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

Going to get started. Thank you, everybody, for joining us this morning, and welcome to the conference. This is your first presentation. I'm Patrick O'Shaughnessy, the Capital Markets technology analyst here at Raymond James. And presenting this morning for our fireside chat, we have Tim Gokey, CEO of Broadridge Financial. So Tim, welcome back.

Great. Thank you for having me here. And great to help open things up.

So to get started, for those in the room who might be less familiar with Broadridge, can you please provide a brief overview of the company and what you think makes it unique?

Yes. Thank you. And I'm really excited to be here today because I think it is a time of tremendous change, obviously, as we look around. And we think that we are uniquely positioned to help drive innovation at scale in our part of the industry. So for those of you less familiar, we sit at the intersection of capital markets, wealth management, asset management and public companies. And we scaled quite a bit over the past 15 years, and we've done that really by growing and innovating at the intersection of key long-term trends like the acceleration of trading and the democratization of investing. And we think some of the changes we're seeing right now are just going to continue to accelerate those trends, really putting us at a good place. If you think about just some of the positions we have, we process about $15 trillion in trades every day. We are -- and of that, about $400 billion are tokenized, which is a really leading position in that space. Our governance platform managed about 1.5 billion positions over across about 150 million accounts, and we serve 28 of the 29 G-SIBs. So it's a strong position really at the center of things. And at a time of change, it's a really interesting place to be. It gives us high connectivity across a real group of complex functions. So I can go on. I can talk about acceleration of trading and can talk about digitization and democratization. I think maybe we should get to your questions, just to give us time. I see you sort of looking at the clock there and getting a little nervous.

No, we have plenty to get through, and we will certainly touch on some of those.

One thing I will -- I won't come back to it, though. It just all of that creates a -- it rides on the financial model, just for everyone to hear, that is investment grade 5% to 7% organic revenue growth, 7% to 9% recurring revenue growth with a little bit of tuck-in M&A there with the leverage of being a technology company, call it, 8% to 12% over the long term in terms of earnings growth, 10% in the midpoint, buy back a point of shares, pay a nice dividend. We can support really low double-digit or low teens return to shareholders over a long period. And our guidance this year is right in the same place, 9% to 12%, including mid-single-digit growth in this quarter and in the next quarter.

Got it. Great. Great place to start from. So the conference is obviously just getting underway, but I'm sure the #1 topic is going to be the threat of disruption from AI. If I gave a blank check to your best salesperson, a subject matter expert and a great software engineer to build an AI-native competitor to Broadridge, why would they still fail to disrupt Broadridge?

Yes.Well, look, I'm really -- I'm glad you asked that question because we do think that AI is going to be a tailwind for Broadridge. We're pretty differentiated from pure SaaS players that sort of take your data and do some workflow and sort of UI on top of that. We are a regulated market infrastructure provider that moves money, move securities and moves votes. And for the vast majority of what we do is not just code. It is a network and it's a combination of many capabilities at scale. We compete on connectivity, on event coverage, on operational resilience and on certified compliance with regulatory change. So in governance, we directly collect events from thousands of public companies, and we connect them to over 100 million investors. We combine the physical and the digital at scale, and we monitor and implement regulatory change. So even if you had the code with all of the nuances of all of the edge cases over all the years across all the clients, you need the other capabilities to be at scale. On the GTO side, we're providing mission-critical services back to the $15 trillion a day and where one error would be many, many times our annual fees. And as I said, our platform are engineered to anticipate all the edge cases that can come up and that can create those kinds of errors. And the platform is surrounded by the people and the expertise to operate it daily because as straight to as everything is, it's not always as straight through as you think with all the various providers that are providing inputs to that as well as when there's industry and regulatory change. So -- and finally, if someone were to make a change, it's not just our platform. It's all the things that go around it. All the other systems, all the testing that goes into that. So the ROI of change is tough to make that case. And -- but then conversely, we think that the opportunity, once you have everything in place that we have and all the connectivity, the opportunity to build on top of that and use AI to attack the $160 billion of unvended space just in the categories where we already serve is a real positive for us.

Got you. So I think that's a good setup for my next question, which is what are some of the examples of how Broadridge is embedding AI within its products and services to increase your competitive moat as well as extract operational efficiencies?

