Broadridge Financial Solutions, Inc. ($BR)

Friends, the afternoon sessions. I am delighted to be here with me today, Tim Gokey, Chief Executive Officer of Broadridge.

Great. Thank you very much for having us.

So Tim, why don't we start with an overview of Broadridge for those less familiar with your story?

Yes. And I'm not sure that with this group, maybe people are more familiar. But it's an exciting time to be talking about it because there is actually so much change going on with a Pro innovation regulatory agenda with all the technology change. And one of the things that we really do is neutralize the cost and effort of change. And so it's a real opportunity for us to drive innovation at scale for our industry. We're a technology company, just under $5 billion recurring revenue the last 12 months. If you look at our sort of segment focus, it's all in financial services, capital markets, asset management, wealth management, funds also serving certain corporate issuers. And the core thing that we do is taking functions that are difficult that are critical, often that are regulated, but that lots of people have to do the same thing and help mutualize that to be able to do it better and more cost effectively. Same thing with change. When there's industry-level change we can really help people address that by doing it once on behalf of many clients. So those -- that's sort of some of the fundamental drivers. We really look at change is something that is good for us. So underneath that, 3 sort of core businesses, our governance our ICS business, that's our largest business, just under $3 billion in recurring revenue. And there, we really -- the core part of that is providing voting for Boards of Directors elections for public companies, actually serving the broker-dealer who have to send and take back materials and tabulate the votes for that. And around that, a series of other communications businesses. The second franchise is capital markets, which is $1.2 billion. It is -- there, we have front office platforms, back-office platforms in largely in cash securities globally, opportunity to help simplify both in the front and the back. And then the third business is wealth management. It's about a $700 million business focused on North America, Canada and U.S. again, bringing platforms there. And with that really sort of deeply embedded technology piece that we are, we are deeply embedded with operations with technology, with complex functions. It gives us a lot of subject matter expertise in complex areas, which helps us identify the next thing and sort of help our clients the way we grow is by doing the next thing for satisfied clients. That has led to a pretty predictable revenue and earnings model. What we target is 5% to 7% organic growth with tuck-in M&A, call it 7% to 9% with the advantage of being a technology company, call it, 8% to 12% earnings, buyback a point of shares, pay a 2% dividend provides sort of low teens total return to shareholders over long periods. If you look at our last 10 years, we've exceeded those numbers over the past 10 years. We give 3-year guidance, and we've met that guidance on each last 5, 3-year period, if you include this one, which we've announced, we will the -- we'll have a current trial end in June. And so we really like the business model. We like the client base. We like this moment when there's a lot of change, even though it's creating a bit of uncertainty in the environment and is providing a really which environment for us.

That's a great overview, Tim. What do you see as the 3 biggest areas of opportunity for the company over the coming years? And why is Broadridge positioned to win in those areas?

Yes. I think there are opportunities in each of our franchises in governance, in capital markets and in wealth and you have really good visibility on those near term. And then longer term, they're really supported by the investments that we're making in AI and tokenization, which is -- that's that moment of change because we're seeing a lot of people grappling with how that's going to affect their business model, and we're helping them with that. So let me just run through those a little bit. In governance, the mega trend that has been driving our business for a long time is, we call it the broad category of democratization, which is sort of more products for more investors at lower cost. And that has played out from the advent of mutual funds to ETFs to managed accounts to free trading to direct indexing. And that has tended to create more positions we get paid per position. And so the more positions there are, the more work we have to do, and that has been a multi-decade trend. And we see tokenization as just sort of the next wave of that. So in that governance, the opportunities there, is that position growth driven, as I just said, by that innovation. There's an opportunity inside there relative to shareholder engagement, which I think we might talk more about, which is how do companies engage with their shareholders and asset managers with their shareholders. And then longer term, we think tokenization is a real hard to quantify, but nice tailwind for us in the governance business. In capital markets, the opportunities around simplifying in the front office where people tend to have lots of platforms that they've built up by asset class, by region. And so they end up with 20 different OMS's and how do we simplify that into a global multi-asset class piece of technology. Same thing in the back end and connecting front to back. And then on the -- and also, we're doing a lot of innovation in the capital market space with digital ledger technology, and I'm sure we'll talk about that ad nauseam, but we're doing $365 billion a day of tokenization, which is bigger than the entire crypto market. And we're by far the leader in that space. And then -- and we move to wealth management. There, we have a really good -- we're the market leader in Canada. We're sort of more of a challenger and [indiscernible] in the U.S. but a good position. And the challenge for clients there is there's so much change going on. They're trying to incorporate all of that. So that creates real opportunities for us to help them adapt to that change. And our platform is also has the advantage of being very modular, but all linked together. So it gives them a lot of flexibility in terms of how they implement change, and that's a nice driver for us. So multiple opportunities in our franchises, supported by it, and I'm sure we'll talk more about tokenization and AI, but we made a number of announcements just in the past few weeks about how we can serve tokenized equities and governance across all the different models that there are against how we will use genic AI to help our clients be more effective and also about platforms to tokenize -- okay, tokenized equities and other securities. So a number of those announcements sort of not to the future in terms of where the growth will come in the future.

