All right. Good morning. My name is Puneet Jain. I'm from J.P. Morgan's Payment Processors and IT Services team. Glad to have here with us, Mr. Tim Gokey, Broadridge Financial's Chief Executive Officer. Welcome, Tim.
Thank you.
The format of this presentation will be fireside chat. I'll start with a few questions. I'll open the floor for questions from audience. For those who are listening from webcast, feel free to ask questions through the online portal. I'll try and ask them during the live chat here. Tim, maybe for benefit of investors who may be new to Broadridge, can you introduce the company, talk about the growth profile, your competitive differentiation, and also if you can quickly recap your third quarter results?
Yeah, absolutely. Thank you very much, Puneet. Great to be here. Thank you, everyone, for joining. I'll just give a brief introduction to Broadridge, why we are confident in a strong fiscal 2023, which ends for us at the end of June. More importantly, why we are confident in the future going forward. I have a couple of updates that are incremental to what we talked about on our earnings call three weeks ago. First of all, just for those of us that are less familiar with the story, Broadridge is a global fintech. We provide industry-level solutions for critical functions that are often involving regulatory aspects that need to be right, but that are less differentiating.
We focus on corporate governance, capital markets, wealth and investment management. I think we have a very attractive economic profile. Our recurring revenues are 93% recurring. Our client revenue retention is 98%, and we've grown earnings at about 11% over the past over the past five years. We operate in two segments, governance and technology and operations. Our governance or ICS segment is about $2.3 billion in revenue. It has been growing on the order of about 8% over the past five years. We sit really at the center of a network that includes every corporate issuer, every broker-dealer, every asset manager, and every individual and institutional investor.
Through that, we end up with every investment position of every investor in the U.S. and many globally in our database. Now, that's our clients' data, but it gives us a privileged opportunity to work with those clients to do the next thing for them. On that theme, we've grown the company from when we became an independent company in 2007 from about 3,000 associates and $ 2.5 billion market cap to today about 15,000 associates and $18 billion market cap. We see that opportunity to continue to grow to be basically unbounded. Our clients spend several hundred billion dollars doing operations and technology. The portion of that that we directly address is about $60 billion. Our fee revenues are $4 billion.
From $4 billion to $60 billion, at least during the portion of my career, we see. And the $60 billion is getting bigger all the time. We see a lot of opportunity. Our other segment is our global technology and operations segment. That's about $1.5 billion in revenue. That's been growing at about 13% over the past five years. Let me just take a minute to talk about fiscal 2023, but also about why we're confident going forward. I'm gonna mention five things. First of all, the underlying driver of our growth in our governance business, and we'll talk later about how our growth is really balanced between organic.
It's all organic, pure position growth and new sales. A big driver for us is growth in investor positions. That's the way we get paid, and that has been very healthy. It's been growing at mid-single digits for many, many years. The past year it's grown faster than that. We see high-single digits for equities this year, mid-single digits for funds, and we have forward testing that we see that into next year as well. There are some long-term unfundamental drivers. We'll probably talk about those. We're pretty confident in that continued growth. That's the first thing. The second part also in governance is that we continue to innovate and drive new solutions.
Whether that is pass-through voting, universal proxy, or we think coming up, tailored shareholder reports, there's been a constant stream of a new product that is expanding our market opportunity. Third, our capital markets business. That's a technology business serving the capital markets in a very, very strong position. We made a key acquisition two years ago to get into the front office side of capital markets with what we now called Broadridge Trading and Connectivity Solutions. That's going very well. We made investments to integrate that front part with what we were already doing in the back to have a front-to-back solution that has a lot of client demand behind it. Fourth, excuse me. Our Broadridge Wealth Platform is really now poised to turn the corner and move into a growth phase.
This has been, f or those of you that follow us more closely, this has been a big investment over the past few years. This platform focuses on three areas: increasing advisor productivity, improving the end client experience, and digitizing front-to-back operations. We recently completed the development of the platform. Now since our earnings call three weeks ago, we have now finalized the rollout approach with our lead client, UBS. As a result, I'm in a position to give some incremental detail this morning, that we weren't able to share three weeks ago.
