Broadridge Financial Solutions Inc

NYSE:BR

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to the Broadridge Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I'd now like to turn the conference over to Edings Thibault, Head of Investor Relations. Please go ahead.

[Edings Thibault, IR]

Thank you. Good morning, and welcome to Broadridge's fourth quarter 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. 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. 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. Tim?

[Tim Gokey, CEO]

Thank you, Edings, and good morning to everyone joining us. I'm pleased to update you on Broadridge's strong fourth quarter and full year performance for fiscal '22 as well as our positive outlook for fiscal '23. This performance is driven by strong execution, positive underlying trends and our acquisition of Itiviti, which exceeded our expectations in year one. We expect this strong performance to continue into fiscal '23 and beyond. I'll provide an overview, and Edmund will take us through the key details.

Before turning to our results, a note about what we are seeing from our unique position at the center of the equities, fixed income and fund markets. Despite the uncertainty and market pullback in the quarter ending in June, investors continue to be engaged and position growth remains robust. Our broker and asset management clients continue to face the imperative for digitizing their business. At the same time, they face regulatory change greater than any time since the global financial crisis. Our conversations with clients, both in North America and globally remain very active as they pursue industry solutions for common needs and digital innovation for areas where they seek to differentiate.

With that background, let's move to an overview of our results, which highlight the strength and resilience of our business model. First, Broadridge closed the year on a very strong note. Fourth quarter recurring revenues rose 15%, driven by exceptional 12% organic growth. Adjusted EPS rose 21% to $2.65.

Second, these results were the capstone on a very strong year. For the full year, recurring revenues rose 16%, driving higher margins and after accounting for higher interest expense, adjusted EPS growth of 14%. We also delivered an 11th consecutive year of record closed sales, up more than 20%.

Third, our growth is powered by execution against strong underlying market trends, including increased investor participation and diversification and the digitization of financial services as well as the successful integration and strong performance of our Itiviti acquisition.

Fourth, we continue to drive balanced capital allocation as a core part of our long-term value-creation algorithm. We continue to invest in modern, scalable technology platforms. And yesterday, our Board approved a 13% increase in our annual dividend.

Broadridge has increased its dividend every year since becoming an independent company, with double-digit increases in 9 of the last 10 years. As a testament to our execution, the strength and resilience of our business model, and, of course, the long-term trends driving our growth.

Fifth and last, our outlook for fiscal '23 is positive. Our business model is built to deliver growth to all economic cycles. Our fiscal '23 guidance calls for a strong 6% to 9% organic recurring revenue growth. This will drive double-digit growth in adjusted operating income and 7% to 11% adjusted EPS growth. We also expect another year of very strong sales.

The combination of excellent fiscal '21 and '22 results, coupled with a strong fiscal '23 outlook, has Broadridge well positioned to deliver at or above the higher end of our three-year Investor Day objectives for the period that ends next June. That will mark the third successive three-year period in which we've delivered on our objectives.

To build on those highlights, let's turn to a review of our execution against the three key opportunities that are driving our growth. First, extending our governance business by driving digital engagement; second, leveraging our acquisition of Itiviti to grow our capital business -- capital markets business; and third, building on our wealth franchise by delivering capabilities that make up our Open Wealth platform. I'll touch on each of these initiatives as I review our businesses, starting with governance on Slide 4.

Our ICS business delivered another very strong year as recurring revenue growth of 11% was powered by a combination of increased investor participation and revenue from new sales. Investor participation continued to grow at a very healthy pace in fiscal '22. Equity position growth remained well above trend at 18% for the year, and we benefited from increasing investor participation on the fund side as well, with mutual fund and ETF record growth of 14%.

We remain positive on the trends driving long-term investor participation and diversification growth, and we see this growth normalizing in the mid- to high single-digit range in fiscal '23 and beyond as market appreciation slows and we lapped the benefit from zero commission trading.

