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

All right. Thanks, Tiana, and thanks, everybody, for joining me and Jim and Broadridge on the call this afternoon. First of all, I just want to reiterate again how much we really appreciate everyone being flexible doing this virtually. Obviously, it was really a bit out of our control, but we did think it was the right call to make last Friday, given the number of cancellations, the travel restrictions, frankly, even just the overall health considerations, just to be safe. So thank you, everyone, for being with us. Jim and Edings, I also want to thank you guys again for being flexible. Really happy to have you with us this afternoon. So as long as you could hear us, okay?

We can hear you well. Thank you.

Okay. All right. Why don't we start off, I mean, look, Jim, I think the obvious question in the room is going to start off with what the trends are you seeing right now, given the level of volatility in the world? Start off maybe with any impacts you think you're seeing, if any, or maybe not, most -- many companies so far in the U.S.-based have been saying limited, they're not seeing much yet. But any color you can give us on impacts in the U.S. from a demand standpoint, from an ability to do your business and travel standpoint? And then maybe we can even follow up on that on the volatility and trading volatility in the market and how that translates to you guys.

Terrific. Thanks for hosting us. Yes, I think the first off, people ought to understood we view our model as pretty resilient, especially as providers of mission-critical services. So we think about specifically unusual times like this. And it's important to understand that most of what we do is delivered on a SaaS basis or to minimum software that we're managing. So we do have sort of -- it feels very much like business as usual at the moment. Obviously, we're very aware of the situation and evaluating all of our business continuity plans. We do have some areas of our business that require physical delivery of certain communications. So we prepare for that. But the majority of our regulatory business is really electronic in nature. So again, right now, we're operating business as usual. And we look at historical periods for some sense of what could -- what this could spell. And so a couple of things worth calling out. And you mentioned trading volatility. And we see volatility, it generally appears -- if at all, it appears in our GTO business around trades. A smaller part of that business is tied to actual trading activity. And on balance, if there's more volatility, we'll get a little bit of additional trading revenue. Over time, we've attempted to minimize that. So it's nothing really kind of noteworthy or headline. But on balance should be positive, depending on the mix and all the rest. So that's near-term positive. On the ICS side, obviously, one of the things we track really closely, especially this time of year is position growth, both equities and mutual fund interims. Obviously, we are entering or the middle of equity proxy season. We entered the season, very healthy trends, good mid-single-digit growth and even higher in some areas. So obviously, we're keenly aware of that. Too early to tell, obviously, yet what that means. But I will just take a moment just to look historically, and each of these crises can have different characteristics. So we're conscious of that. But obviously, our best analog, really only analog is to go back to the financial crisis when our equity position, despite the market being down 40%, we were only down about 1% on our equities and we were positive on our mutual fund interims; on a blended basis, slightly positive growth. So we take some comfort that there's good resilience on that as U.S. securities and U.S. companies and mutual funds are still one of the best places to invest, and that will continue to be the case. So that's where we're anchored. No news at the moment. And obviously, doing everything we can to be prepared.

Okay. And at the end of the day, I mean, your clients, these are pretty much what you're offering, really mission-critical offerings. And so to some degree, whether or not it's new business or just existing business, to your point, I mean, there's a high recurring revenue nature to your story. It's probably unlikely to see a material amount of volatility anytime soon in your revenues other than maybe just the trade-related revenue streams, which, if anything, volatility helps, right?

Correct.

All right. Good. Let's take it a step back now and start looking at just the overall big picture. And I mean, Jim, last year, we had you on stage with us actually in physical person, which is not the case. But if we look at the discussion of just the business mix and who -- what your business dynamic is, I don't think everybody that dialed in or really on this webcast understands everything they showed about Broadridge. So we can take a quick step back, maybe just spend 1 minute on each of your key segments, and we're going to go into some of the drivers and growth trends of the core business going forward.

