Broadridge Financial Solutions Inc (BR) — Q1 2015 Transcript

Thank you. Good morning, everyone, and welcome to the Broadridge Quarterly Earnings Call and Webcast for the First Quarter of Fiscal Year 2015. This morning, I'm joined by Rich Daly, our President and Chief Executive Officer; and Jim Young, our Chief Financial Officer. I trust that everyone has had the chance to review the earnings release we issued this morning. The news release and slide presentation that accompany today's earnings call and webcast can be found on the Investor Relations page at broadridge.com. During today's conference call, we'll discuss some forward-looking statements regarding Broadridge that involve risks. These risks are summarized on Slide 2. We encourage participants to refer to our SEC filings, including our annual report on Form 10-K, for a complete discussion of forward-looking statements and the risk factors faced by our business. Our non-GAAP fiscal year 2015 earnings results and guidance exclude the impact of acquisition, amortization, and other costs. These costs are significant, and we believe that non-GAAP information provides investors with a more complete understanding of Broadridge's underlying operating results. A description of any non-GAAP adjustments and reconciliation to the comparable GAAP measures can be found in our earnings release. Now let's turn to Slide 3 and review today's agenda. Rich Daly will begin the call with his opening remarks and provide a summary of the financial highlights for the first quarter of fiscal year 2015, followed by a discussion of a few key topics. Jim Young will then review the financial results in further detail. Rich will then share some closing thoughts before we move to the Q&A portion of the call. Now I'll pass the call over to Rich. Rich?