The, the rollout approach gives UBS the flexibility to roll out modules really on its own timetable. That means that we are, you know, very definitive that we'll be able to complete our platform spending here in fiscal 2023, that we will start to recognize revenue in July, this coming July, which will be the beginning of our fiscal 2024. UBS and other existing client relationships on the platform will give us recurring revenue next year on the order of $75 million. We weren't able to say that three weeks ago. That will be dilutive to our historic margins, but we are very confident that with operating leverage and ability to reprioritize other investments, we will be able to continue to grow our earnings in the way we have historically.
The amortization associated with this will be on the order of $57 million, which you can see that's what creates the dilution. With that, we're really turning to sales. Our wealth management pipeline continues to grow. As I said a few weeks ago, our pipeline is up 40% since the beginning of our fiscal year, but we're really excited to be turning the page on the investment phase and moving to the growth phase. The fifth thing that I'll just say from an update perspective is that, as we come to the end of this investment cycle, both with Itiviti, and with the Wealth Platform, we are gonna be returning to more historical free cash flow conversion and capital allocation.
We weren't able to say this three weeks ago, with the finalized rollout plan, we expect to end fiscal 2023 with free cash flow conversion greater than 80%. As a result, we will end on June 30th with leverage on the order of about 2.5. That is what we committed to two years ago when we made the Itiviti acquisition, it's really pleasing to be able to end, you know, sort of in line with the commitment that we made and our commitment to being an investment-grade company.
With getting to 2.5, and with moving to more historic free cash flow conversion next year, we will have much greater flexibility around capital allocation and expect to return to more normalized capital allocation, including share buybacks, tuck-in M&A, and the other things that we've been, you know, we've mostly focused on debt pay down the past couple of years. With that, we feel we're really ending 2023 on a strong note. We have really looking forward to 2024 and beyond. The last thing I'd note in this rather long introduction, but for those that are new to the story, is we do historically take a long-term view of our business.
We have an economic model that focuses on delivering 5%-7% recurring revenue growth, with tuck-in in recurring revenue, with tuck-in M&A, 7%-9%, with operating leverage, 8%-12% on the earnings side. You take the 8%-12%, have a nice dividend, you know, on a just under 2% dividend yield, plus some share buyback. We have and believe we can deliver low teens total returns to shareholders over long periods with low volatility and high defensive characteristic. With our results this year, we expect to end at the high end of the guidance we gave three years ago. When we do that will be the fourth three-year period in a row that we've delivered on our objectives.
That was a long background.
With some new things in there.
You answered all the questions. Thank you. No, it was really helpful, so thanks for that. Let me start with UBS. $75 million in revenue. I'm assuming that's for this year target. Previously, you had talked about achieving $100 million.
That's right.
I n revenue. Is it like a ramp? There will be a ramp, you can still get to $100 million in subsequent years, $100 million or higher?
It really depends on the way that they roll out the additional modules and the speed at which they do that. I don't really intend to continue to update everyone on a single client. I think whatever they do in the future will become part of part of our wealth sales that we'll, that I'm sure people will ask us about and we'll probably end up talking about to a certain degree. When we made this investment and a few years ago, I really talked about three criteria to measure the success of what we're doing. One is successfully going live with UBS, which we're well into and feel really good about.
The second was having a healthy growing wealth business, which with the sales backlog that we have and with the sales that we foresee, we feel pretty good about that. The third is really leveraging the technology that we've created across all of Broadridge, and we are, we've built a lot of foundational technology that we're using to really knit the company together and be able to operate for our larger clients who consume many things from us as much more of a platform.
Got it. No, no, that's helpful. How should we think about margins? Like, you said, like, it'll be dilutive to margins, but will this be at least a profitable contract given, like, the new revenue and amortization schedule?
It will be profitable in the long term. It won't be profitable initially. It is, it's definitely dilutive initially. Though with the other things that we talked about, in terms of reprioritizing other investments and our operating leverage in other parts of the business, we expect to deliver a year next year that looks, you know, very much like a typical Broadridge year.
