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

Good afternoon. My name is Puneet Jain. I am from JPMorgan Payment Processing and IT Services team. Glad to have here with us Edmund Reese from Broadridge. Welcome.

Thank you.

And Edings -- my friend Edings is sitting here in audience. So the format of this presentation is going to be fireside chat. I'll start with a few questions, and then we'll open the floor from -- questions from folks in the room. And if you have any questions, you can send me through ask a question portal. I'll check that occasionally throughout the presentation and ask -- I'll try and ask as many questions as I can from there.

So Ed, maybe for benefit of investors who may be new to Broadridge, we always viewed or have heard so much about Broadridge as most important financial services company that many investors haven't heard about. So can you introduce Broadridge.

Sure.

To investors who may be new to the story and review your 3Q results?

First, thanks for having me, Puneet, and it's good to be back in-person and talk to you and then meet these investors here. Broadridge is a global fintech company. We're $5 billion in revenue. We are composed of 2 different segments. We provide the technology solutions for banks, for asset managers, for wealth managers, that power trading, that power investor communications and governance. We're composed of 2 different segments, our investor communications segment or governance segment that's over $2 billion in revenue in fiscal year '21, that's been growing for the last 4 years at 7% growth. Within that trading business, we sit in the center of a network where we're providing over $2 billion in communications for corporate issuers, for 9,000 corporate issuers, for 30,000 mutual funds. We're working with 1,100 broker dealers and providing communications to over 120,000 institutional investors, 170 million retail investors. That position in the center of that network really allows us to have relationships with essentially all mutual funds, all public companies, and we've used that position to drive data-driven solutions for fund companies, other issuer services and communications that are non-regulatory as well. The second segment that we have is our Global Technology and Operations segments or GTO. That's a $1.2 billion recurring revenue business in fiscal year '21. It's been growing at 10% over the last 4 years. And there we're really providing technology that allows for trade processing across multiple asset classes, fixed income and equity. We're processing over $9 trillion in notional value per day in equity and fixed income trades. And within the GTO segment are 2 franchises. First, the capital markets franchise, that's a $661 million recurring revenue business in fiscal year '21. There we're really focused on trading innovation, so innovating technology across those different asset classes and also using the data that we have, given the coverage we have, to provide network solutions. Recently there we purchased -- we made an acquisition last year of Itiviti that has allowed us to increase our capabilities, not just in post-trade processing, but in pre-trade processing as well. So we now have solutions across the entire trade lifecycle with that acquisition. The second franchise in GTO is Wealth Management. That business itself has been growing at 13% over the last 5 years -- over the last 4 years. There we really provide front, mid and back-office solutions for wealth managers. We have 30% of U.S. wealth managers using our front office capabilities. There we've been focused on building out a modular wealth management platform that allows companies to come on and modernize their technology. We offer that technology and componentized solutions. And there we've signed UBS as our anchor client on the wealth management platform. All of that business strategy, that I just discussed, is really sustained and underpinned by a very strong and resilient financial model that's focused on sustainable recurring revenue growth, on driving margin expansion, on the continued commitment to investment in steady and consistent earnings growth, all of that next to what I call a balanced capital allocation policy. We've been able to drive strong performance over the past few years. In fact, our ability to deliver on our objectives in each of the 3-year cycles that we commit to has historically resulted in strong returns for our investors. Currently we're in a cycle that's for fiscal '21 through fiscal year '23. There our objectives are for recurring revenue to grow at 7% to 9%, for us to continue to see adjusted margin expansion and to have adjusted EPS growth at 8% to 12%. During my last earnings call, I mentioned that we are well-positioned coming off a very strong fiscal '21 and our results here in '22 to deliver at the high end of those objectives. So that's a quick overview for you. You asked me about Q3. Q3 showed continued strength and resilience in our model. We delivered 16% recurring revenue growth in Q3. We continue to have margin expansion. Well, we continue to have a strong margin. Our adjusted operating income grew to $313 million. That was 10% growth, and margins were flat year-over-year at 20.4%. Adjusted EPS grew at 10% as well to $1.93, and we had closed sales, Puneet, that were growing 33% over the last year. We had 3 key messages in the -- the Q3 call, which was just this continued strong growth in Q3, both on the top line and the bottom line, a continued commitment to what we think will be a strong fourth quarter, but more importantly, delivering on our objectives for the full year. And I talked about our guidance for this fiscal year of '22 being at the high end of 12% to 15% recurring revenue growth, continued margin expansion and 13% to 15% adjusted EPS growth. The third message when you think about that performance is, we are continuing to balance our short-term results that I just talked about, with a continued commitment to investing for the long term, and we feel like we're well-positioned to be at the high end of those 3-year objectives that I just mentioned.

