Good morning, and welcome to the Broadridge Second Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Edings Thibault, Head of Investor Relations. Please go ahead.

Thank you, Andrew. Good morning, everybody, and welcome to Broadridge's Fiscal Second Quarter '21 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. 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?

Thank you, Edings. Good morning, and thank you for joining us. I'd like to start with a special welcome to Edmund Reese, our new CFO, on his first Broadridge earnings call. I know many of you were introduced to Edmund during our virtual Investor Day in December, and I hope you came away as impressed as I have been over the past 2 months. This morning, I'll provide an overview of the key messages from this quarter and give you an update on our progress against the growth plan we discussed in December. Edmund will review our financial results, and we'll close with your questions. Let's get started. After a strong second quarter, Broadridge is on track to deliver another solid year of top and bottom line growth. We now expect to be at the higher end of our guidance range for both recurring revenue and adjusted EPS growth. That guidance reflects our strong quarterly results. For the quarter, Broadridge delivered 7% recurring revenue growth, continued margin expansion and 38% adjusted EPS growth in a seasonally small quarter. We continue to execute against the growth plan we outlined in December. I'll highlight later some of the specific steps we've taken on key initiatives across governance, capital markets and wealth and investment management. Our strong second quarter results and outlook for the second half of the year have given us the opportunity to step up our investment. I'm pleased to see us increasing our investment in our technology, products and people to meet our clients' growing needs as they face accelerating trends towards next-generation mutualization, resiliency and digital transformation. Finally, our outlook for the year means we are off to a strong start toward achieving our latest set of 3-year growth objectives, including 7% to 9% recurring revenue growth and 8%…

Thanks, Tim, and thank you again for the warm welcome to our first earnings call as CFO. During my opening remarks at our December Investor Day, I mentioned my excitement joining a company with such a strong leadership team and growth strategy. Now over 2 full months, and I'm even more excited and more confident in Broadridge's ability to execute our simple but powerful financial model. And our strong second quarter and outlook for the full year are great examples of how that model works. As you can see here, looking at the Q2 financial summary on Slide 7, this was a strong quarter of top and bottom line growth across all our key metrics. Recurring revenues grew 7%, operating margin increased 150 basis points year-over-year to 11.2%, and we continue to demonstrate our ability to expand margins, even while ramping up the investment spend that Tim highlighted earlier, which we said we would accelerate during last quarter's call. And adjusted EPS grew to $0.73 in the quarter, up 38% over Q2 '20. Now let's turn the slide and get into the details of the quarter, starting with some of our key operational metrics. Broadridge's recurring revenue growth benefits from underlying volume growth trends, including record growth. Over the last 10 years, equity and mutual fund record growth has averaged 6% to 8% and is a driver of our regulatory revenues. Stock record growth in Q2 increased 24% driven in part by a few large issuers, and I'll remind you to keep in mind that second quarter volumes historically make up less than 10% of the full year total. Looking ahead to the seasonally larger second half of the year, we expect low double-digit growth across stock records. Looking further ahead, our 3-year objectives assume that this increased growth moderates…

Excuse me. this is an operator. There seems to be an issue with the current speaker's line. Just one moment, please. Excuse me. I have Mr. Reese to reconnect. Apologies for the inconvenience. Please go ahead, sir.

Okay. So I apologize for the technical difficulties that we just had. I think I dropped off on Slide 11 of our document. So I'll pick up there. Slide 11 highlights that our growth is primarily driven by our internal efforts. Organic growth has consistently been the largest part of our recurring revenue growth. In Q2, revenues from new sales -- I'm not clear that I'm being heard yet.

Yes, sir. You are coming through clearly, sir. Please continue.

Okay. So in Q2, revenue from new sales drove 6 points of growth and remained the biggest driver of our revenue growth across both our GTO and ICS segments. We continued our long track record of retaining 98% of existing revenue from existing clients, and internal growth contributed 2 points of growth driven by higher trading volumes in our GTO segment. ICS internal growth was neutral as our strong position growth was offset by the impact of lower interest rates and lower customer communications print volumes. The impact of acquisitions made within the last 12 months contributed 1 point. Barring any new acquisitions, we'd expect the contribution of growth from acquisitions to be less than 1 point from Q3 and 0 in Q4. And while we're focused on recurring revenues, let me share some insights on the drivers of growth across our updated ICS and GTO product lines that Tim touched on earlier. These categories were introduced at our Investor Day with the goal to better align our external reporting with our growth strategies. ICS recurring revenues rose 7%, with strong growth across 3 of our 4 product categories. The biggest contribution to growth came from our regulatory revenues, which were propelled by strong 24% stock record growth and 5% interim record growth. We also benefited from additional growth across our international and Canadian proxy volumes. Revenues of our data-driven fund solutions benefited from strong double-digit growth in our data and insight product revenues and the acquisition last February of FundsLibrary, offset by the impact of lower interest rates on our mutual fund trade processing unit. Customer communications revenues were flat in the quarter as double-digit growth in digital revenues was offset by a decline in print volumes. Looking ahead to the second half of the year, we expect to…

[Operator Instructions] The first question comes from David Togut of Evercore.

