Broadridge Financial Solutions Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

Key Takeaways

  • 16% recurring revenue growth and 10% adjusted EPS increase in Q3, leading Broadridge to raise its FY22 EPS guidance to 13–15% and anticipate mid-teens growth across revenue and EPS with further margin expansion.
  • Governance segment momentum drove 9% ICS revenue growth as equity positions rose 17% and mutual fund/ETF positions grew 10%, fueled by record proxy season volumes and increased investor participation and digitization.
  • Capital Markets revenue surged 56% to $247 million, led by the Itivity (now Broadridge Trading and Connected Solutions) acquisition, modular technology wins, DLT repo volumes climbing toward $50 billion/day, and progress on AI-powered fixed-income platforms.
  • Wealth and Investment Management revenues dipped 2% against lapping last year’s elevated trading volumes, yet wealth sales jumped over 50% year-to-date, and the next-generation workstation rolled out to 15,000 UBS advisors with strong user feedback.
  • Closed sales set new Q3 and year-to-date records—up over 40%—driven by componentized deals (90% under $2 million), underpinning guidance of $240–280 million in full-year bookings and topping multi-year growth objectives.
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Earnings Conference Call
Broadridge Financial Solutions Q3 2022
00:00 / 00:00

There are 8 speakers on the call.

Operator

Morning, and welcome to the Broadridge Fiscal Third Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Eddings Thibault, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Kate. Good morning, and welcome to Broadridge's Q3 fiscal year 2022 earnings 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, a few standard reminders.

Speaker 1

We will be making forward looking statements on today's call regarding Broadridge that involve risks. A summary of these risks can be found in the slides and a more complete description on our annual report on Form 10 ks. We will 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.

Speaker 1

Tim?

Speaker 2

Thanks, Annie. Good morning. I'm pleased to be here to discuss our strong results, record sales and outlook for another really good year. I'll start with the highlights for the quarter. First, Broadridge reported another quarter of strong results.

Speaker 2

Recurring revenues rose 16% and adjusted EPS rose 10%. More importantly, we're entering our seasonally largest quarter with continued momentum and we are well positioned to close out Another year of strong top and bottom line growth. 2nd, our growth continues to be powered by long term trends. In an uncertain market, we're benefiting from increased investor participation, the need to modernize and digitize financial systems technology and the ever present focus on efficiency. Thanks to our investment and multiyear focus, Broadridge is taking advantage of these trends.

Speaker 2

And you see that in our growth and in our closed sales. We're also benefiting from strong performance in our acquisition of Activity. 3rd, the convergence of long term trends is making what we do increasingly important, especially in governance. In a few moments, I'll discuss those trends and their positive implications. Finally, Broadridge is on track to deliver another strong year.

Speaker 2

As a result of our year to date performance and visibility into the 4th quarter, we are raising our adjusted EPS forecast to 13% to 15% from 11% to 15%. With only a few months to go, we expect to deliver mid teens recurring revenue and mid teens adjusted EPS growth along with another year of margin expansion. That in turn positions us to deliver at the higher end of our 3 year growth objectives. Let's turn now to our business update on Slide 4, starting with governance. Our governance business continues to drive our growth.

Speaker 2

ICS recurring revenues rose 9% to $630,000,000 in the 3rd quarter, driven by new sales and strong physician growth. We are now well into the peak of proxy season and record growth remains strong. Equity stock record growth was 17% in the 3rd quarter with overall positions increasing throughout the quarter despite volatility in the market. We see this momentum continuing into the Q4 as Edmund will share with you. Looking at the drivers of that growth, Our data shows the largest increase in online brokers complemented by substantial double digit growth from more traditional players.

Speaker 2

And we continue to see very good growth across both managed and individually directed accounts. We're also seeing investor Participation increasing on the fund side with mutual fund and ETF record growth of 10% for the quarter. ETFs are continuing to gain ground with investors, but we also saw strong growth at a number of active complexes. The continuing strength and breadth of equity and fund position growth Reflects the continued breadth of retail investor participation and the power of technology to increase access to markets. Outside of regulatory, we saw solid mid single digit growth across our other businesses, including data driven solutions, issuer and customer communications.

Speaker 2

Moving to Capital Markets. Recurring revenues rose 56% to 247,000,000 Itivity was the biggest driver and is also contributing nicely to our closed sales growth. The combination of Itivity's modular technology architecture, Our commitment to client service and our long term product roadmap is resonating with clients and driving market share gains. We're also making good strides on the integration itself, including rebranding the business as Broadridge Trading and Connected Solutions or BTCS. With 3 quarters under our belt, we forecast the rebranded activity is on track to meet our expectations.

