Q2 2022 Broadridge Financial Solutions Inc Earnings Call

February 1, 2022

[music].

Good morning, and welcome to the Broadridge second quarter 2022 earnings conference call.

All participants will be in listen only mode.

You need assistance, please signal a coffee.

Specialists my personal Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad.

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 adding CFO head of Investor Relations. Please go ahead.

Thank you Andrea.

And welcome to Broadridge is second quarter fiscal year 2022 earnings call 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.

First we will be making forward looking statements on today's call regarding broadridge that 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.

An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings release and presentation.

Me now turn the call over to Tim Gokey, Tim Thanks.

Thanks, Ed.

Im excited to be here. This morning to talk about our strong results record sales and our outlook for another really good year.

I'll start with highlights for the quarter.

First broadridge reported another quarter of strong results.

Recurring revenues rose 19%.

Adjusted operating income rose 19%.

And after the interest cost of activity adjusted EPS Rose 12%.

More importantly, we are entering the seasonally larger second half of our year with strong momentum.

Second.

Our growth is diversified across multiple sources and is backed by strong underlying market trends.

Our strong organic growth is being driven first and foremost by revenue from new sales across both Ics and GTO as we continue to convert our backlog into revenues.

We're also benefiting from the long term tailwind provided by healthy position growth in our governance business as.

As well as the continued successful integration of activity.

Third.

We continue to execute on our growth strategy across our governance capital markets and wealth and investment management franchises.

Our strong closed sales underscore how our investments are paying off and how our value proposition continues to resonate in the market.

Finally, after a strong start to the year, we expect to deliver at the high end of our 12% to 15% recurring revenue growth guidance.

We're also reaffirming our adjusted EPS guidance.

11% to 15%.

Positioning us for another year of steady and consistent adjusted EPS growth while funding additional investment.

After a strong FY 'twenty one.

Guidance for FY 'twenty two.

We remain well positioned to deliver at the higher end of our three year recurring revenue and.

And adjusted EPS objectives.

Execution against our long term growth plan has been a key driver of our results over the first half of fiscal 'twenty two.

So, let's turn to slide four for an update starting with governance.

Our governance business is performing really well.

Ics recurring revenues rose, 10% to $427 million in the quarter, the biggest driver being revenue from new sales across all four product lines.

The franchise also continues to benefit from strong underlying position growth, including 20% equity stock record growth in a seasonally small quarter for proxies.

And another quarter of strong ETF and mutual fund position growth.

Physician growth remains broad based across both equities as well as funds and Etfs.

For example, the equity position growth was strongest in energy and financials.

Every industry sector reported growth of more than 10%.

And we're also seeing almost identical growth across both managed accounts and individually directed accounts.

On the fund side, we saw additional growth across both active and passive funds with growth across equity fixed income and alternative asset classes.

These trends remained resilient in January despite the decline in equity markets.

Our weekly testing is actually showed some modest strengthening position growth since the beginning of the year.

Overall, our data shows more Americans are investing in our capital markets.

Across different types of accounts and an increasingly diverse range of asset classes and securities.

Moreover, they're staying invested in the face of market turbulence.

For Broadridge this as an opportunity to continuously raise the bar to serve more accounts and drive enhanced digital capabilities to ensure that investors.

Both new and existing get to critical communications, they need to make better investment decisions.

And to participate in the governance of those investments.

We are also investing to further enhance the proxy voting system by implementing and invoke confirmation for thousands of public companies.

Over the past year.

I've worked closely with an industry group led by the society for corporate governance, the council of institutional investors and others to enhance devote reconciliation process.

This spring we will be rolling out these enhancements to reassure investments that every vote is counted as cast for all fortune 500 companies as well as all of the more than 2500 public companies for whom Broadridge calculates proxy votes.

This is an investment that will further improve an already highly accurate process.

And it's a great example of how we work at the center of the governance network in partnership with issuers and funds to strengthen the system as a whole.

Before I turn to capital markets I'm pleased to report that our customer communications business saw 9% growth in recurring revenues in the quarter.

This business has been a strong contributor to earnings growth in recent years and is positive to see adding to our top line as well.

Interestingly, we're seeing strong demand for print solutions with several new clients coming on board.

These new wins give us more opportunities to upsell digital solutions.

Moving to capital markets recurring revenues rose, 41% to $224 million driven primarily by the addition of activity.

When we announced the activity acquisition last spring, we highlighted both near and medium term benefits.

10 months later I'm pleased to note that we're delivering on those benefits.

In the near term the team delivered strong second quarter sales, including several integrated solutions, where our activity products are helping to drive sales ever broader broader solutions.

It gives us incremental confidence in our market share thesis in the front office.

And in our ability to leverage activities capabilities and geographic reach to contribute to our overall growth.

Just as importantly.

After extensive positive client discussions we are starting to move forward on a fully modular suite of solutions covering the entire trade lifecycle.

Signing our first client for a middle office solution.

Over the next 18 months, we'll be rolling out a series of face integrations to bring together, our front middle and back office solutions by sharing regulatory reporting data.

And normalizing other data sources across the trade lifecycle.

It's exciting to be in the execution phase and on the road to making your front to back vision a reality.

In wealth and investment management revenues rose, 15% to $146 million.

We remain on track to deliver the body's wealth platform to UBS.

Over the coming weeks, we expect to reach an important milestone with the rollout of our front office advisor workstation to more than 17000 advisors and others across UBS.

The workstation combines broadridge UBS at third party applications that enable the advisor to manage their practice give advice and initiate transactions under a single sign on with an intuitive UI.

With shared context.

<unk> look and feel.

A beta version of the workstation was rolled out earlier this year and the response has been overwhelmingly positive.

More than 95% of advisors offered the workstation have adopted it even when the current workstation is still available to them.

When you consider how resistant to change most of US are you appreciate what a great endorsement that is.

Last.

Rogers delivered strong closed sales across all three franchises.

Quarter closed sales were $83 million in the first half was $113 million up 48% from last year.

With both Ics and GTO contributing is certainly a strong sign that the broadridge value proposition is resonating in the market.

More importantly, it's.

It's a strong start toward start toward what we expect to be another year of record closed sales setting the stage for continued growth.

So some of my business review that saying that Broadridge is performing well across all three of our franchises with strong execution driving strong financial results.

Let's turn to slide five to wrap up.

First and foremost broadridge is performing well.

That growth being propelled by sales and long term growth drivers.

We're executing on our strategy extending our governance capabilities to enable ever more accurate voting.

Growing our capital markets business with a blueprint to create front to market front to back capabilities across the trade lifecycle.

And rolling out a major component of our wealth platform.

The biggest driver of organic growth over the past several quarters.

Even in a period of strong position growth has continued to be new sales.

Those sales and a consistently high 98% revenue retention rate.

The direct result of the investments we have made over the past years in strengthening our existing solutions, adding new capabilities through targeted M&A and organic investments as.

As well strengthening our technology.

So it should come as no surprise that we're going to take advantage of our strong performance to increase our investment this fiscal year as we balance our commitment to delivering low teens adjusted EPS growth.

With attractive investment for the future.

In our fiscal 'twenty, two is shaping up to be another broadridge kind of year.

Delivering strong topline results powered by new sales continued position growth and strategic M&A.

We're doing the hard work to execute on our multiyear growth plan to extend governance grow capital markets and build wealth and investment management.

We're using stronger event, driven revenues and higher recurring revenue growth to fund additional investment all while delivering strong, 11% and 15% adjusted EPS growth.

As we look around us at a market that's growing increasingly concerned about inflationary pressures fed moves and geopolitical risk.

We believe that clear formula coupled with our long term focus both of which have served us so well for many years, we will continue to resonate with our clients associates.

Shareholders.

So let me sum up with this message.

Midway through fiscal 'twenty to.

<unk> business is strong.

On track to deliver another year of strong recurring revenue growth.

1% to 15% adjusted EPS growth.

We remain well positioned to deliver at the higher end of our three year growth objectives.

And we're well positioned for long term sustainable growth.

Before I hand, the call over to Edmund.

I want to thank our associates for their continued engagement.

And their focus on our clients.

Our purpose is strong.

And we are making a difference.

We're proud of the 8% improvement in our associate engagement score last year.

In January we received a result of our most recent survey.

And I am very pleased to say that engagement is just as high this year, which.

Which is not the case across many companies.

So to those associates, who are listening to this call.

For staying focused on our clients and our company.

That focus is.

An important role in the strong growth numbers, we reported today.

Despite the challenges of the pandemic you have cat financial markets working.

Driving broadridge forward.

And I'm, making a difference in the financial lives of millions.

Now, let me turn the call over to Edmund for a review of our financials.

Thank you Tim and good morning, everyone I am pleased to be here discussing another quarter of strong performance.

You've just heard Broadridge as performance remains resilient and.

And our long term growth drivers are quite stable.

Organic growth from new sales strong underlying volume trends and the progress integrating activity helped us deliver very strong topline growth.

And adjusted EPS growth in line with both our guidance and three year objectives.

