Q4 2023 Broadridge Financial Solutions Inc Earnings Call
[music].
Good morning, and welcome to the Broadridge fourth quarter and fiscal year 2023 earnings Conference call.
All participants will be in a listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
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Tom I'd like to turn the floor over to adding Tivo head of Investor Relations. Please go ahead.
Thank you Jamie.
Everybody and welcome to Broadridge is fourth quarter and fiscal year 2023 earnings call.
Our earnings release and the slides that accompany this call may be found on the Investor Relations section Broadridge Dot 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, one we will 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 well also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of broadridge as underlying operating results.
An explanation of these non-GAAP measures and reconciliation to the comparable GAAP measures can be found in the earnings release and presentation.
Let me now turn the call over to Tim Tim.
Thank you Eddie and good morning.
It's great to be here. This morning to review our strong fiscal 'twenty three results.
I am, particularly proud of what Broadridge has been able to accomplish over the past year and where we stand now as we look forward.
In fiscal 'twenty, three we finalized the rollout of our new wealth platform suite.
<unk> the product integration of our front office trading capabilities.
New innovation and Digitization drug governance clients.
At the same time, we delivered strong financial results and record free cash flow.
We met our leverage target.
And we delivered at or above the high end of our three year financial objectives.
The net result is that Broadridge is exiting 2023 poised to deliver another strong year in fiscal 'twenty four.
Well positioned for continued long term growth.
I'm, especially proud of our execution given the uncertain market environment.
Our financial services clients are dealing with the fallout from the steepest rate increases in decades.
<unk> slowdown in investment banking activity.
Fund outflows banking crises and increased regulation.
They are reducing head count.
[laughter] purchasing decisions.
Those pressures have had any impact in our sales and I'll touch on later in this call.
On the other hand recent data points suggest an economy, that's proven to be more resilient than anticipated.
Relating to the clear sense of urgency our clients feel about next generation technology.
They know they need to streamline their operations.
Increased their digital capabilities and drive innovation.
They want partners, who can help them accomplish these goals.
And they recognize that Broadridge is one of only a handful of scale technology players.
Investing to deliver new solutions built on modern technology.
That's great for our business and is driving our record pipeline.
So it is an uneven environment.
But for Broadridge, it's a market that further highlights the resiliency of our business.
The value of our investments for the future.
With that as background, let's look at the headlines from the quarter and the year.
First broadridge delivered another strong quarter.
Recurring revenue grew 8% with strong growth across both our segments.
Earnings Rose, 21% driven by the combination of strong revenue growth and disciplined expense management.
Second those results closed out a strong fiscal year.
In 2023 recurring revenue and adjusted EPS, both rose 9%.
And free cash flow conversion improved to 90%.
Importantly, broadridge met or exceeded our three year financial objectives.
Third our ability to deliver strong results.
Fight, an uneven market was driven by strong execution across governance capital markets and wealth and by the long term trends underpinning our growth.
Fourth we.
We expect to deliver another strong year in fiscal 'twenty four.
Our guidance calls for 6% to 9% recurring revenue growth all organic.
8% to 12% adjusted EPS growth.
We also expect free cash flow conversion of approximately 100%.
Finally, I'm delighted to announce a 10% increase in our annual dividend.
Dividends are an important part of our long term capital allocation.
And we're proud of our track record of increasing dividends every year since we became a public company in 2007.
Including double digit increases.
11 of the past 12 years.
As a result of our strong free cash flow.
We expect to resume share repurchases in fiscal 'twenty four.
Also have the flexibility to fund tuck in M&A, if the right opportunity arises.
As I noted earlier 2023 was the final year of our latest SEC after your objectives.
So, let's turn to slide five to highlight our performance against those goals.
In fiscal 'twenty, we reported recurring revenues of $2 9 billion and adjusted EPS of just over $5.
Three years later, we've grown our recurring revenues nearly 40% to $4 billion.
We reported adjusted EPS just about $7.
We met or exceeded the high end of our objectives for recurring revenue growth adjusts.
Adjusted operating income margin and adjusted EPS growth.
Our ability to deliver on those goals kind of eating more meaningful in the context of a longer length.
The fiscal 'twenty to 'twenty three period marked the fourth consecutive three year cycle.
In which we have delivered I guess, a similar set of objectives.
That track record underscores the long term trends driving demand for what we do.
But if you just focus on driving profitable growth.
And the strength of our recurring revenue business model.
Next let's review our business performance, starting with our governance franchise on slide five.
Our Ics business delivered another very strong year.
Recurring revenue growth of 9% was powered by a combination of revenue from new sales.
Increased investor participation and higher interest income.
All four product lines reported strong growth.
The biggest growth driver remained new sales are.
Our business benefited from new digital and print wins in our customer communications business.
And by increasing our relationships with fast growing digital brokers.
Our regulatory business also benefited from increased investor participation, which continued to grow at a healthy pace.
We saw balanced position growth across both equities and funds. Despite the headwinds from an equity market that for much of the year is lower.
After two very strong years equity position growth of 9% returned to more normalized mid to high single digits.
Given by double digit growth in managed accounts and single digit growth in self directed accounts.
Mutual fund and ETF position growth was also strong at 8% with balanced mid single digit growth across both equity and fixed income funds.