So just a quick overview. We are a global fintech player. We've got a real narrow focus on governance, capital markets and wealth. The first 2 are, we think, real franchises with really special characteristics around growth and defensibility. Really our special sauce is to bring scale, domain expertise and focused investments to, as we just mentioned, really mission-critical-type services, but these are also largely undifferentiated, which means they're really perfect for mutualized solutions, which is what we've done in capital markets and governance. We do think our growth algorithm is a strong one, that we've got good proof points over the years with 5% to 7% organic growth. A couple of points from acquisitions, which gets us to this target of about 7% to 9%. And with about 50 basis points or more of margin expansion per year, that gets us into operating income growth in the high single digits. And then you round that out with some share repurchase, and that gets us to low double-digit EPS growth and you throw our dividend in there, which these days yielding 2% or better, gets us into a low double-digit TSR. And we've been following that for some time with a good track record. And so Darrin, I think it's that and just broadly speaking, the ICS business houses the governance business and GTO houses the capital markets and wealth businesses.

Okay, that's helpful. Why don't we start off with the GTO segment just because it's an area that we focused a lot of our research on, and it's certainly been a driver in the past of your growth profile? It's a business that's been growing high single to low double digits over the last couple of years, especially when -- particularly through organic wins. We have seen some organic deceleration over the past year due to some longer conversion cycles, but the 6% net new business growth in second quarter is encouraging. What's the sustainable growth rate you see for this business? It's a question that I know, Jim, you and I talked about for a long time is what could this really do? It used to be a business I thought was going to be a concern. And then it really accelerated. And I think it has a lot of potential. So just touch on that segment over the next couple of years and what you see the profile looking like.

Yes. This is, obviously, a business we're incredibly bullish about. It's got a great track record in recent years. When we think about the record sales we've had over the last, I think, 5 successive years. And the backlog, you mentioned $330 million, GTO is a big driver of this. And this is, again, taking advantage of the need for mutualization in a lot of these mission-critical services and really specifically around post-trade management of different securities, whether it's equities and fixed income and FX and newer things like collateral management, et cetera. So we are in a perfect space, meeting an industry demand as our clients are facing low returns on equities. So when we think about the growth, it's as much about the durability as it is the absolute growth rate. And this feels like it's got legs to continue growing for a while. Obviously, as a company, we target about 5% to 7% organic. We expect GTO to contribute on the higher side of that, just given what it's got in front of it. And so it's really as much about the durability of that growth, which we look at from the backlog standpoint, new sales opportunities and new industry solutions as being a really good foundation and something that feels like we should be supporting really nicely that 5% to 7% organic growth rate. And with lots of big opportunities ahead, whether that's geographically new asset classes, bringing AI to bear and even blockchain around some areas. So I think this is a business that's got all the right characteristics for really good long-term durable growth. And hopefully, mid-single and maybe even better type growth.

Okay. And then just thinking shorter term, Jim, should we still expect an organic inflection next quarter as you see -- as you face some easing comps, some of those large deals come through?

Yes. We had a softer first half kind of across both businesses, GTO a little bit better. But when we look at the back half, where embedded in our guidance as of January 31 was that we would grow our second half organically, call it around 5%. In order to do that, GTO is going to be contributing we think above that and that is going to be a function of continued onboarding with a great Q2 and onboarding new business. So that gives us good visibility on our ability to onboard all the backlog. And then as you noted, I think we had some internal growth challenges, just some comps really around equities, trades, down 16%, not far off of industry levels after a really good quarter a year ago. Some little nicks around professional services and some licenses, et cetera. So as we move to the second half, we think you get that combination of onboarding of new business and easing comps that should flip us into positive internal growth. And so the combination of those 2 would set up for a really solid second half and a really nice exit to the year.

Okay. That's good to hear. Just quickly, and one of the questions we've been getting is that after the M&A we're seeing among especially the e-brokers, most recently, Morgan Stanley, E*TRADE, can you just touch on how we should think about the financial impact of consolidation on the -- in the industry, maybe most recently around that deal?