Thanks, David, and good morning, everyone. Let's begin on Slide 4 with the key points we hope you will take away from this call. First, we had a solid start to the year with results that were consistent with our expectations. Building on the momentum generated in fiscal year 2014, our performance was primarily driven by Net New Business. I am satisfied with our results, especially considering the strong event-driven trading and trading support activities in the first quarter last year. This year's first quarter positions us well to achieve our guidance for the full fiscal year. Additionally, I am very pleased with our recurring revenue closed sales results, which reached record levels in the first quarter. In the past, I have discussed how the Broadridge revenue model has evolved and how we are not relying on market-based activities for growth. Strong growth in recurring revenue closed sales remains a crucial part of our strategy, and achieving record levels this quarter gives us a robust start to our sales goals for the fiscal year. Given our first quarter results and our ongoing confidence in the business, we are reaffirming our fiscal year 2015 guidance. Before discussing our financial highlights, I want to talk about how our growth strategy is supported by continuous reinvestment in the business. At Broadridge, we categorize investments into two areas: recurring run rate investments that support our current operations and infrastructure needs, and investments in future growth, including strategic initiatives where the timing of execution allows us some flexibility. We believe investments in new and existing products, technologies, and sales capabilities will result in greater recurring revenues and scalability. Consequently, our revenue and revenue growth have become increasingly less dependent on market activities and more predictable. With the ability to pace some discretionary investments, we can mitigate the impact of market volatility on our results. As a result of our efforts in this area, our earnings growth should be sustainable over a multiyear horizon, laying the groundwork for greater sales and efficiencies. I appreciate the confidence these efforts have given us in our ability to meet our guidance commitments. During the prior fiscal year, we highlighted an increase in discretionary investments in our business. Since these amounts do not capture all our investments and due to the long-term nature of our commitment to investing, we do not plan to provide regular updates on discretionary investment levels going forward. That said, one quarter into the year, nothing has changed versus our prior plans. We remain committed to investing in growth opportunities that will provide long-term benefits for our stockholders. I am very pleased with our execution on the growth strategy and our ability to plan effectively for both the short and long term. Thus, we continue to be confident in targeting sustainable, long-term, top-quartile total shareholder returns over any multiyear period. Let's move to Slide 5, which covers the financial highlights for our fiscal year 2015 first quarter. I am satisfied with our first quarter financial results, which were aligned with our expectations. Recurring revenues increased by 4%, mainly due to Net New Business, defined as recurring revenue closed sales minus client losses. Our internal growth was flat overall, with positioned growth in equities and interims offset by decreased trading volumes and trading support activities. We reported non-GAAP diluted earnings per share of $0.30 compared to $0.39 a year ago. GAAP diluted earnings per share fell 26% to $0.26 from $0.36. The decrease in EPS met our expectations and aligns with the direction provided in the last call. Keep in mind that last year's Q1 was unusually strong due to heightened trading and trading support activities, which led to internal growth across both segments and increased event-driven mutual funds proxy activity. I'd like to briefly comment on the current market environment. Recent history has shown us that markets can fluctuate significantly. Although we observed weaker-than-expected trading and trading support activities during Q1, I was pleased that our strategy to focus less on market activities and more on controllable factors was both timely and effective. Notably, market activities in Q2 for October improved and were stronger than what we experienced in Q1, which further boosts our confidence for the full year. The solid start to the fiscal year, combined with our confidence in the business, leads us to reaffirm our full year guidance now, which includes recurring revenue growth of 5% to 7%, non-GAAP diluted EPS of $2.42 to $2.52, GAAP diluted EPS of $2.29 to $2.39, recurring revenue closed sales between $110 million and $150 million, and free cash flow in the range of $320 million to $370 million due to our low capital intensity and robust free cash flow business model. Next, I will cover closed sales performance on Slide 6. A highlight of the first quarter was our record recurring revenue closed sales of $32 million. Historically, our first quarter closed sales contribute the least to our full year results, as it is generally more challenging to schedule meetings and close new business during the summer months. Therefore, I am very pleased with our strong performance and our ability to successfully close transactions. The quarter's results include two deals valued over $5 million each. Despite this performance, our sales pipeline remains robust and is growing with strong momentum. We continue to make significant progress in our emerging and acquired product portfolio and our jointly launched Accenture Post-Trade Processing Platform. We expect Société Générale's London operations to be fully implemented and processing on the platform by Q3 of this fiscal year. In October, the platform signed its second client, with a targeted go-live date during fiscal year 2016. Moving forward, we anticipate the regulatory environment will become even more complex and restrictive. The value proposition for all our solutions, including the platform, continues to focus on the most relevant initiatives our clients face today: mutualizing non-differentiating functions and costs. Broadridge is well positioned in the marketplace as a vendor of choice. Currently, we have strong interest from various firms, based on our capabilities, to mutualize their communications, operations, and technology cost structures. We are optimistic about our pipeline and excited about our future opportunities. We are also continuously investing in our go-to-market capabilities. In September, we hired Chris Perry as our President of global sales, marketing, and client solutions. Chris joins Broadridge after serving in senior executive and sales leadership roles at Thomson Reuters. With over 25 years of experience in banking, brokerage, and financial information services, he brings unique and valuable experience to the team. The executive leadership team and I are excited to have him with us and look forward to his contributions. We are off to a strong start this fiscal year, executing on our strategy as demonstrated by our sales performance and investments aimed at enhancing long-term growth. As I previously mentioned, we are not relying on market-based activities for growth. Consequently, Broadridge is a very different company today than it was when we became public almost 8 years ago. With that, I will turn the call over to Jim, who will discuss the financial results in more detail.

