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

All right. Good morning. My name is Puneet Jain. I'm from JPMorgan's Payment Processors and IT Services Team. Glad to have here with us Mr. Tim Gokey, Broadridge Financial's Chief Executive Officer. Welcome, Tim.

Thank you.

So the format of this presentation will be a fireside chat. I'll start with a few questions. I'll open the for questions from audience. And for those who are listening from webcast, feel free to ask questions through the online portal. I'll try and ask them during the live chat here.

So Tim, maybe for benefit of investors, who may be new to Broadridge, can you introduce the company, talk about the growth profile, your competitive differentiation? And also if you can quickly recap your third quarter results.

Yes, absolutely. Thank you very much, Puneet. Great to be here. Thank you, everyone, for joining. And so I'll just give a brief introduction to to Broadridge why we are confident in a strong fiscal '23, which ends for us at the end of June, but more importantly, why we are confident in the future going forward and have a couple of updates that are incremental to what we talked about on our earnings call 3 weeks ago. So first of all, just for those of us that are less familiar with the story, Broadridge is a global fintech. We provide industry-level solutions for critical functions that are often involving regulatory aspects that need to be right, but that are less differentiating. We focus on corporate governance, capital markets, wealth and investment management. I think we have a very attractive economic profile. Our recurring revenues are 93% recurring. Our client revenue retention is 98%, and we've grown earnings at about 11% over the past 5 years. We operate in 2 segments: governance and technology and operations. Our governance or ICS segment is about $2.3 billion in revenue. It has been growing on the order of about 8% over the past 5 years. And we sit really at the center of a network that includes every corporate issuer, every broker-dealer, every asset manager and every individual and institutional investor. And through that, we end up with every investment position of every investor in the U.S. and many globally in our database. Now that's our clients' data, but it gives us a privileged opportunity to work with those clients to do the next thing for them. And on that theme, we've grown the company from when we became an independent company in 2007 from about 3,000 associates and $2.5 billion market cap to today, about 15,000 associates and $18 billion market cap. And we see that opportunity to continue to grow to be basically unbounded. Our clients spend several hundred billion dollars doing operations and technology. The portion of that we directly addressed is about $60 billion. Our fee revenues are $4 billion. So from $4 billion to $60 billion, at least during the portion of my career, we see -- and the $60 billion is getting bigger all the time, so we see a lot of opportunity. Our other segment is our Global Technology and Operations segment. That's about $1.5 billion in revenue. That's been growing at about 13% over the past 5 years. First of all, the underlying driver of our growth in our governance business, and we'll talk later about how our growth is really balanced between organic -- well, it's all organic, but pure position growth and new sales. But a big driver for us is growth in investor positions. That's the way we get paid. And that has been very healthy. It's been growing at mid-single digits for many, many years. The past years, it's grown faster than that. We see high single digits for equities this year, mid-single digits refunds, and we have forward testing that we see that into next year as well. So -- and there are some long-term fundamental drivers. We'll probably talk about those, and we're pretty confident in that continued growth. So that's the first thing. The second part also in governance is that we continue to innovate and drive new solutions. Whether that is pass-through voting, universal proxy or we think coming up tailored shareholder reports, there has been a constant stream of a new product that is expanding our market opportunity. Third, our capital markets business, that's a technology business serving the capital markets in a very, very strong position. We made a key acquisition 2 years ago to get into the front office side of capital markets with what we now called Broadridge Trading and Connectivity Solutions. That's going very well. We've made investments to integrate that front part with what we were already doing in the back to have a front-to-back solution that has a lot of client demand behind it. Third -- or fourth, excuse me, the -- our Broadridge wealth platform is really now poised to turn the corner and move into a growth phase. And this has been -- for those of you that follow us more closely, this has been a big investment over the past few years. This platform focuses on 3 areas: increasing adviser productivity, improving the end client experience and digitizing front-to-back operations. And we recently completed the development of the platform. And now since our earnings call 3 weeks ago, we have now finalized the rollout approach with our lead client, UBS. And as a result, I'm in a position to give some incremental detail this morning that we weren't able to share 3 weeks ago. So the rollout approach gives UBS a flexibility to roll out modules really on its own timetable. That means that we are very definitive that we'll be able to complete our platform spending here in fiscal '23 that we will start to recognize revenue in July this coming July, which would be the beginning of our fiscal '24. UBS and other existing client relationships on the platform will give us recurring revenue next year on the order of $75 million. We weren't able to say that 3 weeks ago. That will be dilutive to our historic margins, but we are very confident that with operating leverage and our ability to reprioritize other investments, we will be able to continue to grow our earnings in the way we have historically. And the amortization associated with this will be on the order of $57 million, which you can see that's what creates the dilution. With that, we are really turning to sales. Our wealth management pipeline continues to grow. As I said a few weeks ago, our pipeline is up 40% since the beginning of our fiscal year. But we're really excited to be turning the page on the investment phase and moving to the growth phase. The fifth thing that I'll just say from an update perspective is that as we come to the end of this investment cycle, both with activity and with the wealth platform, we are going to be returning to more historical free cash flow conversion and capital allocation. We weren't able to say this 3 weeks ago, but with the finalized rollout plan, we expect to end fiscal '23 with free cash flow conversion greater than 80%. And as a result, we will end on June 30 with a leverage on the order of about 2.5. That is what we committed to 2 years ago when we made the Itiviti acquisition. So it's really pleasing to be able to end sort of in line with the commitment that we made and our commitment to being an investment-grade company, with getting to 2.5 and with moving to more historic free cash flow conversion next year. We will have much greater flexibility around capital allocation and expect to return to more normalized capital allocation. including share buybacks, tuck-in M&A and the other things that we've been mostly focused on debt pay down in the past couple of years. So with that, we feel we're really ending '23 on a strong note. We have really looking forward to '24 and beyond. And the last thing I'd note in this rather long introduction, but for those that are new to the story, is we do historically take a long-term view of our business. We have an economic model that focuses on delivering 5% to 7% recurring revenue growth with tuck-in in recurring revenue -- with tuck-in M&A 7% to 9%, with operating leverage 8% to 12% on the earnings side. So you take the 8% to 12%, have a nice dividend on just under 2% dividend yield plus some share buyback. We have and believe we can deliver low teens total return to shareholders over long periods with low volatility and high defensive characteristics. And we -- with our results this year, we expect to end at the high end of the guidance we gave 3 years ago. And when we do that, that will be the fourth 3-year period in a row that we've delivered on our objectives. So that was a long background with some new things in there.