Turning to slide seven you can see that strong performance.

In Q2, Broadridge as recurring revenues grew 19% to $798 million.

Adjusted operating income increased 19% to $141 million in AOI margins were flat at 11, 2% with a drag from low to no margin distribution revenue.

And adjusted EPS increased 12% to 82 cents.

I will note that we will continue to see operating income growth, partially offset by higher interest expense related to the acquisition of activity until we grow over the incremental interest expense in Q1 'twenty three.

Let's get into the details of those results starting with recurring revenues on slide eight.

Recurring revenues grew from $673 million in Q2, 'twenty $1 million to $798 million in Q2 'twenty two.

Increase of 19%.

Well above our fiscal 'twenty two guidance range.

Organic growth accounted for nine points of the 19% increase driven by the conversion of our healthy revenue backlog and volume growth.

Hi activity revenues, which were in line with our expectations drove most of the remaining nine points of growth.

Now, let's turn to slide nine to look at growth across our Ics and GTO businesses.

Both of our business segments had healthy organic revenue growth.

Part of that growth is driven by the secular tailwind in stock and fund position growth, but as I noted the biggest driver across both as the contribution from new sales.

It is clear that the investments that we've been making in our technology platforms have reinforced our value propositions boosted our sales and are contributing significantly to this growth.

Ics recurring revenues grew by 10% all organic to 427 million powered by both new sales and continued strong volumes Reg.

Regulatory revenues had the largest contribution to Ics recurring revenue rising 15% to $166 million driven by strong growth in mutual fund and ETF communications and the continued equity position growth in our U S proxy business.

Data driven fund solutions revenue grew 3% to $89 million as assets under administration in our mutual fund trade processing unit grew from both new client onboarding and growth with existing clients.

Our issuer business delivered $24 million in revenue up 14% as we continue to see growth in our disclosure products.

Finally customer communications revenue rose, 9% to $148 million well.

Well, we've been expecting modest top line growth in this business our unusually high growth in Q2 was driven by new client wins in our print business, which we can use as an entry point to pursue higher margin digital business.

Turning to GTO recurring revenues grew by 30% to 371 million.

Organic growth reached 8%.

Wealth and investment management revenues increased by 15% to $146 million.

This growth was primarily organic driven by an uptick in license revenue from a large client renewal.

Continued momentum from Onboarding of new components sales as well as higher retail trading.

Capital market revenues grew to $224 million, an increase of 41% with activity continuing to be the largest contributor organic recurring revenues increased 3% as revenue from new sales were offset by lower equity trading volumes.

We continue to expect both our capital markets business and wealth franchises to deliver fiscal 'twenty to growth in line with our three year objective of 5% to 7% organic growth.

Let's turn to slide 10 for a closer look at the volume trends.

Broadridge continues to benefit from the long term trends that we've.

They'd invest that have made investing more accessible.

The biggest driver of our internal growth was mutual fund and ETF volumes, which grew 12%.

Reflecting steady fund inflows over the past several quarters we.

We expect low double digit growth to continue for the second half of the year.

Our 20% equity position growth in Q2 was in line with the projection that we provided on our last earnings call.

As we approach the spring proxy season, which typically generates over 80% of our equity communications.

Our latest record positioning testing shows continued strength with low double digit growth in the second half of the year.

For the full year, we expect to be ahead of our historical averages delivering low to mid teens growth.

And as you can see by our results.

<unk> participation in financial markets has continued to increase.

And our digital platform investments in our proxy business have positioned us to support this growth.

We remain encouraged by the long term tailwind and its positive impact on our business.

Turning to the bottom of the slide trading volumes increased 1% as higher fixed income volumes offset the impact of lower equity volumes.

Given elevated equity volumes in Q3 dollars 21, we continue to expect lower volumes in the third quarter and full year trading volume growth to be essentially flat for the year.

Turning now to slide 11, where we summarize the drivers of recurring revenue growth.

<unk> revenues rose, 19% propelled by 9% organic growth and a nine point contribution from activity.

Revenue from closed sales was the biggest driver of our organic growth with strong contribution in both Ics and GTO.

Internal growth contributed four points to recurring revenue driven by higher fund and ETF Communications and Ics.

And a significant renewal that drove increased license revenue in GTO.

Activity was the biggest driver of our acquisition growth contributing $61 million, while our tuck in acquisitions made in Q4 'twenty. One in Q1 'twenty. Two are also performing in line with expectations.

I'll finish with a discussion on revenue with a view of total revenue on slide 12.

Total revenue growth was a healthy 19% in Q2.

Recurring revenues was the largest contributor driving 12 points of growth with elevated distribution revenue driving five points of growth and continued year over year contribution from event, driven revenues, which added two points of growth.

Low to no margin distribution revenues continued to grow at a double digit pace and reached 17% year over year.

Which is significantly higher than we expected at the beginning of the year.

The growth came from higher customer communications mailings as well as significant increases from higher postage rates.

We expect continued high levels of distribution revenue for the full year.

And I'll reiterate that this revenue suppresses our reported margin.

Over the long term, we expect that the share of distribution revenue as a percentage of total revenue will decline.

Finally, we reported another quarter of strong event driven revenue on the back of healthy mutual fund proxy activity.

We expect event driven revenue to remain healthy in the second half of the year and believe that our $55 million seven year quarterly average as the best modeling assumption for Q3 and Q4.

Now on the margins on slide 13.

Adjusted operating income margin in Q2 was flat at 11, 2% as our strong growth in recurring in event driven revenue was offset by increases in low margin distribution revenue and growth investments.

No margin distribution volumes in pass through revenue from postage rate increases are higher than what we expected at the beginning of the year.

This incremental distribution revenue will negatively impact our adjusted operating income margin by an additional 40 to 50 basis points on the full year versus our original guidance.

Like many other companies, we're seeing a modest impact from higher labor inflation as we seek to add and retain talent, but we remain confident that we can find the efficiencies to offset these costs.

Separately, we are also modestly increasing our investments.

As in the past, we are taking advantage of stronger than expected position growth and above trend event driven revenues as we remain committed to ongoing investments that support our growth.

And our Ics business, we have investments to build nextgen capabilities on our digital platforms for fund communications Srd, II and an upgraded <unk> platform.

All of which we expect to have a near term impact on our results.

And GTO, we continue to invest in our global post trade management system or DLT enabled platforms, including our repo in private market hub solutions and of course executing the front to back activity product roadmap that Tim highlighted earlier.

Given a higher distribution revenue and our continued commitment to investment.

Lower in our fiscal year adjusted operating income margin guidance by 50 basis points from approximately 19% to approximately 18, 5%.

Broadridge has a long track record of steady margin expansion and continuous accretive investment.

Using a high revenue growth and efficiency gains to create capacity, while delivering steady and consistent earnings growth.

We expect this to continue in fiscal year 'twenty two.

Let's move to close sales on slide 14.

We reported second quarter closed sales of $83 million.

Which brings our year to date totaled a $113 million and keeps us very much on track to achieve another year of record closed sales in line with our guidance range of $240 million to $280 million.

We were encouraged to see strong closed sales across both Ics and GTO with Ics registering just over half of closed sales for the quarter.

As Tim noted activity was a strong contributor to GTO sales in Q2.

Which I see as early validation of our investment case.

Finally, let's turn to cash flow and capital allocation on slide 15.

I'll start with a reminder, that Broadridge is free cash flow generation typically begins the year negative.

And strengthens as the year goes on.

We generated $28 million of free cash flow in the quarter, bringing our year to date free cash flow to negative $1 $24 million.

We continue to invest heavily in our next gen platforms, especially our wealth management platform.

For the first six months of fiscal year 'twenty, two we've invested $29 million in Capex in software and $236 million in our platforms.

We are at peak investment levels for our wealth platform.

And that spending will decline as we move to future phases.

As Tim said, we remain on track to deliver the wealth management platform and I expect that we will begin to recognize revenue in mid calendar year 2023.

Looking ahead, we remain committed to elevating potential evaluating potential tuck in M&A opportunities that meet our strategic profile.

We will also continue returning capital to shareholders, primarily through our dividend as we remained focused on paying down debt and maintaining an investment grade credit rating.

I'll close my prepared remarks, with a quick review of our guidance and some final thoughts on our second quarter results.

Starting with recurring revenue, we now expect recurring revenue growth for fiscal 'twenty two to be at the high end of our 12% to 15% guidance range.

As I noted earlier, we are reducing our adjusted operating income margin guidance from approximately 19%. So approximately 18, 5%, reflecting the impact of higher distribution revenues and continued growth investments.

Third we are reaffirming we reaffirming our expert expectations for strong adjusted EPS growth in the range of 11% to 15%.

Finally, after a strong start to the year, we continue to expect closed sales in the range of $240 million to $280 million.

I will also add that we expect third quarter EPS to be flat to marginally lower driven by tough comparisons to elevated equity volumes and high event driven revenue as well as the timing of investments.

We expect strong earnings growth in the fourth quarter.

With that let me reiterate today's key messages.

