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

All right. Great. Well, thanks for everyone showing up here again. As you know, my name is Dan Perlin, I head up the fintech practice here at RBC. And I am delighted to have Broadridge with us today. From the company, we have Tim Gokey, who's the CEO. So Tim, thank you so much for being here, fighting the traffic as it turns out, but you made it on time. And as Edings was just telling us, this is how they level-set expectations. Tell them they're going to be late and then beat numbers. So it's a good track record to establish here also on conference timing. So we appreciate that. Broadridge is a company that's pretty well known, but it's also complicated. And so what I thought, if we wouldn't -- if you wouldn't mind, is just starting with an overview of the business, to kind of level set for everybody, and then we'll dig into some of the details from there.

Yes, absolutely. And I'd like to think we're a very simple business.

Well, we're going to flush that out right now.

So we're about a $24 billion market cap global fintech. We serve asset managers, capital markets firms, wealth managers and public companies. And we provide a lot of the infrastructure that serves those industries in sort of corporate governance and regulatory communications. We provide a lot of that as basically an industry utility, especially for Boards of Directors elections. And we provide technology platforms on kind of SaaS basis for wealth management firms, capital markets firms and, to a lesser extent, asset management firms. We have a pretty good growth track record. Over the past 10 years, we've grown our fee revenues on average of 10% a year, our earnings an average of 14% a year. Our multiples rerated a little bit during that time frame, so TSR of 22%, which is probably not the go-forward promise, but I think we can deliver top quartile returns over a long time. All of that really starts with being fundamentally a growth business. And we think we are that. We're basically a network business, connecting broker-dealers, asset managers, individual investors, public companies, really in a network to facilitate corporate governance, communications, and some of the back-end technology. And that provides us a really interesting client base with a really big market opportunity. If you look at the things that we do that our clients do that is vended, it's about $60 billion that they spend with vendors, and we have about $4 billion of that. So a lot of opportunity in the vended space. And then if you look at the total market, including unvended, there's over $200 billion. So there's a big market opportunity for us. And we think we can capture that as long as we're good enough. And so we spend a lot of time on thinking about our business, how we continue to reinvest in it, how we continue to bring new capabilities to market. A lot of the things we're in are pretty arcane areas. And so we have a lot of knowledge that positions us really well, I think, to have a view into what's happening and a view into what our clients are going to need over time. And there are some big trends sort of shaping that. If you go down area by area, there's lots of stuff going on. But I think the biggest sort of larger-scale trends that we talked about, we always talked about the democratization of investing, which is really the cost of investment coming down over time, the amount of product innovation continuing, bringing more people, more products at lower cost and being more engaged with investment. And that creates a lot of tailwind for the government side of our business, but also for the wealth management side of the business. There is also the digitization of how people interact. And we think we're really at the forefront of that, and that's a nice driver for us. There is the ongoing really increase in data and analytics and how that is now playing into AI. We sit on a lot of data, and can help our clients create value from that. There's the ongoing modernization of wealth management and how that business is evolving. And then regulatory change is just -- is an ever constant -- something the industry needs to deal with. And since what we largely do is neutralize costs around things that are really important and critical but are less differentiating. Regulatory change is a key thing that people want to sort of do at lowest cost as possible. And if we can do that once on behalf of the industry. It's a real positive driver for us. So we've really positioned our business, try to get in front of those trends across the 3 franchises we have, and I'll just briefly cover our business franchises. So there's the governance business or ICS business. That's our biggest business. It's about $2.5 billion. Over the past 5 years, it's grown about 10% a year. And that is -- that's really that core network. We're really driving that position growth. We get paid per position that we manage. And that's a core driver. Also new products and product innovation, in the core governance area, with things like tailored shareholder reports and pass-through voting and things like that, but also in some of the areas where we help issuers with their annual meeting process, with data analytics, with retirement. All those are sort of in our investor communications business. Then our capital markets business, which is about a $1 billion business. That's been growing -- that has grown at a 14% rate. That includes an acquisition in there. And there, we provide technology platforms front to back with the acquisition a couple of years ago of Itiviti, now Broadridge Trading and Connectivity Solutions. We're playing in the front end. We're playing in the back end. We think we have a real opportunity to help our clients simplify their infrastructure but also drive innovation. And we've been doing that with digital ledger technology and applying AI and lots of cool things that I'm sure we'll talk about.

Yes, absolutely.

