Broadridge Financial Solutions, Inc. (BR) Earnings Call Transcript & Summary

Delighted to welcome Jim Young, Chief Financial Officer of Broadridge to our Payments and Fintech Innovators Forum; and Edings Thibault, I think, is here somewhere in the crowd as well. And Elsa, who just joined the IR team. So Jim, welcome. Thanks so much for being here today.

Thanks for having us, David.

So on the December 2019 quarter earnings call, you guided to the low end of your 8% to 12% EPS growth range for FY '20. You called out a 20% to 30% expected decline in event-driven revenue and a reduction in your organic recurring revenue growth forecast to 3% to 4% from 5% to 7% previously. So really 2 questions. Number one, do you see these mostly as sort of onetime or short-term issues? And then number two, you benefit from this highly elevated stock market volatility that probably everybody is experiencing today. And that it may drive a much higher level of trading volume.

Yes. Well, listen, on the second question first. And in the short term, the volatility on balance benefits us. So if there's a silver lining that puts more emphasis on our trading platforms, and -- we typically will see higher volumes and our systems perform really well and gather good proof point of how well Broadridge performed at scale. When you talk volumes, we've had seen some players out there that have struggled with increased volumes in the last couple of weeks. So we're pleased with our performance. But more importantly, to kind of what we saw in the second -- the first half and what that may or may not mean for the long-term trend. And obviously, disappointed. We're disappointed at the 2% organic growth rate for the first half targeting 5% to 7%, as you said. As we think long term, nothing that we're seeing has any implication for our long-term growth algorithm, which is embedded heavily in this 5% to 7% organic. And the big reason is we began our year with a large revenue backlog, $330 million, which is -- equates to about 12% of our recurring revenue base as of last year. So it gives us really good visibility, and that is still our lifeblood. It is adding new sales and onboarding those. And when we're doing 6, 7, 8 points of growth coming from our conversion of sales to revenue, our model is very much intact. The -- we had our best second quarter of onboarding. Usually, it's -- the activity can be later in the year, but we're now seeing just more activity come on. I think it was about 6 points -- 6-plus points of growth. So that portends really well. Our client retention has continued to be very high, I think, around 98%. So that's very strong. And then really, what we saw in the first half was what we call internal growth, which has nothing to do with sales or retention, a little bit more of the volume moving around. And none of that, we think, is really long term other than we called out a little bit around some post-sale fulfillment, which, again, a modest -- a smaller part of the business. But again, so we look at it and think all those trends are intact for our long-term growth, especially given the backlog, we start all of this with.

Great. How do you -- maybe just staying on the long-term model, how do you think about capital allocation priorities among dividends, share repurchase and acquisitions. And then what types of businesses are you most interested in acquiring at current prices?

Yes. And if I could, you know this well, David. But it's important as we think about, if you will, our algorithm, all that capital allocation fills in. So if I follow through and say that 5% to 7% organic, we think about a couple of points from acquisition. I'll come back to actually how we do it, where we spend. So that gets you to about 7% to 9% recurring growth. And then we've traditionally driven about -- or we've guided longer term to 50 basis points of margin expansion per year. We've done well better than that over the last 5 years on average. So doing very well against that. All of that gets you to a high single-digit operating income growth rate. And then we've been steady buyers of our own shares. So with that, that puts you into, call it, 9% to 11% EPS growth. We have been very disciplined dividend payers at about a 45% payout ratio. So at today's -- fortunately, today's yields push that up. And so there are a couple of points that puts you into this low -- 13% to 15% kind of TSR, more -- kind of 12% to 14% TSR model, which we think about long term. And as you know, we think we're unique, and we set 3-year targets. We delivered on our 14 to 17. We're in the final year of our 18 to 20, based on that whole algorithm that's put together. We're right on track. The earnings growth in there, the EPS growth with the Tax Act, we are targeting 14% to 18%. Right now, with our last guidance as of January 31, right on track at the high end of that range. So despite some short-term volatility and smaller quarters for us, I think our long-term picture is really clear. I know you asked the capital allocation. I'll come back and answer that, but I just wanted to frame out sort of how all those places come. So we do think about, on average, these 2 points of revenue growth coming from acquisitions. We are serial tuck-in acquirers. For us, that means typically $50 million to $100 million in the areas of either capital markets, which could be new asset classes for us, like FX or a collateral management tool or cryptocurrency, as was the case in the fall. It could be data analytics, supporting our governance business, like an acquisition we did in December on Fi360. And it can also be in the wealth space like we did in Canada to support our overall North American goals called RPM. So that's a big part of what we do. We do have a lot of free cash flow typically around 100% or better of our adjusted net earnings, which enables us to pay out the 45% payout ratio with lots left over and a pretty equal split between share buyback and M&A.

