Broadridge Financial Solutions, Inc. ($BR)

I think we're going live. Okay. Here we go. Well, thanks, everyone, for joining us. I'm happy you made it back from lunch. I know we're the second one post-lunch, but it always is appreciated when you can have a good meal and come back. My name is Dan Perlin. I head up the fintech practice here at RBC. And I'm delighted to continue to have great companies in the second half of the day. Broadridge is who we're hosting now. And from the company, we have Doug DeSchutter, who is the President of Investor Communications Solutions, which is arguably probably the most talked about part of the business these days. And so I thought what would be great to kick it all off at a very high level, Doug, is just to talk about what ICS does in the context of Broadridge overall.

Great. Dan, thanks for having us. Thanks for having me here. It's great to be here today and hopefully answer any questions that you have. This is -- look, there's a lot of change going on right now. Change has traditionally been very good for Broadridge. And because we've been in a unique position to be able to drive innovation and scale for our clients and the industry as a whole. When you think about Broadridge, so Broadridge is a leading technology and financial infrastructure provider to financial services. We have $4.8 billion in LTM recurring revenue. And we operate at the intersection of capital markets, wealth managers, asset managers, corporate issuers. ICS is about 60% of that. at the core of ICS is a pretty extensive industry network that's taken a long time to build and develop. And with that industry network, we connect 200 million-plus retail accounts to 1,000-plus banks and brokers and with access to virtually every public company, mutual fund, ETF across the world. We have leveraged that position within ICS in that network position and connectivity to think about what adjacent opportunities are and problems that we can solve for our clients. And so we built a whole portfolio of like very attractive adjacent business opportunities off of that, some of which are really accelerating very well right now, like digital, like shareholder engagement, like institutional governance and data and analytics and perhaps to talk about a couple of those later.

Yes, for sure. So let's kind of stick with the core for now and maybe talk about the basics and really the mechanics of what you do in the regulatory communications side and the value that you're bringing to clients, so we can kind of level set what the ultimate debates are around this, but we got to understand the roots of what you do first.

Right. So step one is let's actually just explain what we do.

Yes. Let's make sure we understand that. I know you really...

Sometimes ICS can seem confusing to folks. So at the core of ICS are distributions to U.S. retail investors. The vast majority of revenues in ICS and kind of the core regulatory business piece is tied to distributions to U.S. retail investors. And so the question is, where are those investors sitting? 95% of those shares are sitting with a bank or a broker, 5% of those shares are held direct with an issuer. And if it's being held with a bank or broker, that's called the beneficial model. If it's held directly with an issuer, that's called the registered model or the direct model. Now the register -- that mix, that 95% to 5% has been growing on the 95% over time because the ultimate value proposition for the end investor in that account is -- and we'll probably get to things like tokenization later on in blockchain. But the value proposition for them isn't what's the underlying record-keeping system. The value proposition for them is they have one place to buy and trade and security type that they have. They get access to product. They have tax optimization and portfolio planning and estate planning. They get advice from their adviser as an example. And so that value proposition coming from a bank or an adviser or broker adviser has been very strong. So the beneficial component has been growing. Now those brokers have a responsibility to send things like proxies and disclosures to their clients in the shares in the funds that they're invested in. And back in the day, there was a kind of a network problem there because every broker had to communicate with every issuer, and that was a many-to-many problem. And what we've been able to solve is take that many to many communication problem and do a many to one to many. So we simplify that process. And we've taken a huge amount of cost out of that coordination process and create a lot of value and efficiency for all the industry participants as a result. There's a lot of value in what we do in terms of that core regulatory model for that beneficial model. I would say we do still serve the registered side, 80% of the Fortune 500 still uses us for proxy voting for the registered side of their business. So we still have very strong relationships with issuers even on the registered side.

