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

All right. We will go ahead and get going. Thank you, everybody, for joining us. I'm Patrick O'Shaughnessy, the capital markets analyst here at Raymond James. And up next, we have Broadridge. And on their behalf, we have CEO, Tim Gokey. Tim, thanks for joining us again.

Patrick, great to see you.

Good to see you as well.

Am I coming across well. Can everyone hear us?

Okay. All right.

Even more. Okay.

So to kick things off, for the benefit of folks in the room who are a little bit less familiar with Broadridge, can you maybe just spend a few minutes talking about the company as it exists today?

Absolutely. I thought you'd never ask. We are a $28 billion global fintech. We have a scale business at the intersection of capital markets, asset management, serving corporate issuers really on critical foundational technologies often regulated that need to be right but that are less differentiating and that where there are many people needing to do the same thing and where we can build an industry solution and do that on behalf of the entire industry. We have a pretty simple financial model. When we look at our last Investor Day, we do 3-year objectives. We talked about 5% to 8% organic revenue growth with a little bit of tuck-in M&A, 7% to 9% recurring revenue growth, which is the primary -- and where we can present recurring revenue growth, which is the primary revenue metric that we look at with the operating leverage of being a technology company 8% to 12% adjusted earnings growth, call it, 10% at the midpoint. And then when you think about it from a TSR perspective, we add on to that a dividend that is typically just a little below 2% and say a point of share buyback, we look to deliver low teens total return to shareholders over long periods with low volatility, and that's sort of a very simple financial model. The core of the business is this sort of pretty unique network that connects every asset manager, fund, broker-dealer, public company, individual investor, institutional investor, all around governance and communications matters. And we have a pretty ubiquitous position in that. And around that core, we have been able to provide a lot of other services to those same clients around key nondifferentiating activities. That's given us a lot of scale. We regularly process nearly 800 million equity positions each year. We cleared and settled $10 trillion in trades every day. We sent 7 billion communications last year between regulatory and customer communications. So we're really a core part of the implementation fabric of our clients. Now when we think about that growth algorithm, it all starts with that 5% to 8% organic growth. And so where do we get that growth? And it's through sort of 3 simple strategies around each of our core franchises. It's around digitization and democratization in our governance business. It's around simplification and innovation in our capital markets business, and it's about modernizing wealth management. And I'll just take a moment on each of those. If you look at our governance business, this is our biggest business, about $2.5 billion of our $4.5 billion in fee revenue. I might just add this $4.5 billion fee revenue. I have a total market of about 60. That's vended and another chunk that's unvended. We'll talk about that. So that core governance business we're growing partly the underlying positions that we're serving are growing at -- right now, the guidance we just gave when we -- on our last call was that the equity positions will be growing in low double digits this year. The fund positions in sort of mid-single digits this year. When you look at that over long term, it tends to be more sort of mid- to high single digits for both of those, but there's this underlying growth and we are serving that growth by continuing to scale our company but also by innovating to provide clear information to investors in ever more digital form that's easy for them, easy for them to access and with innovations like pass-through voting and other things that we'll talk about. We also have a customer communications business inside there where we are converting physical print to digital communications really growing our digital revenue footprint, and that's a very nice growth driver for us as well. On the capital market side, where we're simplifying and innovating. We're doing that in the front office. Many clients tend to have many different front-office platforms built up over time by asset class, by region. We're building a global multi-asset class SaaS platform that can really help them simplify all of that. Similarly in the back office, people tend to have clearance and settlement platforms that were built by asset class by regions. They have a complex operating environment and we're helping them simplify that with a single global multi-asset class platform, and then we're connecting it front to back for even more simplification. Also, a lot of innovation on the capital market side, bringing AI, in doing a lot with digital ledger repo in particular. That's a nice growth area for us. We're doing -- we'll talk about this, but we're doing, I think we're the leader in tokenized securities on the planet. And that's, I think, really shows the innovation for us. And then on the wealth management side, where we're really modernizing with componentized platform that we originally built for our UBS engagement that they were bringing to the market to help people transform on their own terms where they see a path through modernization, they don't want to take it all at once. They want to do bite size. We're bringing that to market, also doing a fair bit of investment in the Canadian market where we just bought SIS, which was a platform owned by IBM, and we're bringing that same modernization to that platform and to Canada overall. Briefly, we just had our second quarter call about a month or so ago. Very good first half results. And on that call, we reaffirmed our guidance pretty much essentially for the year across the board, basically at the midpoint.

