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

All right, guys, why don't we kick it off? First of all, thank you all for joining us at this event. It's really the Inaugural Wealth Symposium for Wolfe, and I think it's gone really well so far. So really excited to have you all here. But most of all, really excited to have Broadridge here with us, Edmund, CFO of the company. I mean, I think we were just talking, how fast it's gone. It's been 2 years since you've joined. For those of you who don't know me, I'm Darrin Peller. I'm the fintech payments processor and IT services analyst at Wolfe. And Broadridge is a name that I've covered really for many years now since Rich Daly was walking around, talking about his vision for the company, which was really fun to listen to. But it's really gone through quite a bit of a transformation since and turned into a lot more than maybe it was then. Very much looked at it as one of the recurring revenue consistent stories in our coverage universe by a lot of investors with a lot of optionality and opportunities. So thank you again for joining us.

Yes. Thanks, Darrin. Thanks for having me.

Why don't we just kick it off with some of the recent trends you saw last quarter and some of the things you -- really, if you take it a step back the last year, just catch us up for anyone here that may be a little less familiar.

Well, let me just maybe start with a little overview and then get into the some of the recent trends for sure. So first, thanks for having me here today, and it's good to see so many of our wealth client -- wealth management clients in the room here. As Darrin just said, Broadridge is a global fintech leader. We're a $16 billion market cap company. We provide the critical technology solutions for banks, wealth managers, capital markets and other financial institutions that power trading, that power investing -- investor communications and governance. We have a business that's composed of two different segments. The first is our Investor Communications segment. That's a $2.3 billion recurring revenue business in fiscal year '22. It grew over the last 4 years at 8%. That growth is being driven by one of the trends that, Darrin, that we'll talk about here is this increased investor participation and this increasing focus on corporate governance. Our other segment is our Global Technology and Operations business. That's a $1.5 billion business. It's been growing at 13% over the last 4 years. There, we are really providing the trade processing for financial institutions and capital markets. We're processing over $9 trillion in fixed income and equity trades per day, and that business is really broken into 2 units. First is our capital markets unit, which has been growing at 13% over the -- I'm sorry, 14% over the last 4 years. And there, we are focused on building technology to help with trading innovation, to help with network-enabled solutions. In fiscal '21, we purchased Itiviti, now known as BTCS, that really increased our capability in the capital market space, really allowing us to move not just the back office, but into the front office as well. And so the other part of our GTO business is our wealth management business. That's a $554 million recurring revenue business in fiscal '22. It's been growing at 11% over the last 4 years, and there, we're providing front, middle and back-office solutions to wealth managers. We have over 30% of U.S. advisers using our solutions in wealth management. And I'm sure we'll talk about the fact that we are focused on building an open architecture modular capability that brings all our capabilities together with UBS being our anchor client there. So those are our businesses That business strategy that I just described in ICS and in GTO is underpinned by, I would say, a strong and resilient financial model, focused on what you just said there, growing sustainable recurring revenue growth, being able to invest for our long-term growth, while expanding margins roughly about 50 basis points per year and being able to drive steady and consistent earnings growth. We're quite unique in Broadridge from some of the other companies at least that I've been at and I've seen in that we set 3-year objectives. Every 3 years, we go out and set topline and bottom-line objectives. We're currently in the third year of our objectives that run from fiscal '20 through fiscal '23. In those objectives, we have set 7% to 9% recurring revenue growth as the objective with 5% to 7% of that being organic, 50 basis points of margin expansion, 7% to 11% of adjusted EPS growth. And you asked about what's been going on with Broadridge. We're just finishing those first 2 years, fiscal -- our fiscal '21 and our fiscal '22, which ended in June of '22. Just finished consecutively 16% revenue growth in fiscal '22 and 10% in fiscal '21. And both those years, '21 and '22, we also had margin expansion of 60 basis points. And then on the earnings side, it was 14% in fiscal '22 and 13% in fiscal '21. So well on our way to being able to hit the high end to be at or above our 3-year objectives. We just reported results last year for Q1, and there, we had 9% constant currency recurring revenue growth. Our adjusted operating income was down, but we did very, very importantly, reaffirm our guidance for fiscal year '23, which is 6% to 9% recurring revenue growth, another 50 basis points of margin expansion, and 7% to 11% adjusted EPS growth. So if we do that, which again, we just reaffirmed the guidance, we expect to be well on our way to being at or above the high end of our 3-year objectives. So I just wanted to give that little overview before jumping in. Talking about the trends of the business that you just talked, and I think the first one I'd mentioned, we talked about this recurring revenue growth. The key thing for us is being able to convert our sales backlog into revenue. That is -- we have a very healthy backlog, but the key trend that investors have been asking about is, what's happening with position growth, for sure. And I think you just gave some commentary on that. We've seen position growth continue to be quite strong for us. In Q1, it was 9% on equities, 11% for funds in ETF. And a lot of folks ask, is it COVID? Is it the meme stock that's driving that growth? And I would say, it's the continuation of a long-term trend that began with new trading technologies with initiatives to reduce the cost of trading. And so you've seen everything from discount brokerage to online brokerage to 401(k)s, ETFs and managed solutions just drive down the cost of trading and the accessibility for new investors to come into the market. And during the COVID time period, during the pandemic, I'd say, things like zero commission trading or new digital interfaces. You've talked about some competitors that you have here today that provide those type of solutions. Those have only accelerated those trends as well. In fact, over the last 2 years, our fiscal '22 and fiscal '21, we saw 18% and 26% equity position growth. And I think we should expect to see not those elevated levels as we flatten out here, but probably mid- to high single-digit growth. And then I'll remind you before I wrap up on this one that we continue to be able to test companies what their positions look like, particularly those companies that are going to proxy in the next 6 months. We have high confidence in that data. And again, there, we're seeing growth that supports our fiscal '23 guidance of mid- to high single-digit growth. So again, I think that really just emphasizes that it's not COVID, it's not the meme stock, this is a long-term trend. And when I think about things like direct indexing or model-based investing, I think you'll continue to see investors coming in and us continue to see mid- to high single-digit growth despite the volatile markets where that gives us confidence in the guidance.