Very good. Yes. It's great overview. Your stock record growth this year, like has been very strong despite very, very tough comps from last year. How should we think about that metric beyond this year? Should we expect it to normalize, to return to a normal level of growth rates, but obviously at a much higher base than where it was a couple of years ago? Or could there be like a risk of mean reversion in that metric?

Yes. It's a great question and one that many investors ask. If you look at our stock record growth, it's been growing at mid to high single-digit growth. In fact, over the last 10 years, it was 6% to 8% growth. And I would say that's been driven by secular trends as you think about the cost of trading coming down, as you think about new products like 401(K) managed accounts and ETFs. To your point, recently, that's been elevated growth. Our fiscal year '21 showed stock record growth at 26% to the tough comps that you just mentioned. And again, for this year, we've continued to see these secular trends driving the business. So we've said that we expect approximately 18% growth this year here. And the trends continue. Zero commission trading, the ability to be able to enter the market through digital applications that make it much easier for investors. I don't expect that level of elevated growth to continue. There's a lot of questions about the market environment, would we see it revert to the mean or decline. I look back over the past 20 years, look back to the 2000 period or in 2008 and 2009, and we didn't see investors liquidate their positions. We saw in total between equities, funds and ETFs actually continued growth. If I look back at 2008 and 2009, equity growth -- equity position growth went down, but we saw a very high growth in funds and ETFs. So I don't think that you'll see the continued kind of elevated growth, but I don't see that you'll see folks liquidating their positions as well. I've mentioned before that we have good insight into looking in our position growth over the next 6 months. And when I do the testing now, it suggests mid-single-digit growth. And just to make sure you understand what that means, if we were to send out proxies today, we'd expect to see mid-single-digit growth. But if I look back at this time last year and what happened between when it was time to send out those proxies, I saw an uptick in the growth throughout the time period. So it's that point, what I see today and what I saw previously in terms of growth, that gives me high confidence that we should expect to continue to see mid to high single-digit growth. And most importantly on that, I think there's just a strong secular trend that provides a long runway for that kind of mid to single-digit growth on an ongoing basis.

And on the last earnings call, you also talked about like increased shareholder engagement through ESG. So talk to us like how that translates into win for Broadridge, more business for Broadridge, increased shareholder base?

