Broadridge Financial Solutions, Inc.

Good morning and welcome to the Broadridge Fiscal Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Eddings Thibault, head of investor relations. Please go ahead.

Thank you, Kate. And good morning, everybody, and welcome to Broadridge's third quarter fiscal year 2023 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 CEO, and our CFO, Edmund Reese. Before I turn the call over to Tim, let me make a few standard reminders. One, we will be making forward-looking statements on today's call regarding Broderidge 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 Broderidge's underlying operating results. An explanation of these non-GAAP measures and reconciliations to the comparable GAAP measures can be found in the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?

Thanks, Ed Ings. Good morning, and thank you for joining us. I'm pleased to be here to review our strong third quarter results. I'll start with a quick summary and key headlines, followed by a review of our business. Then I'll close with some thoughts on why I think fiscal 23 has been such a strong year for Broadridge across key operating, strategic, and financial milestones. and why that positions us well for the future. Let's get started on slide three. First, Broadridge delivered another strong quarter. Recurring revenue rose 9% constant currency with double-digit growth in our governance business and strong growth in GTO. That revenue growth helped drive 10% growth in adjusted operating income and 6% growth in adjusted EPS. Importantly, those earnings translated to strong free cash flow, which nearly tripled year over year as we continued to step down our wealth platform investments. Second, investor participation remained strong. Q3 equity position growth was 10%, and fund position growth was 6%. With over 90% of equity record dates completed through last week, we continue to expect position growth be in the high single digits for fiscal 23, underlining the power of the trends driving that growth. Third, Broadridge continues to execute across governance, capital markets, and wealth. The investments we have made to innovate in our governance business, to put in place front-to-back capabilities in capital markets, and to build a transformational wealth platform suite are resonating with clients. Fourth, As we move through our seasonally large fourth quarter, Broadridge is on track to deliver another year of steady top and bottom line growth. We expect to report recurring revenue growth at the higher end of our 6% to 9% guidance range, and we are reaffirming our outlook for continued margin expansion and 7% to 11% adjusted EPS growth. Our fiscal 23 outlook has us on track to deliver at or above the high end of our three-year financial objectives, 7% to 9% recurring revenue growth, and 8% to 12% adjusted EPS growth. That would mark a fourth consecutive cycle in which we have delivered on our three-year financial objectives. Now let's turn to slide four for a review of our results, beginning with our governance for ICS business. Governance recurring revenues rose 11% constant currency, driven by strong growth across all four product lines. Our regulatory business, with its connections to broker-dealers, funds, public companies, and tens of millions of individual investors, continues to benefit from strong investor participation. As we move to the peak of proxy season, equity position growth in particular remains strong at 10%. led by low teens growth in managed account positions and solid 7% growth in self-directed positions. Broadridge is benefiting from broad base growth across both mid and large cap equities and across sectors. And, as Evan will share, we see further growth ahead for the all-important fourth quarter. That growth especially in the context of declining equity and fixed income markets over the past 15 months, really underscores the secular, technology-driven trends driving increasing investor participation. On the fund side, position growth also remained solid at 6%. We continue to see double-digit growth in passive fund positions, including ETFs and money markets, with basically flat growth in active fund positions. For all the growth we've seen in passive funds over the past decade, passive positions still account for less than 40% of the total. Giving us confidence, this trend can continue to drive growth for a long time to come. Outside of the regulatory core, our governance business posted double-digit growth in recurring revenue. Our customer communications business is benefiting from strong growth in digital solutions. Our issuer business is benefiting from strong demand for our registered and disclosure solutions, and higher interest rates are contributing to the growth of our data-driven funds business. Partially offsetting the strong recurring revenue growth is lower event-driven activity. The weakness we noted last quarter has continued and will likely extend into the fourth quarter as well. In the past, We've seen these lulls in activity extend anywhere from two to four quarters in periods of market weakness and uncertainty. As a reminder, most of this deferred activity involves elections for mutual fund boards of directors. As such, they need to happen eventually, and when they do, they grow with positions. Turning now to GTO, capital markets revenues grew 5% to $246 million. The integration of BTCS continues to deliver long-term benefits. During the quarter, we onboarded a leading global multi-asset class clearing firm, providing them with ultra-low latency connections to 40 global member markets and displacing a major competitor. In addition, one of our goals has been to develop a suite of applications that bring together our capabilities across the front and back offices to simplify workflow across the trade lifecycle. These efforts are now translating into multiple pipeline opportunities for bundled front-to-back sales. Outside of BTCS, our distributed ledger repo solution, while still small in revenue terms, continues to generate strong market interest. UBS recently executed the first real-time intraday DLT repo trade on our platform. This represents a major step forward in increasing settlement velocity