Okay. Guys, just to be clear, so the key KPIs that Edmund is talking about that drive the business, for those less familiar, really position growth, a number of equity positions being held by investors, drives you sending out information, proxies and other information about mutual funds as well. So those -- the number of stocks or mutual fund positions held is a key KPI. So is trading volume for your GTO business, right, given you're settling trades and processing. And then obviously, you have a backlog and you have bookings on really software provided for the industry on wealth and capital markets just to level set. But going back, and we're going to go into the wealth discussion given that's really what this conference is about, but going back to position growth, given that's kind of a hot topic right now. As you said, it's been extremely strong. I mean the pandemic definitely had an impact, whether it's because it's structural reasons to stay or it's just folks had more money to go around. So maybe we revisit that again. I know right now, you test to see what kind of position growth you could have based on your current issuers and you see what shareholder base there is. And so you know for the next couple of quarters, but what about beyond that? I mean you seem to have a lot of conviction in that high single-digit growth rate versus it was 20% or high teens actually, as you go back through the pandemic, but really mid-single digit to high single digit was before. You don't expect any type of tough comp to drive something lower than that?

No one knows exactly. But we do have this visibility of being able to test. I think the key thing for us if I look back to the data that we have back in 2000, I look at the data that we have in 2008, 2009, you didn't see mid-single-digit growth, you didn't see elevated growth, but you didn't see folks selling the positions that they have as well and it going negative. Maybe there was a couple of quarters of negative equity growth, but when you add funds and ETF on top of that combined, position growth was still positive when you look at that 2008. And the intuition for me there is that if you're sitting in the stock position that you -- and the markets are volatile, you're not necessarily going to liquidate and sell that. So you might not see elevated growth, but the history suggests that we're not going to see anyone liquidating those positions. And again, if you add to it, direct indexing, there's a lot of momentum behind that. If you add to it some of the model-based investing, what's happening with pass-through voting, I think those things are things that continue to bring investors into the market. They want to say, they want to be able to vote their positions and it's the continuation of that long-term trend.

Okay. And then when we think about the data you get to see for that, obviously, it's something that's, I think, pretty differentiating, right? I mean you, actually, know who specifically the retail or the investor that owns the position. So more than any of the brokers perhaps you can see where to send information. What can you do with that data? Is that something monetizable more so than you've already done? Or...

