Broadridge Financial Solutions Inc (BR) — Q2 2022 Transcript

Thank you Andrea. Good morning and welcome to Broadridge’s 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.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. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K. We will also be referring to several non-GAAP measures which we believe provide investors with a more complete understanding of Broadridge’s underlying operating results. An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?

Thanks Edings. I’m 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 Itiviti, 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 ICF 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 well as the continued successful integration of Itiviti. 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 of 11% to 15%, positioning us for another year of steady and consistent adjusted EPS growth while funding additional investment. After a strong FY21 and with our guidance for FY22, we remain well positioned to deliver at the higher end of our three-year recurring revenue 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 ’22, so let’s turn to Slide 4 for an update, starting with governance. Our governance business is performing really well. ICF 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 strong quarter of strong ETF and mutual fund position growth. Position growth remains broad-based across both equities as well as funds in ETFs. For example, while 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 has actually showed some modest strengthening in 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 is 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 the critical communications they need to make better investing decisions and to participate in the governance of those investments. We are also investing to further enhance the proxy voting system by implementing end-to-end vote confirmation for thousands of public companies. Over the past year, we have 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 investors that every vote is counted as cast for all Fortune 500 companies as well as all of the more than 2,500 public companies for whom Broadridge tabulates 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 it’s 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 onboard. 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 Itiviti. When we announced the Itiviti acquisition last spring, we highlighted both near and medium term benefits. Ten 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 Itiviti products are helping to drive sales of our broader Broadridge solution. This gives us incremental confidence in our market share thesis at the front office and in our ability to leverage Itiviti’s capabilities and geographic reach to contribute to our overall growth. Just as importantly, after extensive positive client discussions, we have started to move forward on a fully modular suite of solutions covering the entire trade life cycle by signing our first client for middle office solutions. Over the next 18 months, we will be rolling out a series of phased integrations to bring together our front, middle and back office solutions by sharing regulatory reporting data and normalizing other data sources across the trade life cycle. It’s exciting to be in the execution phase and on the road to making our front-to-back vision a reality. In wealth and investment management, revenues rose 15% to $146 million. We remain on track to deliver the Broadridge 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 17,000 advisors and others across UBS. The workstation combines Broadridge, UBS and 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 and enhanced 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, Broadridge delivered strong closed sales across all three franchises. Second quarter closed sales were $83 million and the first half was $113 million, up 48% from last year. With both ICF and GTO contributing, it’s certainly a strong sign that the Broadridge value proposition is resonating in the market. More importantly, it’s a strong start toward what we expect to be another year of record closed sales, setting the stage for continued growth. I’ll sum up my business review by saying that Broadridge is performing well across all three of our franchises, with strong execution driving strong financial results. Let’s turn to Slide 5 to wrap up. First and foremost, Broadridge is performing well with 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-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 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 well as strengthening our technology. 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 all, fiscal ’22 is shaping up to be another Broadridge kind of year. We’re delivering strong top-line results powered by new sales, continued position growth, and strategic M&A. We’re doing the hard work to execute our multi-year growth plan to extend governance, grow capital markets, and build wealth investment management. We’re using stronger event-driven revenues and the higher recurring revenue growth to fund additional investment, all while delivering strong 11% to 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, will continue to resonate with our clients, associates, and shareholders. Let me sum up with this message. Midway through fiscal ’22, Broadridge’s 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 last year. In January, we received the result of our most recent survey, and I’m very pleased to say that engagement is just as high this year, which was not the case across many companies. To those associates who are listening to this call, thank you for staying focused on our clients and our company. That focus is playing an important role in the strong growth numbers we reported today. Despite the challenges of the pandemic, you have kept financial markets working, are driving Broadridge forward, and are making a difference in the financial lives of millions. Now let me turn the call over to Edmund for a review of our financials. Edmund?