And while we saw growth of passive funds demand for active funds also continue to be positive.
One reason clients are choosing to do more with Broadridge is our commitment to innovation.
Including artwork and driving Digitization.
And shareholder engagement.
For example.
We are driving the digitization of wealth management communications with our Omnichannel wealth and focused product.
Our ability to consolidate information.
Simplifies the investor experience, while lowering costs for our clients.
Thanks to our investments in digital.
Rogers has become the leading Omnichannel communications hub.
We are enabling a new frontier and investor engagement for funds with that work behind the scenes I'm voting choice.
Over the course of 2023 we've rolled out pilot programs for four of the five largest ETF managers in the United States.
We're enabling these fund managers to capture devoting preferences of millions of ETS shareholders, giving them, an even stronger voice in the governance of underlying companies. They are.
We're also helping funds adapt to the new tailored shareholder report regulations by applying our unique digital and inline print capabilities to create a better investor experience at lower cost to fund companies.
Those are just some of the examples of the innovative solutions that are differentiating broadridge draw.
Driving high client retention and engagement.
And enabling strong revenue growth for our governance franchise.
Now, let's move to our capital markets franchise.
We're a b Tcs business continues to drive growth.
Capital markets revenues rose, 11% to $965 million driven.
Driven by strong growth in BTC, yes.
And by the Onboarding of New Global post trade clients.
Our clients continue to look for ways to simplify their operating model.
Whether by bringing together disparate platforms had the front office.
Pursuing global multi asset solutions, and the back office or connecting front to back.
We're meeting that demand with a standardized global multi asset trading platform.
<unk> solutions deliver a unified global book.
In the front to back integration that enables clients to improve controls and reduce cost and risk by implementing straight through processing.
We're also delivering leading edge solutions like distributed ledger repo.
Earlier this spring we saw our clients execute intra day repo transactions and our DLR network.
These new capabilities mashed distributed ledger technology with existing market settlement infrastructure to give our clients added flexibility to manage liquidity.
We're also developing new AI applications.
<unk>, an AI enabled interface for our bond trading platform.
Reducing the friction around pre trade analysis by making it easier to identify bonds with similar characteristics.
Let's turn to wealth management.
Wealth and investment management on slide seven.
Wealth and investment management revenues rose, 4% to $560 million in fiscal 'twenty three.
Our growth was paced by revenues from new sales.
Driven by demand from modular solutions, especially advisor tools like our digital marketing platform.
Which more than offset the impact of a significant license sale in the prior year.
During the fourth quarter, we finalized our rollout plan with UBS, which enabled us to begin to recognize revenue on July one as planned.
We have built a suite of solutions that can drive advisor productivity.
Since the client experience and reduce cost and risk by digitizing operations.
It can help wealth firms better acquire manage and grow client accounts.
It's a fully modular suite of components linked by a common data layer and common API.
With the new UBS contract in place. We are now focused on our goal of $20 million to $30 million of annualized wealth platform sale.
Over the past few months, we developed a targeted marketing plan to expand our outreach efforts and build on our really demand.
We're seeing strong near term demand for advisor experience suite, a corporate accident platform and their alternatives product.
Deeper into the pipeline, we're seeing significant interest in other module solutions for wealth managers, who want to enhance the client experience as.
As well as those considering more fundamental changes in how they serve clients.
I'll wrap up my business review with a discussion of closed sales, where we continue to feel the impact of market uncertainty and longer sales cycles.
After 11 years of record sales closed sales of $246 million were down 12% from fiscal 'twenty two.
While U S sales were largely on track we saw many delayed decisions in Europe .
The good news is that we believe these are delays and that they will have little impact on our long term growth trajectory.
We have not seen projects drop or experience competitive losses.
As a result, our pipeline is at an all time record and we expect strong sales growth in fiscal 'twenty four.
Let's wrap up on slide eight with some closing call out.
First broadridge had another strong year in fiscal 'twenty, two a financially and operationally.
We delivered strong financial results, including record free cash flow and achieved critical growth and leverage milestones.
We also finalized the delivery of our wealth platform and continued to enhance our governance and capital market solutions.
Second the same long term trends that have propelled our growth shows no signs of easing.
Third we expect to deliver another strong year in fiscal 'twenty, four with continued top and bottom line growth as well as record closed sales and higher free cash flow conversion.
Which returned to a more balanced capital allocation and 24.
We expect to make further progress in raising our Aro I see to the mid to high teens over the next three years.
Finally.
I've never been more confident in the outlook for our company.
As I look across Broadridge, our governance business has a differentiated core offer.
Innovative new solutions like pass through voting digital communications and tailored shareholder reports.
Our capital markets business is driving simplification and innovation in the front and back office.
And our wealth business is now, bringing the platform of tomorrow to clients today.
We've never been better positioned for sustainable differentiation and innovation driven growth.
And at the end of our investment Phase return historic free cash flow conversion balanced capital allocation and increasing ROIC to go with that growth, we are well positioned to drive strong returns for our shareholders.
I'll wrap up on that note.
But before I turn it over to him let me thank our almost 15000 associates.
Those listening on this call. Thank you for your focus on our clients.
Your work is helping us enable better financial lives for millions.
Edman over to you. Thank you Tim and good morning, everyone.
