Charles River, software, data sales drive State Street in Q2

Five years on, State Street’s $2.6 billion acquisition of Charles River Development is paying dividends. The custodian’s front-office software and data business brought in revenues of $162 million for Q2—an increase of 29% over the same period last year, and a 49% increase over Q1 this year.

In the bank’s Q2 earnings call, held Friday, chief financial officer Eric Aboaf said State Street’s overall 5.3% revenue increase year-on-year was “driven by our front-office solutions business … [which] enabled us to offset headwinds in other areas,” where overall fee growth was less than the firm had hoped to deliver, such as lower asset servicing fees as a result of less custodial business.

The front-office software and data business line—though a small part of State Street’s overall $3.1 billion revenues for Q2—was a standout performer while many other business lines, including back-office servicing, management fees, and foreign exchange trading, declined year-on-year as a result of lower client activity over the year, though most rallied over Q1 as markets rose and as a result of net new business.

The move to diversify revenues has been evident in major acquisitions of software and vendors, largely by exchanges—for example, Intercontinental Exchange’s acquisition of Interactive Data in 2015, and the London Stock Exchange Group’s acquisition of Refinitiv—with activity by custodians more modest and tactical. For example, Northern Trust bought Parilux Investment Technology to strengthen its Front-Office Solutions business, while BNY Mellon has owned Eagle Investment Systems since 2001.

State Street CEO Ron O’Hanley said on the call that the performance underscores the importance of Alpha, the firm’s front-to-back-office investment and data management platform—of which the Charles River software forms an integral part—to its long-term growth.

“The Charles River wealth management solution continues to resonate with clients and drove a number of on-premise installs this quarter,” O’Hanley said, adding that the firm also converted long-term clients from on-premise deployments to SaaS (Software-as-a-Service) models during Q2.

Aboaf added that 60% of State Street’s software clients now use its SaaS platform, with wealth management clients accounting for two-thirds of the uptick during Q2.

“We continue to advance and broaden our outsourced solutions capabilities across the front, middle and back office,” he said, citing the recent addition of ETF functionality, and noting a strong overall pipeline for the business.

However, the division’s strong performance in Q2 could make Q3 look less impressive, Aboaf warned: He expects overall fee revenues to be down between 1% and 1.5% in Q3, and expects front-office software and data revenues to drop 7% in Q3. “We don’t expect a level of on-premise renewals in 3Q that we saw this quarter,” he said.