And then the wealth management side of the business, just under $600 million business, that's been growing about 10% a year as well over the last 5 years. The big news there is really the completion of the platform that we were building with UBS, which we think can really, again, come back to simplify, we'll probably talk about it in more detail, but simplify some of the challenges that wealth manager space. So we're excited about that. All of that plays into a pretty simple model for what we believe is delivering top quartile total returns to shareholders, which is the investment grade, do a level of internal investments that we need, pay a dividend, which we grow with earnings, has grown double digits in, I'm not sure if it's 9 of the last 10 or 10 last 11, but pretty much every year except for the pandemic year. Then that leaves money left over for some combination of M&A or share buyback. M&A has been an important growth driver for us over time -- a series of tuck-in acquisitions, I'm sure we'll talk about that. But if you look sort of over the past decade, has averaged about 50% of that extra cash going to M&A versus going to share buybacks. And we don't -- it's not a top-down allocation, is really we look opportunity by opportunity. When we find things that meet our criteria and will provide strong returns, we'll execute on that. But we don't let cash build-up, and so we return that to shareholders. And so with that, we think we can provide really good capital allocation and really drive good strong shareholder returns based on that core growth model.

Yes. And you've demonstrated that for a number of years now. So there's lots of proof points to believe that that can continue.

What I wanted to start with is there's a lot of questions around just what you're seeing from a macro perspective in the current environment. I think you've said recently around the earnings, clients are being careful with their spending. So like, define careful, like what does that mean?

The environment is pretty dynamic, and our clients are, I think they're feeling optimistic, but they're also looking at all the big macro risks that there are. And so they're being careful. And now if you contrast that with a year ago where I think the lights are all sort of firmly on red, and they were doing only things that were absolutely necessary, I think if you compare that to this year, they're still being careful, but they're really executing on things that will drive growth, reduce cost, or meet regulatory needs. And so we've had, I think, much more sales momentum this year than last year. Now part of that last -- at the beginning of the year, was just a buildup of things that spilled over, and -- but as we go into the second half of the year, we are seeing people execute for growth, whether it's some of the front office things, for cost, whether it's some of the digitization of communications, or regulatory, whether it's tailored shareholder reports, and we can go through all of our product areas. But we're just seeing a lot more flow of opportunities. And so I think we've talked about a sales guidance of $280 million to $320 million, which would be, I don't know, something like 30% above last year, which was a low year, but that would put our sort of compounded sales growth rate sort of back into the double digits, which is really where we think it should be.

Okay. No, that makes sense. When you think about -- a lot of things that you're talking about here really resonate in terms of the concept of just durability, and -- but the business, it's like it's changed over the past several years, like you've added some things and you've expanded in certain areas. So how do you think about the durability and visibility also of the business in its current construct relative to maybe some of the performance you would have done 2, 3 years ago?

Yes. We think of every client as being a 99-year client, and so that really gives us a way of thinking about how we -- the service we provide to clients and how we reinvest and what we think their needs are going to be in the future. And we're always thinking about our business in terms of the core business that we have today, the things we have that we're -- that are real businesses that we're growing, and the things that we're developing for tomorrow. And if you think about that sort of life cycle of activities that we're doing for our clients, that's how we think about making sure that we sustain a really good long-term growth. When I think about durability coming back to the market size I talked about and how low our penetration is, really of the opportunity that we have, so a lot of the durability is making sure we keep increasing our capabilities at a level to take on more difficult, more complex assignments. And I always tell people internally that, as long as they're good enough, the opportunity is infinite. And the real competition is usually our client doing it for themselves. And they have so many other things on their plate that if they are confident we're going to do a good job, they're pretty happy to have someone take it on and neutralize some of that change cost. So I think that market size is a big driver for us. There are those sort of growth macro trends that I talked about, whether it's democratization of investing or acceleration of trading or digitization of the communications, those all things are going to go on for a long time, and I think continue to be drivers for us. And then we're always innovating, and whether that's digital ledger repo or applying AI to fixed income, or pass-through voting, we're trying to be on the forefront for our clients so that they see that, as their needs evolve, we're going to be right there for them.

Yes. I just want to make sure we clean up one thing on the implications of timing for like the annual meetings, a little bit of a push in the last quarter. We keep getting questions around it. I know you feel really certain about it. So maybe just share a minute about why you feel so confident that those numbers are going to come back in the [indiscernible].

Yes. So the annual meetings are mostly in the spring, mostly in sort of late April, May, a little bit beginning of June. We send out materials in advance of that. So literally, the peak days for communicating with investors about the meetings that are coming up is the last week of March and first week of April. And so any timing that affects those days and materially affect our results between the third and fourth quarter, but has no impact on the full year. So last year, Easter fell in April. This year it fell in March. That changed the way companies arrange things just by a few days, but that made a material difference. I mean not a ridiculously large difference, but a difference. And we feel confident about it because those meetings have already happened.

