Good day, and welcome to the Broadridge Fiscal Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

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?

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…

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…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from David Togut of Evercore ISI. Please go ahead.

Good morning. I'll ask my question and follow-up together upfront. First, both Tim and Edmund, you reiterated your view that you'll recognize revenue from the UBS contract in mid-calendar 2023. What does the annualized revenue and profit run rate look like from that contract kind of once you're up and running?

I'm sorry, was that the follow-up as well, David?

That's the first question. The second question is really the guide to decelerating stock record growth in the second half to mid-single digit from 9%. What's behind the deceleration in stock record growth in the back half?

Okay. Perfect.

Maybe I'll start off with the first question. And good morning, David, and thanks for the question. I mentioned on our last call, in Q1 -- for Q1 '23 in November that we expected the annualized revenue on the existing and in-flight contracts that we're working on to be roughly $100 million and the amortization associated with all of the build and conversion cost to be roughly about $65 million. We continue, as I said in my prepared remarks, to expect to recognize revenue in mid-calendar '23, this will not be at the full annualized amount that I just mentioned and that we shared in November. The fiscal '24 specific amount will be subject to the rollout approach that UBS has and will have a more definitive view of what those near-term economics are when we finalize those plans. And as we've previously mentioned, I'll go on to say that we do expect it to be dilutive to margins, but we can offset that and continue to deliver margin expansion. I think the important thing, as we mentioned -- we both mentioned in our prepared remarks is that we're now past that peak period of investment and expect to return to more historical free cash flow and be able to deliver on our long-term financial objectives. Tim, I'll maybe turn it to you for the second component.

Yeah. And I think just to reiterate, I think Edmund said was right. And David, the really -- for us, this is something we continue to be really excited about in terms of the broader $16 billion opportunity in Wealth Management and how this positions us. And as we look at the components that we've created for UBS and how we are now able to show those to other clients as live software, that makes a real difference in the other sales discussions which is why we're seeing a building sales pipeline, not for other transformational deals, but for a series of components. So we feel good about that. Turning to the second part of your question or the follow-up question on our guide for the second half of the year in terms of stock record growth. I think, clearly, we have been at quite elevated levels of stock record growth over the past couple of years, well above historic sort of mid-single digit norms. And last year, really despite a 20% decline in the market, investor participation remained very healthy with very good growth. So we can't really predict the market. But given its ups and downs, our best indicator is really our forward testing. And that really gives us very good visibility into Q3 and pretty solid visibility into Q4. And really is based on that testing that we expect to see mid to high-single digit growth in the second half of the year. A little bit stronger for equities than for funds, but I think collectively, call it, mid to high-single digits. And we do think the fact that it's not sort of going back to levels of a couple of years ago, sort of not the growth rate, but the overall level really underscores a fundamental lift that has taken place driven by free trading, app based investing, younger investors being involved in the market. And that sort of one-time effect is then building on the continued growth driven by longer-term trends, including growth in managed accounts and more recently, direct indexing.

And David, I'd just add to Tim's point. Again, equity position growth of 9% is flat to last year and the testing that Tim just mentioned continues to be in line with what our expectations were in our original guidance and what we have as well at that mid to high-single digit level. So we are reaffirming our guidance and outlook on that. And again, the same thing with the fund position growth as well. You saw a little bit of a deceleration sequentially in that. But again, we said mid to high-single digits, and we still expect that level to play out.

Understood. Thanks for that.

And our next question today will come from Peter Heckmann of D.A. Davidson. Please go ahead.

Hey. Good morning, everyone. Thanks for taking my question. I wanted to see if you had any thoughts about where we are in the process of moving to direct indexing. It still seems fairly early. But conceptually, could we see managed accounts and direct indexing continue to generate really interesting growth that leads to strong growth in equity positions, but potentially fund positions continuing to slow down and if that could be the case, how do you think about the -- any relative change in economics due to mix shift?

Yeah. Thanks, Peter. It's Tim. I do think that this is one of those things, it's the latest in a long series of investment product innovations that have help drive sort of the broad trend that we call the democratization of investors on top of things we're all familiar with, like 401(k)s (ph) and IRAs and ETFs and managed accounts. It's pretty early days. I think it is even too early to really sort of pick it up in the numbers, you sort of begin to see it as a sort of like the barest of breezes if you're trying to sort of talk about tailwinds. And I do think it's one of those things that could gain traction. There's a lot of benefits for investors in it relative to tax efficiency. So not a big driver today. I think of it as not necessarily something that is going to lead to a -- I'd like to be here telling you it's going to lead to some sort of fundamental change in the growth trajectory. I think it is something that just really supports the long-term trends that we've seen. And if we see it begin to begin to have a real measurable effect, and we'll begin to talk about it and break it out. But we're not seeing it really as an independent thing yet, but we are seeing it as one of the things that gives us confidence in the long term.