Speaker 2

I'm also pleased to see continued progress in our distributed ledger and AI initiatives. On distributed ledger repo, We're on pace to go live with our 3rd significant market participant in the next few weeks, which will take our daily average trading volume Up over time to $50,000,000,000 per day from $35,000,000,000 now with strong pipeline behind that. Our AI powered fixed income trading platform also continues to make steady progress. During the quarter, we completed our integration with Charles River And last week, we announced our buy side advisory form with many of the world's largest asset management firms, including BlackRock and PIMCO. Turning to Wealth and Investment Management.

Speaker 2

Revenues declined 2% to $134,000,000 as we lapped the elevated trading volumes triggered by the mean a year ago. More importantly, our wealth sales remained strong in the quarter and are up more than 50% year to date, building the base for future growth. Finally, we successfully rolled out our next generation client workstation to more than 15,000 UBS advisors and others and feedback from those users has remained exceptionally positive. Last, we reported another strong quarter for closed sales, which are up more than 40% year to date and set a new record for Q3 and for year to date. These new sales are being paced by our investments in enhancing investor engagement, adding and growing activity, Building out our DLT and AI powered solutions and in our wealth product suite among others.

Speaker 2

Our strong sales results have us on track to achieve another year of record closed sales and to set the stage for continued growth. As I noted earlier, We are now well into proxy season as more than 80% of annual meetings take place in April through June. Equity position growth remains strong, which speaks to the continued increase in participation in our markets, and that's clearly a strong tailwind for our business. Beyond that growth, however, we see a confluence of long term trends that are making our role powering corporate governance even more critical and valuable to the investment process. So let's turn to Slide 5 for a deeper dive.

Speaker 2

The first of those trends is one I've already discussed, which is growing participation in our For the democratization of investing. And that really is a function of falling trading costs, enabling a much wider set of products for investors. If you think back over the past 2 decades, we've seen the rise of ETFs, managed accounts including pass through voting and direct indexing. Taken together, these trends are bringing more investors, especially younger ones, into the market and giving them access to more diversified and sophisticated investment strategies. At the same time, The importance of environmental, social and government factors is also growing, driven especially by climate and social issues.

Speaker 2

Investors are voting with their assets as shown by the strong inflows into ESG funds and increasingly they're voting with their shares. Not only are we seeing a rising number of ESG proposals on the ballot for annual meetings, those proposals are getting more support over time. And we've all seen the SEC's proposed rules for further ESG disclosures. It's clear That ESG issues are increasing engagement of all investors, both retail and institutional. As a result, engagement between retail investors, institutional investors, wealth managers, fund companies and issuers is more important than ever.

Speaker 2

We've instituted end to end vote confirmation for 2,500 public companies, including all the Fortune 500, so that investors can confirm their votes are being counted. And we're implementing universal proxy to simplify contests. At the same time, We're making it easier than ever for voters and issuers to engage each other with our enhanced proxy vote app and an upgraded virtual shareholder meeting platform. In short, we're using our place at the center of a network linking broker dealers, institutional investors, tens of millions of retail investors And thousands of funds in public companies to make it easier than ever for every investor to vote and to have a voice in the policies of the companies that they own. And we're making it more efficient than ever for public companies and funds to engage with their shareholders.

Speaker 2

These investments are paying off in the form of higher growth and higher value for all of our stakeholders. I'll wrap up with some final thoughts on Slide 6 and then turn it over to Edmund. Broadridge Continues to execute and deliver on our growth strategy. We're extending our Governor's franchise and enhancing investor engagement. We're growing capital markets by driving efficiency and enabling trading innovation.

Speaker 2

And we're building a wealth and investment management business with next generation technology. Our performance in the quarter and over this year has been driven by the onboarding of new sales and strong underlying volume trends. Looking ahead, we see another strong quarter despite increased volatility as the world copes with rising inflation, higher rates, the slowdown in China and unfortunately the Russian invasion of Ukraine. Our ability to execute in these choppy markets reflects the strength of our recurring business recurring revenue business model and the long term trends that power our growth. Whether it's the increased investor participation driven by falling trading costs, Digitization or the relentless pace of technology innovation, these trends have proven durable in both strong And give us the confidence to make investments to drive long term growth.