Yes. We are -- I think about this in really in 3 buckets. There's a first bucket, which is just bringing AI to everything that we do already. And we're doing that with natural language search, with embedding self-service help and with all of those things under our existing platforms. We think that's going to be table stakes in the future. The second bucket is where we have unique data or a unique position where we think we'd create new services. Examples there would be in asset management, our global demand model, which is predictive given economic scenario, it will tell you in what countries, what asset classes, what wrappers. That's been very successful. I think we sold on the order of 20 clients so far, that. Another example would be the custom policy engine, where we're helping people with proxy voting. We just announced that. That wouldn't have been possible without AI. And then the last opportunity is using agentic AI to be more efficient ourselves in our operations, in our coding to go faster, do more. And great examples there are what we're doing around managed services, what we're doing on client onboarding and other areas where we can really see the acceleration.

I want to go back to something you said about there's a network aspect to Broadridge. Can you flesh that out a little bit and kind of how it applies across your key businesses?

Yes. We are connected to thousands of brokers, about 1,000 brokers, tens of millions of clients, 30,000 funds and, call it, 10,000 corporate issuers. And when you think about the economics of when there are many to many connections, having an intermediary that is a trusted intermediary in the middle of that is something that reduces cost for all the parties involved. And that's a core element of what we do. And so that's a really key piece. And when you think about the governance side, the way we simplify all that for all the parties is something that is, the more people you have on the network, the more effective it is. On the GTO side, I think the scale is also about interoperability. It's about change. It's about scale. And again, it comes back to all the edge cases I talked about and how we drive that.

So I think people in this room may have read a story a couple of weeks ago about Goldman Sachs using AI to handle things such as trade exceptions. Are you hearing anything from your clients about them leveraging AI to handle tasks that Broadridge historically handled for them?

Yes. So broadly, no, but we are talking to clients about AI, obviously, and we think it's an opportunity. When -- remember the majority of what we do is really market infrastructure. What Goldman announced a couple of weeks ago was really around the operations that ride on top of that. And it was in finance, but there are some in the trading space. And so now they don't happen to be a client for our market infrastructure services. But if they were, then their AI would be basically riding on top of our platform. All that said, operations do prevent great use cases for agentic AI, and we're doing that ourselves, applying it at scale. We do have a managed services business that helps clients with operations. It's a pretty small part of our business, about $100 million in revenues. But we've seen about a 20% improvement in productivity over the past year. We have line of sight on another 20%. That's something we're sharing with clients, and we're using that to take more business. And we really think here, this is a perfect example of neutralization, which is it makes more sense for us to invest in the AI to make that efficient than for each of our clients to try to invest in themselves. So we don't see the Gold announcement as a risk to AI. It doesn't really affect the 98% of what we do. And the part that it does affect, we think, is an opportunity.

Got you. So you mentioned your clients letting you invest as opposed to them investing. But I think a lot of broker dealers and other clients are just kind of trying to figure out how to invest in this new AI world. Does that create any headwinds for Broadridge in terms of your sales pipeline and particularly on the GTO side of things?

Yes. It's not what we're hearing today from clients. And who knows what the future will bring. But what we've actually seen in the first half of the year was an increase in new opportunity generation relative to last year. So our new opportunity generation was up about 20% in the first 6 months compared to a year ago. And our pipeline is more robust now than it was a year ago at this time relative to how much we have to get done. The thing that I really like is that, that growth has been driven in the areas we're investing in areas like tokenization, shareholder engagement, digital communications. And so we like the fact we're investing and then we're seeing clients come to us for that. So we feel good about it. Obviously, we did $89 million in the first half, which is a little bit less than the first half last year. So we have a lot of wood to chop in the second half. That's not unusual given the seasonality of our business. And -- but really the strength of the pipeline and the way it aligns with what we're doing is what gave us the confidence in our last call to reaffirm our guidance for the year.

Got it. Appreciate that. I want to turn now to tokenization, another current topic of note. Starting with your ICS segment, there's a notion that tokenized equities could potentially disrupt the current model where broker-dealer intermediaries play a critical role in investor communications. Why are you confident that tokens won't change this role?