Okay. That's fair. And then just on the Secure 2.0 legislation. Can you just remind us that the portions of the business related to retirement plans at Broadridge and how you see that potentially being a tailwind for continued growth in retirement plan participants.

Yeah. I'll let Edmund add on to this, but retirement is not a huge direct part of our business. We do serve all of the retirement record keepers in their client onboarding. And then we serve a lot of the 401(k) market in our mutual fund trade processing. So we have a couple of our smaller businesses that directly serve. And then obviously, it's a big factor for all of our wealth management clients. It's a big portion of wealth management. So we don't see a -- I'm not sure that we're going to be sitting here a year from now saying we have a significant change in growth because of this, but it is something that is going to put more money directly into investing, help our clients, help their ability to invest, and I think will be generally a tailwind for a couple of our smaller businesses.

Yeah. And the only thing I'll add to what Tim said is that, we do have in our mutual fund trade processing unit economics driven by assets under administration and retirement accounts. And if this legislation goes through and we see the increase in the amount of retirement accounts and assets, then we should expect to see some uptick in those assets as well. So overall, I think while small right now, this is generally a tailwind for us, and we'll be more specific about the economics as it plays out.

Great. That’s helpful. Appreciate it.

Our next question today will come from Darrin Peller of Wolfe Research. Please go ahead.

Hey, guys. I wanted to touch based on, we always have this seasonal pickup in the second half for bookings for closed sales that we have to like, we have to prepare for, which is honestly sort of to be expected. I think you guys were around 20 to 20% or maybe 21%, 22% of your budgeted bookings in this quarter, which is, again, seasonally normal. So maybe just make sure we get a little more color on what the actual drivers are of your conviction on the pipeline and what parts of the business they're coming from for the second half of the year to meet those targets that you guys have for the full year. And just as a part of that, I mean, how much conviction do you have now? And are you seeing any of those numbers flow through to the wealth side coming out of, again, I know the UBS contract will be up and running and -- but it's not going to be very profitable. So it's really relying on other contracts and other revenues to complement that platform. Are you seeing any evidence of that yet? Thanks, guys.

Yeah, Darrin. I'll start and Edmund can add on. I think as you say, where we are right now is seasonally at a very normal place and when we look at our pipeline and then sort of the stages of deals in the pipeline for the second half, it is very similar to previous years in terms of the coverage of deals in 00 for the second half and their stage of maturity. So as we reiterate today, that's really what we're looking at. Specifically on the wealth side, we said in the call last time that our pipeline is up 25% year-over-year. It's not to the stage where we're beginning to see it in the sales numbers as much as it is sort of in the pipeline build. So that's sort of where that stands. But I think the quality of the conversations gives us a lot of good feeling. And then I just want to come back to, I discussed this in my prepared remarks, but the 30 plus meetings that I've had with CEOs and other C-suite executives over the past month. And just in those conversations, there's a continued focus on next-generation technology, a lot of energy around modernization, digitization and at the same time, management teams have a lot on their plates, which is why they like the componentized approach that delivers things and delivers value along the way. And so there's a lot of positivity around us as a partner. And those, I think, are the things that have led to our pipeline being really at an all-time high. And that then combined sort of the stages of where those things are in the pipeline is what allows us to feel confident about the rest of the year.

And Tim, I'll add one important point. And Darrin, I know you know this, the closed sales that Tim has just been discussing here, the in-year closed sales have aren't as impactful on our full year recurring revenue. It's the revenue backlog of what we've already closed, which is now 12% of recurring revenue, that's the big driver of our growth. So I think everything Tim said is correct, but the revenue backlog is what gives us the confidence in our ability to be able to hit the guidance this year.

And just on the wealth side, just as a quick reminder of where that's -- how much evidence you're seeing that you're going to be able to take advantage of the platform, the UBS platform you built out?

Yeah. I think that comes back to the -- anecdotally, when I think about the specific conversations that I'm involved in and enthusiasm as people see those components and see them live. And then numerically, it really comes back to the pipeline and comparing that year-over-year, which there is a substantial increase. So I think this is more of a topic that we don't have the news on the actual sales, but we have the news on the pipeline and there'll be a ongoing topic (ph).