Okay. So let's dive right into it then. Let's talk about how the network that you've built is structured today, the buzz around digital assets, tokenized securities, like these are the things that we are constantly trying to answer questions for investors around. And so what is the impact as you see it as those models potentially evolve?

Okay. That's a pretty -- there's a lot of pieces -- so we'll have to kind of go back and forth here a little bit, but I think it's really kind of important to understand. Let me get to the answer first, which is it's going to be a tailwind for us in ICS. At the end of the day, this is going to create more security types, more disclosure requirements and more complexity in the system and for issuers to be able to manage. By the way, all those things are good for us. And we have technology and we have solutions for those things. I should say they're good for us, just that we have the ability to provide technology and solutions to be able to provide efficiency around all of those different things. [ Edings ] and I just came from, we cohosted a fantastic tokenization conference this morning along with the Financial Times. And there is a lot of buzz and excitement around this, and we certainly share that. I think you have to break it down into just understanding, just like you said, like help us understand beneficial versus retail. Let me just break down for you a little bit in terms of tokenization and digital assets and things like that. The first topic is, well, what digital assets are really in scope for ICS. Let me tell you what it's not. It's not things like Bitcoin and crypto and stablecoin and those things. Those are going to be considered commodities, cash. They're not securities, and they've never been in scope for ICS nor will they be in scope going forward. So just kind of put those aside for a second when you're just trying to understand the ICS model. What will be in scope are tokenized securities. And it's really important to understand what the SEC has said about tokenized securities. And the very first statement that they've repeated consistently and they're adamant about is that a tokenized security is still a security. The underlying recordkeeping system isirrelevant. A tokenized security is still a security. So what that means is that federal securities laws still apply to tokenize securities in the very same way that they will a traditional securities and that brokers will have to provide things like proxy voting and disclosure and all the things that they do for traditional securities for tokenized securities. So just to understand that -- if there's a SEC commissioner [ Ester Pers ], who made a statement, tokenized securities actually aren't that special. They're securities. They have a different record-keeping system, but they're still securities. You didn't get a question, which is not as relevant, but you may be kind of wondering about it, so I'll answer it, which is, well, does it matter who tokenizes these securities? And the answer is no. From our perspective, you could have a [ tokenized ] these securities -- they could be tokenized by a third party. It could be DTCC as a large pilot. We're partnering with them around certain components of that. It could be exchanges like NASDAQ or NYSE, it could be a broker that's tokenizing these things. But at the end of the day, they're just different institutions tokenizing the security and tokenized crop is still going to be a security. With all that as background, it's going to get back to this question of, well, where are they going to be held. And there are -- there are three -- I think there are three kind of examples of where these are going to be really positive, all tailwinds and one is going to be, I think, a modest tailwind. So let me go into all of these. I think they're all good for us. First of all, the biggest use case around tokens assets and tokenized securities clearly is institutional markets. It's going to be entities that have the knowledge and the know-how that are thinking about how they do instantaneous settlement between the cash lag and securities. And they want to play with perpetual futures call perps, -- they have a massive amount of leverage. They talked about this morning, it's almost 500 x leverage in some of these things, which in the held outside of the United States for reasons like that. But you just think about institutional markets, how that's going to play. I think there's a big opportunity there. And you've seen what we're doing in institutional markets as well. We are the leader in tokenizing -- in tokenizing assets with DLR we're doing $365 billion a day, $7 trillion a month. And that's a real win for us. So there's a whole institutional angle here, which will be a big win for us. That's on the GTO side. the most money we make in ICS is on the retail side -- so put checkup is a positive, but it's not kind of an ICS thing. The next area, there's a real opportunity is getting global retail investors access to U.S. securities where they don't today. And I think that will be -- it's hard to size what that potential could be. That will be a tailwind for us. We are actually working with a company called Ondo. They're on Alpaca platform. So they're a correspondent on Alpaca's platform. And they are the leading in third-party synthetic tokens. They're -- you won't see them in the U.S. anytime soon, frankly, and they won't even be part of the innovation exemption from the SEC. But they're kind of a first step in thinking about how foreign global retail investors can get access to the equivalent of a U.S. security, and we're providing governance and voting to them. And in fact, they had a speaker at a conference today, and he made a specific point to call out that one of the great things that they're doing around proxy voting is because it gives credibility and credence to these securities for investors, which I thought was really positive. So number one is institutional. Number two is global retail investors. Number three is, I think, a very niche market, even a subsegment of like Neo Digital investors who not only want to kind of invest all digital, but the value of owning something on the blockchain actually means something to them. So they'll hold these in self-custody wallets where they're responsible for the keys. They'll be willing to take the risk to be able to do that. And there's value to them in just owning it kind of natively in a wallet where they own the keys. All those things will kind of be a net positive. The thing you come back to is the core of the U.S. retail market for us. And if this asset class is going to have interest in demand, it's going to have to come from that 95% of the shares is held at banks and brokers. And that's again where we're just really well positioned. We're providing proxy voting and disclosure for them already. And from the broker's perspective, they have a lot of existing infrastructure, we can talk about it in a little bit, but we will continue to provide proxy loading and disclosure for them going forward. On this piece on this last piece, Citibank put out a report recently they made an estimate that 3% of the total equity market could be tokenized by 2030. So 3% is Citibank's estimate. And they had a low case and a base case in a high case, 3% was their mid case. That's in 3 years. I'll just do simple math and say, well, say it's 1% a year for 3 years, if that comes through. Stock record growth on an annual basis for us has averaged 11% a year for the last decade. So just put it in the context of we're 11% a year on average. There's a potential for 1% a year for the next 3 years if there's demand, and it kind of takes off. And then even of that 1%, I think, a fair amount of that will be net new with that really niche persona on people that actually want to hold this stuff directly, these things directly. But the vast majority of those would be held through banks and brokers. And so it will give us a bit of a tailwind on stock record growth, just like ETFs have done, just like fractional shares have done, just like managed accounts and low commission and no commission trading and all these things. They're just all these innovations over time that continue to lead towards more involvement in equity markets by retail investors and ultimately position growth for Broadridge, and we'll be there to provide the services for it.

