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

This is Broadridge. Joining us is Doug DeSchutter. He's the Co-President, Investor Communication Solutions. So welcome. Thank you.

Thanks, Matt. Thanks for having us.

A lot of people in this room are probably using Broadridge technologies solutions and may not even know it. So can you give us a brief overview of the company in total and then the ICS unit.

Good. Yes. Happy to do so again. Thanks for having us today. And again, my name is Doug DeSchutter. Thanks for the time today. Just a bit of background on me, and then I'll get to Broadridge. I'm Co-President of our ICS division. I've been part of the Executive Committee, Broadridge since we spun off in 2007 from ADP. I've run a number of businesses, our post-sale business, our proxy business, our customer communications business. I've been responsible for our overall digital strategy at Broadridge as well. So it's a pleasure to be here today. So let's talk about Broadridge. In doing that, I'm going to talk about what we do. I'm going to talk about our growth plans a little bit, talk about our execution model, how that translates into numbers and return. So in terms of what we do, we are a leading provider of technology infrastructure to the financial services industry. We have roughly a $28 billion market cap. We have $4.5 billion a year in fee revenue. That $4.5 billion is against a $60 billion addressable market. So we think we have a long runway left. The clients that we serve are primarily in wealth management, asset management, capital markets and corporate issuers. We service 28 of the 29 globally systemic important banks around the world. We do that through providing technology, operations, governance and communications. The ICS business is a pretty unique network. And sometimes people think the ICS business is complicated to learn. But think about it as a network linking corporate issuers to investors through banks and through advisers. So think issuers, investors, banks and advisers and the network, and Broadridge is sitting in the middle of that. In the GTO business, we have a capital markets business. We have a wealth management business. Capital markets is providing front, middle and back-office systems for capital markets. And in the wealth business, we are a leading wealth provider in the industry. It's about a $600 million business there as well. Just in terms of what that translates to in terms of volumes, we processed almost $900 million equity positions last year. That translates into 7 billion communications that we send out to investors. We clear and settle $10 trillion a day in fixed income settlements. We do that on behalf of 20 of the 24 primary fixed income dealers in the United States, where we're the primary back office platform. And I think we're the primary back-office platform for 11 of the top 15 equity houses across North America. We -- and we're increasingly doing all these things as a platform company. We'll probably talk a little bit about some of the things we're doing in wealth management and some partnerships that we've done to create the next-generation wealth platforms. But increasingly, as a platform company, we're doing this across common data ontologies, common data mapping language, common APIs and just other ways to make it easier for businesses to do business with Broadridge. So that's who we are. In terms of our growth plans, we'll break it down into 3 different things. We'll talk about our governance franchise, where we are democratizing and digitizing governance. We have capital markets, where we're simplifying and innovating and trading in capital markets. And then, of course, we're modernizing wealth management. So let me talk about each of those in turn. In terms of our governance franchise, we've got a clear power around that business from the democratization of governance and investing. We'll probably talk about position growth in a little bit. But we've seen in FY '25, mid-teens position growth in equities and mid-single digits in terms of funds, and we're investing a lot to make those communications more engaging and more effective for shareholders. We are doing a lot with funds. We just rolled out a tailored shareholder report platform on behalf of the industry about a year ago, which is the next-generation disclosure for fund companies. We are helping asset managers and funds better engage with the underlying shareholders and passive funds through something called pass-through voting. We -- pass-through voting is an increasing trend. We supported 8 funds in that in '23. We had about 100 funds last year, probably 400 funds this year, and that continues to grow in terms of things we're doing. And in the customer communications space in ICS world, we have a huge effort around the print to digital migration, helping our clients digitize communications, investing in next-generation digital communications platforms around that as well. So that's around the democratization and digitization of governance. In the capital markets, which is about a $1 billion business, capital markets, again, it's about simplifying and innovating and trading. We have a class-leading global post-trade books and record system in the back office. We made a pretty meaningful acquisition in Europe. It got us into the front office with a global leading SaaS platform for front office trading capabilities in capital markets. And we're really doing a lot of innovation in capital markets right now. We're doing real things around AI. A lot of people are talking about AI and how they're experimenting, exploring. We're executing, we're implementing. It's driving real revenue for us. I think we just announced there's a press release this morning around BondGPT and the rollout of BondGPT. We have real platforms and real revenue around distributed ledger repo. And all these things are basically helping speed execution, lower execution costs, lower execution risk, a lot going on in capital markets. Wealth management for us is very much around modernizing wealth management. And back in the day, a wealth management back-office conversion was a huge big bang. And we've really extended to creating modular solutions that you can use as various different point solutions. And we talk about transforming on your own -- transforming on their own terms, transforming on your own terms. So the firms now can think about modernizing back office and back-office capabilities using these modular solutions that we've been spending the last 5 to 6 years investing in. So that's what we -- that's kind of our growth strategy. Just quickly, Matt -- I'm sorry, just about the execution like -- so what does that mean to you guys? And how does that translate around execution and returns. If I go back to the last 10 years for Broadridge, we've had 10% recurring revenue growth, 13% adjusted EPS growth. We've had dividends growing in line with earnings. I think we've had a double-digit dividend increase for 12 of the last 13 years, and over the last 10 years, a 19% TSR, total shareholder return. We're a pretty unique company in that we hold an Investor Day every 3 years. And when we do that, we provide 3-year guidance. And at the last Investor Day, we talked about that guidance, 5% to 8% organic revenue growth, 7% to 9% revenue growth in total with a point or 2 coming from M&A, 8% to 12% EPS growth. And we're just over halfway through that 3-year period, but we're on track to achieve that. Overall, I would say, as you think about Broadridge as an investment, we target low double-digit TSR returns with high defensiveness and low volatility. And we think that's relatively boring, and we think boring is exciting in that context. That's my line, and I'm sticking to it.