Exactly. That's the point, I just want to make sure you say that.

And so we have 100% visibility on that at this stage.

Cool. Okay. In the spirit of putting capital at work, you did this recent acquisition of Kyndryl's Securities Industry Services business. So I guess a couple of things there. Strategic rationale for doing so. Any kind of metrics you can put around it to kind of frame it for investors. And then your long-term expectations about how you think that business is going to perform.

Yes. It's a -- it's a really nice business for us. So Wealth Management, we said just a little under $600 million business. About 1/3 of that is Canada, where we have a really nice market position in Canada. And this business is a business that has been -- we've talked about for literally 20 years in terms of would they be more logical together, and it was owned by IBM. IBM never really felt they wanted to transact on it, with the spin-off of Kyndryl from IBM. Kyndryl is really focusing on its core business. They're important business partners for us. So we're able to have a very proprietary conversation with them, which is, when you go back over the 40-plus transactions that we've done over the past 10 years, a large proportion of those large -- have some proprietary element to them. So that's one of the things, I think, that helps us be successful with M&A. And so when we look at it, it's really, it's giving us access to a couple of the significant institutions out there where we had a relationship and not as significant a relationship, and this is going to open that up a lot more. It is going to enable us with that to bring many of the wealth components that we're -- we started in the U.S. that we're in the midst of bringing to Canada anyway, now bringing that to a larger base of clients. So we think there's a really nice synergy there, really nice uptick for the Canadian wealth market, a nice uptick for us. And so we expect to earn really nice returns on this. From a scale perspective, we paid just on the word of $200 million, and it will add to our -- I think what we said is a 3-year growth rate sort of 50 to 100 basis points. And you can sort of do the math on that, but it's -- it will be a nice revenue pickup when it happens. And we're not putting it into any of our guidance at this stage because it is a carve-out, so there's some work to do on that and there's work to do just going through regulatory approvals on the Canadian side. So we don't -- we're sort of saying mid-calendar year, but really until we have that for sure, then we'll include it in guidance and be more specific.

Okay. One other thing I just want to clear the air on, you do have this kind of CFO transition that's occurring, so maybe if you could just speak to that for 1 second. And then we're going to dive into some of the more long-term topics.

Yes. So Edmund Reese has been our CFO the past 4 years. Fantastic guy. I'm sure many of you met him. Very good with explaining our story. And he has a fantastic opportunity at Aon. And I will miss him, but I couldn't, in good conscious, say this isn't a great opportunity for you. And I think we always knew he was someone that's super talented, super capable of being a Fortune 100 CFO that would be with us for 3 to 5 years, I was hoping for 5. But he brought a lot of benefit to us while he was here. The good thing is he built a really strong team and really started thinking about his succession from the time that he arrived, and brought in some really good people, including Ashima Ghei, who is going to be the interim. And so we feel really good about our ability to carry forward and I feel really good about building on some of the things that he brought to us.

That's great. No, thanks for clearing that up. So let's talk about some of these long-term secular trends. You've kind of highlighted them a little bit. But like the idea of increasing investor engagement, right, that's a pretty material thematic for you guys. So talk to us about the industry component of that, but then also the things that you're helping to drive within that industry dynamic.

Yes. I think when you think about industry engagement or investor engagement, it is -- there are a couple of pieces to that. One is we're big believers in investor disclosure and in the sort of 100-year mutual understanding between regulators and the industry that will let you innovate as long as there's good disclosure. And I think that's been really good for investors, it's been really good for the industry. And that paradigm has been very healthy. And so making sure that investor disclosures are clear, engaging, increasingly digital as we transition to a digital world that is still as good as it has been, I think that's an important part of engagement. Another part of engagement is around the whole voting process, and again, making sure that's easy and clear. But also I think the innovation you're seeing now is pass-through voting. And a lot of the large, especially passive asset managers, are under pressure to make sure that they're not sort of taking a stand one way or the other, overly influencing companies. And so one of the ways they're trying to get out of that is by passing the voting rights along, which is to institutional shareholders, that's pretty straightforward because they have voting platforms. They're probably already voting those issues so they can vote them. For retail investors, it's a little bit trickier, but we've seen some good innovation there over the past year. We're helping drive that. So those are both, I think, examples of how we keep engagement moving forward. All this in the end in terms of drivers for us comes back to position growth. And the thing that really is the driver for us is how positions grow, I'm not sure if we're going to talk more about the drivers of that. But when we do some of these things around the edges, it's not so much we get paid for that thing, but it keeps the whole ecosystem healthy, and then we get paid over time through position growth.

