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

Good afternoon. This is Puneet from payment processing and IT services team at JPMorgan. Glad to have here with us Tim Gokey, Broadridge CEO. Well, not, I mean, physically here, but I really appreciate your time and for you agreeing to do it digitally, Tim. Welcome, Tim.

Puneet.

The format of this presentation will be fireside chat. I'll start with a few questions. And if you have any questions, investors can ask back through the Q&A box on the upper right, and I'll try to go through as many as I can.

So Tim, I always view Broadridge as the most important financial services company that many investors have not heard about. So for the benefit of investors who might be new to the story, can you quickly introduce Broadridge and recap your recently announced 3Q results?

Sure. Absolutely. Thanks, Puneet. It's great to be here, and I have my fireplace going right over here on the side. So look, I'll just give a quick overview of Broadridge with an emphasis on how we're performing in this COVID crisis. And just summing it up in a couple of sentences and I'll go with a bit more detail, but we're a global fintech leader. The work we do is important. Our business is resilient, has performed very well operationally. As a result, we are generating continued growth and solid financial results. And finally, we see a real opportunity ahead, and our long-term outlook is strong. So let me just start with what we do and why that's important. So I think these are unprecedented times, and they really reaffirm the essential nature of what we do, which is power the critical infrastructure behind investing, governance and communications, which has really never been more important. And really throughout the crisis, our scalable and resilient technology platforms have processed remarkable volumes that are multiples of normal, supporting capital markets and wealth management for clients and really enabling investors to buy and sell securities, generate liquidity, fund new investments and really navigate uncharted waters. At the same time, on the communications side, we've enabled tens of millions of investors to track their holdings to get key information in periods of high uncertainty and volatility. And from distributing billions of dollars of checks to sending and receiving voting information to reassuring investors with timely confirmations and statements, we've kept that flow of information open. And then finally, really more than ever, strong corporate governance is critical. As companies are coming to grips with unprecedented economic and health challenges, the role of the Board of Directors has never been more important. And we're really proud of how we've worked to ensure that vital communications and voting remain in place, and our technology and our people have ensured companies can conduct their annual meeting safely and enable continued shareholder engagement. As a result of really that central role that we play in securities trading and corporate governance, our operations have been deemed -- many of our operations are deemed essential services -- as essential service providers. And we've been in constant contact with the SEC and with other regulators to help them better understand the resiliency and the challenges faced by the financial system as trading volumes spike and as companies move their meetings online, so clearly, an important and central role there. And that has really led to -- through that our operating performance, which has been really strong. Our resilient and scalable technology process huge spikes in volume, as I said before, really flawlessly and keeping our clients operating when some others in the industry had some challenges. And on the production side, we had some physical facilities handling communications. They managed strongly not only through the peak of proxy season, which was right in the middle of crisis, but also right in the middle of the crisis was the quarter end and the month end. And there's a surge of other trading-related communications like confirmations, prospectuses related to the surge in volatility. And we managed through all of that. That sometimes involved a shift of production from 1 facility to another across our 7 sites in North America and sometimes a shift in timing, but we worked closely with the regulators and our clients to manage through that. We're now past the peak proxy season, and we feel really good that in this really unprecedented time, Broadridge differentiated itself as the right industry solution for these critical functions. Now at the same time, public companies have rapidly shifted to move their annual meetings to a virtual format. We pioneered virtual shareholder meetings in -- more than 10 years ago and we steadily grew that to just over 300 meetings last year. This year, more than 1,500 clients have already signed up to do their meeting online. And these meetings are -- is not like a Zoom meeting. We have a role in validating shareholders in ensuring that they can vote while they're participating in the meeting, and that makes it a little bit unique. And then we've also just helped our clients by stepping up, taking on some work where maybe their facilities or other suppliers were having challenges. And that's been good too because these relationships which form in times of crisis really strengthen our relationship for many years to come. So that strong operating performance through the crisis has led to really good financial results as well. And our third quarter results and our fiscal year outlook really underline -- remember our June year-end, really underline the resilience of our business and strengthen the value proposition even in the context of everything that we're going through. So we did have headwinds from significantly lower event-driven revenues that was even happening precrisis. We also had a significant shift in proxy timing from the third quarter to the fourth quarter. And despite those 2 headwinds, we reported really solid third quarter results. We had recurring revenue growth of 9%. We had adjusted EPS growth of 5%. Closed sales rose 20%. And our outlook for the full year calls for continued growth. We continue to expect recurring revenue growth in the 8% to 10% range. To reflect the full impact of COVID, including some of the lower event-driven revenues, we did modify our adjusted EPS full year growth guidance to 5% to 7%. Previously, it had been the low end of 8% to 12%, so call it 8%. So we took it down a little bit. But we remain on track to hit that and, importantly, to hit our full year sales goals of $190 million to $230 million for closed sales. So we feel good about our sales pipeline, and our ability really to hit anywhere in that range speaks to the importance and value of what we do. I'm also really, really pleased to note that we remain on track to hit above the midpoint of our 3-year guidance. Our 3-year guidance ends in June. And when we set that 3-year guidance, event-driven revenue was at $200 million. We forecast it would be at $200 million this year when we did that 3 years ago. And we're going to hit above the midpoint even after absorbing a decline in event revenue from $200 million down to about $155 million, which I think speaks well to the next 3-year period when we should see a recovery in that. So I think our ability to hit those targets and objectives despite new headwinds is a real testament to the long-term demand trends that are driving our business. If we look ahead to FY '21, we think we're very well positioned to weather any economic downturn. And we are planning, preparing for an extended period of economic weakness. While we think that the -- many of our secular drivers remain positive, including $330 million backlog for sales and continued stock and fund record growth, at the same time, we do expect there to be an impact of recession in the form of lower trading volumes, lower interest in AUA on some smaller parts of our business and potentially slower onboarding activity. And so baking all of that in, we looked at different scenarios and are looking ahead at -- talking about low single-digit revenue growth. And that will definitely cause us to balance the competing imperative and making sure that we invest in the business for the future because we think there's some really good future opportunity and what we deliver to shareholders, and we'll have an opportunity to come back and talk about that at length in August. And then we think about beyond '21. Look, a long-term focus is really important. There's tremendous opportunity. As we emerge in the crisis, the world is going to be a different place. And as I talk to clients, it's clear that the fallout will cause a permanent shift in the way that they operate. First, some of those things are just accelerating the existing trends that are already driving our business around mutualization, around digitization, around data, and those will get stronger. Wealth management firms will continue to transition in a way that they already have been, but they'll have even more pressure to do that. We see a continued move to digital communications, continued challenges to the investment management industry, and as I noted, really the importance of corporate governance. But the impact of COVID is going to do more than just confirm existing trends. It's going to cause more fundamental changes in client operations because every business leader is really thinking about resilience in a new way. It used to be thinking about losing a facility. Now it's like losing a country or losing the world. And so to create the degree of resilience across their entire technology estate, that's very expensive. And it really reemphasizes the need for the right industry solutions. And I think how we've performed through this crisis demonstrates that we're one of those. Also, I think the impact of the work-from-home boom is accelerating, digital literacy and demand for digitized communications, and that's only going to increase the pressure on financial services firms to really raise the bar on delivering enhanced digital communications. And then finally, Puneet, I'll just leave you and the audience with one last thought, which is in times of uncertainty, the business model fundamentals are more important than ever. And Broadridge has a highly resilient business with recurring revenues that are on long-term contract with leading institutions. We have strong, investment-grade balance sheet, high liquidity, a strong history of balanced capital allocation, including a dividend that's increased every year since we've been a public company, and a strong record of delivering on growth backed by 97% client retention, a $330 million sales backlog and really good secular trends. So while the -- at the near-term it's understandably uncertain, we're very well positioned for that. And the longer term for Broadridge has never really been clearer and never been brighter. So that's just my quick intro to the day and to Broadridge in the context of COVID.