Great. How do you size the TAM for Broadridge's 3 businesses, capital markets, governance and wealth management technology? And then in connection with that, what do you think the 12- to 24-month growth opportunity is in each of the 3?

Yes. So as you said, we've got this full advantage. We've about $25 billion to $40 billion market opportunity. And we are today, call it, around $3 billion in fees. So for all intents and purposes, really lightly penetrated infinite room for deeper penetration of that. Even if you go at the low end of that range, $25 billion, capital markets represents about $10 billion. And you think about our opportunity there. While we've had great success in the U.S., there are still some very large players that manage their post-trade environment on their own software. We think, over time, Broadridge's mutualized solution, the middle of the network wins out, and then we'll win more of that. Europe and Asia are really early days in terms of adopting it all in-house. A lot of what we're targeting here is unvended. So we think there are really good growth prospects there. Wealth is the other piece, about $6 billion. $5 billion to $6 billion is how we size the wealth. We think we're early days. That's more vended. You've obviously been talking to some wealth players, a lot of different tools and technologies. But when we think about a -- the few -- frankly, the uniqueness of our offering, which is really a front-to-back platform for wealth. So everything from your adviser desktop, all the way back to your books and records, and settling and reconciling every day, you can do that in Broadridge. And UBS agrees with that and signed on with Broadridge to make this industry platform. It's not just a custom build, so a little bit of plug outside the TAM. So we're thinking about running -- how do we go after the top 20 wirehouses, starting with one of the very largest in UBS. So we think that's a really big opportunity. Early days, we're excited. And then the final piece is governance and communications. It's about $9 billion. A good chunk of that, given our market share and governance is around communications. We've had, obviously, a little bit lower growth in our communications business than we targeted. But we still think there is a really big opportunity as large in-house print operations, even among some of the largest financial services institutions in the world are big printers, believe it or not. We think that they consolidate on to an industry platform, even as print declines and there's more digital adoption, which drives up the cost per unit. And so we think we still win there. So we look at this any way you size it from $25 billion to $40 billion as ample opportunity to maintain this, and we'll update our 3-year numbers probably in December, would be our normal cadence, and we don't want to prejudge those numbers, but we wake up every day thinking about the durability of our growth, not necessarily acceleration, but durability of 5% to 7% organic. And so that's the way we always think about it. We think there's ample market opportunity to do it. It's really about onboard -- execution and onboarding. It's not for lack of opportunity. It's really about our ability to quickly go live with the clients.

Got it. Do you see increasing pressure in the brokerage industry is creating more risk or opportunity for Broadridge in your securities processing business?

