Broadridge Financial Solutions Inc

NYSE:BR

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. My name is Anne, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the Broadridge Third Quarter Fiscal Year 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to your first speaker for today Mr. Edings Thibault. Thank you. You may begin your conference.

[Edings Thibault, Investor Relations]

Thank you, Anne. Good morning, everyone and welcome to Broadridge's third quarter 2019 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 President; and our CFO, Jim Young.

Before I turn the call over to Jim, 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. And 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?

[Tim Gokey, Chief Executive Officer & President]

Thank you, Edings, and good morning, everyone. Broadridge reported solid third quarter results and is poised to deliver another strong year of recurring revenue growth double-digit EPS growth and strong closed sales. We also continue to make excellent progress against key growth initiatives across governance, capital markets and wealth management. And we announced two tuck-in acquisitions that enhance our capabilities in key strategic areas as well as our ability to hit our three year objectives and to deliver long-term growth.

This morning, I will review our key guidance points, walk through our business results and share our progress against these important growth initiatives. Then I will hand over to Jim to walk through our financial results in more detail.

As you know the ASC 606 accounting change has had a big impact on our quarterly results. Jim will help you bridge between our reported figures and our underlying results. He will also provide further insights on our fiscal 2019 guidance.

So let's get started on page 4. Broadridge reported solid third quarter results. Recurring fee revenues rose 20% to $767 million and total revenues rose 14% to $1.95 billion in line with the guidance we gave last quarter. Excluding the impact of the accounting change recurring revenues grew 4% and total revenues were up 1%.

During the quarter adjusted EPS was $1.59 ahead of our outlook. Event-driven revenues were a healthy $68 million contributing to the strength of our quarterly EPS. With nine months of the year now complete and with visibility on more than 80% of the proxy season Broadridge is very well-positioned to deliver another strong year with recurring revenue growth in the mid single-digits and double-digit adjusted EPS growth.

Looking ahead to the end of the year, we are reaffirming or raising our outlook across all three of our most important guidance points. First, we are reaffirming our expectations for recurring revenue growth of 5% to 7%, drove toward the lower end of that range. Second, we are reaffirming our guidance for adjusted EPS growth of 9% to 13%. And third, we are raising our outlook for closed sales on the back of a record year-to-date results and the continued strength of our sales pipeline.

Outside of these three key guidance points, we are lowering our overall outlook for total revenue growth, primarily as a result of lower-than-expected distribution revenues. These distribution revenues carry little and no margin and we're therefore also raising our margin outlook reflecting this improved mix as well as our own work to deliver on costs.

The changes to our revenue and margin guidance are a reminder that changes in distribution revenue have little impact on our operating profit. That's why we emphasize recurring revenue growth and separately event driven revenue rather than total revenue as the best metrics for Broadridge. Simply put, we are much more aligned with our profitability.

Given our focus on sustainable long-term growth, I'm even more pleased that we're positioned to deliver another year of strong double-digit earnings growth while continuing to invest in digital communications, in fixed income network benefits and in emerging capabilities by cloud and block chain.

The strength of our recurring revenue business model, combined with a lot of really good work across the company, enables us to both deliver strong returns and make critical investments for growth. The outlook for fiscal 2019 also leaves Broadridge very well positioned to achieve three year Investor Day growth objectives for 2020 as well as continued growth beyond 2020.

Let's turn to slide 5 to review our business results and the progress we've made against our growth initiatives. Before I begin my overview, I want to note that I will be referring to growth rates, which exclude the impact of the accounting change. Jim will take you through the impact of this change in detail. But I think it's more helpful, if I focus on the underlying business trends.

I'll begin with our ICS business, which continued to generate strong results with 6% underlying recurring revenue growth. Excluding customer communications, which as we've discussed in the past, continue to cycle through the loss of large clients, ICS revenues were up 14%, reflecting both the strength in our regulatory communications business as well as strong demand for our data and analytics offers.

Consistent with the outlook we shared on our last call, both stock and interim record growth slowed somewhat in the third quarter. Stock record growth slowed to 3% in the quarter, as we comped a robust 11% from a year ago. With less than 20% of proxies expected to be distributed in May and June, we expect full year stock record growth to be in the mid-single-digit range. Interim record growth, which covers both mutual funds and ETF's, also slowed a bit to 6% in the third quarter versus 8% a year ago.

We expect full year interim growth to be in the mid to high-single-digits. Event-driven revenues in the third quarter were ahead of our expectations driven by higher mutual fund proxies due to recent fund consolidations. When fund companies merge, they typically need to get approval of their individual fund shareholders to shift fund management to the new corporate entity. It requires a proxy vote, and such activity benefited our results in the third quarter.