Well, I mean, our position at the center of -- I should have said in my opening remarks, but our position at the center of this network that sits in between all the corporate issuers, so to your point, we know for every -- not all the 9,000 corporations out there, who is invested in those positions. We have relationships with all of the funds and all of the broker-dealers as well. So if you think about issuers, funds and broker-dealers sort of on the left-hand side and institutional investors and retail investors on the right-hand side, we're sitting in the middle of that with all the information to the point. And what we've done is use that. You talked about when you first covered and Rich Daly was leading the position, the big difference between when Rich was leading it and where we are now is the adjacent businesses that we've gone into being able to provide solutions for the funds. So we have a business now called data-driven fund solutions. It's over $300 million, where we're providing analytics for fund companies to help them with distribution, to help them with their marketing efforts, to help them with some of their regulatory communications. We're providing issuer solutions to the corporate issuer as well to help them with their disclosures, some of the regulatory communications they do. And then we have a customer communications business over $660 million that's distributing $4 billion of nonregulatory communications as well. I would say, it's our position at the center of that network, basically having a relationship with every fund, every corporate issuer out there that allows us to move into these adjacencies.

And can you just quickly -- before we go over to the wealth management side, just touch a little bit more on what digitization of the business means for you. Just going over from the print, which you guys have always done well at scale, sending out mail effectively at a better price and efficient to e-mail, right, or to any other electronic form. Does that help?

Digitalization is an important part of our business, and I would say, very...

And competitively also, I wonder, if that's...

Competitively and for our funds as well when you think about it. So if you -- right now, over 85% of our proxy communications are digital. Nearly 80% of the fund and ETF communications are digital. And the benefit to the funds, to the issuers in that is, we're driving down cost. You don't have to print the paper. You don't have to mail. You don't have all of the postage costs. You drive down carbon emissions. We've estimated that through fiscal '20, that was over $600 million in savings for funds as we drive those costs down. So it's a key part of our business. When we think about moving digital in our regulatory business, it's also beneficial to us because it increases recurring revenue for us. And then I mentioned earlier, our customer communications business driving -- making that be more digital is a key focus of ours. In Q1, we announced this relationship, this new deal that we signed with Cetera Financial, where we are consolidating all of their clients, all of the regulatory communications and the more customer-friendly omnichannel one-point place for them to be able to access that. And that's a big thing to be able to move from physical to digital. That is also going to come in for us at higher margins as we drive down low-margin print, physical mailings and move up into digital mailing. So I think about digital as being a benefit to us both on margins and on earnings as we move from low-cost, low-margin print business to higher-margin digital business, And it's good for the funds as well as it helps drive down the cost, which is part of our objective here.

So just to wrap it up on this. I mean, it sounds like from what you can see right now, first quarter is only about 15% of your full year, your seasonal. So...

Last -- to be very specific on that, the last 10 years, it's been between 10% and 17%. So yes...

Okay. So...

And I just said in Q1 that the first half is going to be about 25% of our full earnings. If you look over the last 10 years, that's what it's been.

Yes. So importantly, your trends that you're seeing, you still have the same confidence or anything different in what you're seeing in terms of investor behaviors?

If you think -- so if you think about -- and you said this, but it's worth repeating. If you think about what drives our in-year performance in our financial model, one is going to be what we just finished talking about, like what is happening at position growth. And everything that we're seeing there, the testing suggests that our guidance of mid- to high single-digit growth is the right thing. The other thing is that already contracted sales backlog converting that to revenue. That's the biggest piece. And I don't know if we quantify it, but to put a number on that, that's currently sitting at $430 million, 12% of our recurring revenue. So just monetize it, just converting that into revenue is key. There is sometimes quarterly noise in our business when you think about event-driven revenue in a particular quarter. 4% of our revenue is ad hoc things, if there's a mutual fund going up to proxy or if there's IPOs and capital market transactions, that could change quarterly. But we don't have any major funds going to proxy as part of our assumptions that allow us to hit our guidance. And then I really do hope I get the opportunity here to talk about my continued confidence in our ability to be able to drive margin expansion because it's that component. The backlog, the position growth, modest event-driven revenue and our ability to be able to continue to drive margin expansion, those are the factors I think about when I think about the guidance and my confidence in it.