Yes. Obviously, this is something we track really closely. And let me just lay it out. Both clients are really important clients to Broadridge. And the first -- we'll break it down by business segment because they have different dynamics. On the ICS side, we're really paid on the number of positions and think equity positions and mutual fund positions that are held in street name here. And so when we combine those 2 businesses, nothing really happens there. A lot of -- typically, those positions are maintained. So really nothing to speak of there. When we go to the GTO side, it's important to note that E*TRADE is an important post-trade management client of ours. So they're on our technology platform. Morgan Stanley is not. They've got a homegrown system. So as we narrow in and say, what could happen there? First, we look at the time line. And obviously, it's a deal that's going to probably take another year to close. They've announced a 3-year integration plan. So maybe we hear something 2 to 3 years out. So that's the first relevant point to figure out. Then there really are 3 scenarios to consider. And I think for argument's sake, we can say they all have equal probabilities. So the first is the down case, which is Morgan Stanley makes a decision to take E*TRADE off of its platform, which is Broadridge, and move it onto its platform. That would be, obviously, a small hit to Broadridge. We don't view it as material. Again, likely many years out as you think about a transition plan and net of any protections we have in our contract. So that's sort of the down scenario, far out and modest in the grand scheme of things. The second is the neutral case, which is they maintain 2 platforms, which is really not unusual and could happen for some time as they work through all the complexities that they need to work through. The final case is the upside case, which is where we're focused on. And that is that Broadridge emerges as a winning platform here between -- for the 2 parties. And we think we've got real work to do to make this reality, but we think we've got a really good case to make here. One, E*TRADE with its high number of accounts and volumes is on a successful Broadridge platform. We think Morgan Stanley may have slightly more data technology, could benefit from a newer build. And we would certainly want to be the player in the middle, but we also recognize Morgan Stanley is a very sophisticated client running on a lot of its own technology for a while. So big considerations on their part. But when we think about the investments we've made over several years to modernize this and the investment we're making for wealth related to our UBS win, it puts us in as good a position as we possibly can be to convince a powerhouse like Morgan Stanley that we are capable of being that combined platform. So, again, this is going to take several years to play out, but we are kind of excited to put our best foot forward and create an opportunity out of this.

Okay. All right. That's helpful. Jim, let's touch on for a minute, the wealth management opportunity, which I still think is an area that investors may have a bit of a tough time understanding really what the opportunity is for you guys, the competitive environment around it. Maybe if you can just provide us an overview of the value proposition here longer term. I know you signed a top 5 wealth manager in UBS. So pretty unique, given its size. How do you think about the opportunity for incremental wins among the rest of the top 20 as well?

Sure. And let me just start with the macro trends because I think it informs why we think our value proposition is a strong one. And when we look at the wealth side, it's clearly one of the areas for investment among our clients. We also have seen proliferation of competition and technologies. Obviously, there are some exciting e-brokers and robo-advisers that are on the scene that are driving down the cost of technology or the cost of a transaction, bringing more investment opportunities to the masses and also bringing some pretty slick tools. We think that puts pressure on some of the more traditional wealth managers to have a variety of technology offerings, everything from kind of traditional look and feel, but also to more modern experiences where they can do on the fly financial planning or portfolio modeling, et cetera. And so we think with the pressure that's drilling up among the wealth managers is managing a much more complex technology environment and especially if they've got legacy platforms and multiple legacy platforms that's super complex. So what we are in the market with is a front-to-back platform, which both enables, one, the continuity of customer data going across sort of all applications. So you've got one system of record there and the flexibility to add new applications. And this is really important. We're going to have an open architecture, such that 30 -- third-party applications can be added. So it doesn't have to be a monolithic Broadridge stack. It could be a very slick modeling tool that could be added for their client base. And so, again, this is a lot of anchored off of where Broadridge has excelled over many years, and that is a very strong powerhouse back office around the books and records that give a lot of people comfort at night, coupled with -- there's more modern architecture. So we think we are unique in sort of providing a platform, wealth has clearly got more competitive intensity than other areas. But when you talk front to back, we're thinking where there's really very few people, if anyone, that can make the claim that we are. And UBS is a really big name to start with to your point, which is they're pretty sophisticated, pretty big and so the demands on us will be real. And I think we get a chance to prove our muscle and might when we go live with them.