We have the news on the pipeline and what we said in Q1 was that we expect incremental sales of $20 million to $30 million in that wealth and all that Tim is saying I think gives us confidence in that number. Which, again, we feel good about and reaffirms our belief in the business case and the overall return for the company here.

Guys, just one quick follow-up is on the position side. Obviously, position growth and equity in mutual fund is really out of your control. It's a market dynamic. But there's -- clearly, there's some correlation to what people have in their savings accounts and what they can do in stocks or anything else in that matter in terms of investing. And so I guess just looking forward maybe into '24 and beyond and I know it's early, but if you do see a change in the patterns of position growth rates, I mean, is this company do you feel that the drivers outside of that are strong enough to sustain the medium-term type targets you've been showing? It seems like there's a lot of wood in the fire that provide for sources of growth, but I'd just love to hear your thoughts. Thanks.

Yeah. I think, Darrin, when we look sort of at the -- it's true that in past times when there have been significant dislocations like 1999 and 2008. In those extreme times, position growth went to zero, didn’t go negative, went to zero. If you look at the growth of our ICS, GTO is clearly just driven by pure technology sales not related to position growth. And then if you look at the growth of our ICS business, it's been about half and half in the past couple of years in terms of revenue from new sales versus internal growth from positions. So clearly, if positions growth were to go all the way to zero, that would reduce our overall growth rate. But that has never -- has not happened for an extended period. So I think we wouldn't have any reason right now to think that our medium-term growth plans wouldn't be the same.

Yeah. And again, I'll just add to Tim's point, position growth -- we have a very diversified business. Position growth drives 20% of our overall recurring revenue. So I'll point that out. But I just reiterating a point that Tim made, you won't be surprised. We look six months out and have confidence in that information, and we come and share that with you. You won't be surprised, we won't be surprised and we have the flexibility in our model make adjustments and ensure that we're still online with our growth objectives and guidance that we give if we see anything like that.

That’s fair. All right. Thanks, guys.

Our next question today will come from James Faucette of Morgan Stanley. Please go ahead.

Thanks very much. Just wanted to follow up on questions around the rollout of the wealth platform with UBS and the leverage that potentially you get with other customers. I think it makes sense that as those start to go live, it should improve sales cycles, et cetera. But what about from an implementation perspective, are there things that you're learning in this process with UBS that should allow you to make commitments to potential customers in terms of their own new implementations even if it's just for specific pieces or modules? And how should we think about that on a go-forward basis in creating that flywheel?

Yeah. Sure. And first of all, James, welcome to -- welcome to the call. Great to have you on.

Thank you.

And I do think, look, there have been lots of lessons learned in the work with UBS. I think in the future, we would break things like this into smaller pieces and do them a little bit differently. So that's definitely a learning. But moreover, we have built a lot of muscle as we have gone through this in terms of our project management technology tracking, the level of our ability now to look at -- we've converted all to agile. Where we are in the agile sprint. The number of story points left, the velocity and the story points. When you get into the testing, what are the expected defects, what are the defects on the defects when they're retested. How do you model all that out from a capacity standpoint. And we've built a whole platform around that, which we're now using rolling out to the rest of the company. And so it's been a pretty incredible maturation as well as just becoming much, much more mature on leveraging AWS. A lot of this new technology for UBS is all based in the cloud. And our maturation around that and around the development productivity that we're seeing is something that I'm very, very excited about. So we've talked about how this work is really driving the technology transformation of Broadridge to be the true SaaS company in the future. And I think that piece is really playing out well. So thank you for the question.

Great. And then just wanted to ask a question related to headlines that we started to get some inquiries from investors on, and that's related to tailored shareholder reports. And given the pending SEC regulation on shareholder reports. Can you provide some color on how Broadridge is becoming involved or the opportunity to be involved in the creation and production of these reports to help offset some of the admittedly small headwinds associated with notice and access fees.

