Friends, the afternoon sessions. I am delighted to be here with me today, Timothy C. Gokey, Chief Executive Officer of Broadridge.
Great. Thank you very much for having us.
Tim, why don't we start with an overview of Broadridge for those less familiar with your story?
Yeah. 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 mutualize the cost and effort of change. 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 last 12 months. If you look at our segment focus, it's all in financial services, capital markets, asset management, wealth management, funds. Also serving corporate issuers.
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. That's some of the fundamental drivers. We really look at change as something that is good for us. Underneath that, three core businesses. Our governance or ICS business, that's our largest business, just under $3 billion recurring revenue.
There, the core part of that is providing voting for boards of directors' elections for public companies, actually serving the broker-dealer who has 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. There we have front-office platforms, back-office platforms, largely in cash securities globally. Opportunity to help simplify both in the front and the back. The third business is wealth management, which is about a $700 million business focused on North America, Canada, and U.S. Again, bringing platforms there. With that really deeply embedded technology piece that 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 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%-7% organic growth with, talking M&A, call it 7%-9%, with the advantage of being a technology company, call it 8%-12% earnings, buy back one point of shares, pay a 2% dividend, provides low teens total returns 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 in each of the last 5 3-year periods, if you include this one, which we've announced. We'll have a current 3-year period will end in June.
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 little bit of uncertainty in the environment, it's providing a really rich environment for us.
That's a great overview, Tim. What do you see as the three biggest areas of opportunity for the company over the coming years, and why is Broadridge positioned to win in those areas?
Yeah, I think there are opportunities in each of our franchises, in governance, in capital markets, and in wealth. 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. 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 more products for more investors at lower cost. That has played out from the headwind 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. We see tokenization as just the next wave of that. In that governance, the opportunities there, it's 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. In 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 OMSs, 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. 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. Then we move to wealth management. There, we're the market leader in Canada. We're more of a challenger in the U.S., but a good position.
The challenge for clients there is there's so much change going on. They're trying to incorporate all of that. That creates real opportunities for us to help them adapt to that change. Our platform really sort of has the advantage of being very modular, but all linking together. It gives them a lot of flexibility in terms of how they implement change and that's a nice driver for us. Multiple opportunities in our franchises supported by, 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 agentic AI to help our clients be more effective. Also about platforms for tokenized equities and other securities.
A number of those announcements sort of nod to the future in terms of where the growth will come in the future.
Let's talk about tokenization and AI, and we'll start with AI as an opportunity for you. 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?
Yeah. This is an announcement we made a couple of weeks ago at the SIFMA Conference. That's the Securities Industry Association. It's the biggest operations and technology conference. We have been investing for a few years to take all the applications that we have and turn them into sort of a coherent platform. We defined a common data model across our applications, a common data layer, a set of APIs, and that as it turns out is the perfect basis for agentic AI. Because when you get into AI, one of the real challenges is I do it here, and now I build all that up, but now the data is different over here, and they're not reconciled with each other. Having a reconciled set of data where the same thing means the same thing irrespective of what you're doing, super powerful.
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. We've, 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 a clear line of sight to the next 25%. That announcement was really around AI partnership, which is give us your operations, we will give you 25 One is looking at where are they going to apply agentic and operations, very logical place to do it. 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. We offered two 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. As we're on revenue, I want to just mention, in addition, we're launching new products. I talked about shareholder engagement. We've created a Custom Policy Engine that allows asset managers to, instead of using a proxy advisor, to leverage technology to use their own policies. That's totally built on AI, introduced this year. It's going to serve about $800 billion in assets this year.
Similarly, our global demand model also in asset management, that's gone from zero to a couple dozen clients in about 18 months, both built on AI. There's a lot of opportunity for us to. We already serve almost everyone, but to do the next thing for them and to think of our market as a 220 billion market that clients spend doing stuff that we do, 64 of that is vended. Doing the next thing in the non-vended space is a nice growth opportunity as well.
Let's now talk about the flip side of AI, the broader SaaSpocalypse narrative.
Yep.
Kind of this view that AI also lowers the barriers to entry. How does that impact Broadridge?
Yeah. 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 quote "SaaS vendors." He sees us as market infrastructure, as moving billions of dollars, incorporating a strong regulatory component that he has to certify to his regulators. He just views us in a very different light. Now, when he think about applying AI, he thinks about it much more about, "I love that platform. I love the APIs. I want to apply my AI on top of that." The idea of replacing that is something that. The reason I was having dinner with him is because he's about to do more.
