Broadridge Financial Solutions, Inc. (NYSE:BR) Q3 2024 Earnings Call Transcript

Broadridge Financial Solutions, Inc. (NYSE:BR) Q3 2024 Earnings Call Transcript May 8, 2024

Broadridge Financial Solutions, Inc. misses on earnings expectations. Reported EPS is $1.79 EPS, expectations were $2.23. Broadridge Financial Solutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Broadridge Financial Solutions Third Quarter and Fiscal Year 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call over to Edings Thibault, Head of Investor Relations. Please go ahead.

Edings Thibault: Thank you, Andrea. Good morning, everybody, and welcome to Broadridge’s third quarter fiscal year 2024 earnings conference call. Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com. Joining me on the call this morning are Tim Gokey, our Chief Executive Officer; and our Chief Financial Officer, Edmund Reese. Before I turn the call over to Tim, a few standard callouts. One, we’ll be making forward-looking statements on today’s call regarding Broadridge that involve risks. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K. Two, we’ll also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge’s underlying operating results.

An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?

Tim Gokey: Thank you, Edings, and good morning. It’s great to be here to review our third quarter results and update you on our full year outlook. Overall, I’m pleased with the performance of our business in a complex environment. We see a market in which the underlying fundamentals are solid, where capital markets and retail investor activity are beginning to strengthen, and where our clients are highlighting the need for continued technology investment. While all that is going on, those same clients are being careful with their spending as they weigh the new higher for longer scenario as well as other tail risks. These trends play to Broadridge’s strength. Our testing is indicating that healthy markets are driving a pickup in investor participation and position growth, and are delivering innovative solutions across governance, capital markets and wealth.

Sales continue to be strong, highlighting our clients’ willingness to move ahead with solutions that address revenue, cost or regulatory needs. My conversations with clients make it clear that they see Broadridge as a partner in helping them grow their business and adapt to change. It’s a strong position, and it will be further enhanced as we put our cash flow to work with a balance of capital returns and targeted M&A. So, let’s dig into the quarter. First, Broadridge reported 4% recurring revenue growth and 9% adjusted EPS growth. Those results were modestly impacted by the timing of annual meetings, which pushed some governance revenues into the fourth quarter. Second, we continue to execute against our strategy to drive the democratization and digitization of investing, simplify and innovate trading, and modernize wealth management.

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Q&A Session

Our strategy is supported by long-term trends, including position growth, which we continue to see in the mid to high single digit range. Third, that execution is coming through in our closed sales, which rose 29% in the quarter and are now up 19% year-to-date. We expect that positive momentum to continue in the fourth quarter. Fourth, we remain on track to achieve our objective for 100% free cash flow conversion for the full year. That positions us to use our capital to increase share repurchases and to fund strategic tuck-in M&A. Finally, as we move through our seasonally large fourth quarter, Broadridge is on track to deliver another year of steady and consistent growth, in line with our long-term financial objectives. We are reaffirming our outlook for fiscal ’24, adjusted EPS at the middle of our 8% to 12% range, with recurring revenue growth at constant currency at the low end of our 6% to 9% range.

With strong year-to-date sales, we also expect record closed sales of $280 million to $320 million. Now, let’s turn from the headlines to slide four to review highlights of our execution, starting with our governance franchise. ICS recurring revenue rose 1% in the third quarter as the timing of regulatory communications impacted our quarterly growth. In regulatory communications, revenues were flat despite 5% equity position growth. As many of you know, the peak period for proxy communications falls right at the end of March, so any shift in the annual meeting schedule can have an impact on quarterly revenues. This year, with Easter in the last week of March instead of April last year, we saw a substantial number of companies push back to date for their annual meeting.

That change led to a shift of regulatory revenue from March to April, or from the third to fourth quarter. This timing shift will have no impact on our full year results. Outside of timing, position growth trends were mixed. As I noted, equity position growth was 5%, in line with our testing, driven by double-digit growth in managed accounts. Fund and ETF record growth declined to negative 1% for the quarter. Quarterly fund position growth can vary more widely than the full year number, because it is impacted by the timing and types of communications that are distributed during any particular quarter. More broadly, the cumulative impact of lower fund flows and the shift to money market funds that began over a year ago has weighed on growth, especially for active funds.