No. It's very good. Thanks for that. So continuing on the theme of digitization, I agree that it could result in permanent change in trends in wealth management and communications like you talked about. Talk about like the potential impact of increased digitization in governance business. Could we -- should we expect like a mix shift in core proxy delivery as well? I know that process is highly regulated. And did you see any relaxation in regulatory requirements to allow you to send proxies digital in the last quarter and that can become permanent?

Yes. We -- look, first of all, we had a very strong quarter for core proxy. We saw -- and I'll come to the trends in a second, but we saw stock record growth of 7%. And what we did see was a timing shift from Q3 to Q4. And now that has already been recovered. We're sort of on the downside of things. And so we expect for the year to end up in very good shape in proxy, and we expect, in ICS overall, to be mid- to high single digits of growth. The -- what we did see -- and there wasn't any regulatory change that changed the mix between digital and physical deliveries. What there was -- from a regulatory standpoint, there's a little bit of relaxation around dates, and a few companies took the SEC up on that. None of them are going -- a very, very small number are going beyond June 30. So that won't affect our year, expects a little bit of timing within the year. And what we also saw was relief for -- some people had selected full package deliveries to receive notice and access instead. That just allowed some of the [ migration ]. So there's a little bit of a mix shift there. I don't see, in proxy, this affecting the mix that much. It's highly digitized already. 80% of proxy deliveries are already done digitally. And then of that last 20%, about half are notice and access, where I send you a notice if something is available; and then there are 10% that are full package and those tend to be high-value shareholders that want to receive the packages and that issuers really want to receive the packages.