Now let's turn to our GTO business, where third quarter revenue was essentially flat with a strong Q3 of 2018 and growth was slower than last quarter. There were several temporary factors driving that slowdown in growth. The rest was the impact of lower trade volumes.

As you recall, equity trading volumes rose 28% year-over-year in the fiscal third quarter of 2018. Against that strong comparable, FY 2019 equity volumes were 6% lower. A second factor was longer implementation cycles as we discussed last quarter. We expect both these temporary factors will subside and the GTO revenue growth will accelerate in the mid-single-digits in the fourth quarter.

Turning to sales, we reported $37 million of closed sales in the quarter, pushing our year-to-date number up to a record $161 million. Notable signings included two sales of our GPTM platform capabilities U.S. Bank, a great sign of the traction we are gaining in the market as we continue to make progress on-boarding some of our early clients.

We expect to close out fiscal 2019 on a strong note, and we are raising our guidance for closed sales to $200 million to $240 million from $185 million to $225 million. Beyond our financial results, I'm excited that our progress we made against key growth initiatives across governance, capital markets and wealth management and will further strengthen our ability to drive long-term value for our clients and shareholders.

In our governance business, our path to long-term growth lies in creating and delivering next generation communications that empower retail shareholders. Their strength and governance and the drive down of clients cost made a small but important step forward on that path with the launch of our new proxy voting app last month. The new proxy vote app is available on both the Apple and Android app stores. And it creates an intuitive streamlined experience to drive more meaningful engagement.

Investors will be able to vote directly in the app and receive important regulatory and educational information on boards of director's elections and the DFC decisions. We're also working with our broker-dealer clients to streamline the voting process within their app and to enhance their e-mail communications. And it is working. One of our smaller clients has already reported a meaningful uptick in voting during the current proxy season as their clients find it easy to engage on governance matters with the new technology.

Speaking of the investor experience, the issue of end-to-end vote confirmation and proxy voting remains an important focus. Working in tandem with institutional investor’s corporate issuers and broker-dealers we submitted a joint comment letter to the SEC to make end-to-end vote confirmation a reality and increase confidence in the integrity of the corporate governance process.

Using technology to enhance the proxy process is a win-win for all parties. Individual investors find it easier to make their voice heard, our broker partners get an enhanced relationship with their clients, corporate issuers see higher engagement with their shareholders all of which cements the important role that Broadridge plays as the critical infrastructure provider at the center of corporate governance.

Beyond proxy voting, we're working with more than 130 mutual fund complexes to help them prepare to implement the new notice access 30e-3 rule using our technology to help them capture the communications preferences of their shareholders across 1,200 plus broker-dealers. That same technology also allows for those shareholders to opt all the way into e-deliver bypassing notice and access altogether and creating additional savings for those funds.

Progress on all three of these initiatives offers great insight into how we build our governance franchise by driving value to all constituents, investors, issuers, funds regulators and broker-dealers. We're using technology to make it easier and more cost efficient for shareholders to vote across multiple platforms. We are helping lead the industry to find common sense solutions and strengthen governance. And we're working with our clients to help them implement lower cost alternatives to physical mail. These changes are right for the industry and they benefit investors.

Turning to our GTO business, I'm excited about the progress we are making in onboarding the new clients. We're off to a strong start in working with UBS to build our innovative wealth platform. We're moving beyond the planning stage into execution and ramping up our development team to deliver on our commitments. We also continue to work with a major client to bring the U.S. equities business onto our SaaS technology platform. These technology implementations should contribute to the reacceleration of revenue growth that we expect in the fourth quarter.

These implementations are critical for two reasons. First, as they progress we can begin to recognize revenue turning sales backlog into revenue growth. The second and bigger benefit is that other potential clients can see how modern technology platforms can streamline their operations not just in theory, but in real practice. It's no coincidence as we bring more major clients onto our platform we are seeing heightened interest from other players in learning how we can help them.

M&A is another important part of our long-term investment strategy. And we are investing approximately $100 million to tuck-in acquisitions that will strengthen our existing mutual fund business and broaden our wealth management product line. First, we announced the acquisition of TD Ameritrade's retirement custody and trust assets. This business which provides mutual fund and ETF trading and custody services to record keepers and third-party administrators will build on our sustained Matrix business, which combined $420 billion of retirement assets under administration to solidify Broadridge's position as one of the largest third-party providers of fund trading, deprocessing and custodial solutions. And the incremental scale will enable us to invest more gradually to build out our technology platform. Second, we acquired Rockall Technologies, a SaaS based provider of securities based lending and collateral management solutions for wealth management firms.

Rockall not only extends our product line in wealth management, also it gives us new front office capabilities that we can eventually incorporate into our broader wealth platform.

