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

Great, good afternoon. My name is Rajiv Bhatia. I am the analyst to cover Broadridge here at Morningstar. I'm pleased to welcome Edings Thibault, Head of Investor Relations for Broadridge Financial Solutions. Prior to joining Broadridge in 2016, Edings lead business intelligence and Investor Relations at MSCI. I'm really excited to have Broadridge presenting here today. Earlier in the year, we had Broadridge on the best ideas list. Broadridge is the only firm in my coverage with a low uncertainty ratings. I think that the firm is guiding to continued organic recurring revenue growth in fiscal 2021 shows how robust of a business model Broadridge has. Just so everyone knows, we have about 45 minutes today. I have a series of questions that I'd like to get through, and you can also ask questions through the portal.

So just to get started, at Morningstar, we think a lot about economic moats or sustainable competitive advantages. We think Broadridge has a moat, and I think you're referring to Governance Capital Markets businesses at growing franchise. I'd like to hear what you think Broadridge's key sources of competitive advantage are.

Terrific. Well, thanks, Rajiv. And first, let me start by saying thank you for inviting us to this conference. We've had a really good series of meetings all day, and I'm looking forward to answering your questions this afternoon. I'll answer your question. I'll start with a little bit of an overview because I think it's important to understand how Broadridge approaches its end markets and why we think that creates some of the competitive advantages that we think we enjoy. At our core, what Broadridge is trying to bring is to bring industry solutions to the financial services industry. And by that, we mean how can we find a few areas of focus where we can build platform solutions, taking our scale and domain knowledge, apply that to solve a problem in the industry. And generally, we're talking about providing -- where Broadridge can step in and provide mission-critical services for nondifferentiating functions. So if you think about the context of everything a bank spends money on, there are plenty of opportunities for them to invest and spend money on areas of their business that differentiate them from their competitors. But there's also a significant amount of their operations that are dedicated to keeping the lights on, making sure they are on the right side of the financial requirements and providing the kind of service to their clients that their clients expect overall and are demanded by the regulators. So Broadridge has historically looked for these opportunities to step in and provide the advantages the services we provide in governance and capital markets, in wealth and investment management, both here in the U.S. and globally. And so if you think about where these competitive advantages start, then I'll start broadly and then talk about each of our franchise businesses. It starts with deep domain knowledge. We bring a deep knowledge of a given function organization, and then we apply scale to that. So success for us is getting big enough at a given function that we can invest more than any other single player in the industry, which means we can continue to advance the state of technology, improve the overall of the services for a growing number of clients. By doing that, we are also attracting the best talent to whether it's post-trade processing or proxy and governance regulation processing, we can bring a level of expertise that no client can match. And that continues to build the kind of scale we think we can enjoy, and it drives real benefits to our clients. The third strength, which is really our track record of having delivered for our clients. And this is obviously a softer point, but I think Broadridge is, in many ways, the FinTech adult in a world of a lot of start-ups. We have been partnering with our clients in proxy for 30-odd years on the GTO post-trade side for an even longer period of time. And we've delivered -- we've developed the reputation at our clients for really strong client service for persevering, working and solving their problems. And I think that helps us when we start thinking about becoming an integral part of our clients' infrastructure. So if we start -- we apply that overall and we start with our governance business. At the core of what we do is providing regulatory communications on behalf of our broker-dealer clients. And so whether that's distributing proxy to shareholders who hold their shares in beneficial accounts, whether it's the distributing mutual fund communications to shareholders who hold those shares in their beneficial accounts, there are significant requirements that are core to the governance of the funds and the governance of public companies. And our position in that business puts us at the center of a network that includes 1,000-plus brokers, 5,000-plus corporate issuers, public companies as well as every mutual fund complex on a global basis. And so our goal there is to take that core network, the values we provide and continue to provide additional value and additional services, whether it's additional services to corporate issuers, additional services to mutual funds or continuing to work with our broker-dealers to deepen our relationship with that, while continuing to drive down cost of the core governance function. On the capital markets and wealth management side, the core of what we do is post-trade processing for cash security. We have -- we clear and settle over $6 trillion a day on average on our platforms. About 30% roughly of North American equity volumes, 60% of North American fixed income volumes, transact and are processed on our platforms across capital markets firms and wealth management firms. And so what we're talking about is bringing that scale and expertise in a way that creates a strong competitive advantage for us and continuing benefits for our clients. And we're starting to -- we've identified wealth management as a third potential franchise where we think we can be the only player really bringing sort of enterprise-scale solutions to the wealth management market. We obviously have a great relationship with UBS. We're in the process of building a multi-tenant platform with UBS is the anchor tenant on that platform. We think that's really going to take our wealth business much closer to sort of go from a collection of point solutions to a true franchise that are offering a unified platform solution with some of the strong competitive advantages that I had mentioned.