Got it. The second aspect, you talked about wealth management. Can you talk about the pipeline of similar deals you are seeing at other clients, and how much of incremental investments will be required as you try and implement those clients?
It's a great point. One of the things, how this has really evolved as since we began the work, I think when we began the work, we thought that there would be that the deal shape would be transformational deals, you know, other large transformational deals. As time has evolved in our conversations with other clients, what they are really liking is the componentized nature of this. So it's a common data model. It's a enterprise integration service layer. It's all API-driven, so people can take sort of whatever modules they want and we're calling it Transformation on Your Terms. What we're seeing in terms of the pipeline is really a series of much more bite-sized module, modular sales.
Because we're through the development phase, because it's implementation, we would see the implementation of those new additional client sales as being, you know, much faster and obviously much lower investment.
How should we think about like the cash profile? This year, like you said, like you're gonna end the year at a healthy free cash flow generation. Are all the investments related to this wealth management platform, not just UBS, but overall, like, will they be behind you beyond this year? How should we think about cash profile from next year?
Yeah. What we've talked about is our free cash flow conversion returning to historic levels. For those that have followed us over longer periods, our free cash flow conversion in a typical year has been, you know, on the order of, quote, 100%. You know, sometimes a little lower, sometimes a little higher. On the last earnings call, there was a question and people asked me, you know, to commit to 100%, and I declined to do that because I don't know, you know, what may be there that would be really, really good to do. I think you'll see us in a range around that.
Got it. Let's talk about your stock record growth, like equities, like, which you said is growing in high single digits, and it continues to hold up well despite like the last year being like a very difficult macro environment. How should we think about like the secular growth or the secular drivers for that metric? What's driving this growth in a tough economy?
Yeah. You know, just for, again, for those, depending how closely you followed us, positions have grown, historically over long periods in sort of mid-single digits. In 2021 and 2022, during the pandemic, there was a significant spike in growth, 26% one year, 18% the next year. There's been a little bit of a question about would things go back to where they were or was that sort of a new plateau? First thing is, that I think we've established that it is a new plateau. That's what we've seen in past spikes. This one we really attribute to, the advent of free trading apps and drawing in a lot of new investors. We're, we're, you know, going along mid-single digits.
We have a bump up because of some new technology. Now as we look forward, what do we see? I think we see really a return to, sort of a historic growth. We're at high single digits, this year. It's probably too early to say what we expect next year, but I would say sort of, you know, in that mid to high single digits. The underlying growth drivers of that, it comes down, you know, pretty simply to its account growth, and positions per account.
Accounts typically have grown, you know, 1%-2% a year, so most of the growth is in positions per account, and the biggest trend that's driving that is the move to managed accounts as broker-dealers really basically go after asset managers to try to take their revenue streams and end up, you know, what was maybe one mutual fund now becomes, you know, 30 positions. So that growth in managed accounts is the fundamental driver. It has a long way to go, that trend. Then when we look at future drivers based on, you know, the additional innovation that we're seeing, it would be things in the future like direct indexing, like pass-through voting. Those things are still too small to really turn up in the numbers.
People continually ask us just, you know, do we think that's gonna put us on a new growth trajectory? You know, I've declined to say that it would. Just I think it's part of what sustains, you know, mid to high single digits over long periods. You know, we'll see in the future.
More recently, like last few years, zero commission trading have also helped drive your growth in that metric. Is that benefit or the tailwind behind you, like, or could there be more juice in that factor?
It's a tough one to know. What we certainly have seen, as I just talked about, is that the new level, you know, we think is very sustainable. When you look, and we've just published a really interesting study on investors and investor behavior based on all the data that we talked about having. If you haven't seen that, it's on our website, I'd recommend. You know, it's pretty interesting. It really pinpoints the beginning of the generational shift that we've all been talking about for, like, 30 years. It's really beginning to happen.