Thank you, Rich. Good morning, everyone. As we move to Slide 7, let me begin with some call-outs before going through our results in more detail. First, Q1 came in where we expected, with contributions to full year revenue and EBIT consistent with the distribution we shared with you along with our fiscal year 2015 guidance on the August call. This performance, coupled with our current outlook, enables us to reaffirm our full year guidance for fiscal year 2015, including recurring revenue growth of 5% to 7% and non-GAAP EPS in the range of $2.42 to $2.52. Second, as Rich highlighted, we began the year with strong recurring revenue closed sales including 2 larger deals, both of which are anticipated to convert within 12 months. While we can expect some very modest revenue benefit in this fiscal year from these sales, we do not see any impact as of now to our full year revenue guidance. Third, despite the tough comparisons from a year ago, and a relatively weak trading and trading support activity in Q1 of fiscal year 2015, recurring revenue and total revenue were up 4% and 2%, respectively, with healthy top-line growth in the Investor Communication Solutions business. Further to the strong comparisons, Q1 fiscal year 2015 EBIT and earnings growth were heavily impacted by sales, general and administrative expenses, which grew 25%. This growth was a function of some discrete items, which I'll cover in a bit, and should not be considered in any way indicative of a trend or run-rate growth. Finally, contributions from internal growth led by market-based activity were neutral and consistent with how we approach planning for the year. Now focusing more specifically on the data on Slide 7. This should be a familiar layout to you. It shows the components of our 4% recurring revenue growth and 2% total revenue growth in the first quarter of fiscal year 2015. In addition, you can see the strong performance last year that we grew over 11% recurring revenue growth and 10% total revenue growth in Q1 fiscal year 2014. In particular, you can see 4 points of internal growth a year ago, which is a result of 14% equity trading volume growth, very strong trading support activity, including post-sale fulfillment, and healthy position growth. As you move further down the Q1 FY '14 column, you can see the 2 points of total revenue growth from event activity associated with Mutual Fund Proxy services. All of this is helpful perspective for understanding our Q1 fiscal year 2015 performance. You can see mutual contribution from internal growth and the drag on growth from event-driven activity in the quarter. Net new business continues to be the biggest driver of our performance in the quarter and on a projected basis for the balance of the year. And again, we expect event-driven revenues for the full year to be flat year-over-year. Below the revenue section, you will see the contraction in Q1 non-GAAP EBIT margin and non-GAAP EPS compared to a year ago. As I mentioned above, the real driver here was the growth in SG&A expenses. This anomalous growth in SG&A expenses was the result of several factors including: higher commission on the 100-plus percent increase in closed sales, which is an expensive driver we happily accept; other increased performance-based compensation expenses; and impacts from investments in our sales and marketing capabilities, largely in the form of people that began a year ago. Also, we revalued a contingent obligation related to an acquisition, which resulted in a credit in the prior year period. These items alone represent the majority of the $0.09 decline in non-GAAP EPS. Therefore, we don't expect this level of SG&A expense growth in the remaining quarters. In closing out on the overall Broadridge financials, we reiterate our direction on how to think about our revenue and EBIT distribution across the fiscal year, where approximately 40% of annual revenue and about 20% of related EBIT should fall in the first half. Now turning to Slide 8 and the performance of the segments. ICS posted solid recurring revenue growth of 10%, matching fiscal year 2014 levels, and total growth of 4% with the event-driven drag amplifying on ICS's results. Five points or half of the recurring growth was from Net New Business with continued momentum for new closed sales. Another 3 points of growth came from the Emerald acquisition, which will anniversary in February 2015. Internal growth contributed the final 2 points. Looking at the drivers of internal growth, Q1 stock record positions grew 7%, which was consistent with fiscal year 2014 growth, recognizing that this driver is not as meaningful to our Q1 results. It is, however, directionally positive. Mutual fund interim positions grew 8%, which was even with our fiscal year 2014 Q4 rate. ICS Q1 fiscal year 2015 EBIT contracted 7% year-over-year with less high-margin event-driven activity and impacts from some of the SG&A items discussed earlier, including higher sales commission expenses. Moving down to SPS. Revenue here contracted 2%. While Net New Business was slightly positive, overall trade volumes were flat, and trading support activity was down from Q1 fiscal year of 2014. As Rich highlighted, and we discussed on the last call, we are not counting on much contribution from internal growth for the full year. And no longer-term extrapolations can be made from current period trading volume levels. With respect to EBIT, the revenue contraction combined with higher sales commissions related to the strong Q1 sales performance and continued investment in sales capabilities resulted in a 20% contraction in SPS's EBIT. In closing, I'll offer a few odds and end. First, as you may have seen, Broadridge amended and extended its existing revolving credit facility in August. This transaction enabled us to secure attractive rates, pricing, and credit availability. The revolving credit facility was extended with a new 5-year maturity out to August 2019. We also upsized the revolver from $500 million to $750 million. There are no specific uses for the additional room on the revolver other than to support Broadridge's future growth and provide additional funding and financing flexibility. Second, consistent with our capital stewardship commitments, we repurchased 15 million or approximately 350,000 shares using proceeds from exercised options to offset the impact of dilution in the first quarter. Third and finally, please note that certain discrete services that were previously reported in our Securities Processing Solutions segment are now reported within the Investor Communication Solutions segment. This was done to reflect organizational changes made in fiscal year 2014, with the goal of further aligning and enhancing our portfolio of services. This action had the effect of moving approximately $14 million of revenue and negligible EBIT from SPS to ICS for fiscal year 2014. Further, we updated our segment guidance numbers to reflect these moves. For avoidance of doubt, this has no impact on the consolidated reported results or the fiscal year 2015 guidance. With that, back to Rich.