Speaker 2

So even in the face of increased volatility, Our business is poised to grow. Broadridge is on track to deliver a strong Q4 to close out another very good year With FY 2022 recurring revenue at the high end of our guidance range, with continued margin expansion and with adjusted EPS growth of 13% to 15%. That strong performance in 2022 comes on the back of a fiscal year 2021, Broadridge delivered 10% recurring revenue growth, 60 basis points of margin expansion and 13% adjusted EPS growth. As a result, we remain well positioned to deliver at the higher end of the 3 year growth objectives we laid out at our last Investor Day. Before I turn it over to Edmund, I want to thank our 14,000 associates around the world for their hard work in delivering the results we're announcing today.

Speaker 2

The work we do is important, enabling better financial lives for millions of investors around the globe. Our associates' high engagement, still 10% above pre pandemic levels, makes a difference every day for those investors, for our clients and for our shareholders. Thank you. With that, let me turn the call over to Edmund.

Speaker 3

Thank you, Tim, and good morning, everyone. I'm pleased to be here discussing another quarter of strong performance, which highlights the strength and the stability of our financial model And the long term trends that are driving our growth. Broadridge delivered top line growth above our fiscal year 2022 guidance range, Driven by revenue from new sales, strong volumes and continued contributions from Itivity. We continue to expect recurring revenue growth to be at high end of our 12% to 15% growth range. And that coupled with our continued ability to create operating leverage Even in this inflationary environment, gives us confidence to increase our adjusted EPS guidance to 13% to 15% growth.

Speaker 3

As a result of our strong Q3 performance, together with our expectations for a strong Q4, Broadridge remains on track to deliver another year of double digit revenue growth, higher margins and double digit adjusted EPS growth. Turning to Slide 7, you can see that strong performance. In Q3, Broadridge's recurring revenues grew 16% to 1,000,000,000 Adjusted operating income increased 10% to $313,000,000 and AOI margins were flat at 20 EPS increased 10% to $1.93 Our Q3 results included higher than expected equity position growth And also benefited from the timing of Itivity revenue and tax discretes. I'll also reiterate that we will continue to see operating income growth, partially offset by higher interest expense related to the acquisition of Itivity until we grow over the incremental Interest expense in fiscal Q1 2023. Let's get into the detail of those results starting with recurring revenue on Slide 8.

Speaker 3

Recurring revenue grew from $873,000,000 in Q3 'twenty one to $1,000,000,000 in Q3 'twenty two, an increase of 16%, Exceeding our fiscal 2022 guidance range, organic growth accounted for 7 points of the 16% increase, driven by a balance of onboarding new sales and volume growth. Acquisitions, primarily activity drove 9 points of growth. Now let's turn to Slide 9 to look at the growth across our ICS and GTO segments. We continue to see strong growth in both of our segments. ICS recurring revenues grew 9% all organic to $630,000,000 driven by strong growth in our regulatory business and balanced Mid single digit growth across all other product lines.

Speaker 3

Regulatory revenues rose 13% to $322,000,000 driven by strong growth in equity positions and mutual fund interims. Data Driven Fund Solutions revenue grew 6% to $91,000,000 resulting from higher assets under administration in our mutual fund trade processing unit. Our issuer business increased by 5 to $46,000,000 as we continue to see growth in our disclosure products. That business also benefited from high retention rates for our virtual shareholder Meeting platform as the number of meetings are on pace to modestly exceed fiscal year 2021. Finally, we continue to benefit from strong demand in our customer communications business as revenues rose 6% to $172,000,000 Turning to GTO, recurring revenues grew by 29% to $381,000,000 Organic growth was 2%.

Speaker 3

Capital market revenues grew by 56 percent to $247,000,000 iTivity now branded BTCS

Speaker 1

was the largest

Speaker 3

Timing of license revenue, but more importantly, activity continues to benefit from strong demand, including market share gains in Europe and Asia. On an organic basis, capital market revenues grew by 6% driven by new sales and higher fixed income trading volumes. Wealth and Investment Management revenues decreased by 2% to $134,000,000 in line with our expectations. Lower equity trading volumes resulting from lapping the elevated retail volumes we saw last year at the height of the meme stock Phenomenon lowered growth by 4 points. Looking forward, we expect both wealth and capital markets growth to pick up in the 4th quarter.