and collateral mobility, and therefore reducing the amount of capital needed by clients to manage their intraday liquidity needs. In wealth, revenue grew 10% to $143 million. I am pleased to announce that we have completed both the platform development and testing of our Broadridge Wealth product suite. We've made significant progress towards finalizing a phased rollout approach with UBS that delivers solid economics to Broadridge while addressing T plus one and giving UBS the flexibility to deploy modules on its own timetable as it continues its digital transformation. We remain confident that we are on track to recognize revenue in the first quarter of fiscal 24 and that we will see notably improved free cash flow conversion going forward. We have invested significantly the past three years to reach this point. Working closely with UBS, we've created a suite of modular solutions that enable our clients to drive advisor productivity, improve the investor experience, and digitize front-to-back operations. This is a differentiated capability that others are talking about, but that only Broadridge can deliver now. Our componentized approach means that firms can step into this transformation based on their needs, These conversations are resonating, and our pipeline continues to grow, now up over 40% from the beginning of the year. All in all, this is a proud moment for Broderidge. Finally, speaking of client conversations, closed sales rose 8% to $62 million in the third quarter. We are now entering our critical selling quarter with a record pipeline, and we are seeing significant interest in digital solutions, capital markets, and wealth. At the same time, we're clearly in a highly uncertain economic environment. Like others, we're seeing longer sales cycles, especially in Europe. With some deals slipping into the summer, we now expect full-year closed sales to be near the low end of our 270 to 310 million guidance. Our record pipeline gives us confidence the variation we are seeing is timing, and our strong backlog of solutions already sold and in the onboarding process means that we expect minimal impact on FY24 revenue growth. I'll close my remarks on slide five. Broadridge is poised to deliver another strong year in fiscal 23 across key operating, strategic, and financial metrics. First, on the operating side, position growth remains very healthy. After two years of strong markets and ultra-low rates, market dynamics have shifted significantly over the past 12 months And yet our results year-to-date, the activity we're seeing early in Q4, and our forward testing all give us a high degree of confidence that we'll end the year with position growth in the high single digits for equities and mid-single digits for funds. These results, in turn, give us added conviction that the long-term trends driving increased investor participation remain very much intact, even in a choppy market and even after two above-trend years. Beyond position growth, we've taken steps to strengthen our government business by implementing voting choice for funds, or pass-through voting as we've referred to it in the past, and universal proxy, all while developing a new offering for tailored shareholder reports. Between the fundamental drivers and these enhancements, the regulatory business is the strongest it's ever been. Second, our investments in digital communications capabilities have begun to translate into significant momentum. Broadridge has become a leading omnichannel communication hub, giving our clients an enhanced digital experience while preserving best-in-class print. For many years after we acquired DST's communications business at the beginning of fiscal 17, the combined business contributed double-digit earnings growth by delivering strong synergies and scale. More recently, we've seen these efficiencies help us drive new client wins. And now, our digital capabilities are enabling Broadridge to play a new and more central role in how our clients service and grow their business. This is the vision we laid out when we made the acquisition, and it's exciting to see it bear fruit. Third, our capital markets business have never been in a stronger position. Our ability to address the entire trade lifecycle puts us in a unique position, to help our clients simplify their complex operations. As we integrated I-tivity, we have built the capabilities that will link our front and back office solutions, and the market receptivity has been strong. Fourth, our Broadridge Wealth Platform will enable our clients to drive digital transformation on their terms through a wide set of modular solutions targeting advisor productivity, improved investor experience, and digitized operations. We've now completed the elevated investment phase of our growth strategy, and we are well positioned to attack this growing market. Lastly, we're delivering another year of strong and consistent financial results. After a strong third quarter, our full-year outlook calls for high single-digit recurring revenue and adjusted EPS growth. The successes we are discussing today required investments, significant investments in the case of BTCS and wealth. Now we're exiting that investment phase, which means that our free cash flow conversion is starting to return to historical levels, which we expect will result in improving ROIC as well. In summary, Broadridge is delivering strong fiscal 23-year results across multiple fronts, Our key operating metrics continue to grow. We've made important steps in strengthening key parts of our governance, capital markets, and wealth franchises, and we are reaffirming our outlook for another year of consistent financial results backed by improving free cash flow. Broadridge is well positioned to drive long-term and sustainable growth. I want to conclude by thanking our associates, many of whom listening to this call our commitment to client service consistently sets us apart with our clients that is a big testament to the work of our highly engaged associates around the world they continue to make a difference for our clients and for millions of investors every day thank you and with that let me turn things over to Edmund well thank you Tim and good morning everyone