Thanks, Jim. Please turn to Page 9 for my summary wrap-up. I am satisfied with our results. The first quarter places us solidly on track for the full fiscal year and demonstrated that our strategy to be less dependent on market-driven activities is working. As Jim pointed out, due to the seasonal nature of our business, our first 2 quarters earnings historically contribute disproportionately less to our full year results. Recurring revenue momentum has continued, driven by Net New Business. Closed sales grew nicely and our sales pipeline continues to be robust. Going forward, we are well-positioned for continued success and in our ability to execute on our growth strategy. We are not relying on revenue from market-based activities to fuel our growth. The benefits of our strategy are reflected in our first quarter performance. We remain confident in our fiscal year 2015 guidance. The solid start to the fiscal year coupled with our confidence in the business leads us to reaffirm our full year guidance. With respect to capital stewardship, nothing has changed. We remain committed to our priorities, which include paying a meaningful cash dividend, investing in our business, pursuing tuck-in acquisitions and making opportunistic share repurchases, all enabled by low capital intensity and a great free cash flow business model. Broadridge is well-positioned to achieve sustainable success over the long term and in our ability to execute on our growth strategy. Our performance enables us to have continued confidence in our ability to generate sustainable, top-quartile stockholder returns over a multiyear period. I look forward to seeing you at our second Investor Day, which is planned for December 11 this year in New York City. At that time, we'll provide you with a view into the multiyear growth trajectory of our business, the market dynamics driving our industry, and how Broadridge is positioned for success. You will also have the opportunity to meet our senior management team, comprised of experienced leaders running successful businesses, operating in large and opportunity-rich markets. It will be an insightful event, and I hope you can join us. Finally, I'd like to take this opportunity to personally acknowledge our highly engaged and committed associates, who have enabled us to deliver consistently strong performance and continue to generate ideas to generate the business forward. We are a different company today compared to when we became a public company almost 8 years ago. At our Investor Day on December 11, you will learn more about the opportunity that will enable us to transform Broadridge again as we go forward. We continue to add new talent and invest in our associates worldwide, knowing they will produce outstanding results for our clients and stockholders. I'll now turn the call over to Benita, the operator, and we look forward to taking your questions.

Just to start off, you mentioned the 114% growth in new recurring closed sales in the quarter. Are there any patterns regarding the types of businesses or services associated with those two $5 million wins? Also, could you provide some insight into the sustainability of the strength observed in Q1?

Sure, David. First of all, it's always better to start strong rather than have to play catch-up. We've historically ended the year on a high note. As I mentioned, the summer months tend to make the first quarter our weakest due to scheduling challenges. Specifically addressing your question, our sales were well distributed across both segments, with significant deals in each. We experienced good momentum in both areas, not just with the two large transactions over $5 million, but across all our activities. The investments we've made in our products and our emerging markets, along with the trend of cost mutualization driving industry activity, are key factors in this performance. The timing from one quarter to the next can be interesting, but it's encouraging to begin the year this way, and we’re optimistic about what lies ahead.

Understood. Could you also comment then on the $40 million in investment for this year in terms of how we should see that allocated among quarters? Was it high or low in Q1, relative to plan?