If you think about our governance business, I think there's 2 trends that are really helping to drive the growth in that business, and the critical role that we play in the corporate governance business. One is what I just talked about, and I'd summarize that as this democratization of investing, more investors coming into the market because of lower cost of trading because there -- because it's just more accessible to them, and that's just what I talked about. The other, and specific to your question, is this ESG trend. There's -- it's very clear that there's increased focus on climate and social issues in addition to what's historically been a focus on governance issues from an ESG standpoint. And I think you see more, particularly younger investors coming into the market. You see more inflows into ESG-related funds. And so I think investors are increasingly voting with their assets and voting with their shares. We have seen the number of ESG proposals increase, and the support for those proposals increase as well. And I know that most folks in this room are aware of the latest proposal from the SEC to standardize the communications for ESG. So how does that help Broadridge? How is that a win for Broadridge, is a question. And when I think about that, driving this engagement between these new retail investors that are coming into the market and the wealth and the funds that have to communicate to them, that's what we do. We provide the technology and the infrastructure to do that. And if I think about what we've been doing to drive it most recently, a few examples. One is, think about this pass-through voting, fund managers allowing their end investor to actually own the vote. We provide the infrastructure and we're enabling that working with -- we've talked about our relationship with BlackRock and their other funds as well that we would talk about. The end-to-end vote confirmation. So we've now implemented end-to-end vote confirmation with over 2,500 public companies. We have coverage across the Fortune 500. And what that does is allow an investor to know that their vote has, in fact, been counted as they vote towards these ESG type proposals out there. And then things like universal proxy, again, that is a -- an initiative that allows for simpler contest when you think about some of the governance issues related to ESG as well. We're enabling that as well. And then, of course, we have to continue to invest to make it easier for investors to be able to engage. So you see investments in our ProxyVote app, you see investments in our virtual shareholder meetings platform, and that allows investors to come in and vote on those issues. That's a win for Broadridge. And I think this is an ongoing tailwind to help us now as well.

You broke out like data-driven solutions, issuer solutions, like provided more disclosures in your ICS business a few years ago, and that's great disclosures. Tell us like why those businesses, like the 2 issuer solutions as well as data-driven businesses, why those businesses should not grow faster than a regulatory business because the penetration rates are low and you have so much of capability, so much of data that flows through your pipes. So what are the gating factors to those 2 businesses?

It's a great question. And it really allows me to emphasize a point that I went by quite fast there. Our position in the center of this network, again, with funds and issuers, to your question, allows us to create other services like the data-driven solutions business that you're talking about. So that's a $350 million business. It allows us to provide -- we provide trade processing for retirement funds. We also provide data solutions that help funds and asset managers with their distribution efforts. That business has been growing well within the objectives that we set for our businesses in this 5% to 7% range. And I think that's a good place and something that we expect as we think about that business. On the issuer side, you've actually seen elevated growth, right? That business, for those who might be less familiar with it, facilitates annual meetings. It facilitates the shareholder registry for different corporate issuers, and it also helps with the regulatory disclosures, I think SEC-type disclosures as well. It's just under $200 million. Recently that business -- last year that business grew over 20%. And it's because we've been driving things like the virtual shareholder meeting proposal, being able to facilitate annual meetings through these virtual environments. The coverage there of the S&P 100 is over 70% and of the S&P 500, over 50%. So to see that kind of growth on an ongoing basis is going to be hard. So we're focused on retaining those clients, investing in these apps and being able to retain those clients. You put those 2 together, and I think you have a good combination of businesses that can grow at the targets -- at the objectives that we set for ourselves, which I think is a healthy level of organic growth.

Yes. I agree. Then the last part of your ICS, Customer Communications.

Yes.

How should we think about a growth profile of that business? What's the strategy there as end customers increasingly move to digital channels? Like instead of getting paper bills, they sign up for digital e-mail bills.

I mean, that's one of the most -- having been with Broadridge now for 18 months, I get that question often. And it took me a moment to completely understand it myself, but that's a $570 million recurring revenue business in fiscal year '21. And historically, what you've seen from that business is earnings growth, double-digit earnings growth, if I look over the last 3 years. And you've gotten that earnings growth because of the efficient -- the ability for us to be able to drive efficiency in how we process print-related communications, because we have over 7 facilities. Now in addition to that earnings growth, you see top line growth as well. Year-to-date, it's 6% in that business. And I think about it in 2 components. One is the print business itself. Particularly in this environment as companies have pressure, inflationary pressures, other cost pressures, they're certainly outsourcing that business. And we are seeing, given the scale that we have, we're winning even more sales than previously in that business, and we're seeing growth on the print side of it. But most importantly, and I think to where your question gets, is that we're not just winning the print business, we're winning the digital business alongside those clients. And the digital business, while smaller, less than $100 million, has been growing. In the last 2 years, it grew at double-digit rates from a recurring revenue standpoint as well. And so think about the bank client, Puneet. You have a client in the bank that has a mortgage, that has a credit card, that has a retail brokerage account. And if you think about managing the preferences, archiving those communications, those things are done in a siloed sort of ad hoc faction. I've been at places and seen it myself. We have an omnichannel cloud environment that allows us to manage preferences, the analytics, the data reporting. And so increasingly, we've been seeing wins that are both print and digital. And what that means is that you'll see now both top line and bottom line growth as we grow that digital business and the overall higher margin business because, obviously, digital is coming in at a higher margin. So that's the strategy. Use print as the entree into many of these clients, win the digital business as well and end up with top line and bottom line growth that's at higher margins.

