Broadridge Financial Solutions, Inc. (NYSE:BR) Q2 2023 Earnings Call Transcript
Broadridge Financial Solutions, Inc. (NYSE:BR) Q2 2023 Earnings Call Transcript February 2, 2023
Operator: Good day, and welcome to the Broadridge Fiscal Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note the event is being recorded. At this time, I'd like to turn the conference over to Edings Thibault, Head of Investor Relations. Please go ahead.
Edings Thibault: Thank you, Allison, and good morning, everybody and welcome to Broadridge's second quarter fiscal year 2023 earnings call. Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com. Joining me on the call this morning are Tim Gokey, our CEO; and our CFO, Edmund Reese. Before I turn the call over to Tim, a few standard reminders. One, we will be making forward-looking statements on today's call regarding Broadridge that involve risks. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K. Two, we'll also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge's underlying operating results.
An explanation of these non-GAAP measures and reconciliations to the comparable GAAP measures can be found in the earnings release and presentation. With that done, let me now turn the call over to Tim Gokey. Tim?
Timothy Gokey: Thanks, Edings. Good morning, and thank you for joining us. I'm pleased to be here to review our strong second quarter performance. I'll start with a quick summary of our results and key headlines followed by a review of our business. I'll close with some thoughts on why my recent client meetings have given me even more confidence that Broadridge remains well positioned to grow even in an uncertain market. First, on Slide 3, Broadridge delivered another strong quarter. Recurring revenues rose 8% on a constant currency basis, with strong growth across both our segments. Adjusted EPS rose 11%, driven by the combination of strong growth and disciplined expense management. Second, this performance highlights the strength and resilience of our business.
Clearly, the market backdrop remains uneven. Equity markets rose slightly in the quarter, capping off a year of strongly negative returns. Rates continue to rise. Volatility remained high. Asset managers pulled back on discretionary expenditures and the dollar remained very strong. In the face of this uncertainty, Broadridge's resilient business model with 93% recurring fee revenues continued to perform. Moreover, our long-term business drivers remain healthy. We're benefiting from a strong sales backlog, robust investor participation and significant demand for our digital solutions, which, along with disciplined cost management are enabling us to drive top and bottom line growth. Third, investor participation in particular remains at very healthy levels.
Broadridge benefited from mid to high-single digit position growth across both funds and equities. And we expect to see further growth ahead in the second half. Fourth, we are executing on our long-term growth initiatives. We're innovating in governance, including pass-through voting, tailored shareholder reports and digital communications, and we continued our strong momentum in capital markets. Fifth and finally, we are reaffirming our guidance for the full year. We continue to expect to deliver 6% to 9% recurring revenue growth, constant currency, expanding margins and 7% to 11% adjusted EPS growth. Now let's turn to Slide 4 for a review of our results, beginning with our governance or ICS business, which reported another strong quarter.
The biggest driver of our 10% growth in ICS continues to be new sales in our Fund Solutions and Customer Communications businesses. Equity position growth remained strong, driven by double-digit growth in managed accounts and mid-single digit growth in non-managed accounts. On physician growth, while still healthy, slowed to 6% as investors rotated away from the traditional active strategies into ETFs and passes. Looking ahead to the seasonally larger second half of the year, we expect further growth across both equities and funds. Demand for our innovative solutions remains strong as evidenced by significant interest amongst our asset manager clients to offer their investors both institutional and retail, choice on how their underlying shares are voted.
Just yesterday, we launched a new pilot for individual investors with another leading passive asset manager. And we're in discussions with a number of other fund complexes. We're also continuing to work with our fund clients to develop our future road map for tailored shareholder reports, which will fill a critical need for the industry. Beyond our regulatory products, we're seeing strong demand for digital communications with a second major client signing for our wealth and focused platform during the quarter. This omnichannel product suite offers enhanced investor engagement while delivering near-term cost savings through increased digitization of critical communications. That has proven to be a compelling combination for our customer communications clients.
