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

All right. Well, welcome back, everyone. Thanks for joining. Again, if you haven't seen me yet, my name is Dan Perlin. I have the fintech practice here at RBC. You will hear me give that announcement every time throughout the day, so sorry. But we are delighted to have Edmund Reese here, who's CFO of Broadridge. This is an interesting time for your company. You've had a lot of new investments, new platforms, normalization of business, we're going to get into all of that today. But let me just first and foremost, say thanks so much for being here. I know you've got a busy schedule, so we appreciate your time.

Dan, I'm excited to be here. So thanks for having us and talk about what's going on with Broadridge.

Yes. Well, so it's interesting because we are relatively new in terms of our coverage journey with you guys and through that process, what I have found is that although you're a very well-established company, I don't think you're a very well-understood company because there's a lot of nuances that are actually our business. And quite frankly, I've been in capital markets for 26 years, and I only recently learned a lot of stuff from this gentleman upfront right up here, about how this business works, if you're not in it. So maybe if you wouldn't mind turning in a few minutes, kind of as an overview of what Broadridge really is.

Yes, I think it's always helpful to give the overview of who we are. I'll also maybe talk a little bit about our fiscal '23, our high free cash flow conversion and capital as well. I want to make sure we get into that. But the Broadridge is a $18 billion leading global fintech company, we provide technology solutions for mission-critical functions in the highly complex and highly regulated financial services -- industry. We target a market where our clients and prospects are spending over $200 billion on technology and operations, and that's growing at mid-single-digit rates per year. We directly address about $60 billion of that. And if you think about $4 billion in recurring revenue, that means there's a significant opportunity for growth, almost infinite as you think about it. 93% of our fee revenue is recurring, and we retain -- you look over the last 6 to 8 years, we retain 98% of that recurring revenue. And we've been growing our adjusted earnings by 11% over the last 4 years. So strong -- strong financial performance. The business is really composed of 2 different segments; an Investor Communications segment that's providing critical regulatory communications, and a Technology and Operations segment as well. If you think about our Investor Communications segment, which we also refer to as our governance business. It's a $2.3 billion recurring revenue business as we're growing at 8% over the last 4 years. In it -- it could sound complicated, but in it, we sit at the center of this network where on behalf of all public funds in North America, all public companies and the banks and broker-dealers, we are driving the -- we use our technology platforms to drive the communications to retail and institutional investors. And that business has a unique growth opportunity because it's driven by a secular trend, more investors coming into the market -- coming into the market and participating. On the Global Technology and Operations side, that's $1.5 billion in recurring revenue. It's been growing at 13% over the last 4 years. It's really 2 businesses within that group. One is our capital markets business. There, we have been growing that business based on increasing from the back office to the front office, we provide their trade processing for fixed income and equities doing over $9 trillion in trades per day. So strong market share as well. And the second component of that business is our wealth management business where over 30% of U.S. advisers are using our front and back-office solutions there as well. So that's the business. We are now -- I think there's 15 days to the end of our current fiscal year, and we just gave a reaffirmation of our guidance. So let me just talk a little bit about fiscal '23, why it's so strong for us and why we think the drivers of long-term growth really set us up to be -- to have the kind of sustained strong financial performance that we've had. A key driver of the growth for us, as I talked about that governance business is continued investor participation. More folks having positions and funds and in equity positions. We have talked about this fiscal year, expecting equity positions, a key driver of growth for us to be at 8% and for fund growth to be at mid-single-digit growth. And that's very important to us. We have sight -- line of sight into the first half of our fiscal '24 as well, so the July through December time period. And when we look at customers that expect to go to proxy during that time, we still see mid-single-digit growth. So that secular trend plus our ability to continue to provide products and services with the members -- with those relationships that we have with public companies and funds, so we provide data and analytics. For fund companies, we provide other disclosure services. For the public companies, we provide nonregulatory communications. So those things have been driving our growth in fiscal '23. And I think those are ongoing strong long-term trends for us as well. On the GTO side, I talked a moment about moving into the front office. New sales, us landing and expanding with our existing clients is propelling the growth in that business, particularly as we've combined our back-office solutions with our front office solutions, which really drives efficiency in the trade cycle process, a very complex process. And on the wealth management side, I'm sure we'll get into, Dan, because you've asked this before. We are in a very strong position and poised for growth. We've completed the development and testing on our wealth management platform. We'll look to recognize revenue on that a month from now in July, in our Q1. Most importantly, we have a pipeline that's up 40% year-over-year from a wealth management standpoint, we'll bring those sales on, we've talked about bringing on $20 million to $30 million in incremental sales. We'll do that at accretive -- we'll do that at very accretive margins. So we have a strong fiscal year '23, but most importantly, the drivers of long-term growth for us make us feel very optimistic about going forward. The last point I'll mention is I think about the Broadridge overview really, it's an important focus for us, is our high free cash flow in our capital model. We have historically had a free cash flow conversion that hovered around 100%. Most recently in fiscal '24 -- in fiscal '20, as we started to see some elevated investments related to the wealth management platform, we've been in an elevated investment period. And our client platform spend peaked in fiscal '22. We saw free cash flow conversion drop to like 48% in fiscal '22. We are now at the end of that investment cycle with client platform spend, reducing our free cash flow moving back up. In fiscal '23, we talked about recently, we now expect it to be over 80% and then return to our more historical levels in fiscal '24 as we move forward as well. That really sets us up with the high free cash flow conversion, it really sets us up to really get back to ROICs that are at the mid- to high-teen levels over the next 3 years that we've had. The last thing I'll say and then turn it back over to you, and all of our questions are going to go this way.