Yes. Well, maybe just elaborate on that. I mean, it's a good segue into, again, durability of that. Why would that continue? How does the market aperture kind of open up so that there's more opportunities for those position growth to continue?

Yes. Well, what we've seen over the past decade or more is position growth in sort of the mid- to high single digits. And when you decompose that, it's really how many people already have a position, and how many positions -- or how many accounts are there and how many positions to account is it? And the account growth is really driven by demographics and a little bit by penetration of the number of people who have accounts. We've seen the number of individual investors that own stocks going from something like 49% to 59% over the past decade. So there has been a little bit above population growth on that. And then the other piece, which is a bigger piece, is positions per account, which is just around increasing diversification inside individual accounts. And so we've seen the number of positions for account growing. If you think about it, let's say, you're saying, mid- to high single digits, let's say you take, call it, 6% as an average across all of that. That would be sort of 1 to 2 of account growth and, call it, 4-plus of position growth -- position for accounts. And then one last wrinkle inside that is a big driver of that diversification is the growth of managed accounts. And that obviously has been a huge trend in wealth management. Most wealth managers are still really trying to push their clients towards managed accounts. That's been growing double digits. And about half of the positions are in managed accounts today. So that growing at double digits give us a nice sort of mid-single-digit growth as a base right now.

Okay. Let's talk about the data asset that you have, as you said earlier, like this is one of the bigger drivers. And we can maybe talk about AI as how you're using it. But I'm more interested to know how you're going to leverage the data that's inside of Broadridge to ultimately continue to drive growth for the business.

Yes. I think it is a real opportunity for us. I think it is -- it's not one that we fully harnessed yet. And it is -- first of all, it's our clients' data and we're very, very careful about that, and meeting all of their safeguards and thoughts that they have about the proprietariness of their data that's on our platform. And then at the same time, they are asking us, how can we add more value to that? And so that's the balance that we always try to strike. I think the way that we've been doing it with -- particularly with drive data and aggregated data, to -- especially to provide visibility to asset managers into what's going on in wealth management and what are the flows, where the assets are, what are their sales, asset managers have a hard time, for instance, even knowing where to pay sales tax. And so something as simple as, yes, there's x billion within our [ lynch ], but here's where it actually is. Something as simple as that, to as complex as, here we've been, let's take all the global flows, retail institutional across all the product types globally, look at all the macroeconomics and all the levers around that, use AI to say, if this is what you believe the macroeconomic scenario is going to be, here's how that's going to flow across products and where the growth areas will be over the next 3 years within a high degree of precision, and you can play with the dials on that to sort of design your product strategy. And that's our latest product. We're applying AI to that. Big backlog of people wanting to sign up for that. So it's the whole range, from basic reporting to really very predictive AI driven.

That's awesome. Let's talk about some of the, I would call, I guess, segments or divisions. So specifically around capital markets, I mean really strong, 8% revenue growth. BTCS was really strong. I just want to make sure we understand kind of all the levers of growth that you have to pull there, or maybe not pull so much, but just are tailwinds for you, for that to continue. Because here again, like the theme is the sustainability, and that seems to be an area that's been incredibly strong for a long period of time.

Yes. I think -- so capital markets, about $1.5 billion business. I think we are -- we're pretty differentiated in this business in terms of the capability that we bring to market relative to others. And again, the strategy is around simplification and innovation. In the front office, it's simplification because so many of our clients have infrastructure that's built up by asset class, by region. They'll Have 30 different order management platforms across the different desks, it's been mostly a desk-level decision. And so how do we help them bring that together, make it more productive. And that's where the -- what we're doing in Itiviti is a great step forward. And a great example of that is the opportunity that we talked about in our last earnings call where we're partnering with one of the largest global investment banks around taking all that into a global multi-asset class platform for derivatives. And that also plays with there's a lot of that market today, the biggest player is what was Fidessa, is now Ion. A player that many of our clients really like to do business with, and many of them have active projects on to try to move away from them based on the way they do business. And so it's a great opportunity for us to take share, but also to -- but half the market is vended, so also to help people simplify their internal infrastructure in the front office.

5 minutes left, gentlemen.

Okay.

How many did you say?

How many did you say?

About 4 or 5.