Tim and Edmund, 24% stock record growth may actually be the highest stock record growth that Broadridge has posted since spinning out of ADP in 2007, and I hear the message about reinvesting the excess growth in products and platforms. But as we think about the 2021 proxy season, if 24% stock record growth is a jumping off point for proxy mailings, will you actually be able to reinvest this excess revenue growth fast enough in the second half to actually keep earnings growth within the 6% to 10% growth guidance? And then my follow-up question, which is related, as we think about fiscal '22 and recognizing you haven't given guidance yet, you've got the strong jumping off point with stock record growth, with a lot of secular growth drivers behind that. You've got UBS contract coming on stream this summer. Isn't the setup for fiscal '22 potentially above the long-term growth guide as well?

Sure, David. And thank you for joining us this morning. I'm going to make a couple of comments and then hand it over to Edmund to also comment. First, I think, certainly, we're pleased with the headline number that sounds like 24%, but I do want to caution that the second quarter is small, and there is some specific names that really drove that. And as we look to the second half, we are seeing certainly very nice stock record growth, but not at that level. So that's just an important starting point. We are really pleased in the investment side. We think that our opportunity here is essentially unlimited relative to our current size, and we see -- we do see many arenas where we're better positioned than anyone to meet real industry needs. So you will see us continuing to invest within the confines of those 3-year targets, and we do have a lot of ability to invest, Dave. So I do think that we will be able to do that. Really, the only thing that would keep that from happening would be if we had sort of surprising event activity in the fourth quarter. Let me ask Edmund to just expand on that, and then I'm going to come back to your '22 question.

Thanks, Tim. And I think you're right. David, thanks for the question. We began the investments also in second quarter, and I think we do have the ability to continue to ramp up as we complete the second half of the year. That gives us momentum going into fiscal year '22. I'll turn it back to Tim and let him talk about '22, but I do think we should expect some modest acceleration in recurring revenue growth and adjusted EPS as we -- if our outlook continues as we expect for fiscal year '21. If we're able to make those investments, they'll contribute to some modest acceleration, as I said, at -- in the Investor Day to '22 and '23.

Great. And then, Dave, with respect to '22, it is certainly very early to comment on that, so we'll be definitely coming back to that later in the year and in the fourth quarter. We do see some really good secular trends here, and we do feel very confident in our 3-year outlook. I think it's just too early to speculate on anything that's sort of above the long-term trends we see.

The next question comes from Peter Heckmann of Davidson.

I wanted to see, Tim, if you had any early comments on the SEC. Let's say, the NYSE is looking at, I guess, to push some of the regulatory oversight on proxy fees to FINRA, and I've seen a few initial comments there. But can you talk about where Broadridge sits and how you see that shaking out, including a time line?

Yes, absolutely. And Peter, I think this is a really good opportunity to step back and look at the regulatory landscape, and I'll work my way to the fees question. But just I think, as you look into regulatory landscape, we have a long history of working with administrations on both sides of the aisle to promote really effective and cost-efficient disclosure. That's really the foundation of our market. And with the increasing democratization that we're seeing, there's a real -- the need for effective disclosure is greater than ever before. The democrat administrations do tend to be somewhat more inclined to extend disclosures and protections, and we're already seeing some of that relative to ESG and fiduciary standards. But even with all that background, they -- we don't really see a substantive regulatory update relative to the things that are happening in our space. So 30e-3 is now live, and it's saving funds money. The comments are in for 498B, and those have been really supportive of the summary concept and -- but people are expressing concerns about drop and prospectuses. So it's not clear whether that will happen. There is a big push for moving to e-delivery, and that's something that we support, and it's really aligned with the idea of summary documents. And then there continues to be, as you raised this question around fees, ICI continues to push for a fee review and is talking about let's move it away from the NYSE, which the NYSE would like to move it away. At the same time, FINRA has responded saying they don't want it either as you go to the SEC, so I think there's going to be a lot of back and forth here. We do feel, wherever it ends up, it will be fine. We have a strong relationship with FINRA, a strong relationship with the New York Stock Exchange, a strong relationship with the SEC. And we really believe that when you look at fees, when you bring all parties to the table, not just the funds, but all parties and have good information that we'll get to a very good place on that. I think it's -- in terms of speculating on timing, I think it's going to be a long debate about who is the right place for it to do. And then if there were to be a review, as you know, the last one took several years to unfold.