This year, we aimed to wrap up last year's discussions where we increased our discretionary investment in the business due to a strong start. In our planning this year, we’re excited to make this investment a regular part of our cycle, something we didn’t have before due to market conditions. Although we haven’t changed our outlook regarding the $40 million, nothing has shifted from what we communicated during our year-end call. This $40 million depends on our business units submitting their plans as we evaluate competing ideas for capital using the same criteria as our acquisitions. We're aiming for a strong return of around 20% IRR, ensuring the necessary talent is in place for execution. Most of this will typically be implemented in the second half of the year, and we are on track for that. The encouraging aspect is how our revenue develops, particularly with our new business turning into revenue. We plan to use this investment primarily to accelerate growth in the coming years. However, if market conditions become uncertain, this investment allows us to maintain our guidance without jeopardizing our long-term strategy. This should instill confidence in our investors regarding our commitment to growth and our ability to fulfill our promises each year. The $40 million is just a part of our broader investments; we highlighted it last year due to the increased potential we faced. This year, we’ve established it as an ongoing activity to preserve flexibility and growth opportunities. We believe discussing this specific amount, without considering our other activities, misses the full context. We look forward to sharing more about our investments across both segments at Investor Day to reassure you about our future growth opportunities.

That's very clear. Just a quick final question for me, Rich. It looks like recurring fee revenue growth for the first quarter of 4% was a little bit below your FY '15 target of 5% to 7%. Is that just a function of a difficult comparison? Or are there any other drivers behind that?

Well, I'm going to comment overall and I'll let Jim go into the numbers. We saw the summer months, in particularly August, which you guys see as well, as it was slightly slower activity. I specifically wanted to comment that certainly October was not slightly slower activity, and was actually pretty good market activity. So that's again why we feel so great the way we put together the plan. Our plan didn't anticipate the need or didn't need market activity in the first quarter. And our Net New Business enabled us to deliver the results we delivered. October, we saw some nice market activity. I'd love to see that continue. And if it does, we'll feel even better. But if it doesn't continue, we have every expectation of delivering on our guidance commitment. Jim, why don't you comment more specifically?

David, it's Jim. You hit it on the head. Obviously, just largely a tough compare given the strong performance in Q1 of last year. And then as we look at our drivers, we plan for about 4% to 5% of net new business for the full year, closer to 3% in Q1 of '15. So as we bring on a lot of the deals that we signed throughout the year, we'll edge up to that number. So a combination of that internal growth that you referenced and then as we grow into our sales wins.

Rich, I wanted to ask you a question. Congratulations on securing the second customer for the Accenture post-trade processing platform, which I've been learning more about since you mentioned it in relation to shared utilities. I also saw that another company in the sector recently announced a new shared utility for derivatives post-trade processing. Do you see that as a validation of the business case for shared utilities in the securities processing sector? From what I've read about the Accenture platform, it doesn't seem to compete, is that right?

David, our platform currently does not include derivatives in terms of exotic products. There are many who see this as a strong opportunity, particularly with the challenges faced by larger firms regarding their return on equity. We believe that the momentum is still strong. These opportunities are not resolved quickly. We were especially pleased to hear Accenture reaffirm their investment in what they describe as the leading post-trade services platform, which is Broadridge. We appreciate that reference and believe we are the only proven solution in the market with substantial volume, and in our case, that volume is exceptionally significant. We feel confident about our position, although these discussions take time.

Okay, that's helpful. And then as regards the bookings in the quarter, that is a good start. But if I remember correctly, you had announced the Fidelity deal that closed in July, and you'd announced it on the prior call. I guess based on my estimates of the size of that transaction, that was a good chunk of the bookings for the quarter, isn't that correct?

Yes, Pete. I apologize, we didn't communicate it clearly. Fidelity was in our fiscal '14 fourth quarter. So we announced it on the August call, but Fidelity is not in the first quarter results. So we had a very strong fourth quarter and followed by a very strong first quarter.

Rich, I wanted to revisit the pipeline of new business as it pertains to new sales. You mentioned two deals exceeding $5 million. It seems increasingly that you are now able to secure some of these larger deals going forward. How does the pipeline currently look in terms of these substantial deals compared to, say, two years ago?