Year-to-date fund record growth was 2%. Looking ahead, fund flows are improving and our testing indicates a modest pickup in the fourth quarter. As Edmund will outline, for the year, we expect stock record growth of 6% and fund record growth of 3%. Driving and enabling the democratization of investing is a key part of our long-term growth strategy. There’s no better opportunity to demonstrate that — what that means than in a large and very visible proxy fight. As part of the Disney contest, Broadridge processed and distributed multiple rounds of communications to millions of registered and beneficial shareholders holding almost 2 billion shares on behalf of hundreds of our broker/dealer clients. Each vote was subject to multiple reviews and a process verified by an independent accounting firm so that all sides could be highly confident in the accuracy of the Broadridge votes.

Vote tallies were available daily to all participants. The process culminated with an annual meeting posted on Broadridge’s virtual shareholder meeting platform and the outcome was known immediately when the meeting closed. Contests like Disney are a great showcase for issuers, investors, our broker/dealer clients and regulators of how Broadridge’s significant investments in technology and digital communications, combined with our commitment to accuracy, enhance investor confidence in our markets. Outside of highly visible contests, we continue to enhance investor engagement by supporting the growth and voting choice across funds. In recent months, we’ve gone live with five of the largest asset managers across a mix of both retail and institutional focused funds and ETFs. This, in turn, is leading to strong interest to extend this service from more asset managers and for a wider set of fund categories.

We’re also continuing the rollout of our tailored shareholder report solution as we help the funds industry navigate regulatory change. We’re in production testing now and we go fully live beginning in July. Turning to capital markets. Revenues rose 8% to $266 million, driven by strong growth in BTCS, which continues to deliver on the pillars of our original acquisition case. During the quarter, we signed a leading U.S. and global bank as the first client for global futures and options SaaS platform. This new capability will build on our existing products and significantly expand our derivatives trading solutions. It also represents another step forward in our goal of expanding BTCS’ capabilities across asset classes and to our U.S. client base, which was a key part of our long-term growth plan at the time of the acquisition.

On the post-trade side, we completed the implementation of our global post-trade platform for a leading Nordic bank. Our platform consolidates the bank’s legacy in-house systems, streamlining its operations across 25 European markets and 10 custodians across both equities and fixed income. This particular bank was a long-term BTCS client. So, it’s also another example of leveraging our front office relationship to extend our solutions across the trade life cycle. We also continue to see nice traction with our digital ledger repo and in AI with our BondGPT and OpsGPT solutions. Turning now to Wealth and Investment Management. Revenues rose 11% to $159 million as strong growth from UBS and the license revenue was partially offset by the E-Trade transition.

In the first full year since the rollout of our wealth platform, we are seeing significant interest in our broad suite of wealth capabilities, and that’s driving strong sales momentum with year-to-date Wealth Investment Management sales up 75%. I’m especially pleased to see strong interest in Canada for wealth component capabilities. Canada accounts for approximately a third of our Wealth and Investment Management revenues, and we see a long-term opportunity to adapt our wealth tools for Canadian firms. Moving to sales. Closed sales rose 29% in the third quarter and are up 19% year-to-date. We benefited from strong sales of our digital and print solutions for the new tailored shareholder reports, and we continue to see significant print and digital opportunities in customer communications.

Our pipeline remains at record levels as clients focus on solutions that drive revenue growth, like our front office trading tools, and meet their regulatory requirements like tailored shareholder reports. That combination of strong sales and a record pipeline is giving us increased confidence in our ability to achieve record closed sales in line of $280 million to $320 million full year guidance. Let’s move to slide five for some additional thoughts on our quarter and outlook. First, we are poised to deliver another year of mid single digit organic recurring revenue growth and double-digit earnings growth, right in line with the long-term growth goals we laid out at our Investor Day in December. In a quarter impacted by the timing of annual meetings, we reported 9% adjusted EPS growth.

Now one month into the fourth quarter, we have high visibility into our remaining volumes. For the full year, we’re tracking to recurring revenue growth of 6%, adjusted EPS growth of approximately 10% and record closed sales. Second, our growth continues to be driven by long-term trends, increasing investor engagement, the demand for digitization, accelerating trading, regulatory change, leveraging data and AI, and the need to modernize wealth management have all combined to drive strong sales over the first three quarters. As a result, we’re going into our largest sales quarter with a strong pipeline and increasing visibility. Position growth has moved from pandemic highs and overall trends remain in line with the mid to high single digit growth rate of the past decade.

Looking beyond the fourth quarter, the outlook for financial services firms appears to be improving. Capital markets activity is picking up and innovation is driving sales growth as our clients increase their level of investment. At the same time, strong equity markets are driving investor engagement and fund investors are beginning to rotate out of money market funds, both of which bode well for future position growth. Third, we’re executing on our growth strategy. We are driving shareholder engagement and governance, enhancing our digital capabilities and customer communications, delivering innovative new capabilities in capital markets and are expanding our ability to drive growth and wealth across North America. We’re also investing to strengthen our product teams, sales capabilities and technology capabilities including of course AI.

