GAAP operating income and diluted EPS to reflect higher acquisition amortization in the private cloud-related charge.

In summary, after a slow start to the year, we expect GTO acceleration and a healthy proxy season to drive improved organic growth in the seasonally bigger second half of the year.

And we remain on track to deliver our full year revenue and earnings guidance.

And importantly, we are also on track to meet our 3-year objectives for fiscal years '18 through '20.

And with that, operator, we'll open it up for questions.

(Operator Instructions) The first question today comes from David Togut with Evercore ISI.

I'd just like to clarify one part of your updated guidance for fiscal '20, Jim.

I think, initially, in the FY '20 guide, you were expecting a 4 percentage point contribution from M&A to recurring fee revenue growth.

So originally, you were guiding to 8% to 10% recurring fee revenue growth, which implied 4 points from M&A and 4 to 6 points organic.

But with M&A coming in about 6 percentage points to recurring revenue year-to-date, that implies organic about 2 points lower, more like 2 to 4 percentage points.

So is that correct in the way I'm thinking about that?

And then my follow-up really is on the internal revenue growth, which you have down 3% on Slide 7. Is that really almost all just the decline in event-driven?

Or is there some other components there that we should focus on?

Yes, David.

As I said in my remarks, we now see organic growth at 3% to 4%.

And I also said that we expect acquisitions to be another 5-plus points, which gets us back to this range of 8% to 10%.

As we look at that internal growth, I think it's important to remember that 3% to 4% is comprised of the softer first half at about 2%.

And we see strength in the second half, especially the fourth quarter, which helps us exit the year at a healthy rate.

And then specifically, and it relates to your next question on internal growth, remember that event-driven is not reported in our recurring revenue.

So it's not -- the internal growth is not related to event.

What you're seeing in that internal growth is a function of trades, some of the weaker mutual fund communications that Tim referenced driving that.

When we look at the second half and we think about the strength of our proxy season, a couple of comps just easing a little bit, we think that internal growth flips to positive.

So it's that combination of continued strength on revenue from new sales plus positive internal growth helps us exit the year at a higher organic growth level.

Is the weakness in trade volumes just market conditions being soft?

Or are you concerned there might be some share shift there?

No.

This is really the equity volumes that some of the industry has seen much weaker.

We were down 16%.

And so in hindsight, not a big surprise, but clearly, that's something that usually is sort of neutral to positive.

So we were down 16%, that's going to put some pressure on revenue growth at the margin.

The next question comes from Patrick O'Shaughnessy with Raymond James.

So just wanted to drill down a little bit more into the underlying drivers behind lowering the full year organic recurring revenue guide to 3% to 4%.

I know you spoke about this a little bit in your prepared remarks, but maybe if you can summarize kind of what are the key moving parts to take that down for the year.

And then I think building off of that, what are the implications, if any, in terms of your outlook for fiscal 2021 and beyond for organic recurring revenue growth?

Patrick, I'm going to start, this is Tim, and then I'm going to let Jim add on to that.

I think one of the broad points that's really implicit in what we've been saying, but I think it's worth just restating is that we are really an annual company.

And so when you think about what are our drivers of organic growth, it's really around position growth and then revenue from new sales.

And in the seasonally small first half, that position growth doesn't really have a chance to come through and have the impact that it does for the full year.

Remember that 70% of our proxy business is in the second half.

So I think as we see that position growth coming through and having a bigger impact in the second half, a turnaround in some of the smaller internal growth factors that Jim talked about, that's why we feel good about -- as well as the continued strong performance on revenue from sales, that's why we feel good about the acceleration in the second half.

And then what you're going to see is that building from Q3 into Q4, so the exit rate in Q4, I think, is -- will be the strongest part of the year and that gives us a good feeling about '21.

Got it, Tim.

And then you mentioned in your prepared remarks some commentary about in the communications business, I think, increased suppressions weighing on growth going forward.

Can you provide a little bit more detail on kind of what that means?

Sure.

The -- some of our -- our large clients are always looking at how they manage their costs.

And as they've been looking at their client experience and specifically how they handle the treatment of communications to managed account holders, a couple of the -- our larger clients are taking a little different view on that and that's something that we think will persist over time.

And so they're just doing some fine-tuning about who they send what to.

And so that is -- didn't have that much of an impact in the first half.

It will have some impact in the second half and that's built into all the forecasts and guidance that we've given.

The next question comes from Ken Hill with Rosenblatt Securities.

Had a question on the IBM deal, I know you talked about it a little bit in the prepared remarks.

But I was hoping you can maybe walk through any potential changes we can expect on the operating expenses going forward as a result of that agreement?

And then also kind of on the flipside of that, maybe talk a little bit more specifically about some of the opportunities you're thinking about given the flexibility this platform might allow you going forward.

Yes.

Ken, thanks for asking that question and I'll start and let Jim add in anything that I miss.

But we're really excited about this.

As I said in my prepared remarks, it's a real step forward in our hybrid multi-cloud strategy.