As you look at comparing younger investors to older investors, now they have fewer positions because they just don't have as much money, but the growth in positions has been even stronger than it has been with older investors. I think there's some really good, really good fundamental things in there. I don't really at this point see any deviation from that historic sort of mid to high single-digit growth.
What does, like, investment dollars potentially shifting away from trading accounts into more money markets, more fixed income funds mean for Broadridge as a business?
Yeah. It doesn't tend to have a lot of impact. When people, you know, you could think about, "Oh, I'm, you know, lowering my equity position, putting in a money market fund," does it take away all those positions and just create one position over here. People don't tend to close out their positions. They tend to just make them smaller, and we get paid per position, whether it's a big position or a small position. It does not tend to affect us that much.
Got it. On the last earnings call, you also talked about like the lengthening sales cycles. Can you elaborate on that? How's like the company working to drive like incremental new sales through that environment?
Yeah, absolutely. Now, one thing I wanna just emphasize before, because it relates to this question, when I talked about the growth drivers for our technology and operations business, it tends to be largely based on new sales. For our governance business, it's about 50/50 between position growth, which we've been talking about, but also new sales. The sales question is an important one. So conversion of sales is a really important, you know, driver for us. I think the thing I wanna make sure people take away from though is that when we make a new sale, it doesn't directly become revenue.
It goes into a backlog, and then we have to convert that from a backlog of sort of projects that have been signed into a project that is live. As of the end of our last fiscal year, we report on this once a year, our backlog was over $400 million. It's really, you know, a couple of years of sales conversion. We have ups and downs in terms of what our sales are. It doesn't tend to really affect the growth trajectory of the company unless it would be low for a prolonged period.
If we look at our sales right now on the earnings call, we talked about our expecting sales at the low end of our $270 million-$310 million range, and talked about these lengthening sales cycles that a lot of folks are seeing. What we're seeing there is our overall pipeline is bigger than it's ever been. We have a lot of great conversations going on. As there has been the uncertainty and volatility with things like Silicon Valley Bank and other things here in the U.S., a lot of uncertainty in Europe, obviously with the war, we have seen people just, you know, things that we thought would close this quarter would, you know, might close next quarter. It's just taken longer to get things signed.
Now frankly, whether, given the whole backlog dynamic, whether something closes in the fourth quarter this year or the first quarter next year doesn't really make a material difference, to our, to our revenue growth. You know, that's really what we're seeing.
Talk about like the growth formula and if it's possible individually for ICS and GTO. Can... Like, how much of contribution there is typically from bookings of last year? How much of like this lengthening of sales cycle this year might have impact on next year's growth?
Yeah. One of the things that I really like about what we do is we're very transparent and report each quarter on where our revenue came from in terms of revenue from new sales, which is the conversion from backlog versus client losses versus internal growth. You know, we lay all that out.
Mm-hmm.
Which I think is a really nice, really nice dynamic. For our ICS business, over long periods, the growth has been about half positions, half revenue from sales. For GTO, it's largely all revenue from sales. There's a little bit from trading and the growth of trading, over time. What was the second half of the question again?
Like how much of the impact, there could be from, this, weaker sales this year...
Oh, that's right.
This year's growth.
That's right. Well, it's really, you know, typically, sales from this year would convert over into next year. It's almost like 30% a year for each year. That said, a lot of this is just based on the capacity of the teams that we have. You know, so if we did have lower sales in a year, it would probably be filled just with the capacity of onboarding the other projects that are already in the queue. Again, I don't see a lot of impact.
Are clients also breaking down like large deals into smaller chunks which might convert faster?
Well, they're definitely breaking things into smaller chunks. They're definitely looking to do things, put points on the board. They are definitely looking for things with nearer term payback. You know, we all see the cycles that people go through, and so people are thinking, definitely less transformational, less, you know, the three to five year project and much more the, what's the, you know, six month to two year kind of, kind of, payback, which is good. We have a lot of solutions. We have solutions that fall in both those categories, but we're seeing demand in the solutions that create immediate benefit.