Broadridge financial model is strong and resilient.

We continue to deliver strong operating results, which drove another quarter of high top line growth and double digit earnings growth.

Looking ahead, we expect continued strong recurring revenue growth, enabling us to continue to balance growth investments with delivering steady and consistent earnings for our shareholders.

With that let's take your questions operator.

We will now begin the question and answer session.

Asked 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.

To withdraw your question. Please press Star then two.

And just a time, we ask that you. Please limit yourself to one question and one follow up.

Further questions you may reenter the question queue.

At this time, we will pause momentarily to assemble the roster.

Okay.

And our first question comes from David <unk> of Evercore ISI. Please go ahead.

Thank you very much and good morning could you walk through some of the headwinds and tailwind in the.

A little more depth to margins in the second half of FY 'twenty two in particular, if you could maybe talk through your investment spending plans and the impact of inflation that would be appreciated.

David Hi, it's Tim good morning.

Uh huh.

I just wanted to say on this and I'll I'll.

Turning to Edmund Tu Tu.

To add but we feel really good about where we are here for the year and for the second half and they're really they're really three things going on of which I really think that what matters. So the first is distribution.

This is really almost literally a technical judgment I'd estimate that Ed and it will take you through but the we believe the impact for the full year will be obtained.

40 to 50 basis points and really when you look at the adjustments, we're making to our guidance. If it's all about distribution, we're just taking out the distribution piece of that.

The second part is inflation in labor.

There's a little bit of an impact here, but it's not really material for us in 2022, and it is something that we as well within our sort of normal contingencies and so it's not really a factor for us.

The third part is investment and with better revenue more event driven revenue, we might have expected margin to increase modestly and that's the delta that we're reinvesting.

And we really like these investments they are giving us the opportunity to accelerate our road map.

As Ed said, where we're enhancing our digital capabilities strengthening DSM expanding srd.

Driving the front to back.

Our Q2 results demonstrate that those investments are are having impact and helping our sustained revenue growth and David as you know more than anyone.

That investment is a critical part of our long term growth strategy and we have a commitment to balancing those investments while delivering consistent growth margin expansion and a 12% adjusted EPS growth over the long run so.

Those are sort of the pluses and minuses I see I'm going to just ask Joe to add on anything to thanks, Tim and David Good morning, I wanted to double click on each of those three topics. It. If you don't mind just David as a reminder, our guidance for fiscal 'twenty two was made with the expectations.

Of normal distribution revenue growth, we thought that we would drive 100 basis points of margin expansion above our three year objectives of 50 basis points in margin expansion and now that we see these elevated levels of distribution revenues double digit in the second quarter and I think we can expect similar type of growth for the balance of the year.

Year that distribution revenue, particularly when it's concentrated in our customer communications business comes with no margin and we've been alluding to the postal rate increases throughout the past few quarters that starting to come through and that's direct pass through revenue with no margin on it either the impact of those two items that.

Distribution revenue in the customer communications business. The postal rhythm Pac has the impact that Tim just mentioned, 40% basis, 40% to 50 basis points and that's what's reflected in our move from approximately 19% to 18, 5%. That's the key thing that's other than that we continue to expect at 18 approximately <unk> <unk>.

18, 5% if you think about 18, 1% last year continued margin expansion in our business, while we're continuing to invest so I feel very good about that let me just double click on this point that Tim made about inflation. The short answer to that is as Tim said that we don't expect a big impact but double clicking.

On it a little bit we have on the revenue side, our contracts have clauses in them that increased price in line with the metrics that you would expect when you look at inflation like CPI and PPI normally when inflation comes that that means that there is an uptick in interest and the interest expense and for us, particularly.

As we go into 'twenty, three and pay down debt and continue to see growth in our matrix business. That's a positive for us so that all of our other costs the distribution cost the post like like posted that I. Just mentioned is pass through costs. So the key sort of open item for us is the labor cost and like many other companies we are.

We're seeing an uptick there as we look to add and retain talent as I talked about what we feel good that the that the efficiencies that we get to scale on our business at our continued move to higher margin digital business that the savings that I am seeing in our technology business will allow us to offset the labor related inflation costs.

We will deliver margin expansion and be able to deliver the double digit earnings growth that we've been talking about.

And finally.

No quite thorough in this answer, but finally I definitely do want to hit on the investment component of it. This is key this relationship between revenue growth.

Investments in earnings is a key part of our financial model and our strategy for growth. The Q2 results that we just talked about demonstrate that the incremental investments that we've been making over the past few quarters is paying dividends both balance sheet investments and P&L investments are helping to drive that.

<unk> revenue growth and I think that level of revenue builds are steady.

Our pace of foundation for consistent and steady adjusted earnings growth they might create some margin pressure, but the expense the margin expansion that we're able to get through the efficiencies in our business makes us feel confident that this is the right approach delivering on our short term commitments for investors, but also continuing.

To drive medium and long term growth, so you're going to see us continue to be committed to investing to support this future growth delivering margin expansion and delivering steady and consistent EPS. So I just wanted to double click into each of our tims items there.

Thanks, and just as a quick follow up could you walk through the new business pipeline.

First half clearly very strong with bookings up 48% year to date, but you still have 60% of your closed sales target to do in the back half of FY 'twenty two.

Yes, David It is Tim Thank you for that.

We see.

Yeah.

We're staying right, where we are for the full year, we have a robust pipeline lots of good client discussions as always the timing of those is uncertain and particularly with the larger deals that could effect that could affect how the year falls, but we're not seeing anything.

That would really take us out of the range that we that we originally did we have succeeded in closing things earlier this year than we often do.

And.

We're staying we're staying right with the range that we had.

Thank you.

Okay.

The next question comes from Peter Heckmann of Davidson. Please go ahead.

Hey, good morning, everyone and thanks for taking my call a couple of items on the governance front can.

Can you talk about on the end to end vote gone firm side.

Rolling that out to 2500 issuers in the states.

You talked about.

If theres a change in economics to Broadridge there.

And then a related question for the U S proxy businesses, the universal proxy card and.

How you see that as a as potentially.

Acting as a headwind tailwind when that goes into effect.

Yeah, Peter highest Tim I agree too.

Great to hear from you.

Great questions on both of those when I look at.

<unk> and confirmation.

This addresses.

A question that people have had over the years about are.

Are all of the votes really getting through obviously, we audit those and have 99.

9% on that already but it just really addresses those and there are.

A few cases, where the chain of nominations falls down and this allows us to clean those out.

We are doing it in concert with an industry group for all Fortune 500 companies, even where were not the calculator and then where we are the calculator.

We're able to control the whole end to end of the process and we're doing that for all the companies where we're the calculator from an economic standpoint.

Really not material. It's it's a there's no additional charge to our clients for it as part of the value that we provide to the industry.

There is a little bit of cost in our side and Thats just part of what we do.

As you know.

The key role that we play in the industry, but something that we're excited about and I think really.

<unk> continues to strengthen what is already a very strong very strong system.

In terms of Universal proxy.

<unk>.

That is going into effect this summer.

And again, I don't think youre going to see material economics really appear in our P&L on that.

We're doing the investments too.

To make that available even as we speak there there are basically done.

And we.

We think it's again something that is a.

Long term strength of the industry. There are some people that say that this will give.

More access to Actavis and could lead to.

Two more proposals and contests and things over time, I think it's way too early to know about that.

But that would be the only potential impact if it if it somehow contributor to extra activism, but but I think it's pretty early to say that.

Got it got it and then just one follow up on the odd regulatory you've got a couple of announcements on an international developments.

I know Broadridge has been a pretty large and active player in the U S and Canada.

And I know they've had some toehold or a foothold in a couple of other countries, but how do you. How do you think about the international opportunity for for governance.

Yeah. It is.

It's a really interesting topic because historically.

<unk>.

The institutional arrangements were different in North America are creating an opportunity for the role that we play in there hasnt been a similar role in other countries and there hasnt been really strong shareholder rights in other countries and as this part of this trend of democratization.

You're really seeing a.

Stronger shareholder rights, taking place other places there are some rule changes just a couple of years back in Japan that have really signet.

Increased the.

The importance of proxy voting there and in our joint venture we've gone from.

Several hundred companies too.

I know, we broke 1000 it might be near 500 now companies that were doing that for with our with the Tokyo stock Exchange and then really the biggest move in terms of building a more material business has happened over the past.

<unk> of years as the European Union has put forward the shareholder rights directive shareholder rights directive too.

Telles.

Brokers and custodians that they need to make available to end investors the ability to get the information and vote their shares and as you probably know in Europe . Historically has been very hard to vote you had to go and appear at the meeting in person.

And and there is no obligation to distribute the materials. So voting was very restricted and with that.

We'll move towards greater democratization all of those companies across Europe , we're looking for a solution for how to do that and we were able to bring our comprehensive suite with.

All of the different digital channels that we offer the app that this that that and bring all of that.

And went over 300 clients, which have been implemented and now we're just in the second phase of that so we are excited about the ability to build a more robust.