So let's talk about tokenization and AI, and we'll start with AI as an opportunity for you. So you recently announced your agentic AI platform. You highlighted up to 30% operational cost reduction for clients. How is AI turning into an opportunity for you?

Yes. So at the -- this is the announcement we made a couple of weeks ago at the [indiscernible] Securities Industry Associations, the biggest operations and technology conference. And we have been investing for a few years to take all the applications that we have and turn them into a coherent platform. we defined a common data model across our applications, com and data layer, a set of APIs. And that, as it turns out, is the perfect basis for agenetic AI because it gives you -- when you get into AI, one of the real challenges is, I do it here. And now they do on that, but now the data is different over here and they're not reconciled with each other, and it creates a lot of -- to having a reconciled set of data where the same thing means the same thing irrespective of what you're doing is super powerful. We have a -- for about 65 clients, we do the technology, but we also do the operations on top of that. We have a team of about 1,000 people doing that. And we've been, over the past couple of years, been deploying agentic AI to those 1,000 professionals. We've seen about 25% productivity improvement so far, and we have clear line of sight to the next 25%. So that announcement was really around AI partnership, which is give us your operations, we will give you 25%, 30% upfront savings. And then additional savings as we continue to do more AI in the future. And it's really a play of everyone is looking at where they can apply agentic and operations, a very logical place to do it, but for each person to reinvent that for themselves when we can invest more than any of them, it makes more sense for us to do it. So we offer 2 ways either -- we'll do the work and we'll guarantee the savings, or we'll give you the technology, which you can do on a SaaS basis, and you can create the savings yourself. That's what that announcement was about. That, I think, is a really nice revenue opportunity, and it really shows off the power of the platform that we've created. But as on revenue, I want to just mention, in addition, we're launching new products. So I talked about shareholder engagement. We've created a custom policy engine that allows asset managers to -- instead of using a proxy adviser to leverage technology to use their own policies. That's totally built on AI introduced this year. It's going to do -- it's going to serve about $800 billion in assets this year. And similarly, our global demand model, also an asset management that's gone from 0 to a couple of dozen clients in about 18 months, both built on AI. So there's a lot of opportunity for us to -- we already serve almost everyone, but to do the next thing for them and to -- and if I think of our market as said, $220 billion market that clients spend doing stuff that we do. 64 of that is vended. So doing the next thing in the non-vented space is a nice growth opportunity as well.

So let's now talk about the flip side of AI, the broader Saicalipse narrative and kind of this view that AI also lowers the barriers to entry. How does that impact Broadridge?