Speaker 3

As we continue to onboard new sales with full year organic growth in our targeted 5% to 7% range for both franchises. Now let's turn to Slide 10 for a closer look at volume trends. We are now in the peak period for annual meetings and proxies and we continue to see Strong volume growth driven by increasing investor participation. Equity positions continued to strengthen throughout the quarter and reached 17% in Q3. Through the end of April, we have received record data for 97% of the proxies For the full year, we expect equity position growth of approximately 18%.

Speaker 3

We are encouraged by this long term tailwind and its contribution Driving growth in our business. Growth in mutual fund and ETF volumes was also strong at 10% in Q3 despite choppy markets. We continue to expect low double digit growth for the full year. Turning to the bottom of the slide, trading volumes fell by 6% on a blended basis as expected, driven by lower equity trading volumes in wealth, which more than offset an increase And fixed income trading and capital markets. We continue to expect full year trading volume to be essentially flat for the year.

Speaker 3

Now I'll move to Slide 11, where we summarize the drivers of recurring revenue growth. Recurring revenues rose 16% powered by 7% organic growth and a 9 point contribution from Mitevity. Organic growth Balance between net new business and internal growth. Revenue from closed sales and our continued high retention of recurring revenue from existing client Contracts drove 3 points. And internal growth contributed 3 points to recurring revenue driven largely by position growth, which more than offset the decline in equity trading volumes.

Speaker 3

Our nine points of acquisition growth were driven by Itivity, which contributed $79,000,000 as I noted earlier. And keep in mind, we expect the benefit from acquisitions to decline significantly in the 4th quarter as we lap the 1 year anniversary of the close of the Itivity acquisition in mid May. At that point, We will begin to contribute to our organic growth. I'll finish the discussion on revenue with a view of total revenue on Slide 12. Total revenue grew 10% in Q3.

Speaker 3

Recurring revenue was the largest contributor driving 10 points of growth. Loaded no margin distribution revenue increased by 6% and contributed 2 points to total revenue growth. The biggest driver of that growth came from higher mail volumes in our customer communications business as well as higher postage rates, which offset a decline in event driven activity. I will reiterate that both elevated distribution revenue and the increased mix Elevated growth in distribution revenue in the Q4. Over the long term, we expect that the share of distribution revenue as a percentage of total revenue will decline.

Speaker 3

Event driven revenues were slightly above our 7 year quarterly average and reached $59,000,000 diluting total revenue growth by 1 point. For modeling purposes, we continue to believe that the best assumption is our $55,000,000 7 year quarterly average versus the strong Q4 2021. Now the margins on Slide 13. Adjusted operating income margin in Q3 was flat At 20.4 percent as our strong growth in recurring revenue was offset by elevated growth in low margin distribution revenue And our continued investment in our digital and technology platforms. As a reminder, the increased distribution revenue we have seen throughout the year, Including the postage rate increase will negatively impact our reported full year adjusted operating income margin by 40 to 50 basis points with no impact on adjusted EPS.

Speaker 3

Like others, we continue to see an impact from higher inflation, both in attracting and retaining talent and in materials cost. To date, this impact has been modest We are confident that we can continue to offset most of these costs. Let me also add that we have been increasing our level of investments over the last several quarters With a focus on revenue generating initiatives, client retention and strengthening our technology infrastructure. I'll reiterate that we have the flexibility to dial up and dial down our investments. That period of elevated investment began in Q2 2021 and Continued in the Q3 2022.

Speaker 3

As we enter the 4th quarter, we are now fully lapping the period of higher investments and we expect to See increased margin expansion. As a result, we are reiterating our AOI margin guidance of approximately 18.5%. Let's move ahead to closed sales on Slide 14. We reported 3rd quarter closed sales of 58 1,000,000 bringing our year to date total to $170,000,000 which as Tim said earlier is more than 40% above last year. Our strong sales performance continued to be propelled by smaller sales.

Speaker 3

In fact, sales of less than $2,000,000 accounted for 90% of our sales in the 3rd quarter. To me, that's an indicator of strong sales traction and highlights the value of our increasing focus on driving componentized solutions, especially in GTO. Looking ahead to the all important Q4, we have a very healthy pipeline And we are well positioned to achieve our closed sales guidance of $240,000,000 to $280,000,000 And finally, let's turn to cash flow and capital allocation on Slide 15. For the quarter, Broadridge generated $55,000,000 in free cash flow, bringing our year to date total to negative $68,000,000 Year to date, we have invested $54,000,000 in CapEx and software and $350,000,000 in our platforms. As we indicated last quarter, we continue to be in the peak period of investment Across multiple client platform investments, including our wealth platform.

