Broadridge Financial Solutions delivered a quarter of faster-than-expected growth in recurring revenue, and boosted current fiscal-year guidance to boot. But a lot of the increase in sales won’t flow through to the bottom line.
Broadridge is projecting a lower overall profit margin for this year, but it isn’t because of any fundamental issues with its businesses, CEO Tim Gokey said. Still, the news knocked Broadridge stock (ticker: BR) on Tuesday, making it the worst performer in the S&P 500 . Shares were down 5% in midday trading, at around $151, versus a 0.1% rise for the index.
Earlier Tuesday, Broadridge reported results for its fiscal second quarter, which matches up with the calendar fourth quarter. The company, known for handling distribution of proxies and other communications on behalf of securities issuers, said it brought in 40 cents in earnings per share, down 17%. After adjusting for one-time costs and benefits, the figure was 82 cents, up 12% and in line with analysts’ consensus estimate.
Revenue came in at $1.3 billion, including recurring fee revenues of $798 million, a critical metric for Broadridge. Both were up 19% from a year earlier. Close to half of recurring revenue growth came thanks to Broadridge’s acquisition of electronic trading platform Itiviti, which closed last May. Both sales measures were modestly ahead of Wall Street consensus.
It has been a punishing earnings season for most companies. According to data from Wells Fargo’s Chris Harvey, S&P 500 companies that missed Wall Street’s consensus calls for earnings per share so far this earning season have dropped by an average of 3% the next day. And those that beat have also declined, by an average of about a quarter of a percent. Overall, the average post-earnings reaction has been a 0.8% decline for S&P 500 companies.
Broadridge management said on Tuesday that they expect recurring fee revenue growth to be at the “high end” of their previously offered growth range of 12% to 15%. They also reaffirmed their forecast for growth in full-year fiscal 2022 adjusted earnings of 11% to 15%, which would mean per-share earnings of $6.28 to $6.51. But management also cut their guidance for fiscal 2022 adjusted operating income margin, to about 18.5% from 19% previously.
That dynamic is explained by a projected increase in postage costs in 2022, which Broadridge passes through to its clients. Although that means revenue will be higher this year, with no associated increase in profits. It doesn’t represent a decline in the profitability of Broadridge’s core business.
“The margin decline is really just a technical factor around the increased distribution revenues, which are just pass-throughs,” CEO Tim Gokey told Barron’s . “In particular there’s a large postal increase this year which comes straight in and then goes straight out with no margin to us.”
That postage increase was a 0.7 percentage point drag on margins in the reported quarter versus a year ago. For the full fiscal year, it will subtract about a percentage point from margins, Gokey said.
The quarter reported on Tuesday is a seasonally slow one for Broadridge. The company’s largest business is processing and distributing the proxies and regulatory filings for nearly every public U.S. company—both electronically and by paper mail. Proxy season peaks in April and May, and Broadridge tends to bring in more than 70% of its full-year adjusted earnings per share in the company’s fiscal third and fourth quarters—or the first half of the calendar year.
Growth in stock records—or all the individual positions held by brokerages on behalf of their clients—is the main driver for Broadridge’s core proxy business. That was up 20% in the quarter reported on Tuesday, down from a 39% jump in the prior quarter, but still healthy growth. A flood of retail investors opening their first brokerage accounts over the past few years has been a boost to Broadridge’s business. More people holding shares in more companies means more investor communications for the company to deliver, and thus more fees.
Gokey expects this proxy season to be particularly busy, with more ESG-focused proposals for more companies. Once again, that means more investor communications for Broadridge to deliver.
“There are two mega trends coming together,” Gokey said. “One is the continued democratization of investing…and even as the market has backed off a bit we’re still seeing continued growth in stock records. And the other is this increased interest in ESG. We saw a big increase in shareholder proposals last year and we’re already seeing that again this year.”
Broadridge has a new and improved app for this proxy season as well as other innovations related to end-to-end vote confirmation and universal proxies.
Broadridge’s other businesses include software for asset managers, broker-dealers, and other financial service providers. It licenses tools or allows clients to outsource functions like trade processing, record-keeping, and compliance. Those make up about a quarter of Broadridge’s annual sales.
“BR remains one of our best defensive growth stocks with 63% recurring fee revenue retention driven by its near-monopoly in the street-name proxy business while benefiting from favorable, secular trends in its GTO business, including increased outsourcing by banks, broker dealers, and issuers,” wrote Evercore analyst David Togut on Tuesday. He rates shares at the equivalent of Buy, with a target price of $199. That is based on 28 times Togut’s $7.10 forecast for Broadridge’s fiscal 2023 earnings per share.
Broadridge stock had a tough January, losing 13% as the S&P 500 slid 5%. The shares have returned 20% including dividends annually over the past half decade, versus a 17% return for the index.