Yes, that's -- it's a really interesting one, and I'll take it from a couple of angles. Generally, these cost pressures at the broker-dealer level are opportunities for Broadridge. We are part of the solution. We saw this during the crisis, post-crisis, when you had historically low returns on equity. Broadridge was the solution that you have the ability to take significant cost out, do things more efficiently, benefit from Broadridge's scale. You also get a nice regulatory halo because a lot of regulators will look at Broadridge as underpinning a lot of the capital markets players in there. And so when we think about -- generally pressures can be good. Near term, does that mean a contract could come up and they want a concession, sure. But generally, our view is more on wallet share. And we are part of that release out. They typically want to do more. What's interesting about this most recent round of cost pressure, though, is that it's driven by a lot of the 0 fee commissions, which I think really portend interesting things for Broadridge because it means 2 things. One, you've got an increase in activity and trades, which means there are more positions out there. Further democratization of trading results and more longer-term positions that help our ICS business. And obviously, we see that with -- there's other aspects of that, including robo advisers and managed accounts, which are all positive tailwinds for Broadridge. So we feel really good about that. And then also, as the -- as you see the merger activity, which is a function of this cost pressure, we think that also fits -- very much aligned with our wealth goals because the wealth environment is increasingly complex. It's no longer -- let me get you a printed book out in the mail and let's set up a lunch, and we'll go through your portfolio. It's much more -- even among the affluent, they want online tools for portfolio modeling and financial planning, et cetera. And so they need a much more sophisticated set of tools. This falls right into what exactly we're trying to do. And we think this deserves shared infrastructure with a player like Broadridge who's focused on investing in that area. So obviously, we think it's opportunity long term and fits very well with our value proposition.

On the same theme of opportunity versus risk, do you see that Morgan Stanley's acquisition of E*TRADE and both our clients and Broadridges', certainly on the ICS side or proxy business and then E*TRADE, obviously, on the securities processing side, how are you positioned in the MS E*TRADE merger? Kind of how do you see the pluses and minuses to Broadridge?

Got it. I think generally, we view it as a net positive, but let's pull apart the pieces and so you know how we're looking at it. As you said, on the ICS side, both our proxy clients, those are really position-based revenue or fee models. And so combining 2 entities really doesn't have any impact. Those positions don't go away. So on the ICS side, we look at it as -- will obviously help them in whatever we need to do, but it's really a nonevent, from a revenue standpoint. The more interesting one is on the technology side. As you said, E*TRADE is a very good client of ours. Morgan Stanley, while a big client of us for Broadridge across the board, is not on -- they're on their own technology, not on Broadridge's platform. And so first, we'll look at it. So that's really the key variable. What happens with that technology platform? So first, the time line is that's going to take a year to close. So even if it's calendar fourth quarter, 9 months away, 10 months away. They've talked about a 3-year integration plan. So we think it's going to be some time before we actually know what happens, we're -- probably 2 to 3 years would be my best guess. But within that, there really are 3 scenarios, probably with equal probabilities that the neutral case, which is they manage 2 platforms, that's not unheard of. You get 2 very different systems, 2 different client bases and managing that with 2 platforms. So that's one that be a neutral case. There's the upside case, which is -- which we're fairly bullish on, which is they're going to probably need to pick a platform and probably neither you could argue that Morgan Stanley while very sophisticated, maybe not have the perfect platform for the E*TRADE business and the higher frequency of trades and more accounts. Broader E*TRADE is on our SaaS platform. So they're availing themselves all the best and latest technology. So we think we've got a really good pitch. Morgan Stanley, we know they're really close partners of ours. They'll have a high bar, but we're -- we think we've got a really good pitch because at some point, they're going to have to make a decision if they integrate it. It's not a -- you do have to identify which platform. I don't think the legacy platform is the solution. So there could be a new build in there. Who knows what can happen, but we're excited. We actually think we've got a really good pitch on that. And then there's a downside case of they somehow don't take the CFO's advice on the right technology build, which will be shocking. But they put that on to a Morgan Stanley platform. They don't need Broadridge. We still view it as a not a material event for Broadridge. We also have termination fees and protections for ourselves, which would be a ways out there. So net-net, we actually think there's good opportunity, along with our wealth. Obviously, we're going to monitor it really closely to make sure the downside doesn't happen, even then that's manageable, but we're actually more focused on. We think there's actually on balance, more opportunity that comes out of this.