I'm pleased to be here to discuss the results from yet another strong quarter and the strong full year fiscal 'twenty three.
Today I'll also provide you with some additional color into our guidance for fiscal 'twenty, four which continues to be in line with our historical three year financial objectives.
Before jumping into a review of our strong results and guidance I want to emphasize some of the significance of some key milestones that we achieved in fiscal 'twenty three.
First we completed the investment in our wealth management platform reduced our client platform spend.
Now going live with our anchor client recognizing revenue in July .
Second free cash flow conversion improved to 90%.
Third we paid down debt and reached our leverage objective.
In line with our commitment during the activity acquisition.
And fourth we positioned ourselves to return more capital to shareholders via higher dividend and the resumption of share repurchases in fiscal 'twenty four.
And finally as Tim noted, we kept our current three year cycle, where we delivered at or above the high end of our three year objectives.
Those milestones were a direct outcome of our strong fiscal 'twenty three results.
And as you can see from the financial summary on slide nine Broadridge is full year recurring revenue growth was at the higher end of our fiscal 'twenty three guidance.
With operating leverage in our business and continued disciplined expense management high single digit adjusted EPS growth was right in line with our full year guidance. Despite the lower event driven revenue.
On a full year basis recurring revenue rose to approximately 4 billion.
Up 9% year over year on a constant currency basis all organic.
Adjusted operating income increased 12% and margin expanded 110 basis points to 19, 8%.
Outpacing our annual margin expansion objective despite the drag from increased low to no margin distribution revenue.
And I'll remind you that while higher interest rate expenses, partially offset operating income growth the interest rate impact that the broadridge level is fully offset by higher a float income and our Ics segment.
Adjusted EPS rose, 9% to $7 one soon and finally, we delivered closed sales of $246 million.
Turning to the fourth quarter recurring revenue grew 8% on a constant currency basis to $1 3 billion again the growth was all organic adjusts.
Adjusted operating income grew 22% right in line with our expectations.
<unk> margins expanded 360 basis points.
Adjusted EPS increased 21% to $3.21 and close sales were 19% lower at $90 million.
Let's get into the detail of these results starting with recurring revenue on slide 10.
Recurring revenue grew 8% to $1 3 billion in Q4 23.
Our recurring revenue growth was organic driven by a combination of converting sales to revenue and mid single digit position in trade growth.
For the full year, 9% recurring revenue growth was at the higher end of our full year guidance range of 6% to 9%.
This 9% growth exceeds our 5% to 7% organic growth objective in March three consecutive years of organic growth of at least 8%.
In addition to our strong organic growth the acquisition of BTC, Yes contributed two six points of growth to our fiscal year 'twenty to fiscal 'twenty three recurring revenue CAGR right in line with what we communicated at the time of acquisition.
As a result, we also exceeded our total recurring revenue growth objective of 7% to 9%.
With a three year constant currency CAGR of 11%.
Let's turn now to slide 11 to look at the growth across our Ics and GTO segments.
We continued to see strong growth in both Ics and GTO.
In Q4, Ics recurring revenue grew 7% all organic to 858 million with solid growth across all four product lines.
Regulatory revenue grew 5% to 444 million on the back of continued growth in U S equity and fund positions.
Partially offset by lower growth in international proxy.
Data driven fund solutions revenue increased 12% to $113 million, primarily due to higher float revenue in our mutual fund trade processing unit.
In issuer revenue grew 7% to 134 million led by growth in our registered shareholder in disclosure solutions.
Our customer communications recurring revenue was up 7% to 166 million led by new client wins higher print volumes and very strong double digit growth in our digital business.
Our digital customer communications business has now surpassed 100 million are recurring revenue, which is a sign that our print the higher margin digital strategy is working.
For the year Ics grew recurring revenue at 9% with regulatory at 7% and double digit growth across all other product lines.
Turning to GTO on Slide 12, Q4 recurring revenue grew by 9% to $401 million.
Capital markets revenue grew 12% to $257 million propelled by higher license revenue and be Tcs.
<unk> fixed income trading volume growth and new sales growth.
Wealth and investment management revenue increased 4% to 143 million driven by healthy growth from new sales offset by lower trading volumes and the grow over impact of higher license revenue in Q4 22.
For the year GTO grew recurring revenue at 8% ahead of our 5% to 7% growth objective driven primarily by double digit growth in our capital markets business.
Now, let's turn to slide 13 for a closer look at the volume trends.
We had healthy position growth for both equities and funds in the fourth quarter consistent with our testing results.
Equity position growth lapped high teen growth in Q4, 'twenty, two and was 6% in the quarter and 9% for the full year with continued double digit growth in managed accounts.
Mutual fund position growth in the quarter ticked up to 8% and full year growth was also 8% with continued strong flows in the money market funds.
Looking ahead to the first half of fiscal 'twenty four.
Current testing for equity positions is showing mid single digit growth, which supports our full year outlook of mid to high single digit growth.
Turning now the trade volumes on the bottom of that slide.
Trade volumes grew 3% on a blended basis in Q4, driven by another quarter of double digit fixed income volume growth, which benefited our capital markets business and <unk>.
Modest declines in equity volumes impacting our retail wealth business for the full year trading volume was up 4%.