Got it. Got it. And then talk about this 30e-3 regulation. Remind us what will change. And could it be implemented earlier than the January 21 time line as a result of COVID-19?

Yes. Absolutely. So in regulatory communications, there's a whole world of proxy and governance that we just talked about. And then there are communications to holders of mutual funds. And every year, as part of full disclosure, mutual fundholders receive the annual report then the annual report and the prospectus, and those are called interim communications. And what 30e-3 is allowing is "notice and access," which happened in proxy about 10 years ago, which allows fund companies, instead of sending the full documents -- these are pretty thick documents or something like 50 pages. It allows people to send -- instead of sending the full document to send a notice that the document is available. And that significantly reduces cost. The economics to us of that are mildly positive. We get a little incremental fee presenting that. However, the effect on the investor is not that great because they need to be getting a package. They didn't look at the whole thing, but they knew where to look for a few things. And with a notice, now they have to go someplace else to see it. And so when -- and I don't see, Puneet, that's going to accelerate. It's going to happen in January. We've been working with over 100 fund companies on an industry solution to deliver that. So it will happen on time. What we are going to be doing is giving -- putting QR codes on those notices so people can put their phone over it and get some of the information that they want to see and -- but the falloff in investor experience caused the SEC at the same time that the rule on 30e-3 to ask or comment and what should be the next-generation client experience. And there's a lot of comments on that. There's a lot of consensus that the right next step for fund investors is a summary document. But if you go all the way back 10 years ago in prospectus, people moved from sending full prospectuses, which are very lengthy, complex documents, to sending a 2- to 3-page summary. It's much more digestible for the investor. And there's a lot of consensus that for these annual and semiannual reports, really what we should be sending is sending a summary. That would be -- save the industry just as much money as 30e-3 and would be a much better investor experience. That's the SEC short-term agenda. Whether it survives everything going around COVID or not, we don't know, but we're in favor of that.

Got it. Got it. And can you compare pricing and your economics for the full document versus notice and access?

Yes. The -- for a -- when we send the full document, there's a fee that's -- there's our fee and then there's obviously the cost of materials and the postage and the handling. So the total cost to the fund company is -- but is -- our fee is like $0.15, and then the total cost to the fund company is -- it has all the postage and handling. It's quite a bit more than that, not $1, but between $0.50 and $1. When it moves to notice and access, our fee, we get a slight incremental fee. So those are $0.15 to $0.25. And the amount of materials at the fund company has to distribute the way down. It's 1 -- now it's 1 sheet, less postage, less paper. That creates an overall savings. When it moves to digital -- and it's already 70% digital. So it's already on its way and it's going up every year. When it moves to digital, then the fee to us is the same as notice and access, the cost of fund coming out -- have to pay any postage, didn't have to pay any materials. And so they have even greater savings. And so one of the things we guys talk about is how, over time because of driving digital, we've taken the cost of these communications, the average cost across all the communications, down by 40% over the past 10 years. And that's because of the increasing penetration of digital. And that digital delivery, we think, is more savings and it's better than your notice and access because you click on the link, you get right to the document. You don't have to go searching for it.

Got it. Got it. And then you talked about virtual shareholder meetings. Can you talk about how you can leverage that product, some 1,500 or so meetings that you conducted virtually? How you can leverage the product to offer additional services to issuers, like give us 1 or 2 examples as you can cross-sell that solution to them.