How can we partner together for us to do the things that are sort of the core market connectivity, the network, the bringing in all the different. It's not just a piece of software on their own data, it's connecting them to everyone else. 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 is pretty hard for people to replicate. I think we are not really seeing or hearing from our clients, the SaaSpocalypse. Again, we're not a seat-based model either. We're sort of an outcomes-based model. We never had that threat of, oh, they're going to have fewer people, therefore they need less of our services.
Let's also talk about productivity a little bit more. How are you thinking about AI as a productivity driver? Is this something that could meaningfully impact your margin profile over time?
Yeah. 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?" Any company that's not doing that is probably going to be really challenged in the future. When I look at us, 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.
it's going into the other parts of software as well, and that's obviously a big part of what we do, is development. 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.
position growth has been one of the key drivers for Broadridge for a long time. What gives you confidence that these underlying drivers remain durable? </edited_transcript
Yeah, I think the main thing is the sort of track record of innovation in financial services is a thing that has driven position growth for multiple decades. I talked about it before, but we've gone all the way from fixed commissions to non-fixed commissions to decimalization to you just think about the arc of the past 50 years. now as we look forward, right now we're in the middle of a huge amount of growth driven by direct indexing. the next phase will be tokenization. I think there's that continued arc. right now we've been having position growth in the teens, which is typically it's been sort of high single digits, would be sort of a more, quote, "normalized amount." The revenue position growth, because this is a little bit about direct indexing, very small positions don't count.
The direct has been still double digit, so that's probably a little bit above what the historic trend has been. The historic trend has been very stable, and even in periods of severe downturn, like during the global financial crisis, position growth, it went to zero for a while, but it never went negative. It's never gone backwards. I think all those things, and you look just the underlying dynamics of how many investor accounts are there, how many positions per account are there, and you do that multiplication to get to position growth.
I want to talk about tokenization and shareholder engagement, but before we get there's one more question that came in on.
Yeah
AI that I want to ask. 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 port the learning, the memory?
Yeah. we have, as have many companies, built a platform that is sort of between the layer of our product teams and the LLM providers. that connects into all of the LLMs, and it has a compliance layer in it, and it keeps track of the agents and does a lot of the stuff so you can switch from one to another. that's worked very well so far. As we get into agentic, there's a matter of where do you put. The context layer is really important. where do you keep the context layer? How private do you 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 burn up tokens at a geometrically higher rate, and they're much less replaceable. If you have simple agents, you use the dumbest model possible that will do the task, it dramatically decreases the token cost, but also the flexibility that we talked about. Will there be some lock-in? I can't say there won't be, but I think there are measures that we and others are taking to try to make it as cost-effective, but also as affordable as possible.
Just one final question on AI before we move to other topics. How do you think about cyber resilience? This has been a big topic over the last couple of years.
Yeah. It's one that we're all spending time on. Certainly, all of our clients are spending real time on this. 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. We get 50 plus on-site audits per year from our clients, and that gives us the opportunity to level up across all the things that our different clients see. 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 spending a lot of time right now 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. Getting the automation around remediation is a big focus. 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?
Yeah. If you think about some topics that people have been wrestling with for a while, and the solutions for those. One topic that people are investing with is you 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 crosshairs for having too much voting power. They're very interested as one of the solutions for that to devolve the voting power back to the shareholders. 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 think it was four years ago, eight funds, and then we did 100 funds. Last year, we did 400 funds. This year, we're doing 900 funds with $8 trillion AUM.
It's involved in the passive voting. That continues to grow. Another issue that people are concerned about is the power of the proxy advisors, and sort of the question of firms wanting to really show that they are independent. We worked with a set of asset managers this year to create a technology solution that would basically enable people to detach themselves from proxy advisors, leverage technology with their own set of policies to come up with their own recommendations. Really, instead of getting recommendations a week before the meeting, get all of the data and the ability to apply their own policies six weeks before the meeting so they can run through and see if there's something controversial, now they have time to actually research it, whereas before they didn't have time to research it.
That solution will be serving asset managers this year that we're in right now with about $800 billion under management, and it has a nice pipeline behind it. The last solution is around standing instructions. This is really to help public companies who would like to access their retail shareholders more. As much as we try to do to make it convenient, retail shareholders vote at a lower rate. 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 to vote with management." Our lead client with that has been ExxonMobil. They've had really good results. They just had their meeting. They had really good results in it.
That's causing a whole lineup of other clients that want to explore that. Collectively, each of those is solving a little bit different pain point, and collectively, we think that could be a multi-hundred million dollar business for us over time. 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.
speaking of earnings call, you lowered close sales guidance this year. Walk us through what happened and why you remain confident in the broader pipeline and over what time?