Now I'll move to slide 14 for the drivers of recurring revenue growth.
For the quarter recurring revenue growth of 8% was all organic and balance between net new business and internal growth.
Revenue from closed sales and our continued high retention from existing customers provided four points of growth.
Our recurring revenue retention rate was 99% in the quarter and 98% for the full year.
And internal growth, primarily higher positions trading volumes and float income also contributed four points.
Foreign exchange impacted recurring revenue by one point with most of that coming in our GTO business as you can see in the table on the bottom of this slide.
I'll finish the discussion on revenue on slide 15.
Total revenue grew 7% in Q4 to $1 8 billion of recurring revenue was the largest contributor with five points of growth.
Event, driven revenue was 59 million and what a one point headwind to Q4 growth.
Event, driven revenue increased sequentially and was in line with our seven year average as mutual fund proxy activity improved.
Well, we're not forecasting any large fund proxy campaigns, we do expect some of the delayed mutual fund proxy activity in fiscal 'twenty three to come through in fiscal 'twenty. Four is event driven revenue returns to more historical levels.
Low to no margin distribution revenues contributed three points to total revenue growth distribution revenue increased 9% to postal rate increases contributing eight points of that growth.
Given that postal rate increases are pass through elevated distribution revenue have a dilutive impact on our adjusted operating income margin.
Turning now to margins on slide 16.
Adjusted operating income margin for Q4 was 28, 9%, a 360 basis point improvement over the prior year.
Driven by a combination of our operating leverage in our business higher float income and continued disciplined expense management.
On a full year basis, we delivered 110 basis points of margin expansion.
The impact of interest income more than offset a 30 basis point headwind from the growth of low to no margin distribution revenue.
Excluding both.
Margins expanded 60 basis points, which is above our 50 basis point long term objective is.
As I mentioned earlier, we have a track record of disciplined expense management.
This discipline.
Along with the operating leverage inherent in our business model.
Laos us to invest in our long term growth investments and meet our earnings objectives.
As we exit fiscal 'twenty three we are undergoing a modest restructuring that will realign some of our businesses streamline our management structure and impact approximately 2% of our 14700 associates.
As a result, we incurred a 20 million restructuring charge in Q4, 'twenty three and we anticipate that these actions will generate approximately $50 million in annualized savings again, allowing us to continue to fund growth investments and deliver earnings growth.
Looking ahead, we expect another 15 to 30 million charge in Q3 'twenty four as we complete this restructuring initiative and seek to create further room to invest.
These restructuring charges are excluded from our calculation of adjusted operating income and adjusted EPS.
Let's move ahead to close sales on slide 17.
We ended our fiscal year closing 90 million and closed sales for the fourth quarter for the full year sales were down 12% of our record fiscal 'twenty two to 246 million.
Closed sales were below our full year guidance driven by lower international sales.
Strong U S sales were driven by customer communications digital solutions and retirement solutions.
Our pipeline entering fiscal 'twenty four is at a record high and the demand for our technology solutions remains strong.
Importantly, the slowdown in sales we experienced in Q4 23 is fully incorporated into our fiscal 'twenty four guidance, our 400 million backlog equal.
Equal to 10% of our fiscal 'twenty three recurring revenue provides strong visibility into the revenue conversion from closed sales that will drive fiscal 'twenty for revenue growth.
I'll now turn to cash flow on slide 18.
In fiscal year, 'twenty, three we generated $748 million in free cash flow.
<unk> fiscal 'twenty two levels.
As a result free cash flow conversion calculated this free cash flow over adjusted net earnings improved.
To 90% in fiscal 'twenty three.
This improvement was the product of reduced client platform spend and payments from UBS as we finalize the rollout and go live plan, along with strong working capital management.
Looking ahead to fiscal 'twenty, four we estimate free cash flow conversion of approximately 100%.
So let me make a note here before we move on to capital allocation with a new contract with UBS in place. We have now moved our focus to marketing and driving $20 billion to $30 billion in sales of the wealth management platform components.
As a result, we have moved approximately $600 million of software investment from the deferred client conversion line to intangible assets.
This is consistent with balance sheet classification of platform technology that will be marketed to multiple clients.
We continue to expect to recognize 57 million of annualized amortization expense in fiscal 'twenty, four resulting from our wealth platform investment and this change will have no impact on the free cash flow or the income statement.
Let's now discuss capital allocation on slide 19.
We spent 369 million on investments for growth, primarily our wealth platform and returned a net of $312 million to shareholders in fiscal 'twenty three.
In addition, we repaid $385 million of debt.
The combination of strong earnings growth and lower debt moves our leverage ratio at the end of fiscal 2003 to two six times.
This level is consistent with the leverage objective, we set when we announced the activity acquisition and it's in line with our goal of maintaining an investment grade credit rating.
As a result, we expect to return to more balanced capital allocation in fiscal 'twenty four.
To that end, we're pleased that our board has approved a 10% annual dividend increase to $3.20 per share in fiscal 'twenty four.
In line with our targeted dividend payout ratio of 45% of adjusted earnings.
We have capacity for modest strategic tuck in M&A and we are also in a position to resume share repurchases.
For the first time since fiscal 19.
I'll close my prepared remarks, this morning, with some detail on our fiscal 'twenty four guidance, which is on slide 20.