We think it's going to enable us to really speed our time to market.

It's going to offer enhanced resiliency.

It is going to allow us to offer new capabilities over time, and really, we think improve strength of our SaaS offering.

Importantly, and I didn't get into this as much on the call, not a substitute for our public cloud strategy, and we continue to invest strongly with AWS.

We have 80 teams at work refactoring various applications and modernizing them and we see that as a real modernization approach.

But the nice thing about the private cloud approach is it doesn't require any change to the applications.

It doesn't require any client testing and also there were a number of our associates that moved to IBM.

So those associates will be able to continue to support us and have great career tracks.

So we think it's a win for our clients, it's a win for our associates and it does -- when we talk about what's the impact on our operating expense, it is more efficient.

And that is going to enable us, in the near term, to increase our investment in terms of moving to the public cloud and developing our application.

So it really is a nice move away from spending money on running servers and things like that to being able to invest in things that will make a real difference for our clients.

So we are excited about that.

And then the last piece is what it will also free up is capital dollars that we're investing.

So in addition to the expense today, we have capital dollars that we won't have in the future.

Okay.

Thanks for the detail there.

One quick one though on closed sales.

I think after the first quarter, you guys were up 103% and then the latest update was up double digits year-to-date basis.

Is there any more color you can provide on just the second quarter activity?

Second quarter we felt really nice about.

We have ended the first half really where we had hoped to for the first half.

And so it was -- if you take out the very large deal from last year, it was about on track with last year.

And the timing between first and second quarter, I think some things happened in Q1 that was great that they happened as early as they did.

So we feel really on track in terms of delivering on our full year sales guidance.

Next question comes from Peter Heckmann with D.A. Davidson.

Just a couple of follow-ups.

In terms of the M&A that's contributing to fiscal '20, just in terms of a rough number, the $39 million this quarter, we're thinking it's somewhere around $140 million for the full year?

Yes.

The $39 million peak for this quarter is...

The sales contribution.

That's revenue from sale, not specifically the M&A number.

Pete, sorry, I may have misunderstood it.

Just remember, we're taking about 5 points -- a little -- better than 5 points of growth coming from M&A and our recurring revenue for this year.

Okay, 5 points to recurring.

Okay.

And then in terms of a little bit softer revenue in Customer Communications, are you seeing any acceleration to e-delivery or e-billing that's playing into that?

Or is it other issues?

We're just -- and you're a little soft, so we're approximating the question, Pete, but it is -- I think I would say yes and no is my answer, which is, we do definitely see continued traction on digital and that's a very positive thing.

And -- but that's not the cause of what you're seeing this quarter.

So what you're seeing this quarter is really very much around the post-sale business and the change we saw in really volumes there.

And again, we projected those volumes going forward for the second half.

And we'll -- just because I -- as you say digital, it sort of gets my juices flowing.

I can't help but talk about that a little bit.

If you look at some of the things that we have going on in digital, over the past 2 years, we have onboarded more than 100 mutual fund complexes and transitioned from DST onto our next-generation cloud-driven digital platform.

And we really transferred that like-to-like in the initial instance, but that platform has significant capabilities that those funds aren't using today.

And so we think that's a really, really nice digital opportunity for us over time and that we'll see some nice acceleration there.

So we do remain excited about digital, but that wasn't the impact this quarter.

The next question comes from Chris Donat with Piper Sandler.

Tim, wanted to follow up something you said in your prepared remarks about the volume of new mutual fund ETF sales in the quarter.

And I know it had a tough comp, but I'm just wondering if you're seeing any impact on new ETF sales now that a lot of the online brokers have gone to 0 trading fees?

It seems to me like you might see some adjustment in some of the ETFs that were branded by a large broker that now may be just less interesting or I might be wrong.

But anyway, I'm just curious if you're seeing any change in end-market demand for some ETFs?

Yes.

I don't think that we are seeing anything related to the zero trading.

I think when we look back and try to correlate this, and you can imagine that we spent a few late nights trying to -- well, yes, not me, but the team here, as I said, a few late nights trying to correlate that and we really see -- the best correlation we see is really with the VIX and with volatility and so we had -- in periods of high volatility, there can be a lot of rebalancing activity.

So I was calling it new sales and new purchases, but a lot of this has to do with the things that decisions that individual investors may not be making themselves, but is happening as a matter of rebalancing of large portfolios and our in-managed accounts.

And so I'm not thinking it's on the zero trading side and I am thinking it's a matter of just with the pretty quiescent quarter that we just passed, there wasn't a lot of that rebalancing activity.

Okay.

That's helpful.

And then on the -- just on the acquisition front since you've done a lot of them.

As we think forward to fiscal 2021, whatever, I assume you're keeping the same playbook in terms of accretion.

But can you just remind us what your expectations are for accretion from the 4 acquisitions you cited in the press release, for example?

Like what's a reasonable expectation for what they'll contribute?

Yes, Chris, this is Jim.