Fourth, we’re on track to achieve our 100% free cash flow conversion objective and the combination of strong free cash flow and our investment-grade balance sheet positions us to return additional capital to shareholders. We’re also seeing a growing number of attractive M&A opportunities to further complement our organic growth. Finally, Broadridge remains well-positioned to drive long-term growth. We remain on track to deliver on our three-year growth objectives of 7% to 9% recurring revenue growth constant currency, 5% to 8% organic, and 8% to 12% adjusted EPS growth with fiscal ’24 right in line with those goals. And with continued execution supported by long-term demand trends, we are well-positioned to continue to grow beyond FY ’26 as we attack our $60 billion and growing market opportunity.

I want to close by thanking our associates around the world. The market for what we do continues to evolve and Broadridge will be evolving as well. We’re seizing the opportunities in front of us. And your focus on serving our clients, as shown by our strong accomplishments this quarter and over a long period, continues to set us apart. Thank you. And with that, let me turn it over to Edmund.

Edmund Reese: Thank you, Tim, and good morning, everyone. Let me start by saying that I’m pleased with the third quarter results relative to our full year guidance. While third quarter recurring revenue growth was impacted by the timing of annual meetings, we are entering the seasonally larger fourth quarter in a strong position. Through three quarters, we reported 6% recurring revenue growth, 11% adjusted EPS growth, and have received 98% of proxy records through April. That gives us a high confidence interval in our ability to deliver 6% recurring revenue growth, approximately 20% adjusted operating income margin and adjusted EPS growth of approximately 10%. Of equal importance is our cash flow performance for the year. We are on track for 100% free cash flow conversion, which will allow us to return a total of $700 million to $800 million to shareholders through the dividend and with share repurchases of $350 million to $450 million.

So, with clarity on fiscal 2024, in my view, what matters most to achieving our three-year financial objectives are the wins that we have at our back, which are driving positive momentum in the business. First, closed sales through the first three quarters are up 19% over last year. And our healthy pipeline reinforces our conviction that we will achieve 15% to 30% sales growth in our full year ’24 guidance. Second, while our testing shows 6% equity and 3% fund and ETF position growth for full year ’24, the early testing for Q1 ’25 is consistent with more recent increased retail market activity and our long-term outlook of mid to high single digit growth. Third, we continue to focus on actively managing our expenses and finalizing our restructuring effort in the fourth quarter to create investment capacity for organic growth in fiscal ’25 and ’26, while delivering continued earnings growth.

Finally, our free cash flow conversion is definitively back at historical levels, positioning us to supplement our organic growth with accretive tuck-in M&A or return capital to shareholders. As a result, when I look ahead, I see strong momentum in the Broadridge business. Strong closed sales, driving five to eight points of growth from new sales, position growth supporting two to three points from internal growth, M&A investment contributing additional growth, and active expense discipline that will enable Broadridge to continue to invest in organic growth and deliver continued earnings growth. We continue to execute the Broadridge financial model and that gives me confidence that we remain on track to deliver again on our three-year financial objectives and on mid- to high teens ROIC.

So, now turning to the financial summary on slide six. You see the performance for the third quarter. Recurring revenue rose to $1.1 billion, up 4% on a constant currency basis, all organic. Adjusted operating income increased 7%. And AOI margins of 21.4% expanded 40 basis points. And adjusted EPS rose 9% to $2.23. Finally, as Tim noted, we delivered third quarter closed sales of $80 million, up 29% over Q3 ’23. On slide seven, you see that recurring revenue grew 4% to $1.1 billion in Q3 ’24. Recurring revenue growth driven by converting our backlog to revenue and growth in GTO was impacted by proxy communications that were delayed into our fiscal Q4. So, for more context on this point, March is typically a heavy month for proxy communications, accounting for almost a quarter of our full year positions.

As Tim mentioned, in 2024, we saw a modest delay in the timing of annual meetings, which pushed volumes from March into April. While that lowered our Q3 revenue, we have since processed virtually all of those delayed positions, and that will benefit regulatory revenue in the fourth quarter. On slide eight, we can see recurring revenue growth across our ICS and GTO segments. In Q3, ICS recurring revenue grew 1% largely impacted by the quarterly noise that I just mentioned. Regulatory revenue was flat as mid single digit equity position growth in revenue from sales were partially offset by the timing of the annual meetings. As I explained earlier, while these timing variances have no real impact on full year revenues, they can result in quarters that vary from our reported position growth.