Government business in Europe , it's not going to be the magnitude of what we have in North America, but it is.

It's certainly a great opportunity.

Got it alright, thank you.

The next question comes from Darrin Peller of Wolfe Research. Please go ahead.

Hey, Thanks, guys.

The customer communications business, you talked about 11, Sean acceleration with that.

I expect it to continue which has obviously been an area that's been a headwind for some time for you guys and so can you touch on today and the dynamics. There I think you mentioned more printing even than electronic but what are you. What are you what exactly is happening and why is it sustainable it's great to see obviously I know, it's also having an impact on distribution and margins, but nonetheless.

Yes, the headwind turn into a tailwind the nice thanks, so any color on that.

Yeah Darren thanks.

It is.

And just taking back as you know, but just to refresh everyone. We always had three objectives for this which is to get near term synergies.

<unk>, which we have grown the earnings in this business are really nicely over the past five years. So that's been a it's been a really nice contributor to the bottom line.

The second piece was to be the point of consolidation for print as people begin to move digital they lose scale in their print operations and the in house plant, which is almost 50% of the market really becomes less and less economic and that is really what we began to see is.

More and more in house print operations.

Throwing in the towel and saying Ah.

They can't be efficient anymore, and looking for a third party solution. So we've really been I've been able to take advantage of that and then that leads to the third part which is which is the digital piece we've been showing.

Strong double digit growth in digital over the past few years and growing the print side actually gives us a bigger pool to fish farm in terms of creating that digital growth for the future right.

And I'll just add.

Growth is obviously have higher margins right, there and as we bring that business on so that's what we continue to focus on.

Yes, no that's great to say all right it sounds sustainable so listen one other follow up would be the mix between them closed sales between your let's just call. It the higher level segments for a moment, whether it's detour Ics first.

And what trends you're seeing between the two areas where were the biggest driver of closed sales is now and is expected to be and then just further into that how much of that is going into wells. It sounded like you've had some good progress with UBS.

Take hold and so I'm curious if we can break that down a little bit would be great. Thanks again guys.

Sure.

First of all Darren I'd say, we've had a really good sales in our Ics business, the past few quarters and really over the past few years. So it's been a.

Well I think historically some of our sales have been been more.

Our focus on GTO and sort of the large deals there. We just had really strong performance on the Ics side.

As we look forward I think we see it pretty balanced.

And activity has been a really nice contributor and will continue to be.

So that is helping the capital market side of GTO for activity itself and then also how that's connecting other capital markets products on the front to back.

Back there and on the wealth side.

Had really nice really nice.

Sales slash renewal this past quarter, helping drive some of the results you saw so we've had a.

Very nice continued organic growth on the wealth side, we're not yet seeing sort of the additional.

I sort of large platform sales and you know those are long sales and we'll tell you when they're when they're coming but that's going to continue to be.

A developing story, so, but we like where we are in the wealth side.

Thanks, guys.

The next question comes from Puneet Jain of Jpmorgan. Please go ahead.

Hey, Thanks for taking my question.

Can you review potential impact of interest rate increase.

Our financials I know you talked about it could be positive two metrics business.

Can you talk about what it means for interest expense and it does say overall.

Yes, absolutely Puneet I'll I'll take this so.

If you think about the liability side of our balance sheet. We have as you can see clearly $4 2 billion in debt $2 3 billion of that is at fixed rates. So not sensitive to near term interest rates. The remaining $1 9 billion as a revolver in the three year term loan that we took out a very good ROI.

Rates.

For the activity deal, but that's pre payable and will decline over time, given our intention to delever and maintain our investment grade credit rating on the asset asset side off balance sheet, we have about $1 8 billion in assets in our matrix business that are interest bearing assets obviously.

At low rates.

That has not been generating revenue for us, but as rates increase.

It's roughly the same size as the liability variable component.

Right now I would say in fiscal 'twenty, two we estimate 100 basis point impact on order rates to be negligible to us in fiscal 'twenty, two but as we pay down that debt and have the matrix business continue to grow I think as we go into fiscal 'twenty. Three you can see a neutral to positive impact for us from interest rates.

Got you.

And then I'm done.

The new guidance increase for that recurring revenue at the high end.

Which segment is driving that increase mode I know botox.

Alex and then dose.

Banking fees.

Paul.

Ics GTO.

If you think about I'll, maybe start and Tim you should jump in on this I'll maybe start here on the GTO side of the ledger. So clearly we have we.

We've said that the acquisition of our activity was going to drive seven to eight points for us throughout the first two quarters, you've seen eight points of growth and nine.

Points of growth that it has driven for us. So that's on the higher end I expect that to come back more in line with our expectations have been for the for the core organic capital markets and wealth management business as I said during my prepared remarks, I expect them.

Both of those franchises.

The year in our normal 5% to 7% growth range, and so where there's opportunity where theres variability and the thing that's been driving us up has been in the Ics business, which has been having extremely strong growth in that growth, obviously has a bit of a tailwind from the volumes. We started the year thinking that we would have singled.

Digit <unk> growth and now, we're saying low to mid teen <unk> growth. So that's having an impact on one of the key items, that's driving us up but we continue to have this contribution, particularly from the net new business. The new sales that we've been generating in that business as well. So I would say that the majority of the growth you see coming from from that.

Ics business.

Okay. Thank you.

The next question comes from Patrick O'shaughnessy of Raymond James. Please go ahead.

Hey, Good morning, Tim do you have any insight into why the FCC is revisiting his decision to keep the New York stock exchange in charge of regulated communication pricing and how do you see things playing out on this front.

Sure Patrick Thank you for the question and just for the full the full audience that.

Uh huh.

You know what's going on is that.

Last summer the New York Stock Exchange asked to have the process of a process of what we're seeing us move to FINRA, who oversees brokers.

The SEC rejected that.

Because FINRA doesn't really have any connectivity to public company issuers, who pay a lot of the bill.

New York Stock Exchange is is appealing that ruling there is a comment right now.

We have previously commented that we are agnostic as to as to who has oversight for this so that's that's.

Really it is not clear to us which direction. This will go.

And really the longer answer is.

Does this increase the chance of a feed review in some way and really Patrick we don't have first of all any news about which direction. This is going to go and we don't have any news about about a review, but I will say that if one does happen we are confident that with all the stakeholders.

<unk> at the table and with real data.

The industry will get to a sound position.

Because we provide real value to the industry, which has only gotten stronger and.

We provide that value with that are highly functional 24 by seven SaaS platform and people talk about the cost of sending a communication, but the platform includes compliance property management of course digital communications reporting record retention data security audit and consulting consolidated billing across thousands of participants.

We've worked with the industry to drive out annual cost many times, our fees to digitization and other initiatives.

And the value of that platform in terms of the efficiency. The participation compliant that brings as demonstrated by the fact that over half of U S. Publicly listed companies choose to engage us for communications there directly held investor accounts, when they could use us anyway.

And so really strong value.

Which had just gotten stronger.

I'm going on here Bank I feel passionate about this our fees have an increase for 25 years and.

And during that time through Digitization and other initiatives. The total cost for communications industry has fallen dramatically over 40% in the past 10 years, even more of a 33.

If the review its typically a long process. The last one started in 2010 and went into effect in 2014, and it's complex because there are many competing stakeholders. So there are public companies funds broker dealers and within those.

Large and small have different interests. So it's pretty complex, which is why it takes a long time and then finally the most important point is that in the meantime, we are working with a final industry and others on innovation and to make the system better and more cost effective for all stakeholders.

We implemented 30, 33 were rolling out and Danville confirmation universal proxy.

If you're voting support ESG.

Digital experiences to drive engagement.

And we're working on future initiatives that we think can again reduce the total energy costs by many multiples of our fees. So we feel Phil.

Good about wherever defense up that it will be in a good place.

Understood I appreciate that.

And then switching gears to the GTO segment.

You mentioned a large.

Client renewal.

Wealth and investment management.

As we think about are we look at the revenue number this quarter of $146 4 million is a good chunk of that going to be kind of onetime in nature because of that renewal.

Yes, I think when you look at the.

The size of that of the growth of 14% growth that's really because of that is is the.

The nature of of that solution is.

About half the revenue is recognized upfront and then the other half is recognized over time and so it creates just a little bit of lumpiness in the quarter.

Over the long term this license revenue in that business versus a small component of the overall revenue.

We have a number of sales throughout so.

Quarter to quarter, you might see some fluctuations, but I think the revenue stream itself is on the smaller end relative to the whole business and on an annual basis quite stable.

Alright, perfect. Thank you.

The next question comes from Chris <unk> of Piper Sandler. Please go ahead.

Hi, good morning, Thanks for taking my questions.

Tim I appreciate your answer.

On the question around the proxy fees and just wanted your sense.

Okay.

Like you said there are competing stakeholders here.

Is there any sense that theres been a change in where any of the stakeholders stand or.

Any shifting in that dynamic I view it as something.

There's a balance between a bunch of interests and.

I think if you are a regulator.