You answered all the questions. Thank you. No, It was really helpful. So thanks for that. Let me start with UBS, $75 million in revenue. I'm assuming that's for this year target. Previously, you had talked about achieving $100 million in revenue. So is it like a ramp -- there will be a ramp and you can still get to $100 million in subsequent years, $100 million or higher?

It really depends on the way that they roll out the additional modules and the speed at which they do that. So I don't really intend to continue to update everyone on a single client. I think whatever they do in the future will become part of part of our wealth sales that will -- that I'm sure people will ask us about, we'll probably end up talking about to a certain degree. When we made this investment and -- a few years ago, I really talked about 3 criteria to measure the success of what we're doing. So one is successfully going live with UBS, which we are well into and feel really good about. The second was having a healthy growing wealth business, which, with the sales backlog that we have and with the sales that we foresee, we feel pretty good about that. And the third is really leveraging the technology that we've created across all of Broadridge. And we are -- we've built a lot of foundational technology that we're using to really knit the company together and be able to operate for our larger clients who -- because many things from us is much more of a platform.

Got it. No, that's helpful. And how should we think about margins? Like you said like it will be dilutive to margins, but will this be at least a profitable contract given like the new revenue and amortization schedule?

It will be profitable in the long term. It won't be profitable initially. So it's definitely dilutive initially. And though with the other things that we talked about, in terms of reprioritizing other investments and our operating leverage in other parts of the business, we expect to deliver a year, next year, that looks very much like a typical Broadridge year.

Got it. And the second aspect you talked about wealth management. Can you talk about the pipeline of similar deals you're seeing at other clients? And how much of incremental investments will be required as you try and implement those clients?

Yes. It's a great point. And one of the things how this has really evolved as -- since we began the work, I think when we began the work we thought that there would be -- that the deal shape would be transformational deals. We're calling it transformation on your terms. And so what we're seeing in terms of the pipeline is really a series of much more bite-sized modular sales. And so because we're through the development phase, because of the implementation, we would see the implementation of those new additional client sales as being much faster and obviously much lower investment.

And how should we think about like the cash profile? Like so this year, like you said, like you're going to end the year at healthy free cash flow generation. So all the investments related to this wealth management platform, not just UBS, but overall, like will they be behind you beyond this year? And how should we think about cash profile from next year?

Yes. So what we've talked about is our free cash flow conversion returning to historic levels. So for those that have followed us over a longer period, our free cash flow conversion in a typical year has been on the order of "100%," sometimes a little lower, sometimes a little higher. On the last earnings call, there was a question, and people asked me to commit 200%, and I declined to do that because I don't know what may be there that would be really good to do. But I think you'll see us in a range around that.

Got it. Let's talk about your stock record growth, like equities, like which you said is growing in high single digits. And it continues to hold up well despite like the last year being like a very difficult macro environment. So how should we think about like the secular growth or the secular drivers for that metric? What's driving this growth in a tough economy.