Then let's talk about closed sales. You mentioned earlier that closed sales obviously has been running very strong this year.

Yes.

How much of that would you attribute to Itiviti acquisition, cross-selling and from Itiviti? And what are -- like talk to us like given obviously markets being down, increasing macro uncertainty, how are your capital market clients responding to those concerns? And are you seeing any change in client behavior as it take outsourcing decision?

And soon we're going to have those things combined, capital markets and activity. Activity is part of that business, helping our capital move from post trade to pre. But when I think, I mean, just for context here, we've grown year-to-date through 3 quarters in our fiscal year. We've grown closed sales by over 40%, I think, roughly 42%. And your first question is like how is Itiviti contributing to that? And the answer is significantly. They're driving over half of that growth. I can contribute -- attribute half of that growth. And when I think about the strategy for Itiviti, a part of it was really gaining share in the front office with our existing Broadridge clients, so taking Itiviti capability and selling them in North America to existing Broadridge clients. And we've seen wins with significant banks. I think we talked about one on our Q2 call or at least we made that point on our Q2 call that we've seen wins there. Itiviti, whether it's the financials or the sales, is performing in line with our expectations and it's contributing to sales. Your broader question is about just the appetite for banks and others in the capital market space to purchase our products right now. And first I'd say, we are moving towards this componentized across different asset classes, across different geographies, across agency and principal trading, high-touch automated -- manual trading versus automated trading. And so we've continued to see folks want to buy those componentized solutions, want to modernize their technology stack, get operational efficiencies, mutualize into industry solutions like Broadridge that are investing, helping them be on more innovative digital technologies. So we've continued to see strong sales and a strong appetite from our capital markets. So we're focused on the pipeline to sales and the pipeline is strong in both ICS and in GTO as well in our capital markets business. I'm focused on pipeline of sales and converting those sales to revenue. And as you know well, I talk about the converting -- about our revenue backlog, which is sales that have not gone live yet. And the last number we reported was $385 million, 12% of our recurring revenue. That gives us good visibility into the ongoing growth that we have.

Got you. And how much of business is tied to trading volumes? So if -- like there is like deterioration in trading volume, which it seems like on a year-on-year basis. You experienced some of that. What is the sensitivity there?

Well, let's talk both about trading volume and the other volume component of our business, which you mentioned earlier, which was the position growth. I guess, I've already said, on the position growth side, I think that to be pretty resilient. Overall, the trading volume is 15% of our -- on the GTO side, 15% of our overall recurring revenue -- of Broadridge's overall recurring revenue. And there is some cushion in that in terms of how we price there. Some of that is on a per transaction basis. Some of that is in tiered type pricing. But what we've seen in these types of sort of volatile scenarios is that, in the short term, in volatile scenarios like the one that we're in now, we actually see a benefit on the trading side. Particularly right now in the fixed income, about 2/3 -- about 3/4 of the trading is on the equity side, but particularly on the fixed income side. As you can see the move, Index move up, the movement in U.S. treasuries, we're seeing an uptick in fixed income trading and equity is more flat. I think over the medium term, that abates and you don't see that kind of performance. You could see some downside. So because of that, we don't anchor any of our planning or any of our assumptions in big trade growth. I think the key point for me is that I don't know -- I think every sort of recessionary volatile environment is very different. We have a very strong business strategy and flexible and resilient financial model that I think gives us confidence in the ability to be able to continue to drive towards the types of objectives I talked about, regardless of what happens, how we're trading.