Got it. That's a helpful overview. So just kind of starting with your governance franchise, position growth is a key driver for revenues and profitability. You have a leading and high market share. So growth has to come from other sources. Maybe can you spell out what you see as the growth drivers in that business, such as account growth and the trend towards managed accounts?

Sure. I think there's a much bigger at the core of our regulatory communications business, the governance business. The biggest driver of growth overall in that core business is physician growth. Ours is a business model that essentially gets paid per communication to individual shareholders who hold those shares and beneficial and registered accounts. And we think there's really a multiyear trend there that's founded in technology, but it's really about driving down the cost of managing retail investments. And what that effectively means is retail shareholders today are getting access to much more sophisticated investment strategies than they've ever had in the past. And that leads to them owning more securities, whether they be mutual funds and ETFs or underlying equities. And that's great for business like ours that's positioned to make sure that they get the communications and the education they need about what's in their account. And you've cited a few examples of that, but that's really managed accounts, which are bringing these sophisticated strategies to retail investors, ETFs and passive investments, which are helping drive down the management cost of those investments and making them much more accessible to sort of the AUM-based pricing model that most financial advisers are shifting to away from traditional commission base. You're seeing the cost of trading to continue to decline to the point that some of the e-brokers are now beginning to offer 0 commission trading, again, driving down these costs. And for some of the newer FinTech players, you're certainly seeing an emphasis on improved user interfaces that seem to be bringing in a totally new class of investors. So if the old model would have had account growth roughly in line with population growth at 2% to 3%. We're now seeing the opportunity to extend that to a whole new class of investors, perhaps younger with fewer assets than historical brokerage account investors. You're certainly seeing that the dropping costs of technology are leading to a greater number of underlying holdings in each individual account. And that -- those 2 combinations together are driving and have driven over the last decade, mid-single-digit growth in the number of positions, whether they be mutual funds or individual shares. And we think we're in relatively early stages of that process. So I think that's going to continue to be a core driver there, and there's no -- we don't need to increase our market share in order to continue to benefit from the overall growth in that market. And as I mentioned earlier, the second -- additional growth drivers of that really set -- really come from our position in the overall network by servicing issuers, funds, broker-dealers, that gives us a relationship with each one of those. So we see a significant opportunity to continue to grow the range of services we offer to corporate issuers. One of the big drivers -- an important driver of our growth in the fourth quarter of last year was virtual shareholder meetings. As we all know, the days of in-person annual meetings are probably gone. They're certainly gone temporarily and then maybe going in the long run, and they can be effectively replaced with the virtual shareholder meeting. Broadridge is one of the leading providers of that product. We sell the number of shareholder meetings. We service go from 300 to over 1,500. So just an explosion in demand driven by COVID, we think most of those customers are going to continue to hold virtual meetings, whether they'd be hybrid physical virtual meetings. So that's an opportunity for us. A, extended our relationships with corporate issuers to corporate issuers. We've never had a relationship for, so there's opportunities for us to sell additional services into them. And it shows the power of being in the middle of that network. We obviously do a ton of both communications and other data and analytics work for mutual funds. We have a very nicely growing business in data and analytics that -- data and intelligence that provides real insight to mutual funds based on understanding how those funds are distributed. That's been a nice driver of growth there. So not only is there growth in the core of that business driven by this position growth and the long-term trends of reducing cost for retail investors, but there's also very significant growth opportunities, servicing the other players in the network, including corporate issuers, mutual funds and to the same extent, broker-dealers.