Yes. I was having dinner a couple of weeks ago with the CTO of one of our largest clients. And he was really talking about how he just sees us in a different category than his sort of "SaaS" vendors. He sees us as market infrastructure as moving billions of dollars, incorporating a strong regulatory component that he has to certify his regulators. So we just view this in a very different light. Now when you think about applying AI, he thinks it much more about, I love that platform. I love the APIs. I want to apply my AI on top of that. But the idea of replacing that is something that he's -- I was having dinner with him is because he's about to do more. And how can -- how can we partner together for us to do the things that are sort of the core market connectivity, the network they're bringing in all the different -- it's not just a piece of software on their own data, it's connecting them to everyone else. And you think across our businesses, that was the technology business I just talked about. Think about the governance business, where we're connecting every public company to every fund, every asset manager, every individual investor, 1,000 broker dealers that network piece is something that it's pretty hard for people to replicate. So I think the -- we are not really seeing or hearing from our clients the [indiscernible]. Again, we're not a seat-based model either. We're sort of an outcomes-based model. So it's -- we never had that threat of, oh, they're going to have to people, therefore, they need less of our services.

So let's also talk about productivity a little bit more. How are you thinking about AI as a productivity driver. Is this something that you -- that could meaningfully impact your margin profile over time?

Yes. I mean, I think every U.S. business at this point is looking across all of their functions and saying, how can I make a big difference with AI. And any company that's not doing that is probably going to be really challenged in the future. When I look at us, we are -- we certainly have high AI adoption amongst our associates 90% plus. We have seen real productivity in areas like that managed services offering that I just said, where we've gotten 25% so far, and we can see where the next 25% is going to come from. We are definitely seeing it in software development. Take an example of testing. We are significantly improving our testing in terms of coverage and automation, amount of regression, which is improving quality, but with many fewer people. And it's going into the other parts of software as well. And we -- that's obviously a big part of what we do is development. So we'll be systematically going through all of our functions. I think it is too early to say for us or for anyone else, how does that end up getting reallocated between investment, between clients and investors, and sort of what are the margin implications of that. I know right now, it gives us as we just look directly at -- we're at the end of our fiscal year. So we're doing our planning for next year right now. When we look directly at next year, we have a lot of investments around this change that we think is really good investment on behalf of our shareholders, but we feel very comfortable being able to maintain the same sort of rate of increase of margin that we have historically still be able to fund these investments because we feel we have a lot of gas in the tank with AI.

So physician growth has been one of the key drivers for Broadridge for a long time. What gives you confidence that these underlying drivers remain durable?

Yes. I think the main thing is the sort of track record of innovation in financial services is the thing that has driven position growth sort of for multiple decades. And I talked about it before, but we've gone from -- all the way from fixed commissions to a fixed emissions to decimalization to -- and you just think about the arc of the past 50 years. And now as we look forward, right now, we're in the middle of a huge amount of growth driven by direct indexing and the next phase will be tokenization. So I think there's that continued arc. We have seen -- so right now, we've been having position growth in the teams, which is -- typically, it's been sort of high single digits would be sort of a more normalized amount, the revenue position growth because this is a little bit of our direct indexing very small positions don't count. And so -- but the direct has been like still double digit. So that's probably a little bit above what the historic trend has been, but the historic trend have been very stable. And even in periods of severe downturn, like during the global financial crisis, physician growth, it went to 0 for a while, but it never went negative. It's never gone backwards. So I think all those things and you look just the underlying dynamics of how many investor accounts are there, how many physicians for account are there, and you do that multiplication to physician growth.

I want to talk about tokenization and shareholder engagement. But before we get there, there's one more question that came in on AI that I want to ask. So can you and your customers remain LLM agnostic after running with a given LLM for a couple of years, can someone really be able to switch. How do you pull the learning in memory?

Yes. So we have built our -- as have many companies built a platform that is sort of between the layer of our product teams and the LLM providers. And so that connects into all of the LLMs and it has a compliance layer in it, and it keeps track of the agents and it does a lot of the stuff so that you can switch from one to another. I think it is -- and that's worked very well so far. As we get into agentic, there's a matter of like where you put that context layer is really important. So where do you keep the context to keep private to keep that to you versus in the LLM. I think one of the things that people are seeing is when you get into using AI for operations, there are some design principles around keeping the agents really small and simple having lots of very simple agents versus fewer, bigger, more complex agents. The bigger agents bring up tokens at a geometrically higher rate and they're much less replaceable. If you have simple agents use the demos model possible that will do the task. It dramatically decreases the token cost, but also the flexibility that we talked about. So will there be some lock in? I can't say they won't be, but I think there are measures that we and others are taking to -- try to make those cost effective, but also as portable as possible.