Yes. What do you say to people that are, I would say, like the proxy and disclosure business can just be done in kind of smart contract forms by the issuer and therefore, they're just going to go around you guys entirely. Like how does that, again, working through the structure of the framework that you provided for us? Like how does that not occur? Why would that not occur?

Well, there's -- let's go back to the structure we just talked about, which is the vast majority of these are held through a brokerage firm in an adviser relationship. Let's talk about the broker business model. One of the primary components of the brokerage business model is providing privacy as to the underlying client. They do not disclose who owns these securities to the rest of the world. So -- and privacy is a topic called NOBO/OBO. It is a cornerstone of the broker business model. So that's number one. And they are very particular about who communicates to their clients and what they communicate with. So the idea that they would give up privacy and that they would allow others to communicate directly, I would say, it's not going to happen. And the second thing is -- so that's a business model reason. And the second reason is really more just like the technical realities of it. whether it's RBC or [ Schwab ] or Morgan Stanley, it doesn't matter, you're not going to be supporting a bring your own digital wallet to [ our ] adviser anything okay? That's not going to happen. Brokers are going to set up their own infrastructure to be able to house and custody these. They will -- they'll follow -- there's a pretty complicated web of, I think, wallet topography in there. At the end of the day, these are going to be large cold custodial wallets that look a lot like omnibus wallets or omnibus accounts of what they have today. So even from a technical perspective, there's actually no way to deliver it straight through a smart contract. So I just -- I don't see any view or any way as to how you would actually do that directly in something that sits in a brokerage relationship. The one small kind of market where you could do that is that individual that wants to download a MetaMask self-custody wallet and do it themselves. And we provide wallet infrastructure and proxy voting to be able to do that. Galaxy came out with the very first digital native proxy campaign that just closed last month. We were the proxy vote provider. So it was tokenized by Superstate. We're the proxy provider, use proxyvote.com, which is the main proxy voting engine that we use across all registered and beneficial. There's actually a pretty good video of that on our LinkedIn site if you want to see it, but it's just kind of going through proxyvote.com. And just remember, like if it's going through a smart contract, you could see how that would be quite easy for a dividend or for a stock split or something like that, that's just purely mathematical. Proxy voting is a full multimedia experience where you have to actually make a return value. So you actually have to display the proxy, you have to source all the information. It's much more -- there's a lot more involved than decades in building proxyvote.com. So I don't see that being replicated.