All right. Terrific. I think you set the table for a bunch of the questions that I have lined up here. What are Broadridge's key priorities for fiscal '25 and does very strong event-driven revenue in the December quarter allow you to more aggressively attack those opportunities via investment?

Yes. So behind that, just we're an organic growth company, as I just talked about. And so driving that organic growth is a key piece for us. And so we're looking at it, what are the things in our road map that we think will continue to drive that over time. I'd say if we look at the investments that we're making right now, there are, I think, 5 areas that were sort of specifically allocating dollars to. So first of all, digital communications, we just talked about that. Print to digital strategy with inside customer communications, but also in our broader regulatory business. And there's a digital platform that we have built out and are continuing to make even better. So that digital communications is a big industry need growth driver for us and something that we're continuing to invest for. Second is the capital markets innovation that I talked about and the -- that global multi-asset class front office platform. It's there in many places, but it's not 100% there. And so we continue to build that out. For instance, we are partnering with Bank of America to bring that to the futures market where we don't -- we currently are the cash securities but not future securities. And we've had a successful partnership with Bank of America and corporate actions and other places. So great to have a core launch client for that, just as an example. Data analytics, we are -- there's a big opportunity to bring the -- there's a lot of data that flows through our platform. Clients are asking us how do we add more value to that. We have a great team that is doing that, and they have a whole long road map of things that they see value in and then applying AI to that. So I sort of bucketize AI right with that. And then the last one is -- let me just call it platform, which is we have built up over time as a lot of different applications that were purpose built or acquired for a specific purpose at a specific time, and it doesn't necessarily work together. And again, building on the investments we did a few years ago in the wealth space, we've created a common data oncology, a common API framework. And over time, we're bringing that to all of our applications. So there will be a lot greater interoperability, a lot more simplicity for our clients, more stickiness, more value that we bring and at the same time, better ability to scale the company. So those are the areas we're investing. It is certainly the case, Patrick, as you point out that when we -- when we have times with strong event-driven revenue that helps our economics. We tend to look at things that are on our road map and accelerate those, and we're certainly looking at that now.

What do client budgets look like right now? We're strong equity markets in 2024 and strong capital markets activity and an expectation for a rebound in M&A. Does that help client budgets as it pertains to spending on your solutions?

I'm not sure. There is definitely a burst of optimism post the election and around markets, around M&A, around a variety of financial topics. And those things are broadly tailwinds for Broadridge. And we've seen that, for instance, in a pickup in position growth. So there's some -- definitely some things that are -- where the market is going well. We see that in our numbers. In terms of our clients buying behavior to contract with us for new solutions, the buying cycles for those things tend to be pretty long. And so there's not really enough time for the enthusiasm postelection, they have sort of seeped into our buying cycle yet. And similarly, there's not enough time for the uncertainty of the past few weeks where the policy situation seems a little unsettled that hasn't really affected us -- affects us either. So we do have -- when I look at where we are from a sales perspective, if you take out a sort of a unique solution we did last year around tailored shareholder reports, our first half sales were up 8%. When we look at our pipeline and our backlogs and all those very healthy. So we certainly expect to have a good healthy sales here.

You mentioned the addressable market in your opening comments. And you guys have measured the entire market, the entire TAM at $225 billion, of which $60 billion is currently vended. What are some of the key components of the unvended $165 billion? And how is Broadridge attacking those opportunities?

