Q2 2021 Broadridge Financial Solutions Inc Earnings Call
[music].
Good morning, and welcome to the Broadridge second quarter fiscal year 'twenty 'twenty, One earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad after today's presentation.
Patients there will be and opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Eddings Tebow head of Investor Relations. Please go.
Ahead.
Thank you Andrew.
Morning, everybody and welcome to Broadridge is fiscal second quarter 'twenty one earnings call.
And our earnings release and the slides that accompany this call may be found on the Investor Relations section of Broadridge Dot com.
Joining me on the call. This morning are Tim Gokey, our CEO and our CFO Edmund Reese.
Before I turn the call over to Tim a few standard reminders.
We will be making forward looking statements on today's call regarding broadridge and involve risks.
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 as underlying operating results and explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found and the earnings release and presentation.
Let me now turn the call over to Tim Gokey Tim.
Thank you <unk>.
And thank you for joining us.
I'd like to start with a special welcome to Edmund Reese, our new CFO and his first <unk> earnings call.
I know many of you were introduced edman during our virtual Investor day in December.
And I Hope you came away as impressed as I have been over the past two months.
This morning, I'll provide an overview of the key messages from this quarter and give you an update and our progress against the growth plan, we discussed in December.
And then we will review our financial results and we'll close with your questions.
Let's get started.
After a strong second quarter Broadridge is on track to deliver another solid year of top and bottom line growth.
We now expect to be at the higher end of our guidance range for both recurring revenue and adjusted EPS growth.
That guidance reflects our strong quarterly results.
For the quarter Broadridge delivered 7% recurring revenue growth.
Continued margin expansion and 38% adjusted EPS growth and a.
Seasonally small quarter.
We continue to execute against the growth plan, we outlined in December.
And I'll highlight later some of the specific steps, we've taken on key initiatives across governance capital markets and <unk>.
Wealth and investment management.
Our strong second quarter results and outlook for the second half of the year.
And given us the opportunity to step up our investment.
I am pleased to see and increasing our investment and our technology products and people to meet our clients' growing needs as they face accelerating trends towards next generation Mutualization resiliency and digital transformation.
Finally.
Our outlook for the year. It means we are off to a strong start toward achieving our latest set of three year growth objectives, including 7% to 9% recurring revenue growth and.
And 8% to 12% adjusted EPS growth.
We remain focused on long term growth, which has helped us deliver consistent sustainable top quartile total shareholder return.
Our focus on long term.
Growth is the reason why I remain excited by our progress against our clear strategy.
Let's turn to slide four for an update and some recent achievements against these goals.
I'll start with our governance franchise.
Where we are delivering next generation regulatory capabilities.
Building data driven solutions for funds.
Delivering and and solutions for issuers.
And driving Omnichannel communications.
During the quarter, we made strong progress on each of these fronts.
First and Nextgen and regulatory.
We're making strong progress on building a European regulatory communications hub for the shareholder rights directive too.
We are winning new clients across the EU, including major institutions, and both Italy and Spain.
We're also working with other technology providers.
<unk>, a leading Danish bank technology player and a leading French government solutions provider.
To deliver Broadridge is srd two solutions.
Broadridge also made strong progress against delivering data driven solutions to mutual funds.
A key part of this effort is our growing data and insights business.
Based on our unique data.
And we enable spuds to better understand at an aggregate level, who and.
And importantly, where their shareholders are.
The compelling value of these solutions was further demonstrated by a multimillion dollar sale and the second quarter to a leading global fund company.
We'll be using our data solutions from multiple use cases, including.
Including enabling the repatriation of tens of millions of dollars of dividends to the U S shareholders.
On the issuer side, we continued to see strong demand for virtual shareholder meetings.
During the past calendar year, we hosted meetings for 83% of the S&P 100.
And we're seeing strong renewal rates as we begin a lead up to the 'twenty 'twenty one proxy season.
We continue to enhance our BSM capabilities by rolling out the first phase of and enhanced platform.
Which will enable corporate issuers to leverage our unique capabilities around shareholder validation.
And while using the meeting platform their choice.
Finally, and Omni channel Communications, we continued with double digit growth and our digital communications revenue and the first half building and last years strong performance.
Let me turn now to our capital markets franchise, where.
And where we continue to drive important mutualization benefits to our global clients.
Broadridge is already the leading global postpaid provider for cash securities processing over 10 trillion dollars and equity and fixed income trades per day.
During the quarter, we took an important step toward expanding beyond cash securities and to exchange traded derivatives.
We announced that our J O'brien.
The largest independent futures exchange and clearing firm has selected Broadridge is global derivatives platform.
Our scalable and agile solutions will enable RJ out to streamline and modernize its operations with one unified global technology platform.
We're also bringing network value to our clients by extending to the front office and fixed income.
As we described at Investor day, our AI, driven corporate bond trading platform L. T X.
And on track for a broader launch this year.
We're now live in the soft launch with select clients.
And we continue to receive positive feedback.
Full launch with more than 10 dealers and 35 buy side clients will be later this year.
Turning to wealth and investment management as we laid out in December.