George, I've consistently reported that our pipeline is expanding, and that remains true. I previously mentioned Chris Perry joining us, and he's a seasoned professional with experience managing around 3,500 sales associates at one point in his career, though I can't confirm the exact number. He has been actively involved in our pipeline activities. A strong pipeline is a positive sign for our future, and we anticipate continued growth in that area. We've faced challenges in determining which metrics to share with you, apart from my general comments, and I hope we can provide more detailed information in the future. I want to ensure that any details I share are understandable. Nevertheless, we are confident about the direction of our pipeline, and given the pressures our industry is facing, it's clear that our pipeline is indeed growing.

Okay. And just to sort of be clear. Is it fair to say though that you are seeing larger deals in the pipeline than perhaps what you've seen historically?

George, I'd say that's fair, but I'd also say that over the last 2 years, we've had lots of dialogues with large deals. We're still having some dialogues with some of those same large deals. So I don't want to give you an indication that I believe that every quarter we're going to be doing 2 large deals over $5 million, right. Although nothing would make me happier than to do 2 or more large deals every quarter.

Okay, that's fair. And then just last question for me. Should we be expecting you guys to sort of ramp-up the repurchases throughout the course of the year? I know you mentioned several different capital allocation priorities, but maybe a little bit of help on how we should be thinking about that as the year progresses?

Sure. My approach to share repurchases has been quite steady. We are fully aware that utilizing our shareholders' funds to enhance their value is essential. We find ourselves in a unique position due to the significance of our role in the market, which is acknowledged by our clients as they entrust us with important operations, as evidenced by the two major deals we secured this quarter. This instills confidence in our financial prospects. As mentioned in our year-end call, we are committed to providing a substantial dividend, which is reflected in the recent increase we announced. Identifying tuck-in acquisitions is a priority for us, although I didn't announce any this quarter. I would have been pleased to do so, but our criteria for such acquisitions remain stringent. They must align strategically with Broadridge's goals, provide more advantages under our management compared to a private equity scenario, and yield a 20% IRR without relying on speculative terminal value estimates. As we continue to generate cash, we find Broadridge to be a strong investment. While we remain open to tuck-ins, our commitment to Broadridge's value is unwavering, considering our optimistic outlook. However, we will not disclose our plans for share buybacks until they are executed to avoid any potential market implications. To reiterate, our philosophy remains unchanged, and our dedication to leveraging cash to boost shareholder value is stronger than ever. Broadridge has maintained a consistent track record of generating robust free cash flow since we became independent, even through economic downturns.

I wanted to ask for clarification on the pipeline for closed sales. Rich, you mentioned that the pipeline is robust and growing. With $32 million exiting the pipeline this quarter, can we assume that a similar amount has entered the pipeline in terms of potential new business at the early stages?

Chris, we definitely have a growing pipeline. This means that what we close is far surpassed by what we're bringing in. I feel very confident in saying that. I'm pleased with the strong start we've had. Those who know me understand that I use the term "very pleased" sparingly, but there's no question that I am very pleased. In fact, my cardiologist is also very pleased. It's a great beginning. Consider the product growth we've achieved, which I want to highlight regarding George's input. We have closed deals in our sales and recurring revenue that didn’t exist three years ago, including those tied to our acquisitions and the new products we've launched. During Investor Day, you'll get a clearer picture, although with everything we have going on, the 3- to 4-hour presentation might not cover everything. However, you will hear from our business leaders about their confidence in controlling their own outcomes without depending solely on market trends. Ultimately, our focus will be on Net New Business, and we've made investments for quite a while now. It's encouraging to see such a strong start to the year. What will be significant are the total sales results for the year, and we remain confident in meeting our guidance. Importantly, if we had achieved more than $32 million based on the products we’re adding, the acquisitions, the growth of the Broadridge brand in the market, and our efforts to help clients reduce unnecessary costs, we would be in an even stronger position. Additionally, I want to mention why our pipeline is more credible than those of many companies. We have consistently made strong investments in cybersecurity. Our industry is currently focused more than ever on their own cybersecurity and that of their partners. We are one of just nine entities in the financial services sector to hold an ISO 270001 certification, which is challenging to obtain. This distinction clearly sets us apart from competitors. These factors enhance our confidence in why partnering with Broadridge is preferable. While we may not always have the lowest costs, we undeniably offer the best value.