I would guess that your inclination is first do no harm in some ways. So just wanted to understand if you think theres been any shift in stakeholder interests are for pretty steady state. When you take a long term view of the dynamics here.

I'm not sure that I see any shift I think.

All of the stakeholders, who want the system to be a sound to be found to work to create great client experiences and they all wanted to cost as little as possible.

And and that's that's whatever you want and are aware that the public companies.

Or where the fund industry.

And the financing of course is facing a lot of pressures on a phone and so you know for some time they've been advocating for for lower fees.

But I think where we feel like we're in good dialogue with all of the different parts of the industry and really are.

Making the case that if we work together, we can reduce the total cost and that when you look at the total cost our fees are a relatively small proportion of the total cost and that the best way to reduce cost to the industry is to work together on further digitization.

And on attacking some of the very high cost around it the competition of all these documents and automate that more so we think there are good opportunities to reduce total cost and we look forward to working with the industry to make that happen.

Got it.

Thanks, very much Tim and then.

Edmund I apologize if I missed this in the release I mentioned.

Higher total discrete tax items.

For the quarter, just any color on on what was going on in that the tax rate.

Yes, the key headline Chris I'd want you to takeaway is that on the full year. We continue to have a stable effective tax rate.

Equal to or slightly better than last year and still at the guidance that I gave at the beginning roughly about 21% is what you can expect quarter to quarter Youll see some fluctuations primarily driven by two items that they are discrete benefits or one time items, which is what we had in second quarter and the continued benefit that we the tax benefit that we have from equity.

From equity compensation, so quarter over quarter Theres, a benefit driven by those two items I think the key point is on the full year still at that 21% level.

Okay that makes sense to me thanks.

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 everyone for joining today. Thank you for your interest in Broadridge for being an investor as I Hope you heard we have we are really excited about how our business is doing well.

Excited about the performance you just had in this quarter and about the next half of the year and about the outlook going forward and making a difference in our industry.

We look forward to updating you again in another three months and thank you again.

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

[music].

Okay.

[music].

Good morning, and welcome to the Broadridge second quarter 2022 earnings conference call.

All participants will be in listen only mode.

Or do you need assistance. Please signal a conference specialist by personal Starkey followed by zero.

After todays presentation, there will be an 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'd now like to turn the conference over to Adam <unk> head of Investor Relations. Please go ahead.

Thank you Andrea good morning, and welcome to Broadridge is second quarter fiscal year 2022 earnings call 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.

First we will be making forward looking statements on today's call regarding broadridge that 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.

An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings release and presentation.

Now turn the call over to Tim Gokey, Tim Thanks.

Thanks, Ed.

Im excited to be here. This morning to talk about our strong results record sales and our outlook for another really good year.

I'll start with highlights for the quarter.

First broadridge reported another quarter of strong results.

Recurring revenues rose 19%.

Adjusted operating income rose 19%.

And after the interest cost of activity adjusted EPS Rose 12%.

More importantly, we're entering the seasonally larger second half of our year with strong momentum.

Second.

Our growth is diversified across multiple sources and is backed by strong underlying market trends.

Our strong organic growth is being driven first and foremost by revenue from new sales across both Ics and GTO as we continue to convert our backlog into revenues.

We're also benefiting from the long term tailwind provided by healthy position growth in our governance business as.

As well as the continued successful integration of activity.

Third.

We continued to execute on our growth strategy across our governance capital markets and wealth and investment management franchises.

Our strong closed sales underscore how our investments are paying off and how our value proposition continues to resonate in the market.

Finally, after a strong start to the year, we expect to deliver at the high end of our 12% to 15% recurring revenue growth guidance.

We're also reaffirming our adjusted EPS guidance.

11% to 15%.

Positioning us for another year of steady and consistent adjusted EPS growth while funding additional investment.

After a strong FY 'twenty one.

Guidance for FY 'twenty two.

We remain well positioned to deliver at the higher end of our three year recurring revenue and.

And adjusted EPS objective.

Yes.

Execution against our long term growth plan has been a key driver of our results over the first half of fiscal 'twenty two.

So, let's turn to slide four for an update starting with governance.

Our governance business is performing really well.

Ics recurring revenues rose, 10% to $427 million in the quarter, the biggest driver being revenue from new sales across all four product lines.

The franchise also continues to benefit from strong underlying position growth, including 20% equity stock record growth in a seasonally small quarter for proxies.

And another quarter of strong ETF and mutual fund position growth.

Physician growth remains broad based across both equities as well as funds and Etfs.

For example, the equity position growth was strongest in energy and financials.

Every industry sector reported growth of more than 10%.

And we're also seeing almost identical growth across both managed accounts and individually directed accounts.

On the fund side, we saw position growth across both active and passive funds with growth across equity fixed income and alternative asset classes.

These trends remained resilient in January despite the decline in equity markets.

Our weekly testing is actually showed some modest strengthening position growth since the beginning of the year.

Overall, our data shows more Americans are investing in our capital markets.

Across different types of accounts and an increasingly diverse range of asset classes and securities.

Moreover, they're staying invested in the face of market turbulence.

For Broadridge this as an opportunity to continuously raise the bar to serve more accounts and drive enhanced digital capabilities to ensure that investors.

Both new and existing get to critical communications, they need to make better investment decisions.

And to participate in the governance of those investments.

We are also investing to further enhance the proxy voting system by implementing and invoke confirmation for thousands of public companies.

Over the past year, we've worked closely with an industry group led by the society for corporate governance, the council of institutional investors and others to enhance the vote reconciliation process.

This spring, we'll be rolling out these enhancements to reassure investments that every vote is counted as cast for all fortune 500 companies as well as all of the more than 2500 public companies for whom Broadridge calculates proxy votes.

This is an investment that will further improve an already highly accurate process.

And it's a great example of how we work at the center of the governance network in partnership with issuers and funds to strengthen the system as a whole.

Before I turn to capital markets I'm pleased to report that our customer communications business saw 9% growth in recurring revenues in the quarter.

This business has been a strong contributor to earnings growth in recent years and is positive to see it adding to our top line as well.

Interestingly, we're seeing strong demand for print solutions with several new clients coming on board.

These new wins give us more opportunities upsell digital solutions.

Moving to capital markets recurring revenues rose, 41% to $224 million driven primarily by the addition of activity.

When we announced the activity acquisition last spring, we highlighted both near and medium term benefits.

10 months later I'm pleased to note that we're delivering on those benefits.

In the near term the team delivered strong second quarter sales, including several integrated solutions, where our activity products are helping to drive sales of our broader broadridge solution.

It gives us incremental confidence in our market share thesis in the front office.

And in our ability to leverage activities capabilities and geographic reach to contribute to our overall growth.

Just as importantly.

After extensive positive client discussions we are starting to move forward on a fully modular suite of solutions covering the entire trade lifecycle by signing our first client for a middle office solution.

Over the next 18 months, we'll be rolling out a series of face integrations to bring together, our front middle and back office solutions by sharing regulatory reporting data and normalizing other data sources across the trade lifecycle.

It's exciting to be in the execution phase and on the road to making your front to back vision a reality.

In wealth and investment management revenues rose, 15% to $146 million.

We remain on track to deliver the body's wealth platform to UBS.

Over the coming weeks, we expect to reach an important milestone with the rollout of our front office advisor workstation to more than 17000 advisors and others across UBS.

The workstation combines broadridge UBS in third party applications that enable an advisor to manage their practice give advice and initiate transactions under a single sign on with an intuitive UI.

With shared context in it.

Hence look and feel.

A beta version of the workstation was rolled out earlier this year and the response has been overwhelmingly positive.

More than 95% of advisors offer the workstation have adopted it even when the current workstation is still available to them.

When you consider how resistant to change most of US are you appreciate what a great endorsement that is.

Last.

Broadridge delivered strong closed sales across all three franchises.

Second quarter closed sales were $83 million in the first half was $113 million up 48% from last year.

With both Ics and GTO contributing it.

Certainly a strong sign that the broadridge value proposition is resonating in the market.

More importantly.

It's a strong start toward start toward what we expect to be another year of record closed sales setting the stage for continued growth.

So some of my business review that saying that Broadridge is performing well across all three of our franchises with strong execution driving strong financial results.

Let's turn to slide five to wrap up.

First and foremost broadridge is performing well.

That growth being propelled by sales and long term growth drivers.

We're executing on our strategy extending our governance capabilities to enable ever more accurate voting.

Growing our capital markets business with a blueprint to create front to market front to back capabilities across the trade lifecycle.

And rolling out a major component of our wealth platform.

The biggest driver of organic growth over the past several quarters.

Even in a period of strong position growth has continued to be new sales.

Those sales and a consistently high 98% revenue retention rates are the direct result of the investments we have made over the past years in strengthening our existing solutions, adding new capabilities through targeted M&A and organic investments as.

As well as strengthening our technology.

With attractive investment for the future.

In our fiscal 'twenty, two is shaping up to be another broadridge kind of year.

We're delivering strong topline results powered by new sales.

<unk> position growth and strategic M&A.