Our goal is to build a leading technology and operations provider to the wealth management industry.
But providing both a growing list of differentiated component solutions.
And by delivering a next generation in a free wealth technology platform.
First and foremost we have continued to demonstrate the value of our leading wealth back office platform by seamlessly processing. The recent spike a record trading volumes driven by high volatility and increase retail participation.
These volumes have challenge the industry is homegrown systems have struggled to scale.
Our performance has continued to drive home the value of a mutual is industry solutions.
At the same time, we continued to extend our suite of component solutions.
Working with multiple partners to bring new and innovative solutions to our clients.
And we continue to make strong progress towards the launch of our next generation and wealth management platform with UBS.
The net of all of this across governance.
Capital markets and.
And wealth and investment management.
And that we're seeing strong execution and tangible deliverables, coupled with unique innovation.
Gives us confidence and our longer term growth growth is on track.
Let's turn now to a brief review of our recurring revenue results on slide five.
And then we will cover our financial performance in more detail.
But I want to share my key takeaways from our 7% recurring revenue growth and the second quarter.
First I was pleased to see balanced growth across both segments, 7% growth and Ics and 8% growth and GTO.
Second.
And I look at the drivers of growth and Ics wet.
What stands out is the impact of strong stock record growth, which reached 24%.
And even in a seasonally small quarter drove strong growth and regulatory revenues.
Our business is clearly benefiting from the long term technology trends and have lowered the cost of retail investors are buying and owning individual shares.
These trends, which include the widespread introduction of commission free trading or having a broader and longer term impact on investor behavior.
Those beyond the very recent volatility and a few high profile names.
Stock record growth has been healthy across virtually all of our broker dealer clients.
And it has been especially strong among online brokers, who are leading many of these changes.
As Ed and then we will discuss we expect these growth trends to remain favorable and the second half of the year.
Third and I'm also pleased to see a strong growth contribution from both our data driven fund solutions as well as the issuer business.
Customer communications revenues were flat with strong growth and digital revenues balancing modest COVID-19 declines in print volume.
Fourth and last.
Strong sales on boarding and higher trading volumes are driving the growth and our GTO segment.
As I noted earlier much of the impact from higher trading levels is coming on the retail side, which clearly benefited from our well, which clearly benefited our wealth and investment management business and the second quarter.
More important from my perspective.
Is it year to date growth and both capital markets and wealth has and balanced at seven 9% respectively.
Let me wrap up my comments with some final thoughts about how to put our strong second quarter and first half and context.
Simply put.
And our performance and the first half of fiscal 'twenty. One gives me even more confidence that broadridge will continue to deliver steady and consistent revenue and earnings growth and years to come.
As we shared at our Investor day.
We have a large and growing 46 billion dollar market opportunity.
Three strong and growing franchise businesses and.
And a clear targeted growth plan to take advantage of long term trends around next generation Mutualization.
Zillions and digital transformation.
We are on track to deliver another solid year of recurring revenue growth.
And expansion.
And adjusted EPS growth at the higher end of our 6% to 10 per cent range.
Our strong results and disciplined cost actions.
And put us and are positioned to deliver against the higher end of our revenue and earnings guidance for fiscal 'twenty one.
While making investments that will sustain our growth through fiscal 'twenty three and beyond.
We are investing and our technology platforms.
And strengthening our product development teams.
We're also investing and our human capital.
By rewarding our associates.
Increasing our diversity equity and inclusion and career development investments and.
And upping, our recruiting for new talent.
All of which will enhance our talent base going forward.
As we entered the seasonally larger second half Broadridge is delivering and the short term and.
And investing for the long term.
That's a great place to be and a strong formula for long term value creation.
Before I hand, it over to Edmund.
I wanted to thank our associates around the world.
For the important work they do and.
And for their commitment to the service profit chain.
But they're working from home.
Our socially distanced from the production floor.
They are persevering and delivering for our clients at an extraordinary rate.
They truly are enabling better financial lives from millions of investors around the globe.
And near engagement and this powerful mission is what drives us forward.
Thank you.
Edmund over to you.
Thanks, Tim and thank you again for the warm welcome to our first earnings call as CFO.
During my opening remarks at our December Investor Day, I've mentioned, my excitement joining a company with such a strong leadership team and growth strategy.
Now over two full months and I'm, even more excited and more confident and broadridge has ability to execute our simple, but powerful financial model.
And our strong second quarter and outlook for the full year are great. Examples of how that model works.
You can see here and looking at the Q2 financial summary on slide seven this was a strong quarter.
Top and bottom line growth across all our key metrics.
Recurring revenues grew 7%.
Operating margin increased 150 basis points year over year to 11, 2%.
And we continue to demonstrate our ability to expand margins, even a ramp while ramping up the investment spend that Tim highlighted earlier, which.
Which we said we would accelerate during last quarter's call.
And adjusted EPS grew to 73 cents for the quarter up 38% over Q2 'twenty.
Now, let's turn to slide and get into the details of the quarter, starting with some of our key operational metrics.
Broadridge has recurring revenue growth benefits from underlying volume growth trends, including record growth.
Over the last 10 years equity and mutual fund record growth has averaged 6% to 8%.