Speaker 3

We expect lower investment as we complete the wealth management platform build and begin to recognize revenue from the UBS contract in mid calendar 2023. As we move past our current investment phase, we expect that our free cash flow conversion will revert to historical levels. More broadly, we remain committed to a balanced capital allocation policy that prioritizes internal investments, value enhancing M and A and a strong and growing dividend. We have returned a net of $168,000,000 to shareholders in fiscal year 2022, primarily in the form of our dividend. And we remain focused on paying down debt and maintaining an investment grade credit rating, all while delivering steady and consistent earnings growth.

Speaker 3

I'll close my prepared remarks with commentary on our updated guidance on Slide 16 and some final thoughts on our Q3 results. We are maintaining our revenue and margin guidance and increasing our adjusted EPS guidance. Specifically, we expect to deliver recurring revenue growth at High end of 12% to 15% guidance range. We maintain our adjusted operating income margin guidance of approximately 18.5%. We are raising our adjusted EPS guidance to 13% to 15%, Modestly higher than our original 11% to 15% range, reflecting better than expected performance in the 3rd quarter and our continued ability to create operating leverage, while delivering steady and consistent earnings growth.

Speaker 3

And we are reiterating our closed sales guidance of $240,000,000 to $280,000,000 With that, let me reiterate my key messages. First, Broadridge delivered strong 3rd quarter results across both the top and bottom line. 2nd, we are positioned to deliver strong 4th quarter results and more importantly another strong fiscal year. Our updated guidance calls for the high end of 12% to 15% recurring revenue growth, higher margins And 13% to 15% adjusted EPS growth and not to mention record sales. 3rd and last, we continue to balance Strong short term results with long term growth investments and we are well positioned going into fiscal year 2023 to deliver at the higher end of our 3 year growth objectives.

Speaker 3

And with that, let's take your questions. Turn it back over to Kate.

Operator

We will now begin the question and answer The first question is from David Togut with Evercore ISI. Please go ahead.

Speaker 4

Hi. This is Milly on behalf of David Togut. Congrats on the strong quarter and the 42% year to date closed sales. Just can you please give us more color on the mix Of different contributing factors to that 42% increase?

Speaker 2

Yes. This is Tim. I'll comment and let Edmund add on to it. First of all, it's great to see the continued momentum in the market for our products and Really nice progress. What we saw was balanced across both ICS and GTO.

Speaker 2

We are seeing of course, this is the 1st year we have activity as part of the mix and so that is adding nicely and the timing of the activity sales A little bit different than our traditional timing. So I think that probably is contributing to the very strong year to date results. But When we talk to clients and talk to them about their underlying needs, we are just seeing the things we talked about in terms of long term. We're seeing Strong demand in the governance side, in the wealth side, in the capital market side. I've had some great client conversations over the past 2 months had an opportunity to demo all of our wealth products, with 1 of the leading wealth managers.

Speaker 2

A really exciting day when they see how it's all coming together Now that that's beginning to be live and they can see things in production. So we're very excited about the momentum and we think that's all leading into that 240 to $280,000,000 for the year. So actually I went on longer than I expected to. I don't

Speaker 5

know if you have anything to add to that.

Speaker 3

The only thing I'd add to that is, Milly, as you know, Closed sales is more of a longer term metric. What we are we continue to be focused on is our revenue backlog. And as you know, the last time we reported on that number, It was 12% of recurring revenue and that gives us great visibility into the recurring revenue growth, as well. So that's the only piece I'd add to what you have there, Tim. Thanks, Mike.

Speaker 4

Perfect. Thank you so much.

Operator

The next question is from Michael Young of Truist. Please go ahead.

Speaker 6

Hey, good morning. Thank you for taking the question. I actually wanted to follow-up on kind of the sales Commentary, maybe get a little bit deeper and more granular. I appreciate the detail on kind of the size of the sales. But just generally, kind of as you zoom out, What's kind of your key driver of new sales?

Speaker 6

Is it new product or expanding relationships? Is it kind of a backlog post pandemic? Just if you could kind

Speaker 1

of walk us Through what's

Speaker 6

kind of driving it in both segments would be helpful.