Okay. I want to drill down a little bit. You mentioned democratization. There's this theme of democratization of investing. You mentioned the position growth.

Yes.

Can you kind of unpack the trends that are underlying it maybe, first, what is it?

What is it? So what -- if you say democratization of investing, it took me a while ago to get those words out consistently. What does that mean? That means more people are transacting in the market, and that brings in more positions. And generally, our revenue trends are tied to the number of positions that we process. So this trend around democratization isn't new. Going back to -- I'm going way back for some of the old folks in the room, right? The end of fixed income are the fixed commissions and you get decimalization. And then there's a point where you could get a managed account if you had a $250,000 balance. And now the balance for managed accounts is like way down. And then you have the advent of app-based investing in digital brokers and robo advisers and you have model indexing and all these various different things, that where you see underlying broker-dealers that are basically innovating, thinking about new ways to make it effective for investors to participate and enter into the market. All those things are continue to drive position growth. So let's step back. What is position growth? Because this is a core driver for Broadridge in the ICS business. Position growth is if you own -- [ Edings ], if you own 100 shares of Amazon or you own 1,000 shares of Amazon, that's just one position. And generally speaking, we get paid for processing positions. Position growth over the last decade, Matt, has grown about high single digits. And the way to think about that is through 2 primary factors. There are more investors coming into the market that's been of that, call it, high single digit, that's been 2 to 4 of that -- 2 to 4 points of that high single digit. And then, of course, for folks in the market, more positions per investor. That's been worth about 5 to 7 points. And so on a combined basis, it's been high single-digit growth. Again, we talked about where we are in fiscal year '25 year-to-date, we've been at mid-teens in terms of equity position growth and mid-single digits in terms of fund growth. In terms of where I think that's going to -- is that trend going to continue? For me, I think positively, it will. There are certain demographic drivers behind that, more investors in the market. And then, of course, there's the innovation that our clients are doing around creating more product for investors to invest in, and that will continue to drive growth. And even things that where the regime has yet to been set in terms of digital assets or private assets and how those are going to come to the market and investors participate in that, all those things will need investor information and investor disclosure and ways for investors to engage with those underlying assets. And I think all those things will bode well for Broadridge. So the democratization of investing is all these things, and it's been a positive trend for us.

You talked about it, it impacting the ICS business. How do you think it's impacting the GTO business in terms of capital markets, wealth management?