Our fiscal 'twenty four guidance calls for mid to high single digit recurring revenue growth margin expansion strong adjusted EPS growth and a recovery in closed sales.
So, let's break down the relevant components and drivers of each guidance point, starting first with revenue.
We expect fiscal 'twenty for recurring revenue growth constant currency of six 9% all organic driven by new sales as we work to onboard our $400 million backlog.
For modeling purposes, we expect GTO growth to be in line with our historical 5% to 7% organic range.
And our wealth business, we anticipate that we will recognize approximately 75 million in incremental revenues from wealth platform clients.
This growth will be significantly offset by the loss of revenue transitioning E trade to the Morgan Stanley platform.
We are assuming flat trading volumes.
We expect event driven revenue to return to more historical levels in the range of 230 to 250 billion.
Distribution revenue is anticipated to grow in the high single to low double digit range driven by further increases in postal rates.
This continued strong growth in low to no margin distribution revenue. It does create a margin headwind that I'll discuss in a moment.
I'll also note that using the current forward curve for FX suggest the half point benefit of recurring revenue relative to fiscal 'twenty three.
Second let's move on to margins.
We expect our adjusted operating income margin will be up year over year to approximately 20%.
We expect the net impact of higher distribution revenues and higher float income to be dilutive to our margins in fiscal 'twenty four.
Excluding the headwind from distribution and float income, we expect that the operating leverage in our business and our disciplined expense management will allow us to absorb the amortization from our wealth platform.
<unk> higher growth investments in our business, while driving greater than 50 basis points of margin expansion.
In line with our historical objectives.
Third EPS.
We expect adjusted EPS growth of 8% to 12%.
Embedded in this outlook is an expected tax rate of 23% a slight uptick driven by the lower impact of discrete items on higher earnings and the geographic earnings mix.
Finally closed sales, we expect a strong year in sales with the fiscal 'twenty four range of $280 million to $320 million based on our strong pipeline.
We expect balanced sales between Ics and GTO and I want to reiterate that the delays in the timing of our sales have only a very modest impact on our medium term revenue outlook given our backlog.
Taken together, our fiscal 'twenty four guidance demonstrates the strength of our financial model.
We continue to be focused on driving sustainable recurring revenue growth.
Using the operating leverage in our business to create capacity for continued investment and continued margin expansion, while also delivering steady and consistent adjusted EPS growth.
All while maintaining an investment grade balance sheet and the balanced capital allocation policy.
Before I move on from guidance, let me briefly discuss our Q1 and first half adjusted EPS outlook.
Historically broadridge has generated at a little less than a quarter of our earnings in the first half and we anticipate this year to be no different with earnings slightly more weighted towards Q1 versus Q2, driven in part by higher event driven revenue in the first quarter.
With that final note, let me wrap up with a quick summary, but my key messages.
Broadridge delivered strong Q4 financial results to close out a strong fiscal 'twenty three.
We delivered at or above the high end of our three year financial objectives.
With our fiscal 'twenty four guidance, we are positioned to deliver another strong set of financial results.
Last we expect to return to more balanced capital allocation in fiscal 'twenty, four including double digit dividend growth the resumption of stock repurchases and potential tuck in M&A.
And with that let's take your questions operator.
Okay.
Ladies and gentlemen at this time well begin the question and answer session.
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We'll pause momentarily to assemble the roster.
And our first question today comes from Peter Heckmann from D. A Davidson. Please go ahead with your question.
Hey, good morning, everyone really complete call you checked off a number of my questions is we went in.
I didn't hear I think I heard the equity position growth embedded in guidance was about mid single digits would you assume funds would continue kind of mid to high.
Yeah, I'll start off with that Peter and thanks for the question and thanks for joining this morning, yeah that that is exactly what we're expecting for fiscal 'twenty. Four we've continued to see strong growth in both equities and funds, they're at a more normalized level relative to fiscal 'twenty, one and fiscal 'twenty two.
<unk> in our testing in the first half for the first half of this year is as I said in my prepared remarks, showing mid single digit growth, which gives us confidence in our outlook for mid to high single digit growth in both equities and we expect the same thing and funds ending the year at 8% with continued growth in passive funds there we expect.
Mid to high single digit growth.
Okay. That's helpful and then.
In terms of the so the so it sounds as if the first quarter might have a little bit more event, driven as well as a relatively easy comparison.
On margins.
So first quarter looks like a little bit larger than historical so certainly that the current consensus appears to be.
Appropriate or if not a little low.
On the EPS side.
Well look we're certainly focused on our business and whats driving the economics here I do think there was as we've been talking about throughout last year delayed mutual fund proxy activity and I don't think that's a choice that business has to come back at some point as I said in my remarks, we're not predicting any major fund to.
The proxy, but the early signs as we begin to look at the jobs that we have for Q1 suggests that we are seeing some of those delays come into Q1. So I do expect Q1 to be slightly higher than Q2, but overall the first half in line with what we've historically seen which is just under a quarter of our earnings in the <unk>.
First half.
Okay, and if I could just sneak in one more just on the bookings side and in the in the second half of fiscal 'twenty three.