Speaker 2

Yes, Michael, it is really It's a combination of all of that. It is We have deep client relationships and most of our sales are to existing clients and are sort of Part of I guess what some people call land and expand, but if you look at the available wallet share inside our largest clients relative to what selling them even when we have large relationships, there's a lot of opportunity. And so I think across the board, that It tends to be the biggest driver. A year ago at this time, we had lots and lots of new clients with the shareholder rights directive when we signed up over 300 clients in the span of 18 months. That is continues to be a factor, but less than it was a year ago.

Speaker 2

I think also a year ago, we are having really strong success with expanding Virtual shareholder meetings this year that is more of a retention story. So I think if you look at the difference between last year Last year and this year, it continues to be strong governance. Obviously, we talked about the increase in wealth, the addition of activity And then just really solid capital markets results as we go through. And I'm not sure

Speaker 1

if you

Speaker 5

have anything to add to that. The only thing I'd

Speaker 3

add to that, Again, you were thorough there, Tim. As we said in our prepared remarks here, Michael, the fact that most of the sales are smaller sales, they are core less than 2,000,000 sales. It really gives us confidence in the value proposition across the entire product set. Tim talked about existing Clients, we see strong existing products as well that are selling. In our customer communications business, we've Expanded relationships from just print relationships into digital and have seen strong sales there as well.

Speaker 3

So again, I think it's broad based and across Our overall product portfolio.

Speaker 6

Okay, great. That's helpful. And then the second question, I just wanted to ask about kind of the Capital markets volatility we've seen here more recently, are you guys seeing any pull through impacts into either stockholder record growth As we move even past the Q4, I know you guys can start seeing the quarter following that. And then or is it Acting your trading comps, it'd be helpful to get some color on either of those.

Speaker 2

Sure, Michael. There's clearly A lot of increased uncertainty in the market and driven by higher inflation, the Russian invasion, rising rates, Those had very little impact on our Q3 results. We just talked about the strong sales. We saw the strong record growth. Trading activity was modestly lower, but that was really more as we lapped last year's high volatility.

Speaker 2

We have a lot of visibility into Q4 at this point, Given the way the records close before the actual sending of communications and we see strong continued record growth in Q4. So it's really being driven by the long term trends that we've talked about in terms of market participation, digitization, technology. As we look beyond that, the we do have some visibility into the first half of next year And we do expect a return to more normalized levels. Our testing right now would be mid single digits, but it's hard to say It always continues to increase as you get closer to the event and we're pretty far out right now. So it's a yes, I do think the growth will be lower than this year and that's That's sort of the planning scenario that we're working on.

Speaker 2

And then we're seeing inflationary pressures like others, but the strong revenue growth we're seeing, the efficiencies we're enabling It means that we think we can offset that and still deliver sort of the margin expansion that we typically talk about.

Speaker 1

Okay. Thank you. Appreciate it.

Operator

The next question is from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Speaker 5

Hey, good morning. Curious about what areas of your business you would think that you would have pricing power in during an inflationary environment?

Speaker 2

Yes, Patrick. I will I'll start on that And let Edmund add on to it. It is as we think about how the world is evolving And could we be in a more inflationary environment over time? Obviously, we have a large portion of our revenue Our total revenue that is pass throughs and so take that out, but if you focus on fee revenue, the regulated part of that is about 25%. And as you know, those fees are fixed, but there's good underlying growth in those revenues with operating leverage.

Speaker 2

But about 75% Are things that we negotiate, they have CPI. And so I think there can be Quarter to quarter or even within year impacts where you get the timing of that off. But over time, we think that's something where these are solutions that are Absolutely critical to our clients. They have high switching costs and we have good long term relations with our clients and where we end up being fair with each other in terms of the value provided.

Speaker 5

Got it. Thank you for that. Itivity, I think it looks like the revenue was up nicely quarter over quarter. And I believe during your prepared remarks, you mentioned something about the timing. But can you speak to the activity revenue contribution in the quarter and What was driving that strength?

Speaker 3

Sure. Let me make a few comments about that, Patrick, and then I'll turn it over to Tim to see if He wants to add anything. And let me just remind you, we had always said that iTivity was a business that grew at mid single digit rates. As we brought it on, we'd be able to move that to high single digit rates. And we thought that this year it contributes 7 to 8 points to our overall recurring growth and Through the first three quarters is contributing 9 points, so strong, strong performance there.