We're doing the hard work to execute on our multiyear growth plan to extend governance grow capital markets and build wealth and investment management.

We are using stronger event, driven revenues and higher recurring revenue growth to fund additional investment all while delivering strong, 11% and 15% adjusted EPS growth.

As we look around us at a market that's growing increasingly concerned about inflationary pressures fed moves and geopolitical risk.

We believe that clear formula coupled with our long term focus both of which have served us so well for many years, we will continue to resonate with our clients associates and shareholders.

So let me sum up with this message.

Midway through fiscal 'twenty two.

<unk> business is strong.

We're on track to deliver another year of strong recurring revenue growth and 11% to 15% adjusted EPS growth.

We remain well positioned to deliver at the higher end of our three year growth objectives.

And we're well positioned for long term sustainable growth.

Before I hand, the call over to Edmund.

I want to thank our associates for their continued engagement.

And their focus on our clients.

Our purpose is strong.

And we are making a difference.

We're proud of the 8% improvement in our associate engagement score of last year.

In January we received as a result of our most recent survey.

And I'm very pleased to say that engagement is just as high this year, which.

Which is not the case across many companies.

So to those associates, who are listening to this call.

For staying focused on our clients and our company.

That focus is.

An important role in the strong growth numbers, we reported today.

Despite the challenges of the pandemic you have cat financial markets working.

Our driving Broadridge forward.

And I'm, making a difference in the financial lives of millions.

Now, let me turn the call over to Edmund for a review of our financials.

Thank you Tim and good morning, everyone I am pleased to be here discussing another quarter of strong performance as you've just heard broadridge as performance remains resilient and.

And our long term growth drivers are quite stable.

Organic growth from new sales strong underlying volume trends and the progress integrating activity helped us deliver very strong top line growth.

And adjusted EPS growth in line with both our guidance and three year objectives.

Turning to slide seven you can see that strong performance.

In Q2, Broadridge as recurring revenues grew 19% to $798 million.

Adjusted operating income increased 19% to 141 million in Oi margins were flat at 11, 2% with a drag from low to no margin distribution revenue.

And adjusted EPS increased 12% to 82 cents.

I'll note that we will continue to see operating income growth, partially offset by higher interest expense related to the acquisition of activity until we grow over the incremental interest expense in Q1 'twenty three.

Let's get into the details of those results starting with recurring revenues on slide eight.

Recurring revenues grew from $673 million in Q2, 'twenty $1 million to $798 million in Q2 'twenty two.

Increase of 19%.

Well above our fiscal 'twenty two guidance range.

Organic growth accounted for nine points of the 19% increase driven by the conversion of our healthy revenue backlog and volume growth.

Activity revenues, which were in line with our expectations drove most of the remaining nine points of growth.

Now, let's turn to slide nine to look at growth across our Ics and GTO businesses.

Both of our business segments had healthy organic revenue growth.

Part of that growth is driven by the secular tailwind in stock and fund position growth, but as I noted the biggest driver across both as the contribution from new sales.

It is clear that the investments that we've been making in our technology platforms have reinforced our value propositions boosted our sales and are contributing significantly to this growth.

Ics recurring revenues grew by 10% all organic.

427 million powered by both new sales and continued strong volumes.

Our issuer business delivered $24 million in revenue up 14% as we continue to see growth in our disclosure products.

Finally customer communications revenue rose, 9% to $148 million.

Well, we've been expecting modest topline growth in this business.

Our unusually high growth in Q2 was driven by new client wins in our print business, which we can use as an entry point to pursue higher margin digital business.

Turning to GTO recurring revenues grew by 30% to $371 million.

Organic growth reached 8%.

Wealth and investment management revenues increased by 15% to $146 million.

This growth was primarily organic driven by an uptick in license revenue from a large client renewal.

Continued momentum from Onboarding of new component sales as well as higher retail trading.

We continue to expect both our capital markets business and wealth franchise to deliver fiscal 'twenty to growth in line with our three year objective of 5% to 7% organic growth.

Let's turn to slide 10 for a closer look at the volume trends.

Broadridge continues to benefit from the long term trends that we've made investments that have made investing more accessible.

The biggest driver of our internal growth was mutual fund and ETF volumes, which grew 12%.

Reflecting steady fund inflows over the past several quarters.

We expect low double digit growth to continue for the second half of the year.

Our 20% equity position growth in Q2 was in line with the projection that we provided on our last earnings call.

As we approach the spring proxy season, which typically generates over 80% of our equity communications.

Our latest record positioning testing shows continued strength with low double digit growth in the second half of the year.

For the full year, we expect to be ahead of our historical averages delivering low to mid teens growth.

And as you can see by our results.

Investor participation in financial markets has continued to increase.

In our digital platform investments in our proxy business have positioned us to support this growth.

We remain encouraged by the long term tailwind and its positive impact on our business.

Turning to the bottom of the slide trading volumes increased 1% as higher fixed income volumes.

Offset the impact of lower equity volumes.

Given elevated equity volumes in Q3, 'twenty, one we continue to expect lower volumes in the third quarter and full year trading volume growth to be essentially flat for the year.

Turning now to slide 11, where we summarize the drivers of recurring revenue growth.

Recurring revenues rose, 19% propelled by 9% organic growth and a nine point contribution from activity.

Revenue from closed sales was the biggest driver of our organic growth with strong contribution in both Ics and GTO.

Internal growth contributed four points to recurring revenue driven by higher fund and ETF Communications and Ics.

And a significant renewal that drove increased license revenue in GTO.

Activity was the biggest driver of our acquisition growth contributing 61 million, while our tuck in acquisitions made in Q4 'twenty. One in Q1 'twenty. Two are also performing in line with expectations.

I'll finish with a discussion on revenue with a view of total revenue on slide 12.

Total revenue growth was a healthy 19% in Q2.

Low to no margin distribution revenues continued to grow at a double digit pace and reached 17% year over year, which is significantly higher than we expected at the beginning of the year.

The growth came from higher customer communications mailings as well as significant increases from higher postage rates.

We expect continued high levels of distribution revenue for the full year.

And I'll reiterate that this revenue suppresses our reported margin.

Over the long term, we expect that the share of distribution revenue as a percentage of total revenue will decline.

Finally, we reported another quarter of strong event driven revenue on the back of healthy mutual fund proxy activity.

We expect event driven revenue to remain healthy in the second half of the year and believe that our $55 million seven year quarterly average as the best modeling assumption for Q3 and Q4.

Now on the margins on slide 13.

Adjusted operating income margin in Q2 was flat at 11, 2% as our strong growth in recurring in event driven revenue was offset by increases in low margin distribution revenue and growth investments.

No margin distribution volumes in pass through revenue from postage rate increases are higher than what we expected at the beginning of the year.

This incremental distribution revenue will negatively impact our adjusted operating income margin by an additional 40 to 50 basis points on the full year versus our original guidance.

Separately, we are also modestly increasing our investments.

As in the past, we were taking advantage of stronger than expected position grow in above trend event, driven revenues as we remain committed to ongoing investments that support our growth.

And our Ics business, we have investments to build nextgen capabilities on our digital platforms for fund communications Srd, II and an upgraded VSO platform all of which we expect to have a near term impact on our results.

Given a higher distribution revenue and our continued commitment to investment we are lowering our fiscal year adjusted operating income margin guidance by 50 basis points from approximately 19% to approximately 18, 5%.

Broadridge has a long track record of steady margin expansion and continuous accretive investment.

Using a high revenue growth and efficiency gains to create capacity, while delivering steady and consistent earnings growth.

We expect this to continue in fiscal year 'twenty two.

Let's move to close sales on slide 14.

We reported second quarter closed sales of 83 million.

Which brings our year to date totaled a $113 million and keeps us very much on track to achieve another year of record closed sales in line with our guidance range of $240 million to $280 million.

We were encouraged to see strong closed sales across both Ics and GTO with Ics registering just over half of closed sales for the quarter.

As Tim noted activity was a strong contributor to GTO sales in Q2.

Which I see as early validation of our investment case.

Finally, let's turn to cash flow and capital allocation on slide 15.

I'll start with a reminder, that Broadridge is free cash flow generation typically begins the year negative.

And strengthens as the year goes on.

We generated $28 million of free cash flow in the quarter, bringing our year to date free cash flow to negative $1 $24 million.

We continue to invest heavily in our next gen platforms, especially our wealth management platform.

For the first six months of fiscal year 'twenty, two we've invested $29 million in Capex in software and $236 million in our platforms.

We are at peak investment levels for our wealth platform.

And that spending will decline as we move to future phases.

As Tim said, we remain on track to deliver the Wolf management platform and I expect that we will begin to recognize revenue in mid calendar year 2023.

Looking ahead, we remain committed to elevating potential evaluating potential tuck in M&A opportunities that meet our strategic profile.

We will also continue returning capital to shareholders, primarily through our dividend and as we remained focused on paying down debt and maintaining an investment grade credit rating.

I'll close my prepared remarks, with a quick review of our guidance and some final thoughts on our second quarter results.