Thank you Tim, and good morning everyone. I’m pleased to be here discussing another quarter of strong performance. As you’ve just heard, Broadridge’s performance remains resilient and our long-term growth drivers are quite stable. Organic growth from new sales, strong underlying volume trends, and the progress integrating Itiviti 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 7, you can see that strong performance. In Q2, Broadridge’s recurring revenues grew 19% to $798 million. Adjusted operating income increased 19% to $141 million and AOI margins were flat at 11.2%, with a drag from low to no margin distribution revenue. Adjusted EPS increased 12% to $0.82. I’ll note that we will continue to see operating income growth partially offset by higher interest expense related to the acquisition of Itiviti until we grow over the incremental interest expense in Q1 2023. Let’s get into the details of those results, starting with recurring revenues on Slide 8. Recurring revenues grew by $673 million in Q2 2021 to $798 million in Q2 2022, an increase of 19%, well above our fiscal ’22 guidance range. Organic growth accounted for nine points of the 19% increase, driven by the conversion of our healthy revenue backlog and volume growth. Itiviti revenues, which were in line with our expectations, drove most of the remaining nine points of growth. Now let’s turn to Slide 9 to look at growth across our ICS and GTO businesses. Both of our business segments had healthy organic revenue growth. Part of that growth was driven by the secular tailwinds in stock and fund position growth, but as I noted, the biggest driver across both was the contribution from new sales. It is clear that the investments 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. 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 on-boardings 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. While 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 on-boarding of new component sales, as well as higher retail trading. Capital market revenues grew to $224 million, an increase of 41% with Itiviti 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 franchise to deliver fiscal 2022 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 have made investing more accessible. The biggest driver of our internal growth was mutual fund and ETF volumes, which grew 12%, reflecting steady funding flows 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 position 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. As you can see by our results, investor participation in financial markets has continued to increase and our digital platform investments and 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 2021, 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 Itiviti. 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 in ICS and a significant renewal that drove increased license revenue in GTO. Itiviti was the biggest driver of our acquisition growth, contributing $61 million, while our tuck-in acquisitions made in Q4 2021 and Q1 2022 are also performing in line with expectations. I’ll finish the discussion on revenue with a view of total revenue on Slide 12. Total revenue growth was a healthy 19% in Q2. Recurring revenues were 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 is the best modeling assumption for Q3 and Q4. Now onto margins on Slide 13. Adjusted operating income margin in Q2 was flat at 11.2% as our strong growth in recurring and event-driven revenue was offset by increases in low margin distribution revenue and growth investments. No margin distribution volumes and 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. In our ICS business, we have investments to build next-gen capabilities in our digital platforms for fund communications, SRD2, and an upgraded VSM platform, all of which we expect to have a near-term impact on our results. In GTO, we continue to invest in our global post-trade management system, our DLT-enabled platforms, including our repo and private market hub solutions, and of course executing the front-to-back Itiviti product roadmap that Tim highlighted earlier. Given the 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 our high revenue growth and efficiency gains to create capacity, while delivering steady and consistent earnings growth. We expect this to continue in fiscal year 2022. Let’s move to closed sales on Slide 14. We reported second quarter closed sales of $83 million, which brings our year-to-date total to $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, Itiviti 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’s 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 $124 million. We continue to invest heavily in our next-gen platforms, especially our wealth management platform. For the first six months of fiscal year 2022, we’ve invested $29 million in capex and 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’ll begin to recognize revenue in mid-calendar year 2023. Looking ahead, we remain committed to evaluating potential tuck-in M&A opportunities that meet our strategic profile. We will also continue returning capital to shareholders, primarily through our dividends as we remain 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 2022 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% to approximately 18.5%, reflecting the impact of higher distribution revenues and continued growth investments. Third, we are reaffirming our expectations for strong adjusted EPS growth in a range of 11% to 15%. Finally, after our strong start to the year, we continue to expect closed sales in the range of $240 million to $280 million. I would 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’s 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.

Thank you very much, and good morning. Could you walk through some of the headwinds and tailwinds in a little more depth to margins in the second half of FY22, 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. I just want to say on this, and I’ll turn it to Edmund to add, but we feel really good about where we are here for the year and for the second half, and there are really three things going on, of which I really think that one matters. The first is distribution. This is really almost literally a technical adjustment that Edmund will take you through, but we believe the impact for the full year will be between 40 and 50 basis points, and really when you look at the adjustment we’re making to our guidance, it’s all about distribution. We’re just taking out the distribution piece of that. The second part is inflation and labor. There’s a little bit of an impact here, but it’s not really material for us in 2022 and is something that is well within our normal contingencies, 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. We really like these investments. They are giving us the opportunity to accelerate our roadmap. As Edmund said, we’re enhancing our digital capabilities, strengthening DSM, expanding SRD, driving the front-to-back. We think our Q2 results demonstrate that those investments are having an impact and helping sustain 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 8% to 12% adjusted EPS growth over the long run. Those are sort of the pluses and minuses I see. I’m going to ask Edmund to add on anything to that.