Got it. At this time, are there any questions from audience? Just wait for the mic, because it's being webcast. For folks online, like, if you have any questions, please use the online portal.
I had two questions. One, just can you talk about competitors for the different parts of your business? Specifically for that wealth management platform, I think SEI was developing some kind of big wealth management platform a number of years ago. Does that compete directly with you? It's been kind of like a slow grind to build that and add clients. Do you expect a similar kind of trajectory for your platform?
Yeah. Um, so, uh, first of all, specifically on the SEI, uh, the SEI build, that was really in the sort of private banking/trust space. So it was a little bit of an adjacent space to the broker-dealers that we typically serve. So we really, um, almost never come up against them, uh, as, uh, as direct competition. Uh-In, uh, if you think about the competition for the different aspects of our business, uh, and it is different competitors in, uh, in different aspects. So, uh, in, in the communications part of the business, you know, the main competitor would be Donnelley Financial. Uh, in our governance business, uh, the, uh, there are fewer competitors, but there, there's a company called Mediant that's recently been purchased by, uh, by BetaNXT, that's a competitor there. Uh, and, and in-house can be a, can become a, a competitor.
In our capital markets business, really the, probably the main global competitor is a company called ION Trading, which is owned by a really successful Italian billionaire, but he does not have a very client-friendly approach to. When he buys things, you know, we get a lot of sales. We like that as a competitor. On the wealth management side, again, lots of different solutions with different competitors for different pieces of that.
Morning. Morning. Are you seeing any impact from, like, the shift from cash, like checking savings to money market funds? Has that benefited, like, the record growth, or has that been muted? Question to you on the event-driven side, is there any way that you see that could be, like, less lumpy, or is that just the nature of it being event-driven?
Yeah. First of all, on moving cash to money market funds, I love that as an opportunity. I don't think we have been able to discern it in the data as of yet. We'll see. It would probably be something we'd see in the future than versus right now. I'm hoping that with the, you know, oncoming economic excitement, that'll be interesting to see how that affects things. With... I'm sorry, the second part of the question was?
Event-driven.
Event-driven, yes. You know, it is really, it is just the nature of it being event-driven. The only way I could see. For everyone following the story, the event-driven part of the business, it's a few $100 million, a couple $100 million of revenue that is tied to contests on the corporate issuer side or boards of directors elections on the mutual fund side. They don't need to have boards of directors elections every year. They tend to have them everyfive to seven years. You know, depending on what's going on in terms of who's retired or who's done whatever, they will either call an election or not call one. It tends to ebb and flow.
We are gonna be really at the low end. We have lowered our guidance on this. By the way, I'd say it's a, I think, a real demonstration of the resiliency of Broadridge that we will have significantly lower event-driven revenue this year than last year. Tends to be pretty profitable incrementally because we have a fixed infrastructure, and we're still gonna be delivering on our earnings commitments. That's a real point that we're very proud about. In terms of smoothing it, I don't think there's a way to really smooth the activity. You know, it has to happen. When it doesn't happen one year, it sort of builds up to happen in the future. Again, it's sort of like sales.
It's not lost, it just comes at a different time. The only thing I could ever think of would be switching to some sort of subscription where people paid us every year, and then they got to the. Whenever the event happened, we did it for them, and that smoothed out their P&L and smoothed out our P&L. So far, we haven't actually had any serious client conversations about a pricing structure like that, but it's a, you know, one I brainstorm about sometimes. Yes.
I believe you mentioned pass-through voting. I wonder if you can describe what that is and how Broadridge might be able to monetize that.
Pass-through voting, or you will sometimes hear it referred to as voter choice, is something that the large asset management firms are looking at. As you know, today, most large asset management firms have a governance section who will research all the different issues that are there and then decide how the firm is going to vote its shares. There is a lot of political pressure on the larger firms around, you know, basically being attacked in red states for being too woke. One of the things that they are trying to do to defend themselves is to say, "Well, you know, we won't make the decision. We'll pass the decision to the underlying shareholders." There are multiple ways to do that.
