All right. Good morning. My name is Puneet. I'm from J.P. Morgan Payment Processing and IT Services team. Glad to have here with us Mr. Tim Gokey, CEO of Broadridge. Welcome, Tim.
Good, Puneet. Thank you for having me.
Happy to have you here. The format of this presentation will be fireside chat. I'll start with a few questions, and then we'll open the floor from questions from audience. So Tim, like, for benefit of investors who may not be as close to Broadridge, can you talk about, like, the company, what you do for your clients, what's your right to win, and, and what opportunities you are seeing in the marketplace?
Yeah, absolutely. Thank you. Thank you, Puneet, and thank you all for joining us to talk about Broadridge this morning. For those that are less familiar, we are a global fintech at the intersection of capital markets, wealth management, asset management, and public companies. We serve a lot of the core infrastructure behind those industries, facilitate a lot of a lot of the board of directors' elections for public companies in North America and around the world, and provide core infrastructure platforms for capital markets, wealth management, and asset management. We have delivered very strong returns over the past 10 years, recurring revenue growth of 10%, earnings growth of 14% compounded.
That includes the tax cut, but, you know, take that out, is 12%. We give guidance every three years. We've delivered on that guidance over the last four three-year periods. And we have a very simple financial model: grow our recurring revenues organically, 5% to 8%, add 1 to 2 points of M&A, grow our fee revenue, 7% to 9% in total. With the operating leverage of being a SaaS company, we can grow our earnings a little bit above that, call it 8% to 12%. Buy back, say, a point of shares, pay a dividend just under 2%, and we believe we can deliver TSR in the low teens over long periods with high defensiveness and low volatility. And of course, all that starts with growth.
We have a very, also a very simple and clear, growth strategy. We're really a network business. We connect more than 1,000 broker-dealers to all of the asset managers, to every individual investor, to every institutional investor, and, and work with the regulators. And, that unique network model really positions us at the intersection of a lot of interesting trends. But a bet on Broadridge is really a bet on the continuing compounding of financial services in, in North America and, and around the world. There are five key trends that are really have been driving our business over long periods, and, and we think will continue to, to do so. The democratization of investing, and that's really...
It is more people participating, but it is costs going down, more products, causing more people to be engaged with more products and financial services. Digitization of communications, very clear trend, which is a tailwind for us. The acceleration of trading in capital markets, which is more than just the acceleration, is the increasing, you know, lower spreads, higher volumes, but more complexity, with more products in more geographies. The growth of AI and data. We have a lot of data flowing through our platform, great opportunity for us to add value to our clients. Continued regulatory change and mutualizing that change is a key way that we add value to our clients.
So we have really positioned our business in front of those trends, and continue to do that, and that really plays into three core franchises we have: governance, capital markets, wealth and investment management. The largest of those is governance. It's about a $2.5 billion fee revenue business that has grown on the order of 9% over the past five years in revenue. And that really will continue to grow through partly the compounding of positions. We get paid per position, and partly the innovation and new products that we continue to introduce, and that's everything from supporting universal proxy to supporting tailored shareholder reports to facilitating pass-through voting, i.e., voting choice for funds.
In capital markets, that is about a billion-dollar business that has grown on the order of 14% compounded over the past five years. That includes the acquisition of Itiviti AB, now Broadridge Trading and Connectivity Solutions ( BTCS), which has really brought us into the front office and allowed us to have a true front-to-back proposition. And our growth there is really around simplification and innovation. Our clients have, in many cases, dozens of platforms in the front office, many platforms built by asset class, by geography in the back office, helping them simplify in the front, simplify in the back, and connect front to back. Huge opportunity for uplift for our clients. And we're innovating in capital markets. We're doing about $80 billion a day on digital ledger repo.
We're bringing AI to fixed income and to the arcane areas of operations in capital markets. So big growth opportunity there. Wealth and investment management is just under $600 million business for us. It's grown about 10% per year over the past five years. The big news there is we have completed you know what we believe is a platform that represents tomorrow's technology today to help wealth managers solve the difficult problem they have of so many different applications because of all the different things that they have to do, some that they might create, others that would be with third parties. How do they bring those together to create a better experience for clients, for advisors, and to digitize their operations?...