So you've said that your go-live date on the UBS wealth management tech platform is mid-calendar 2021. And that seems to be probably a good point in the cycle also on the securities processing decision that MS will be making with E*TRADE. So is it your plan to basically go to Morgan Stanley, both with a wealth management tech solution and with a securities processing solution and try to go enterprise-wide with both?

That's clearly one scenario and a pitch and you're right on the timing, which is we signed UBS, we know all eyes are on us. We get this right. I -- we think there's a lot more business to come. Clearly, we're in sales processes, but they'll take a long time, and we clearly know that people are looking very carefully at what happens with UBS. They all talk to each other. So they'll know. Right now, we're right on track, as you said. So yes, we think that's actually -- originally in our business plan. We would have said, okay, UBS is the top 3, top 4 wealth client, depending on what league table you use. So clearly, we can start looking at clients 4 through 10 or even later, which have a really solid one. We hadn't thought about going upstream. It is very possible that we could have a pitch there. It's really early. Morgan Stanley is a very strong firm, but we've got very good relationships, and we would certainly make that pitch. And I think there's a very credible pitch there. But obviously, a long -- a lot has to happen between now and then.

Great. Just staying on technology for a minute. Where do you stand in implementing blockchain or distributed ledger technology in your international and U.S. proxy services businesses? And then related to that, can you quantify for us the possible EBIT margin benefits from implementing blockchain?

Yes. Look, I think Broadridge probably doesn't have -- I'll take out the word probably, does not have the name recognition that a lot of other companies do, especially at this conference. But I do think one of the things we're really intensely proud of is blockchain is not sitting in a lab somewhere for us. We're at -- we're actually out doing this, commercializing it, we've done annual meetings in the U.S. on blockchain. We've done them in Europe on a major financial institution. And so these are not hypothetical. We've done real annual meetings and vote counts on blockchain. What's more interesting is -- so those have been not meaningful in the number of votes that we're doing relative to the big base, but it shows that we can get this live and you can do a real vote on it. But what's really interesting is right now in Europe, there's something called the Shareholder Rights Directive II, we call it for short SRD, which has a lot of U.S. style obligations for the financial intermediaries, which is to get out all these investor communications to the end users, not just to sit with what we call advisers here. They need to get out. So they now have -- and they also have a many-to-many problem that we have in the U.S. So we are -- and this is great because there's an impending event, I think, later this calendar year. They need to be compliant with that. We are in market. Our plan A, what we're in market with is a blockchain or digital ledger technology solution. So again, that is the way we're solving that problem, which serves really well, so we can maintain the records of who owns what, their receipt of materials and maintain that on digital ledger. So again, I think it shows a really good progressive mindset and applying this as plan A in a new market where we're going to pick up some new opportunities, which is really exciting. Too early to comment on revenue and earnings. But suffice to say, it's a cost at the moment to do it this way, but long term, we think it's right. And by the way, it's a good long-term investment and arguably our most valuable franchise to say we're going to be here for a long term and a little bit of a message to any would-be entrants to say we're willing to invest big money. And we -- as you know, we spent $140 million on buying a technology player 3 or 4 years ago. It helped us get there faster. So we're very deliberate and committed to investing in our platform to make sure that it's good governance today, tomorrow and many years to come. And if that's on digital ledger, then we're ready for it.

Great. Broadridge recently announced a new private cloud agreement with IBM. Can you quantify for us what the financial benefit is to Broadridge once you go live in terms of cost savings, time to market with new products?