Then your wealth management business. Like you recently branded wealth management business as BTCS.

Let me -- we branded our Itiviti business as Broadridge trading and connectivity solutions.

Sorry, my bad.

Wealth management is...

Wealth management remains wealth management.

Yes.

So wealth management, so you're obviously trying to create like a new platform integrating front office, back office, middle office. So talk to us about the traction you are seeing in other clients, other than UBS. UBS obviously, you expect to come through middle of next year?

Mid-calendar 2023.

'23, yes.

Yes.

So -- but talk to us like about the pipeline, about sales you're seeing at other clients for wealth management.

And I'll hit both of them because I think your question earlier on BTCS is an important one as well, but I'll first go to wealth management, like you said. So I mean, we continue to be excited and continue to expect that we will have most of that platform live by mid-calendar '23. So we'll see revenue along with the capitalized expense start to come through our financials, primarily in fiscal year '24 and beyond. As you know well, we've had success rolling out components of that solution. I just talked about sort of the modular structure of the technology and the componentized sales that we've been seeing. So we've talked publicly about rolling out workstations to over 15,000 associates, and the feedback on that from financial advisers and others at wealth management, has been very strong. We've talked about rolling out the websites, about billing. So some of the capabilities have already gone live. And that's an important point to make in response to your question because we can now go out and demo some of the capabilities to not just the top banks, but also Tier 2 banks, other RIAs. And we are seeing positive responses from prospects and existing clients on those businesses. We talked about -- I'm pretty sure we talked about very strong growth in wealth management sales in Q3. A part of that is the fact that we're now starting to see traction and strong feedback on the component type solutions. So there, we're going to focus on executing and completing the code development and rolling that out, and then turn our attention to driving sales there. And of course, we have talked about signing the second large client on that platform in RBC as well. So I feel good about -- I break that up into new clients coming on to renew existing clients like RBC, making us feel good. And now this movement into the componentized sales, those are the things that make me feel confident in the investment in this overall wealth management platform, not just for UBS, but as a long-term driver of our sustainable growth. Let me hit on BTCS for a moment since you mentioned that when it came to sales and overall performance. The strategy there for those of you who are maybe less familiar, we made an acquisition last year for Itiviti, now branded BTCS, again, to move up into the pre-trade processing in our capital markets business. And the strategy was, as I said earlier, to penetrate the Broadridge base in North America and gain share there. And as I said, we're having success there, but also to expand into the international markets. Our Asia Pacific business increased by 80%, bringing that business on. And we have been having some success going out with our modular solutions now that we can offer front-to-back trading and having success displacing -- half that market for this is proprietary. The other half has bended 2 big players play, and we've been having a success displacing one of the big players in the international markets in that space. So we feel really good about that. So penetration in North America with our clients starting to penetrate across the trade life cycle in the international markets as well, sort of the third and longer-term phase for that is the investment. We have all these post-trade capabilities. We have all of this data, the connectivity services, and now pre-trade. So we're investing to connect all of that together and get the benefits of a full sort of set of solutions there, that again can be sold in the modular and componentized solution. That's sort of the long-term objective there.

Are there any questions from the room? So we have like 6 minutes left. There is mic, can you?

I just had a question on the ICS business. How powerful do you think direct indexing can be as a tailwind to that business? I don't know how you want to talk about it in terms of TAM or in terms of a point or 2 of growth as a tailwind for the next decade.