Absolutely. So we're excited about doing so many virtual meetings this year. It's a capability that we started over 10 years ago. It's been -- it's a bit slow getting acceptance. There was initially some resistance that activists wouldn't have a chance to engage directly with management and with the Board. I think we've seen that lessen over time as people are seeing that wow, they can ask questions and get answered and have the same interaction, and the participation actually goes up. So we're seeing a lot of activity on that. We think we'll see that same activity next year. It's not that -- in and of itself, it's $10,000 to $15,000. So you can do the math on sort of how much revenue that is to us. But it really deepens our relationship with the corporate secretary in and around the annual meeting and how we help them with that annual meeting. And our goal is to really be more of a one-stop shop from the creation of the proxy materials to -- from the composition of them to the typesetting -- that is a bit from composition, excuse me, to the printing of them, to the filing of them and then holding of the meeting. And by having that holistic service base, it's much more convenient for the corporate secretary. That is a couple of hundred million dollar opportunity. And so there's a nice opportunity in and of itself relative to our business. It also really deepens our relationship, and corporate issuers do pay for a lot that happens at Broadridge because of all the proxy activity. And in that ecosystem of corporate issuers, funds, individual investors, broker-dealers, regulators, they're an important stakeholder. And so when we have a deeper relationship with them, it just better cements the overall ecosystem.

Got it. Got it. And you talked about potential for low single-digit growth next year even in a weak economic environment. Talk to us like how did your position growth and interim growth hold up in the last recession in 2008, 2009, and why you didn't see like a deeper slowdown in those metrics. And what do you expect this time around?

Yes. So it's interesting. We saw those metrics. So stock record growth, that's the number of individual positions of shares. So that's how we get paid. So if you have 100 shares of IBM or 1,000 shares of IBM, that's 1 position. And we saw for equities, that has been in the sort of mid-single digits and it went to 0, went to minus 1 at one point. For mutual funds, it was in high single digits. It never went negative. The blend of those 2 never went negative. It went to zero 1 year, but it went to low single digits in the last global financial crisis. And that is -- we do tend to see that in time, the sort of market exuberance. Retail investors come in and there are -- there's more position growth. In times of market negativity, it pulls back a little bit, but it tends to stay slightly positive. So as we think about next year, we've done a variety of scenarios looking at our main revenue drivers. We have assumed that we have some real positive things behind us in terms of stock record growth, sales backlog, other connected events, but we've assumed a low single-digit stock record growth. We've assumed some impact on client onboarding. We've assumed from a trading perspective, it will be -- volatility helps trading. And so we think that beginning of the year, there will be continued volatility and it will play positive comps. And then second half of the year, volatility will be lower, play negative comps, so call that flat for the year. And when we put all that together, that's where we end up with mid-single-digit revenue growth.

Got it. Got it. So your GTO business, for example, benefited a lot from the market volatility in third quarter, potentially could benefit again in fourth quarter. How should we think about growth in that business? Like you have $330 million of backlog, which should come in over the next 20 years. So how should we think about the growth algorithm there in terms of new sales versus internal growth as we think about next 1 or 2 years in that business?

Yes. So it was a very strong quarter for GTO, up 23%, which is -- by any accounts are pretty good. The organic growth was super strong, both revenue from sales but especially internal growth, this past quarter. I think when you take a long-term view, that business will -- we think it's a very nice grower, upper single digits in the long term, driven primarily from revenue from sales, and with little M&A and internal growth, sometimes a little positive, sometimes a little negative. I think if we look at the next 12 months, it will be comping that volatility of this year. And also, many of the acquisitions that we did, we'll be annualizing. So we won't see the contribution for M&A. We won't see the internal growth. It will really be dependent on the revenue from sales. And we do have a good backlog. A lot of it is in the GTO business. Those are complex projects. We have a lot of work to do to get them on board, but so far, it's going well.

And talk to us about wealth management. Like how should we track the progress of that business? Like do you plan to report those numbers, like wealth management numbers, anytime soon? And you recently won that big UBS account, which should come through hopefully sometime next year. So talk to us about like the progress in implementing some of the large deals there as well as if UBS resulted and benefited overall pipeline in wealth management.

Sure. So we have -- and just as a reminder to the people with us, we have a strong governance franchise. We have a strong capital markets franchise. And really, at our last Investor Day, we talked about building a franchise in wealth management. We see that as an opportunity especially amongst the top 20 broker-dealers. But there's no real core provider, scale-provider technology. And our vision is to -- and people have different business models. So they do need different technologies. But what they all need is really good market connectivity, books and records, really open data with a very modern integration layer, with APIs and microservices that allows me to put apps on top of that, some of them provided by us, some provided by the client, some provided by third parties. And that will provide much more flexibility across different kinds of business models and for driving next-generation technology at a much lower cost. And so that's the proposition. We are building on technology we have already, and we have many wealth management clients today. But this next-generation piece, UBS will be the first client. That should come live sort of mid-calendar year next year. And that project is going very well. It's causing a lot of additional conversations with other wealth management firms. The -- our progress in wealth management so far, I couldn't be more pleased with what it's been. And if you think about what we set out to do at the last Investor Day, we are ahead of that plan. We've had some very nice acquisitions in the wealth management space, some really good stuff going on in Canada where wealth management is much more bank-centric, and some great technology we bought there. We're really the leading provider of -- with banks, helping them integrate the banking and the wealth management together into one account. So good progress across a number of fronts. So there's the sort of the core platform but there's also a number of solutions around that, that provide value and I'm excited to talk about. Yes, we're going to break things out. My hope is that when we get to our next Investor Day, we'll be in a position to give you all the breakout that is sort of more ongoing so that everyone can track our progress there.

