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

Welcome back to Evercore ISI's 7th Annual Payments & FinTech Innovators Forum. I'm David Togut. I lead the payments processors and IT services research team at Evercore ISI. Delighted to host Tim Gokey, Chief Executive Officer of Broadridge. Tim, thanks so much for being with us here today. We greatly appreciate it.

David, great to see you, and great to be at the conference.

Just to start off, what are your top 3 priorities for Broadridge?

Yes. And David, if you -- that's a great question. And if you don't mind, for those that are less familiar with us, I'm going to just take a couple of minutes and just introduce the firm for a moment and then get right into that. Just, again, for those that aren't as familiar, Broadridge, a global fintech providing industry-level solutions for mission-critical functions and financial services. We build and we operate the infrastructure that powers investing, capital markets, governance and communications. About $4 billion in fee revenues against the total addressable market of $60 billion, which we think highlights the significant growth opportunity that we have. About 93% of our fee revenues are recurring, 98% revenue retention. We've had adjusted EPS growth over the past 4 years at about 11% per year. We operate in 2 business segments: one focused on governance, the other on technology and operations. The governance business or ICS business, it's a $2 billion recurring fee revenue business, growing at about 8% a year over the past 4 years. Long-term secular trends there, including increasing investor participation, digitization. And we play an important role at the center of an ecosystem that connects every public company, fund company, ETF, bank broker-dealers, institutional retail shareholders. And then the second segment is our Global Technology and Operations business or GTO is $1.5 billion recurring revenue, growing about 13% a year over the past 4 years. And that includes our capital markets and wealth management businesses. Taken together, those platforms clear to settle $9 trillion every day. Within capital markets, it's a $900 million business, growing about 14% a year, long had the best back-office solution in terms of post trade and with our recent acquisition of Itiviti, we're bringing a full front-to-back solution to important clients. And then the second piece of that, which I'm sure we'll talk about, is our wealth management business, about $550 million of revenue, growing by 11%. And then we've always been the core leader in the back. And with the investment we made over the past couple of years, we've really rounded out that solution as well. Last points before I get exactly to the 3 priorities, which I'm going to get to, but just in terms of introductions so people sort of know where we're coming from. We take a real long-term focus as a company. We've built our business around a resilient financial model, and we really have a model to grow our organic revenue at 5% to 7% a year on a recurring basis. Top that up with some M&A to get to sort of 7% to 9% recurring revenue growth overall. With operating leverage, we aim to drive sort of 8% to 12% adjusted EPS growth. And then with a healthy dividend, typically yielding about 2% a year, some share buybacks, we aim to deliver low teens total returns to shareholders over long periods with low volatility and high defensiveness. And since 2014, we've explicitly set 3-year financial objectives. We're currently in the final year of our current cycle. And we said in our most recent earnings call that we reaffirmed that we expect to deliver at the high end or above of those 3-year objectives. When we do that, it will be the third or depending how you measure maybe the fourth consecutive period that we've done that. So we're pretty proud of it. I think it speaks to the long-term nature. Also, we're at the tail end, and I'm sure we'll talk about this of an investment cycle that begin in 2020 around building out our wealth management franchise and capital markets with BTCS. And as we complete the wealth management platform, we expect our investment spend to be a lot lower, leading to a lot better free cash flow conversion. And we expect to return to more historic levels in '24. And then finally, we just reaffirmed our guidance on our last earnings call, which, again, for those that are not following exactly, a 6% to 9% recurring revenue growth on a constant currency basis, 7% to 11% adjusted EPS and sales of $270 million to $310 million. So it's a, we think, a really attractive business that is resilient and really goes through different cycles really well. And that's sort of what we're trying to do. So with all that background, I just wanted to take a couple of minutes on that. The biggest priorities right now, we see this really big market opportunity in front of us, David, in terms of $60 billion of addressable market to us. And it's really the priorities around how do we translate that into growth across those businesses that you talked about: governance, capital markets, wealth management. In governance, we're continuing to grow the regulatory business with innovations like pass-through voting, tailored shareholder reports, direct indexing. We're also creating better digital experiences, which are opening up new opportunities to enable both public companies and funds and banks broker-dealers to better engage with their underlying investors and shareholders. And that can come in the form of either better, more effective communications, virtual shareholder meetings, better data, all of that. In capital markets, the key theme is simplification. Legacy institutions have grown up with dozens of applications on the front, middle and back by asset class and geography. And we help clients simplify the back office, simplify within the front office and front to back. And then on the wealth side, there's really no scale technology player today. Firms need to either sort of build it themselves or assemble a collection of applications and try to integrate them, which is expensive to build and even more expensive to maintain. And what we're creating is an ecosystem of the highest-value components, really pulled together by an open data integration and API layer that allows our clients to use our solutions, their applications or third-party solutions and have it all work together. And that, we think, is going to help our clients create better experience for their clients and their advisers. So those are some of the big areas and priorities that we have as we try to translate that big market opportunity into a really nice growth for ourselves.