Just one final question on AI before we move to other topics. How do you think about cyber resilience, right? This is kind of has been a big topic over the last couple of quarters?

I mean, man, is one that we're all spending time on. Certainly, all of our clients are spending real time on this. I think -- I hate to say it, I think it's sort of an advantage for scale players that are able to really take the steps that their clients expect. And we get 50-plus on-site audits per year from our clients. And that gives us sort of the opportunity to level up across all the things that are different clients, different clients see. And so I think they see us as at least we seek to have them see us as at least as good and, in many cases, better than themselves. There's such a focus on third-party risk right now amongst all of our clients. We're part of Glasswing and we're spending a lot of time right now on especially on how do we use the AI to accelerate the rate of remediation. The identification side, which is everything you read about in the papers it's important. But -- we and many others already have lots of known vulnerabilities. And the rate of those coming in is going to be a lot higher. So getting the automation around remediation is a big focus. And you can never feel fully protected on this topic, and you never should say that you are, but I do think in the end, it will be an advantage.

Great. I'm reflecting on some of the comments you made earlier, you talked about shareholder engagement as kind of a growing opportunity. Why is this becoming more important for you?

Yes. It's -- if you think about some topics that people have been wrestling with for a while and the solutions for those. So one topic that people investing with this, think about the rapid growth of passive asset managers and the amount of voting power that they're accumulating. They obviously want to continue growing, but they don't want to be in the cross buyers for having too much voting power. So they're very interested as one of the solutions for that to evolve the voting power back to the shareholders. And so that has engendered a whole set of technology around pass-through voting, which is enabling the end shareholder to indicate their preference. We started that with -- I guess 4 years ago, 8 funds, and then we did 100 funds. Last year, we did 400 funds. This year, doing 900 funds with $8 trillion AUM. It's involved in the passive voting -- passive voting. So that continues to grow. Another issue that people are concerned about is the power of the proxy advisers, and sort of the question of firms want to really show that they are independent. And so we've worked with a set of asset managers this year to create technology solution that would basically enable people to detach themselves from proxy advisers leverage technology with their own set of policies to come up with their own recommendations. And really, instead of getting recommendation sort of a week before the meeting, get all of the data and the ability to apply their own policies 6 weeks before the meeting, so they can run through and see it does something controversial. Now they have time to actually reserve whereas before they didn't have time to research it. So that solution will be serving asset managers this year that we're in right now with about $800 million -- $800 billion, excuse me, under management, and it has a nice pipeline behind. And then the last solution is around standing instructions. This is really to help public companies with -- who would like to access their retail shareholders more. And as much as we try to do to make it convenient, retail shareholders vote at a lower rate. And this is -- and that we've all grown used to defaults in other parts of our life. So this is an opportunity for shareholders to sign up to say, I want to get all the materials, but unless I tell you differently, I want about with management. And that has been -- our lead client with that has been Exxon. They've had really good results. They just had their meeting. They had really good results in it. And that's causing a whole lineup of other clients that want to explore that. So collectively, each of those are solving a little bit different pain point. And collectively, we think that could be a multi-hundred million dollar business for us over time. And we said on our earnings call that we think it will add sort of a point to our growth of our governance business over the next few years.

And speaking of earnings call, you lowered closed sales guidance this year. Walk us through what happened and why you remain confident in the broader pipeline over what time?