So just a word on our Q3 that we just announced. We finished our fiscal year in June, and so we had our earnings call last week. Really, I think three takeaways from that. We're three-quarters of the way through the year. We really have high visibility now on the investor positions that we'll see this year, and with that, we said we have confidence in delivering in our guidance range, you know, single-digit, mid-single-digit revenue growth, double-digit earnings growth, which is right in line with the three-year objectives that we have, sort of point one. Point two, we're seeing really good demand for our solutions.
Our sales year-to-date, newly contracted sales, up just under 20%, and have a good, good visibility into our pipeline for the rest of the year. So we confirmed our guidance of $280 million to $320 million in closed sales, which will be up 15% to 30% versus last year. Last, we guided to 100% free cash flow conversion. That really is consistent with the financial model that we have, and that enables us to consistently grow our dividend. We've grown it double digits, 11 of the past 12 years. And then with the excess, combination of tuck-in M&A, which has been very, very successful for us over time. We announced a deal last week. I'm sure we'll talk about that.
And then share buybacks, and we confirmed that we'd be doing additional share buybacks this fiscal year. So that's the quick summary, and really excited to be here today to talk to all of you.
Yeah. Thanks for a very comprehensive overview. So let's start with, like, talking about the acquisition you recently announced, the SIS deal. So talk to us like, how big is the acquired business, the valuations you are paying, and the strategic reason, like what are the revenue synergies, that you expect from the acquisition?
Yeah. This is a great example of a tuck-in acquisition for us, and we have done 40 acquisitions over the past 10 years, and we typically buy things not to go in there and take out a bunch of costs and get cost synergies, but typically we buy things because it's a really good product fit, another way we can add value to our clients and grow revenues, compounded on an organic basis after that. We track every acquisition. Over the past 10 years, we have compounded, you know, IRRs in just below 20 unlevered. So, you know, it's been a very successful strategy for us. The transaction we announced last week is the SIS business previously owned by IBM, now Kyndryl in Canada.
About a third of our wealth management business is in Canada. We have a nice position there, and this will add to that. They have a nice position with a few of the larger clients there, where we also have a relationship, but it'll really strengthen our relationship with those clients. And it will enable us to, as we bring our wealth platform to Canada, to mutualize the cost of that investment and to bring all those components, not just to our clients, but also to the SIS clients, and so, you know, nice cross-sell opportunity over time. It was about a $200 million acquisition, and it is a carve-out.
And so between it being a carve-out and regulatory approvals, you know, there's some uncertainty over the exact timing of close, so we're not going to, we're not going to guide on revenues until, until the close date, but our expectation would be that it will add, between 50 and 100 basis points to our three-year, three-year, CAGR, you know, once that is, is fully integrated.
No, that's great. And Canadian wealth management, it seems like that you're seeing, like, a lot of opportunities. That was one area you called out recently. So can you talk about, like, how large that market is for you? And generally, like, since, like, the UBS rollout, like, are you seeing, like, other clients or maybe not the size of UBS, but, like, the large wealth managers come to you for end-to-end solution?
Yeah, the Canadian market is, you know, is, is very, is a very attractive, you know, interesting market. Obviously, much smaller than the U.S., but as I said, it's about, it's about, you know, between 30% and 33% of, of our business today. There are six large banks that have, a very large share there, and then there's a tail of, of smaller, smaller broker-dealers. We serve both those, so we serve, four of the six banks in a, you know, significant way, and then also a number of the smaller players. And, what is... You know, what's nice about the Canadian market is people are just very...
When one bank tends to do something, the others tend to follow, and it does make for a nice mutualization opportunity, where we can really create great value for the entire market by creating a solution that many people adopt. And so I think the discussions about the wealth components that we've created in North America and, you know, it takes a little bit of modification to fit the Canadian market. It's not just a straight fit, but it's, I think that's going to be something that will be really helpful for the market over time there.
Got it. Got it. Let's talk about stock record growth, like a metric that all of us follow very closely. So you shared, like, the goal at the recent Investor Day, that that metric can grow mid- to high-single digits. You talked about some of the secular growth drivers. But, like, on the last earnings call, like, you're seeing that metric growing in mid-single digits right now. So what drives the acceleration over the near term? What trends and what confidence you have that we should see acceleration in that metric over the near term?