And hopefully, we'll be able to attend in person by then.

Hopefully that will be in person, exactly.

That's December. All right. There is one question from an investor. Let me ask. Can you break down your $330 million revenue backlog across ICS, GTO and wealth management? And when you say that COVID-19 may accelerate mutualization, digitization trends, which of the ICS, GTO and wealth management stands to see the largest benefit?

Okay. So first of all, just wealth management, just for clarification is really the way we've defined it. And when we asked Mike Alexander to lead that business, which I'm also very excited about, is really -- we'll see that as part of GTO. So when I look between GTO and ICS, I'm not going to have the exact numbers right at hand, but it's pretty balanced. There's a lot of backlog on both sides. It's a little more weighted to the GTO side because those projects take longer to go. But there's a nice backlog on both sides of the business. It could be as high as 2/3, 1/3, but nice backlog on both sides. And I'm sorry, the second half of the question was?

The COVID-19 impact, the acceleration of mutualization, digitization, which business might benefit.

I think it's going to -- I think it can help both businesses, will probably help ICS first because the time lines for onboarding tend to be faster in ICS. So when we think about -- we have a lot of discussions going on in communications right now with people. They have physical facilities that are -- as things go more digital, are losing scale, and so a lot of good conversation going. Those things happen a lot faster. I think the conversations on the GTO side, they're very deep conversations. They're very fundamental. They're really good conversations. But they just take longer to come to fruition. So I think we see opportunity on both sides but probably sooner on the ICS side.

Yes. That's fair. And so the -- it was impressive that you didn't see like significant impact on implementation time lines given the massive disruptions we have had. As you begin to implement remotely, could it result in lower cost of implementation and increased outsourcing over the long term in your wealth and GTO business?

Well, definitely from your lips to God's ears, it is -- what we're seeing right now is these projects are going surprisingly well. And I think for many people listening or who have been undertaking these kinds of meetings, it's surprising how effective they are -- it's surprising to me how effective they are. People are saving on commuting time. People aren't running around. They're building so much trying to find the next meeting. Meetings are a little smaller and more so, the best seat. You can get everyone on one screen. It seems to be a little bit more to the point. And so we're being really productive. And now is that going to go all the way to being more productive than we were before and faster, better, cheaper? I don't know. If it does, that definitely will be an accelerant because right now, there's no question that the biggest barrier to us having a lot more sales is the cost and complexity and time of the operating process. So that would be a huge accelerant to our business if we're able to make that [ fast music ]. It's also a big -- switching cost in terms of leaving, which is one of the reason we have the high client retention and why people really stay with us for the long term.

Got it. All right, 2 minutes left. Let me quickly talk about margins. How should we think about your ability to protect margins in an event of revenue slowdown that you expect for next year? What are the levers in the business model that can help you to continue expanding margins if that's the right assumption?

Yes. Look, our model -- as we've talked about, our long-term model is to expand margins about 50 basis points a year. We've been above that the past few years, and that's not every year. In a lower growth revenue like we're expecting, obviously, it's much harder to expand margins. One of the reasons that we're planning for lower growth is it doesn't -- you can't just turn on a dime. You have to really plan for it. And so we want to make sure we plan the business around that lower growth plan, the lower expense growth. And within that, we'll be able to invest. There are big opportunities in digital, big opportunities in fixed income across other places in the business. And so to continue to position ourselves for that growth coming out of the crisis, we need to continue to invest. So we need to reprioritize all the things we're doing, look at the bets we have going, say which of those maybe aren't as relevant now, which of them aren't panning out as much, slow those down so we can reinvest in the other areas that are. And I think it will be hard to expand margins. But our aim is to -- and we'll obviously have a chance to talk a lot more about this in August, to deliver acceptable financial results in a low growth scenario.

Got it. Thanks a lot. Thanks a lot.

Thank you, Puneet.

Appreciate it.

Bye.