And as a driver of our regulatory revenues.
Stock record growth in Q2 increased 24% driven in part by a few large issuers.
Now I'll remind you that keep in mind that second quarter volume historically make up less than 10% of the full year total.
Looking ahead to the seasonally larger second half of the year, we expect low double digit growth across stock records.
Looking further ahead, our three year objectives assumed that this increased growth moderates and return to mid single digits.
Touching briefly on trade volumes, which youll see at the bottom of this slide this is the fourth consecutive quarter of aggregate double digit volume growth.
This growth reflects the continued volatility and the markets, which as you know Spike last March and April and remains well above pre COVID-19 levels.
As a result, we expect tough trading volume comps from both Q3 and.
And Q4.
Now turning to closed sales the biggest driver of our recurring revenue growth.
Our $79 million closed sales year to date are in line with our performance over the same period last year.
We continue to see strong demand for our Ics solutions, including virtual shareholder meetings.
Regulation, driven SRT sales across Europe.
And continued client expansion and cross selling data solutions to existing customers.
We remain on track to achieve our full year guidance of $190 million to $235 million per closed sales.
Historically, the closed sales performance and the back half of the year has been impacted by large silos.
A large funding could propel us to the top end of our guidance range.
And Conversely delays could lower our performance.
And I'll also note that we continue to feel good about our revenue backlog.
Which as of Q4, 'twenty was 12% of our fiscal 'twenty recurring revenue and gives us great visibility into our top line growth.
Turning to recurring revenue growth on slide 10.
As I've said recurring revenue grew 7% and the quarter well.
Well in line with our historical mid single digit growth performance and demonstrating the resiliency and consistency of our recurring revenue growth model.
With the strong start to the year, we are on track to be at the higher end of our 3% to 6% recurring revenue growth guidance range.
Now, let's look at the drivers of the quarter's recurring revenue growth.
Slide 11 highlights that our growth was primarily driven by our internal efforts.
Organic growth has consistently been the largest component of our recurring revenue growth.
And Q2 revenue from new sales drove six points of growth and remain the biggest driver of our revenue growth across both our GTO and Ics segments.
We continued our long track record of retaining 98% of existing client recurring revenue.
And internal growth contributed two points of growth driven by higher trading volumes and our GTO segment.
Ics internal growth was neutral was our strong position growth was offset by the impact of lower interest rates and lower customer communications print volumes.
The impact of acquisitions made within the last 12 months contributed one point.
Barring any new acquisitions, we would expect the contribution to growth from acquisitions to be less and the point in Q3 and zero in Q4.
And while we're focused on recurring revenue, let me share some insights on the drivers of growth across our updated Ics and GTO product lines that Tim touched on earlier.
These categories were introduced at the Investor day, with the goal of better align our external reporting with our growth strategies.
Excuse me. This is an operator, there seems to be and <unk>.
Issue with.
The current speakers.
Our line just one moment please.
Okay.
And I don't know.
Okay.
Okay.
And then.
And then.
Good day.
And.
And.
And then.
And.
And.
Intermodal growth.
And.
Yes.
[music].
And.
And then.
And then.
[music].
And then.
Yes.
[music] and.
And.
Okay.
And then.
[music].
And the country.
[music], Inc.
And then.
Okay.
And.
[music] sales.
Yes.
And.
And then.
And.
And within the region.
Ladies and gentlemen.
And.
Okay.
[music] channel.
Yes.
And.
Yes.
And then.
And then.
And.
Okay.
And again.
Okay.
And.
Net.
And.
[music].
And so forth.
Moving around.
Free cash.
And.
And the revenue.
And.
And then.
Okay.
And.
[music].
And then.
Yes.
And.
[music].
Good day.
Okay.
And then.
And.
[music].
Okay.
Okay.
And the money.
And.
And.
[music].
Yes.
And then.
And these.
Yes.
And.
And.
Thank you.
And our.
[music].
And as well.
[music].
And.
And.
And I don't know.
And.
And then.
And again.
Okay.
Excuse me I have Mr. Rees to reconnect apologies for the inconvenience. Please go ahead Sir.
Okay. So I apologize for the technical difficulties that we just had I think I dropped off on slide 11 of our document so I'll pick up there slide 11 highlights and our growth is primarily driven by our internal efforts.
Organic growth has consistently been the largest part of our recurring revenue growth.
And Q2.
<unk> revenues.
From new sales.
I'm not clear to them being heard yet.
Yes, Sir you're coming through clearly Sir please continue okay.
So in Q2 revenue from new sales drove six points of growth to remain the biggest driver of our revenue growth across both our GTO and Ics segments. We continued our long track record of retaining 98% of existing revenue from existing clients and internal grew.
Both contributed two points of growth driven by higher trading volumes and our GTO segment.
Ics internal growth was neutral as our strong position growth was offset by the impact of lower interest rates and lower customer communications print volumes.
The impact of acquisitions made within the last 12 months contributed one point.
Barring any new acquisitions, we would expect the contribution to growth from acquisitions to be less and the port and Q3 and zero and Q4.