You did say 30 minutes are not going to cover it.

The last thing I'd say to you is I do think -- this is important for principally new investors coming into the market. I do think that we are unique in that we provide -- we have a very long-term focus, and we provide 3-year objectives. Our current objectives suggest 7% to 9% recurring revenue growth. 5 to 7 points of that is organic growth. We are an organic growth company. We focus on expanding our margins to the tune of 50 basis points per year, and we believe that allows us to deliver 8% to 12% recurring -8% to 12% adjusted EPS growth. You combine that financial model with commitment to the dividend that I talked a little bit about combine that with strategic tuck-in acquisition and returning capital in the form of share repurchases. And you get to a TSR that is low-teen through very volatile and changing time periods. I think that's very good for investors. As I just said, we're in the last 15 days of our current 3-year cycle, we expect to be at the high end of our recurring revenue growth objective for the 3 years of 7% to 9%, high end or above, and we expect to be at the high end of the adjusted EPS of 8% to 12% as well. So positioned well, and I think that will now mark the fourth consecutive 3-year cycle that we've had that kind of performance. And I think it's a testament to the focus of the management and the leadership team.

We should just do a mic drop right now. What do you think? It's almost like you've never done that before.

I enjoy talking about it.

I love it. I love it. This is awesome. So look, it is a great story, and you told it very well. So just to put a couple of finer points on some of those items that you brought up. So the wealth platform with UBS, it is -- we found early on in our coverage, like that was a sticking point. It's great to get that information out. We start to recognize in July. Can you just talk about the recurring revenue dollars that you're expecting to get out of that kind of the amortization that's tied to that? And then how you're going to be able to maintain kind of the profit margins that you've given to the Street, understanding those 2 dynamics right now?

Yes. Yes. So I mean, as I said a moment ago, we've now completed the development and the testing for it. And you see that coming down in a lower client platform spend in the increase in our free cash flow that we committed to definitely. What that means we've been very specific about the revenue from that contract and existing in-flight contracts to see effective in our Q1, which begins in July, our Q1 '24, $75 million in incremental revenue associated with that. Now to be able to drive that revenue, we obviously had to invest, and we've been talking a lot about that investment. So we'll see amortization coming into the P&L. We've been explicit about that number at $57 million in amortization associated with it as well. That will not be -- it's a new platform. It won't be at the type of margin profile that we have in the other parts of our business in our existing business. But that point I made in your latter point about incremental sales of $20 million to $30 million coming on that incremental -- coming on at very attractive margins is what will allow us to get the return on that platform investment in line with our prior business. And that is where we have been spending a lot of time. I spent yesterday with our President of Sales our head of the GTO and wealth management business. And I hear that the prospect pool has increased for us. So before when we initiated this build-out, before I joined the company, we were focused on the Tier 1 investment banks that has now expanded. And there, you have these Tier 1 investment banks that have proprietary systems that are aging that need to be modernized and that need to be upgraded. But we've now expanded that prospect pool to focus on the regional and national brokers banks as well. And there, I think we have an opportunity to really gain market share and display some of our competitors both in the front office and back office, which we can talk about. I think we have been seeing some traction with the independent broker-dealers. They're using the large custodian banks for clearing. But there's an opportunity to sell our modules. There's over 30 modules that we built out on this platform as an entry point and continue to expand with them. And the conversations I had yesterday, they're talking about our billing solutions, which we're hearing strong feedback on, that allows you to calculate billings based on average AUM throughout the quarter as opposed to the end of the year, that drives benefit but very important benefit for those firms. Very importantly, they're talking about the compensation, the adviser compensation modules. We made an acquisition around the time of Itiviti in '21 called AdvisorStream, and that provides front office capabilities that helps advisers engage their clients more with marketing capabilities. That's been a big point for as well. So what I've just said is the Tier 1 sort of investment banks have talked about the national and regional banks, talked about the independent broker-dealers and products that are resonating with them. And I'd just finally add that there's an opportunity in the [ RIA ] population to sell our capabilities front to back. There's a population -- there's an opportunity with new entrants, the folks that you'll use, if you pull up your phone to do trades to really particularly focus on their back office capabilities as well. And that's the key thing about this platform, services across the front [ mill ] and back office to help drive productivity for advisers and to help them enhance the client experience and make it stickier with their clients. And so this $20 million to $30 million in sales, we're very bullish on that opportunity to be able to attack it and get after the $16 billion market opportunity.