Importantly, we're delivering increased digitization across our regulatory business. For proxies, digitization rose to 86% from 81% 2 years ago. For funds, digitization rose to 78% from 69% 2 years ago. When you apply that change across some 2.2 billion shareholder communications, you can see that Broadridge generated tens of millions of incremental savings for issuers and funds, while significantly reducing greenhouse gas emissions.

New sales was the other big driver of growth. Itiviti our focus on innovation is increasing shareholder and client engagement across the full governance network from broker-dealers and wealth managers to public companies, to funds, to end investors.

For example, for our broker-dealer clients, we instituted end-to-end vote confirmation for nearly 3,000 public companies and are rolling out universal proxy functionality this month. For fund companies, we're helping the world's largest fund managers launch pass-through voting. We launched a new cloud-based European funds reporting platform, and we're growing our data and analytic solutions.

For issuers, we rolled out an upgraded virtual shareholder meeting platform across more than 2,500 annual meetings, making it easier than ever for investors to participate. We also upgraded our proxy vote app, enabling deeper investor engagement. Finally, our continued focus on digitizing customer communications enabled us to close a landmark deal to serve as the core digital communications infrastructure for a Tier 1 wealth manager, while continuing to onboard and serve a growing roster of new clients. These innovations helped drive strong revenue growth and led to what's clearly another strong year for our governance franchise.

Now let's move to our capital markets franchise, where the acquisition of Itiviti is helping to transform our position in the market. In capital markets, we're driving trading innovation, simplifying global post-trade technology and building new enterprise data and network-enabled solutions. Itiviti's leading front-office capabilities have meaningfully extended our franchise, deepening our relationships with key clients. Capital markets revenues rose 39% to $921 million, primarily driven by our acquisition of Itiviti, on which I will touch in a moment.

In the meantime, despite our focus on the acquisition, we drove organic growth of 5%. The biggest factor in organic growth was revenue from new sales as we onboarded multiple new clients to our global post-trade platform. It's great to see our platform investments converting to revenue growth.

We're also developing enterprise and network solutions. Our digital ledger repo solution is now live with three clients, with a fourth signed and others in the pipeline. Our production volume is now averaging more than $50 billion a day, and we expect that will climb further by year-end. Today, our clients are using digital ledger repo to process intracompany transactions and reduce external counterparty expense. We're further enhancing our capabilities in early fiscal '23 to include sponsored repos. While the revenue from this business remains small today, the pipeline is strong, and we see a long runway for future growth.

Another key network initiative is LTX, our fixed income trading platform, where we continue to make steady progress towards a full launch. The biggest growth initiative in capital markets this past year has been the acquisition of Itiviti, which is delivering even more value than we first anticipated. So let's turn to Slide 6 for a double-click on the performance of that business.

I'm pleased to report that the integration is going very well. We are near completion on most streams. We're driving revenue and cost synergies, and we strengthened and deepened the management team. We've also officially rebranded the business, Broadridge Trading and Connectivity Solutions, or BTCS.

When we announced the acquisition last spring, we highlighted three key drivers for why we thought this is a strong fit and will generate significant value for our shareholders. A year later, these drivers have only been reinforced. The first driver was the compelling strategic fit with our capital markets franchise. We expect that the combination of Itiviti's front office and connectivity solutions, with our back-office capabilities, would give us an unmatched ability to add value across the trade life cycle. That thesis is playing out, and we're in dialogues with multiple clients to increasingly see Broadridge as a critical partner in a multiyear process of modernizing their trading infrastructure. We're also well into developing the capability to enable common data sets across the trade life cycle, which will be a significant benefit for many clients.

Our second driver was to use our expanded global scale and footprint to unlock additional growth. A year later, our international revenues have grown by more than 60%, enabling us to strengthen our position in both Europe and Asia-Pacific. Clients see us as an increasingly global player, and Itiviti clients are seeing the benefit of being partnered with a larger player, especially one with a reputation for investment in service.