And while we're focused on recurring revenue, let me share some insights on the drivers of growth across our updated Ics and GTO product wise that Tim touched on earlier.
These categories were introduced at Investor day, with the goal and to better align our external reporting with our growth strategies.
Ics recurring revenues rose, 7% with strong growth across three of our four product categories.
The biggest contribution to growth came from our regulatory revenues, which were propelled by strong 24% stock record growth and 5% interim record growth.
We also benefited from additional growth across our international and Canadian proxy volumes.
Revenues of our data driven fund solutions has benefited from strong double digit growth and our data and insight product revenues and the acquisition last February a fund library.
Offset by the impact of lower interest rates and our mutual untreated processing unit.
Customer communication revenues were flat and the quarter.
And as double digit growth and digital revenues was offset by a decline and print volumes.
Looking ahead to the second half of the year, we expect to see the impact of some recent client wins and the fourth quarter.
What should put that business from a former track for low single digit growth.
Issuer solutions revenues rose, 14% driven by higher revenues from virtual shareholder meetings, which also helped drive growth across a broader set of issuer and products and offset the impact of lower revenue and our transfer agency business.
And GTO recurring revenues grew 8% driven by strong growth and our wealth and investment management revenues.
Both our wealth and capital markets product revenues benefited from new client Onboarding and the impact of the 24% increase and trading volumes versus the second quarter of fiscal 2020 with higher growth coming from the retail side of our clients' businesses.
As we entered the second half of the fiscal year, we expect the growth in trading volume to slowly significantly lap last spring spike and volatility, which coupled with lower license activity will put pressure on GTO growth.
Now I will turn to slide 12, and briefly touch on our total revenue performance.
As a reminder, on Broadridge as revenue mix.
65 per cent of our total revenues recurring.
About 31% is from distribution revenues and 4% from more cyclical event driven revenue.
This revenue mix has steadily improved since 2017 recurring revenues comprised 58% of the total.
Our total revenue growth this quarter was stronger than usual, reaching 9% with distribution revenues contributing three points due to the increased mailings, we saw a corresponding to the high record growth and increase event driven activity this quarter.
Moving forward, we expect low to no margin distribution revenues to decline over time as we focus on increasing higher margin digital revenues across our governance business.
Pausing briefly on that event driven revenues, we saw another quarter and one with our historical norms of about $50 million per quarter and.
And we remain on track to meet or exceed our 180 million and outlook for fiscal 'twenty, one event driven revenues.
Going forward as I covered and the Investor Day, we expect annual driven is that revenues to return to the approximately $200 million average that we've seen over the past seven years.
Turning to slide 13.
This was another strong quarter of margin expansion.
We increased adjusted operating income margin by 150 basis points over last year.
During the quarter, we began to ramp up our level of investment and our technology platforms product capabilities and people as we highlighted we went and my first quarter call.
While this increased investment is likely to affect margin expansion and the second half of the fiscal year.
These investments will support our long term growth.
And I want to underlying net point because it is critical to how we run our business.
We're foregoing some of the near term margin expansion that you get from Underinvestment and.
Favre of capturing the larger future margin opportunity.
That is driven by growth.
And that Formula has been a key factor and Broadridge has the ability to drive long term sustainable growth.
Moving to capital allocation and the following slide.
We generated 51 million net free cash flow year to date.
Up $82 million over the first six months of fiscal 'twenty.
Driven by higher earnings and strong working capital management.
Broadridge remains committed to a balanced capital allocation policy, which prioritizes internal investment.
Growing our dividend and.
M&A and returning excess capital to shareholders.
All while maintaining our investment grade credit rating.
During the first six months of the fiscal year, we invested $128 million and building out our industry platforms.
And then net of $51 million and Capex and software spending.
Turning to capital returns and the right hand side of the slide our dividend is grow and remains in line with our historical 45% payout ratio.
Looking ahead to the second half of the year and we have historically generated most of our annual free cash flow.
Our average is in great shape to pursue attractive targeted M&A opportunities or repurchase shares.
Now turning to guidance on slide 15.
We expect recurring revenue growth to be at the higher end of our 3% to 6% range with higher full year record growth was strong first half trading volumes offsetting the drag that we expect from lower second half trading volumes.
We expect our adjusted operating income margin to expand to approximately 18% from 17, 5% and fiscal year 'twenty as we balance and near term returns with continued investments to sustain long term growth.
And finally, we expect to be at the higher end of our adjusted EPS growth guidance range of 6% to 10%.
Putting us well on track to achieve our three year, 8% to 12% adjusted EPS growth objective that we presented at our Investor day in December.
Finally, as I noted earlier, we continue to expect closed sales and a range of $190 million.
$235 million.
And looking below the line, we expect our full year effective overall tax rate to remain at 21%.
Confirming what we shared on our last call.
And one final point and our outlook.
We expect third quarter, adjusted EPS to be flat or slightly lower fiscal year 'twenty driven.
Driven by increased investment spend and lower license revenues.
So before we begin to take your questions, let me share some final thoughts.
Hold you at our Investor day that Broadridge is a simple financial model.
Based on sustainable revenue growth and.