Let's shift to the wealth management opportunity now. I mean just maybe start off by giving us a sense of the lay of the land in terms of what you see -- really, just big picture, what do you see around wealth management technology spending? Who are the competitors out there right now? And what are you trying to be?

For Broadridge, we put some market size numbers out there. For Broadridge, we see the wealth management space at least for the solutions that we provide, the wealth tech solutions that we provide is being roughly about $16 billion. And that's growing, I would say, depending upon what source you look at, at mid-single digit rates each year, driven by wealth managers wanting to digitize and continue to innovate their platforms. And I think about the trends that has been driving growth in that market, and we're quite excited about. The first one I think about is just who's coming into -- who's using the services, and we're seeing more and more young investors who are looking for a more digital experience, who are looking for a more personalized advice from their advisers and personalized experience from their advisers. Again, I think that was accelerated during the pandemic, young investors coming in. And I also think this transfer of wealth, multigenerational transfer of wealth from boomers to Gen X and Gen Y is also a big driver of that. So young investors coming in, I think, we see as a big trend. I think when we talk to our prospects and our existing clients, the fee pressure that clients are seeing, the regulatory pressure that they're seeing, new competition, low-cost entrants coming in, that's creating pressure for the prospects and the clients that we're talking to. And I think they think the way that they address those issues, they meet that demand is by scaling, digitizing, modernizing their operations. And if you sit back and think that is a -- most of these clients out here have legacy systems that are very complex, that it's hard to reduce cost, that it's hard to update in terms of the critical capabilities that they need, hard to stay regulatory compliant. So they look for solutions to outsource that and mutualize the investment, drive down costs, stay regulatory compliant. And that's exactly where Broadridge fits in and seize an opportunity to be able to sell our point solutions, the ones that we have in the back office and the ones that we're building as we build out the wealth management platform for UBS and to sell those solutions as well.

Let's go into that a little more now in terms of the specifics of what you're doing for UBS, the timeline and really what you're trying to -- what kind of modules you're building out, maybe just explain what it is a little bit more if you can?

Yes. So we are building a wealth management platform that I would say is an ecosystem of front to back office capabilities. And I think about it, we go into a lot of detail. It's a big investment for us, which we can talk about. It's over 30 different capabilities. So I'm not going to sit here and sort of like tell you what each module is, but I do bucket them into about 3 categories. The first, I would say, is capabilities to help advisers be more productive. And so there, I think about things like a CRM or -- because what it is, is a workstation framework that allows you to integrate many other capabilities into it. So I think things like digital marketing, think CRM, the client relationship master to connect different types of relationships, commission calculation. So things that can help advisers be more productive, a number of capabilities there. The second one, I would say, second bucket for me is enhancing the client experience. And there, the modules that we have are focused on digitized statements, confirms, proxy, tax, other insights that enhance the customer experience. And the third, investors are certainly -- wealth management prospects are certainly focused on this is digitizing the operations. And I've seen sort of some of the demos of this myself. So if you think about trade settlement, margin calculation, cash management, I've seen a demo of what we call the operations console. So somewhat being able to see exactly where your cash management positions are helped with the back office functions. And so those are some of the key modules that we are focused on as we build out this platform. One very important thing for us is something that we call the integration service layer, where we're allowed to take the applications for those 30 capabilities that we have built, combine them with partner solutions that are best-in-class solutions folks, vendors that we're partnering with, but also have an integration layer that allow clients to put their own applications and for those capabilities to work seamlessly across one another. And if you think about what I just said, I just talked about a platform, but I talked about individual solutions as well. And that is a big advantage for us, whether we're going out and working with a self-clearing firm who wants to have the complete platform solutions or selling the individual point solutions to folks who might have a system in place and might just want to use one of the individual solutions. So that's what we're building, and that's what we -- with UBS as the anchor client and what we feel very good about. What I think -- sorry, go ahead.

Well, I was just going to say, just to keep things going on the financial opportunity, I mean you gave us some numbers of the UBS specifically. I think you said $100 million of revenue a year. There's depreciation of $60 million or $65 million, something like that, right, in terms of the cost. But overall, this is really supposed to be leverageable to a lot more clients, and really, like you said, a platform or modules that can be leverageable to a huge number of incremental wealth managers. And so can you touch on that? I think you touched on already seeing some inbound demand.