Yeah. Absolutely. So tailored shareholder reports, as a reminder to everyone, what for the annual and semiannual reports that people get around fund communications, it's two communications a year instead of getting either a link to or a notice of a very long report that's difficult to read. People will receive, investors will receive a two to three page summary, just like some prospectus years ago. And we think this is very positive for investors all the testing shows that it is much, much clearer for investors to see, is more cost effective for funds in the long-term report is much more digestible to be e-delivered and we're big fans of e-delivery. So a lot of positives all around. For us, as we said on the last call, there is the slight flying that we get paid right now for these notices. I think we said $30 million some and that will go away. In the meantime, as we talk to our fund clients, this change, while it sounds simple, create some real complexities for them. The reports are -- the mandate is the reports come to investors not with a sort of generalized expense table that pertains to many different share classes, but it is tailored specifically to the share class that, that investor has. And so in talking to our fund clients, we talked to one fund complex who today does 200 different reports. In the future, they're going to need to do 1,200 different reports. So the scale of the work on them in terms of even though the reports are short, creating them in a very tailored way specific to each investor, there's a lot of complexity there. And that's all around data management. Converting that data and composing it digitally and being able to send that. That's something that's a real strength of ours. And so we think that there is an opportunity for us to really help the industry. We've had a couple of webinars, one with Ignite, one with Nixa among the best attended webinars for those groups over the past year because there's a lot of interest in the fund industry about how do they meet this mandate, which is, on one hand is sort of -- it sounds like it makes sense from an investor standpoint, but view the one having to actually deliver it, it's tough. And so we are definitely working with fund clients. We definitely think we can help be part of that solution.

That’s great. Thank you so much.

Our next question is from Puneet Jain of JPMorgan. Please go ahead.

Hey. Thanks for taking my question. I know like you talked about that the stock record growth can slow down to mid-single digits in the back half of the year. Can you disaggregate that 5% or so growth into benefit from secular tailwinds like zero commission, direct indexing and any potential macro headwinds there?

Puneet, it's Tim, and I'll let Edmund add on this. It is, what we have is very specific testing where we're able to measure right now, how many positions are there in these funds, which allows us to say when we and how does that compare to where it was last year, and that's where we get the growth numbers for. We don't have specific data on macro versus tailwinds. What we do know is things like the positions in managed accounts. We're growing at double-digit rate the positions on non-managed accounts. We're growing more mid-single digits. So we can see that differentiation, you could do some math on that. So that's where -- when we talk about the tailwind, we can incrementally measure that, and that’s may be a point or 2. And then broadly, it's driven by the macro with these additions, but I’m going to see if Edmund can – cover on that.

So the host (ph) is just going to hit on the -- one thing I do first, Puneet, is just to be clear, we were saying mid to high-single digit growth. So that 5% would be sort of at the low end of what we expect here. So I just want to be clear on what's been in our guidance and continues to be what we're reaffirming here. And as Tim said, it’s very hard to desegregate between macro and other, but we've talked previously about broad-based growth in online and full brokers and large accounts in mid-size and small accounts as well and managed accounts and self-directed accounts. And we continue to see solid growth across each of those areas. And that, I think, seeing that broad-based growth is what continues to give us the confidence in the guidance here.

Got it. And it was good to know that the pipeline is strong, but are you seeing any changes in client behavior over the last few quarters in terms of maybe delays in decision making or flow deals through the pipeline? And any changes in client preferences for outsourcing versus in sourcing, given some macro pressures that they might be facing right now?

Yeah. I would say clients are definitely busy. They are banking clients do have money. And it's an interesting one for us which is, we do best when they have money and sort of just enough money. So if they have too much money, then they like to build it in-house, and you don't have any money that it's hard for them to fund the project. So you have to be sort of just right as a sweet spot for our sales. So I do think that the conversations, there's a lot of thought before people go forward. There's a lot of work to get these over the goal line. And we certainly feel like that feel that, I'm sure you're hearing that from others. At the same time, we're moving in. We got a lot of stuff done in the month of December. As for the preferences for in-house versus third party, I think if I go back 12 months ago, people had a lot of money and you could sort of feel some of the conversations slowing a little bit more toward, well, maybe I should build this, maybe I should build that. And I think when you look at where things are now, I don't know if it's money. I think it's as much all the regulatory change that is coming. There are so many things that people are having to address coming in from the SEC and others that they have a lot on their plate and getting help is very useful. So it's -- and you have to segment that a little bit by size of institution. Certainly, all the Tier 2 institutions are strongly looking for help.

Got it. Thank you.

At this time, we will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. This is Tim. I'll just close things off. I want to thank everyone for joining us this morning. I hope that what came through is how pleased we were with our second quarter performance and our outlook for the full year, that our growth drivers remain healthy. Our business is resilient and that with our investment cycle increasingly behind us, our free cash flow is strengthening. So thank you very much. We look forward to continuing the conversation next quarter.

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.