Thanks so much for that, Tim. Just starting first with the wealth management business. Most frequent investor question I get relates to Broadridge's likely financial returns going forward, both from your long-term wealth management contract with UBS and from your ability to leverage the UBS platform to win additional business. So when will financial returns inflect up? And how do you dimension potential returns over the next 12 to 24 months?

Well, I'm glad you asked it because it is the one that everyone -- it is on everyone's mind. And as I get to the economics, I just want to take a moment on what we're building. I described it briefly a moment ago. But it is a series of solutions tackling really 3 pain points. The first one is around adviser productivity, and we're tackling that with capabilities like in NextGeneration advisor workstation, digital marketing, commission calculation. There's a second set of pain points around enhancing the client experience, and that includes things like client onboarding, digitized statements and other capabilities. And then the last piece is really digitizing clients' operations by modernizing key back-office capabilities like real-time margin, corporate actions and having all those components work together through that API and data integration layer that I talked about. So when we started this too long ago because it's taken longer and cost more than we wanted, we had a hypothesis clients would consume this as a single platform. Now it's always architected as components because each wealth management firm makes money in a different way. And so part of the whole conception from the beginning was that people would be able to combine their applications, some of ours, some third-party applications and have it all work together. So it was architected in components. We thought people consume it more in transformative events like the UBS. And as we've talked to clients, what we've realized is people really want more of a bite-sized consumption model that's easier and sort of faster to value. And so we've evolved our strategy. So when we talk about where we are right now, the development is complete, the testing is complete. We have a great relationship with UBS. The parts of the platform, the billing solution, which created tremendous economic value for UBS went live 2 years ago. The workstation went live a year ago. Right now, we're in the midst of rolling in additional capabilities into the workstation. And then we're working through with UBS in light of the change date for T+1, and that really affects when some of the things can be introduced, what is the exact rollout schedule for the remaining components. And under any of those scenarios, we do expect to begin recognizing revenue in the mid part of this calendar year, so the beginning of our next fiscal year. And the economic arrangement we're envisioning, it's a little bit hard to predict the revenue right now, which is why we came off the $100 million that we talked about. But irrespective of the revenue, the costs and cost to achieve adjust with that. So we expect the bottom line impact to be about the same to us in those different scenarios. And so we are -- we expect to see much lower platform investment in the second half of this year. We expect to see positive cash flow beginning in the next fiscal year. And then we will provide a more detailed update, hopefully, in our next call but certainly the call after that when we have all this outlined with UBS. And after that, I think what you're going to see is just a nice growing wealth management business, where all of these components feed into our annual sales and are able to get a really nice, well-defined growth business there.

In other words, is fiscal '24 the year that we start to see kind of the financial returns from the UBS investment?

Yes. We'll begin to see it in '24. You'll certainly see the first nice chunk of revenue then, and then you'll be seeing the impact of new sales beyond that and additional components from UBS over time.

Got it. Okay. Okay. In the December quarter, your capital markets business grew revenue 12% driven by Broadridge Trading and Connectivity Solutions. If you could unpack some of the key growth drivers behind that 12% revenue growth, including the Itiviti acquisition, which is Broadridge's largest acquisition historically and LTX among others, just to shed some light on the sustainability of low double-digit growth for BTCS?