Yes. I mean the first -- one of the biggest -- so one thing we're seeing is this market opportunity. The other was being able to use it with existing clients. We have these existing clients, and as we talked about on the ICS side, being able to expand those relationships with them. But a big benefit for the Wealth Management platform was to be able to invest alongside an anchor client, build something specifically for that client that we can then sell to others as opposed to trying to build something from scratch and go sell that out to others. So when you think about that, with the type of investment that we are talking about, you're right, I mentioned revenue numbers of -- on an annualized basis, about $100 million. It's going to be marginally dilutive with UBS only. But incremental to that deal, we will be bringing on. Right now, we estimate $20 million to $30 million per year in incremental sales. Clearly, having completed the big build, and we can talk about that...

And that's after this goes live, right? Which is when again?

Right now, we are -- we've now completed 26 of the 29 -- we're dev completed on 26 of the 29 modules. We'll have the other 3 complete this month. By the end of December, we'll be finished with the integration testing phase. So we're on track for what we've said about going live mid-calendar '23, which means, in our fiscal '24, we'll start to see some of the economics for this deal and other deals that are in flight. We'll start to see the investment in this start to be amortized in our P&L. And as we get to the end of '24 and into '25, because there is a sales cycle for when you bring on incremental sales, we'll start to drive $20 million to $30 million in sales that will be incremental to this, which will be at much better margins and I think, help us with the overall performance.

And so on that note, just to wrap it up on the margins now. I mean you talked earlier about having conviction and you've done 50 bps or so in a year. And yet this is going to come on dilutive to margins, but when you add on incremental customers, you'll see that change to the accretive side. So...

You'll see that change. We keep in mind -- I just sort of quantified the size of the current contracts out there -- current and existing. But again, I talked about 3-year cycles, '14 to '17, we had margin expansion of over of 53 basis points. The last 4 years, we have increased our margin by 280 basis points. That means over 70 basis points of margin expansion. In the last 2 years, 60 basis points. How do we do that? We do it because we have a scalable fixed infrastructure as we bring on new business, it comes on at incremental margin. As we move, as we talked about earlier from physical print to digital that's at higher margin. And then we continue within our business to have efficiencies, particularly in our technology space. That allows us to absorb inflationary pressures, absorb pressures from a specific business. It allows us to have capacity to be able to invest in the business and still be able to drive towards the long-term earnings objectives that I talked about in our 3-year cycle. That to me is sort of the formula on the margin rates there.

Guys, I'm going to turn it to you for questions -- wrap it up, though. It has taken a little bit longer than I think you anticipated.

Well, I wasn't here when we -- I was not at Broadridge when we signed that deal, but I definitely think...

But the conviction is there now.

The conviction is there. It sets us up. We feel good about the end date and this going live, and what we're seeing in pipeline growth to be able to drive the type of returns that we want in the business.

Cool. All right, guys. Any questions from the audience?

Can you just talk a little bit more about pass-through voting and what that means for the business?

Yes. I mean right now -- so for many of those who -- so the question was about what pass-through is and what that means for the business. And so let me just maybe -- for some of you to just provide some background, there's an effort, particularly by many of the big funds, some of the passive funds today to -- given that they have so much voting authority in most firms having between 15% to 20% of the positions of any particular firm to be able to pass that through to both institutional and now we're seeing retail investors as well so that they have more of a say, and what -- and voting on what the companies are doing. We signed a deal with BlackRock a couple of quarters ago, about 2 quarters ago. I think I want to say, that gave us -- that was for a small sliver of their institutional voters, I would say, it's good. I think it's a good thing to drive investor engagement, but from a financial solution, still -- from a financial standpoint, still not largely -- hugely significant for us. You've seen some other funds, and we continue to talk with some of the big funds as you see them think about providing that opportunity, whether it's on the specific voting standpoint or whether it's polling and surveying to retail investors right now. And again, I think that is driving increased investor engagement. We are set up with the expertise in back office to be able to drive that. Time will tell how big that is. In the near term, I don't see that as a significant financial driver.

Okay, guys, I think we're just at our time. So I want to thank you very much for joining us.

Thank you, Darrin. Thank you. Appreciate it.