Okay. I mean really -- so it sounds like something you're building out now that theoretically could be leveraged pretty well across the ecosystem once you have that up and running and kind of as a proven track record behind it.

Exactly. And it's got to be -- to make this work, it's got to be a multi-tenant platform, so it's SaaS in nature. And that's the only way it scales. And I think we've got good alignment with our client because that's where they get to get benefit as we are able to drive scale. And I think -- to your point, I think it should be a good proof point in the market. We know all eyes are on us. So a little bit more pressure on us, but we welcome the opportunity to prove out this case.

Okay. Okay. Let's shift to ICS recurring trends. I mean looking at the regulated communications first, the core proxy business continues to exhibit a pretty stable trend, mid-single-digit position growth. I mean anything on the horizon we should be watching out for in that business? Remind us of the opportunity there, just growth rate long term as well, if you don't mind.

Yes. This has been just about one of the most steady, reliable growth contributors in our business. And we look over really long term. We have relied on good mid-single-digit position growth across both equities and mutual funds. And a lot of the drivers we just mentioned around robo-advisers, use of ETFs and other passes, really high value for us. And as we said, fairly resilient even in downturns. So really what we're keeping our eye on is we're in the midst of proxy season and ensuring that we deliver on everything we need to deliver on in this environment and clearly with an eye towards what does the retail investor do. Do they maintain, do they -- even if they pull back a little bit, do they maintain the number of positions they were in? What kind of choices do they make? Again, we think this kind of "trades" in a narrow band of growth, but that's what we'll be watching for over the next quarter or 2.

Okay. When we think about this business and we think about the actual growth potential of really the overall, not including the customer communication, BRCC, but the core regulated side, it's always this formula of the position growth -- interim position growth or -- I mean, really, when we think about anything you can or should be doing to expedite that, it's investments around it, right? Data analytics and other areas around it that can really help that segment along. What are the latest opportunities you see on that to really help buoy that growth or at least sustain it?

Yes. I think Broadridge has been pretty smart about working with its clients and its data assets, and collectively our clients' data assets as well to provide real insights into their business. And recognizing that we have some incredible insights into the downstream owners of mutual fund position, we've been able to in turn offer our mutual fund clients good marketing and sales analyses that indicate kind of where they have success by geography, by product and certainly inform product selection as we're able to now incorporate cross-border flows given some acquisitions we've made internationally on where there's demand and pulling together unique insights on both holdings and also where the demand is for various products. This has turned into a really good performing double-digit organic growth business. And I think we've done this really sensibly with some smart tuck-ins here and there and some really good management on our side. Always the push/pull is can we make this bigger and bigger, but it's clearly doing its part to grow well above the Broadridge average. So we continue to be excited about it and want to apply that data and analytics discipline to other areas, including even our issuer business.

Okay. And just a quick update on your thoughts around -- anything around the SEC or pricing or any review on that front?

Yes. There's nothing specific in the works, but just sort of review the bidding a little bit. We've got 30e-3, which goes into effect in January of 2021, and that's after 6 years of -- 6-year process. And we -- that's going to allow mutual funds to send out notice and access to the end-clients. That's kind of modestly positive to us on a fee and margin basis. So good progress there. And then we're tracking ongoing SEC priorities, and they've talked about things like modernizing communications for investors and how do you mimic what we see on the consumer side with really slick informative performance documents that give you both returns as well as fees as opposed to big legalistic documents. And so we're really well aligned with that goal. We think they've got a near-term agenda item around streamlining communications, which could take a number of forms, but we think technology is going to be a part of it. And so we're tracking that. There are -- there's a proxy roundtable that has a series of committees, which certainly we participate in. The only thing that we think has real momentum around it right now is end-to-end vote confirmation, which will give all investors comfort that their vote is being truly counted and Broadridge, I think, can show its capabilities through its technology. It's not really a revenue opportunity for us, but I think it certainly keeps us in good stead with the industry and with the SEC.