Well, it's a good question because I always think of in-house solutions as sort of our #1 competitor. People say, "Well, do you really have a competitor?" Our main competitor is the technology teams. They're a client and they are competitor technology teams of our clients. And when you look at our call it $300 million-ish of newly contracted sales last year, a significant portion of those were things where we were taking out in-house solutions and bringing to them better -- we think better technology that we provide. So that's a big part of our sales every year. And we have really sort of the secret sauce when you think about the organic growth of our company is this theme around mutualization and industry solutions. So our clients, they're very good. Right -- maybe right now, the coolest place to go work is Google or Facebook or something like that. But -- I guess I'm dating myself, Meta, pardon me. But for the 30 years before that, the coolest place to work, except for investment management, of course, but if you're in technology, the coolest place to work was in financial services. So they have really good talent. And at the same time, they have so many different things that they need to do. And as the market changes, some of those really matter and some of them are left less differentiating. And so our clients are being very discerning about where they deploy their talent and their dollars on the things that will make the biggest difference for their business. When there's change, when they need to make an investment, when there's a platform that's end of life, and it's in a less differentiating area, it just makes sense for them to look to the unvended market. And we really are pretty clear that we are the scale player that is investing -- reinvesting in our business, and we have a really good culture. We are really focused on client service on the long term. We think of every client is a 99-year client. We have 98% revenue retention. And so I want to say it's an easy choice, but we win more than our fair share of those.

And then in terms of capturing more of the $60 billion TAM that is currently vended, what would you say is key to broader to winning market share?

Well, I think, try to have them meet me. And then beyond that, the -- I think it does come back to in all seriousness, what I just said. When you think about the competitive landscape, for financial services technology. There are a few scale players of which we are one. The other large-scale players have not been reinvesting in their business. There is -- some of them had a model of doing M&A and then really cut in the expenses and the property they acquired and leveraging the cash flow to do the next deal. Others have just been distracted in other businesses and really not reinvesting in the business. And then the other part of the competition are startups, smaller PE-backed firms and they don't have the relationships, they don't have the contracts. They don't have all the cyber protections to really deal with large scale -- large-scale competitor clients. And then there's Broadridge, a scale player that our clients know where we're serving them well. We already have contractual agreements. They've already done all the cyber audits on us. They already have all these other things. And for them to make the choice to work with us is often a very, very logical choice. And it's the thing that keeps us so focused on serving them well and making sure that they're satisfied on the solutions that we're providing today because when they're happy with what they were providing them today, then they're very open and happy to transact with us on the next thing. And that's where our organic growth comes from.

How do you see the generational wealth transfer that's expected to happen or probably is already underway? How do you see that impacting your business? And I imagine that it has implications on multiple components of your business?

Yes. It's definitely happening. It is bringing in younger investors who want to interact in a different way and is causing our wealth management clients, in particular, to rethink their technology landscape and ensure it is fit for purpose so that can -- it comes sort of younger investors about who are going to more quickly acquire more wealth. And so as they think about how they evolve their technology to address that, it really raises the bar for modernization, which comes back to some of those platform components I talked about. I would say that I think there are other trends in wealth management that are even more here and now. Certainly, the continued growth of managed accounts, big driver, especially on our regulatory communications business, the growth of private assets. There's a real barbell of people moving to, which I'm sure everyone in this room loves to hear, but moving to passives for market exposure and the privates for alpha. And we'll see where that balances out. And we're obviously rooting for sort of a better balance with active management really winning that because we serve a lot of the active managers. But that has been a key trend. And as it causes wealth management firms to really rethink their business models, we think how they make money, we think the technology they need to stack against that.

So my team recently published a research now where we highlighted the consistency of your results, certainly over the 3-year period, but also across fiscal years. How would you characterize the actions that your management team takes to deliver that consistency?