Got it. That's helpful color. Just what you're thinking about your other ICS outside of your governance franchise. What are some of the headwinds and tailwinds for your customer communications and fulfillment business?

Sure. So for customer communications and fulfillment business, as a reported line item, it's about $700 million in revenue, it's been -- it has not been an area of growth for us. There's really 2 businesses there. And as the team suggests, these really our Broadridge Customer Communications, which makes up the vast majority of that. There's also a small part that has to do with the distribution of prospectuses to brokerage account holders. On the customer communications side, our focus is on delivering -- that business today is largely around nonregulated communications. So think about Bill's statements for brokerage accounts, health care statements, et cetera, that are part of that. Our goal is to provide an omnichannel communications experience. Today, the vast majority of that, both in our business and across the communications business, most transactional communication volumes remaining in paper. And so we think there's an opportunity to help accelerate the trend towards digitization by consolidating all of the preferences of clients and being able to provide effective digital communications as well as effective paper communications. Today, e-mail communications work for some people, not for others, a lot of people are struggling with the amount of physical mail they get. So we think there's an opportunity for us to continue to drive down the overall level of physical communications and improved digital outcomes. That's been a challenge for us. We had -- when we invested in this business by acquiring some of the customer communication assets of DST 3 years ago. And the good news is we've been able to really drive a lot of costs out of those businesses and our customer communications business has been a nice contributor to earnings growth and hasn't been as successful in driving revenue growth in part because we saw the loss of a large client, which was expected. It took a little bit longer to go off. That's now off. We -- I think the integration of the digital capabilities that we acquired took a little bit longer. But the good news is we think we're in really good shape. We finished the digital migration. The client loss is now done. We're seeing some nice traction in the marketplace with some nice client wins in sales last fiscal year, and we think that positions us well going forward. So we're no mission accomplished banner for customer communications in terms of returning that business to growth. But we certainly feel like they've made a lot of progress in strengthening that business last year, and we're cautiously excited to see what it can do in fiscal year '21. So I think we still think there's an opportunity for growth in this, and we think we're well positioned to take advantage of it.

Got it. And then just rounding out, about 20% of your ICS recurrent fee revenue, you classify as other ICS. I guess what are some of the bigger businesses in that segment? And what is the margin profile like?

Sure. I probably won't discuss the margin profile. But I think if you think of what we call other ICS, there are 3 major businesses there, and they're not too far off of one another in an overall size. First is the suite of services we offer to our issuer clients. That can be anything from the transfer agency services as well as document management services that we offer to our corporate issuer clients. And I've already talked about some of the exciting trends we've seen in virtual shareholder meetings. So I think there's an opportunity to drive that. That's going to be -- we see several hundred million dollars of growth potential in that market. The second business is data and analytics, where we gather data from our relationship from what we're learning from our internal sources, which is our brokers sharing with us what's held in the accounts of their customers. We combine that with third-party and other acquired data services, and we have a really robust data product offering for mutual funds, for example, who struggled to understand in a world in which 70% of their shareholders buy their shares through a broker, they have very little visibility into their market share by region or where these end customers sit. So we've given the ability to look through broker-dealers and really understand where their shareholders are, and that obviously powers a lot of their marketing efforts. So there's a nicely growing business, double-digit growth last year in our data and intelligence business there. And then the third part of other ICS, it's really a range of services we offer servicing third-party administrators of mutual funds -- excuse me, retirement funds. Most smaller corporate 401(k) plans are sold through financial advisers. We help administer those retirement services on behalf of the fund. So there's an opportunity that's been growing nicely. There's some couple of headwinds there related to -- we do earn a little bit of interest income from cash we custody, but and with rates where they are, that's -- there's not a lot of that left, but we think that's a really nice opportunity to, again, bring scale, work on a relatively small part of the market and really apply a mutualized solution to really help our partners there.