Okay. Let me just touch on the topic -- there was a topic last quarter, post-sale prospectus. I think it was just still one of the more misunderstood items last quarter popped up. I don't remember it being something we saw before, correct me if I'm wrong, but these are, I think, tied to ETFs and some clients we're considering not sending them out. Can you just help us get a sense on sizing and how we should think about this headwind?

Yes. This was something that is really a pretty small line item. If you think about the overall $700-plus million that we report in the customer communications line item, this is a really small piece of that. And then specifically, the part we're talking about is around managed accounts, which is even a further subset of this post-sale fulfillment. I just want to explain what are we talking about. This is work that we do on behalf of our broker clients when one of their investors purchases a mutual fund for the first time, and we furnish a prospectus to that investor. What we saw were a couple of clients that took the action to suppress the prospectus to some of its managed account clients really around, we think, kind of their thinking about what that client experience looks like. And this resulted in a modest sort of revenue hit in the quarter. So modest in the quarter and the first half, we think we'll see more of it in the second half. That was embedded in our guidance. So this isn't that massive going forward, but it certainly merited call out in the second quarter. And again, the fact that we'll see some more of it the next couple of quarters, that's why we called it out. But again, we think this is -- we've got our arms around what this area looks like. And we have to also remember that we've been big beneficiaries of this move towards managed accounts, both the number of positions it generates related to the interims that we generate and deliver. So that's been, obviously, good for our business as well as the complexity I talked about on the wealth side, as you have more and sophisticated managed account structures that's driving demand for a lot of our products. So we've got to look at this in the big picture, which is we've been net beneficiaries. This is an area where it turned into a little bit of a near-term headwind.

Got it. Okay. Well, let's just talk more broadly, I mean, on the customer communication piece of your business now, I mean, I think you anniversaried or you're growing over one client that was a headwind, which we've talked about before. But just broadly speaking, I mean, is this a business that you think can actually grow even a low single-digit rate in the next few years? Maybe talk on the way to make that happen and the strategy around it now. Or if there's any other strategic thoughts you have around that in terms of alternatives.

Yes. Look, it's incumbent upon us to get this business to be growing and contributing to overall growth goals. We're very committed to organic growth of 5% to 7%. This business, on the revenue side, did not perform to the business case that we had laid out. It did do awfully well on the earnings side as we are able to get kind of 2x the synergies that we are targeting. But in order for this to be where we want it to be, we also need to see some organic growth, and it will be more modest, as you said. So the things we're encouraged by are we've had good sales activity so that gives us a little bit of a pipeline to start adding some new revenue to the business, which is good. We have also seen good interest from some very large clients who have in-house print operations and certainly are exploring that idea that a third party could do it, and we're -- that pipeline, it's a ways to go, but certainly the thought process and the pitch makes sense, which was originally in our business case. And as well, as you mentioned, we took a long time to exit a customer that we knew about it from the time of the acquisition that was going to move off of us. It created for a lot of noise, a little bit of extra earnings. So we think we've now approached more stabilization on the business. And to your question, our goal is to get this into at least some low single-digit growth. We're not there yet, but we do think the backlog and the sales pipeline give us cause for encouragement. Back to your broader question, we're going to be our most critical -- we're going to be the most critical set of eyes on this, and it needs to be both financially attractive and strategically attractive to Broadridge. And we'll definitely continue to monitor progress here because it needs to be a contributor in the way we've set out our multiyear plans.

Okay. That's helpful. All right, guys. I mean I think we're just about 5 minutes before the end. So I'm going to tell the audience now if you have any questions, you're free to start writing them into the text box. Jim, I guess, we should really touch on event-driven before we wrap anything up. And just -- I know it's not core to your business in the sense that you really focus on it as far as recurring revenue goes. But over the last couple of years, it's been a continuous talking point, just given the volatility around it, but you've also had activism in several big funds, holding general meeting, causing kind of almost a more normal uplift in the amount of event-driven revenue we've gotten used to seeing. I think the question is, number one, do you think there's a higher level of ongoing event-driven expectation now embedded in your business and what we should expect or should we really discount that? And then secondly, yes, I mean, I think, is there any way to think about margin? When you have that occur, I'd be curious to hear what your -- what do you do with those dollars? Do you generally let it pass the bottom line? Or do you think about that as just a source of reinvestment?

