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

All right. Good morning. My name is Puneet, I am from JPMorgan Payment, Processing and IT Services team. Glad to have here with us Mr. Tim Gokey, CEO of Broadridge. Welcome, Tim.

Puneet, thank you for having me.

Happy to have you here. The format of this presentation will be fireside chat. I'll start with a few questions, and then we'll open the floor from questions from audience.

So Tim, like for benefit of investors, who may not be as close to Broadridge, can you talk about like the company, what you do for your clients? What's your right to win? And what opportunities you are seeing in the marketplace?

Yes, absolutely. Thank you, thank you, Puneet, and thank you all for joining us. Talk about Broadridge this morning. So for those that are less familiar, we are a global fintech at the intersection of capital markets, wealth management, asset management and public companies. And we serve a lot of the core infrastructure behind those industries, facilitate a lot of the Board of Directors' elections for public companies in North America and around the world and provide core infrastructure platforms for capital markets, wealth management and asset management. And we have delivered very strong returns over the past 10 years, recurring revenue growth of 10% and earnings growth of 14% compounded, that includes the tax cut, but take that out as 12%. We give guidance every 3 years. We've delivered on that guidance over the last four 3-year periods. And we have a very simple financial model, grow our recurring revenues organically, 5% to 8%, add 1 to 2 points of M&A, grow our fees, fee revenue, 7% to 9% in total. With the operating leverage of being a SaaS company, we can grow our earnings a little bit above that, call it, 8% to 12%. Buyback point of shares, pay a dividend just under 2%, and we believe we can deliver TSR in the low teens over long periods with high defensiveness and low volatility. And of course, all that starts with growth. And we have a very -- also have a very simple and clear growth strategy. We're really a network business. We connect more than 1,000 broker-dealers to all of the asset managers to every individual investor, to every institutional investor and work with the regulators. And that unique network bottle really positions us at the intersection of a lot of interesting trends, but a bet on Broadridge is really a bet on the continuing compounding of financial services in North America and around the world. There are 5 key trends that are really have been driving our business over long periods, and we think we'll continue to do so. The democratization of investing. And that's really, it is more people participating, but it is cost going down, more products causing more people to be engaged with more products and financial services, digitization of communications, a very clear trend, which is a tailwind for us. The acceleration of trading and capital markets, which is more than just the acceleration is the increasing lower spreads, higher volumes but more complexity with more products in more geographies. The growth of AI and data. We have a lot of data flowing through our platform, a great opportunity for us to add value to our clients and continued regulatory change and mutualizing that change is a key way that we add value to our clients. So we have really positioned our business in front of those trends and continue to do that. And that really plays under 3 core franchises we have, governance, capital markets, wealth and investment management. The large of those is governance. It's about a $2.5 billion fee revenue business. That has grown on the order of 9% over the past 5 years in revenue. And that is really, we'll continue to grow through partly the compounding of positions we get paid per position and partly the innovation and new products that we continue to introduce. And that's everything from supporting universal proxy to supporting tailored shareholder reports to facilitating pass-through voting, i.e., voting choice for funds. In capital markets, that is about $1 billion business. That has grown on the order of 14% compounded over the past 5 years. That includes the acquisition of Itiviti, now Broadridge Trading and Connected Solutions, BTCS, which has really brought us into the front office and allowed us to have a true front-to-back proposition. And our growth there is really around simplification and innovation. Our clients have, in many cases, dozens of platforms in the front office, many platforms built by asset class, by geography in the back office. Helping them simplify in the front, simplifying their back and connect front to back, huge opportunity for uplift for our clients. And we're innovating in capital markets. We're doing about $80 billion a day on digital ledger repo. We're bringing AI to fixed income and to the arcane areas of operations in capital markets. So big growth opportunity there. Wealth and investment management is just under $600 million business for us. It's grown about 10% per year over the past 5 years. The big news there is we have completed the what we believe is a platform that represents tomorrow's technology today, to help wealth managers solve the difficult problem they have of so many different applications because of all the different things that they have to do. Some that they might create, others that would be with third parties, how do they bring those together to create a better experience for clients, for advisers and to digitize their operations. So just a word on our Q3 that we just announced, we finished our fiscal year in June, and that so we had our earnings call last week, really, I think, 3 takeaways from that. We're 3 quarters away through the year. We really have high visibility now on the investor positions that we'll see this year. And with that, we said we have confidence in delivering in our guidance range, a single digit -- mid-single-digit revenue growth, double-digit earnings growth, which is right in line with the 3-year objectives that we have, sort of point one. Point two, we're seeing really good demand for our solutions. Our sales year-to-date newly contracted sales up just under 20%. And have good visibility into our pipeline for the rest of the year. So we confirmed our guidance of $280 million to $320 million in closed sales, which will be up 15% to 30% versus last year. And last, we guided to 100% free cash flow conversion. That really is consistent with the financial model that we have. And that enables us to consistently grow our dividend. We've grown to double digits 11 of the past 12 years. And then with the excess combination of tuck-in M&A, which has been very successful for us over time. We announced a deal last week. I'm sure we'll talk about that. And then share buybacks and we confirm that we'd be doing additional share buybacks this fiscal year. So that's the quick summary. And I'm really excited to be here today to talk to all of you.