Yes. Again, I think this is one that we see as an opportunity, not a risk for our governance business. And I think that view is really supported as we talk to clients and regulators and exchanges and all the folks around the ecosystem. So just a few things. I think, first, it's not clear when or what pace tokenization will come to equities. There are a lot of market observers that think that really this makes more sense in fixed income and collateral and may eventually get to equities, but it may not. And 23x5 trading may sort of suck up the demand. So we'll see about that. But second, tokenization is going to create more complexity for some of the actors. And what we said to our clients and to regulators is that we are going to solve that complexity for them so that the governance aspects won't become a barrier to growth. And so we're supporting it. Because third, we think when it comes as a tailwind for Broadridge. Over time, position growth for us has always been driven by innovation and by the next thing. And so we see tokenization as one of those next things and that as it draws more investors into U.S. equities, whether that's global investors or investors that are on the sideline now, that's going to help us with physician growth. So now as high level. Let me just break this down because it is an important topic. The SEC has given guidance that tokenized securities have -- our securities and have all the same protections of regular securities. And the disruption case really assumes sort of large-scale disintermediation of wealth managers and broker-dealers. And we just don't see that happening. So what we see happening is that the vast majority of tokenized equities when it comes, are going to be purchased through the broker-dealers and wealth manager that are in business today. And those are all in digital exchanges. And those are all our clients. And they're going to have the same obligations that they do today, and we're going to be able to help them with that. Then people talk about, well, issuers will have direct access to clients' wallets. And again, we don't think that's something that's going to happen. Wealth managers are investing literally hundreds of millions of dollars to acquire clients, and they're very protective about those clients and not letting that through. And then finally, when you think about it from the issuer side, it creates a lot of additional complexity. So today, I have my registered shares. I have my beneficial shares. In the future, on top of that, I could have tokenized shares that could be tokenized in multiple models on multiple Layer 1 networks. So today, 80% of the Fortune 500 engages us to help them with their election process, and this just creates more value, more value for them.

Got it. Very thorough answer. And then on the GTO side of your business, particularly in post-trade processing, would instant settlement on the blockchain change the nature of how Broadridge serves its clients?

No. The -- it changes -- it could change the settlement part of it. But when you think about all the downstream activities that need to happen, they're still going to happen, and they're not going to be able to be compressed into some smart contract. It's going to go through, as we've said, traditional broker-dealers, they continue to have all those obligations. They are our clients today. And whether it's tax, margin, class actions, think about all the asset servicing things that is going to need to take place. Now what clients are concerned about is that as this begins to come, the most likely scenario is a very long transition period of where you have digital assets and tokenized assets and regular assets and you're trying to operate all of those. And so people are very concerned about building up a parallel infrastructure where I have to do it one way, but also do it the other way. And so what we're doing is enabling our existing core processing engines to handle all the asset servicing for digital assets so that you can maybe take advantage of quicker settlement, but still run things through your existing infrastructure. And we think that's going to be a very powerful value proposition.

And then I think building off of that, so as with AI, Broadridge is not just sitting on his hands regarding tokenization, and you kind of spoke about one of your initiatives. But what are some of the other key things that you guys are doing right now in the tokenized space?

Yes. So I talked about our distributed ledger repo platform quite a bit. And that is something we see is very rapidly growing. We're continuing to sign major new logos every quarter. And we have a really nice road map of that, bringing that to real time, bring it to new asset classes, bring it to tokenized deposits. And so we think that's going to be something that's really nice. And I also just talked about how on the asset servicing side, allowing people who are using our platform today to flow their digital assets to those platforms. That is enabled already. We have -- well, already "call it this quarter", we're rolling that out. And then on the governance side, we have -- we're talking to all of our clients and to the digital exchanges. We'll be fully enabled for unchanged governance by the end of this calendar year. And again, we think we don't know how quickly that will come, but we have been very clear that we will be an enabler of that.

Got it. Another current events item is the SEC's recent proposal to default investor communications to electronic, which comes on the heels of a similar process at FINRA. Broadridge submitted a comment letter to FINRA that was in favor of default electronic communications. Why is this Broadridge's position? And do you worry at all that your preference management fee could be at risk because of this change?