Okay. I wanted to ask a question about the significant changes in investment managers at PIMCO and Janus this past quarter, as there's a lot of money moving between different mutual funds. Do any of these changes have implications for your event-driven mutual fund proxies or other types of distributions? Or do they not trigger activities that are beneficial for Broadridge?

Chris, that's a great question. PIMCO generates market activity, and the market fluctuations we saw in October certainly did increase that activity. Generally, things that create market activity are beneficial for us, but I prefer when that activity is positive. A declining market that generates activity is not favorable for investor confidence in the long run. The ups and downs of the market can be complex to assess, but I don't view it as negative. When investors choose to exit a specific investment, that leads to transactions. Typically, if that money is reinvested into another option, it creates a corresponding transaction. For instance, if someone were to move from one fund to another, it would result in one trade if processed through our client, along with the necessary prospectus fulfillment prior to the transaction, and it would maintain recurring revenue related to communication requirements under regulations. Often, whether transitioning between fund managers or changing asset classes from equities to bonds or vice versa, investors might retain part of their original investment while moving other funds into a new investment. This action not only creates a trade and necessitates a prospectus but also boosts recurring revenue from asset servicing as it expands from one fund position to two. A significant driver of recurring revenue growth here has been the increase in mutual fund positions, and that continues to hold true. I don't believe the PIMCO situation substantially contributed to that activity, although it likely played a role in the overall net addition.

It's Stephanie Davis on for Tien-tsin. ICS saw solid margins in the quarter despite the event-driven softness. So what sort of contribution margins are you seeing from the emerging and acquired businesses?

Stephanie, yes, ICS typically has a higher margin for new businesses. While I haven't provided an exact margin, if that business operates within a margin similar to our guidance of 17.7% to 19.3% for SPS, ICS would be in the mid-18% range. However, the margins for those new businesses are significantly higher, potentially nearly double that, which may be slightly optimistic, but they are indeed much higher within the ICS portfolio.

The APTP transaction is the thing that, as I pointed out in the past, really was a game changer for us internationally. By being partnered with Accenture, we went from having a relatively small sales force covering everything outside of North America to now we have the Accenture machine, which is regularly in every financial institution around the world, including outside of North America, consistently presenting the opportunity for APTP at these organizations. What we have found in some of these dialogues is, when we've brought into the dialogue as the processing expert in the APTP transaction, it's enabled us to discuss some of our other offerings, whether it be Broadridge City Networks, which is a reconciliation product, Bonaire, or other type of transactions. So part of that growing pipeline that we've discussed reasonably at length in the Q&A today is also tied to some of our international opportunities.

Just to follow up on the previous question about your commitment to capital stewardship, could you speak to how the overall operating environment has impacted your thinking around dividends and share repurchases? And as you look into the next quarter and beyond, how do you see that affecting your overall cash deployment strategy?

Sure, David. Happy to do that. I mean, obviously, we take our dividends very seriously. For the most part, you have seen where they just compounded over time, and that's our intent. We're committed to paying a meaningful cash dividend to our shareholders, and certainly increases in that dividend are in line with where we expect our cash flows to go. Given where we are in terms of the operating environment, I think we feel good that we can maintain our current dividends and increase them as we go. I would say we certainly have to be very thoughtful in terms of both share repurchases and tuck-in acquisitions, the nature of where our pricing is in the market and what those opportunities look like. I think we've run this exercise before in terms of taking a look at how we measure our internal investments, but also where the market is in terms of acquiring companies. If we get the opportunity over the coming quarters to purchase additional shares at a reasonable price, we absolutely will take advantage of that. But we're also very focused on ensuring that we can maintain our dividend as we step this forward.

Thanks, Rich. Just to clarify, you're already at a pretty high payout ratio. So there's some balance there, given where your payout is. It seems like you're talking more about sustaining it as opposed to accelerating the increase. Would that be accurate?

Yes, David, I think that's a fair conclusion. I think we've been consistent with how we feel about our capital deployment strategy. And we certainly have been rewarded due to our market position and strength in the market. And we look to continue that over time. So I think your read on it is consistent with how we view it.