I'm just going to finish my next sentence in 4 or 5 minutes. Seemingly in the back office, the same thing, lots of platforms by area, by region, how do we help them simplify that and how do you simplify front-to-back. Many companies have very different data model in the back office and the front office, lots of rigs between that, and so there's a big simplification opportunity. And the innovation side of things is, again, I think tokenization will be a big topic over the next 10 years. What we're doing with digital ledger repo is our first step into that. What we're doing, applying AI with very creatively named OpsGPT as a way to apply AI -- generative AI to the operating departments, I think it's sort of a very logical solution. But we have more ability to invest in it than any one provider -- any one bank does. So doing that on behalf of many is a great opportunity for us.

Okay. All right. And let's move on to wealth and investment management here, another very successful quarter in terms of revenues. Maybe just talk about the interplay of rolling on UBS and then E-Trade rolling off, and then what that kind of trajectory looks like once it's all kind of set and done.

Yes. So we said that the revenues from bringing on UBS was about -- will be -- or are about $75 million a year. We've also said, and we've talked about for a while now because Morgan Stanley acquired E-Trade 2 years ago. That grew quite a bit during the pandemic in terms of how big that was. And we helped with that transition. We took on some other things from Morgan Stanley, but net-net in terms of what's reported in this segment, the loss of that as it just converted over this past year is a good proportion of what we took on with UBS. Not the full thing, but a good proportion. That will annualize really in the third calendar quarter. So they'll be -- it will be a little bit of a drag in the next fiscal year. And then we'll be done with that.

Okay. Just for the sake of time, I want to open it up to the audience if they have any questions. If not, we can keep going.

What's the take on [indiscernible]. Blockchain and [indiscernible].

So I'll repeat it. So just blockchain is kind of the question. And how do you think about that in terms of your business?

Yes. I think that there are already specific use cases where it can be very helpful. And I'm differentiating blockchain from crypto. Crypto is own whole topic, but blockchain as a technology, we think that there will be asset classes where tokenization becomes important. And that's why we've been investing in it for repos. We're doing about $80 billion day in repos now. We have a really good road map on that to -- we've been doing -- starting with internal repos, amazing how much of the repo market is just inside the same institution between legal entities. But now we're doing real-time bilateral repos. It's going to be a big market response to repo. So just the repo opportunities could be nice for us. But we think that's precursor of other things.

Just a last question to wrap up on is really now your free cash flow conversion rate back to 100%. That wasn't always the case, but you've been pretty consistent there now. And so that brings back into decisions about capital allocation, buybacks, dividends, M&A. It sounds like the M&A conversations you've had, like the environment seems better maybe than it has been in a little while. So just lastly, just how are you thinking about putting some of that free cash flow to work?

Yes. So yes, historically, we've been 100% free cash flow conversion company. We went through a couple of years where we made some pretty significant investments that took that down, and we're sort of back to 100, which is what we expect going forward. And so that's going to give us a fair bit, even after dividends, a fair bit of cash to reinvest either in share buyback or in M&A. Over the past couple of years, we've been -- M&A has been an important growth driver for us over time. Just in our long-term growth model, we talk about recurring revenues growing 7% to 9%, and 5% to 8% of that organic 1% to 2% M&A. So we've done 40 transactions, but they are small tuck-in transactions around product capabilities. We've been out of the market the past couple of years as we were paying down the debt from the Itiviti acquisition. That fortuitously corresponded with a time when really there's nothing to buy because PE firms had sold everything on the shelf 3 years ago. So there are lots of PE firms readying lots of things for market right now. What we don't know is what price [indiscernible] is going to transact at. And I think the whole market is sort of waiting to see sort of what clearing prices will be. And we are -- we have a really good organic growth opportunity. If there's -- if there are things that -- where they're clearing prices such that it's an attractive IRR for us, then we'll transact and we can incrementally add to that. If it's not, then we can stick with organic growth. So we do view it really as a very bottoms-up underwriting opportunity-by-opportunity, build versus buy. And in the past, we've found some really attractive things that added. And if we see that in the future, we'll transact. Otherwise, we'd never let cash build up. We do -- we buy back shares to do that. And I'd say, in my long-term growth algorithm, I think of 5% to 8% organic, 1% to 2% through M&A, giving us 7% to 9%, with operating leverage, grow earnings at, call it, 10%, but 8% to 12% as a range, buy back 1 point of shares, pay a dividend, let's call it a little under 2%, and that can deliver over the long term, low double-digit TSR with low volatility and high protection around that in a very sustainable way.

Yes. No. It's a great story. It's a great story. So thank you so much, Tim, for being here.

Thank you.

Thank you for sharing it with us.

Thank you.

Thank you.