Yes. Well, our sales in Q3 were definitely a disappointment to us. And at the same time, we don't think that it is -- they're an indicator of some sort of secular change. As you sort of unpack that, each year, we have a sort of a different mix of larger and smaller deals. Our ticket size ranges from $10,000 to $50 million. So it's a pretty wide range. And this year, we had a few larger deals in there that the timing of which could really make a difference. And I think we just misjudged how quickly those were coming to fruition. None of them have gone away, but it's just happening more slowly and that caused us to be more cautious about the full year. I think if we step back sort of the second part of it is, what does that say about the future -- we feel really good about the demand situation. Our origination is up 25% compared to last year. Our pipeline is up over 20% compared to last year. And that pipeline is in origination is in areas where we are investing in digital communications and shareholder engagement. -- and wealth platform and all the areas where we think there's a need and where we're creating products, we're seeing pipeline. So I think -- we'll see how things develop, but we're not seeing anything that we think changes our ultimate growth algorithm.

Earlier in our conversation, you talked about 2 big topics, AI and tokenization. So -- let's talk about the second topic, tokenization. How will growth in digital assets and tokenization impact the broader financial services industry? And how does it impact your role within the industry?

Yes. I think we think tokenization is a real thing. We think it will affect the market structure over time. We think it will take time. and that there will, therefore, be a long period of hybrid infrastructure with digital distributed ledger products and sort of traditional products side by side. And that's sort of the base case that we're planning for. If you think about how that plays out across our different businesses, in our governance business, that is mostly about tokenized equities. The rate at which that happens, there's some uncertainty about that. We tend to think it's going to be a bit of a slow burn, and I'm sure we'll talk more about that. But we see that as upside as it happens. We're very well positioned across each of the models by which it could happen. -- and we think we'll create additional positions as it does, but slowly. We think the biggest opportunity is or at least no near-term opportunity is around capital markets. They're very tangible business case around moving, especially collateral movement, cloud mobility to tokenized solutions. And we're doing that today. We've been investing for the past 8 years. That's how we built our $365 billion day position in distributed ledger repo. And as we move that to real time, the benefits become even more tangible. There's a white paper out there that says cap firms can save up to in capital buffer with real time, which when you think about what that can do in ROE and therefore, trading volume, that's real upside. And then in Wealth Management, I think the first use cases will actually be around things like money market funds, alternatives and over time, tokenized equities, and we're providing platforms there. We announced about 4 weeks ago Canada, an end-to-end platform for our wealth management clients there. We're the market leader to be able to do crypto and other tokenized assets and feed it directly into the existing infrastructure so they don't have to have 2 parallel -- parallel infrastructure. We made a similar announcement 2 weeks ago at SIFMA for institutional securities in U.S. Again, people are very concerned about -- they don't know how quickly this will develop. They don't want to have 2 sort of separate infrastructures and have to bear the cost of that. And so the proposition of -- if you do it with us, you'll feed directly into the existing infrastructure you already have with us is very attractive. So all in all, I think we see this as a real change. We see it as something that's going to take a while to develop. There will be a long period of hybrid. But in the end, we see it as a nice upside.

Let's talk more about equities. How do you see the infrastructure evolving over time? What does that mean for proxy shareholder communications in Broadridge?