Yes. This is an important deal. So let me give a backdrop before I even come close to what you're asking around the quantification, which is we're still very committed to the public cloud. We've already built new applications on the public cloud. We've already refactored some of our existing distributed applications onto the public cloud, which is great. We can get out of the hardware business, the software business, much more on a user basis. But what we realized was that we still have a big base of distributed applications that take a long time to refactor, and we want to avail ourselves with the benefits of being -- what we're calling a private cloud and having IBM manage that. So we get out of the business of hardware and having certain personnel that are managing all this and shifting that to IBM, which gives us all the benefits of IBM's scale, their virtualization, which is even stronger than ours and all the resilience they bring. So yes, we wouldn't have done it if the economics were not favorable to us. But the goal is to reinvest a significant amount of those economics into more developers, new developers, refactoring existing code base. So not ready to kind of go into cost savings because the ideal scenario is that we reinvest a good chunk of that. But I'd say it's all embedded in this longer-term goal of maintaining the 50 basis points plus of margin expansion, doing things like this are important. It's eating your own dog food because we're out telling clients all the time, don't manage these things that are non-different. They may be critical, but they're non-differentiating why you're doing that. Similarly, us managing hardware and network communications gear is non-differentiating, we realize. What we do need to be is really good on the business process and the developers behind it. So long-winded way of not answering your question, but we're not ready to kind of quantify savings mostly because we want to come -- that's they got to turn around and be invested.

Got it. How would you assess the risk to Broadridge from the SEC's current review of the U.S. proxy system? And what are the upcoming milestones we should be watching for in this review?

Yes. Obviously, the SEC is really critical to our governance business. We've been a long time, in our view, good partners to them. We're kind of, we think, honest brokers who certainly always want to do the right thing. There are these periodic reviews, which we've been doing for decades, and they come in a lot of different forms. We think we're really aligned with the SEC. That seems to be very pramatic -- very pragmatic on things. So things -- I'll kind of give you in-flight conversations and things we keep our eye on. So things that are in-flight are regulation 30e-3, which allows mutual funds to send a notice instead of a full package to their end investors alerting them to the availability of the communications data. That will save some distribution, postage and paper for them. That goes live, goes in effect January of 2021. That is neutral to slightly favorable for us. So we're good with that. We're helping all our mutual fund clients get ready for that. Again, this started, just to give you a sense of time line of these things. That 30e-3 first took life in 2015 and going live in 2021. So these things are very slow and deliberate for good reason. And all players need to [ comment on that ]. So that's one on the fund side. Another one on the fund side was the SEC has been very focused on potentially modernizing the experience for the end investor. And so versus a full package or even a notice that doesn't have a lot of information on it. How do you make it an impactful summary that gives a sense of performance and fees and being cost-effective in the industry, but better value-add to the end investor. So we think there's a lot of focus on that, where you've got a lot of energy around that. We obviously think we can help. It's not so much a big economic event as it is an opportunity for us to sort of showcase and help the industry with new -- with good technology using our digital capabilities. And we think there's momentum, some momentum around this. We have to see what happens. The SEC has an agenda item around streamline communications. Don't know when that's going to come up, but they've talked a little bit about this. So we're hoping that this is more of what this is or more to follow. The last one you mentioned, which is just the proxy roundtable. Hard to say if there's any real time line to this. It's a series of industry groups that get together that have no formal authority, but there's definitely energy around end-to-end vote confirmation, which Broadridge has been very vocal about we can do and do really well and support that process, given our technology. There will be reviews on the universal proxy, technology and the system. There will be a group looking at fees. We're on that group, but it's not a formal processing like that. And so we sort of notice well. We're very big participants in this whole process. So right now, those are the milestones and the things we're keeping our eye on. But right at the moment, more status quo.

How would you characterize the major changes that CEO, Tim Gokey, has made since taking over from Founder and CEO, Rich Daly?