Yes, it is. That's a great question. So thank you. I think you know that we have been a leader in digital communications for a long time. It's been an area that we've invested in significantly. And that's why regulatory communications are currently at nearly 90% digital. But when you step back and think about why we have been a market leader and continue to be a market leader. It's really around 3 things. It's, first of all, knowing that the system works and being able to prove that it's 99.49% accurate and having all that certified by third parties. Secondly, it's continuing to drive innovation and showing change and whether that's tailored shareholder reports or universal proxy or pick your change that we've driven over the past few years. And finally, is that the cost continues to come down and become more efficient. And the cost of sending a communication, all in is down 75% since 2010. So we've really driven a lot there. And this is in the current situation. So we think there's no question that done the right way. Digital delivery can be very engaging for investors and will be sort of at the next level of driving cost, and that's something we've always been doing for our clients.

And to the point that you said that 90% of communications are already electronic. If the default were to switch to electronic, I assume that means that there's just not going to be much financial impact one way or the other?

Yes. I think -- and you know, Patrick, your other question, you asked about the preference management fees. So let me just mention that because I realized I didn't address that because it's an important part of your question, which is if it's all digital, then what happens with preference management fee. And so for those -- this is really in the weeds, but when you look at sort of our total fees that we get, there's a chunk that's sort of a core fee and then there's a chunk that's a preference management fee for digital communications. And that -- I think that whole fee is, I would just call it a bit of a misnomer because when you look at how we get paid, we only get paid today for the communication. When you look at what we do, it's much, much broader than that. We are connected to every public company. We collect the events from all the public companies. We're connected to every investor. We collect their preferences for how they want to receive communications. Then when there's an event, we pulled the positions from all of our broker-dealer clients. We communicate to the end investors in the way that they've chosen to be communicated to. We take back their votes and process them and tabulate them. We provide a 365, 24/7 view of that for the brokers, for the issuers, so they can see what's going on. We tabulate all the results, reconcile them, show the end-to-end that it's worked. And then we provide one reconciled bill on behalf of the industry. And so all of that activity right now is all charged. But really, it shouldn't be about sending a communication. It should be about -- it should be like an annual -- what 3 months ago, I would have called a SaaS fee, but I won't call it that today, but an annual fee around per position for covering all those activities. So all that work, whether it's digital or physical, it's 98% the same. And so we feel good about that. Meanwhile, you just asked about a new question, which was how will this affect -- if it does go electronic, when communications go electronic as they will, how will that affect our revenue. And I think -- and you pointed out, look, regulatory communications were already 90% digital. So how much will this affect our revenue? And I think you're right that the impact will be relatively small. Now what we do think is it's going to make us a more valuable company with higher margins and more growth, and I'll come back to where that is. So as I said, we've been investing to make this happen for years. And if you go back to our last Investor Day, we shared our strategy for our new digital platform at that time to really help drive things away from print towards digital. We made a lot of progress with that. And digital default, I would call that sort of the next step on that journey. Now it's important to note that the timing of this is pretty uncertain. There has been talk on the hill. There's actually a bill passed in the House, sort of stalled some place in the Senate. The SEC has said that they're going to be working on this. And so we think it is quite possible that in the next -- before the summer that there could be movement on this and the beginning of a process. If the process begins in that time frame, then it would -- and these can often be very protected processes, as you know, but we think this one could play out more quickly. And in 2 to 3 years, we could be there. That would affect a small percent. I'm going to say, a few percent of our revenue, sort of if you look at the direct impact, we think that there are directly linked products that would create demand for that would really make the revenue impact and the profit impact negligible. So just if you think about again, for those that follow us closely, and go back a few years of something called tailored shareholder reports that were introduced. And we talked about at the time that, that was going to be a $30 million to $40 million sort of revenue impact on us. And then by the time we got the implementation, we had created new products that more than offset that. And in the end, the impact was 0, and we grew our earnings 11% that year. So that's really the way we think about this playing out.