Well, the GTO business, I go back to the strategy is we've been creating a multi-asset class on the front end. And of course, we have leading capabilities on post-trade on the back end. And innovation is a common theme around all those different things. So it's simplifying operations, creating scale and around the innovation. And that's -- I think Broadridge plays very well in that space. We're going back to being a $28 billion market cap company and $4.5 billion of revenue. I will -- at some point, I don't know if Dan is in here, like you guys always talk about your capital model because it's very interesting to investors. But the first thing in the pecking order for our capital allocation model is investing in attractive internal growth opportunities. And we have the balance sheet and the capacity to be able to do that. So we're innovating at scale. And whether it's things like BondGPT or OpsGPT and things like that, you're seeing that. And in the wealth markets, you're seeing the investments that we're making. We had a big partnership with a client going back over the last 5 years, where we created a next-generation wealth platform and investing in that. All these things are so that our end client can reduce the cost of operations, make it more effective and provide tools that they can continue to innovate. Innovation, everybody is innovating, and we fuel that innovation, and that's a good trend for us.

Okay. Can we drill down on the digitization that you also talked about. Is that simply replacing paper with digital communications? Or is it more involved?

A good question. Is it more involved? It's a lot more involved. So let's just talk about what digital is and what that means. The financial services industry has been doing digital for 25 years, and digital started off as e-mail. Where we are right now as a financial services industry, and you think about the things that we do and the communications that we provide. 85% to 90% of regulatory communications, so think of it as a proxy or an interim or prospectus, 85% to 90% of those are already suppressed digitally. So there's about 10% to 15% left in paper. In terms of the transactional communications, like the things that we do in the customer communications business, 50% of those have gone electronic and 50% of that is paper. We've been partnering with an industry for the last 25 years to drive that electronic -- to drive those rates up higher. And it's not something that we're concerned about in protecting the print business. It's just the opposite. We are actively investing and engaging to help our clients go from print to digital. And it's to drive -- yes, it is around cost savings, but it's also around client engagement and deeper engagement with clients in a digital way. And then when you think about digital, Matt, I'd ask you think about not just e-mail, that's the simplest way to think about it, but that's just a fraction of what it is. The digital ecosystem around digital communications ranges from data ingestion to composition to e-delivery to SMS texting, providing personalized [ ETMO ] microsites on behalf of clients, the preference management process around that, the [indiscernible] delivery process around that, archiving all those communications. There's a compliance layer that goes across all those different things. And there's a whole vertical stack of capabilities tied into digital, which is attractive for us. And so when you step back and say, Broadridge, you're still doing print, are you concerned about print going away and that driving digital? I think about just a mirror of that. I think about the 50% that's not yet digital. I think about that as the opportunity. And I'm not concerned about the print, the 50% of print that exists because of all the different things in that value stream around what is digital.

You mentioned the customer communications business. I mean, I think most people think of Broadridge, they think of the proxy business. So what is the customer communications that you're talking about?

Customer communications. So think of it -- so it's a $700 million business. It's about 85% print today and 15% digital. That digital business within there, I think, is a terrific business. So you can do the math on what 15% of $700 million is. And that business grew double digit in '23, double digit in '24. We're on track to be solidly double digit this year in '25. So it's a pretty meaningful business growing double digit because of all the different things that I just talked about. Our typical client could be a -- like somebody you're familiar with, think of a large financial services firm, that it is consumer-facing and has to send out really important communications like a customer statement or a trade confirm or a letter and various different disclosures and things like that. And what a firm like that would be looking to do is to essentially optimize that overall program across print, they really like to streamline and reduce the cost of providing print. And they want to create better digital experiences, so they have a better digital interaction with their clients. And they're looking for our help to help convert clients from print to a digital relationship. And I think that's a win-win. That's great for our clients. It's good for us because we're going from a low-growth, low-margin print business to a high-growth, high-margin digital business. So it's really -- there's a good synergy and a very good fit there. And so that's our typical client. For us, we are a leading omnichannel platform, which is pretty unique. There are -- if we were to get into competition, there are a number of folks out there doing purely print. There are some folks out there doing e-mail. There are some folks out there that can provide the technology stack to do archive. We have a fully integrated suite. We have a whole set of next-generation digital experiences tied to all those things, and we actively work and partner with our clients to drive print to digital. And I think it's a pretty unique value proposition for us. And that's why you're seeing this double-digit growth in the digital business underneath within customer communications growing pretty attractive over the last several years.

Okay. You've mentioned a couple of times recurring revenue, where you also report event-driven and distribution revenue. Can you kind of explain the differences? And how should investors sort of think about them and the drivers?