Starting with recurring revenue, we now expect recurring revenue growth for fiscal 'twenty two to be at the high end of our 12% to 15% guidance range.

Third we are referring we reaffirming our expert expectations for strong adjusted EPS growth in the range of 11% to 15%.

Finally, after a strong start to the year, we continue to expect closed sales in the range of $240 million to $280 million.

We expect strong earnings growth in the fourth quarter.

With that let me reiterate today's key messages.

Broadridge financial model is strong and resilient.

We continue to deliver strong operating results, which drove another quarter of high top line growth and double digit earnings growth.

Looking ahead, we expect continued strong recurring revenue growth, enabling us to continue to balance growth investments with delivering steady and consistent earnings for our shareholders.

With that we'll take your questions operator.

We will now begin the question and answer session.

Asked 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 key.

To withdraw your question. Please press Star then two.

In the interest of time, we ask that you. Please limit yourself to one question and one follow up.

Further questions you may reenter the question queue.

At this time, we will pause momentarily to assemble the roster.

Okay.

Right.

And our first question comes from David <unk> of Evercore ISI. Please go ahead.

Thank you very much and good morning could you walk through some of the headwinds and tailwind in the.

David Hi, it's Tim good morning.

I just wanted to say on this and I'll I'll.

Turning to Edmund Tu Tu.

To add but we feel really good about where we are here for the year and for the second half and they're really they're really three things going on of which I really think that that one matters. So the first is distribution.

This is really almost literally a technical judgment I'd estimate that Ed and it will take you through but the we believe the impact for the full year will be obtained a 40 to 50 basis points and really when you look at the adjustments, we're making to our guidance. It's it's all about distribution, we're just taking out the distribution piece of that.

The second part is inflation in labor.

You know theres, a little bit of an impact here, but it's not really material for us in 2022.

And it is something that we as well within our sort of normal contingencies and so it's not really a factor for us.

The third part is investment and with better revenue more event driven revenue, we might've expected margin to increase modestly and that's the delta that we're reinvesting.

And we really like these investments they are giving us the opportunity to accelerate our road map.

As Ed said, where we're enhancing our digital capabilities strengthening D. S M spanning srd.

Driving the front to back.

We think our Q2 results demonstrate that those investments are are having impact and helping our sustained revenue growth and David as you know you know more than anyone.

That investment is a critical part of our long term growth strategy.

And we have a commitment to balancing those investments, while delivering consistent growth margin expansion and.

And 812% adjusted EPS growth over the long run so.

Those are sort of the pluses and minuses I see I'm going to just ask you to add anything to that thanks, Tim and David Good morning, I want to double click on each of those three topics. It if you don't mind.

David as a reminder, our guidance for fiscal 'twenty, two was made with the expectations.

Year that distribution revenue, particularly when it's concentrated in our customer communications business comes with no margin and we've been sort of alluding to the postal rate increases throughout the past few quarters that starting to come through and that's direct pass through revenue with no margin on it either the impact of those two items that.

Distribution revenue in the customer communications business. The postal rhythm Pac has the impact that Tim just mentioned 40 basis 40 to 50 basis points and that's what's reflected in our move from approximately 19% to 18, 5%. That's the key thing that's helped other than that we continue to expect at 18 approximately <unk> <unk>.

In on it a little bit we have on the revenue side, our contracts have clauses in them that increased price in line with the metrics that you would expect when you look at inflation like CPI and PPI normally when inflation comes that that means that there is an uptick in interest and the interest expense and for us, particularly.

As we go into 'twenty, three and pay down debt and continue to see growth in our matrix business. That's a positive for us so that in all of our other costs the distribution cost the post like like posted that I. Just mentioned is pass through costs. So the key sort of open item for us is the labor cost and like many other companies we are.

We're seeing an uptick there as we look to add and retain talent as I talked about what we feel good that the that the efficiencies that we get to scale in our business and our continued move to higher margin digital business that the savings that I am seeing in our technology business will allow us to offset the labor related inflation cost <unk>.

We will deliver margin expansion and be able to deliver the double digit earnings growth that we've been talking about.

And finally.

No quite thorough in this answer, but finally I definitely do want to hit on the investment component of it. This is key this relationship between revenue growth.

<unk> investments in earnings is a key part of our financial model and our strategy for growth. The Q2 results that we just talked about demonstrate that the incremental investments that we've been making over the past few quarters is paying dividends both balance sheet investments and P&L investments are helping to drive that recur.

<unk> revenue growth and I think that level of revenue builds are steady.

Our pace of foundation for consistent and steady adjusted earnings growth they might create some margin pressure, but the expansion the margin expansion that we're able to get through the efficiencies in our business. It makes us feel confident that this is the right approach delivering on our short term commitments for investors, but also continuing.

And then just as a quick follow up could you walk through the new business pipeline. The first half clearly very strong with bookings up 48% year to date, but you still have 60% of your closed sales target to do in the back half of FY 'twenty two.

Yes, David It is Tim Thank you for that.

We we see a.

The range that we that we originally did we have succeeded in closing things earlier. This year and then we often do.

And but we're saying, we're saying right with a range that we had.

Thank you.

Yeah.

Our next question comes from Peter Heckmann of Davidson. Please go ahead.

Good morning, everyone. Thanks for taking my call a couple of items on the governance front.

Can you talk about on the end to end vote gone firm side.

Rolling that out to 2500 issuers in the states.

You've talked about.

If theres a change in economics to Broadridge there.

And then a related question for the U S. A proxy business as are the universal proxy card and.

How you see that as a as potentially are acting as a headwind tailwind when that goes into effect.

Yeah, Peter highest Tim I agree too.

Great to hear from you.

So great questions on both of those when I look at our end to end confirmation.

This addresses.

You know a question that people have had over the years about are all of the votes really getting through obviously, we audit those and have you know 99 nine.

9% on that already but it just really addresses those and there are no ah.

Few cases, where the chain of nominations falls down and this allows us to clean those out.

We are doing it in concert with an industry group for all Fortune 500 companies.

We're we're not the calculator and then where we are the tabulator we're.

We're able to control the whole end to end of the process and we're doing that for all the companies where we're the calculator from an economic standpoint.

Really not material. It's it's a there's no additional charge to our clients for it as part of the value that we provide to the industry.

There is a little bit of cost in our side and that's just part of what we do as well.

The key role that we play in the industry, but something that we're excited about and I think really.

<unk> continues to strengthen what is already a very strong a very strong system.

In terms of Universal proxy.

D a.

That is going into effect this summer.

And again I don't think you're going to see material economics really appear in our P&L on that we're doing the investments too.

To make that available even as we speak there there are basically done.

And we.

We think it's again something that is a.

Long term strength of the industry. There are some people that say that this will give us.

More access to Actavis and could lead to a two two more proposals and contests and things over time I think it's way too early to know about that.

But that would be the only potential impact if it if it somehow contributed to extra activism, but but I think it's pretty early to say that.

Got it got it and then just one follow up on the on regulatory you've got a couple of announcements on an international developments.

I know Broadridge has been a pretty large and active player in the U S and in Canada.

And I know they had some toehold or a foothold in a couple of other countries, but how do you. How do you think about the international opportunity for for governance.

Yeah. It is.

You know, it's a really interesting topic because historically the the institutional arrangements were different in North America, and so it created an opportunity for the role that we play in there hasnt been a similar role in other countries and there hasnt been really strong shareholder rights and other countries.

And as this part of this trend of democratization.

You're really seeing a stronger shareholder rights taking place. Other places there are some rule changes are just a couple of years back in Japan that have really signet increased the importance.

The importance of proxy voting there and in our joint venture we've gone from.

Several hundred companies too are too.

I know, we broke a thousand who might be near 500 now companies that were doing that for with our with the Tokyo stock Exchange and then really the biggest move in terms of building a more material business has happened over the past couple of years as the European Union has put forward the shareholder rights directive shareholder rights directive too which are.

Telles.

With that a real move towards greater democratization all of those companies across Europe , we're looking for a solution for how to do that and we were able to bring our comprehensive suite with.

All of the different digital channels that we offer the app that this that that and bring all of that and and went over 300 clients, which have been implemented and now we're just in the second phase of that so we are excited about the ability to build a more robust.

Government business in Europe , it's not going to be the magnitude of what we have in North America, but it is a it is certainly a great opportunity.

Got it alright, thank you.

The next question comes from Darrin Peller of Wolfe Research. Please go ahead.

Hey, Thanks, guys.

The customer communications business, you talked about 11, Sean acceleration with that expected to continue which has obviously been an area. That's been a headwind for some time for you guys and so can you touch on today and the dynamics. There I think you mentioned more printing even than electronic but what are you. What are you what exactly is happening and why is it sustainable it's great to see obviously.

I know, it's also having an impact on distribution and margins, but nonetheless.

I guess the headwind turn into a tailwind the nice thing so any color on that.

Yeah Darren thanks.

It is.

And just taking back as you know, but just to refresh everyone. We always had three objectives for this which is to get near term synergies are which.