Yes. So the capital markets growth in that segment, it was driven by strong growth in Itiviti, good growth in our other core capital markets solutions due to the onboarding of some clients and then a little bit of trading. LTX was not really a factor in it at this time. And then when I think about unpacking the longer-term growth for BTCS, just as a reminder, when we made the Itiviti acquisition, we outlined 3 objectives. First was to continue the market share gains that it was already seen in the front office. And remember, the 3 large players in front office, ION Trading is the largest. FIS is #2. And Itiviti now BTCS was 3. And we really like this opportunity to take share because FIS has definitely not been investing in their business. And ION has a strategy of buying companies, stripping out the investment and the sales and harvesting the cash flow to buy the next company. And so when ION bought Fidessa, which had been the largest player in this space, it created a real chorus of clients looking for an alternative solution. So just continue to take market share is thesis #1. Thesis #2 is really getting cross-selling going between Broadridge and Itiviti and, in particular, bringing Itiviti in North America because they are much more of a non-North American company. And we saw that with the sale that we announced on this latest call, in which long time Broadridge client has come over and is committed to the Itiviti solution so -- in North America, which we're excited about. And then the third piece, which is a longer-term piece, which is creating a really strong front-to-back value proposition because it tends to be right now the back office and the front office don't exactly speak to each other. You don't leverage exactly the same data. It creates a lot of reconciliation issues and other kinds of things. And so then having that flow front to back with common reference data is a real opportunity for our clients to simplify their applications. So those are the thesis, and we're really seeing that play out. The market share piece is playing out nicely. As I said, we had the beginnings of some of those cross sales and bringing it to North America, in particular with that really nice sale that he has talked about. And the front-to-back proposition is longer term, but the conversations we're having with clients about what the benefits of that are, are really gratifying. So we feel pretty excited about BTCS in particular and more holistically about the capital markets franchise, which is now really a pretty sizable business for us and pretty uniquely positioned, we think.

Appreciate that. As we approach the all-important 2023 proxy season, you've guided a mid-single-digit stock record growth, which is a key revenue and earnings driver, especially in the back half of fiscal '23. When you think of some of the secular proxy tails, how would you frame this proxy season compared with 2021 and 2022? And what might we expect to see in fiscal '24?

Yes, I think this one is a more -- sort of a more normal proxy season relative to '21 and '22 in terms of the overall level of position growth. Remember, this is a typically a sort of a mid upper single-digit growth business. And then we saw a couple of outsized years, and now we're sort of back in more normal levels. Now we're confident in what we're seeing this year around those levels because we have forward testing. It gives us pretty good visibility on what's going to happen over the next few months. So really good visibility in Q3 and pretty solid visibility into Q4. And based on all that testing, we're expecting to see mid- to high single-digit growth in [ the second ] half of '23. So I think one of the questions on people's minds is with the outsized growth that we saw in '21 and '22 is does that create sort of a new high watermark and we grow from there? Or is that sort of a bubble that we'll go back down from? And we don't have a crystal ball on that, David, but what I'm telling people is, look, it's -- yes, there was COVID, but at the same time, was the introduction of free trading. And that was a onetime secular shift. And it was started by people like Robinhood, but Schwab followed suit, and Fidelity followed suit, and is a pretty seismic change in the industry. And so the hypothesis we're working off of and we're doing all of our internal modeling off of is that, that was a onetime change, and then we'll have sort of normalized growth from this space. Lastly, I'd be remiss if I didn't mention that there's a lot of innovation going on and that innovation you're -- we're having a universal proxy for the first time. And we're sort of just beginning to see the impact of that and some of the contests. We're seeing that the beginnings of pass-through is [ loading ]. We're seeing the beginnings of direct indexing. We think all of those things are -- none of them are by themselves sort of things are going to transform to growth rate, but they're all incremental things that support the longer-term mid- to high single-digit growth.

Activism seems to be picking up lately. Do you think we've reached a potential upward inflection in event-driven revenue, given a potentially higher level of activism?

I -- very, very difficult to say. When you look inside our event-driven revenue, first of all, just if you do the zoom in, it's about half of it is elections for Boards of Directors for mutual fund companies. Now those elections, they have to take place, but there is some discretion that fund companies have. And it's been a pretty tough year for them, and so they put some of those off. That's why we're seeing low levels of event-driven this fiscal year where we've guided toward the low end of our range there. And then the other half is the contests. And I think there's certainly money flowing into activism as a share class. There's the innovation of universal proxy, which a little unclear what direction will go. I do think we have to differentiate between activism and activism that results in contest because there's a lot of pressure on managements to settle. So I'm not really, David, thinking there's any secular shift. What is true about event-driven is that it does, over time, it grows with positions. So it should compound basically at the same speed as the rest of our business but in a little bit of a lumpy way. But -- so we're a little bit lower this year, but when next time we're higher, the peak will be higher than it was before because of the growth of positions.