As you'll recall, most of these acquisitions in the first year, which is everything we're talking about because as a lot of these were done in Q4 and then just this year, are pretty neutral to the year.

The only -- so I think the assumption is relatively modest.

There are -- as Tim mentioned, a couple of the businesses are overperforming already and doing pretty well, so nice contributions.

In the grand scheme of Broadridge earnings, nothing that moves the needle, but nice contributions above our business case, which means that we get a little bit of contribution above and beyond the plan, but nothing that is significant in that respect and worthy of callout.

Yes.

I think I would say that they're not accretive in the first year.

Their margins do increase over time.

I think that's really built into the 50 basis points per year that we tend to talk about and have delivered on for a long time.

So I would really think about it that way.

It is just a case to talk a little bit more broadly about M&A, and I've talked before about how we see this as an evergreen opportunity for Broadridge because there's always change and all these teams creating new opportunities.

And we've really seen this year that play out in terms of when we can make these companies sort of under our umbrella using our master services agreement, our sales force, our servicing, how that really adds value to them and why we've had such good returns from this over time.

And just you're not -- we're not buying these and holding them as sort of separate things and ending up as a collection of stuff.

They're being nicely integrated into our product offers and into our service delivery.

So we think this is really something that is an important part of our growth strategy that will continue.

This year, it is at a higher level than it typically has been.

And as you know, we take a lot of time looking at what are the things that we would like to own and we do that well in advance.

And many of the conversations, many of these are companies we've been talking to for many years, we don't necessarily control when they decide they want to transact, but it's nice that we have -- with our balance sheet and leverage and other things, we have the ability to act when people do want to transact and we think we have really nice business cases around these.

(Operator Instructions) The next question comes from Darrin Peller with Wolfe Research.

This is Andrew on behalf of Darrin Peller.

Just want to touch upon wealth management briefly.

Are you guys seeing any incremental interest in the market due to the UBS announcement over the last couple of quarters?

And how is that translating into the closed sales you've seen in the last couple of quarters?

Yes.

I'll take that.

It's Tim.

Thank you, Andrew.

We are definitely seeing a lot of good interest.

First of all, we're making good progress on the implementation with UBS.

We had a very high number of deliverables for the first year, which I'm pleased to say we finished on track.

And so we're excited about that.

We're seeing a lot of interest from others in terms of -- with the agreement around the pain points that we've identified and the interest in really being part of the open architecture platform of the future.

And so that is good.

In terms of, specifically, on the broad platform, the momentum in terms of closed sales, it's really too early for that.

These are long conversations and people want to see it further along in the build, but those conversations are very positive.

What we have seen is we do have a lot of component solutions in and around that platform and those have had nice momentum.

I mentioned the sale of an adviser compensation solution to a leading wealth manager.

That was the largest sale ever for that business and that is a really nicely growing business for us and plays right into things like Reg BI.

If you think about the number of conversations we're having with clients about Reg BI and all the solutions that we bring to the table, the communication solutions, the advisory solutions and with Fi360, they really to help people really look into their portfolios and make sure that they are suitable.

So lots of good things happening in wealth; it's a really nicely growing area for us.

And then I have to just do a callout to Mike Alexander who just, this past week, we asked to take leadership of this combined business, which we're now bringing together under one leadership.

So we feel really good about it and continue to make good progress.

And then with regards to the Customer Communications business, it continues to be a headwind in the ICS segment.

When should we expect you start to grow over the one large client that you called out in the past?

Or is it a couple of other clients that you see some declines in?

Yes.

I'm glad you asked that so we can just clarify this because in what we talk about externally as Customer Communications, there are a few different business lines.

The largest line is the transactional communications business, and that is the business we've talked about quite a bit in previous calls that has had -- was affected by that client -- those departing.

This quarter, it was not the transactional communications business.

And that -- the transition off of that client is essentially complete, so you won't hear us talk about that again in the future.

And that business was stable.

It didn't grow, but it didn't shrink either.

And so the 3% you saw -- minus 3% you saw this quarter was related to the post-sale business that we talked about.

And then I'll just -- I will say, on the transactional communications business, just even though -- just to remind people, even though the revenues haven't gone down, it has been a nice contributor to earnings.

And because of synergies and other things in the acquisitions, it has been growing earnings over the time that we've been talking about it.

So that's where that is.

It is -- it was stable this quarter.

I'm not putting out the mission accomplished sign here, but that transition off of the larger client is complete now.

This concludes our question-and-answer session.

I would like to turn the conference back over to Tim Gokey for any closing remarks.

Yes, I would just like to thank everyone for being on the call today.

We remain very excited about our revenue from closed sales, about the level of sales activity, the backlog, the M&A performance.

We're looking forward to increase in organic in the second half.

And we just remain really confident and excited about what our long-term opportunity is.

And I'll just bring you back to the conversations that I've had since the beginning of January with leaders of our largest clients.

And when we look at the challenges that they face and transformations that they're looking to do and the alignment of what we are doing with what their needs are, I feel very optimistic about the future of Broadridge.

Thank you.

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