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

Good afternoon. I'm Chris Donat. I'm a financial technology analyst here at Piper Sandler. Welcome to our second fintech fireside chat of today. With me is Jim Young. He's the CFO of Broadridge. And I'm just actually really going to kind of jump right in here. This is Broadridge's busiest time of year. It's proxy season, which represents a substantial majority of Broadridge's revenues and earnings, well, at least in sort of the back -- the back half of their fiscal year.

But Jim, I want to ask one question about proxy season in this different unusual world. Virtual meetings, looks like you've done over 1,500 of them this year compared to like 300 last year. How are they going? And how are clients adjusting? And what does it mean for Broadridge?

Yes. These have been terrific and something we're really happy that we can contribute during this time and really came at an important time. It was kind of an under-the-radar offering. And obviously, in this environment, it was really critical that public companies could do virtual shareholder meetings. And our product is really aligned well with that. And it's more than just sort of what we're experiencing here with Zoom. This has all the really cool functionality that allows for authentication of shareholders by specific IDs and allows for shareholder Q&A on one platform for both registered and beneficial shareholders. So this is -- it's really slick. And as you said, big numbers these are small, kind of in the grand scheme of things for revenue, but it's phenomenal brand building and a reminder that the role Broadridge plays here as a neutral player. So we're really excited. Things are going well. We've got some big annual meetings, some great feedback from clients. And I definitely think this is something that will be what we see in the future with or without pandemic conditions.

Got it. And when I think about Broadridge, recurring revenue and a high retention rate is part of the story. Does this help you with retaining customers and building business and deepening the relationship?

Sure. As you know, one of our strategies is really around penetrating further with corporate issuers. So we touched all of them by virtue of the beneficial work we do, but we've got strategies working directly with the corporate issuer teams, and this is a phenomenal opportunity for us to touch, lots of senior executives at our clients, including corporate secretaries and general counsels and heads of IR, et cetera. So plays really well. And so I think it helps for further penetration. And obviously, as you said, long time relationships. With a 98% revenue retention rate, that's really important to us and this is further defense, but also as a little bit offense as it allows us to get deeper into these issuer relationships. So it fits really well with our strategy that existed before all this.

Got it. When you reported earnings a month ago, one of the striking things is that you did not reduce your expectations for closed sales for your fiscal year ending in June. And when you look across corporate America, that's a pretty remarkable accomplishment. So as we think about the working-from-home environment, how does that impact your ability to close your closed sales in the near term? And then do you think there's going to be some point where we see the backlog diminish because things do close, but then it's tougher to get them in on the other side of the pipeline?

Yes. What's interesting is -- and as you said, it comes -- this kind of comes in a really interesting time because as you know, our fourth quarter for sales is really critical for us. We're definitely a strong fourth quarter closer and with almost $130 million year-to-date and targeting about $190 million to $230 million, we have a lot of work to get done. But when we kind of reaffirm that guidance, we just took a long look at what we had in the pipeline. Obviously, we felt really good about the pipeline. Obviously, it's a different environment. But one of the things that I think we'll learn kind of in 2 chunks about what happens. I think a lot of the things that are targeted to close in the fourth quarter, by definition, are in late stage. So things that we may have already exchanged paper on our term sheet or you've got lawyers going back and forth. So I think this quarter is going to be as much about clients' willingness to finalize terms and close out and not demonstrate that there's sort of no paralysis, largely business as usual, making decisions, recognizing a lot of what we do is giving them cost saves. So I think that will tell us more about maybe the economic environment because I don't think it's a -- there's no inhibitor in terms of closing a deal remotely. We're used to doing lots of conference calls between attorneys and the rest, to close out a deal. I think what will be interesting going forward is as you take deal from early stage to late stage, are we just as efficient? We think we should be. We think our products line up well on those lines. We think we can get a lot of work done. We've seen early signs of this, but that will be the test. And those are the things that are really -- we just need to prove out for ourselves that we can do this successfully. But obviously, look at the pipeline. To your question, we -- one of our critical attributes is really our big revenue backlog. And we estimate we're somewhere around $330 million in backlog, we'll do the stuff at the end of the year. That gives us really good revenue visibility. So we do need the fourth quarter to help us replenish the onboardings that we'll be doing in the fourth quarter and early next year. So that's a really big part. So we hit our plan and our guidance for the sales, we should be -- all things being neutral, add a little bit to our backlog certainly be around $330 million or better, and that gives us really nice jumping off point for next year and years beyond.