Yes. So I think a topic that people are trying to figure out is as and if tokenized equities develop, how will that impact specifically? And here, I think there are a few things that are important to keep in mind. First of all, the SEC has been very clear that a tokenized equity is [indiscernible] security and still needs to come with sort of all of the rights, the ownership rights of it being an equity. So that's an important sort of backdrop factor. I think another backdrop factor that I'll return to in a minute is where this gets held like who owns it and where they keep it is going to be a really important factor in this. Now as you look at tokenized equities, and how they could develop. There are multiple models. And the SEC has said, I'm not going to prejudge which model is right. I let the market decide. So there's a model where the issuer tokenizes the security. And that's an interesting one. There's been a lot of publicity about that. And as [indiscernible] was talking about it and the stuff in the press about it. This is 1 we like this model because we serve 80% of issuers today. And if you think about how shares happen today, there's sort of 2 models, there's registered shares that are directly on the books and records of the company and then they are beneficial shares that are held in street name, about 95% of shares are in street name, 5% are registered. And this issue, I think, is sort of envisioning growing that registered side a bit. We serve 80% of Fortune 500 companies for the registered shares, and we do it at economics that are better than what we do on the beneficial side. So I think some people that aren't as familiar with sort of how our business works, sort of COD, if there is some registered model that would be a negative for Broadridge, actually would be a positive for Broadridge. And we have -- there's been one company that's done it so far been [indiscernible] with us, Galaxy, and there's a video on the Internet. You can see people voting their Galaxy shares on chain right now and it works great. And so we'll see how that develops. I think the interesting thing about that model, though, is even if the issuer tokenizes it. There is still the question of, well, where is it going to be held. We think the most likely place is going to be held is at Morgan Stanley or Bank of America or Charles Swab. And if it's held there, then it looks very much like the second model like to talk about. So that was Model 1. Model 2 is where it's tokenized by sort of a third-party intermediary and in that case, it looks very much like today's beneficial model. And even if it's tokenized by the issuer, it is held up Morgan Stanley. Morgan Stanley is not going to give the issuer direct connectivity to the client. They're going to -- Morgan Sally wants to control the communications. And -- or any other broker, I don't want to specifically just call out, call them out. And they are already our clients. We're already providing this activity for them. So we see that as just a growth for us. And then there's the third model, which is synthetic, which is, again, is done by a third party. This is largely for non-U.S. investors, where you have a bunch of the securities, you mobilize them and you issue sort of a derivative that is -- whose value is based on the performance of those underlying securities. The market leader in that is Ando. They have very high share of that. We've announced -- they're doing proxy with us. And so really across each of the 3 models, we're already leading. We'll see which one plays out over time. And as I say, it's a little bit of an edge case, we think about, well, what's the -- where is the demand going to come from to buy these. There's a clear reason why Robin Houdan Coinbase and others want to have them become popular, where the investors will come from and therefore, why the public companies will issue them is a bit interesting. I think the areas of demand we see would be existing coin holders who want to diversify into equities, which would make sense for icon base or someone they haven't those investors. If you look at how much AUM that is compared to the total of equities is our vanishingly small number. The other one that could be interesting is global investors and could it make it easier for global investors to bring in that could be a force of demand that would cause someone going public saving tile natively issued securities. And we'll just have to see how that develops. But we don't serve global investors today, so that does happen, and that's just another sort of tailwind for us. So long story short, but I wanted to get into details of it because it is sort of people feel uncertainty about it, is we think it's somewhat slow developing, irrespective of the model, we are investing to cover it, and we said told the SEC and our clients. We will cover whichever model there is. And as it develops, it's just going to be a source of new positions, which will be additional incremental tailwind to that sort of high single-digit position growth that we've been seeing for the past couple of decades.

You mentioned the SEC, I want to ask about the regulatory environment and initiatives more broadly. Is there anything on the horizon that meaningfully impacts the business on the regulatory side?

Yes. I think, if you think about what Chair Atkins main priorities are. And he -- if you listen to him, he's very consistent with it. Improving access to -- or creating a [indiscernible] framework for digital assets. It's helping public companies making IPOs great again, and it is improving access for investors to private assets. So those are the 3 big themes that he's talking about. So the digital asset side of things, I think we just talked about. There's been a little bit of noise back and forth the past sort of week about an innovation exemption that is going to come. And it is -- I think it's largely covered by what I just said. But it's been on again, off again, but it will come at some point and it will be for a period of time, it will be a little bit limited in nature, it will cover all 3 models. And I think it will make clear some of the protections that the SEC wants to see investors have. In Bucket 2 around making IPOs great again, one of the things in there is this concern about proxy advisers. And I think the work that we're doing around shareholder engagement that I mentioned feeds right into that. And that concern about proxy advisers is one of the things that's causing asset managers to have a lot of interest in our custom policy engine. So that's a good alignment. The other topic that's not exactly one of those 3, but is a real topic that the SEC is working on is digital communications. And as you know, today, the default communication is paper and then you can elect to receive things digitally. And we've been working for a long time to increase the digital proportion. Today, the proportion of communications that are digital and regulatory communications, it's over 90% and customer communications is closer to 50%, but we're really working on, can we switch the default to be digital and you easily quest paper. And we've been working with SIFMA and with ICI and other industry groups to work with the SEC to make that happen. I think we're getting close. We are expecting -- we would expect something from the SEC in the next few months. And then they will go out for comment. There will be comments, then there'll be rule-making, then there will be an implementation period. When you cycle through all of that, we're thinking this is probably our fiscal year '29 or after. And that will be something that we think is, again, a mild positive for us, with some moving parts in between. It would -- we have -- if you look at our top line revenue, which was talking about recurring revenue, really our top line revenue is a big chunk of pass-through revenue in there that's postage and paper and things like that, that are 0 to very low margin for us. So a lot of that will shrink as this transition happens. At the same time, there will be some substitution within our existing products. There's some amount of recurring revenue that would go away. And then there is other recurring revenue we think we'll gain with sort of very closely related products that will increase. And we think the net result of all of that is roughly a wash. But at the end of that, we'll have higher margins because of less distribution revenue. We'll be a little bit faster growing because the digital part of our business has been a faster growing business. It's been growing at double digits in the past 3 to 5 years. And so we really like this change. And we'll think we'll see something in the next couple of months on it.