Yes. And I think you answered it at the end of your question there. I think it's still early days to see how large direct indexing becomes. And obviously, if you have one ETF position today and that turns into multiple positions, that's a tailwind for us. There's a little bit to understand in terms of the way that the pricing works, and that, for an equity position, one position is how we price and manage account, 5 positions, and so that you have enough assets to turn a single position into 5 different holdings so that we can price on that. But when you think about that over the long term, it's certainly a tailwind for us. I think it's too early, and I'm certainly not forecasting what it's going to be in the long term, but I think about it in terms of a point or 2 of growth.

Any other questions? Let me ask about M&A. You obviously did Itiviti, a great acquisition. It's been a year, almost a year. Talk to us your appetite to do like large deals in GTO. Can you -- what's your focus? And can you do like a large deal in GTO – another large deal in GTO?

The first focus, Puneet, is the fact that our growth is primarily anchored in organic growth, 5 to 7 points of organic, when we have a large market opportunity to continue to do that. A $52 billion market opportunity with $5 billion of revenue means we have a long runway for growth. But to your point, we have a balanced capital allocation policy, and M&A is going to continue to be a part of that. In the short and medium term, having done a $2.6 billion acquisition in capital markets means that -- I think our capacity is limited in GTO to be able to bring on another large acquisition. And particularly even on the wealth management side, with the continued investment in the wealth management platform that we just discussed, that's where the organization is focused right now, completing that and going to sales. So a large acquisition on the GTO side. While there are assets that are attractive in that space, and I feel very good about that, I don't see that as being our key area of focus right now. But M&A, primarily tuck-in acquisitions, are going to continue to be an ongoing part of our capital allocation policy. I think they are strong -- they're attractive assets in the governance space that we'll continue to look at. Particularly in data and analytics, there are some assets that are interesting for us to think about. So if they fit the strategic profile, if they fit the financial profile, and I've talked about that before, we look for very high recurring revenue growth. We look for IRRs and shareholder returns that are very attractive to us, and certainly above our cost of capital and attractive to our shareholders, then we'll consider that. In the meantime, we're more levered than we would normally be, given the acquisition of Itiviti. We have an objective to continue to have an investment grade credit rating for many reasons to keep cost balance. I think it's a big signal as an industry utility, as we are to have an investment-grade credit rating. So you're going to see me -- you're going to see us focus on paying down that debt and getting to the levels that we want. And I just have to add, since we're talking about capital allocation, as you're going to -- likely going to continue to see the dividend that has now grown for 15 years in line with our earnings as well, and at the bottom of that stack now in the excess being returned to shareholders. That's the policy.

And you have like a strong track record of expanding margins as we think next few years, current 3-year horizon as well as beyond that. What are the levers in the model that can continue to drive margin expansion?

Yes. Let's talk about current and beyond, but let's also hit on the prior, because the prior year's last 4 years, 75 basis points of margin expansion, including 60 basis points in our fiscal year '21 and guidance this year with continued margin expansion. So that's a long track record, and it's because we have a business model that I think has natural operating leverage in it. So to answer your question, I think I've always bucketed into sort of 3 components. The scale that we have in our business from having fixed infrastructure is -- to bring on a new ICS client or GTO client, it's not at huge incremental costs. So they're coming on at incrementally better margins just to scale in our business. You asked me earlier about the customer communications business. So this continued shift from low to no margin print business to a higher-margin digital business allows us to be able to expand margins as well. And then I am very -- I play a big role with our technology leaders, and I continue to see the ability to get efficiency in our technology spend as we migrate to the cloud, as we think about multi-cloud strategies there. So I think the efficiency that we see in our technology is an opportunity to be able to get it. The key thing is that we have a long runway for margin expansion. I think you're going to -- we feel confident in the objectives that we have here. I think that allows us to create capacity to continue to invest for the long term, while delivering the kind of results that we talked about at the beginning of the conversation here.

That's great. On that note, I'll stop here. Appreciate it.

Thank you for your time, Puneet, and having me here.