Thanks Tim. David, good morning. I want to discuss each of those three topics in detail. As a reminder, our guidance for fiscal 2022 was based on the expectation of normal distribution revenue growth. We anticipated achieving 100 basis points of margin expansion above our three-year target of 50 basis points. Now that we are observing elevated distribution revenue levels, particularly double-digit growth in the second quarter, and we expect similar performance for the rest of the year, it's important to note that the distribution revenue, especially in our customer communications business, carries no margin. We've also been referring to postal rate increases over the last few quarters, which are now starting to take effect and represent direct pass-through revenue with no margin. The combination of these factors—distribution revenue in the customer communications business and the postal rate impact—contributes to the reduction Tim mentioned, from approximately 19% to 18.5%. This is the main point. Besides that, we continue to anticipate around 18.5%, considering we were at 18.1% last year. We are still seeing margin expansion as we continue to invest, which makes me optimistic. Regarding inflation, in short, we don't foresee a significant impact. However, delving a bit deeper, our revenue contracts include clauses that align price increases with expected metrics like CPI and PPI. Typically, inflation leads to a rise in interest expenses. For us, as we move into 2023 and reduce debt while experiencing growth in our matrix business, this is beneficial. Most of our costs, including distribution costs—previously mentioned—are pass-through costs. The main variable is labor cost, which has been increasing as we focus on talent acquisition and retention. Nevertheless, we are confident that the efficiencies from scaling our business and our shift toward higher-margin digital services will enable us to absorb the labor-related inflation costs, maintain margin expansion, and achieve the double-digit earnings growth we've discussed. Lastly, I want to emphasize the importance of investments in relation to revenue growth and earnings, which are crucial to our financial model and growth strategy. Our Q2 results illustrate that the investments we've made in recent quarters are yielding positive results. Both balance sheet and P&L investments are fostering recurring revenue growth, creating a solid foundation for consistent adjusted earnings growth. While this may generate some margin pressure, the efficiencies from our operations instill confidence that this strategy is effective, allowing us to meet short-term commitments to investors and pursue medium and long-term growth. We will continue to focus on investments that support future growth, drive margin expansion, and deliver steady, consistent EPS.

Thanks, and 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 FY22.

David, it's Tim. Thank you for that. We are maintaining our forecast for the full year. We have a strong pipeline and many positive client discussions. However, the timing of these discussions can be uncertain, especially with larger deals, which could influence our performance this year. Nonetheless, we do not foresee any factors that would significantly change our initial projections. We have managed to close deals earlier this year than usual, but we remain aligned with our previous guidance.

Hey, good morning everyone. Thanks for taking my call. A couple items on the governance front. Can you talk about on the end-to-end vote confirmation side, you’re rolling that out to 2,500 issuers in the States. Can you talk about if there’s a change of economics to Broadridge there, and then a related question for the U.S. proxy business is the universal proxy card and how you see that potentially acting as a headwind, tailwind when that goes into effect.

Yes Peter, hi, it’s Tim. Great to hear from you. Great questions on both of those. When we look at end-to-end confirmation, this addresses a question that people have had over the years about are all 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 we’re not the tabulator, and then when we are the tabulator, 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 tabulator. From an economics standpoint, it’s really not material. There’s no additional charge to our clients for it, it’s part of the value that we provide to the industry. There is a little bit of cost on our side, and that’s just part of what we do with the key role that we play in the industry, but it’s something that we’re excited about and I think it continues to strengthen what is already a very strong system. In terms of universal proxy, 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 are doing the investments to make that available even as we speak - they are basically done, and we think it’s again something that is a long-term strengthening of the industry. There are some people that say that this will give more access to activists and could lead to 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 somehow contributed to extra activism, but I think it’s pretty early to say that.

Got it. Then just one follow-up on regulatory. You’ve got a couple announcements on international development, and I know Broadridge has been a pretty large and active player in the U.S. and Canada, and I know you’ve had some toeholds or footholds in a couple other countries. How do you think about the international opportunity for governance?