Yes. Two things. The $20 million to $30 million, is that -- is there a time line that you attach to that? Or is that a number that you just wanted to have?

No. There's a time...

I know there's that you have, but I mean can you give it to us.

I certainly want to get to a return on that. Look, I think when we talked about that number, we were thinking in our fiscal '24, $20 million to $30 million in incremental sales. I think the important thing to recognize is when that converts to revenue. And I would say depending if you're selling the full platform, it's going to be longer, if you're selling a few modules, 6 to 12 months when it converts to revenue, maybe up to 12 months if you're selling a larger number of modules and the larger platforms. So you can expect in fiscal '25 to start to see revenue associated with those modules. And I'll remind you, they're at the more attractive margins that we typically -- because there won't be investment. There won't be extraordinary investment as you bring on those new sales. It's really just converting them from their proprietary platforms or the competitors that they're using right now.

Are you going to give those KPIs, you think quarterly as you win them? How do you think about telling us how successful you are?

I think it's important for -- we're still finalizing our fiscal '24 plan. We'll come out in August with a view on what fiscal year '24 looks like. It is highly probable that we will likely have an Investor Day in December. And so we're working through exactly what the KPIs are. I think it is important for investors, and there are 2 things that the investment has come to a conclusion and that we now have the free cash flow at higher end. This point about the progress on driving sales to show the return on that. So there will be some information. We're still working through exactly what that is.

Okay. The other one is more, I guess, philosophical because what you were describing a second ago before we were talking about the numbers is that the addressable market for this platform is actually a lot bigger than maybe what you had started thinking about in the original incarnation in 2018, 2019. It sounded like when I went back and read all that data, it was a platform holistic unto itself and has started to evolve into something more modular. So maybe if you can just talk in parallel to what you were just talking about with the end markets.

I think that is a key -- I mean that has been a key learning and evolution for us to move from the full deployment of the platform to a more componentized modular approach. It allows -- and you're right, it did open up the market, which I just said is $16 billion of the overall $60 billion market opportunity that we address today. And going after the clients and the prospects that we just talked about, I think, has a number of benefits, right? It allows us to get to revenue faster. So the time to revenue is much faster if you're bringing on 1, 2, 3 modules as opposed to trying to sell the entire platform. I think it allows us to put wins on the board, hey, we can do this. We can help you with your corporate actions. We can take the manual nature of stock splits or special dividends out of it and put wins on the board that's beneficial to you in your operations. And I think that opens up the opportunity for us to land and expand and continue to expand those relationships with the clients as well. So that has been, I would say, among the top 3 learnings for us on this overall platform build. But the wealth tech, wealth fintech, is just with new investors coming in a different demographic, searching for more digital solutions, more customized solutions helping advisers onboard them, another capability that we provide in a solution, doing it in a way where they can use our solutions, they can use best-in-class at a third-party point solutions or their own solutions and have that work seamlessly. We believe that makes the advisers more productive that drives engagement with their clients. And it also -- the feedback that we're hearing is that the operations staff, we're very excited about margin calculations, asset servicing, the digitizing of operations as well. So these modular solutions, we think really is the path for us to be able to attack that opportunity.

Yes. Well, look, we at RBC are consumers of that product. We did a lot of due diligence before we picked up coverage to trying to understand what that meant.