Some are doing it by polling shareholders and then just allocating their votes according to those results. Some people are doing it by giving shareholders direct access to, you know, literally vote the shares. There are multiple models out there. The monetization for that is-- We are leading in that. It has been publicly said that we're doing that for BlackRock, for Vanguard, for Charles Schwab. It is... As they experiment in those things, we are a leader. It's still very small. In terms of how to monetize it is a little bit less clear right now whether it will be a per position kind of thing like the rest of growth or will be more of a platform charge.
Since we're really in the pilot phase, it is too early to say, you know, exactly what the monetization route would be.
Let me ask on margins. Like you said before, like, you have great track record of meeting your three-year targets. Meeting or beating your three-year targets, which also typically includes like 50 basis points in annual margin expansion. As we think about next three years for Broadridge, can you review some of the margin levers you have in the model that can help you continue to expand margins over the next two, three years?
One dynamic for everyone who follows us to be aware of is, when you look at our total revenue, there's a large piece of it that is a pass-through that comes at a very low margin. You will hear us talk about this because it, depending on whether the pass-throughs are, you know, growing slowly or less slowly, it affects what the margin we report at the overall company level. Historically, I've always assumed that as paper goes away, the distribution part of our that pass-through revenue would be declining. We historically, it was growing much more slowly than our core recurring revenue, and we always got a chunk of that 50 basis points was just mix.
For those of you that you're gonna look at our company, I really suggest you create a pro forma of the company without the distribution, and just look at as based on the recurring fee revenue. When you do that, you'll see that our margins are very much like other tech companies, and our growth profile is very much like other tech companies. It's a little bit... We sort of have to report it this way, so that is a bit of a confounding factor. In terms of the things then that... Then the other thing that's been a little bit unusual lately is, there have been some significant postal increases, and there will be another one next year, which grows that pass-through part and comes at low margin.
That's tends to depress. You know, the margin that we report is based on all of our revenue, you sort of have to back out what's going on on the distribution side. Now let me just talk about margin on the core piece, the sort of the real margin. You know, the main driver there, Puneet, is like any other technology company, you know, there's a fixed cost to get the technology in place, and as you bring in more clients and more revenue, there's a lot of operating leverage in it. When we talk about the increases in margin, it's largely based on that operating leverage of having more revenue on the same technology platform.
You know, in addition to that, we do all the things that every other company does in terms of being more efficient every year, reengineering our processes, all those kinds of things. It's largely that operating leverage that drives it.
No, I appreciate. Just to be clear, so more distribution revenue next year.
Yeah.
Which has been very strong recently, that creates like a margin headwind for the entire on reported basis.
That's right.
Got it. I actually have a question from here. Let me read it. Should have gotten my glasses here.
Here we go.
Are you still anticipating $25 million-$30 million of incremental revenue from additional module sales, such that you are actually close to $100 million in incremental wealth revenue for fiscal 2024?
Yes, we're still anticipating on the order of, I'll call it $20 million plus. However, that wouldn't necessarily be for 2024 because we have to make the sales and then convert them. I would think that'd be more like 2025.
Got it. Any other questions? We have 30 seconds left. There is one actually there.
We're getting the microphone.
Thank you. Maybe just, I just wanted to follow up on something you talked about when it comes to pass-through voting. Just wanted to make sure, would this be something similar to what ISS or Glass Lewis is doing right now, like doing the research around proposals, for different asset managers?
Yeah. ISS and Glass Lewis, they do the research, and they make recommendations. They are. ISS does have a platform that allows people to cast their vote, but the role in the chain that we play is taking in that. We take votes directly. We take some from ISS, other places, and transmit and tabulate them. It's a little bit different, and we are not gonna get into the research business. We've always had opportunities to buy ISS multiple times, and we've always taken the view that being the person that's counting the votes and being the person that's making the recommendations is a conflict and that we would not pursue that activity because we're really focusing on the infrastructure side of things.
I wanna thank you everyone very much. Thank you for your interest in Broadridge. I look forward to continuing the conversation over time. Thank you.
Thank you. Thank you.