Recurring revenue is revenue under contract for multiple years. It's a pretty simple concept. Event-driven revenue is something which is not recurring. It may happen 1 year and not again for another few years. It may just be a onetime one-off or something like that. That's event-driven revenue. Examples of that could be a proxy contest when there's an activist. It could be a mutual fund complex having to go out to a Board vote because they have a new CEO. You actually saw that in '24 and '25. In '24, we had a Disney contest. It was pretty active and pretty public. And we -- of course, we were doing communications on behalf of Disney, but there were also 2 activists in there. And our job is to be the fair middleman in there, helping everybody do effective communications and to manage the overall process. So you saw a big event in '24 from Disney. This year, you've seen a large mutual fund complex. They have a new CEO, a CEO at the top of the house. And so they had a board-led complex to put them on the Board of the various different funds. On average, I think we range from $240 million to $260 million a year on average in terms of event-driven revenue, and that generally should grow in line with position growth, something like that. Distribution revenues, about $2 billion. Think of it as things like postage tied to physical distribution and physical output. It's just a pass-through. I would say long-term, the trend on that is that will dissipate as we continue to execute on digital strategy. I think in the medium term, we're still winning a lot of print business because we have such an effective digital strategy in customer communications and a lot of times the print comes with it. So we've got between position growth and customer communications, I'll call it, low single-digit growth in distribution revenue because of that, maybe add a couple of points on top because of post-trade increases. So I think in the medium term, you'll see mid-single-digit growth in distribution revenue. Over a long period of time, though, I would see that ceding away as we continue to drive more digital.

Okay. You mentioned medium term, maybe we will move a little more short term. What are you seeing in terms of demand? Does market volatility help hurt the business? Very open-ended question.

I think part of that side is sales. So let me just break that question down into maybe sales and then demand and what I'm personally seeing in the businesses that I lead and I'm involved in. In our Q3, we talked about sales. We've -- excluding our tailored shareholder report rollout last year, which is kind of a one-off, we've grown sales 9% year-over-year for Q3 and actually for year-to-date. And at that time, we were seeing some slowing in the pipeline for the full year just because the Q4 is such a big sales quarter for us. And so we ended up revising guidance, which is why we did that. But the demand in terms of solutions that we have tied to anything cost and operation efficiency related, every one of our clients need to get more efficient and save money. There's not a director of operations in the industry that doesn't have a goal every year to save money and take cost out. And we're a big mechanism and partner for them to be able to do that, and we continue to see very strong demand for those. In my particular business and the thing I was doing in areas that we're investing in heavily, data and analytics solutions, really strong demand. Our digital solutions like Wealth InFocus, very strong demand. Even some things where proxy reform and some of the things that are happening there, where you see -- there's a lot going on with proxy advisers right now. Now we're not a proxy adviser. We don't advise them the vote. We're just the -- we're the processor, making sure that it all happens the right way. But fund companies are looking for ways to reduce their reliance on proxy advisers, and we provide tools and technologies for them to be able to do that and the data and analytics for them to be able to do that. So we're seeing some really strong demand for a lot of things in the government space.

Thinking about position growth. If I think about the history, what does it tend to do when markets are up and then when markets are down? Is there any?

Well, it's interesting. It's since 2007, and we've had some pretty big swings in cycles since 2007, right? You think about for those of us, Broadridge, we spun off in 2007, right into the face of a hurricane, which was 2009. And then we've had some other periods, and we've had COVID and various different things. Since 2007, stock record growth and mutual fund growth on a combined basis has never been negative. So there's some pretty good -- pretty strong defensibility in there. And I think that's because the underlying drivers are still pretty strong around population and things like that. You tend to see -- there's probably a couple of effects. These are not statistically modeled out. So they're just kind of hypotheses. But when markets go down, you end up seeing people not getting eliminating, getting out of positions, which, by the way, would trigger tax in a lot of cases. But you see people looking at it as a buying opportunity and getting into more positions. So we saw that during COVID. And even during the most recent uncertainty, you've seen over the course of this year where our stock record growth has increased, and there is some uncertainty that got introduced right around January, February time frame tied to tariffs and things like that, and you still saw stock record growth increasing.

Let me switch gears and talk about the competition. I mean, your proxy business seems like it has a nice moat, but there are competitors. It seems like it's predominantly U.S. Can you compete internationally with the business?