Any other characteristics that you would say in terms of the U S being pretty much on target Europe , a little weaker it any way you can talk about maybe individual solution sets or or or any particular big big projects small projects any other color in terms of the delays that that would be helpful.
Yeah, Peter It is a it's Tim I'll I'll take that and you know clearly our sales ended at lower than we expected even just three months ago and and as you said that was a really continued nice growth in the U S. And then and then challenges in Europe , where I really the comp.
Plex environment, whether that'd be war, whether that'd be the failure of one of the largest European institutions.
You know led to delayed decision, making and.
And as it had been headed you'd have to have to repeat it that you know we think the impact of this is modest as included in our outlook are 24 is driven by by the 400 million dollar backlog.
You know the color on drilling down further it is it's it's it's really across many of the solutions. We saw Oh, you know slowdowns in and remember our international business has driven a bit more on the GTO side than the Ics side and and there was there was really just decisional weakness both in post <unk>.
Jade.
And and on the activity side that.
That is feeding into because as we look at those opportunities are they haven't gone away.
They haven't gone to a competitor and that is what is leading to really a record pipeline as we entered the year. So we are you know that's why were why we feel good about the 280 to 320 guide for this year, which is obviously a strong recovery.
We are anticipating continued nice growth in the U S and and we're positioning ourselves in Europe , so that as decision, making their unlocks a we can really let those things left here.
Yeah.
And ladies and gentlemen, our next question comes from Dan Perlin from RBC Capital. Please go ahead with your question.
Thanks, Good morning, I wanted to kind of follow back up on on backlog here, a little bit so the $400 million is there.
Is there a way to kind of talk about.
I guess the nature of the work that's embedded in that in timing expectations that you might have in terms of conversion into revenue is it any different than what you historically would have seen in patterns.
Are there types of businesses that are embedded in that it just could be prolonged for longer than you anticipate.
And then I just wanted to just revisit again the closed sales in the quarter I mean, it did kind of surprised us and obviously it was surprising to you guys. How quickly it kind of turned down. So here again I guess the question is just really on visibility.
Which I guess is just kind of an extension of the way P. That's the last question.
Tim Let me, maybe just start off and give a little bit I'll talk about the.
First day and thanks for the questions and I'll talk a little bit about the backlog, but I want to put it in the context of our overall 24 guidance and then maybe I'll turn it over to Tim to talk a little bit more about the closed sales. When you think about our guidance for fiscal 'twenty four there's a high level of confidence and keep in mind, we're operating in this very volatile.
The macroeconomic environment and continue to deliver the results that we just just talked about for a moment and as I think about our fiscal 'twenty four guidance. Your point on the backlog is the first thing that comes to mind. Our continued conversion of the backlog to revenue I don't think that there's anything in that.
Backlog that unique we've said before that we see anywhere from a from a 12 to 18 months conversion cycle clearly, we're going to have the wealth management revenue come across earlier in this year from the backlog, but you know continuing to execute on that is what we expect in the cycle continues to be the.
Same further I think about the position growth that we have and as I said the testing that we're seeing now suggest that our outlook for mid to high single digit position growth continues to be a line that continues to give us confidence in our recurring revenue guidance and again, we have a six month window.
Insight upfront to to look at that and so if something changes we have the time to react on that and then our continued execution on our on our margin expansion in our business to be able to drive the guidance that we have and you know coming off a 77 basis points for these last three years, we continue to feel.
Feel good about that got it so nothing specific about.
Nothing specific that's different about the conversion to revenue cycle and those are the factors that I take in mind as I think about the overall guidance and said that you might want to give some other comment on sales if anything yeah, I just think Dan on sales sales visibility.
These things are always hard to judge it is and I'll reiterate that whether a sale finishes in June our it finishes in September or October for that matter I. It really doesn't make much difference to our results and you know I really go to the quality of the conversations.
The the need that our client institutions.
<unk> to express and their intent and then you know beyond that it just gets it gets bogged down in contracting and final lots of final details.
And since the weakness was in Europe and Europe in the summer is not exactly a hotbed of activity I'm not I'm not here promising that Oh, it's you and it's just going to happen and that you know in the next few weeks, either but but I do have good confidence that it will happen in this fiscal year.
Okay. No that's great. Thank you and then just a quick follow up on margins.
A couple of just I guess moving parts here just want to make sure I heard everything right. So if we look at 'twenty three kind of ex distribution in some of these things are treated revenue I think you said it increased 60 basis points versus 110. So that's kind of a pure number that we should be focused on and I think embedded in your guidance. I think you also said as you kind of remove.
I.
I appreciate it things around higher distribution, and then maybe flow going against it.
Amortization that you'd be able to do 50 basis points of margin expansion. So I guess one is that.
Did I characterize both of those correctly and then secondly.
You can call out in terms of kind of underlying.
I meant that you had been margin structure, Dan you called it out exactly right I mean, that's exactly right against 77 basis points over the last three years 110 basis points. This year, you exclude distribution and to be very specific the float income and that was over 60 basis points in fiscal 'twenty, three which is what.
You called out so those are the two items that really impact the reported margins, but had no impact on the overall earnings and when you think about fiscal 'twenty for the same things are happening again, you have float income, which is a benefit to the reported margins, but have no impact to our earnings because we have the answer.