<unk> investment margin expansion and balanced capital allocation.
That model has produced steady and consistent earnings growth over time and help drive strong.
Top quartile total shareholder returns are.
Our second quarter results and expectations for the full year.
Great example of how that model works.
And generated strong 7% recurring revenue growth propelled by long term trends.
That growth helped drive the 150 basis points of margin expansion, which in turn is enabling us to make incremental investments to drive long term growth.
Especially over the second half of our year.
The end result is earnings growth that positions us well to deliver on our three year financial objectives.
Great example of how we manage our business to drive sustainable revenue growth.
Eddie and consistent adjusted EPS growth and historically top quartile CSR.
So now let me hand, the call back to Andrew to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
And at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up after.
At this time, we will pause momentarily to assemble our roster.
The first question comes from David <unk> of Evercore. Please go ahead.
Thank you good morning, Tim and Edmond, 24% stock record growth.
May actually be the highest stock record growth at Broadridge has posted since spinning out of ADP and 2007 and I hear the message about reinvesting the excess growth.
And products and platforms, but as we think about.
The 2021 proxy season.
24% stock record growth as a jumping off point for proxy mailings will you actually be able to reinvest this excess revenue growth.
Fast enough in the second half to actually keep earnings growth within the 6% to 10%.
Growth guidance and then my follow up question, which is related as we think about fiscal 'twenty, two and recognizing you haven't given guidance yet you've got this strong jumping off point with stock record growth with a lot of secular growth drivers behind that you've got UBS contract coming on stream. This summer.
And the set up for fiscal 'twenty two.
Potentially above the long term growth guidance as well.
Sure David Good morning, and thank you for joining us this morning, I'm going to I'll make a couple of comments and then.
Hand, it over to Dan and then too.
To also comment first I think.
And certainly we're pleased with that with the headline number that sounds like 'twenty, four but I do want to caution that the.
And the second quarter is a small and there are some.
And a specific names that really drove that.
And as we look to the second half we are seeing certainly very nice stock record growth, but not you know not at that level. So that's that's just stay at eye and important starting point, we are really pleased and the investment side, we think that that our opportunity here is essentially unlimited relative to our current size.
And we see reduce it and many arenas, where we're better positioned than anyone to meet real industry need. So so you will see us continuing to invest within the confines of the three year targets and we do have.
A lot of ability to invest Dave So I do think that.
And that we will be able to to do that.
And really the only thing that would that would keep that from happening would be if we had sort of surprising you bet activity and the yet and the fourth quarter.
Let me ask <unk> to just expand on that and then I'm going to come back to your 'twenty two question.
Thanks, Tim and.
I think you're right David Thanks for the question. We began the investment also in second quarter and I think we do have the ability to continue to ramp up as we complete the second half of the year that gives us momentum going into fiscal year 'twenty two I'll turn it back to 10 and 11 talk about 'twenty, two but I do think we should.
Expect some modest acceleration and recurring revenue growth and adjusted EPS as we are.
If our outlook continues as we expect from fiscal year 'twenty, one and if we're able to make those investments they'll contribute to some modest acceleration as I've said and the Investor day to 'twenty, two and 'twenty three.
Okay.
Great and then Dave with respect to 'twenty two you know it is certainly.
Very early to comment on that so you know, we'll be definitely coming back to that.
Later in the year and and in the fourth quarter we.
We do see some real.
Good secular trends here and when we do feel very confident in our and our three year outlook.
Yeah, I think it's just too early to speculate and anything that sort of above the long term trends and they see.
Understood. Thank you very much.
The next question comes from Peter Heckmann of Davidson. Please go ahead.
Hey, good morning, Thanks for taking my question wanted to see Tim if he had any early comments on the.
And Sir it looks like.
NYSE is looking at I guess, you to push some of the regulatory oversight on proxy fees to FINRA.
Yeah.
And a few initial comments there, but can you talk about where broadridge sits and and how you see that shaking out and putting a timeline.
Yes, absolutely and.
Hi.
Peter I think this is a really good opportunity to step back and and look at the regulatory landscape and.
And I'll work my way to add to that that these question, but just I think and as you look at the regulatory landscape.
We have a long history of working with administrations and both sides of the IL two.
No really effective and cost efficient disclosure, that's that's really the foundation of our market and and with the increasing democratization that we're seeing.
Theres, a real need for it actually disclosure is greater than than ever before.
Hi.
And a Democrat administration do tend to be somewhat more inclined to extend disclosures and protections and we're already seeing some of that relative to ESP and fiduciary standard.
But.
Even with all that background.
We don't really see a substantive regulatory update relative to the things that are happening in our space. So.
Thirty-three is now live and it's saving funds money.
The comments are and for 498, B and those have been really supportive of the summary concept and but people are expressing concerns about drop and prospectuses. So so it's not clear whether that will happen.
There is a big push for moving to E delivery and.
And.
That's something that we support and that's really aligned with the idea of a summary documents.
And then there is continues to be as you. You you raised this question around fees ICI continues to push for a fee with you and and.
Is talking about lets move it away from the NYSE, which which the NYSE, we'd like to move away.