Yes, this is a fascinating topic because the institutional frameworks in North America have historically shaped the role we play, which hasn't been replicated in other countries where shareholder rights have traditionally been weak. However, as democratization progresses, we are witnessing the emergence of stronger shareholder rights elsewhere. Recently, Japan made rule changes that have significantly enhanced the role of proxy voting, resulting in our joint venture growing from several hundred to over 1,000, possibly close to 1,500 companies working with the Tokyo Stock Exchange. The most significant development for establishing a more substantial business occurred in the last few years when the European Union introduced the shareholder rights directive, which mandates brokers and custodians to ensure that end investors can access information and vote their shares. Historically in Europe, voting was quite challenging, requiring physical attendance at meetings and lacking the obligation to distribute materials, making the process restrictive. With the movement toward greater democratization, many companies in Europe sought solutions, and we successfully brought our comprehensive suite of digital channels, including our app, to the market, winning over 300 clients. We are now entering the second phase of that initiative, and we are enthusiastic about building a stronger governance business in Europe. While it may not reach the scale we have in North America, this certainly represents a significant opportunity.

Got it. All right, thank you.

Hey, thanks guys. The customer communications business, you talked about having shown acceleration with that expected to continue, which has obviously been an area that’s been a headwind for some time for you guys. Can you touch on the dynamics there? I think you mentioned more printing even than electronic, but 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 a headwind turning into a tailwind is a nice thing, so any color on that?

Yes Darrin, thanks. Just taking back, as you know but just to refresh everyone, we always had three objectives for this, which was to get near-term synergies, which we have grown the earnings in this business really nicely over the past five years, so that’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 print, which is almost 50% of the market, really becomes less and less economic. That is really what we’ve begun to see, is more and more in-house print operations throwing in the towel and saying they can’t be efficient anymore, and looking for a third-party solution. We’ve really been able to take advantage of that, and then that leads to the third part, 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 from in terms of creating that digital growth for the future.

I’ll just add that digital growth is obviously at higher margins, Darrin, as we bring that business on, so that’s what we continue to focus on.

Yes, it’s great to see that and it seems sustainable. I have a follow-up about the mix in closed sales, particularly regarding the higher-level segments, such as GTO and ICS. What trends are you observing between these two areas in terms of the primary driver of closed sales now and what is expected moving forward? Additionally, how much of that is being directed toward wealth? It seems like you’ve made good progress with UBS, so I’d appreciate it if we could break that down a bit. Thanks again, everyone.

Sure. First of all, Darrin, I’d say we’ve had really good sales in our ICS business the past few quarters, and really over the past year. Historically, some of our sales have been more focused on GTO and the large deals there, but we’ve had a strong performance on the ICS side. Looking forward, we see it as pretty balanced. Itiviti has been a great contributor and will continue to be, which is helping the capital markets side of GTO for Itiviti and connecting other capital markets products. On the wealth side, we had a nice sales and renewal this past quarter that helped drive some of the results you saw, so we’re experiencing solid organic growth in wealth. We’re not yet seeing significant large platform sales; those take time, and we’ll keep you updated on them, but that will continue to develop. Overall, we like where we are on the wealth side.

Hey, thanks for taking my questions. Can you review the potential impact of an interest rate increase on your financials? I know you talked about it could be positive to your metrics business. Can you talk about what it means for interest expense and interest rates overall?

Yes, absolutely Puneet, I’ll take this. 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 our revolver in the three-year term loan that we took out at very good rates for the Itiviti deal, but that’s prepayable and will decline over time, given our intention to de-lever and maintain our investment-grade credit rating. On the 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 2022, we estimate a 100 basis point impact on rates to be negligible to us in fiscal 2022, but as we pay down that debt and have the matrix business continue to grow, I think as we go into fiscal 2023, you can see a neutral to positive impact for us from interest rates.

Got you. Then on the renewed guidance increase for recurring revenue at the high end, which segment is driving that increase more? I know both are firing on all cylinders, but where is that increase coming from, ICS versus GTO?