This expense on our variable debt then you have distribution, that's growing primarily because of postal rates that is a negative on the margins, but again has no impact on earnings because it's pass through so let's put those two items aside and what you focus on is in the core operations of our business number one we're absorbing the <unk>.
Large amortization, that's coming in for the wealth management platform in that core business is again expanding by we said at least 50 basis points right in line with our historical objectives are very much like what we saw in fiscal 'twenty three as well and just the final point to answer to your question on what's driving that it is.
The scale the operating leverage that we have in our business as we bring on new clients. We do it at very accretive margins and then you also heard US talk both in 'twenty, two and again on this call about the continued disciplined expense management that allows us to create the capacity the best and continue to deliver those are.
So those are the right items and I appreciate the opportunity to clarify that so.
Our next question comes from Puneet Jain from Jpmorgan. Please go ahead with your question.
Hi, Thanks for taking my question I also want to ask about close sales. So given like the period of weakness in your thumb should be expect fiscal 'twenty four seems to be more backend loaded.
And it was good to know that you like.
This was due to sales.
Back from back is included in the guidance, but the lithium back our growth beyond this year beyond fiscal 'twenty food.
Yeah Puneet. Thank you very much for for that so first of all just you know on the will it be backend loaded I think it is and you know as you know our sales are always back end loaded.
Certainly be my ambition that it might be a little less backend loaded this coming year, but it's that it's really not a promise is very hard to judge. These because there are large deals in there and the timing of those can just be <unk> be hard to judge what we will always do is each call based on where we are we will give you an update on where we think we're going to end up for the year.
<unk>.
And then with respect to our 24, but what about beyond Oh, that's a great question and as I said, we feel very.
Very good about 24 based on the backlog, we have and and any you know everything is baked into our guidance. When we look beyond that as we think about the the recovery we anticipate in in our sales. This year are that really refills are backlog nicely and I you know, we don't anticipate that.
It'd be anytime where our onboarding teams would end up with sort of a lack of work to do and so it's really about the pace of on boarding and and we think we'll be in good shape for the midterm.
Got it and I guess like you've been shared like your medium term goals like in December this year.
So maybe if you can review like the margin drivers that you expect over the next few years beyond like the near term benefits from the restructuring.
Well I think.
I think puneet, what youre going to see a repeat of what I just said because I think it is I think youre going to continue I think we have a long runway for continued margin expansion, but let's put it into context, a little bit I have now said 77 basis points over 50 basis points for a year per year for the.
Fiscal 'twenty to 'twenty three time period, if you look back at the three year cycle before that it was over 80 basis points per year in 14 to 17.
Over 50 basis points, I think 53 basis points sort of 14 to 17 period and look at what the drivers are in there and of that margin expansion. One is the operating leverage so scale, bringing on new sales without adding new expenses to drive that our continued move to digital Ah that is that a.
Our higher margin product I talked on the call about the the the the growth in the digital business and our customer communications business and we continue to be more digital in our regulatory business as well and then the operating efficiencies and since I've come on board over the past three years I can tell you that the focus from the company on Kantar.
When you're going to have that disciplined expense management.
Really setting ourselves up to have investment capacity is what we've been focused on so I do think that there's a continued long rate long runway for margin expansion to be able to drive earnings and create room for investment capacity and I don't think that's going to change anytime soon.
And our next question comes from Darrin Peller from Wolfe Research. Please go ahead with your question.
Okay.
Guys. Thanks.
Let me just start off with the the components of margin it looked like.
It looks like the gross margin improvement was fairly notable I saw Cogs change quite a bit I think it was over 300 basis points, maybe if you could just help us understand the dynamics, there and maybe the sustainability or what's the recurring dynamics there for a moment would be helpful.
Yeah, So we talked.
Earlier staying.
And about the initiatives that we took at the end of Q4 'twenty. Two so we're seeing the impact of that in our Q4 right in line with what we expected and growing over some of the investments that we have in 'twenty two as well I think those were the two sort of unique items that right in line with our expectations drove up the <unk>.
As an expansion in Q4 23.
Just as we expected.
And that sounds like the new baseline should be reasonable.
Year, sorry, the full year baseline I think is what you want to focus on and I think you know the guidance that we put against that with the components that I talked about a moment ago is off of that full year baseline in any particular quarter, particularly when you look at our first and second quarter, you know a small dollar amounts.
Can swing that margin. So I really don't look at the quarterly view of margin, but the overall full year number.
Okay, and then just very quickly to follow up on.
Sales I know, there's been a couple of questions already but.
I know the volatility can come timing wise.
Maybe just help us understand a little bit more over.
What was actually any type of surprise in the current quarter, just given again that it was a little below. The initially are there recently lower number for the year for the for this quarter, but again going back to the conviction I understand you feel strongly about your confidence on bookings or closed sales for the year ahead. So I guess, Tim maybe just give us a sense of where youre seeing.
The strengths that gives you that much conviction in terms of what business lines.
It would be helpful.
Yeah. Thanks, Darren we are now.
We are seeing.
First of all you know everything you know largely when you look at the Ics side of things.
Ah the communication side of things the regulatory solutions. The you know what we're doing in issuer.
What we're doing with funds there you know there's very very good strength there in the U S. We've seen a we've seen that and we have new things coming down the Pike that will we think will add to that strength in hot in 'twenty four or so so that side really feels a sale it feels very solid and then.