These acquisitions are exciting. And they continue our successful approach of acquiring small to midsize businesses, and grow our four franchises to strengthen our capabilities.

No different than the past, M&A will continue to play an integral part, in our growth and investment strategy going forward. Even if in a highly competitive M&A market, we continue to find value-creating opportunities that are tightly aligned with our strategic program and where we can add unique value.

The TD and Rockall deals are both great examples. And we will remain on the lookout for additional M&A investments. So let me wrap-up my comments with a summary of my key messages.

First, Broadridge announced solid third quarter results with 4% pro forma recurring fee revenue growth and strong earnings growth. Second, with three quarters complete, and good visibility into Q4, we are well positioned to deliver strong, full year 2019 results including double-digit EPS growth.

And third, Broadridge is making great progress against our key growth initiatives. We continue to make strides in developing next-generation regulatory communications and in strengthening our governance business.

And capital markets and wealth management, we've also made strong progress in delivering on the integrated technology platforms that will help our clients to reduce the cost, and complexity of their operations.

And our recent M&A activity, provides us with additional scale to invest, and will extend our wealth management product suite. These steps and others, give me confidence that Broadridge is on track to deliver more value to our clients, and long-term growth for our shareholders.

Before I turn it over to Jim, I want to thank Broadridge's more than 10,000 Associates across the globe, for the important work they do in delivering product lines and thereby enabling better financial lives for millions of investors. Jim?

[Jim Young, Chief Financial Officer]

Thanks Tim and good morning everyone. Before reviewing our results, I'll make a few callouts. First, Broadridge had a solid third quarter. We delivered on our third quarter recurring revenue and total revenue guidance and exceeded the high end of our EPS range on healthy event fees, and continued cost discipline.

Second, as discussed previously, the ongoing implementation of the new ASC 606 accounting standard, has the effect of shifting a large chunk of recurring fee proxy, and associated distribution revenues into the third quarter that previously under ASC 605 would have been reported in the fourth quarter.

Accordingly reported growth rates comparing the third quarter last year under, 605 to the third quarter this year under, 606 are not indicative of the underlying performance of this business.

Therefore, in addition to on an as-reported basis, we are providing on today's presentation recurring and total revenue growth rates where revenue for Q3 in the year-to-date fiscal 2018 are under 606 to provide a more meaningful view of our top line performance.

And before I move onto my final call-out, I'll remind you that while the impact of the accounting change is material to the third and fourth quarter of growth rates on a reported basis the expected full-year impact on results and growth rates is immaterial.

Third and final guidance, with three quarters of the year behind us and our visibility into full-year proxy revenues we are reaffirming or raising our FY 2019 guidance for the three most important guidance points.

One, we are reaffirming our outlook for recurring fee revenue growth. Two, we are reaffirming our adjusted EPS growth guidance range. And three we are raising our closed sales guidance.

Additionally, we are lowering our total revenue growth guidance to reflect our outlook for reduced, low to no margin distribution revenue and FX headwinds. And finally, we are raising operating margin guidance on the margin accretion from the reduction in our outlook per load in our margin distribution revenues.

I will give more color on each of these. And where the range is we expect to finish in a few minutes. Let's move on to the slides. I will begin on slide 6. On a reported basis, recurring revenue was up 20% and event fees were up 3% and total revenue was up 14%. However, as I said in my opening callouts, the ongoing implementation of the new accounting standard in fiscal 2019 shifted significant equity proxy revenues from the fourth quarter to the third quarter and fiscal 2018 is reported under ASC 605. Therefore, a more meaningful comparison is to fiscal 2018 Q3 revenue results under ASC 606 as shown on this page.

On this basis, recurring revenue grew 4% event fees were flat and total revenue was up 1% these results were consistent with the Q3 guidance we provided in February. Again, the accounting change is expected to have a material impact on the fiscal 2019 third and fourth quarter growth rates only, while the full-year impact would be immaterial. We provided fiscal 2018 results under ASC 606 by quarter revenue type and segment on pages 19 and 20 in the appendix of this presentation.

Let's move on to slide 7 for the drivers of revenue growth. I will start with a more important metric recurring revenue growth on the bottom half of the slide. Recurring revenue growth was up 4% on an ASC 606 basis in the third quarter. Organic recurring revenue growth was 3%, slightly below the 4% to 7% growth we have seen consistently over the last nine quarters or so. We think this is a temporary dip.

Onboarding of new business across ICS and GTO continued at a very healthy clip. Six points of growth from new sales is very consistent with our performance over the last two plus years. Conversely, internal growth which has also been a consistent contributor of growth was modestly negative as we lapped exceptionally strong trading volumes and one-timers in GTO in the third quarter of last year. In the fourth quarter, we expect internal growth to return to positive territory with continued mid single-digit position growth in ICS and less difficult trading volume comps in GTO.