We've been investing steadily in building these capabilities over the past few years, and I'm pleased to see that investment now turning into meaningful revenue with key clients. Turning to capital markets. Recurring revenues rose 12%, driven in part by the continued strong performance of Broadridge trading and Connected Solutions, or BTCS, where our market share gains are driving growth. I was also pleased to see cross-selling start to contribute to new sales as well as we won a new client in the quarter that has long been targeted by BTCS, and that made the decision to switch now based on their trust in Broadridge. Our other capital markets product also performed well as our themes of simplifying globally, front to back, and within the front office are resonating with clients.
We also continue to see progress in digital ledger repo with a strong pipeline of discussions with new institutions. Wealth and Investment Management declined year-over-year as positive core growth was offset by lower license revenue. We continue to hit key Wealth Management platform milestones. UBS advisers are transitioning under the latest generation of our workstation with continued very positive feedback. We've now completed development of all 29 platform areas and testing for 26 to 29. We are working closely with the new management at UBS as they refine their approach to rolling out the remainder of the platform and we continue to expect to begin to recognize revenue in mid-calendar '23. Our sales pipeline is strong. And as Edmund will discuss, our investment levels have decreased as we shift into this new phase.
Moving to Closed sales. Year-to-date Closed sales were $94 million. Client engagement around our next-generation technology remains high, and our pipeline entering calendar '23 is stronger than it ever has been. As a result, our sales expectations for fiscal '23 are unchanged. I'll close my remarks on Slide 5. Over the past several weeks, I have met with more than 30 CEO and C-suite clients in North America and Europe. The message from them is clear. They are continuing to push our next-generation technology. They are looking for long-term partners that invest in their business, and they like a componentized approach that creates value along the way. These critical needs are strongly aligned with our strategy and direction. And I'm confident that Broadridge is well positioned for growth in a market that remains uncertain.
That confidence starts with our strong market positions across all three of our franchises based on mission critical infrastructure we provide that enables corporate governance and power trading and investing and is coupled with our strong track record of innovation and client service. We've invested to bring more value to clients and to meet their need for next-generation technology by building or acquiring critical solutions and adding talent and technology. These investments are playing a key role in driving the strong revenue growth we reported today, and we expect to see over the balance of the year. Importantly, we're innovating. As we talked about today, we're continuing to deliver new governance solutions. Our digital communications capabilities are gaining traction in the market.
Our BTCS business is helping to drive the growth of our capital markets franchise, and we continue to progress Wealth and Investment Management. By aligning with the long-term needs of our clients, we're attacking a $60 billion market opportunity, and we're scaling into a global fintech leader. In an uncertain market, our resilient business model driven by recurring revenue, client focus and a long track record of disciplined expense management, gives us the visibility and confidence to deliver for shareholders. As a result, we're reaffirming our full year guidance for 6% to 9% constant currency recurring revenue growth and 7% to 11% adjusted EPS growth. And in turn, we expect to deliver at or above the higher end of our three year objectives.
When we do that, it will be the fourth consecutive three year period in which we've delivered on our objectives. Finally, we're past the peak investment period in our platform solutions. Positioning us to begin to return to a more historical strong free cash flow conversion and giving us additional flexibility to drive returns for our shareholders. In sum, Broadridge is delivering on the growth plan we shared at our last Investor Day. I want to close by thanking our associates. The work Broadridge does is important and makes a difference for millions of investors. None of it will be possible without our associates' talent, knowledge and effort which enables us to deliver exceptional products and service at scale for our clients and for our clients' clients.
Photo by Towfiqu barbhuiya on Unsplash
So thank you. Now I'll turn the call over to Edwin for a review of our financials.
Edmund Reese: Thank you, Tim and good morning, everyone. I'm pleased to share the results from another strong quarter where recurring revenue growth and continued disciplined expense management drove double-digit adjusted EPS growth, even in the challenging macroeconomic environment. We continue to see organic recurring revenue growth from converting our sales backlog to revenue and healthy position growth. This performance in Q2 and the continued execution of our strategy gives us the confidence to reaffirm our fiscal '23 guidance. As you can see from the financial summary on Slide 6, recurring revenues rose to $840 million, up 8% on a constant currency basis, all organic. Adjusted operating income increased 23% as we lapped elevated investment in fiscal '22 and realize the benefit from targeted cost actions that we initiated in Q4 '22, both of which more than offset the impact of the lower event driven revenue.
