Margin resilience and strong backlog support Q2 earnings, but sharply lower new bookings pose a risk to future topline growth; cost discipline and one-off expense tailwinds may drive better-than-expected margins.

($STT) Margin Strength Offsets Booking Weakness for Q2

# Margin Momentum Meets Booking Caution: Q2 FY2025 Earnings Outlook

## Executive Summary

We maintain a **Neutral-to-Bullish** outlook for the upcoming Q2 FY2025 earnings, expecting **modest revenue growth (~0–1% QoQ)** and **pre-tax margin stabilization at 25–26%**. The company’s robust operational KPIs—**record backlog of $137M** and **AUC up 6.4% YoY to $46.7T**—should underpin fee revenue, while cost discipline (expenses down 3% YoY) supports margin resilience. However, the **sharp drop in new bookings ($9M in Q1 vs. $48M in Q4)** introduces near-term topline risk that the market may be underestimating. The **absence of the $130M FDIC assessment** in Q1, a one-off benefit, may not be fully appreciated in consensus margin forecasts.

## Recent Trends Signal What’s Next

Recent quarters have shown **steady revenue growth** and **expanding margins**. In Q1 FY2025, **total revenue reached $3.28B** (fee revenue up 10% YoY; securities finance up 19% YoY). **Pre-tax margin expanded to 25.0%** (from 19.1% YoY), though it dipped sequentially due to seasonal expenses. The **Investment Management segment** led with an **8% YoY revenue increase** and a **28% pre-tax margin**. These trends suggest Q2 will see **continued fee-driven growth** and **margin normalization** as seasonal costs abate.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Pre-Tax Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|--------------------|-------|
| Q2 FY2024    | 3.12         | 68.5             | 24.0                 | 19.1               | 2.18  |
| Q3 FY2024    | 3.19         | 69.2             | 25.1                 | 22.3               | 2.36  |
| Q4 FY2024    | 3.25         | 70.0             | 26.0                 | 24.5               | 2.48  |
| Q1 FY2025    | 3.28         | 70.3             | 27.2                 | 25.0               | 2.52  |

**Trend:** Revenue and margins have improved sequentially, with Q1 FY2025 showing the strongest profitability.

## Management’s Forward Tone and Positioning

Management’s recent commentary reflects **“cautious optimism”** and a focus on **preparedness**. In the Q1 FY2025 call, leadership stated:  
- “We’re seeing resilience in core fee revenue streams.”  
- “Scenario planning remains central as we navigate macro uncertainty.”  
- “We expect seasonal expense headwinds to recede in Q2.”

Compared to prior quarters, the tone has shifted from defensive to **measured confidence**, emphasizing operational execution and cost control. The absence of explicit quarterly guidance, but reiteration of **full-year fee revenue growth of 3–5%**, signals a base-case bias with upside if bookings recover.

## KPI Trends & Upcoming Quarter Drivers

**Key KPIs for Q2 FY2025:**
- **Backlog:** **$137M (record high)**, up from $120M YoY, supports near-term revenue recognition.
- **New Bookings:** **$9M in Q1** (down from $48M in Q4), a potential drag on future topline if not reversed.
- **Free Cash Flow:** **$2.17B positive**, indicating strong underlying cash generation.

### KPI Movement Table

| KPI              | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change | Q2 FY2025 Implication         |
|------------------|-----------|-----------|-----------|------------|------------|-------------------------------|
| Backlog ($M)     | 120       | 132       | 137       | +14%       | +4%        | Supports revenue recognition   |
| New Bookings ($M)| 42        | 48        | 9         | -79%       | -81%       | Potential topline drag         |
| Free Cash Flow ($B)| 1.95    | 2.05      | 2.17      | +11%       | +6%        | Margin/cash discipline         |

**Impact:** Backlog strength offsets booking weakness for Q2, but sustained low bookings could pressure H2 results.

## Missed by the Street

**Expense Tailwind Underappreciated:**  
The **absence of a $130M FDIC assessment** in Q1 FY2025 drove a **3% YoY expense decline**. This one-off benefit, coupled with ongoing cost discipline, may lead to **better-than-expected margin performance** in Q2—a nuance not fully reflected in consensus estimates.

**Quote:** “The absence of the FDIC special assessment reduced expenses by $130 million this quarter.” (Q1 FY2025 Earnings Call)

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS   | Pre-Tax Margin (%) | Key Assumptions                                 |
|----------|--------------|-------|--------------------|-------------------------------------------------|
| Bull     | 3.38 (+3%)   | 2.70  | 26–27              | Fee growth accelerates, bookings rebound         |
| Base     | 3.31 (0–1%)  | 2.52  | 25–26              | Fee revenue stable, cost discipline continues    |
| Bear     | 3.25 (–1%)   | 2.40  | 24–25              | Bookings remain weak, FX/macroeconomic headwinds |

**Most Likely:** The **Base scenario** is most probable, given management’s tone, backlog strength, and cost control, but with bookings weakness capping upside.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS   | Pre-Tax Margin (%) |
|--------------|--------------|-------|--------------------|
| Q2 FY2024    | 3.12         | 2.18  | 19.1               |
| Q3 FY2024    | 3.19         | 2.36  | 22.3               |
| Q4 FY2024    | 3.25         | 2.48  | 24.5               |
| Q1 FY2025    | 3.28         | 2.52  | 25.0               |

### KPI Movement Table

| KPI              | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|------------------|-----------|-----------|-----------|------------|------------|
| Backlog ($M)     | 120       | 132       | 137       | +14%       | +4%        |
| New Bookings ($M)| 42        | 48        | 9         | -79%       | -81%       |
| Free Cash Flow ($B)| 1.95    | 2.05      | 2.17      | +11%       | +6%        |

### Key Management Quotes

1. **“We’re seeing resilience in core fee revenue streams.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: Underlying business remains strong despite macro noise.*

2. **“Scenario planning remains central as we navigate macro uncertainty.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: Management is preparing for volatility, signaling risk awareness.*

3. **“We expect seasonal expense headwinds to recede in Q2.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: Margin improvement likely as costs normalize.*

4. **“The absence of the FDIC special assessment reduced expenses by $130 million this quarter.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: One-off cost benefit, not recurring.*

5. **“Full-year fee revenue growth is expected in the 3–5% range.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: Implies steady, if unspectacular, topline growth.*

6. **“New bookings softened this quarter, but our backlog remains at a record high.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: Short-term topline risk, but near-term revenue supported.*

7. **“We remain disciplined on expenses and are focused on operational efficiency.”**  
   *Q1 FY2025 Earnings Call*  
   *Interpretation: Ongoing cost control should support margins.*

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**Bottom Line:**  
Q2 FY2025 should deliver **stable growth and margin resilience**, with operational strength offsetting booking softness. Watch for management’s commentary on bookings and cost discipline as key swing factors for the rest of FY2025.