Yes. If I remember correctly, tailored shareholder reports actually led the record closed sales activity for you guys that year. Do you worry at all about a world where nearly 100% of communications are electronic that would reduce your regulatory communications mode by giving Broadridge's -- or given Broadridge's scale and expertise of handling physical proxies and interims, could a digital native competitor maybe come up? And I think this probably ties back into some of your earlier comments.

Yes, it definitely does. So we're -- we don't think that's going to happen really for 2 reasons. So first off, even when you move to digital default, that doesn't mean that physical goes away 100%. There are a lot of investors that really prefer the physical side and that when you look at the people getting paper today about not everyone wants it, but like 80% of people say, well, they want to continue. Now they have to default into it. And with defaults, they along. So there will be a relatively small percent of paper left. But a small percent of a lot is still hundreds of millions of communications that someone has to deal with and the integration of all of that. Second, it comes back to the breadth of the value proposition that I just talked about. The event collection, just if you look at sort of standard industry feeds, they miss a lot of events. When we've done benchmarking about what we're doing relative to sort of publicly available information, you'd be a regulatory risk if you just went with the publicly available information. So that combination of all the things that we do that come together is a really powerful value proposition and clients engage us for that. That's why our Net Promoter Scores are in the 70s, both with brokers and with issuers. And so we think it's just going to be the next step in what has been a long evolution.

And then another interesting development is that Broadridge's role in proxy voting is changing, whether that's pass-through voting or issuer engagement or displacing proxy advisers. Why are these opportunities all emerging right now? And how would you frame the potential upside for Broadridge?

Yes. I think right now is there has been frustration building for many years over a set of problems, a set of problems for passive asset managers as they've grown in this very significant share of voting that they control, a set of problems for active asset managers around sort of lack of choice in the proxy adviser space and a set of frustrations among corporate issuers around how they communicate to their end investors and engage their end investors who engage at a lower rate than they'd like. And so then what you're seeing, I talked about this being a very pro-innovation administration. So you're seeing a bit of an unlock against all those things that have been building frustrations for a while. And so seeing that, we have been looking for a while and how do we help each of those. So with passive asset managers, we have been driving pass-through voting for a number of years. This year, we will do -- last year, we did, I think 400 funds with about $2 trillion in assets. This year, we'll do about 600 funds with $4 trillion in assets, so it continues to really grow. This year, we've introduced this custom policy engine, as I mentioned, they really give asset managers a clean set of data and then allow them to apply their own rules to it, be able to do that much earlier in the cycle and really -- and also provide visibility into that data to the corporate issuers to really solve some of the pain points there. And then withstanding voting instructions, allowing public companies to directly engage with their shareholders and allow them to default because defaults are popular, default into voting with management. So we think those are powerful solutions. I think I said on the last call that collectively, they could add something like a point of growth to our governance business in each of the next several years. And -- but even beyond what that does is it really embeds us strategically with our clients in a way that is much deeper than we really like.

Perfect. I see we have about a minute left. So maybe a good place to end the conversation. And this probably will bring it back a little bit higher level, but what are some of the key messages that you want to make sure that people walk away with today?

Well, first of all, I want to thank you and Raymond James for having us and for allowing me to speak to some of the core concerns that investors have and why there are opportunities. And then I would just want to leave people with 3 messages. So first of all, we are doing very well today. We've given strong guidance for the remainder of the year in terms of growing earnings 9% to 12%. I don't see any change in that. So we really like that where we are today. Second, our growth is being driven by long-term trends like democratization of investing and the acceleration of trading that are only being pushed further by the changes that we're seeing happen in the environment. And so we think the changes we're seeing in the environment are really beneficial to us. And so that really brings me to third, which is we've been investing really to create the growth platforms for the future, whether that is tokenization and trading, whether it's all the things I talked about in terms of new ways for shareholders to engage, whether it's bringing our technology platforms on to a true platform that will enable our clients to drive AI and driving it ourselves. Those things are all, we think, really setting us up really well for the future. We've run this company. As you know, with a very long-term view, we view every client as a 99-year client and that they really look to us to help them navigate periods of change. And when we invest on their behalf, it allows them to do things even faster and that's why I always talk about and help our industry drive innovation at scale.

All right. Perfect. With that, we are out of time, but we'll have a breakout session downstairs. Thank you, everybody, for joining us.