I’ll maybe start and Tim, you should jump in on this. I’ll maybe start here on the GTO side of the ledger. Clearly we’ve said that the acquisition of Itiviti 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 what our expectations have been. For the core organic capital markets in wealth management business, as I said during my prepared remarks, I expect that both of those franchises in the year in our normal 5% to 7% growth range, and so where there’s opportunity, where there’s variability and the thing that’s been driving us up, has been in the ICS business, which has been having extremely strong growth, and that growth obviously has a bit of a tailwind from the volumes we started the year thinking that we would have single digit SRG growth and now we’re saying low to mid teens SRG growth, so that’s having an impact and one of the key items that’s driving us up. But we continue to have this contribution, particularly from the net new business and 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 that ICS business.

Thank you.

Hey, good morning. Tim, do you have any insight into why the SEC is revisiting its 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. Just for the full audience, what’s going on is that last summer, the New York Stock Exchange asked to have the process of overseeing 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. The New York Stock Exchange is appealing that ruling - it’s out for comment right now. We have previously commented that we are agnostic as to who has oversight for this, so that’s really it. It’s not clear to us which direction this will go. Really, the longer answer is does this increase the chance of a fee 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 a review. I will say that if one does happen, we are confident that with all the stakeholders at the table and with real data, that 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 a highly functional 24/7 SaaS platform, and people talk about the cost of sending a communication but the platform includes compliance, process management, of course digital communications, reporting, record retention, data security, audit, and consolidated billing across thousands of participants. We’ve worked with the industry to drive out annual costs many times our fees through digitization and other initiatives, and the value of that platform in terms of the efficiency, the participation, and compliance it brings is demonstrated by the fact that over half of U.S. publicly listed companies choose to engage us for communications with their directly held investor counts, when they could use anyone. So really strong value, which has just gotten stronger. I know I’m going on here, but I feel passionate about this. Our fees haven’t increased for 25 years, and during that time through digitization and other initiatives, the total cost for the communication to the industry has fallen dramatically, over 40% in the past 10 years, even more with 30e-3. If there were a review, it’s 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. There are public companies, funds, broker-dealers, and within those the large and the small have different interests, so it’s pretty complex, which is why it takes a long time. Then finally, the most important point is that in the meantime, we’re working with the fund industry and others on innovation and to make the system better and more cost-effective for all stakeholders. We implemented 30e-3, we’re rolling out end-to-end vote confirmation, universal proxy, pass-through voting support, ESG, and true digital experiences to drive engagement, and we’re working on future initiatives that we think can again reduce the total industry cost by many multiples of our fees, so we feel good about wherever this ends up that it will be in a good place.

Understood, I appreciate that. Then switching gears to the GTO segment, you mentioned a large client renewal in wealth and investment management. As we look at the revenue number this quarter, $146.4 million, is a good chunk of that going to be one-time in nature because of that renewal?

Yes, the 14% growth is largely due to the nature of that solution, with about half of the revenue recognized upfront and the other half recognized over time, which leads to some variability in the quarter.

Over the long term, though, this license revenue in that business is a small component of the overall revenue, and 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.

All right, terrific. Thank you.

Hi, good morning. Thanks for taking my questions. Tim, I appreciate your answer on the question around the proxy piece. I just wanted your sense, because like you said, there are competing stakeholders here, is there any sense that there’s been a change in where any of the stakeholders stand or any shifting in that dynamic? I view it as something of 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 just want to understand if you think there’s been any shift in stakeholder interest or if we’re pretty steady state when you take a long-term view of the dynamics here.

You know, I’m not sure that I see any shift. I think all the stakeholders want the system to be sound, to work, to create great client experiences, and they all want it to cost as little as possible. That’s what everyone wants, whether it’s the public companies or the fund industry, and the fund industry of course is facing a lot of pressures on its own, so for some time they’ve been advocating for lower fees. I think we feel like we’re in good dialog with all the different parts of the industry and really 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 costs around competition of all these documents and automate that more. We think there are good opportunities to reduce total cost and we look forward to working with the industry to make that happen.

The key takeaway, Chris, is that for the full year, we expect to maintain a stable effective tax rate that is equal to or slightly better than last year, around 21%. You might notice some fluctuations from quarter to quarter mainly due to two factors: discrete benefits or one-time items, like what we experienced in the second quarter, and the ongoing tax benefit from equity compensation. So, there’s a quarter-over-quarter benefit related to these two factors. However, for the full year, we're still looking at that 21% level.

Great, thank you everyone for joining today. Thank you for your interest in Broadridge, for being an investor. As I hope you heard, we are really excited about how our business is doing, we’re excited about the performance we 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.