Moving now to total revenue. Total revenue grew 1% to $1.2 billion in the third quarter. The 4% recurring growth translated into three points of total revenue growth. And event driven revenues benefited from increased mutual fund proxy activity and were flat against very healthy levels in the prior year. Distribution revenues declined and the weaker Canadian dollar and British pound continued to be a headwind causing an additional one point of drag in the quarter. The nine months year-to-date revenue results on a reported and on 606 basis can be found on slides 13, 14 and 15 in the appendix.

I'll now move to slide 8. On reported-to-reported basis, adjusted operating income rose 68% to $256 million in the third quarter of fiscal 2019. This exceptional growth rate was primarily the effect of implementing ASC 606 of recurring revenues. Relative to our expectations event fees were a bit higher and with their high incremental margins contributed nicely in the quarter. Also as expected SG&A expense growth in the quarter moderated to 4% versus the prior year. We expect SG&A growth to continue to moderate in the fourth quarter.

Adjusted EPS rose 59% to $1.59 per share in the third quarter. A notably higher tax rate explains the growth differential between the 68% adjusted operating income growth and the 59% adjusted EPS growth. Our effective tax rate was 23% for the quarter, up from 12.9% a year ago. The biggest driver of that change was a drop in the excess tax benefit or ETB to $1 million from $16 million a year ago.

As we've discussed, this is a difficult line item to forecast with year-to-date activity lagging well behind our original $25 million forecast we are reducing our ETB outlook to $20 million. This was the effect of increasing our expected effective tax rate for fiscal 2019. We have provided additional tax detail on slide 17 in the appendix.

Let's turn to slide 9 for additional color on our segment results. Our ICS segment reported strong underlying results. As I said at the outset, the impact of the ASC 606 revenue accounting change was most pronounced in our ICS segment. When applied to our fiscal ICS results, the new standard shifted $97 million of recurring fee proxy revenues in the fourth quarter into the third quarter. So while we reported ICS recurring fee revenue growth was nominally 31%, underlying growth was a strong 6%. Organic growth of 5% reflected a continued strong growth excluding customer communications that Tim discussed.

Looking at the growth drivers at the bottom of the slide, net new business gains were modestly offset by the client loss in Customer Communications. Internal growth remained positive and returned to a more normalized level after the exceptional Q2 interim record growth. As Tim noted, we expect stock record growth to finish the year on a healthy note.

ASC 606 only had a minimal impact on GTO revenues in the third quarter and revenue growth was flat. As we indicated last quarter, GTO experienced a brief low in onboarding activity in the second and third quarters, lull which resulted in more modest net new business contribution totaling three points to growth.

Internal growth turned from a consistently positive contributor to a drag of three points in the third quarter resulting in an overall flat growth. That decline in internal growth was driven by tougher trading comps as equity trades contracted 6%, comping 28% a year ago. In addition, certain onetime fee items a year ago also contributed to the negative internal growth. As we look to the fourth quarter, we expect the impact of most of these temporary pressures to ease and the GTO will return to growth in the 4% to 6% range driven by positive internal growth and new onboardings.

Moving to slide 10 in capital allocation. Broadridge generated $120 million of free cash flow in the third quarter and $172 million year-to-date. The new revenue recognition standard does not impact the timing of our free cash flow and accordingly, we expect the free cash flow will once again be heavily weighted to the fourth quarter of the fiscal year.

Broadridge invested $46 million in capital expenditures year-to-date and returned just over $250 million to shareholders including $155 million in dividends and $97 million in net share repurchases. Following the close of the quarter, we announced the acquisitions of TD Ameritrade Trust Company assets for $62 million and Rockall Technologies for $37 million.

The TD transaction is expected to close in June. The two businesses combined represent less than 1% of annual recurring revenue. Given our typical upfront reinvestment in newly acquired businesses, we expect little or no EPS accretion in fiscal 2020 from these deals, although we expect both to generate very attractive returns over time. Our adjusted leverage ratio of 1.5 times at the end of the third quarter remains below our long-term target of 2.0 times. As Tim mentioned, we continue to look for attractive M&A opportunities and have ample capital capacity.

I will finish off our guidance on slide 11. First, we are reaffirming our recurring revenue guidance range of 5% to 7%. We expect to be in the lower half of this range, as we have been indicating all year. This means that the fourth quarter will be down on an as-reported basis. However, on an ASC 606 basis, the quarter will grow nicely in line with the full-year guidance reflecting continued growth in ICS and the pickup in GTO.