Yeah. So, in our regulatory communications business, which is about a $1.2 billion business, the key drivers there are the number of positions that we serve, both equity positions and fund positions. And, the equity positions, we said in our, we had in our earnings day in December, we said mid- to high-single digits. That's where it's been historically over the past 10 years. What we said last week on our earnings call, now with 98% of the records in for this year, that it's gonna end up at 6%, which is, which is just a shade lower than, than I don't know what mid-high, high single, you know, just call that 7% to 8%. Maybe it's a, you know, a point or two, a point or two lower.
I think when you look at the components underlying it, there are really two components. It is the number of accounts and then the number of positions per account. And number of accounts is really driven by the number of individual investors in the market. That has, you know, over long periods, grown 2% to 4%. There was an acceleration in that around the COVID period. The positions per account is largely driven by increased diversification and significantly by the growth of managed accounts. Managed Accounts account for about 50% of the positions of equities, and that's growing double digits, and that's a trend that has, you know, quite a bit left to play.
So, what we've seen over this past 12 months is continued growth in managed accounts at historic rates, and a little bit of a pullback in the number of new individual accounts. I think if you look and you can track this by looking at, you know, the, you know, what Schwab reports or other people report in terms of new account growth. That's tipped up just a little bit in the past few months. So I think as investor enthusiasm waxes and wanes a little bit, you see that number go up and down just a little bit. But, you know, we're now can see testing into the beginning of next year, which is, I think, reconfirming and having us feel good about continuing to talk about mid- to high-single digits.
Got you. Let's talk about, like, the other side of regulatory business, the funds business. What are, like, some of the long-term drivers you're seeing there? Like, you recently talked about that you're seeing, like, the shift away from trading accounts into money, money market funds. What does that mean for Broadridge? And how large is that business within the overall regulatory?
Yeah, I think within the regulatory, call it sort of 60% equities, 40% funds, maybe 55% to 45%.
Mm-hmm.
But, you know, it's, it's very sizable, and it has been historically a really strong growth area that, you know, the proposition for funds and ETFs is a great way to invest. And so fund and ETF positions have been growing over a decade in the, you know, high single digits. And we also guided mid to high single digits for, for this-
Mm-hmm.
You know, in terms of our 3-year guidance. And I don't think there's any change to that, that fundamental driver. It is, remains an interest, you know, very good way to invest. ETFs are also core in managed accounts, so when you think about managed account growth, it also affects ETFs. And, now what we've seen as a, as I'd say, an overlay to that secular trend, this past 12 months. And remember, when we talk about account growth, we're saying it's gonna be 3% for the year, that's sort of, you know, the full 12 months. And, what we saw, especially at the beginning of the period, was a shift from equity-based accounts to money market funds.
And that does tend to retard the number of total positions, because typically you might have many different flavors of equity strategies you're in, but only one money market account. And so, you know, as those flows go to money market accounts, that can wind down the number, the growth in positions. As the market changes back, that will accelerate the growth in positions, you know, we think back to historic rates.
Got it. Now, on the capital markets side, you talked about earlier, like, acquisition of Itiviti, like absolute home run, BTCS, what you do there. So what's driving clients to embrace outsourcing? I'm assuming, like, lot of competition there is clients' in-house operations. So what's driving clients to embrace more outsourcing there?
Yeah. So, BTCS, Broadridge Trading Connectivity Solutions, we acquired this three years ago. It's the number three player in front office. Fidessa, now Ion, is the number one player. FIS is the number two player. Neither of those companies are really strongly investing in this arena, and so we thought there's a great opportunity for us-
Mm.
To participate, to be able to provide clients a front-to-back platform. And so we made the acquisition three years ago. And really, with three, you know, objectives. Objective one is just continue to grow in the market as Itiviti then was. It's taking share, the market's growing, and continue to do that. Two, is bring it to new asset classes and geographies, and three, is to have a front-to-back proposition. Coming, Puneet, to your point about sort of the growth in the market is, front office is, there's a lot of complexity that global institutions face. And as I said, they have, in many cases, literally dozens of different OMS platforms built by asset class, by region. And so helping people simplify that is a huge market opportunity.