On the on the European side.
You know the business that's an exercise that is more around G. T. S has more technology solutions that is more susceptible to a two decisions that firms make about how you are thinking it may cause modernization now or they can make it in the next quarter it tends to be a little bit more driven by bye bye their budgets and and their priority.
And and those firms, though are also under more stress they have higher need and that that does create a create some volatility in terms of timing of a decision, making but we have as I said a record pipeline, including the things that didn't get done in the last quarter. This year I would just add to that pipeline and so.
So we feel very good about those conversations and the fact that it will ultimately get done.
Our next question comes from David <unk>.
From Evercore ISI. Please go ahead with your question.
Thank you good morning could you.
Drill down a little deeper into the kind of underlying drivers of mid single digit stock record growth expected for Q1, FY 'twenty four and mid to high single digit for the year.
Yeah, Dave.
So for the for Q1.
We are.
Where will we see in our testing is and they say you know on the high side of mid single digit and that's what we're seeing right now and that does tend to float up a little bit as time goes on because you know what the testing is we're making a poll right now and so so each week. It takes up just a little bit. So it's really it's really based on our testing and.
You know as you know, it's a small portion of the year and so it's hard to say, it's fully predictive of the entire year, but it certainly gives us gives us that gives us nice confidence I can't really drill down by sector or other things you know the only the only thing I'd add Tim to what you just said as you know a year ago, David we're talking.
Broad based growth when you look at this I think when we look now we're seeing you know again continued large issuers and midsize as you're showing the growth are we continue to see the strong growth on our managed accounts. We continue to see the strong number of accounts are increasing.
Relative to <unk> versus the.
Positions per account, increasing so as Tim just said it is and you know a small quarter. So it's hard to get any specific insight at this point, but the trends are very much in line with what we've seen over the past over the past year.
Understood and then just as a follow up could you kind of walk through the wealth management platform now that the UBS platform is completed and being marketed to a broader audience in terms of is it demand continuing to be mostly on modules or API and API is are you seeing it broaden out a little bit too.
Transformational deals.
Yeah. Thanks, Dave.
And just as a reminder, which I know you know is that is that you know this is part of a very significant 16 billion dollar market, which is which has continued to grow at.
And we're really excited that we are have exited the build mode and that where you were into the selling mode with that with a good target sales plan.
And.
Uh huh.
I I said and I go on to say as you know our competitors are talking about what they will have and we have that now.
We drill down into.
That specific nature, when you look into our pipeline.
We are.
Right now you know more demand on the component side. It is and that can be part of a bigger transformation, but it is a I think people are feeling much more step by step versus taking on a large program to work and I bet, but that adds up across our across our institutions. So we're.
Seeing as I said now good near term and demand around things related to advisor experience corporate actions alternatives and then.
And then we are seeing longer term demand on on more foundational chunks that would be would be part of a longer term transformation, but again in a step by step kind of way.
And our next question comes from Michael <unk> from Morgan Stanley . Please go with your question.
Hi, everyone. Thanks for taking my questions I apologize. If this was asked already I joined a couple of minutes late but maybe just on the mutual fund and ETF position growth interesting to see the divergence between equity position growth, which accelerated and mutual fund position growth, which decelerated I was hoping you could provide some color on that dichotomy.
Thanks, Michael I'll start off with a few comments I think it's actually the equity positions that decelerated.
1% to 6% and we've seen over the last 10 years.
6% to 8% growth.
In line with the outlook that we have now for mid to single digits. So it was the equity positions that came down mutual funds continue they've been stable throughout the year and they actually uptick in Q4, two 8% and ended for the full year at 8%. So again I think all of that just sort of boils down to the confidence that we have in the full year guidance.
And that mid single digit range for both equity positions and mutual funds.
And our next question comes from Patrick O'shaughnessy from Raymond James. Please go ahead with your question.
Hey, good morning, I apologize if I missed this but did you provide an hour.
Capex and capitalized software development and fiscal 'twenty four.
But Patrick you broke up a little bit.
Paul.
Sorry, if I missed this earlier, but did you guys provide an outlook for your support.
For development for fiscal 'twenty four.
Oh, Hi, Patrick I think what we said is that we expect our free cash flow conversion to be at approximately 100, a 100% and that is we feel very good about that coming off of where we were in fiscal 'twenty. Two when it was at 48% because of the client platform spend was elevated primarily driven by.
Wealth management and the GPT in our in our platforms in the capital market space. We've now sort of completed that that elevated investment level. So I think youre going to see more normalized client platform spend that allows us to get to that 100% free cash flow a level and we feel real good about that.
Ladies and gentlemen, this will conclude our question and answer session for this morning, I would now like to turn the floor back over to management for any closing remarks.
Thank you operator.
I Hope you can tell how excited we are about our strong fiscal 'twenty three our outlook for 'twenty four.
How well positioned we are for long term growth.
Speaking of long term growth.
Please save the date for our 2023 Investor Day, which will take place in New York City on December 7th.
Thank you again for your interest in Broadridge and we look forward to seeing you in December .
Ladies and gentlemen, the conference has now concluded we do thank you for attending today's presentation. You may now disconnect your lines.