AOI margins of 13.4% expanded 220 basis points, and adjusted EPS rose 11% to $0.91. Finally, we delivered closed sales of $65 million. I'll note that the operating income growth is being offset by lower discrete tax items in Q2 '23 and interest rates. On taxes, we continue to project an overall tax rate of 21% for fiscal '23. And I'll remind you that while higher interest expense partially offsets operating income growth, the interest rate impact at the Broadridge level is fully offset by higher float income in our ICS segment. Let's get into the details of Q2 results, starting with recurring revenue on Slide 7. Recurring revenue grew 8% to $840 million in Q2 '23, marking a second consecutive quarter near the higher end of our full year guidance range of 6% to 9%.
Our recurring revenue growth was all organic, again, keeping us on track to exceed our 5% to 7% three year growth objective. Let's turn now to Slide 8 to look at the growth across our ICS and GTO segments. We continue to see growth in both of our segments. ICS recurring revenues grew 10%, all organic to $467 million, with regulatory at 9% and double-digit growth across all other product lines. The 9% increase to $181 million in regulatory revenue was driven by continued growth in equity and fund positions. Data driven Fund Solutions revenue grew 11% to $96 million, propelled by revenue from sales in our data and analytics products and higher float revenue in our mutual fund trade processing unit. Our issuer business revenue increased 12% to $27 million, led by growth in our registered shareholder solutions.
Finally, we continue to benefit from strong demand in our Customer Communications business. Where recurring revenues rose 11% to $163 million, driven by new client wins in print and growth in our higher-margin digital business. Turning to GTO. Recurring revenues grew to $373 million or 6%, driven by new sales and continued strength in our capital markets, including BTCS, Capital Markets revenues grew 12% to $235 million, again propelled by strong growth from BTCS, new sales and higher fixed income trading volumes. Wealth and Investment Management revenues declined by 3% to $138 million. Growth from sales was offset by a decline in license revenue as we grew over a large client renewal from Q2 '22. As a reminder, license revenues can impact quarterly revenue growth, and we expect to grow over impact in Q3 for capital markets and in Q4 for Wealth Management.
Looking forward, we expect GTO full year organic growth to be within our targeted 5% to 7% range. Now let's turn to Slide 9 for a closer look at volume trends. We had solid position growth for both equities and funds. As you can see by our results, investor participation in financial markets has remained steady despite market volatility. And we continue to be encouraged by this long-term tailwind. Equity position growth of 9% was driven by continued double-digit growth in managed accounts. Looking to the seasonally larger second half, our testing continues to show mid-single digit growth. And with those results, we continue to expect equity position growth in the mid to high-single digit range for the full year. Mutual fund position growth moderated from Q1 '23 levels, but still grew 6%, largely driven by the growth in passive funds.
We expect to see continued mid-single digit growth in the second half. Turning now to trade volumes on the bottom of the slide. Trade volumes grew 5% on a blended basis in Q2 driven by double-digit fixed income volume growth and modest equity volume growth as continued higher trading by institutional investors more than offset the lower activity at our retail wealth management clients. As we lap a strong Q4 '22, we continue to expect full year trading volume growth to be essentially flat for the year. Let's now move to Slide 10, where we summarize the drivers of recurring revenue growth. Recurring revenue growth of 8% was all organic and this organic growth was balanced between net new business and internal growth. Revenue from closed sales and our continued high retention from existing customers contributed 4 points and internal growth primarily positioned growth in trading volumes also contributed 4 points.
Foreign exchange impacted recurring revenue by 2 points with the bulk of that impact coming in our GTO business, as you can see in the table on the bottom of the slide. I'll finish the discussion on revenue with a view of total revenue on Slide 11. Total revenue grew 3% in Q2 to $1.3 billion, with recurring revenue being the largest contributor driving 4 points of growth. Event driven revenue was down $27 million from the prior year and was a headwind of 2 points as mutual fund proxy activity slowed to a historically low level, the lower mutual fund proxy activity is driven by the timing of fund in ETF board elections as funds reacted to the combination of weaker markets and record withdrawals. Board elections for these funds may be pushed back from time-to-time, but they are not an optional activity and over the long term, event driven revenue will grow in line with fund and ETF position growth.
