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

All right. Good afternoon. This is Puneet from JPMorgan Payment Processing and IT Services team. Glad to have here with us Broadridge CEO, Mr. Tim Gokey. Welcome, Tim.

Thanks, Puneet.

The format of this presentation is going to be a fireside chat. I'll start with a few questions and please use Ask a Question blue button on your panel if you want to ask any questions. And so why don't we get started?

So Tim, for benefit of investors who might be new to Broadridge, can you quickly give an elevator pitch of the company and recap your third quarter results?

Absolutely. And I should have moved my setup here down actually to the fireplace, we can make it a true fireside chat. But for those that are newer to our story, Broadridge provides critical, non-differentiating industry solutions across financial services, capital markets, wealth and asset management. We already have tremendous scale within our existing businesses, including clearing and settling $10 trillion in income and equity trades every day, supporting proxy building for over 80% of outstanding shares in North America, 76 billion critical customer communications annually. We're really well positioned across our 3 franchises that we talked about in terms of governance, capital markets, wealth and investment management, to really benefit from long-term trends of digitization, of mutualization, the democratization of investing that we see evolving today and which, in many cases, are accelerating as a result of the pandemic. And against this backdrop, our clients are continuing to invest in next-generation technologies, and we are innovating and expanding our suite of capabilities, making us really a key partner as they navigate their business transformations. So we feel, Puneet, like we're better positioned ever to continue transforming our clients' businesses. Our total addressable market today, over $50 billion. When we compare that to our annual fee revenue of about $3.5 billion, you have a sense of why we think there's a significant opportunity ahead. Let me just quickly touch on each of those 3 franchise businesses, starting with governance, which we see as about a $19 billion addressable market. Again, comparing that to our fee revenues today of about $3 billion, a significant runway. We're beginning to really see some benefits of the recent investments as they translate into revenue drivers like Shareholder Rights Directive. We've been bidding, winning business across the EU by providing them a regulatory communications hug -- hub that's really linking millions of investors with hundreds of wealth managers. Our recent third quarter earnings call, we noted that it's driving with an 80% growth in that international proxy business. Also investing to enhance our virtual shareholder meeting capabilities, and that's paying off, almost 1,900 virtual shareholder meetings this proxy season, up by 1/3 versus last year. We're also benefiting from strong equity stock record growth and investing to scale our capabilities, which is enabling us to meet that higher demand. We're also very excited about the opportunity we see ahead for our capital markets business. I'm sure we'll talk about the recent acquisition we made of Itiviti, which we really think further enhances our capital markets franchise. It brings leading front office solutions, and combining that with our back office capabilities, really, we think, creates a compelling platform to serve a full front-to-back for our clients. It adds $6 billion addressable market, pushing our capital markets opportunity to over $20 billion, with some very significant cross-selling opportunities. Also excited by the progress we're making on our AI-enabled fixed income trading platform we call LTX completed this last quarter, a first-ever multi-buyer digital block trade, and excited about that. Our final franchise is wealth management, about a $12 billion addressable market. And here, we offer a differentiated set of components, including both front, middle and back office for wealth managers. We're continuing to progress on the broader platform we're building, which will really make part of a key partner for clients looking to digitally transform their wealth business. So I'm really excited about how we are positioned to build on the strong foundation we've established, really, with these multi-decade trends that are mentioned around digitization, mutualization, democratization. And we saw continued progress on that in our third quarter, which we reported just a few weeks ago. We delivered 8% increases in both revenues and adjusted operating income. And we talked a lot about the different things we're doing to execute on our strategic priorities. As I mentioned then, we are making significant investments and really from a position of strength to support long-term growth. And even with those investments, and even with modest dilution from activity this year, we raised our full year topline-adjusted EPS guidance. I also recognize how important capital allocation is to our investors and to long-term value creation. We're continuing to really -- really, I think we do that wisely by investing first in our business, by growing our dividend, by making value-enhancing acquisitions and returning excess capital to our shareholders. And that's an approach that we'll continue and has led, and we think will continue to lead to sustainable top quartile returns over any multiyear period. Finally, I would never fail to mention how confident I am in our long-term outlook and the 3-year objectives. We just announced these last December in our Investor Day, 7% to 9% recurring revenue growth, 8% to 12% adjusted EPS growth. And now we're continuing to scale against that. We continue to be -- feel pretty good about those objectives and even the higher end of those objectives. So overall, we have a very resilient business model. It has contributed to our recurring revenues nearly doubling since 2014, with it consistently expanding margins. And I think with these investments, the acquisition of Itiviti and all the other things we're doing, we're really in a position to sustain that momentum for the long run. So with that, I'll turn it back to you.