Understood. Thanks for that. In investor communication services, for the December quarter, Broadridge posted 10% growth driven by fund solutions and customer communications. Are the drivers of double-digit growth in fund solutions and customer communication sustainable?

Yes. I do think that those -- the growth that we saw there was above trend. I think we're going to have continued nice growth, but they were a little above trend. And you're right to call out, and we had really strong performance from governance. And we're sort of hitting on all cylinders across all 4 of the major product lines in there. But when we dived in and looked at, say, fund solutions, where we had 11% growth on a constant currency basis, part of that was sales and data and analytics, which is very sustainable. Part of it was higher float revenue. Within our mutual fund trading business, we have a little over $1 billion of cash, and we get float revenue on that. And so it came in high in the P&L up here as revenue and then sort of came out lower down as interest expense and those things netted out. So hopefully, at some point, we'll see a little lower interest rates here. We're balanced as a company, but that would depress the growth within this particular line item. And then customer communications also grew really nicely. And that's a balance of print growth and digital growth. Longer term, what we're expecting to see is a substitution from print to digital. We always go to clients and say we're the largest first-class mailer in the U.S. and our strategic ambition is to be the smallest. And we're the only player that you can give your communications to, and it's in our interest to help you get rid of costs and rebalance things because we do it both. And so we've really been getting traction on the digital side. We're really pleased to see that. Longer term, if that begins to go, what that will do is it will depress the revenue growth rate, but the earnings, it will continue to grow and the margin will go up. So I think it's just important people have that long-term story in line that we do have this revenue substitution that we're really working to try to drive.

Understood. How is your outlook for the economy evolving over the next 12 months? And what impact should we expect to see on Broadridge's revenue and earnings?

Yes. I think the -- I think it's going to continue to be sort of an uncertain, somewhat tough time. I think for folks that are a little less familiar with this, just to unpack how the economy affects us though, so interest rates has a direct impact to us. We're very balanced because we have cash deposits, we have variable rate debt about the same amount. And they -- those 2 things offset each other. With respect to inflation, we're not 100% protected, but we have CPI in most of our contracts. We have pass-throughs where we can pass through the costs directly. And so a good chunk of the inflation is we're sort of neutral to. So those are just 2 of the direct drivers. The way that the economy tends to affect our business is 2 ways. One is that when the markets are exuberant, retail investors tend to be more exuberant, and it tends to create a little bit higher position growth with a lag. So when markets are really in the tank, you tend to see lower position growth, although we've had a pretty much of a down market the last year, and we're still seeing nice position growth. So that's not always. And then the other way it affects us is relative to company's ability or willingness to transact for new technology solutions. And there, we sort of have an interesting demand model, which is when things are too good, firms tend to think, oh, I can just build everything myself, and I don't need that third party. And when things are too bad, they don't have money to do anything. And when they're sort of just painful enough, okay -- I know the people listening to this call are all in asset management firms. So maybe they know what that means when it's sort of -- there's still some money to do stuff, but people are really careful about what they're spending it on. That's the time when leveraging a third party to do things in the most efficient way and to really be very, very sensitive to what are the things I'm investing in that are differentiating versus the things I need to get done, and I can leverage an industry solution. That tends to be really good times for us.

Well, sticking with that point, you've highlighted the strength of Broadridge's new business pipeline. For which services are you seeing particularly strong demand? What trends are you seeing in terms of sales cycles and close rates? And any changes over the last 6 months either in demand trends or time to close, i.e., sales cycles?

Yes. I think the -- where we're seeing demand is -- and it's partly because that's where we're really talking to people vigorously about are -- digital communications is a really nice demand area and one that clients really want to learn about. Our capital market solutions particularly with BTCS and also digital ledger repo. There's a lot of -- that's very innovative and has a really strong value proposition for our clients in that. And then as we talked about, we're beginning to really see we're out now demoing live software for wealth management and being able to show people components that can make a difference to their business. And so we're seeing the pipeline build there. I think in terms of what we're seeing around sales cycles, there's definitely caution. And we've definitely seen some lengthening of sales cycles and are just taking longer to get things done. I think others are seeing that, too. I think one thing, again, as a reminder for those that ever followed us in excruciating detail, we have a big backlog of solutions that have already been sold that we're onboarding. So if we think about our revenue, it is -- while newly contracted sales are a nice -- a good indicator of sort of how we're doing in the market, they don't directly translate to revenue next year. So the revenue for this year is largely from things that were contracted in previous years. We have something like $400 million as of last time we talked about, which I guess is in the summer of backlog, which is enough to -- as we turn through that, it really steadies the ups and downs of the sales cycle because mostly when we do the sale, we're adding to the backlog. And then over time, we're sort of working the backlog down.