You talked about the vended versus non-vended. It is. The market is about 50/50 in terms of vended versus in-house solutions. And I think one of the things that we're really seeing as a trend is not so much build or buy, but build and buy. One of the things that our platform does is it has an underlying tool set that takes people sort of, instead of having to build from scratch, you know, right up to the part where they want to begin to add their intellectual property, especially in principal trading, and it really enables them to do that in a much more cost-effective way. And so we're excited with this.
You know, we just announced a one of the largest global banks partnering with them to bring their global platform to the futures and options market, where we haven't played before. So as an example of that that expansion, we also announced that we had completed the onboarding of a large Nordic bank to our back office platform, and that's an example of that front-to-back strategy playing out. So I think we see each of the pieces of the strategy playing out, and we, we, you know, expect this to continue to have sort of low double-digit growth for a long time.
That's great. Now, let's talk about AI. It's tech conference, we have to talk about AI. So you recently talked about BondGPT, OpsGPT, as some of the AI solutions. Talk to us about your AI strategy. And ultimately, like, I think the goal has to be, like, infusing AI in core systems. How do you do that? Like, do you upgrade, like an AI drive, like a refresh cycle for those core platforms, and you infuse AI into them? Or can you add, like, an AI layer on top of what clients have right now?
Yeah. So, great question. We have... You know, what we said is we're gonna lead in AI in our space, that we're not gonna be necessarily, you know, inventing the next generation of large language models, but applying those to the fairly arcane areas that we do, where it doesn't make sense for each of our clients to do that themselves. So we think we have a natural advantage there. Also, you know, AI is based on data, and we have a lot of data.
Yeah.
So, we think those will be natural advantages for us. Really, four, four places or four strategies. One is, as you say, in the future, AI is gonna be really part of every product. It's just gonna be, you know, it's like turning on the tap, it will be there.
Yep.
And so we're bringing AI to all of our products. The second piece is really how do we build unique propositions that are, in their own right, commercializable? And doing that also sort of ups the bar in terms of, well, what does it really mean to have a good solution? And you get a lot of learning from that because you can really see, you know, are clients buying this, will they pay money for it? The third piece is obviously applying AI to our own operations, and how do we use that to improve our development, our testing, our client service? And the last piece is how do we do all of that safely? You know, when I think about... So that's the strategy.
We have announced several sort of new products that we're commercializing and are seeing people buy them around BondGPT, OpsGPT, Distribution AI. And a common sort of pattern in that is... I'm sure you will all be getting this from others, you know, reality augmented AI, where it is really using large language models to create a query against a real database. So you're not getting hallucination or things like that, and it really significantly reduces the training. So it's really really having good data, having an ability to query that, take something like BondGPT. It is gives a, in the pre-trade area, gives a trader the ability to, you know, ask about the availability, either in current inventory or in the market of certain bonds.
You can do that today on a Bloomberg, but you have to do, you know, 3 or 4 different queries and cross tab them, and it might take you 5 minutes, and this way, you can do it in 15 seconds. So it's, you know, it's just, it's, it's these things where it's reality augmented, is not something that you couldn't do without it-
Yeah.
But it makes it much more, much more productive. And that's a common usage pattern that, that certainly we're seeing, and I think others are seeing, too.
I like the focus on responsible AI in your answer. I think it's important. Do you think, like, you'll be able to charge extra when you infuse AI in the core platforms? Or will it be a way to drive more penetration, to get clients to adopt more of product solutions instead of in-house or competition?
Yeah, I think it will be, it will be both. I think for a lot of things, it will be... As I say, AI will be an expectation that people have of almost every product, and so there's gonna be a core level of AI that, that all companies will, will be incorporating. And for that, you asked, is it, is it built in or added on? You asked that question.
Yeah.
We've created an AI, sort of a broad-ish level AI platform, that enables all of our product teams to hook into a variety of large language models. You know, they don't have to separately negotiate with a Microsoft or OpenAI or, you know, they can pick which model. It has the safety layer.