I was waiting for you to say that.

And it's good. So I'll give you the shout out. It was really good feedback, which was very helpful for me. So one of the things you talked about earlier is this big secular theme, investor participation. One of the questions that comes up occurring from investors is that, are you guys at a new normal, and therefore, you can grow from this point? Or are you having -- people are concerned that you would have to go backwards a little bit just because of the level that you're at today. So maybe you could speak to that.

Yes. And I don't have any information that most investors don't have on that, but it is a legitimate question. If you think about what we've just come through the COVID time period where our fiscal '20, you saw a 10% equity position growth. In our '21, you saw 26% and then fiscal '22, 18%. 10%, 26%, 18% and the 10 years prior to that, you saw mid-single-digit growth. So this question that you're raising is to go from mid-single-digit growth to those levels, do you expect sort of a reset that you'll have to grow from? Or is this a new normal that you'll grow from? And I will tell you, we've just come through a market where there's been a pullback on equities, a pullback on fixed income and I just talked about committing to 8% growth from an equity position standpoint in this year. And again, we don't have -- we don't have predictive models on what these are going to be. What we do is we go out to clients that we expect to go out the proxy for whom we have to distribute the communications on, and we see what their positions look like now versus last year. And when you do -- and we have high confidence in that data over the next 6 months and when you look at that, it still says mid-single-digit growth and it normally ticks up before you get to -- and why is that? It's because the growth, I would say, has been driven by long-term trends. So the cost to trade has gone down. You can do it from your phone at the time when you saw the numbers that I just talked about, had discretionary income to be able to do it. But you also have this continued focus on managed accounts. You have the continued self-directed accounts we see growing. We see ETFs, passives, all these things -- we see more communications from funds to investors through things like pass-through voting. You see new strategies like direct indexing. I think all those things are secular trends that suggests that we'll continue to see -- that we'll continue to see sort of the mid-single-digit growth. And I think we'll see it from where we are today. So the answer to your question is I do think it is a new normal, a new level from which we'll continue to have this mid-single-digit growth. I think the thing for investors is, if I know something different, if we learn something different, we have like a 6-month window before time, to, one, inform and, two, adjust our very diverse business model and account for any impact that we see from that. So I think this is a long-term trend that's going to continue to provide growth for us.

Yes. I have a managed account that I haven't had for a long time and there's a lot of stuff in that thing. It opened up the whole door to a lot of different trading accounts I was just surprised by that.

You don't necessarily see folks go in and liquidate their positions. That might not increase. And remember, the growth there is combined both more accounts coming in as well as the increase in positions that -- in acquisition that you're talking about. We just put out an investor study that I, myself, can't get the intuition from what the study says, but it says 45-year olds, as an example, previously held roughly 5 positions and are now holding 12 positions. So that's a little -- I do think that, that growth is happening. That seems a little high relative to what I would have intuitively thought but it definitely suggests that more coming in and participating, they're diversifying and continuing to have positions increase.

Yes. So you talked about cash conversion, which is fantastic. I think that's a great part of the story. And that lends itself to the idea that now you're going to have this leverage. I think you said 2.5 turns, maybe not just now, but in prior conversations, is your goal. And that's going to free up a different capital allocation strategy, maybe conceptually. So how do you think about that? How do you think about buyback versus M&A? You don't have to delever all the time now?

So first, I wouldn't say different, I would say return back to where we've been. But you're exactly right. Like you look at us over the last 2 years and I would say that the focus has been on, number one, the continued commitment to the dividend. That's grown every year since we've been a public company. It's grown double digits, 10 out of the last 11 years, 13% in the most recent year. We've continued to have that there. To the point that you made, our leverage increased to just under 4x or 3.9x when we made the acquisition in May '21 of Itiviti. At that time, we committed to being at a 2.5x leverage ratio at the 15 days from now. And we're on target -- 15 business days from now, and we're on target to be at that level, right in line with what we've said. And the third area, it has been what we just finished talking about the capital spend on the wealth management platform. So those latter 2 are now at point of arrival. We're at the leverage ratios that we want to be at the client platform spend is coming to a more normalized state. So the point that you're raising, we are now back with the high free cash flow to resuming our historical capital allocation model. And in that, the continued commitment to dividend, the focus on investments. In M&A, I would say, strategic tuck-in M&A that meets the profile. So if you think about the Itiviti acquisition, I don't think we'll have things that are that large and that transformational, but the strategic fit was very strong, right? We moved from the back office post-trade processing into the front office. We moved into international markets and the business case is hitting for that. That's a great strategic fit for a business that we already have. If we find assets that have that profile, strategic fit for us, that have the type of financial returns that we've historically had. When I joined the company, I went out to Investor Day in December 2020 and talked about the acquisitions that we've done, we've done over 40 since we've been a public company. During that '18 to '20 time period, after the first year of owning them, they drove 10% revenue growth, they have IRRs of 19% to 20%. So if they had the financial profile that we're looking for, we'll pursue them. But again, this is an adjunct to our 5% to 7% growth, organic growth, which is our key strategy. And if they're not there, then we'll return the excess capital to shareholders. That is the model. That's been the model before. But very importantly, what that model means is that if we execute at the company level, what was previously prior to the acquisition in the wealth management platform sort of like high teens to low 20s ROIC that over the next 3 years, we should be able to get back to a mid- to high teen ROIC. And we're very excited about that.