Okay. So I know that the NYSE and NASDAQ in terms of tokenization proposals are kind of a little bit different directionally. Maybe you can talk to what you're seeing in that regard as a regulatory framework from what you guys can work from?

Well, I don't know if they're all that different. I think what they're saying is they are going to support issuers that want to do digitally native tokens. And I think that would be a good thing. Again, the question is going to come back to not where are they tokenized. The question is going to come back to how are you going to own them and where are they going to be held. And again, if you're going to hold them in a brokerage account, the -- we're going to provide the same service tomorrow, just like we do today. And if you do get to 3% adoption at some point, you could imagine a scenario where, let's say, in your RBC account, you've got 30 securities that are traditional and now you've got tokenized security sitting in there as well. RBC is not going to say, well, we're going to do everything one way for all the traditional stuff, but we're going to change the model. We're going to do different for this stuff. It's -- we already provide proxy voting for tokenized securities. So the answer is we're going to provide proxy voting and disclosure for all 31 security types. and also through existing audits and controls and reports that we do already for RBC and for other brokerage firms.

So maybe talk about some of the products that you have today. You talked about Galaxy, Ondo, like maybe expounding upon what you're viewing the product road map to be in order to be supportive of whatever model ultimately comes to...

Yes. I mean the product road map is going to be -- well, look, ultimately, at the end of the day, regardless of how they're tokenized or where they're held, we're going to have products and solutions to be able to make that more efficient and to support that activity.

And that's been a hallmark of this company for a long.

It's been a hallmark of our company. We will I think for the existing intermediaries and brokers, I think they're looking for like, so how can you support this in a lot of the existing infrastructure that's going to be very important. So on the wealth management side, what we're talking to brokers about is they don't want to build a whole new set of infrastructure and have dual infrastructure running for an indefinite period of time because there's no view that this all goes -- depending -- if you talk to somebody who's on the sell side that actually runs the infrastructure, there's no view that this is all changing in the next short period of time. So they don't want to run these dual reporting structures. So they're asking us, can you integrate this into our books and records, put this into your cost basis engine, put this into your tax engine, put this into customer statements, make sure that you're doing proxy and disclosure. So basically, Broadridge, can you solve all this for us? And our answer is yes. And we're already building the technology to be able to do that. We've actually built out a very significant component of that technology stack. So that's on the wealth management side. I shared with you what we're doing on the capital market side with BLR and we continue to extend that, and we're a market leader in that. And even on the registered side, this will create more complexity for issuers because having different security types that they have to vote, and we'll provide solutions for them to be able to manage that complexity.

Okay. Let's pivot a little bit and just talk about what the SEC is looking at now in terms of digital default options and what that looks like from an investor delivery perspective and what, if any, ramifications that might have for the business?