Got you, got you. And then just can you remind us on the rules that have been formalized like 30e-3 and then potentially maybe some insight on 498B, the -- kind of the puts and takes that Broadridge sees over the next 6 quarters?

Absolutely. So on 30e-3 as -- so that is live now, and that's something that we're really proud of, that we have brought that solution to the industry as a whole. We have, I think, over 130 fund complexes on the solution now. That is a modest benefit to us financially. With respect to -- but not so much as it's really noticeable on the results. It's just a -- it's a modest positive. With respect to 498B, it had a couple of components. There is a -- the most important component was really around moving some of the long-form communications to summary form. We think that would be good for the industry. We think it would be good for investors, and the economics of that are neutral to us. There was some conversation about dropping the annual prospectus. There was a lot of mixed commentary on that as the comments came back, so that seems less likely to us. As you recall in -- when we discussed this, I believe, in the summer call, what we said is the -- we saw potentially a downtick from the prospectus revenue, an uptick from the idea of us being able to create the summary documents for people and really provide an industry solution around that, and we saw those balancing each other. If we're to proceed with the summaries, but not with the prospectus downtick, then that would be a plus, but I think this is going to be quite some time for it to unfold. The new administration is coming in. They have their own set of priorities. And so I think, really, the timing of this is highly uncertain at this stage.

The next question comes from Michael Young of Truist Securities.

Just wanted to ask, you kind of touched on capital return priorities. But in the second half, just wanted to kind of touch on your desire to engage in share repurchase versus maybe looking at acquisitions and kind of what the environment looks like for the acquisitions at this point.

Absolutely. And Michael, thank you for the question. Look, our capital allocation approach is -- has really not changed, and we believe there's almost unlimited opportunity for us to invest on behalf of our shareholders at really attractive rates of return. At the same time, we believe in the strong dividend. We don't let cash buildup. We only invest when we're confident we can execute well. So that's why you see these priorities around internal investment, dividends, M&A, share buyback in that order. We are definitely looking at M&A opportunities. We think that's an evergreen strategy for us to supplement our internal product development and bring more value to our clients. In this environment, prices are high, and it's unclear whether any of the opportunities that we're looking at will come through at prices that make sense to us. And we have been on the doorstep a couple of times this year and not been able to go through at a price that made sense for our shareholders. So I think M&A is something we continue to really look at. There's uncertainty around it. At the same time, we won't let cash build up on our balance sheet. And so if we're not able to execute on M&A, you will see share buybacks. I'd like to just ask Edmund to add on to that, if there's anything that I've missed, so just -- Edmund will add that up.

The only thing that I'll add to that, because you have the priorities, right, Tim, is that the reason that we're able to execute on that model, Michael, is because of the free cash flow that we're able to generate. That's historically a capital-light business, generate free cash flows that are at 100% over the past couple of years of adjusted net earnings. It's dipped a little bit as we've invested in our wealth management platform. But the model, as Tim described, is the right one, and we'll continue to be committed to that. If we don't see the attractive opportunities that hit a high bar that we have for M&A, as Tim said, we won't let the cash build up on our balance sheet, and we'll return it in the form of share buybacks.

Great. And for my second question, I just wanted to ask kind of qualitatively maybe where we are now. And looking forward, potentially coming out of this pandemic or a little bit more of a reopening, does that aid sales volume -- closed sales volume? I know it's kind of episodic in the second half, but just wanted to get a sense of the ability to convert there. And could there be tailwinds if we do get more of a reopening?

So the first thing I'd say is we feel very good about the performance of closed sales so far in the first half of the year coming off of a record 2020, $239 million. I mentioned in Investor Day that, that's been growing at over 11% over the past couple of years. And for the first half, you saw that we're largely in line with the performance that we had at the -- during this time last year. The back half is always tougher for us. That's not anything new. We still feel good about the range that we have. And this environment might be a little challenging in terms of the focus of some of our potential partners on closing the contracts. And as I mentioned in my prepared remarks, large signing can have us to the top or a delay, which normally means a delay into the next year, not the fact that we won't be able to close the sale can be a challenge for us. But as of now, I think we feel good about the back half of the year and coming in the range that we just mentioned.

The next question comes from Chris Donat of Piper Sandler.