No, thanks for a very comprehensive overview. So let's start with like talking about the acquisition you recently announced the SIS deal. So talk to us like how big is the acquired business, the valuations you are paying, and the strategic reason, like what are the revenue synergies that you expect from the acquisition?

Yes. This is a -- it's a great example of a tuck-in acquisition for us, and we've done 40 acquisitions over the past 10 years. And we typically buy things not to go in there and take out a bunch of costs and get cost synergies. But typically, we buy things because is a really good product fit. Another way we can add value to our clients and grow revenues compound on an organic basis after that. We track every acquisition over the past 10 years. We have compounded IRRs in -- just below 20% unlevered. So it's been a really successful strategy for us. The transaction we announced last week is the SIS business previously owned by IBM, now Kyndryl in Canada. About 1/3 of our Wealth Management business is in Canada. We have a nice position there. And this will add to that. They have a nice position with a few of the larger clients there where we also have a relationship that will really strengthen our relationship with those clients. And it will enable us to -- as we bring our wealth platform to Canada to mutualize the cost of that investment and to bring all those components, not just to our clients, but also to the SIS clients. And so a nice cross-sell opportunity over time. It was about a $200 million acquisition. And it is a carve-out. And so between it being a carve-out and regulatory approvals, there's some uncertainty over the exact timing of close. So we're not going to guide on revenues until the close date. But our expectation would be that it will add between 15 and 100 basis points to our 3-year CAGR once that is fully integrated.

No, that's great. And Canadian Wealth Management, it seems like that you're seeing like a lot of opportunities. That was one area you called out recently. So can you talk about like how large that market is for you. And generally, since the UBS rollout, are you seeing other clients or maybe not the size of UBS, but the large wealth managers come to you for end-to-end solution?

Yes. The Canadian market is a very attractive, interesting market, obviously much smaller than the U.S., but as I said, it's about between 30% and 33% of our business today. There are 6 large banks that have a very large share there, and then there's a tail of smaller broker dealers, we serve both of those. So we serve 4 of the 6 banks in a significant way and then also a number of the smaller players. And what's nice about the Canadian market is people are just very -- when one bank tends to do something, the others tend to follow, and it does make a very nice mutualization opportunity where we can really create great value for the entire market by creating a solution that many people adopt. And so I think the discussions about the wealth components that we've created in North America and it takes a little bit of modification to fit the Canadian market is not just a straight fit. But it's -- I think that's going to be something that will be really helpful for the market over time there.

Got it. Got it. And let's talk about stock record growth, like a metric that all of us follow very closely. So you shared like the goal at the recent Investor Day that, that metric can grow mid- to high single digits. You talked about some of the secular growth drivers. But on the last earnings call, you've seen that metric growing in mid-single digits right now. So what drives the acceleration over the near term? What trends and what confidence you have that we should see acceleration in that metric over the near term?