Well, if I can just step back a little bit, the SEC agenda broadly is something we are super aligned with. I very much agree, and we're investing heavily to help make that happen. So you get into things like -- so digital assets. Let's talk about the top three initiatives. Digital assets. We just talked about that. Make IPOs great again, okay? SpaceX, OpenAI, I don't think any of those things are bad for anybody in this room. I think we're all aligned with that. You get into -- there's proxy adviser reform, and we're helping on that with technology solutions. So maybe talk a little bit more in a bit. And then you get beyond those three, you also get to the topic of digital default. And for us, I've been responsible for digital transformation at Broadridge for the last 15 years. This is -- bless you. This is not something new that we're working on. We've been getting ready for this for a long time. 90% of the regulatory communications today are already digital, 90%. And we've been investing in next-generation tools for statements like our wealth and focus platform, which is getting terrific traction in the market. It's a big part of our pipeline. So I think for us, we could see a potential -- look, the proposed rule hasn't come out from the SEC yet. I think there could be a likely impact in FY '29, if I had to guess is when the impact starts. I think when it does, it will be broadly neutral from a recurring revenue and adjusted EPS perspective. But I think when we come out of that, because of all the investments we've been making over the last 15 years, we're going to end up on the other side of this with a higher growth because we're going to have as much of a drag on the print and a higher-margin business. So we've been investing to make this happen for decades, and we're ready for it.

Awesome. Well, let's talk about all the things you're doing really in and around shareholder engagement. I mean there's pass-through voting, there's standing voting, there's custom policy engine. So there's a lot of really great things that you guys are working on. Maybe talk about that as we pivot away from some of the tokenized stuff.

The -- so there's a lot going on in the governance space generally. You have passive managers that have built up these really large stakes and now they've got a little bit of pressure because they have such influence. And so we've got a solution called pass-through voting, which allows them to pass the voting, the expression of the voting and interest to the underlying retail shareholder. And so we were doing 9 funds 3 years ago, and now we're doing 900 funds. And we're doing, I think, $8 trillion to $9 trillion in terms of assets, in terms of pass-through voting. So that's one thing we're doing. There is for the institutional asset managers, they -- we talked about proxy reform. So they're very much looking to figure out how can they reduce their reliance on third-party advisers. So we have something -- we have an AI native custom policy voting engine, which effectively allows them to create, here's the rules that they would like to have. It's our custom policy. We source all the data. We use AI to compare their policy against all the agendas and the information and the data, and there's like 900 data points. And then that automatically creates a vote recommendation, a vote for them that they can get them apply. There are no third-party advisers or consultants involved in it. It's purely a technology solution for the institutional asset manager. So we're creating a lot of efficiency there. And then there's a topic called shareholder engagement, which is getting retail investors much more engaged. Exxon just did the first voter choice program on retail, wildly successful. We have a really good backlog of other issuers that are interested in that. And I think super exciting is the fund community is really interested in doing something similar, which I think would be fantastic. And we're partnering with the ICI and with SIFMA generally to figure out ways that we can make that happen.

That's great. So in the last 30 seconds or so that we have, what kind of closing thoughts would you have around the business that you're running in terms of how should we think about the growth algorithm going forward, all of these changes, many of which have opportunities and tailwinds for you? What should you leave with investors on that?

ICS is a fantastic business. We have -- we built up a network over decades. There's a lot of complexity and intricacy in that, but it's created an enormous amount of value for industry participants. We continue to innovate and lead in that space. And because of that, we continue to benefit from the industry growing more broadly. And again, because of that position, we built up a whole portfolio of growth initiatives that come off of that, shareholder engagement, pass-through voting, digital communications, data and analytics or retirement business. There's a whole portfolio around those. And it's driving really strong growth for Broadridge. I just can reference what we said at the end of April, so I don't get dings in trouble over here, in trouble. But we think we'll be at or above 7% recurring revenue growth, 10% to 12% adjusted EPS growth. We're executing and operating really, really well here. And I think the future looks great because we've been delivering those results at the same time that we're actively investing meaningfully in kind of the platforms and the technology of the future, which is all the things that we just talked about. So we've got, I think, a great opportunity ahead of us.

Yes. It sounds like it, Doug. Thank you so much for your time. Really appreciate it. it's great stuff.

Thank you.