So that's a very well-rounded question. You answered almost everything I was going to ask.

Well, I touched on it.

Yes. So let me ask about stock record growth. You talked about being very strong. You expect continued strength in Q4. What would you attribute this strength to? Is it like some of it driven by cyclical factors like the stimulus funds ending up into equities somehow? Or most of it is driven by long-term structural changes, like you talked about 0 commission trading on your earnings call?

Yes. I think it's a combination of factors. And just as a reminder for the audience, in the third quarter, we recorded a stock record growth of 20%; in the fourth quarter, we said we're expecting to be 25%. These are numbers that we haven't seen since 19 -- I hate to say it, 1999. So that's pretty scary. But -- so look, it's part of a long-term trend towards democratization. As you know, we've seen stock record has been sort of high single digits -- mid- to high single digits over many years. And I think right now, we're seeing on top of that the 0 commission trading. And we tried to dissect this in terms of where is it coming from. So one thing we're really looking into deeply is how much of the frenzy around sort of the meme stocks, like GameStop and AMC and things like that. And what I say is, those did go crazy, but it's only 1 point out of the 20 that we saw in the third quarter. So it's not that. As we look across the different size stocks, it's both large-cap stocks, it's mid-cap stocks. As we look across the industry sectors, it was every industry sector led by tech, but all sectors doing well. When we look across our brokers, all the brokers are doing well. The wire houses are growing double digits. Now the online brokers are growing faster. And so I think there is just a lot of excitement in the market. There was a lot of growth, I think, led by online brokers, but we're seeing it everywhere. And it's an unusual time. Now I don't think we think this is something that is going to be really be growing, say, 20% in the future. And we talked about on the call, I would say, for next year, when you hear us talk about it, we'll be talking about sort of traditional sort of mid- to high single digits.

Got you. And would you say like some of it was driven by increase in number of shareholders versus like more positions in individual accounts? And also, like were there any underlying trends like more people invested through advisers versus doing it on their own? Like was there any change related to what it used to be in those lines?

It is -- we've tried to really decipher this. And it's hard to decipher. And I would just say it's both, because we did see some of the online brokers, particularly when Robinhood closed down investing for a while, we saw literally we had a client that opened multiple millions of accounts in a day as people moved over. So there were some things in that. But as we looked across this very broad base, we're seeing the very largest firms, the traditional adviser-based firms, also growing double digits. And so I think the main takeaway that we had is that it's broad-based.

Got you. And some of this noise around stock record growth really masks like the solid investments you're making in technology. So talk about like the investment focus within ICS. Which areas you are investing in for near-term growth as well as for servicing very long term, like 3 years, 5 years out growth? What's your investment focus within ICS?

Yes. It's a great question. And I'm glad you asked because as big a headline number as those SRG things are, when you look at the revenue growth, the majority of the revenue growth was from revenue from new sales. So position growth is nice, but the revenue from new sales was the biggest part. And those revenues really reflect the investments that we've already made in building out Shareholder Rights Directive solution suite, DSL, digital. Those things have all been really -- data have been really driving that growth. As we look at that sort of out 3 to 5 years and where we're investing now to ensure that growth continues, I would say digital communications, clearly a big investment area for us; data and analytics, really to serve the asset management industry, and that's been a really nicely growing business and continuing to grow nicely for us now, and we're investing further in it. Building out that -- our governance business in Europe across both Shareholder Rights Directive and fund communications, and that's both an organic story and M&A story. And so I think each -- and continue to build our business where we're serving corporate issuers in and around the annual meeting. I think each of those areas are really solid areas of investment for us. And each of those management teams would be really annoyed if I didn't talk about how great they're going to grow their business over the next few years. So I have to talk about that. But there's a lot of opportunity to go.

And your ICS growth, like the recurring revenue within ICS, can that growth kick into another gear as you continue to invest in technology and differentiate from your peers?