Got it. Just kind of switching gears to your other segment, your GTO segment. Broadridge have spoken a lot about cost mutualization as a driver for growth. And what inning do you think we are in that cost mutualization outsourcing trend?

It's a great question, Rajiv. I think we're still relatively early. I think what banks continue to face, banks broker-dealers, wealth managers continuing to face long-term challenges around the speed of technology evolution. So if you put yourself in their shoes, they're looking at this full range of technology evolution, whether it's how to apply artificial intelligence, the need to go to the cloud, increasing pressure from digitalization, blockchain may or may not be an important -- play an important role in their business, they also face a need to consistently differentiate themselves from their customers in a world in which there's increasing commoditization of, say, passive instruments are inherently commoditizing instruments. So how they differentiate themselves is around service, around service delivery. And those are areas where they need to focus their investments. So we think we're still relatively early in the trend towards mutualization towards turning to partners, infrastructure providers like Broadridge who can really come in and build industry platforms that can give them the scale and scope to compete with even the largest players in the industry. That business was built on very -- on historical growth amongst the sort of traditional Tier 2 broker-dealers. Over the last 5 to 7 years, we've had very good success targeting the Tier 1 players, and we think there's still significant opportunity there. And that's just in North America. When you start to think about the global opportunity, beyond the North American market where the mutualization trend is probably in the fourth or fifth inning, we're probably in the first inning in Europe and even haven't even begun the game in Asia. And we think that's going to change given the cost pressures that certainly European banks are under. They have some strategic issues. They need to work out about exactly how they want to compete globally and regionally. But I think as they do, there's a great opportunity for us to help them simplify their reduced complexity of their operations and drive down the cost of managing those operations. And that's really what Broadridge does, whether it's in that core post-trade capabilities or around some of the new capabilities we've acquired in recent years.

Got it. And then wealth management has been a focus for you in GTO. Being selected to build UBS' Wealth management America's platform was obviously a big win for you. Do you think that would have resulted in a larger pipeline in terms of number of deals or deal size?

I think there's no question that the UBS relationship and the decision by UBS to select Broadridge to building a multi-tenant platform, of which they are going to be the anchor tenant in wealth management has significantly raised our profile. I mean, our sales force was getting inbound calls from the largest wealth managers, and they need to understand the benefits that this could bring or will bring to the UBS advisers, whether it's competitive advantage, whether it's just operational advantages and complexities, it certainly sparked a lot of interest. Now each firm, each wealth management firm is under -- is in its own investment journey in a different stage in terms of the maturity of their technology. And it's important to realize that for Broadridge to be successful in this business, we don't need to win every broker client. We don't even need to win broker clients and big bank transactions where we're putting a platform across the front, middle and back office, the way we're doing at UBS, but we can really build off the strength of our very strong position in the back office to link that to other -- use our platform, to link that to other services across the front, middle and back. So a lot of interest won't comment on where we stand in the pipeline. A lot of people looking -- want to see us bring this closer to reality at UBS, so that they can have confidence that this type of technology evolution really can be achieved. But we think it's certainly -- it's already open doors, and we think it's going to continue to open doors going forward.

Got it. Just shifting gears to your M&A strategy. Broadridge has adopted a tuck-in M&A approach. How does Broadridge think about acquisitions? And why has the tuck-in strategy been the correct one?