Yeah
... built into it. And so all of our product teams can interact with, with our, our AI platform, which greatly enables their ability to bring AI to all the different things, that we're doing, and do that in a safe and responsible way. So I do think it will be part of all, all products in the future. And, where there are unique, new applications, then, then that's something that people will, will definitely pay money for, and we are, you know, signing client contracts right now on, on some of these things.
Yeah. Last question on this. And, like, the AI model needs to be trained on clients' data for them to generate value. So you will do that during implementation, so clients typically would need, like, a partner to train those models?
Yeah. Again, so a lot of the patterns we're using currently, and in many cases, we're on, you know, version one of these things, but the patterns we're seeing currently are leveraging the large language models to create queries which go against a database. The database does not become part of, you know, it's a private database. It's—This is part of the doing it responsibly. It's housed either, you know, in our infrastructure or in our client's infrastructure, it has real data, and it's not training the model. And but the that how do you turn English language into, say, a SQL query? You know, that is part of what is you sort of get with OpenAI or Llama 2 or any of these models, you know, that is part of the training coming from outside.
So really it is the implementation work we do is more around making sure that the data is really well tagged in the database, and sort of getting the interaction of the query and the database going together.
Got you.
That's a common pattern that you see across many companies.
Let's talk about closed sales. Like you talked about, like that metric, bookings are running strong. So what's driving that upside? Like, you also talked about tailored shareholder reports. Talk about, like, the impact of that in closed sales, and how should we think about closed sales over the next two or three years?
Yeah. So, we're guiding to $280 million-$320 million in closed sales. That is the annual contract value that we're signing.
Yeah.
We're seeing really good strength across all three of our franchises. So in governance, certainly tailored shareholder reports, but also in digital communications, in data and analytics, in capital markets, really strong demand on the BTCS side, as we talked about, and really good momentum in wealth. Our wealth pipeline has doubled, and we're expecting sort of, I'm gonna call it $20 million in incremental sales, you know, on the wealth side. So good demand across... And the nice thing is those are all the areas that we've invested in. Specifically in tailored shareholder reports, that is a bit of a tailwind this year, and we'll provide, you know, as part of the nice bump that we're getting from last year.
Mm-hmm.
I think there will be a little more of that next year as people sort of continue to implement or sort of see what they did and is that, was that, you know, exactly what they wanted. It's also really deepening our relationship with asset managers. We're solving a very difficult problem that asset managers have. So, for those of you that follow, you know, the arcana of this regulation really tightly, there's a new rule that has taken the annual and semi-annual reports that fund investors get, that have in the past been sort of a hundred pages, you know, thick and dense.
You know, people do read parts of it, but it's very hard to consume, and that is condensing all of that into sort of a two-page, like a summary prospectus, almost, that has the key data investors need. And, so that's fairly straightforward. However, what the regulation says is that it needs to be, for the specific share class that the investor has. So, for a complex that maybe had 200 annual reports because of the different share classes, in many cases now, they'll have 1,200 tailored shareholder reports. And, and so, that's a difficult problem for people to solve. I think we're, we're really helping people with that, but it's getting us into many deeper conversations about the other regulatory things that they are doing, that I think will be...
It won't completely take up all the space that TSR is this year-
Mm-hmm.
But I think, you know, I'm not expecting to come back with a, you know, significant decline in sales next year.
Yeah. Okay. Any questions from audience? Very well, I'll keep going. So, so let's talk about, like, the margins. Like, how should we think about, like, the incremental margins in the core business? I know, like, the distribution and all, that's like a noise. So if we ignore all that, right, so the core underlying business, like, what should we expect for margins there, and what are the drivers of that expansion?
Yeah. Thank you. And I'll just, I'll just emphasize one thing that Puneet just said. Again, for those that are less familiar with us, what you'll see is, in our revenues, we have fee revenues, and we have distribution revenues. And the distribution revenues are, largely pass through paper, postage, things like that, because there is still... Even though, we're 80% digital, 20% of a lot is still a lot, so there's still some physical stuff there. And, and that's a pass-through. So as you look at our company and look at the margins, and look at the growth rates, and look at all those things, you sort of have to back those things out to sort of look at the, what I'll call the, the real business.