We are reducing total revenue growth guidance to approximately 1%. This reduction is attributable to lower-than-expected, low-to-no margin distribution revenues and FX headwinds. This updated guidance implies Q4 total revenues of around $1.22 billion.

Included in our outlook for total revenues , we continue to anticipate the VAT driven revenues will be down 10% to 20% off of record fiscal 2018 levels. As Tim noted, while third quarter event driven revenues benefited from mutual fund merger activity, most of these activities have wrapped up and we expect fourth quarter event driven revenues to be lower than a year ago.

We are raising our adjusted operating income margin guidance 50 basis points to approximately 17% representing over 100 basis points of margin expansion over fiscal 2018. This nice uptick in our guidance reflects the reduction in the margin dilutive distribution revenues and our continued focus on delivering operating efficiencies. We are also reaffirming our adjusted EPS growth guidance of 9% to 13% and we expect that it will be right in the middle of that range for approximately 10% to 12% for the year.

As I mentioned earlier, our adjusted EPS guidance reflects a cut in our outlook for ETB to $20 million from $25 million. Our free cash flow guidance remains at $565 million to $615 million and we expect to be at the low end of this range. And finally, we are raising our full-year close sales guidance to $200 million to $240 million up from $185 million to $225 million. $161 million in year-to-date sales is a record for us. And we still have a robust pipeline, which speaks to the strong market demand and our growing execution capabilities.

In closing, I'm pleased with our results year-to-date and expect that Broadridge will deliver strong full-year results including strong recurring revenue growth, double-digit earnings growth and record or near record close sales. As Tim noted, our progress against key strategic initiatives gives me confidence that we are very well positioned to achieve the 3-year growth objectives we laid out at our 2017 Investor Day and to continue to deliver strong multiyear growth for our shareholders.

We'll now open it up for questions. Anne?

Operator1

Yes, sir. Thank you. [Operator Instructions] And your first question comes from the line of David Togut of EverCore ISI. Please ask your question.

[David Togut, Evercore ISI]

Thank you. Good morning.

[Tim Gokey, Chief Executive Officer & President]

Good morning.

[David Togut, Evercore ISI]

Does the reacceleration Jim in GTO organic revenue growth for Q4 to 4% to 6% include the onboarding of the Tier 1 investment bank in equity in fixed income trade processing?

[Tim Gokey, Chief Executive Officer & President]

Hey, David it is Tim. And I'll just jump in on that. It really includes very little from that onboarding to achieve that. And look we continue to feel really good about the prospects for GTO. The long-term growth what we're seeing in backlog, what we're seeing in sales, what we're seeing in client discussions and this temporary lull due to trading comps and some items last year and our implementation mix service is temporary. And I just wanted to make a comment on the implementations mix because as we move to these longer and larger projects it is actually a positive because of the notion of that is the projects when they are implemented are larger and that is what is fueling our long-term growth. So irrespective of that onboarding we do expect a mid-single digits in Q4 and we also expect a solid 2020 and feel good about it.

[David Togut, Evercore ISI]

Understood. Just as a quick follow-up any update on the SEC review of the U.S. proxy system in terms of how you expect the SEC to conclude?

[Tim Gokey, Chief Executive Officer & President]

Absolutely. We feel really good about the progress specifically on end-to-end confirmation. This letter that I mentioned in the call in getting the Council of Institutional Investors the Society of Corporate Secretaries and the broker-dealers as represented by Sigma to all agree is very unusual. And we have done – been getting really strong positive feedback from regulators who would really like to see an industry solution here. And so the technology exists for this it has already been piloted and it is – it will really enhance what is already a world leading process. So we feel good about that. And we would just see it as a part of a pattern of creating continuing more value for all constituents.

[David Togut, Evercore ISI]

Understood. Thank you.

[Operator]

Thank you. Your next question comes from the line of Patrick O'Shaughnessy of Raymond James. Please ask your question.

[Patrick O'Shaughnessy, Raymond James]

So to follow-up on that last question, what are your expectations in terms of the process that the SEC might follow to work on the proxy plumbing? And then I guess along with that any thoughts you might have in terms of potential pricing review on fund interims that they put out for request for comments last year and things seem to be pretty quiet on that front?

[Tim Gokey, Chief Executive Officer & President]

Sure Patrick. First of all, just on the plumbing, I think that the main focus is on this question of end-to-end confirmation. And I think there will be further consultations around that. And we do expect that there will be some guidance there that will enable the industry to move forward on that. And that's something that we see as a positive.