Yes. And clearly, this gets a lot of headlines and can create some near-term noise. Let me just take a quick broader perspective. Obviously, drivers here are the mutual fund proxies that can be episodic and drive a lot of fees as well as, as you said, some of the activists work that goes on. And this has been growing probably more linearly than one might expect. And as you said, that was sort of nice on the way up. And we peaked out it appears in fiscal year '18 with $284 million, and you had a banner year when you've got someone like a Vanguard going out for proxy along with really high-profile activist contest going on at the same time. And clearly, we're feeling the effects of stepping down to more normalized levels. And even last year, we were down $40 million in '19 to $245 million. This year, our updated guidance, the midpoint is around $185 million, so it'd be another $60 million down. So we're managing through this, we think, with pretty good earnings growth, but it does cause certainly quarter-to-quarter some noise. But we think long term, we have no issues with this being in our business mix. It's a core part of what we deliver in that it gives people comfort that we are always on or always available for major events like this. And so when we look out even when we set our last 3-year targets in the end of '16, and we've only -- the most we've ever done there was around -- exiting that period was just under $200 million. And we said, if we can get a couple of hundred million dollars a year, that's what's in our multiyear plan, so about $600 million. We've done better than that now. We've been probably closer to $700 million, but we're ending on a low note, and we'll still be able to deliver at the high end of our multi-year earnings objectives. So I think there's kind of 2 takeaways. One is we can manage through it. We feel like we've taken the biggest kind of hits over the last couple of years and continue to manage through it. And while no one is going to be kind of courageous enough to say we're at the bottom, it certainly feels like we're at a 5-year low and that over the long term, more of this will happen. There's nothing structural that's changed. So we anticipate, especially if we think out another 3 years, we should get meaningful $600-plus million of contribution over a multiyear period. So we continue to have to manage the business that way. Quickly, I know because you asked about it, we try not to get greedy during years when we've got really sort of extraordinary event, and we try to reinvest as we go. And so we're disciplined about that. We'll continue to be.

All right. Just a couple of quick questions from the audience now. One of them is actually the same with one of the questions I have as well. So I'll ask that first. Just -- it's really about -- we're in year 3 of your long-term plan. So investors are asking about key themes you want to leave us with as we wait for the next Investor Day. And then if we have time, we'll have one more question from the audience as well.

Yes. It's interesting. There are -- we have sort of all the solid foundation that we had 3 years ago with more capabilities than we had then. So if you think about the foundation of a really good governance business with investment, whether it's blockchain or digital to make voting and retail investor engagement even stronger and better, that's there. And so we feel as good as we can about that long-term trend. We look at the capital markets business, which we think, in the last 3 years, we've really solidified our position and forcing people to ask the question, why not Broadridge, so that's really strong and powerful. And then the third, we just mentioned, we laid out an aspiration to create a wealth franchise at our last Investor Day. And since then, we've added on UBS. We think we'll be doing more for -- in that space and so that's clearly going to be a good growth area for us. And I think the -- all that means that we remind people that we manage for the medium term, and we hit the medium term. We have a good track record of doing that. We'll deliver on 2 sets of 3-year objectives. And I think we'll do it again. And as I said, we have the right foundation with absolutely more capabilities than we've ever had before. And we begin with a bigger revenue backlog than we would have had -- than we had 3 years ago.

Okay. Jim, I think we're going to wrap it up there just because we're out of time. There's another couple of questions from the audience that I didn't have time to hit, but what I'll do is I'll e-mail those questions to you and Edings. And if you get back to me, I'll get back to the clients, if that's okay.

Great. We appreciate it, Darrin. Thanks for hosting us.

Yes. Guys, thank you very much. And again, everyone on the -- listening in, thank you for joining. We do have the next panel coming up in 5 minutes or actually at 4:20 and that's the panel discussing banking of the future, building your branch in your hand with Marqeta and Q2 Holdings. Guys, thank you very much. Jim and Edings, thank you, again. Take care.

Thanks, Darrin.