You -- I want to follow up on some of your recent acquisitions. So you recently announced the acquisition of CQG, a provider of futures and options trade execution app management, how does this fit in within your broader capital market strategy?

Yes. CQG is a really nice private business based out in Denver. It's a global company, call it, revenues in the sort of $50 million to $60 million, and it's in the front office space focused on futures and focused on execution management. Our front office business, is -- has been historically more focused -- first of all, it's order management, so execution order management is very complementary to each other. And it is -- ours has been largely focused on cash securities, but we're in the midst of building a futures capability to compete with Fidessa. And we're partnering with a large global Tier 1 institution to build that futures capability. So what CQG brings is extremely complementary because they already have a strong position in futures. They have an EMS capability that will go with our [indiscernible] capability. And so it's a really a chocolate and peanut butter sort of situation, a very global company, a bunch of clients that -- some of which we already serve, some of which we don't serve, so a nice cross-sell opportunity as well. And so we're really, really pleased and it's a great management team. So we're happy to have onboard. And it's part of the theme that we've seen across our M&A portfolio over a long time, which is looking for really unique opportunities where we are really the best partner to help sell them sort of achieve their ambitions of growing their business, and we expect 3 things to come out of it.

Can you also -- switching gears a little bit, can you also help us understand the recurring revenue model. There has been some confusion about how to think about Broadridge's growth algorithm versus a software company.

Yes. It's -- that's a great question because coming back to that total revenue question, sort of the buckets of revenue that we have because that can be a little bit confusing for people. So when you look at our revenue, we have -- I said of the $7 billion of revenue we have using really round numbers, then there's like $2 billion of it that is the sort of pass-through distribution revenue, which is low to no margin. And then there's about $5 billion of it that is fee revenue, 95% of which is recurring. So when you hear me say 95% of our revenues are recurring. That's what I'm -- that's what I'm referring to. And then there's about 5% that is "event" which is not under a multiyear contract, it comes and goes often due to mutual fund elections. So we really focus on driving the growth in that recurring revenue, which is that sort of 95% of the fee revenue. That's really where the economics of our firm are based and it's very consistent. We have 98% revenue retention within that group. And this is where we talk about that 5% to 7% organic, and then 1 or 2 points of tuck-in M&A was just sort of the first year revenues that we acquired in subsequent years is the growth of those accounts. Thinking about that relative to a software company, the vast majority of our revenue is Software as a Service. So there is -- every once in a while, there's some license stuff in there that creates unfortunately, some quarterly noise, but mostly it's Software-as-a-Service is subscription-based, it's generally not based on seats. It's generally based on activity, how many trades do you do? How many accounts do you have? And it's a great business model. It's very high free cash flow, 100% plus. And we see that sort of long-term compounding, which isn't exactly as we were talking about before, in flavor right at this moment, but we see that long-term compounding as really attractive proposition. And because that 7% to 9% recurring revenue growth turns into 8% to 12% earnings growth, buyback a point of shares, pay 2% dividend. You have low teens total return to shareholders for a long time without sort of stretching the model in any way.