Got it. Thank you for that. We do have an incoming question for you. Which stand-alone wealth management modules are you most optimistic about? Any updated color on wealth management module in the pipeline, i.e., demand for certain modules in the pipeline and/or the sales funnel?

Yes, I think there are 2 specific modules that I might point out, I think, first of all, the client onboarding solution is pretty innovative, is one of the next things that will be up at UBS. And it is -- today, as sad as this sounds, when you're with a wealth adviser and you have 1 account and now you want to open an account for your kid or you want to open a managed account is often back to -- and David, can you remind me what your Social Security number is? And you're like starting right back at the beginning as if you're not even a client. And so it's a huge pain point for advisers. It really pisses clients off. And what we've created is a very holistic account, client onboarding and client management solution that if you already have a relationship and are here and you want to do the next thing, it's just the add-on. And it really is something that I think is -- I know UBS is excited about, and I think others will be, too. So that's one to highlight. I think corporate actions is another one. It's a huge pain point in the industry. And there's -- this is a solution that we had -- is live with clients. We have multiple clients onboarding now. And we've got -- and it's both an institutional and a wealth management solution, but the ability to -- how people do the elections and stuff on the wealth management side is sort of innovative. So I think people like that, too.

Thank you for that. Just shifting to capital allocation, which is a big topic. Could you update us on your capital allocation priorities among dividends, share repurchase and acquisitions? After Broadridge completed the Itiviti acquisition, you underscored the importance of debt paydown. Where are we in that debt paydown process? And are we approaching a period of greater capital return ahead?

Yes. So really important question. I think capital allocation always has traditionally been a strength of Broadridge. I've been involved with it personally for over 10 years, working first with Rich Daly and in the last few years as CEO. And we have the same model throughout that time even though the output of the model has been different. And the model is investment-grade, key internal investments, then pay good dividend with a 45% payout ratio, then do high-value tuck-in M&A and what's left over, buy back shares. And traditionally, as we've had very strong free cash flow conversion, there's been enough cash to sort of cover all of those areas. We've been in this unusual situation in the past couple of years where, first of all, because UBS investment turned out to be much larger than we expected. And then we had this really unique opportunity to build our capital markets business with Itiviti that it was the same formula going in, but it really got pushed in terms of what the priorities were in terms of how cash got done. So now we are done with the UBS investment. We're going to see it done. I'm going to put done, but you'll see much lower investment in the second half of this year and so much more historic. I'm not going to promise to 100%, but much closer to historic free cash flow conversion next year. So that really increases the amount of cash available. We do want to pay down the debt to get back to sort of, I'm going to call it, [ 2.5x ] to secure that and make sure we're investment-grade. That will take a good chunk of next year. And after that, I think you're going to see a much more sort of historic allocation where we'll be sort of open for business on tuck-in M&A and share buybacks. And so we're almost there, but we're not quite there, but we can see it.

Great. Just in closing, Tim, what do you think are some of the most underappreciated growth opportunities at Broadridge?

Yes. I think the piece that people miss a little bit is just -- is the breadth of the spending in technology and operations amongst capital markets, wealth management and asset management firms is hundreds of billions of dollars, is growing 5% to 7% a year. And the vending part of that is, call it, half. I should update that for our Investor Day, but I'm going to just call it half and is growing faster than the overall spend. So there's a great market opportunity for us to grow with that and then to take share within the vended piece. And so I do -- there are individual specific opportunities that I'm really excited about, certainly digital communications, certainly BTCS, certainly, what we're doing with wealth management as we're out now demoing by software. I think all of those are really nice growth opportunities. But the thing I'd point to is it's in this context of a larger, [indiscernible] really nice growth opportunity for us.

Great. Well, Tim, thanks so much for being with us here today. We greatly appreciate your time and insights, and have a great day up ahead.

David, great to see you. Thank you very much.