Speaker 3

That is primarily a subscription like revenue model On SaaS, on our hosted solutions here, there's a small component of That's license revenue that's the timing of that right license recognition change. We initially thought in A later time period that came into Q3, so that drove a small bump in the overall business. But I think the key thing is that we expect it to continue To perform this year in line with our expectations and as we go forward, the overall contribution that we thought it would make to our 3 year objectives still sits with what we thought at 2.5 to 3 points of growth.

Speaker 2

And Patrick, I just want to add on because I'd say we are really pleased with the overall progress we're making in activity. The integration is on track. The revenue and profitability objectives relative to our business case and our plan for this year, we're on track to achieve or more than achieve. And when you come down to the modular architecture, our focus on clients, Our long term roadmap is really resonating. And so, as we look at the short, medium and long term goals that we had, our near term goal was to continue to take share By doing what activity was doing before the acquisition, but with our backing and we're really seeing that in continued wins of Fidescent clients And nice market share gains there.

Speaker 2

We had a medium term goal around better penetrating their client base with Broadridge Products And vice versa, and we've begun to see the beginnings of that. We had a nice front office plus cat sale for a large bank in North America. And then long term is that linking front to back. And that is more of a long term, even 18 month roadmap for phase developments there, but we have some really nice engagement by some of our key North American clients on that topic. So I think it's, we really like the way this is playing out.

Speaker 2

Ray Tierney, the leader there is doing a really nice job, is creating a really strong team. And if you were to sit down with our Capital Markets team today and talk about what we can bring to the table in Capital Markets For any global player, it is an incredibly impressive team.

Speaker 5

Great. Thank you very much.

Operator

The next question is from Puneet Jain of JPMorgan. Please go ahead.

Speaker 7

Yes. Hi. Thanks for taking my question. Tim, are you seeing obviously, you are seeing Structural tailwinds in the business in specifically in the regulatory side, but Are you seeing any cyclical pressure from the markets being down in Q1? And more broadly, if you can Update us on how the business performs like in macroeconomic weakness.

Speaker 7

If there is like a recession or macro Economic factors continue to remain weak. How would individual businesses, ICS as well as GTO might perform in that environment.

Speaker 2

Sure. And I'll make a couple of comments and let Evan add on to it. As we have gone through periods Of pockets of volatility over this 1st 5 months of the year, we and we're doing measuring record growth Almost weekly, we have seen continued record growth, even when the market has been down. So In the near term, if you look over the past few months, we have not seen any correlation between market activity and record growth. So that's been a nice positive.

Speaker 2

I think if you're thinking about a bigger A scenario where there is some sort of real market wipeout and we look back at past times when that has happened, say 2,008 or even going back to 1999, what happened in those instances was that Obviously, trading did what it did in the market levels, do what it did, but position growth basically remained Positive low, 0 maybe, a little bit positive, but even 2,008, 2009 overall position growth It was modestly positive. So, it definitely affects the growth, but we don't tend to see the big downturn. On the GTO side, our contracts there are Much more fixed price and purely trading driven. So there's impact, but it is much more moderated than It would have been at some times in the past. So I think we tend to be sort of a lagging indicator.

Speaker 2

And when markets Go down, we tend to be not impacted as much and then maybe it takes us a little bit longer to reaccelerate growth coming out of things. But Right now, we're seeing really nice continued momentum.

Speaker 7

Got you. That's helpful. And then can you also talk about like the UBS platform? I think they announced that they expect like the full platform to convert in 2023. Can you but I also understand it seems like you are implementing like the smaller modules until then.

Speaker 7

So can you talk about like the timing of revenue Recognition related to UBS until the full conversion?

Speaker 2

Yes, absolutely. And as I said before, This transformation that we are pursuing of Digital Wealth Management is one of the most exciting initiatives that we have. And it's really creating modern technology, cloud native solutions and scaling those across our GTO business. It has been really exciting this past quarter as we've seen the workstation Go live and it's been in beta the last year, but go live with 15,000 advisors, client service associates, home office associates and others and the feedback on that has been great. And that's added to we have a billing solution for managed accounts that enables UBS Something really basically that every wealth manager needs and they've seen a really nice pickup in economics, as a result of it.

Speaker 2

So Those are some nice components that are live. And I think as we talked about before, we have worked with UBS to break this into more discrete chunks that will go live over time. The biggest of those is in mid-twenty 23 and we've tied our revenue recognition to that. So that's why we keep talking about that number. And then just as long as I'm on this topic, sort of the natural evolution of sort of where do we see this going in the future.