I wanted to go back to the equity position growth issue and ask if you can help us sort of unpack what are maybe some of the longer-term trends going on there and some of the things that are more near term. And I caught the commentary about how maybe we see a deceleration in growth in the future on the positions. But in terms of -- I get that the volatility right now is a serious driver of position growth, but like the 0 commission trend is certainly something that's going to be with us forever or there are position phenomenon. And then is there anything else going on, on the sidelines, like the number of SPACs? Is that creating new positions that's a tailwind? Or are you seeing particular activity just around certain issuers? Or is it certain brokerage firms that makes you think that it might be more temporary or more permanent? Just kind of help us understand the factors moving here on position growth.

Sure, Chris. Thank you for calling in. I think on the SPAC side, it's an interesting question. I'm just going to give a couple of comments here and turn it to Edmund. But I think on the SPAC side, it's is interesting. I think it's maybe too early to us to see the impact. But clearly, when there's lots of IPO activity, which is a substitute for, that does help over time. So it's a little bit early on that one. I think we're clearly seeing the extension of healthy trends around the democratization of retail shareholding, and that is building on the prior trends that are still there towards managed accounts and model-based investing. So I think those 2 are building on each other. And -- so I do think that it's going to be something that is longer term. Now the outlook does have elevated growth for this year and a return to more typical growth thereafter. But I know, Edmund, you've been looking into this in a lot of detail. So...

Yes, I mean, I think that's exactly right. Chris, I'd like to just back it up a step from what Tim just said. Historically, as I mentioned, 6% to 8% growth in equity positions or so. That's accelerated for the reasons that Tim just mentioned. So the managed accounts and the model-based investments, that was in the mid-single to high single-digit growth previously, and I don't expect any change there. The 0 commission trading, I think you mentioned more retail investors coming in. I think that's good for Broadridge. In fact, they want to engage and interact digitally. So I think that's also a tailwind for Broadridge. And hopefully, that's stable going forward. The newer things, the coordinated buying efforts, the SPACs, don't exactly -- yet know exactly how stable that is, and we're not counting on that as we look to our outlook going forward. But as Tim mentioned, that higher growth that we saw Q4, Q1 and Q2, we expect to moderate, but still be in the low double digit for the rest of this year. After that, our assumptions are that we return to mid-single-digit growth.

Okay. All right. And then sort of related issues. Just yesterday, we saw January volume from interactive brokers, so one brokerage firm putting up pretty impressive numbers. And anyway, just as we think about GTO revenues and your sensitivity to volumes there, anything you'd say is -- if we think we're in a period of elevated volume, what that could do for revenue or just how you think about equity volumes feeding into GTO revenues? What's sort of fixed versus what's variable on the revenue side?

Yes. It continues to be -- I mentioned in the opening remarks that we saw, during the March and April time period, a spike in the equity trading volumes for GTO. And I think I showed a slide that showed the equity and fixed income volumes combined there for GTO. But it's continued to be at an elevated level through Q2. And even after the environment that we're in right now, so it's continued to be elevated. But I think as we go into Q3 and to Q4, growing over that high performance in Q3 and Q4 of last year, we will -- that will be a tough comp for us. And so as I mentioned, the Q3 outlook will be overall flat to slightly lower relative to where we were last year, and that part of that is driven by the trade volumes in the GTO business.

And just one thing I do want to add on top of that, Chris, is just to build off this for a second, which is, certainly, the volatility in January, it was -- it did exceed the peaks of last March. And as we look at our wealth strategy, we've executed really well through that. And some others have been challenged, and I think it just reiterates the power of an industry solution for some of these critical but non-differentiating functions.

The next question comes from Andrew Bauch of Wolfe Research.

This is Andrew on behalf of Darrin. Nice set of results here, and I kind of want to dig into the investments into potential new product adjacencies. Clearly, derivative activity from a retail perspective has driven a lot of the recent headlines, and it's nice to see the GTO brand announcement from last year. But I guess my question is how well positioned is Broadridge to step into really these derivative adjacencies? And just wondering how many more of those types of deals you think are winnable. And how should we think about the opportunity to take share in that arena, outside of typical cash equities?

Absolutely. And we think that the opportunity derivatives is a really nice one that plays on our whole theme of simplification because it's -- what we've been working on is simplification within cash securities across geographies. So bringing derivatives into that allows people to simplify the number of platforms. And so it's really cost-effective for clients. I think that, that is a very nice opportunity for us on top of the cash securities opportunity. It is -- I think it will take some time for it to unfold, as people will be looking for us to bring R.J. O'Brien live. And so I'm not looking to have an immediate impact on this, but I do think that, over the longer term, it's going to really increase the power of our argument around global simplification. And it will help on both the opportunity derivatives and will help with sales on the cash side as well.