Yeah. Well, our sales in Q3 were definitely a disappointment to us, and at the same time, we don't think that they're any indicator of some sort of secular change. As you sort of unpack that, each year we have a different mix of larger and smaller deals. Our ticket size ranges from $10,000 to $50 million. It's a pretty wide range. This year, we had a few larger deals in there that the timing of which could really make a difference. I think we just misjudged how quickly those were coming to fruition. None of them have gone away. It's just happening more slowly, and that caused us to be more cautious about the full year. I think if we step back, the second part of it is, well, 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. That pipeline 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 need and where we're creating product, we're seeing pipeline. 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 two big topics, AI and tokenization. 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? </edited_transcript
Yeah. We think tokenization is a real thing. We think it will affect 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 traditional products side by side. That's 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. We see that as upside as it happens. We're very well positioned across each of the models by which it could happen. We think we'll create additional positions as it does, but slowly.
We think the biggest opportunity is, or at least the most near-term opportunity, is around capital markets. They're very tangible business case around moving, especially collateral movement, collateral mobility, to tokenized solutions. We're doing that today. We've been investing for the past eight years. That's how we built our $365 billion day position in distributed ledger repo. As we move that to real time, the benefits become even more tangible. There's a white paper out there that says firms can save up to 15% 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. In wealth management, I think the first use cases will actually be around things like money market funds, alternatives, and over time, tokenized equities. We're providing platforms there.
We announced about four weeks ago in 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 their existing infrastructure so they don't have to have two parallel infrastructures. We made a similar announcement two weeks ago at SIFMA for institutional securities in the U.S. Again, people are very concerned about. They don't know how quickly this will develop. They don't want to have two separate infrastructures and have to bear the cost of that. 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. 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?
Yeah. I think a topic that people are trying to figure out is, as and if tokenized equities develop, how will that impact us specifically? 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 still a security and still needs to come with all of the rights, the ownership rights of it being an equity. That's an important backdrop factor. I think another backdrop factor that I'll return to in a minute is where this gets held. 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. The SEC has said, "I'm not going to prejudge which model is right.
I'm going to let the market decide." 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. NASDAQ is talking about it, and there's stuff in the press about it. We like this model because we serve 80% of issuers today. If you think about how shares happen today, there's two models. There's registered shares that are directly on the books and records of the company, and then there are beneficial shares that are held in street name. About 95% of shares are in street name, 5% are registered. This issuer thing is 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.
I think some people that aren't as familiar with how our business works see, "Oh, gee, if there is some registered model, that would be a negative for Broadridge." Actually would be a positive for Broadridge. There's been one company that's done it so far, that did it with us, Galaxy, and there's a video on the Internet, and you can see people voting their Galaxy shares on chain right now. 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 it's going to be held is at Morgan Stanley or Bank of America or Charles Schwab.
If it's held there, then this looks very much like the second model I'm about to talk about. That was model one. Model two is where it's tokenized by a third-party intermediary, and in that case it looks very much like today's beneficial model. Even if it's tokenized by the issuer, if it's held at Morgan Stanley, Morgan Stanley's not going to give the issuer direct connectivity to the client. Morgan Stanley wants to control the communications, or any other broker, I don't want to specifically just call them out. They are already our clients. We're already providing this activity for them, so we see that as just growth for us. 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 immobilize them and you issue a derivative whose value is based on the performance of those underlying securities. The market leader in that is Ondo. They have very high share of that. We've announced they're doing proxy with us. Really across each of the three 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 when you think about, well, where's the demand going to come from to buy these? There's a clear reason why Robinhood and 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 a Coinbase or someone, if they have 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 source of demand that would cause someone going public to say I'm going to do a sleeve of natively issued tokenized securities. We'll just have to see how that develops. We don't serve global investors today, so if that does happen, then that's just another sort of tailwind for us.
long story short, I wanted to get into the 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 told the SEC and our clients we will cover whichever model there is. 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?
Yeah. I think if you think about what Chair Atkins' main priorities are, and if you listen to him, he's very consistent with it. Improving access to or creating a legitimate framework for digital assets is helping public companies making IPOs great again, and it is improving access for investors to private assets. Those are the three big themes that he keeps talking about. 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. It's largely covered by what I just said. It's been on again off again, but it will come at some point, and it will be for a period of time. It'll be a little bit limited in nature, but it'll cover all three models.
I think it will make clear some of the protections that the SEC wants to see investors have. In bucket two around making IPOs great again, one of the things in there is this concern about proxy advisors, and I think the work that we're doing around shareholder engagement that I mentioned feeds right into that. That concern about proxy advisors is one of the things that's causing asset managers to have a lot of interest in our Custom Policy Engine. That's a good alignment. The other topic that's not exactly one of those three, but is a real topic that the SEC is working on, is digital communications. As you know, today, the default communication is paper, and then you can elect to receive things digitally. 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%. In customer communications, it's closer to 50. We're really working on can we switch the default to be digital and you can request paper. 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 would expect something from the SEC in the next few months, and then that will go out for comment. There'll be comments, then there'll be rulemaking, then there'll be an implementation period. When you cycle through all of that, we're thinking this is probably our fiscal year '29 or after. That will be something that we think is, again, a mild positive for us with some moving parts in between.