On the fees, we don't have a specific update on the fees since that submission in October and there is no real time line for what it would be if it did happen although as we said before we think it would be likely to be lengthy. What we think is most notable here is the work that we're doing with the funds to help them prepare for 30e-3. Almost 10 years ago, when Notice and Access was implemented for corporate issuers, it really changed our position with public companies as they consulted with us on how to maximize the benefit from Notice and Access then.

And we're seeing the same opportunity here as we're working with -- as we said more than 100 funds to help them drive savings through 30e-3, but also continued digitization. And now we are saving the industry as we said before relative to 10 years ago $400 million a year, we see the opportunities for next $400 million in savings and again as part of the theme of continually to drive -- continue to drive value to all the constituents. So I think as all that takes place, we feel good about how we're positioned in the industry and with our clients.

[Patrick O'Shaughnessy, Raymond James]

Got it. Thank you. And then, as we look at the ICS segment, obviously the North American Communication business continues to struggle and you spoke about some of those known customer rolloffs. What steps can you guys take to kind of turn that business around and to prevent it from being the growth headwind in fiscal 2020?

[Tim Gokey, Chief Executive Officer & President]

Sure. I think the things that we are continuing to execute on there are, first of all continuing to drive new sales and we do have a nice backlog in that business and we're working to onboard that. And that will help ameliorate this ongoing rolloff of that client. We are continuing to drive pretty strong synergies and I think we have commented that we've achieved nearly $50 million to-date. And creating that cost position, which by the way has really neutralized any earnings impact of the revenue -- revenues we've been talking about. So continue to drive cost which both neutralized any decline, but also gives us a stronger position for driving future growth.

And then last is really continuing to drive digitization because, remember that the ultimate goal here is to help all of those clients get to a digital future. And that is -- that trend in the industry has taken longer than we expected, but we think we're really well positioned to help clients in the future as they make that transition and that will put us really on the right path and maybe a smaller business, but a higher margin business of that type.

[Patrick O'Shaughnessy, Raymond James]

Okay, great. Thank you.

[Operator]

Thank you. Your next question comes from the line of Oscar Turner of SunTrust. Please ask your question.

[Oscar Turner, SunTrust]

Hey guys, good morning. So first question is on event driven. It looks like that segment or subsequent will again be a growth headwind in the fourth quarter as you guys had already forecast. I was wondering if you can provide some color into how the mutual fund calendar is shaping up for next year.

[Jim Young, Chief Financial Officer]

Sure. Oscar this is Jim. Obviously, just as a context, event has contributed nicely over the last few years, obviously a record year last year even down 10% to 20% this year is a really strong good contributions for us. Also put into your context, this is you're talking about 5%, 6% of our total revenue, so as we think ahead to next year, we are obviously in the midst of developing of our operating plans, too early to give you an event-driven outlook.

That said, we take into account just as you said the calendars of major institutions, complexes many of whom have gone out over the last couple of years, look at activist activity, we look at mutual fund merger activity, activists and contests announcements et cetera. And obviously in August, we'll give you a full view of where -- of our best thinking recognizing, we're very good kind of 90 plus days out, but we have enough underlying trends in analytics that we are able to triangulate around our outlook.

And then just as a final reminder when we look long-term over event driven, it continues to be a really nice grower, growing in line with position. So independent of any one year, this has continued to be a nice contributor to Broadridge.

[Oscar Turner, SunTrust]

Okay. Thanks. And then a second question on M&A, can you speak to your appetite for larger M&A deals? How much incremental leverage would you be willing to take on? And which areas would you be most likely to do such a deal?

[Tim Gokey, Chief Executive Officer & President]

Sure. Oscar, this is Tim. Good morning.

[Oscar Turner, SunTrust]

Good morning.

[Tim Gokey, Chief Executive Officer & President]

Let me gives a little broader context and then sort of jump into specific question. So, M&A really -- it does continue to be a core strategy for us. And I said before on other occasions, in Fintech is sort of Evergreen for M&A, because there are always new problems cropping up. And we have the opportunity to look across the landscape and find a really good pieces of technology and to bring those into our ecosystem for clients. And we also know that the M&A market is very expensive right now. And so we need to work harder than ever on proprietary -- some of the proprietary transactions where we bring the value and we think that TD and Rockall are both great examples of that.

We have a very robust pipeline going forward and that represents a mix of size deals, some ones that are traditional tuck-ins to ones that are somewhat larger. And we would -- we really feel that the constraint right now. If you think about going back to the Matrix transaction. At that time, relative to our market cap, that would be a $1 billion transaction today. So, we don't feel constrained on this size. What we really are focused on is what are the things that are uniquely additive to our capabilities where we can create strong value for our shareholders.

And Jim is just going to add on here a little bit.