Yes. Look, there's a lot of goodness in the story. One of the areas, I think it maybe was a little bit weaker was in the closed sales forecasting kind of going to the low end of [indiscernible]. So maybe just in reconciling all the good things that we've just talked about, how do we pull that into the picture?

I don't -- so it's right to sort of delineate it. I don't know if I'd call it -- and obviously, other companies are facing what we see on closed sales. I think it's important for investors, particularly those who are new to the story, to recognize the impact of in-year close sales on our near-term economics. It's very minimal. We have a sales backlog that's over $430 million. That's 12% of our recurring revenue growth, and it has been growing over the last decade at about a 10% rate itself. So near-term economics aren't impacted by the closed sales in the current year, and that's the first point that I want to make. But as I think about the closed sales, first -- the first 3 quarters for us are largely in line with last year. But I do believe that this more volatile economic environment with the uncertainty or maybe long gaining sales cycles. I, myself, in the role that I play as a CFO, sponsor some of our clients. I hear directly from Chief Technology Officers and Chief Operations Officer at some of the big banks that we service. And we are all hearing that they are continuing to invest in lowering their cost and driving efficiencies in their processes. The door hasn't been closed. So you might see an elongated sales cycle, you might see some of our closed sales pushed out to 3 quarters. I think it's important to note that the conversation hasn't closed and the pipeline hasn't dropped as continued to grow and I think near-term economic impact is minimal as well. So look, we're in an uncertain environment. You think about places like Europe, you think about like big -- some of the transformations that are going on, it's not surprising to see elongated sales cycles. Pipeline is strong. We feel good about it.

You're not alone. We got about a minute here. I wanted to touch on some of these kind of future dated opportunities just quickly, in particular, around governance. So pass-through voting, universal proxy and tailored shareholder reports seem to be the ones that bubble up to the top as things that people are most excited about. Could you just spend a moment about how you're thinking about that? How does that roll into the long-term product portfolio?

Yes. First, I'm glad you used the word opportunities, as you said in the question there because I do think there's opportunities. And that's the first important point to make that these are driven by the regulatory environment. And for us, the regulatory environment could be a tailwind or a headwind. Those things that you just talked about, I think, are tailwinds for us. It is the priorities of the current administration. And I think those things are -- more communications to investors is a good thing for Broadridge. And the 3 items you talked about are exactly that. So for pass-through voting, whether it's funds wanting to differentiate themselves or given the power they have in shares that they own across company, transferring that to the end of line individual investors as an objective. We are the company that has the infrastructure to help with that. We have conversations underway with BlackRock, Vanguard, Schwab, State Street as well. So that market is evolving. Do you give customer choice? Do you give them the full voting rights? The structures are still evolving, but we are certainly having progress and success talking to the big fund companies there. You mentioned universal proxies. I know we're out of time. So I'll be quick on that. Look, I think that is about proposals from management and activists and other shareholders being presented in an easier, more seamless fashion for investors, and we can support there. And on TSR, there's a revenue hit for us in fiscal '25, but we disclosed over $30 million but the opportunity to print the more consolidated disclosures on our facilities like we do for our customer communications business, the opportunity to take the complexity from having to communicate on multiple share classes that's more communications from the funds. We have capabilities that support with that. So we think there's an opportunity on the composition side as well. So right now, again, I think the regulatory environment is a tailwind for us.

That's great. Well, you've got a fantastic story, you tell it well and we're excited to be a part of it. So thank you very much for being here. Really appreciate your support.

Thanks. Yes.