I think there are 2 parts to this. First is our business is I'd like to think it's just genius that we're able to create a consistent results. But a lot of it is we just -- we have a very consistent business. So if you look at our $6 billion in fee revenues, and if you pull out the distribution revenues, which are pass-through. So if you look at the $4.5 billion of fee revenues that affect our business, that affect the economics of our business, 94% of those are recurring. And the part that we classify as event is actually a part of that is pretty consistent. So there's a small sliver of stuff that's more volatile. And then when you look at our growth algorithm, the biggest part of that is revenue from new sales, but revenue from the sales does not necessarily mean sales booked in that year is often sales booked in previous years that are being converted. And we're able to -- the other part of growth is from position growth or we're generally able to do testing that is several months out. So we have a high degree -- a low degree of volatility and a high degree of predictability in our business model generally. And then beyond that, with that last bit of fluctuation, we have across our many different product areas. Each of those product areas has a road map of here the investments that we are in the midst of making that we need to finish. Here are the investments that we want to make next year and the investments we want to make after that. So they have a road map of things that they think will bring value to their clients. And we are able to moderate the speed at which we implement those things. And so we started off with sort of a base case at the beginning of the year. And as we are going through the year, we can approve or pull back on projects. And so in a year like this, when we're seeing more event-driven activity than we expected and some nice economics on that, it's an opportunity for us to speed up a little bit, the pace of some of the things that we are planning to do and deliver good results, but also better position us for the future.

And you mentioned the EPS growth algorithm at Broadridge. A component of that historically has been margin expansion. And the company saw 20 basis points of margin expansion. Last year, you're kind of guiding to flattish margins in fiscal '25. Has something really changed there? Or is that just a unique aspect to the last couple of years?

So I think an important point, which I know you know, but I'll just say for the group is when we talk about our overall margins, there's a reported margin. And then there's what we call core margin, but it is really our margin when you pull out the distribution revenue, which is low to no margin. And also, we had some float income and but we have offsetting variable debt, so that is also low to no margin. So those things don't really affect our economics. And we report every quarter on what happened to actual margin, but also what happened to what we call our core margin, which is the thing that's going to truly affect how much we earn. So this year, for instance, when our overall margin is going to be basically flat. Our core margins are going to increase well above 50 basis points, and we saw really good expansion in the first half. So just -- it's important to make that distinction between the stuff that really drives economics. More broadly, we are -- what we're really focused on is the 8% to 12% adjusted earnings growth and call it 10% at the midpoint. And so I would say margin is a little bit more of an outcome than the thing where we're saying, like, we're targeting this number. It's really much more we're targeting the earnings. And -- and so the margin is a natural outflow from that. But I will say that as a technology company, as we grow, we do get scale benefits. And so margin expansion is inherently a part of the business model.

We've touched on distribution revenues a couple of times, and I've covered you guys for a long time, and it feels like the story has always been, well, distribution is going to get deprioritized. Things are going to get sent out electronically. And that's going to be less important going forward. And it seems like every single year distribution revenues are about 30% of total company revenue. Do you think we'll ever hit that inflection point where distribution becomes less important or because of postal fee increases and other drivers, it's never going away?

That is an interesting question because I remember when I joined the business nearly 15 years ago when it was creating models, I would have definitely said that by now, it would already be a trivial proportion of our revenue, and it hasn't worked out that way. So the good news is that it's not sure it really matters because it doesn't affect our economics. I do think that a couple of things have happened. First of all, we bought the customer communications business. This is going on 8 years ago now, but that definitely increased the distribution revenues component. And in the past few years, there have been significant increases in postal rates, which have definitely increased distribution revenue. Again, not a lot of impact on revenue on -- revenues and earnings to us. So it's a little bit -- it's something I'm curious about, but I don't spend a lot of time awake at night about it because it's -- I'm really focused on the fee revenue and the margins and economics to drive off that.