Okay. I want to shift gears a little bit. Most of the folks with Broadridge is around your Investor Communications segment. I want to talk a little bit about global technology and operations. We're wondering, given the environment, if you're seeing any changes in the inbound calls from existing or potential clients related to what you do there? Because Broadridge is a key partner in providing technology and services to banks and brokers. And I would think in this work-from-home environment, there's a number of banks and brokers out there who figured out that they needed -- needed a little more help than they were capable of providing internally.

Absolutely. And I think it's been a good testament to Broadridge and what we've built. I think if anything, we believe our value proposition has been strengthened during all this. And to your point, I think when we hear the way the clients are responding, there's clearly a top 3 that we hear both from European clients and North American clients, which is really around resiliency. And as you pointed out, a lot of people went through some tough times, pretty well understood that Broadridge operated really successfully during this period, not lost on people. And that's one. Another is really -- and it piggybacks on that, which is the value of an industry solution, our mutualized solution because we are -- this is what we wake up and do every day. Sometimes we joke that we may be only a mile -- an inch wide or a mile deep, and this is what we focus on, be able to run $6 trillion settlements or more during these peak times. And then finally, just the whole digitization, which is both from a process standpoint, as well as from communications. So these are things that are top of mind for our clients and obviously fit almost like a glove with our value proposition. So we definitely have received inbounds even during the peak of the crisis from, I think, what many would consider to be really strong, sophisticated clients who needed both technology and even some people resources, which, look, obviously, no one wants to see the industry struggle or the economic conditions and the health crisis. But clearly, it's good when we can demonstrate our strength, and we've invested in our platform for years, our resiliency, our throughput, our capacity, all the capabilities and to be able to turn around and showcase that during a really tough time and it's great. And I think our clients have recognized that. So I think it opens up both near-term opportunities and also reminds people that as we have these bigger opportunities that we're always looking at, I think it further increased our brand, so we're just pretty bullish. And we obviously -- to see what the actual closing environment looks like, but clearly, it puts us in really good stead as we make our case to be -- build 3 -- have 3 strong franchises across both governance, now capital markets that we're talking about and hopefully, more with wealth.

Right. Well, that gives me a good lead into wealth, which when we think about Broadridge and some of the things you've been able to accomplish in recent years, the signing of the UBS contract was a big event just from a closed sales perspective. And obviously, it's going to be a couple of years before we get to implementation of that. On the earnings calls, I guess it looks like UBS is still on track to get implemented on the original time line. Just given the uncertainty environment. Wondering if, first, if there's any update around that? And second, do you think -- you think with the wealth management business, sort of like with the GTO business in general, that, that attracts more attention, Broadridge being able to work on a new wealth management solution, particularly for some institutions that might have older technology that's not as well suited for this environment?

For sure. And I think a lot of the challenges that UBS sought to address are very common. You've got legacy technology bumping up against new demands in the market. And when you think about all of our consumer lives, when we are now used to very slick apps and ability to manipulate and use various portfolio management tools, et cetera, to be able to do all these same things that are -- with our wealth advisers. And so I think this aligns really well. Obviously, with what we're doing with UBS. I think a couple of things, one, you just ask about on time line, yes, we're still on track. And ever since we closed this in the fall of 2018, we had always targeted mid-2021, and we're still on track and that puts us about a year out. So that's really exciting. And we know a lot of eyes are on us and others are ready to jump in. So I think then but the question is, when do we see clients 2, 3, 4 and beyond because we think this is really applicable to the top 20 wirehouses. And so I think a couple of things. One is, clearly, M&A in the near term can help. You've got some large mergers that are scheduled to take place later this year and early next year in the form of Schwab, TD Ameritrade and then Morgan Stanley and E*TRADE. And to your point, those need to -- they need to resolve kind of what their go-forward platform looks like. And so I think that makes for a great conversation for Broadridge about the virtues of our wealth platform. And then just generally speaking, the industry has the same challenges of end-of-life technology, as I said, bumping up against all the demands. And I think if -- when we successfully launch this really front-to-back solution for UBS, which is designed for the industry, it's a multi-tenant by design platform, that's really critical. And so I think from the next-generation adviser workstation all the way through to the really slick modern back office that we're known for is pretty compelling. And so I think we think a lot of the industry has these challenges and puts us in really good stead.

Okay. Moving to another topic here that's been, I think, a point of frustration for some investors, and it's sort of part of the world you operate in, but event-driven activity is something that Broadridge doesn't control. But it's at the lowest level in 6 years and thinking about the pandemic environment, do you think anything changes in event-driven? Because normally, we would expect you to go through sometimes it's better, sometimes it's worse. That's just how the world is with mutual fund proxies and things that move at sort of multiyear cycles. But anyway, has anything changed in the last few months that you think is better or worse? Maybe an elongation of mutual fund proxy cycles for some reason?