Looking ahead to the second half of fiscal '23, we expect the combination of higher contest activity and lower mutual fund activity will have us trending towards the low end of the $240 million to $260 million range that we've seen in recent years. Low to no margin distribution revenues increased by 3% and contributed 1 point to total revenue growth, as the higher volumes in customer communications and the impact of the July postal rate increases offset lower event-driven activity. We continue to expect double-digit distribution revenue growth for the full year. And I'll reiterate that the elevated distribution revenue from July and January postal rate increases and higher customer communications volumes have a dilutive impact on our reported adjusted operating income margin.
Turning now to margins on Slide 12. Adjusted operating income margin for Q2 '23 was 13.4%, a 220 basis points improvement over Q2 '22, driven by the operating leverage in our business, higher float income, continued disciplined expense management and the impact of targeted cost actions that we initiated at the end of Q4 '22. Our progress through Q2 gives us increased confidence that we will be able to offset inflation and FX impacts and deliver on our margin expansion objective of approximately 50 basis points for fiscal '23. Let's move ahead to Closed sales on Slide 13. Second quarter closed sales of $65 million which brings our year-to-date total to $94 million, that's 16% off of H1 '22. Strong ICS sales in the quarter were powered by the large digital wealth and focused sales that Tim mentioned earlier.
As a reminder, closed sales are historically weighted towards the fourth quarter. And given our robust pipeline, we remain on track to achieve our full year closed sales guidance of between $270 million to $310 million. I'll turn now to cash flow and capital allocation on Slide 14. I'll start with a reminder that Broadridge's cash flow generation is typically negative in the fiscal first quarter and strengthens over the course of the year. And we're seeing that trend play out again this year. Q2 '23 free cash flow improved to $104 million, up 276% from $28 million last year. Free cash flow conversion calculated as free cash flow over adjusted net earnings was up 10 points over last year to 51% driven by operating cash flow improvement. This improvement was the product of higher earnings, strong working capital management and most notably, a year-over-year and sequential decline in the level of client platform spend as we expected.
Total client platform spent for Q2 '23 was $78 million, a reduction from last year's $154 million and less than half of the Q1 '23 level of $163 million. The wealth platform accounted for the majority of the investment in the quarter and the lower spend is a strong indicator of our progress in completing the development of that project. As we remain on track to recognize revenue on the wealth platform in mid calendar '23, we expect client platform spending to continue to be lower than last year. Keeping us on track to deliver free cash flow conversion that is higher than fiscal '22. We remain confident that we will return to more historical levels of free cash flow conversion in fiscal year '24. On Slide 15, you see that the client platform spend is our most significant use of cash and that we continue to return capital to our shareholders through the dividend.
Let's turn now to Slide 16 to review our fiscal year '23 guidance, followed by some final thoughts on the second quarter results. We are reaffirming our full year guidance on all of our key financial metrics. We continue to expect 6% to 9% constant currency recurring revenue growth driven by healthy growth across ICS and GTO approximately 50 basis points of adjusted operating income margin expansion and adjusted EPS growth in the 7% to 11% range and closed sales between $270 million to $310 million. And before I move on from guidance, let me briefly discuss our second half outlook, which is embedded in that full year guidance. We expect Q3 adjusted EPS growth to be in the low to mid-single digit range as the impact of continued recurring revenue growth is partially offset by lower capital markets license revenue.
We expect adjusted EPS growth to be higher in the seasonally larger fourth quarter as we recognize the benefit of growth in our proxy business and the timing of investments. Finally, let me reiterate my key messages. Broadridge delivered strong Q2 financial results. Demand for our mission critical technology is strong, and our testing is showing continued equity and fund position growth in a seasonally larger second half of the fiscal year. We are now past the peak period of investment and again, driving strong free cash flow in Q2 '23, and we continue to expect our client platform spend to be lower than last year, resulting in improved free cash flow conversion in fiscal '23 and a return to a more historical conversion level in fiscal '24.
We have a resilient business and financial model with a proven track record of performance through the economic cycle, but we are reaffirming our fiscal year '23 guidance. With that, let's take your questions. Operator?
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