Yes, obviously, big shoes to fill. And it was, in some respects, highly continuous because Tim was there for 10 years driving our strategy and our M&A. So a lot of it is very continuous in terms of strategy. But the things that are different, Tim brings a real product and technology bent to the business. And so as you might expect with a PhD in finance from Oxford, really thoughtful about what does the whole system look like? What products do we have that align with the pain points in the capital markets? And then how do we have disciplined product management, very much like a classic software company? What's the market opportunity? What's the value proposition? What are the economics for us and managing our product life cycle with that kind of discipline? So we had a very senior hire, senior person from JPMorgan. Fred Duden, who's come on to our leadership team, Global Head of Product, that's new for Broadridge, really bringing that product discipline. I think you're seeing your early views of Tim being a really smart business technologist about how we apply it. Everything I just talked about on cloud thinking about adopting the public cloud, use of the private cloud, I think that's got Tim's fingerprints all over it in terms of thinking about what we look like as a next-generation technology company. And then finally, I think Tim has a real international bent. From years at McKinsey, he thinks very globally. He's convinced of the international opportunity for Broadridge. And so another big -- somewhat of a statement hire was Samir Pandiri, who ran a division at BNY Mellon, bigger than actually all of Broadridge, leading our international business. And so I think those are really good indications of Tim thinking about product, technology and international.

Great. Let me just pause for a minute to see if there are questions from the investment community. So you mentioned your 3-year cadence on analyst meetings, which I think puts us at around December of this year. So if that's correct, should we be thinking about a new potential 3-year growth model, largely sustaining the existing model or representing a potential change in trajectory of your growth rate?

Yes. We -- right, so your cadence is right if -- we'll firm up plans, but that would be right in December sometime. And the end of this year would be our natural cadence of 3 years, and we do get these 3-year targets. Obviously, we don't want to prejudge or get ahead of ourselves on what those numbers would look like. But as I said earlier, when we look at the market opportunity, our revenue backlog of the $330 million, it gives us really good visibility of where that growth comes from. So we begin with all of the same drivers that I went through before, mid-single-digit organic growth with margin expansion that turns into high single-digit to low double-digit EPS growth. All those things still feel really achievable to us. We obviously will have done it for 2, 3-year periods running, so it will take a lot to give up on that type of orientation. And if anything, we think we've built more muscle than we have before. We think we're a more fit company than we have been before. So we're excited, but we'll obviously -- you got to give us a little something to be excited about to deliver and -- down the road, but we'll go do our work on this and come back with our plans where we think opportunities are going to come from and where growth is going to come from.

Just to close on the question of durability of growth. Obviously, we're in an environment, which is rapidly evolving, given COVID-19. So number one, any impact to Broadridge from COVID-19 or coronavirus? And then number two, what about your model makes it so durable and able to withstand external shocks?

Yes. Look, we -- I think we've proven we've got a pretty resilient model. And so we look out and the best test -- pressure test we could do is go back and look at the financial crisis. One of our biggest drivers of growth are the number of positions, both for equities and interims. During the crisis, those blended to like a positive 1%. With equities, I think had a nadir of minus 1% and funds somewhere around 3% growth. So these are things that even grew during a crisis. Who knows what the retail investor does, but that's a really good benchmark to -- a good reference point to use. As we look at our GTO business, you've got big long-term contracts. The vast majority of that revenue is under a long-term contract, really the fixed licenses. That gives us really good visibility. There is a portion of that GTO revenue that is more variable, that is trade based or account based even within that. We would say that, that is -- those are not always per drink but can move in bands, and so they are -- they don't -- they neither spike up quickly nor spike down quickly, but there'll be a little variability in that. So we like how that business shapes up, given the long-term contracts and its mission-critical infrastructure that you need to keep doing. It's not discretionary. In the near term, generally, as we said at the beginning, volatility is good. But we don't -- these markets -- markets like this are not what we -- we like sort of steady growth markets. But that said, we can be near-term beneficiaries with short-term volatility. That's been proven in the past. But otherwise, we think we have a fairly resilient model and one that you still really need Broadridge even during -- if there were macroeconomic challenges even during periods like that. And it's just too early to tell as we sort of see what all the implications are, but we'll be a mainstay, no matter -- we think mainstay to our clients no matter what.

Understood, Jim. Thanks so much for sharing your time and insights today, and it's great seeing you.

Thanks, David. Appreciate it. Thank you.