No, I think what we're really seeing is a -- what is -- just reminding us all, our event is very cyclical and it's great core to our business for using the same infrastructure. It's providing an important governance function, but it's, by definition, episodic because really the drivers of our -- when our mutual funds go out for proxy. And on the equity side or the issuer side, when you've got activist campaigns or M&A. So even sort of pre-pandemic, clearly, we were seeing a bit of a slowdown, as just in the last couple of years, we had some very large funds go after proxy. And so we would anticipate some level and although it was slower than we even thought just as there was just fewer campaigns that were going out. This definitely got -- this has definitely got exacerbated by COVID. So we definitely saw some campaigns, but just logistically, it was just difficult for clients to get done. So those shifted a little bit. So it certainly feels like we're at a cyclical low. No one's -- no one at least on our Broadridge side can call bottom, but, man, certainly feels like we're certainly mirrored, if not at it, if we come in at around this $155 million. So as we think about the next year, we think it's more a function of cyclicality, which, over time, some funds will come back, but we don't think there's going to be a big snapback just sort of given we still had some really good recent activity in the last few years, and those typically take 5 to 7 years to go out again. But we do think there's some proxy campaigns that got pushed that maybe will show up next year, maybe some activist work comes back, and that's -- we have no special insight there, but include a little bit of M&A would help. But either way, we don't expect a big snapback in any way. But I'll tell you from a planning standpoint, it makes a world of difference not to have to deal with a $90 million decline of a high-profit revenue stream like we did this year. So even if next year, we're going into flat to slightly up, that's just -- from a planning standpoint, it's a much easier thing for us to deal with. But again, we think over the long term, this should be a couple of hundred million dollar on average revenue stream for us. And we'll have done somewhere between $600 million and $700 million in event fees in the last 3 years, and I would expect something similar over the next 3 years. The timing is always tough to figure out. But this is a steady stream. There's really nothing structural, little bit of delays here and there related to COVID. But generally, revenue stream is intact, we believe, and -- but slowly come back. So we're well positioned for when it comes back, and we've got all the systems and operations to accommodate it.

Got it. Yes. Because when it comes back, it's very nice from the incremental margins on your event-driven are beautiful things to see when they happen, so.

We -- it beats the alternative. We like it.

Okay. Wanted to ask one question about your -- looking a little bit for an update. And granted, your earnings call was on May 8, so it wasn't -- about 4 weeks ago. But at that point, you said you were going to take sort of a pessimistic stance for your outlook for next year, assume sort of prolonged recession and tough macroeconomic conditions. I assume there's nothing that's changed there, but in some levels, it looks like that might be overly pessimistic, but -- just can you give us a philosophy behind taking that stance? And I assume it's Broadridge conservatism, but I'd just like to hear it from you.

Yes. Look, it's really difficult to forecast and plan in this environment. And we learn a lot every month about what is going on, and even a couple of weeks makes a difference. And obviously, we did our call in early May. But I think we still take a cautious outlook. It's uncertain a little bit. Obviously, things look certainly a lot healthier than they did a month ago. And we were really clear in terms of the drivers that we see playing out. And I think those from the outside can make their own. I mean one of the things that informed our low single-digit recurring revenue growth was, okay, let's anchor our stock record growth back in financial crisis measures that we saw, which was on a combined basis, both stock and equities -- our stock and interims, kind of flat to positive growth. And that's sort of embedded in our assumption. And look, we've got a very different dynamic right now. We're exiting the year with really strong stock record growth of about high single digits, but we also had low interim record growth in this past third quarter, that was 0%, but the mix puts us in mid-single digits. So obviously, we're in a good spot going into things. But we also have to remember that stock record growth has really driven in the spring, really a March and April phenomenon. So no matter what happens this fall, what really matters is where stock record growth is next spring. And so reasonable people can obviously come up with different points of view as to where that will be and the health of the retail investor, et cetera. Obviously, embedded in our thinking was the timing of implementations. We're not seeing any material changes to plans. But that could happen just as we work through logistics, and clients are really prioritizing what they need to get done. But again, nothing that is obvious to us. And we talked about some interest rate, a little bit of interest rate exposure, a little bit of assets under administrator -- asset value exposure. So I think people can reasonably take their own points of view. And look, I just -- look, it makes all the sense in the world to plan prudently if we're wrong and things are better, fantastic. But I don't think we're just sort of knee-jerk being super conservative. I think there are still some uncertainty, and we'll be -- I think we'll be happy if we've approached it in that way.