[Jim Young, Chief Financial Officer]

And Oscar, just on the capacity question. Obviously, we ended the quarter at 1.5 times leverage, well below our 2.0 target leverage. As Tim just said, we don't feel constrained. We obviously have room within that. As we have said before, if there was such a transaction, certainly there's an opportunity to go a little bit over and come back down in a short period, but again that is not a driver, but it does give us a lot of flexibility in this market.

[Oscar Turner, SunTrust]

Okay. Thanks for that color.

[Operator]

Thank you. And your next question comes from the line of Peter Heckmann of Davidson. Please ask your question.

[Peter Heckmann, Davidson]

Hey, good morning. Just wanted to follow-up. Could you put maybe a little bit finer points on the acquired revenue? I know it's not terribly material to forecast, but looking to me like four, five, six deals on combined, should we expect that to add, let's say, $20 million at this point -- $20 million to $30 million in acquired revenue to next year?

[Jim Young, Chief Financial Officer]

Hey, Pete, it is Jim. On the -- really we're just at the moment just focused on the two deals we announced, the TD assets and Rockall, which combined are in around less than 1% of our recurring revenue which gets you pretty close to, I think, the estimates you just made. So, not massive, but nice contributors.

[Peter Heckmann, Davidson]

Okay. Okay. And then that you're -- really just trailing deals that were pretty small, I believe. Okay. And then just any update -- I didn't hear I apologize if I missed it, any update to your thoughts on the timeline for the creation and implementation of the wealth management platform for UBS?

[Tim Gokey, Chief Executive Officer & President]

Hey, Pete, it's Tim Gokey. That is something that we think will happen in mid-calendar 2021. So, it is a ways out, but remember we have an existing wealth business with a lot of existing wealth solutions and we continue to sell those and to grow that business. So, we think that this platform will intersect with that existing business and create something that's even stronger, without speaking any names. We're certainly having some very good client conversations around our future wealth ecosystem and obviously as we gets closer to coming live, it will be a time to -- where those could come to fruition.

[Peter Heckmann, Davidson]

Okay. And then just in terms of the expenses related to it, I don't think you've really called out any material uptick in expenses over the next six quarters that we should be just thinking about as we start to model 2020?

[Tim Gokey, Chief Executive Officer & President]

That's right. Pete remember, as we develop in this particular case the wealth solution for UBS, those costs are all capitalized, and then we'll begin recognition when the revenue goes live. So they are very much in our cash flows recognizing that with any of our client deals, we're also taking in cash during that period that all goes to the balance sheet. So from a P&L standpoint, over the next year or so, really nothing of note.

[Peter Heckmann, Davidson]

Got it. Thank you.

[Operator]

Thank you. And your next question comes from the line of Puneet Jain from JPMorgan. Please ask your question.

[Unidentified Analyst]

Hi. This is Connor on for Puneet. I was wondering if you guys could give us some more detail around the incremental distribution softness you're seeing. How much of it was maybe driven by customer communications versus mix or anything else you'd call out?

[Jim Young, Chief Financial Officer]

Connor, this is Jim. The majority is certainly coming from customer communication, and clearly those types of communication have a high ratio of post distribution cost to the fees themselves. And then within that, you can get various mailings that could be even above that ratio. So it's really customer communication, no specific callout as Tim said, the distribution revenue could be a bit of a red herring, because it will move around obviously a bit of a pebble in our shoe this year. But nothing that is material at all to our earnings, and as you saw, in fact, we're taking up our operating income margin as that -- no margin revenue comes out of our -- out of the P&L.

[Unidentified Analyst]

Great, thanks. And maybe a related question kind of around the margin impact, but you guys have been running pretty solidly ahead of the outlook you gave us the last Analyst Day. And as we head into the final year of that outlook, around the margin specifically, should we be looking for potentially a slowdown given the strength in the first two years? I know we will get guidance next quarter, but any early thoughts would be helpful. Thank you.

[Jim Young, Chief Financial Officer]

Thanks Connor. Yeah. We're really pleased with where we are. If you remember, we set out an EPS CAGR of 14% to 18% inclusive of the Tax Act benefit we picked up, and recurring organic growth of about 5% to 7% all in with M&A 7% to 9%. So we feel like we're really tracking well against all those a little less on the inorganic piece, although too early to rule out anything at this point.

The margin, specifically to your question, obviously we called for 50 basis points of margin expansion per year. I think if you take our guidance for this year plus what we delivered last year north of that 50 basis points, we're essentially there. But no, we are not done. And we obviously are ramping up our planning now for next year. As you say we will be back in August, but we feel really good with where we are, what we’ve done against those targets, and we'll be excited in August to share our guidance for next year.

[Unidentified Analyst]

Great, thanks.