If you look at our top-line revenue, there's a big chunk of pass-through revenue in there that's postage and paper and things like that that are zero to very low margin for us. 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. There is other recurring revenue we think we'll gain with sort of very closely related products that will increase. We think the net result of all of that is roughly a wash. 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 the past three to five years. We really like this change. We'll think we'll see something in the next couple of months on it.
I want to follow up on some of your recent acquisitions. You recently announced the acquisition of CQG, a provider of futures and options trading and execution management. How does this fit in within your broader capital market strategy?
Yeah. 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-$60 million. It's in the front-office space, focused on futures and focused on execution management. Our front-office business has been historically more focused. First of all, it's order management. execution, order management, very complementary to each other. Ours has been largely focused on cash securities, but we're in the midst of building a futures capability to compete with Fidessa. We're partnering with a large global tier 1 institution to build that futures capability. 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 OMS capability. It's a really a chocolate and peanut butter sort of situation.
Very global company, a bunch of clients that some of which we already serve, some of which we don't serve. Nice cross-sell opportunity as well. We're really, really pleased, and it's a great management team, so we're happy to have them on board. 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 someone achieve their ambitions of growing their business. We expect great things to come out of it.
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.
Yeah. 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. When you look at our revenue, we have, let's say of the $7 billion of revenue we have using really round numbers, then there's like $2 billion of it that is this sort of pass-through distribution revenue, which is low to no margin. There's about $5 billion of it that is fee revenue, 95% of which is recurring. When you hear me say 95% of our revenue is recurring, that's what I'm referring to. There's about 5% that is "event," which is not under multi-year contract. It comes and goes, often due to mutual fund elections.
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. this is where we talk about that 5 to 7% organic and then one or two points of tuck-in M&A, where it's just sort of the first-year revenues that we acquired in subsequent years is the growth of those that count. If I think about that relative to a software company, the vast majority of our revenue is software as a service. Every once in a while, there's some licensed stuff in there that creates, unfortunately, some quarterly noise, but mostly it's software as a service. It's subscription based. It's generally not based on seats. It's generally based on activity.
How many trades did you do? How many accounts do you have? It's a great business model. It's very high free cash flow, 100% plus. 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 a really attractive proposition because that 7 to 9% recurring revenue growth turns into 8 to 12% earnings growth, buyback of plenty shares, pay 2% dividends. You have low teens, total returns to shareholders for a long time without sort of stretching the model in any way.
Speaking of shareholder returns, how are you thinking about the trade-off between buybacks and M&A?
Yeah. 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. 18 of the last 19 years, pardon me, because we will be 20 next year. After that leaves sort of a bucket of money. 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.
that's been a really nice source of growth for us, really nice source of 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. 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. That does alter a little bit, depending on sort of what a market price is of these assets. When they're higher, we're less likely to be able to find those returns and more likely to do share 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. At the same time, I haven't in the past, but right now I do have a sheet that has sort of, here are the things that we're looking at. Here's their revenue, here's their earnings, here's their revenue growth, here's their earnings growth, what multiple are they trading at, and then right next to it, what Broadridge looks like, and right now, we look pretty attractive. 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?
Yeah, 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 big AI companies, and where is that going to come from? We've been caught up in that. I think there's concern about how will AI play into things, and some companies will be advantaged and some will be disadvantaged, and how do I know which? Until I know which, I'm a bit uncertain. I think a unique factor relative to us has been tokenization, and is there some bear case out there by which our very recurring model would be destabilized? I think that's sort of the drivers of where we are right now.
I think, frankly, both AI and tokenization, as I said, I think are tailwinds, not headwinds, and I think that creates an opportunity for everyone in this room that believes 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 deliver on 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'll provide when we're talking about our investor day, not in December, but three years from December, that the outlook looks just as 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. I think that's really laying the groundwork for that future growth. When you have performance today and we have investment for tomorrow, I think we have a really nice package for investors. Obviously, our whole management team are big holders of our stock and are really thinking about the long-term future.
Tim, we have one minute left, so my last question for you. As you head into your next three-year cycle, what should investors expect for the next three-year target? </edited_transcript
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. I would expect our next three years, in terms of where the metrics come out from the core growth algorithm, to be very similar to the last three years. Inside 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 will look very similar. What's going on underneath, there'll 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.
Thank you.
I learned a lot.
Thank you.