Got it. And then just a housekeeping point, a lot of conversation about balancing investment and growth here. So I guess, was there any -- and how should we think about the margin benefit you saw from your previously announced cost alignment initiatives? And has anything changed from an investment strategy from just even one month ago, at the Investor Day, on how you think about the investment growth trade-off here?

So it's great question. Two things I'd say about it. The higher performance on the revenue side and our ability to be able to get the efficiency gains, expand operating margins through the initiatives, which I'll touch on that we mentioned in Q1, is what allowed us to to make these investments. And so in Q1, we talked about -- roughly about $80 million in cost initiatives, real estate, cloud migration, product realignment, and I think we're well on track. You saw 150 basis points of margin expansion in the second quarter. And I think it's that efficiency that gives us the capacity to be able to make these investments. The second point I'll make, and then I'll turn it to Tim to see if he has anything, is that the investments has been a key part of the financial model in strategy for growth, a key part of our capital allocation program prior to my joining, and it's going to -- we're going to continue to remain committed to it to support the future growth. And I think we have -- Tim mentioned some of these, we have a number of high-returning investment opportunities, as we look across our post-trade platforms, our wealth management platforms. As we look across products and SRD II and VSM and, obviously, our people with our broader sales market strategies. These things help us with growth long term. Might be a little margin compression in the short term, but they help us with long-term growth. So this leadership team is going to stay committed to investing, using the efficiency gains that I just talked about and still delivering the steady and consistent earnings growth that we were able to post and guide to for the rest of this year.

The next question comes from Mark Palmer of BTIG.

First question, we're already getting a couple of inquiries from clients about this. Just given the environment and some of the frenzy that we've seen over the past week, plus with the [ Radix revolution ] and what have you, what impact, if any, are you seeing on the GTO side from anything that's going on there? And then I have one follow-up.

Yes. Mark, I'll just jump in on that, which is, certainly -- and we are seeing record volumes and volumes that are above what we saw last spring. And the broad point is that we are -- just operationally, we're handling those really well, and that's been a challenging week for the industry. And as I said, a few minutes ago, I think that really reinforces the logic of a mutualized industry solution. With respect to what we think the results -- the impact on the results will be, I'm not sure that we're thinking that these really frenzy things will be sustained, and we think that's a short-term phenomenon. And as Edmund remarked, as we get into Q3, we are going against comparables last year, where there were absolute record volumes. And so we're not seeing -- we're not expecting significant year-on-year growth in -- from trading. And GTO, obviously, we saw revenue from sales and other things. But even with this activity, we think the activity will moderate and will be against tough comps.

The next question comes from Puneet Jain of JPMorgan.

Tim, given that we are almost into this new environment, are you seeing any long-term changes in retail consumer behavior as it relates to physical versus digital delivery of communications or investing through an adviser versus on their own?

Yes. Absolutely, Puneet. So I think that we are certainly seeing -- relative to physical versus digital, we saw very strong growth in our digital communications in the first half. I remarked on that, and that builds on a very nice year last year. And we're seeing very strong interest from our clients in terms of digital transformation and working with us to upgrade their infrastructure for digital communications. I think I was a bit surprised to see the increase in distribution revenues this quarter, and that's not something that we generally expect. That was really due to increase in both regulatory and event communications. I think we continue to expect that, over the long run, that physical piece will be a smaller part of our business model, and the digital piece will be a bigger piece. Relative to adviser versus digital channels with the sector investing, I think we're just -- we're seeing both. We saw very good position growth across all of our broker-dealers, including both adviser and online. I think, perhaps in terms of number of investors we're seeing with this democratization, the new investors being on the digital side. But if you look at where the money is, it's still definitely on the adviser side. And those underlying trends that we've been talking about for the past couple of years, we don't see any change in terms of move to managed accounts, move to model-based investing. So we think that trend will continue. We do think there's an overlay of a new trend around democratization that will add and bring new investors in, which is why we highlighted the fact that with all these new investors, really, the need for strong disclosure is higher than ever.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Gokey for any closing remarks.

Great. Thank you, Andrew. Thanks, everyone, for joining us on today's call and persevering through our technical difficulties. Just knowing this was not conducted on the Broadridge platform, so we'll put that plug in. I just want to say that, as we finish up here, I think my conclusion looking at this quarter and the half is that we are executing on our growth strategy. I think you heard us talk about it multiple times that we are investing for future growth. And we're on track to deliver at the higher end of our recurring revenue, adjusted EPS growth -- range. We feel really good about the 3 years as well. We appreciate your support for Broadridge. We look forward to updating you in April on our third quarter call.

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