At the same time and I have just fine and saying they don't want and either should go to the FCC. So I think theres going to be a lot of a lot of back and forth here.
We do feel.
Wherever it ends up.
It will be fine we have.
Strong relationship with FINRA and strong relationship with the New York Stock exchange strong relationship with the SEC and and we really believe that when you look at fees. When you bring all parties to the table not just the funds, but all parties.
And have a good information that we will get to aggregate price on that I think it is.
Yes.
In terms of speculating on timing and I think it can be a long debate about about who is the right place for it to do and then if there would it be and we're gonna be a review and you know that.
Last one took several years to to unfold.
Gotcha Gotcha, and then just can you remind us on the rules that have been formalized like 33.
And then and then potentially and maybe some insight on foreign 98 B.
You know kind of the puts and takes and at Broadridge sees over the next six quarters.
Absolutely so.
On 33, and so that is live now and that's something that we're really proud of that we have brought that solution to the industry as a whole we have a.
I think over 130 fund complexes and the solution now that is.
Modest benefit to us financially.
With respect to but not not too much and really noticed one of the results is just that its a modest positive.
With respect to 498 B.
And it had a.
A couple of a couple of components there was that and most important component was really around moving from.
And the long from communications to summary form.
That would be good for the industry, we think it would be good for investors.
And and the economics of that are neutral to us.
There was some conversation about dropping the annual perspective there.
There was a.
A lot of mixed commentary on that.
The comments came back so that seems less.
Less likely to us.
As you recall in and when we discuss if I belief and the summer call. What we said is the <unk>.
And we saw a potentially a downtick from the prospectus revenue and uptick from the idea of us.
Being able to create this type of documents where people are and really provide an industry solution around that and we saw those balancing each other.
Yes.
If were to proceed with the summaries, but not with the prospectus a downtick there and that would be a plus but I think this is going to be quite some time for it to unfold and then.
New administration is coming in and they have their own set of priorities.
And so I think really.
And the timing of this is is highly uncertain at this stage.
Alright, thanks for that day.
The next question comes from Michael Young of true as Securities. Please go ahead.
Hey, Thank you for taking the question.
Just wanted to ask you kind of touched on capital return priorities, but and the second half.
Just wanted to kind of touch on your desire to engage and share repurchase versus maybe looking at acquisitions and kind of what the environment looks like for the acquisitions of this.
Absolutely and Michael and thank you for and thank you for the question.
Look our capital allocation approach is is really not changed and we believe there is almost unlimited opportunity.
And for us to invest on behalf of our shareholders at really attractive rates of return.
At the same time, we believe and the strong dividend, we felt let cash build up we only invest and are confident we can execute well. So that's why you see these priorities around internal investment dividends, M&A and share buyback and that order.
We are definitely looking at M&A opportunities, we think that's an evergreen strategy for us to supplement our internal product development and bring more value to our clients.
In this environment prices are high and it is.
It's unclear whether any of the opportunities that we're looking at will come through and prices that that makes sense to us and.
Yeah, we have been.
On the doorstep of couple of times, this year, and and and not been able to to go through it at a price that made sense for our shareholders. So I think M&A is something we continue to really look at.
There's uncertainty around it at the same time, we wont, we wont, let cash build up on our balance sheet and so if we're not able to execute on M&A and you will see share share buybacks and I'd like to just.
And I ask Edmond and pet.
Add on to that if there is anything that I've missed and just.
The only thing that I'll add to that because you have the priorities right and I missed it.
And that we're able to execute on that model model, Michael and because of the free cash flow that we're able to generate as a historically.
Our capital light business generate free cash flow is at or at 100 percentage over the past couple of years of adjusted net earnings and shipped a little bit as we've invested and our wealth management platform, but the model as Tim described as the right one and we will continue to be committed to that if we don't see the attractive opportunities that hit a high bar.
And that we have for M&A as Tim said, we won't let the cash buildup from our balance sheet and will return and the former share buybacks.
Great and from my second question and I, just wanted to ask kind of qualitatively.
Maybe where we are now and looking forward you know potentially coming out of this pandemic or a little bit more of a reopening does that aid <unk>.
<unk> volume closed sales volume I know, it's kind of episodic and the second half, but just wanted to get a sense of the ability to convert there and could there be tailwind if if we do get more of a reopening.
So the first thing I'd say is we feel very good about the performance of closed sales so far and the first half of the year coming off of a record 2020 239 million and I mentioned and the Investor data that's been growing at over 11% over the past couple of years.
And for the first half you saw that were largely in line with the performance that we had at the end.
During this time last year the back half is always.
Tougher for us that's not anything new and we still feel good about the range that we have in this environment might be a little challenging in terms of the focus of some of our potential partners on closing the contracts and as I mentioned in my prepared remarks large signing can have us to the top or a delay.
Which normally means a delay into the next year and that's the fact that we won't be able to close the sale can be a challenge for us but as of now I think we feel good about and feel good about the back half of the year and coming and the range that we just mentioned.
Okay. Thanks.
The next question comes from Chris Donat of Piper Sandler. Please go ahead.