Well, we -- well, a couple of things. So the regulatory business in ICS was about 45% of the revenues in ICS. We -- the fees around proxy process, the fees that a broker can charge an underlying issuer tied to proxy and related communications is actually set by the New Stock Exchange and the SEC. And those fees haven't changed in over a year -- over a decade. We have a large share in the beneficial market, which is the market for -- where shares are held through broker-dealers. It's about 8% of the market. And we've got competitors in the space like [ proxy trust ] and [ median ], and we have competitors in that space. We do have a global proxy business as well. And that's where individuals outside of the United States are holding shares in non-U.S. or non-Canadian businesses, and they're doing it through global custodians -- global brokers, global custodians. We're actually starting to see an increasing phenomena, where you've got global investors buying shares held directly in U.S. securities, and we think that's a new growth opportunity for us as well, actually.

I'm going to open it up for any questions from the audience. I still have plenty, but if there's any. No? Okay. I'll give you a chance in a little bit. You mentioned that the pricing is set by the SEC and the New York Stock Exchange. So how -- is regulation a tailwind or a headwind to the business?

Well, let's talk about regulation holistically. When I say the things that -- in the current administration, and the things that the current administration is really focused on are kind of top of the mind issues, tariffs, taxes, immigration, social issues. By and large, those don't impact our clients' business or Broadridge's business. We're service businesses. So those top-of-line things that the current administration is focused on really are not impacting us. I think the next set of potential priorities for the administration could be pretty positive for us. So digital assets. We -- the administration is looking to think about what the overall disclosure and investment regime is going to be for digital assets. I probably wouldn't surprise you to know that we've already come out with a disclosure solution for digital assets called ClearFi, which we're pretty excited about. So digital assets, I think, for us will be an opportunity. We touched briefly on proxy reform. That's a pretty hot topic for the SEC. And I think that's an opportunity for us because we -- when they talk about proxy reform, they're not talking about what we do, they're talking about proxy advisers and potential conflicts of interest and various different things. What that translates into is that our clients on the asset management side and the fund side are looking for different ways that they can get informed decision-making on how to vote their shares, and we have tools and technologies that enable them to do that. And we have tools and technologies that enable them to actually pass that vote back down to the underlying shareholder in a passive fund. So if you go in a passive fund and you've got retail shareholders out there, like all of us could be a retail shareholder, you can actually allow that underlying shareholder to indicate how they would prefer to have their votes presented and shared. And again, we're not processing 400 funds. So digital assets is an opportunity, proxy reform is an opportunity. And then, of course, digitization and continuing to drive digitization for the industry. And that's a win-win for the industry and a win-win for us.

What about ESG?

That's gotten more complicated over the last...

Exactly.

But that's -- if you look at it on a global basis, there are -- ESG continues to be an important topic for different countries and different regimes on a global basis in Europe and APAC and things like that. And so you almost have to answer that differently depending on where you are in the time and things like that. And in some countries and some pension funds overseas, that's why they're thinking about pass-through voting as a way to pass that through the underlying institutional shareholder and things like that. So it's more around the governance piece of it is where I focus on the opportunity, but that's -- we play very strongly in the governance part of that.

Okay. It's a bit of an unfair question because it's more of a broader question. How does Broadridge think about its capital allocation? You got steady business, growing nicely.

That's actually -- that's a layup for us. That's a layup for me to answer. So thank you for ending on that one. We -- look, we have a low capital-intensive business. We have a pretty strong -- we have very strong free cash flow. This year, we've given guidance of 95% -- I think 95% to 105% free cash flow conversion for this year. Again, I've been on the executive committee since 2007. We have a very clear pecking order in terms of how we think about money and investing. The first is we look to fund and prioritize attractive internal growth investment opportunities. That's the first thing. The second thing is continuing to provide a dividend that continues to grow in line with earnings. And that's a good way to give cash back to shareholders. The third is around executing attractive tuck-in M&A opportunities that support our growth strategy. And then after those 3, returning excess cash to shareholders through buybacks. So think about as internal investment, dividends, tuck-in M&A, supporting growth strategy and then buybacks. And we do all that in the context of maintaining an investment-grade credit rating. And so it's -- in any given year, that may change a little bit in terms of the relative mix, but over long cycles, it's been pretty consistent. It's worked out very well for us. And for those of you that have been around Broadridge long enough, we have a saying, we're stewards of investments in the money because after all, it's your money, and we really do believe that.

Excellent. Well, thank you very much. Appreciate it.

Good. Thanks, Matt.

Thank you.