Yes. So in our regulatory communications business, which is about a $1.2 billion business, the key drivers there are the number of positions that we serve, both equity positions and fund positions. And the equity positions, we said in our -- we're in our Earnings Day in December, we said mid- to high single digits. That's where it's been historically over the past 10 years. What we said last week on our earnings call now with 98% of the records in for this year, that it's going to end up at 6%, which is just a shade lower than -- I don't know, mid- to high single -- let's call that 7% to 8%, maybe it's a point or 2 lower. And I think when you look at the components underlying it, there are really 2 components. It is the number of accounts and then the number of positions per account. And a number of accounts is really driven by the number of individual investors in the market. That is, over a long period has grown 2% to 4%. There was an acceleration in that around the COVID period. The positions per account is largely driven by increased diversification and significantly by the growth of managed accounts. Managed accounts account for about 50% of the positions in -- of equities, and that's growing double digits, and that's a trend that has quite a bit left to play. So what we've seen over this past 12 months is continued growth in managed accounts at historic rates. And a little bit of a pullback in the number of new individual accounts. And then if you look and you can track this by looking at what Schwab reports or other people report in terms of new account growth, that's tipped up just a little bit in the past few months. So I think as investor enthusiasm waxes and wanes a little bit, you see that number go up and down just a little bit. But we now can see testing into the beginning of next year, which is, I think, reconfirming and having us feel good about continuing to talk about mid- to high single digits.

Got you. And let's talk about like the other side of regulatory business, the funds business. What are some of the long-term drivers you're seeing there? You recently talked about that you're seeing the shift away from trading accounts into money market funds. What does that mean for Broadridge? And how large is that business within the over regulatory?

Yes. I think within the regulatory, call it, sort of 60% equities, 40% funds, maybe 55%, 45%. But it's very sizable. And it has been historically a really strong growth area that the proposition for funds and ETFs is a great way to invest. And so fund and ETF positions have been growing over a decade in the high single digits. And we also guided mid- to high single digits for this, in terms of our 3-year guidance. And I don't think there's any change to that fundamental driver. It is -- remains an interest, a very good way to invest. ETFs are also core in managed accounts. So when you think about managed account growth, it also affects ETFs. And now what we've seen as a -- as I say, is an overlay to that secular trend. This past 12 months. And remember, when we talk about account growth of we're saying to be 3% for the year, that's sort of the full 12 months. And what we saw, especially at the beginning of the period was a shift from equity-based accounts to money market funds. And that just does tend to retard the number of total positions because typically, you might have many different flavors of equity strategies you're in, but only one money market account. And so as those flows go to money market accounts, that can wind down the number -- the growth in positions. As the market changes back, that will accelerate the growth in positions, we think, back to historic rates.

Got it. Now on the capital market side, you talked about earlier, like acquisition of Itiviti, like absolute home run, BTCS, what you do there? So what's driving clients to embrace outsourcing. I'm assuming like a lot of competition, there is clients in-house operations. So what's driving clients to embrace more outsourcing there?

Yes. So BTCS, Broadridge Trading and Connectivity Solutions. We acquired this 3 years ago. It is the #3 player in front office. Fidessa now, ION is the #1 player. FIS is the #2 player. Neither of those companies are really strongly investing in this arena. And so we thought there was a great opportunity for us to participate to be able to provide clients a front-to-back platform, And so we made the acquisition 3 years ago. And really with three objectives: Objective one is just continue to grow in the market as Itiviti then was. It's taking share if the market is growing and continue to do that; two is bring it to new asset classes and geographies. And three is to have a front-to-back proposition. Coming Puneet to your point about sort of the growth in the market is, front office is -- there's a lot of complexity in that global institution space. And as I said, they have, in many cases, literally dozens of different OMS platforms built by asset class, by region. And so helping people simplify that is a huge market opportunity. You talked about the vended versus non-vented. It is -- the market is about 50-50 in terms of vended versus in-house solutions. And I think one of the things that we're really seeing as a trend is not so much build or buy, but build and buy. One of the things that our platform does is it has an underlying tool set that takes people sort of -- instead of having to build from scratch right up to the part where they want to begin to add their intellectual property, especially in principal trading and really enables them to do that in a much more cost-effective way. And so we're excited with this. We just announced a one of the largest global banks partnering with them to bring that global platform to the futures and options market where we haven't played before, is just an example of that expansion. We also announced that we had completed the onboarding of a large Nordic bank to our back-office platform, and that's an example of that front-to-back strategy playing out. So I think we see each of the pieces of strategy playing out, and we expect this to continue to have sort of low double-digit growth for a long time.

That's great. Now let's talk about AI, it's tech conference, we have to talk about AI. So you recently talked about BondGPT, OpsGPT as some of the AI solutions. Talk to us about your AI strategy? And ultimately, I think the goal has to be infusing AI in core systems. How do you do that? Do you upgrade an AI drive like a refresh cycle for those core platforms and you infuse AI into them? Or can you add an AI layer on top of what clients are right now?