Thanks, and good morning, Tim and good morning, and Edmunds I wanted to go back to the equity position growth issue and ask if you can help us sort of unpack what are maybe some of the longer term trends going on there and some of the things that are more more near term and I caught the commentary about how maybe we see a deceleration in growth.
And the future on the positions but.
Yeah.
In terms of I get that the volatility right now is it serious driver of position growth, but like the zero Commission trend is certainly something that's going to be with us forever or their position phenomenon.
And then is there anything else going on on the sidelines like that.
The number of specs is that creating new positions that a tailwind or.
Are you seeing particular activity just around certain issuers or is it certain brokerage firms and it makes you think that it might be more temporary or more permanent just kind of help us help us understand that.
The factors moving here on position growth.
Sure Chris.
Hi, Thank you for calling in I think he and the snack side, it's an interesting.
Net interest and quite I'm, just going to give it a couple of comments here and try not to Edmond, but I think on the stack side.
And it's interesting I think it's maybe too early to see and the impact, but clearly when there's lots of IPO activity, which is and substitute for that does that does help overtime. So its little bit early on that one.
I think we're clearly seeing that the extension of a healthy trends around the democratization of retail share holding and that is is building and the prior trends that are still there towards managed accounts and model based investing so I think those two are building and each other and.
So I do think that it's going to be something that is longer term now the outlook does have elevated growth for this year and and a return to more and more typical growth thereafter, but.
And then you've been looking into this and a lot of detail. So yeah. I mean, I think that's exactly right, Chris I'd like to back it up a step from what Tim just said historically as I mentioned, 6% to 8% growth and equity positions are so that's accelerated for the reasons that Tim just mentioned so the maintenance.
Accounts and the model based investments that was and the mid single to high single digit growth previously and I don't expect any change there does zero Commission trading I think you mentioned more retail investors coming in and I think thats good for Broadridge and in fact, they want to engage and interact digitally so I think thats also.
A tailwind for Broadridge and hopefully that stable going forward the newer things that coordinated buying efforts the facts don't exactly yet know exactly how stable that is and we're not counting on that as we look to our outlook going forward, but as Tim mentioned that higher growth that we saw Q4.
For Q.
Q1, and Q2, we expect a moderate but still be and.
Low double digit for the rest of this year after that our assumptions are that we returned to mid single digit growth.
Okay, alright, thanks, very much from the detail there and then sort of related issues.
Yesterday, we saw January volume from interactive brokers, so one one brokerage firm putting up pretty impressive numbers.
And.
Anyway, just as we think about GTO.
Revenues and your sensitivity to volumes there.
Anything you'd say is yeah. If we think we're in a period of elevated volume and what that could do for revenue or just how you think about.
Equity volumes and feeding into GTO revenues, what sort of fixed versus what's variable on the revenue side, yes. It can.
<unk> to be you know I mentioned and the opening remarks that we saw during the March and April time period, a spike in the equity trading volumes for GTO, Alright, and I think I showed a slide that showed the equity and fixed income volumes combine there for GTO.
It's continued to be at an elevated level through Q2.
And even after the environment that we're in right now and so it's continued to be elevated but I think as we go into Q3 and the Q4 growing over that high performance and in Q3 and Q4 of last year, we will that will be a tough comp for us and so as I've mentioned the Q2.
And we outlook will be overall flat to slightly lower relative to where we were last year and that that's part of that is driven by the.
Trade volumes and the GTO business.
And just one thing I do want to add on top of that Chris which is it is just to build off this for sandwiches.
And certainly the volatility in in January and it was it did exceed the peaks of last March.
And as we look at our our wealth strategy, we've executed really well through that and.
Some others had been challenged and I think I'd just reiterate the.
Power and industry solutions for some of these are critical but non differentiating functions.
Yeah.
Got it thanks, Tim Thanks.
The next question comes from Andrew Boll of Wolfe Research. Please go ahead.
Hi, everyone. This is Andrew on behalf of Darren. Thank you for taking my question.
No nice set of results here and I kind of wanted to dig into the investments into potential new product Adjacencies and clearly.
Derivative activity from a retail perspective is driven a lot of the recent headlines and it's nice to see the JC O'brien announcement from last year, but I guess my question is how well positioned as broadridge to step into really these derivative adjacencies and just wondering how many more of those types of deals you think are winnable and and how should we think about the <unk>.
Opportunity to take share in that arena outside of typical cash equities.
Absolutely and.
We think that the the opportunity driven is it.
Is it really nice when that plays on our whole theme of simplification because it's it's you know what we.
Been working on is it simplification within cash securities across geographies and bringing derivatives into that allows people to simplify the number of platforms and so it's really cost effective for our clients.
Think that that is a a very nice opportunity for us on top of that the cash securities opportunity.
It is I think it will take some time for it to unfold and people will be looking for us to COVID-19.
R J O'brien live and so I'm not looking for to have immediate impact on this but I do think that over that over the longer term, it's going to really increase the power of our argument around and global simplification and it will it'll help and both the opportunity derivatives and will help.
With sales on the cash side as well.
Got it and then just a housekeeping point, though a lot of conversation about balancing investment and then and growth here. So.