Yes. That certainly seems like the time to be prudent in this world. I want to ask another question kind of related to changes that we've seen in the environment, if it does affect you. Broadridge has a strong history of tuck-in acquisitions. You've done -- whatever -- a number of them over the years. And I'm just wondering if that environment has changed a bit, would either the environment affect how you look at being distracted by and they're not that distracting because they're tuck-ins. But I'm also wondering if we might see more of these smaller private companies that are interested in selling themselves to a stable financial partner like Broadridge because I think it will be tougher for, for example, to get if you're a small private company, it's hard to get a partner who can then get you inside someone's firewall the way Broadridge can.

Yes. And it's interesting because, as you said, we've been really active. We did something like 8 deals in the last 12 months, over $700 million. So we've put a lot of good money to work with a lot of deals we like in key areas like capital markets and wealth, and some data analytics. So I really like the things we got done. But there are a couple of things that even before the crisis hit that were true, which is one is just that we did a lot of deals. So our GMs are pretty busy. We did across all aspects of our business. So there's definitely digestion going on, and we want to make sure that we get these things integrated and executed the way we're accustomed to. So there's a lot of work to do there. We also -- where our leverage was up just a little bit, a little higher than our target leverage in our calculation, about 2.4x versus our 2x adjusted debt metric. So we want to get that down. We think that happens quickly in the fourth quarter here because we've -- our stronger free cash flow at this time of the year, which should bring us down close to that. So I think there's a little bit of digestion going on. And then you fold in the macroeconomic environment. And I think that's interesting. So I think there's one digestion. So I could see us just wanting to be very selective of anything we pursue. I think we're also noticing that there are some interesting deals that have been pulled. Obviously, there are some companies that are probably more distressed that are still in the market. Those may not be as appealing to us. So you roll that all together, and I would anticipate that we would be quiet over the balance of the calendar year and obviously have a nice pile of ammunition to go out again. But hopefully, some prices come down. Prices in the fintech area have been really fairly at a premium level. So we wouldn't mind if prices came down a little bit. I think we'll be fairly quiet for 6 months. I don't rule out something that's really compelling that we do it. But I think we'll be -- watch for a little bit and see how the market play -- it folds out.

Got it. Have time for, I think, one more question. So I wanted to ask one about the Broadridge Communications Cloud, which I haven't heard a lot about recently, but it's Broadridge has a pretty amazing portfolio of relationships, where Broadridge is sending out physical statements, confirmations, paper through the U.S. Postal Service, which as we think about the pandemic might be kind of an anachronistic thing to do and being able to send these things digitally into a trusted, call it, digital mailbox or cloud provider. Anything going on with the Broadridge Communications Cloud, which has been kind of in the works for a couple of years here?

Yes. I'd say the focus right now, Chris, has been ensuring that we win some large in-house business that is still with some very large household name financial institutions, and we think that will, obviously, further any digital strategy. So that's top of mind, which is how we close out with some really big deals, which is always part of our business case. We're also doing more point solution digital offering. So for a particular provider, how do we -- be their omnichannel provider, so they can do both physical and digital with us, and we're successfully getting some deals there, which is less about the big cloud and more about really being an omnichannel provider as well as other digital activation tools that allow for micro sites and techs that allow people to interact with a custom information for a user level. So we think these are things that enable more digital adoption, win us more communications deals. The cloud you described is probably a longer-term vision at this point about how we similarly build a utility and enable more consumer technology folks to aggregate kind of an online mailbox, if you will, the digital mailbox. We think that's farther out. And there's just so many factors that are beyond our control. All we can do is bring the technology to bear, but we're not a consumer brand. So there are just limitations to what we can get to. But we're certainly doing all the technology underneath that would allow all the matching algorithms to identify common addresses and enable more digital adoption, which is a common problem that all of our issuers, all of our clients have. So more to come on that. But I think right now, we're really focused on getting large in-house communications deals under the Broadridge platform.

Got it. Unfortunately, that's all the time we have for you today, Jim, and for the Broadridge story. We appreciate Broadridge participating in our conference over the years and especially making the transition to do it virtually today. We miss having it in the hotel and having the interaction that comes with that and client interaction, but appreciate again your participation here today.

Well, thank you, Chris. We appreciate you having us. The formats work great. You guys have done a good job, and I'm going to treat this like a keynote. You gave us the noon spot. So we'll -- thank you for the opportunity.

You are welcome, Jim. And I'm going to close out this Zoom room, and we will move on. At 12:30, we've got Visa, CEO, Al Kelly. So just check your links on your program there. All right. Take care, Jim. Be Safe.

You too, Chris.