When you look at that side of the business, we have been, you know, over the past 10 years, we've grown our margins between 70 and 80 basis points a year. What we've guided to over the next 3 years is 50 basis points plus. The drivers of that are really... First of all, the way those margins that we just talked about are calculated, including the distribution revenues. So as we move from physical distribution to digital distribution, that tends to help that. Plus, we are broadly a SaaS company, so as we scale, you know, the fixed and variable in a software offer is just, it tends to lead to increasing margins over time.
So we feel really good about our ability to sustain 50+ basis points over the long term. And then the last point I would say is just and you alluded to this, but there is some noise in this number, because if there is a, say, postal increase, that will, you know, grow distribution and but at no earnings growth, that will depress our margin. When there is an interest rate change, we have some amount of float income that is sort of in our operating income. We also have debt that's below-
Yeah
... the operating income. They cancel each other out for net income, but they can tend to create some noise in our reported operating margin. And, you know, what we have said is, we will provide the translation of that as we do our earnings in terms of what was the impact of float income, what was the impact of distribution, so you can see sort of what's happening to that sort of a true margin.
... Got it. And, you just completed or announced this, Kyndryl deal. Talk about like use of cash from here on. You do capital returns as well. How do you balance, like, need for investment through acquisitions, and capital returns? And for M&A, will the focus near term will be to absorb this, acquisition, like integrate that, or are you still looking for more deals, and in which areas?
Yeah. Our, I think we've done really well on capital allocation over a long period. We are. As I say, we focus on the dividend. We're focused on what are the necessary internal investments first. We pay a healthy dividend. We've grown at double digits, 10 of the 11 of the past 12 years. And then we look for tuck-in M&A, and with the remainder, we won't let cash build up. With the remainder, we pay dividends. Over the past 10 years, between M&A and, and share, excuse me, share repurchase event, between, share repurchases and tuck-in M&A, it had been about 50/50. That wasn't necessarily a plan, that's an outcome.
If we can do tuck-in M&A, you know, at high teens or low twenties IRRs, we think our investors would want us to do that 'cause we have, you know, we believe, unique access to, to things that make sense. What we said in the near term is we are continuing to return capital to shareholders. This year, we talked on the earnings call about an additional additional share buybacks this quarter, which, you know, is gonna happen irrespective of this. You know, we can do this tuck-in M&A and still do that. The other thing we've talked about is growing our return on invested capital into the mid to high teens.
And again, we don't see anything that will change with the Kyndryl deal, you know, from, from that objective. I think the other thing, just on thinking about investments is, it is. You know, the balance we have is between internal investments that are sort of inside our P&L, and M&A investments, and how do we – what's the right balance there? And also between short-term investments and long-term investments. And really, you know, we have a whole set of things that we can invest now that'll produce really nice returns in the next, you know, even 12 months. And another set of things that will produce, you know, we think also very attractive returns, but maybe not for several years. And getting that balance right is very important.
Often people, when we have, say, a big event, and revenue goes up in the event-driven side, people wonder why that's not exactly channeling through into earnings right away, and that's because we have a backstore of investments that are, you know, pretty near term, that will produce good, good near-term returns. And so when we get the opportunity, you know, we take the opportunity to make those.
You have a track record to show for it. One thing we like about the business is, like, how incredibly steady, Eddie, like the Broadridge growth rates are. Like, you do three-year targets, and you consistently beat or meet or beat those goals. What macro indicators do you track, like, that can have, like, a near-term impact on Broadridge's growth rate? Like, for this last, well, last two years, three years, you didn't see slowdown, you didn't decline, right? So what macro indicators should we track?
Yeah. I think the, you know, Broadridge, broadly, over a long period, is a bet on the continued compounding of financial services in North America and globally, and that's historically been a very good bet. There are short-term overlays on that. We tend to be not directly connected to the macroeconomic cycle, and so there can be a slowdown, there can... Interest rates can fluctuate. It doesn't tend to directly impact us as much. 94% of our fee revenues are recurring.
Yeah.
So it's a highly recurring model. There's a little bit of fluctuation about investor enthusiasm in terms of number of positions they have. They can tip growth up a little bit or a little bit down. Even in the global financial crisis, position growth did not go negative, and so it's just it provides for a lot of stability over long periods.
Got it. On that note, thank you for your time. I appreciate it.
Great. Thank you very much. Thank you all for your interest.