Yes. Just for -- again, for those depending on how closely you followed us, positions have grown historically over long periods and sort of mid-single digits. And then in '21 and '22 during the pandemic, there was a significant spike in growth, 26% one year, 18% the next year. And so there's been a little bit of a question about when things go back to where they were, or was that sort of a new plateau? So first thing is that I think we've established that it is a new plateau, and that's what we've seen in past spikes. This one, we really attribute to the advent of free trading apps and drawing in a lot of new investors. So we're going along mid-single digits, have a bump up because of some new technology. And now as we look forward, what do we see. And I think we see really a return to sort of historic growth. We're at high single digits this year. It's probably too early to say what we expect next year, but I would say sort of in that mid- to high single digits. And the underlying growth drivers of that, it comes down pretty simply to its account growth and positions per account. And accounts typically have grown 1% to 2% a year. So most of the growth is in positions per account. And the biggest trend that's driving that is the move to managed accounts as broker dealers really basically go after asset managers and try to take their revenue streams and end up what was maybe one mutual fund now becomes 30 positions. And so that growth in managed accounts is the fundamental driver. It has a long way to go on that trend. And then when we look at future drivers based on the additional innovation that we're seeing, it would be things in the future, like direct indexing like pass-through voting. Those things are still too small to really turn up in the numbers. And we're -- people continually ask us, yes, we think that's going to put us on a new growth trajectory. And I've declined to say that it would. Just I think is part of what sustains mid- to high single digits over long periods, but we'll see in the future.

And more recently, like last few years, zero-commission trading have also helped drive your growth in that metric. Is that benefit or the tailwind behind you like -- or could there be more juice in that factor?

It's a tough one to know. What we certainly have seen, as I just talked about, is that the new level we think is very sustainable. When you look and we've just published a really interesting study on investors and investor behavior based on all the data that we talked about having. And so if you haven't seen that is on our website, and I'd recommend it's pretty interesting. But it really pinpoints the beginning of the generational shift that we've all been talking about for like 30 years. And -- but it's really beginning to happen. And as you look at comparing younger investors to older investors, they have fewer positions because they just don't have as much money, but the growth in positions has been even stronger than it has been with older investors. So I think there's some really good really good fundamental things in there. And I don't really, at this point, see any deviation from that historic sort of mid- to high single-digit growth.

And what does like investment dollars potentially shifting away from trading accounts into more money markets, more fixed income funds mean for Broadridge as a business.

Yes, it doesn't tend to have a lot of impact. When people -- you could think about, oh, I'm lowering my equity position, putting in a money market fund is to take away all those positions and just create 1 position over here. But people don't tend to close out their positions, they tend to just make them smaller. And we get paid per position, whether it's a big position or a small position. So it does not tend to affect us that much.

Got it. And on the last earnings call, you also talked about like the lengthening sales cycles. Can you elaborate on that? And how is like the company working to drive like incremental new sales through that environment?

Yes, absolutely. Now one thing I want to just emphasize before because it relates to this question, when I talked about the growth drivers, for our technology and operations business, it tends to be largely based on new sales. And for our governance business is about 50-50 between position growth, which we've been talking about, but also new sales. So this sales question is an important one. And -- so conversion of sales is a really important driver for us. I think the thing I want to make sure people take away from, though, is that when we make a new sale, it doesn't directly become revenue. It goes into a backlog. And then we had to convert that from a backlog of -- sort of projects that have been signed into a project that is live. So as of the end of our last fiscal year, we reported this once a year, our backlog was over $400 million. So it's really a couple of years of sales conversion. So we have ups and downs in terms of what our sales are. It doesn't tend to really affect the growth trajectory of the company unless they would be low for a prolonged period. Now if we look at our sales right now on the earnings call, we talked about our expecting sales at the low end of our $270 million to $310 million range and talked about these lengthening sales cycles that a lot of folks are seeing. And what we're seeing there is our overall pipeline is bigger than it's ever been. We have a lot of great conversations going on as there has been the uncertainty and volatility with things like Silicon Valley Bank and other things here in the U.S., a lot of uncertainty in Europe, obviously, with the war. We have seen people just things that we thought would close this quarter might close next quarter. It's just taking longer to get things signed. Now frankly, whether given the whole backlog dynamic, whether something closes in the fourth quarter this year, the first quarter next year, it doesn't really make a material difference to our revenue growth. But that's really what we're seeing.

Talk about like the growth formula, and if it's possible individually for ICS and GTO. So can -- like how much of contribution there is typically from bookings of last year. So how much of like this lengthening of sales cycle this year might have impact on next year's growth?

Yes. So one of the things that I really like about what we do is we're very transparent and report each quarter on where our revenue came from in terms of revenue from new sales, which is the conversion from backlog versus client losses versus internal growth. And we lay all that out, which I think is a really nice dynamic. For our ICS business, over long periods, the growth has been about half positions, half revenue from sales for GTOs, largely, our revenue from sales is a little bit from trading and the growth of trading over time. What was the second half of the question again?