Which we have grown the earnings in this business are really nicely over the past past five years. So that's been a it's been a really nice contributor to the bottom line.

The second piece was to be the point of consolidation for print as people begin to move digital they lose scale in their print operations and and the in house plant, which is almost 50% of the market really becomes less and less economic and that is really what we began to see is a more and more in house print operations.

You know throwing in the towel and saying Ah they can't be efficient anymore and looking for a third party solution. So we've really been I've been able to take advantage of that and then that leads to the third part which is which is the digital piece, we've been showing a.

Strong double digit growth in digital over the past few years and growing the print side actually gives us a bigger pool the fish farm in terms of creating that digital growth for the future right.

And I'll just add.

That growth has obviously had higher margins right there and as we bring that business on so that's what we continue to focus on.

Yeah, no that's great to say all right it sounds sustainable so listen one other follow up would be the mix between them closed sales between your let's just call. It the higher level segments for a moment, whether it's detour Ics first.

And what trends you're seeing between the two areas where were the biggest driver of closed sales that is now and is expected to be and then just further into that how much of that is going into wells. It sounded like you've had some good progress with UBS.

Take hold and so I'm curious if we can break that down a little bit would be great. Thanks again guys.

Sure.

First of all Darren I'd say, we've had a really good sales in our Ics business, the past few quarters and really over the past year or so it's been a well I think historically some of our sales have been been more.

More focus on GTO and sort of the large deals there. We just had really strong performance on the Ics side.

As we look forward I think we see it pretty balanced.

And you know activity has been a really nice contributor and will continue to be so that's helping you know the capital market side of G. G. L. You know for activity itself and then also how that's connecting other capital markets products on the front to back.

Back there and on the wealth side, we had really nice really nice.

Sales slash renewal this past quarter, helping drive some of the results you saw so we've had a.

Very nice continued organic growth on the wealth side, we're not yet seeing sort of the additional sort of large platform sales and and you know those are long sales and we'll tell you when they're when they're coming but that's going to continue to be a developing story, so, but we like where we are in the wealth side.

Okay.

Thanks, guys.

The next question comes from Puneet Jain of Jpmorgan. Please go ahead.

Hey, Thanks for taking my questions.

Can you review potential impact of interest rate increase.

Your financials I know you talked about it could be positive metrics business.

Can you talk about what it means for interest expense.

So overall.

Yes, absolutely.

Puneet I'll I'll take this so if you think about the liability side of our balance sheet. We have as you can see clearly $4 2 billion in debt $2 3 billion of that is at fixed rates. So not sensitive to near term interest rates. The remaining 1.9 billion is a revolver.

<unk> in the three year term loan that we took out at very good rates.

For the activity deal, but that's pre payable and will decline over time.

Given our intention to delever and maintain our investment grade credit rating on the asset asset side off balance sheet, we have about $1 $8 billion in assets in our matrix business that are interest bearing assets, obviously at low rates.

That has not been generating revenue for us, but as rates increase.

It's roughly the same size as the liability variable component.

Got you and then.

Revenue guidance increase for that recurring revenue at the high end.

Hmm.

Which segment is driving that increase mode. I know both are firing on all cylinders.

We're expecting Ts.

Paul.

Yes Chi deal.

So if you think about I'll, maybe start and Tim you should jump in on this I'll maybe start here on the GTO side of the ledger. So clearly we have a we've said that the acquisition of our activity was gonna drove seven to eight points for us throughout the first two quarters, you've seen eight points of growth and nine points.

Both of those franchises the in the year in our normal 5% to 7% growth range, and so where there's opportunity where theres variability and the thing that's been driving us up has been in the Ics business, which has been having extremely strong growth in that growth, obviously has a bit of a tailwind from the volumes we started there.

Year thinking that we would have single digit <unk> growth and now we're saying low to mid teen <unk> growth. So that's having an impact on one of the key items, that's driving us up but we continue to have this contribution, particularly from the net new business. The new sales that we've been generating in that business as well, so I would say that the.

We already have the growth you see coming from from that Ics business.

Thank you.

Yeah.

The next question comes from Patrick O'shaughnessy of Raymond James. Please go ahead.

Sure Patrick Thank you for the question and just for the full the full audience that you know this.

You know what's going on is that last.

Last summer the New York Stock Exchange asked to have the process of a process of overseeing us moved to FINRA, who oversees brokers.

The SEC rejected that.

Because FINRA doesn't really have any connectivity to public company issuers, who pay a lot of the bill.

New York Stock Exchange is is appealing that ruling there is is out for comment right now.

We have previously commented that we are agnostic as to as to who has oversight. After this so that's that's really it is not clear to us which direction. This will go.

And really the longer answer is.

Does this increase the chance of a fee review in some way and and really Patrick We don't have first of all any news about which direction. This is going to go and we don't have any news about a about a review, but I will say that if one does happen we are confident that with all the stakeholders.

At the table and with real data.

The industry will get to a sound position.

Because we provide real value to the industry, which has only gotten stronger and.

We've worked with the industry to drive out annual cost many times, our fees to digitization and other initiatives.

The value of that platform in terms of the efficiency. The participation compliant that brings as demonstrated by the fact that over half of U S. Publicly listed companies choose to engage us for communications there directly held investor accounts, when they could use us anyway.

So really strong value, which.

Which had just gotten stronger I know I'm going on here Bank NGL passion about this our fees have an increase for 25 years.

And during that time through Digitization and other initiatives. The total cost for communications industry has fallen dramatically over 40% in the past 10 years, even more of a 33.

Large and small have different interests. So it's pretty complex, which is why it takes a long time and then finally the most important point is that in the meantime, we are working with the finance tree and others and innovation and to make the system better and more cost effective for all stakeholders.

We implemented 38, 33 were rolling out and Danville confirmation universal proxy.

So voting support ESG.

Digital experiences to drive engagement.

And we're working on future initiatives that we think can again reduce the total energy costs by many multiples of our fees. So we feel Phil.

Good about wherever defense up that it will be in a good place.

Understood I appreciate that.

And then switching gears to the GTO segment, you mentioned a large.

Client renewal.

Wealth and investment management.

As we think about are we look at the revenue number this quarter of $146 4 million.

A good chunk of that going to be kind of onetime in nature because of that renewal.

Yes, I think when you look at the the size of that of the growth of 14% growth. That's really because of that is is.

The nature of of that solution is.

About half the revenue is recognized upfront and then the other half is recognized over time and so it creates just a little bit of lumpiness in the quarter.

Over the long term this license revenue in that business versus a small component of the overall revenue and we have a number of sales throughout so quarter.

Quarter to quarter, you might see some fluctuations, but I think the revenue stream itself is on the smaller end relative to the whole business and on an annual basis quite stable.

Alright, perfect. Thank you.

The next question comes from Chris <unk> of Piper Sandler. Please go ahead.

Hi, good morning, Thanks for taking my questions.

Tim I appreciate your answer.

On the question around the proxy season, and just wanted your sense.

Yes.

Like you said there are competing stakeholders here.

Is there any sense that theres been a change in in where any of the stakeholders stand or.

Any shifting in that dynamic I view it as something.

There's a balance between a bunch of interests and.

I think if you're a regulator.

I would guess that your inclination is first do no harm in some ways. So.

Want to understand if you think theres been any shift in stakeholder interests are for pretty steady state. When you take a long term view of the dynamics here.

I'm not sure that I see any shift I think all the stakeholders, who want the system to be a sound to be found to work to create great client experiences and they all wanted to cost as little as possible.

And and that's that's wherever you want and where that's the public companies are.

Or or the fund industry.

And the financing of course is facing a lot of pressures I S. One and so you know for some time they've been advocating for for lower fees.

But I think where we know we feel like we're in good dialogue with all of the different parts of the industry and really are.

All these documents and automate that more so we think there are a good opportunities to reduce total cost and we look forward to working with the industry to make that happen.

Got it thanks, very much Tim and then Kurt.

And then I apologize if I missed this in the release it mentioned a higher total discrete tax items.

For the quarter, just any color on on what was going on in the <unk>.

Right.

Yeah, the key headline Chris I'd want you to takeaway is that on the full year. We continue to have a stable effective tax rate.

Equal to or slightly better than last year and still at the guy that so they gave at the beginning roughly about 21% is what you can expect quarter to quarter Youll see some fluctuations primarily driven by two items that they're discrete benefits or one time items, which is what we had in second quarter and the continued benefit that we the tax benefit that we have from equity for.

From equity compensation, so quarter over quarter Theres, a benefit driven by those two items I think the key point is on the full year still at that 21% level.

Okay that makes sense to me.

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 everyone for joining today. Thank you for your interest in and Broadridge for being an investor as I Hope you heard we have we are really excited about how our business is doing.

We're excited about the performance you just had in this quarter and about the next half of the year and about the outlook going forward and making a difference in our industry.

We look forward to updating you again in another three months and thank you again.

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

Q2 2022 Broadridge Financial Solutions Inc Earnings Call

Request a DemoDemo

Broadridge Financial Solutions

Earnings