I guess was there any and how should we think about the the margin benefit you saw from previously announced cost alignment initiatives and.
And is there anything changed from a investment strategy from just even a month ago and at the Investor Day and on how you think about the investment growth tradeoff here.
So.
Great question.
Two things I'd say about the higher performance on the revenue side and our ability to be able to get the efficiency gains and expand operating margins through the initiatives, which I'll touch on that we mentioned in Q1 is what allowed us to.
To make these investments and so in Q1, we talked about roughly about $80 million and and cost initiatives real estate cloud migration product realignment and I think we are well on track you saw 150 basis points of margin expansion and the second quarter and I.
It's that.
Efficiency that gives us the capacity to be able to to make these investments and the second point I'm, making is and I'll turn it to Jim to see if he has any thing is that the investments that's been a key part of the financial model and strategy for growth a key part of our capital allocation program prior to my joining and it's one that we're going to continue and remain committed.
Two it's true.
And with future growth and.
I think we have and Tim mentioned some of these we have a number of high returning investment opportunities as we look across our post trade platforms, our wealth management platforms, because when you look across products and srd Chew and BSM and obviously our people with our growth of sales market strategies. These things help us with growth long.
There might be a little margin compression and the short term, but they help us with long term growth. So.
And this leadership team is going to stay committed to investing using the efficiency gains that I, just talked about and still delivering steady and consistent earnings growth that we are.
And we're able to post and guide you for the rest of this year.
Got it nicely execution and a unique opportunity you guys.
The next question comes from Mark Palmer of <unk>. Please go ahead.
Yes, good morning, and thanks for taking my questions.
First question.
We're already getting a couple of inquiries from clients about this just given the environment and some of the frenzy that we've seen.
Over the past week plus with.
The Red at Revolution, and what have you what.
What impact if any are you seeing on the GTO side from anything Thats going on there and.
And I have one follow up.
Yes, Mark and good morning, I'll, just jump in on that which is.
Certainly and and and we are seeing at record volumes and volumes that are above what we saw at <unk>.
Last our last spring.
And.
The broad point is that we are I guess and operationally, we're handle and those are really well and it's been a challenging challenging for the industry and and and and.
And as I said, a few minutes ago, I think that really really reinforces the logic of a mutual is industry solutions.
With respect to you know.
What we think the results are the impact on our results will be.
Yeah.
I'm not sure that were thinking that these really frenzied things will be sustained and we think that's a short term phenomena.
And as Edmond and remarks, as we get into Q3, we are going against Comparables last year, where there were absolute record volumes and so we're not seeing and.
We're not expecting significant year on year growth.
And that you know from trading and <unk>, obviously, we saw revenue from sales and other things, but but.
Even with this activity, we think we think the activity will moderate and Olivia against tough comps.
Thanks, very much and very nice quarter.
The next question comes from Puneet Jain of J P. Morgan. Please go ahead.
Hey, Thanks for taking my question.
And then given that we're almost into this new.
And what women are you seen any long term changes and.
Retail consumer behavior as it relates to physical versus.
Delivery.
Communications and listing through and advisor versus on their own.
Yes, absolutely at Puneet so I.
I think that.
We are.
And certainly seeing relative to physical versus digital.
Very strong growth and our digital communications and the and the first half I remarked on that and that builds on a very nice year last year and.
And we're seeing very strong interest from our clients in terms of digital transformation and working with us to upgrade their infrastructure for digital communications.
And that was a bit surprised too.
To see the the.
The increase and distribution revenues this quarter and.
And.
And that's not something that we generally expect and that was really due to increase and both regulatory and event and communications I think we we continue to expect that over the long run.
And that physical piece will be a smaller part of our business model and the digital piece will be it will be a bigger piece.
Relative to advisor versus.
Versus digital channels.
With respect to investing.
I think where we're just we're seeing both.
We saw very good position growth across all of our broker dealers, including including both adviser and and online I think perhaps in terms of number of investors, who are saying with this democratization and the new investors being on the digital side, but if you look at where the money is it's still definitely and the advisors.
And and those those.
Underlying trends that we've been talking about you know from the past couple of years, we don't see any change in terms of move to managed accounts move to model based investing so we think that trend will continue we do think there's an overlay of a new trend around democratization and that will that will add and big new investors in which is why we highlighted the fact that with all these new inverse.
<unk> really the need for.
Strong disclosure is higher than ever.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Tim Gokey for any closing remarks.
Great. Thank you Andrew and thank everyone for joining us on today's call and persevering.
Persevering to our technical difficulties.
Not not conducted and the Broadridge platform. So I will put that part again.
And I just wanted to say that as we finish off here I think by conclusion looking at this this quarter and the half is that we are executing on our growth strategy and they get hurt.
And just talk about it multiple times that we are investing for future growth and are on track and live at the higher end of our recurring revenue and adjusted EPS growth range, we felt really good about it.
The three years as well we appreciate your support for Broadridge.
Updating and April on a third protocol.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music], Inc.
And.
Yeah.
And.
[music].
Yeah.
And.
Yes.
[music] standard of care.
Yes.
Okay.
And then.
[music].