Speaker 2

And I think As I've talked about before, our thinking has really evolved to we've made this much more modular and as we engage with clients, They're looking to get to value sooner and so we think this is going to be much more package of modular sales over time with other clients. And I talked about the event that I was involved with a large wealth manager a few years ago Excuse me, a few months a few weeks ago and it felt like years, but a few weeks ago. And when you see all of the different modules, which are now fully integrated into the workstation, See all that playing together. It's very, very powerful. And so I think it's going to lead to a lot of opportunity, which obviously we're seeing already in some of our wealth sales.

Speaker 7

Thank you.

Operator

The next question is from Chris Donat of Piper Sandler. Please go ahead.

Speaker 1

Good morning. Thanks for taking my questions. Tim, I just wanted to follow-up on the comment you made that you just made about More modular sales and also on Edmund's comment about closed sales with 90% of them being below $2,000,000 Are you seeing a shift away from the bigger ticket

Speaker 2

sales?

Speaker 1

Or is this maybe like a temporary phenomenon because of an uncertain environment? It sounds like everything is great with the modular, but I'm just Is this more strategy driven on your part or customer driven to more digestible bites From your clients?

Speaker 2

Yes, Chris, I will it's a great question. I would say It is strategy driven in the sense of, as one takes What used to be sort of a fully integrated all in one highly linked platform and evolves the technology and modernizes it to be more API driven, microservices driven and a series of components. It does enable the idea of modular sales a lot more. And so And there's a strategy and you see that particularly in we talked about it in wealth, but you see it in capital markets where our global post Management platform that we've talked about is, we're breaking that into components and we're seeing nice component sales. We saw a nice component sale to one of the largest international banks that where we haven't really penetrated them before and we have a nice pipeline of those.

Speaker 2

So It's being enabled by how we're evolving our technology. I don't think that we have necessarily thought to ourselves, oh, we're going to go to banks now with just Smaller things, but that's definitely the uptake that we're seeing in terms of where the demand is right now. We do have larger conversations in path, but as you know, those take a long time and are uncertain. So it'd be interesting See how it evolves over the next couple of years. Frankly, I like lots of little ones better than the big ones, But they're all good.

Speaker 1

Okay. Thanks for that, Tim. And then One for Edmund, just on the distribution revenue, which sounds like strong in the fiscal Q3, should be strong in the Q4. As we start thinking about fiscal 2023, I would imagine the trends for Postal pricing and volume remain kind of also strong going into fiscal 2023. Is that A little bit of margin headwind as we go into 2023 or too soon to tell or just something to keep an eye on?

Speaker 3

I mean, we'll definitely come back August with more specific guidance on fiscal 2023. I think we'll start to see us lapping a little bit the postage Rate increases that we saw in this year here, but the other component of that is this shift from higher margin regulatory Driven distribution revenue to the customer communications and we continue to have strong business there. We just showed 6% growth for the customer communications business. The sales continue to be strong in that business. So that is going to be ongoing margin headwind.

Speaker 3

But I think the key thing is that we continue to believe that we have a long runway of opportunity to drive efficiencies in our business continue to drive 50 basis points of margin expansion, whether that's looking at our fixed infrastructure, the fact that even in that customer communications business, we move From print to digital, which is at a higher margin for us and we continue to find in our technology stack efficiencies and saves as well. I think the key thing to keep in mind is that that distribution revenue is fully passed There's no earnings associated with it. So while it has an impact on our reported margin, there is no earnings associated with it, which makes us very confident that we can We continue to drive the steady and consistent earnings growth in the range that we've set out for fiscal 2023 and be

Speaker 2

at the high end of that in fact. Yes. And Chris, as you know, whenever I sit down with investors, I would say, when you look at our company, pull out the distribution revenue and look at the fee revenue. And that's really the right way to analyze the company in terms of growth and margin and other things. We do have constraints in terms Of how we're able to report.

Speaker 2

So we end up reporting that as revenue, but it's really Sort of immaterial to our to the true economics of the company.

Speaker 1

Got it. Understood, Tim. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Tim Gokey for closing remarks.

Speaker 2

Thank you, Kate. That wraps us up for today. Thank you on the call for your interest And your confidence in Broadridge. And just to summarize the strong results that we reported today and the increased guidance that we provided Being driven by long term trends and success in our most significant strategic initiatives, including strong year to date closed sales, We believe we're making a real difference in this tremendous opportunity ahead for our investors, our clients, our associates and of course our shareholders. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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