[Operator]

Thank you. And your next question comes from the line of Andrew Bauch of Wolfe Research. Please ask your question.

[Andrew Bauch, Wolfe Research]

Hey, guys. This is Andrew on behalf of Darrin Peller.

[Tim Gokey, Chief Executive Officer & President]

Hey.

[Andrew Bauch, Wolfe Research]

I just wanted to – hey, how is it going? I just wanted to touch on the closed sales number. Look, it's another strong number here, particularly given the $100 million we saw last quarter. Could you provide us some color on the mix here? Is it primarily across capital markets wealth or governance?

And then my follow-up is looking at this growing backlog, do you have any need to kind of ramp your implementations teams? And then, is there a possibility over time you can kind of build the playbook in order to convert some of these deals faster than historically?

[Tim Gokey, Chief Executive Officer & President]

Yeah. Andrew, this is Tim. First of all on the closed sale, it really is a very well-balanced mix. There was not any major single deal that was a driver, and so it's a really nice balance that we saw. And as we think about the implementation, it is -- we clearly are increasing our capacity to onboard these clients.

And as we talked about in the conversation with Peter, as we do that we are adding resources. That is something that really flows through the balance sheet until those implementations go live. And then we see the amortized cost and revenue from these begin to flow at that time.

So, during the implementation phase, in many cases we are receiving revenue but we're also building a gross that goes in the balance sheet. But we're definitely are expanding capacity.

And looking at how do we make these as fast and as efficient and effective as possible and because we see a lot of activity down the pike and so that is a real under lever for us.

[Andrew Bauch, Wolfe Research]

Got it, thank you so much guys.

[Operator]

Thank you. And your next question comes from the line of Chris Donat of Sandler O'Neill. Please ask your question.

[Chris Donat, Sandler O'Neill]

Hi. Good morning. Thanks for taking my question. Wanted to ask one on the equity proxy record growth, which in this quarter came in at 3% and last quarter was 15% year-on-year. And I thought that Tim's comment that, it's I guess mid-single digits for your fourth fiscal quarter.

As we think about the different quarters should we really be focused on the fourth quarter just because there's much more proxy activity in that quarter? And then kind of as a related question has any of the account or the revenue recognition affected the timing of when you calculate the proxy growth?

[Tim Gokey, Chief Executive Officer & President]

Yeah, Chris its Tim on that first of all just starting with the very lasting perspective of revenue recognition does not affect the calculation. It's all sort of an apples-to-apples basis. I think that remember we did have a very strong Q2, but remember that whole first half is less than 20%. And so it's really -- it doesn't create that productive a comparison.

When we were here in February, we said at that time that we've done tests. And we expected mid-single digits. And its true Q2 was a little below that sort of just based on the prior-year comp. But I think we feel pretty good about mid-single digits for the entire year. And the entire year is really the best place to look at.

Overall just the other thing I'd say overall is that both stock record growth and interims over the long term they are driven by underlying account growth, they are driven by growth in managed accounts, and they are driven by growth in model-based investing which includes robos.

And so we think that mid-single digit it flows a little bit up and down through the year, but we think that's a really good long-term trend.

[Chris Donat, Sandler O'Neill]

Okay. And then, just to follow-up on the comment on robos. Are you seeing any signs of I guess, there's on the position side a notion with them some robo advisers said there is more direct ownership of an index.

In other words someone is owning 500 stocks within a portfolio and of course you need a certain dollar amount in that account do that. Are you seeing signs of that as the driver of robos? Or is it somewhere else? Or do you not have a strong sense?

[Tim Gokey, Chief Executive Officer & President]

Yeah we're not -- Chris we're not seeing that. We're just seeing that when someone goes into a robo model what might have been four positions in an account now becomes 13 to 30. And but we're not seeing people creating sort of full indexes.

[Chris Donat, Sandler O'Neill]

Okay, thanks very much Tim.

[Tim Gokey, Chief Executive Officer & President]

Okay. I'm looking here. Are we taking another question or are we wrapping up?

[James Young]

So I think we've concluded here.

[Tim Gokey, Chief Executive Officer & President]

Okay. So let me just thank everyone for joining in today. And we continue to believe that we have the strong market positions across governance capital markets and wealth management.

And our platform-based business model really creates unique value for both clients and shareholders, that we have a significant long-term growth opportunity that is supported by clear long-term trends.

And we think that that model and that opportunity, long-term focus will provide sustained growth and shareholder value for a long time to come. We think this quarter and the outlook for the year that we shared are just further confirmation of that long-term perspective.

And so we look forward to talking to you again in August.

[Operator]

Thank you, presenters. This concludes today's conference call. Thank you all for joining. And you may now disconnect.