Got you. Switching to current events and macro. One idea that's been pushed by some folks, including the CEO of Robinhood recently in op-ed is the tokenization of assets including equities. Should tokenization occur in a meaningful way, how do you think about the opportunities or risks that presents to Broadridge?

Yes, in the -- I won't comment on the editor help. I think it's going to be taking the equities market. So there are definitely areas where I think tokenization can really provide a lot of value and I'll come back to where we're doing it at some scale. If you take the core equities market, it's pretty efficient today. So I think it's going to be a long time before we get to that. There are scenarios like today's technology could do -- can handle T+1 pretty well. If we went to tZERO, there are different flavors of tZERO. But on some of those flavors, tokenizing might be the way to go. I do think that's a ways out. What I will say is we're certainly preparing for that as something that could happen. And one of the things you'll hear us talk about is digital ledger repo. And so for tokenization, it really helps to focus that where there's a network. We have about 2/3 of the fixed income is on our technology platform. So we have a really strong position in fixed income. We do a lot of repos every night. And we are -- we've introduced a distributed ledger platform for repos. We're doing on that today. Every day about the same volume as the entire crypto market outside of Tether we're doing today. So we have real scale in working with tokenized securities really more than anyone. And to that, and that solution today is largely based on affiliates trading with each other. Next, we're bringing that to clients for -- as the treasury market goes to centralized clearing, there's going to be a lot more sponsored repo and this will be a great solution for that. And after that, we're bringing it to intraday depot, which will really free up liquidity in the daily overdraft market. So there's a lot of very interesting use cases that are going to continue to drive volume there. And I think it's a great example of how we think about innovation because it's not that we're going to build something that maybe will happen 10 years from now is say how do we work very practically with clients today on something that has a real business case now that, at the same time, is on the road to something that could be very different in the future.

And then stand on the current events theme. Clearly, there's an entirely new mindset at the SEC right now versus a few months ago. And sometimes when we get different regimes in there, they make different proposals that impact Broadridge or reports to. Is there anything on the horizon that you see from this new SEC that has any implications for Broadridge?

Yes. I think just stepping back, first of all, when we think about the administration, the -- there's obviously been a burst of optimism in that post -- between November and January 20, there's a lot of optimism. And I think that has, whether it's physicians or M&A or other things, that's generally, I think, positive for Broadridge. When you look at the things that are the main announced priorities of the administration around taxes and tariffs and immigration, and social issues. Those things are broadly neutral to Broadridge. And then you think about the policy things they've talked about in financial services, they're generally much more second order, but crypto, which we think could be a nice tailwind for us if it comes with the good disclosure regime, shareholder engagement, how they engage with proxy firms, and that could be a proxy advisory firm, just to be very clear on that. And that could be a nice tailwind for us and things like pass-through voting and then further digitization of communications. So those are much more second order effects, not clear where the administration will get to those things given all the other priorities, but things that we're certainly working on to make them to be opportunities for us. If I think specifically about the SEC, first of all, and I said it on the call, we think Paul Atkins is a very good choice for SEC. He's very knowledgeable. He's -- I've been there before. And it brings that -- it's a pretty complex area and a sort of a technocratic approach, and he has that. It will definitely be more on the free market side of things. But we've been very successful in working with SECs from both parties. And it is when there is change, we are here to help our clients address change. And so -- we're very much looking forward to working with them. The -- Mark Uyeda, who is the acting Chair and Hester Peirce, the other Republican Commissioner both used to work for Paul at various times in their past history. So those 3 work really well together. We actually had Mark Uyeda came and spoke to, we had an advisory committee of fund leaders that advises on our business, and he came and spoke to that last week. And he was great, and there's nothing he said that would -- should cause alarm to anyone in this room.

All right. Terrific. Well, on that point, I think we're out of time here. So thank you very much, and there will be a breakout session downstairs.

Great. Thank you.