And speaking of shareholder returns, how are you thinking about the trade-off between buybacks and M&A?

Yes. So our capital allocation has been very consistent over time, we call it balanced capital allocation. We want to be an investment-grade company. We're going to make all the investments that make sense for our core business. We do pay a dividend, about a 40% payout ratio, so that goes up each year. It's risen double digits in 19 of the past 20 years, if anyone is asking. And -- 18 last 19 years, pardon me, because I -- we will be 20 next year. But then after that, that leaves sort of a bucket of money. And we do this very bottom-up. We look for attractive accretive M&A like CQG. And if we find those opportunities with a hurdle rate of 20% IRR, sometimes high teens depending on the property, then we'll go for that. And that's been a really nice source of growth for us, really nice for us to strategically becoming more important to our clients. We track every transaction, we've done 40-some transactions in the 15 years that I've been here. Those are running unlevered at about 18%, 19% IRR. So really good returns to shareholders on that. But if we don't find something, then we do share buybacks and not because of a top-down allocation but purely bottom-up, if you look back over history, it's been about 50-50 that we've done between share buybacks and M&A -- and that does alter a little bit bending on sort of what are market prices of these assets. When they're higher. We're more less likely to be able to find those returns and more likely to do see buyback and vice versa. It's an interesting one when I look right now because many of those asset prices are depressed. And so there are some really good buying opportunities. And then at the same time, I haven't in the past, but right now, I do have a sheet that has sort of hear the things that we're looking at. Here's our revenue, here's the earnings, here's the revenue growth, here's the earnings growth, what multiple are they trading at? And then right next to what Broadridge looks like. And right now, we look pretty attractive. So it's -- we just have to keep that in mind when we think about that balance.

Tim, we talked about a lot of the business fundamentals, but the stock has lagged this year. What do you think investors are missing? Which of those concerns are overblown in your view.

Yes. I think that We, like many other names have suffered as we talked about, just in a reallocation of putting money to the hyperscalers and the comes going to come from. So we've been caught up in that. I think there is a there's concern about, well, how AI play into things and some companies will be advantaged and some will be disadvantaged and how do I know which. So until I know which I'm a bit uncertain. And then I think a unique factor relative to us has been tokenization. And is there some bare case out there by which our very recurring model would be to stabilize. And so I think that's sort of the drivers of where we are -- where we are right now. I think, frankly, both those -- both AI and toganization, as I said, I think, are tailwinds, not headwinds. And I think that creates an opportunity for everyone in this room that believe that as we do and time will tell. I think the things that we plan to do are -- we have a great core business that's performing very well today. We're going to keep that going, especially around making sure that we deliver on sales and delivering revenue and continue to deliver on margin, all those sort of core basic things. I think then it's really making sure that we are making the investments in those future areas that will provide -- when we're talking about our Investor Day, not in December, but 3 years from December, that outlook looks is good, and that's making the investments in tokenization in digital communications, in AI, in shareholder engagement in our platform, all the things that we've talked about as really laying the groundwork for that future growth. And so only had performance today. And we have investments for tomorrow. I think we have a really nice package for investors. Obviously, our whole management team are big holders of our stock, and really thinking about the long-term future.

Tim we have 1 minute left. So my last question for you. As you head into your next 3-year cycle, what should investors expect for the next 3 year targets?

Look, I think it's very similar to what I just talked about. We don't see a lot that is changing that core growth algorithm. And so I would expect our next 3 years in terms of where the metrics come out from the core growth algorithm will be very similar to the last 3 years. Inside there, there's a lot of change in terms of introducing new technology and helping our clients make that transformation. When you then boil it out though into the numbers, the numbers look very similar. What's going on underneath. There will be a lot of innovation in there. And I think it's going to be a really exciting time for our industry.

Fantastic. Tim, thank you so much for your time today. I learned a lot.

Thank you.