No. First of all, I think that these -- the investments that I just talked about are paying off in long-term growth. ICS has generated, as you know, revenue -- fee revenue in the sort of 6% CAGR over the past few years. It's going to be stronger than that this year. And I think when you look at that, it's a combination of some mature businesses that are -- they're not GDP, but they're sort of account growth plus position growth, and they're just sort of at solid sort of mid-single digit. And then there are newer businesses that are growing double digits. And the blend of that blends up a bit. The newer businesses aren't big enough to blend the whole thing up like that. That whole thing is not going to grow at double digits because there's this really good core that we all love of this mature sort of mid-single-digit business. And -- but it's a great business. I think across both ICS and GTO, one of the things that we really think about is the duration of our growth. And so it's a solid growth rate, but it also has very long duration. And so -- and we -- as you know, Puneet, we really constantly reinvest in the business so that we can continue to drive that growth in the future. And we're not looking to -- we could dial back the investment, dial up the margins. And 5 years from now, we have a very different company that didn't have that growth. So it's really continuing to reinvest in our client needs that I think is -- distinguishes what we're doing from some of our peers.

Okay. So you recently closed Itiviti, one of the large acquisitions. Talk about rationale for the deal, like how does it make your capital markets business more competitive?

Yes, absolutely. So first of all, just for those that aren't following us every day, Itiviti is a leading global provider of order management and trade execution technology and also connectivity solutions for financial institutions, about $250 million revenue, high-quality subscription-like revenues that are highly predictable and that are growing nicely. And 2 sort of main product areas, the biggest, about 60% of revenues is this front-office order execution. And it's really the core functionality that powers trading. And then the other one is, the other 40% is really anchored by FIX network services. FIX is a financial information exchange network. This is order routing that connects about 1,700 buy- and sell-side institutions. And those 2 things are just, on a stand-alone basis, are generating sort of high single-digit growth, and really from gaining share from in-house solutions, primarily. So when you come to why all that is such a strong fit with Broadridge, it really strengthens our capital markets franchise because our capital markets management, as you know, has a very leading position in the back office. And so when you take this front office and put them together, you really have the opportunity to take data from the back, make it available to the front to make smarter trading decisions, to eliminate reconciliations, especially in high-frequency world to have those flow together. So there's a big simplification opportunity for our clients, but there's also an opportunity through the data to make the product better. And so we think that can help grow share both in the front and grow share in the back. The other piece of this is the geographic side. So we're very strong in North America. That's a bit of a more nascent business for Itiviti, so we can really help them grow in North America. Similarly, they're very strong in EMEA. And we are -- we have a solid business in EMEA, but not as strong as they have, but they can help us grow there. Similarly, in asset classes, we're both strong in equities. They're very strong in exchange-traded derivatives and we have a more nascent offer. There, they can help us. We have very strong fixed income. We can help them. So nice playing asset classes. And so we think that strategically they fit, and that's really when we look at M&A, we look for what is the strategic fit in terms of how we can grow together and make each of our businesses stronger. And then I just come to the financials of it all, which is we always really look for how do we create value for our shareholders. This deal is going to have -- that's going to be growth accretive to us, double-digit returns well above our cost of capital, accretive EPS starting next year, accretive to our margin over time. And so with bringing this on, it really does position us at the high end of those 3-year objectives.

And how should we think about like the double-digit or growth accretion? How much of that would come from higher organic growth of the asset that you apply versus revenue synergies? How should we think about like organic growth versus revenue synergy contribution from Itiviti?

Yes. I think that the -- I think the synergy over time can be substantial. I think the -- when you look at what is going to be directly added on to our -- the sales that we begin to see, it's going to be largely the direct sales that will be the vast majority of it, but we do think that we can add to that over time with synergies, but that will be the smaller portion of it. And we never -- we're pretty conservative in our business -- in our business case assumptions. And so we do look for why do we think we're really the right owner, and that combination is why I mentioned it, but it's not -- we're not banking on sort of radical synergies, but nice revenue synergies. They'll be, over time, material in the context of the deal, but not in any 1 year.

And this is like a relatively larger deal compared to what you have done in the past -- or recent past. Is there any integration considerations we should have, like how are you integrating the asset with the Broadridge?