Well, I think, first and foremost, we see acquisitions as a critical part of our overall growth strategy, wherefrom a pure capital allocation returns perspective, if we believe we can earn better returns from buying other businesses and from, in essence, buying our own shares, and that's a higher and better use of our capital. And we certainly believe we can have done so and we'll continue to do so. But I think more fundamentally, ours is not really a financial strategy. It's driven by the strategy needs of the business. Every year, like most companies, we go through a strategic planning process. But we -- as part of that process, we really push our business executives across our businesses to understand who are the competitors that are watching, what are the new capabilities that are being developed and offered by new entrants, what are sort of interesting opportunities in the near adjacencies in their market. And really develop an understanding of who seems to be gaining traction, what products seem to be gaining traction. And then our M&A team seeks to go out and build relationships with those players and understand that if there is a change of control event at one of those players that Broadridge is involved. And so in many of our M&A recent transactions, these are companies we've been talking to off and on or in some cases, even a decade. So the companies that have been on our radar, we are -- have the strong financial position to be able to take advantage of it. We've also seen attractive returns at the lower level. I think as you begin to see larger acquisitions because of the pressure amongst private equity firms to deploy capital, you can get increasingly competitive markets and auction processes there. And in many cases, that's meant of returns that we require to do the acquisition weren't there. But we really do see FinTech as presenting a evergreen M&A opportunity. I mean they're across the financial services operations space. They are smart people at each one of our clients who are experts in a certain process who look at that process and say, with some investment dollars and some new technologies, I can make this process better. And there's capital, venture capital or otherwise, that will fund them to get them to a point where they can get that initial client win and we see it as an excellent opportunity for Broadridge then to get involved, plug those players with their innovative product set, their deep domain knowledge and bring them to our Tier 1 client base, put them on our MSAs, and we think we can really help accelerate the overall growth of that. And it helps us by bringing in new talent, entrepreneurial talent, new capabilities that we can continuously offer our capabilities and it just continues to expand the range of value we can offer to our clients. So it's been a nice strategy for us. The small size has played well. In terms of being -- where we've been able to see attractive returns and execute those deals. And so we see it as an important part of our overall capital allocation strategy.

Got it. That's helpful. And then just from a geographic perspective, Broadridge generates over 95% of its revenue from North America, and over 85% of that is in the United States. How do you think about international opportunities? And if you were to expand internationally, do you think it would be more on the ICS side or GTO side?

It's a great question. I think we definitely see significant opportunities outside the United States. As you noted, we are, by history and by weight of our revenues, much more North American company than a global company. But having said that, we have strong operations in Europe. We have a lot of our tuck-in M&A strategies have been oriented towards finding niche capabilities in Europe that we think we can bring to the U.S. market on the capital markets or wealth management side. We're also and so we've done a lot of those acquisitions, and that's helped us build an even stronger European business. And I think we see, as I talked about when we talked about what inning we are in on the neutralization trend, we think we're very early in Europe, and we continue to see Europe as a very attractive growth opportunity for us in our business on the technology side, on the GTO business and capital markets on the capital markets side. We're also seeing the emergence of -- we've made some very small acquisitions in the fund communications space there. So we think there's an opportunity around fund communications to build a real scale platform provider that will help both pan-European and global funds reach their underlying investors with the communications they require. So we think there's an opportunity. We've made 2 small acquisitions there to really build a business, and we think we're in a nice attacking position overall. We're seeing opportunities with the recent implementation of the shareholder rights to directive in the EU, which mandates a greater degree of communication between corporate issuers and underlying investors. And we're deploying a blockchain-based solution to help provide a capability that will centralize that communication hub on a pan-European basis, and we've had some very nice success there. And we think we're poised to be an industry leader, trying to think if there are lots of examples of that. We continue to look globally around our post-trade operations. I think in 2019, we made a nice sale to an Asian bank. And so we see additional opportunities there. So look, I think the international business will continue to grow at a rate that's higher than the North American business. And so we'll continue to see a modest shift over time towards being a more global revenue base.

Got it. And you just mentioned your blockchain initiatives. I guess, what's the materiality there? And when do you think they will be material from a financial perspective?