Last, Itiviti is delivering clear financial benefits. Fiscal '22 revenues came in ahead of our acquisition case at $256 million, and we exceeded our earnings target. We've actioned almost $10 million in synergies, including $3 million of revenue synergies and $6 million on the cost side. Our incremental scale helped fuel more than $30 million in closed sales, with multiple competitive wins in fiscal '22. Thanks to those sales, we are on target to delivering double-digit growth in fiscal '23 and beyond.

So we're off to a strong start in realizing Itiviti's potential. Looking ahead, we have a clear road map for continued growth. Driving share gains in the near term, executing on revenue synergies in the medium term and over the long term, driving a suite of modular solutions covering the entire front-to-back trade life cycle.

Now let's turn to Slide 7 for an overview of our progress in building the leading wealth tech player. In Wealth management, we are building on our core strength as the leading back-office technology provider, to delivering new component solutions and developing an agile modular platform that will link the full suite of our capabilities. Wealth and investment management revenues rose 5% in fiscal '22, powered by new sales both the U.S. and Canada, which helped offset the impact of lower trading volumes as we lap the peak of the mean stock phenomenon over the second half of last year.

Our opened component-based wealth management platform remains our top priority. To date, we've rolled out managed account billing and adviser workstation both to strong reviews. We recently delivered the second generation of the workstation with even more capability. Looking ahead, we're deep into integration on the remainder of the core suite with strong results and anticipate being largely code complete by the end of calendar '22. We remain on track to go live in summer of '23.

Ongoing client discussions are enabling us to sharpen our open value proposition -- open platform value proposition. Our ability to offer clients a set of modular solutions, linked by a common enterprise integration layer, enables them to modernize key parts of their tech step one step at a time, with clear value at each step. This modular approach is drawing significant interest from clients, and we expect it to drive increased wealth sales in fiscal '23. So to sum up, we are executing well across each of our franchise businesses.

Now let's move to Slide 8, and I'll wrap up my review with some closing thoughts. First, Broadridge delivered another strong year of financial and operating results. Second, we are executing on our growth plans in three attractive opportunities. We're driving digitization to extent governance. We're leveraging Itiviti to grow capital markets, and we're successfully building wealth management. Our investments in each of these areas are creating significant momentum in the marketplace. Third, our growth is being propelled by the accelerating pace of change in the financial services industry. Clients are evolving their business models, rapidly seeking to digitize and adopting next-generation technologies. Slowing global growth is likely to further accelerate these changes as our clients invest to compete for market share and drive productivity. By accelerating digitization and mutualizing nondifferentiating costs, our solutions help them meet those needs.

And that brings me to my fourth and last point. Broadridge has never been better positioned for long-term growth. Our guidance calls for 6% to 9% recurring revenue growth in fiscal '23 and 7% to 11% adjusted EPS growth. We're on track to deliver at or above our three-year objectives, and with a $60 billion market opportunity, we see a long runway for growth.

Before I finish, I want to thank our associates around the world. Their work is the driving force behind the innovation that we're bringing to the financial services industry. This work is critical for our clients. And through them, we're making a difference in improving the financial lives of millions around the globe.

Edmund, over to you.

[Edmund Reese, CFO]

Thank you, Tim, and good morning, everyone. I'm really pleased to be here to discuss the results from yet another strong quarter and strong year. I'll also provide you with some additional insights into our guidance for fiscal '23, which will position Broadridge to deliver at or above the higher end of our three-year financial objectives.

As you can see from the financial summary on Slide 9, Broadridge's full year results came in at or ahead of both our fiscal year '22 guidance and our three-year objectives across all metrics. Recurring revenue rose to $3.7 billion, up 16% year-over-year. Organic growth was 9%. Adjusted operating income margin expanded 60 basis points, outpacing our annual margin expansion objective despite the drag from increased low to no margin distribution revenue and adjusted EPS grew 14% to $6.46. Finally, and as Tim noted earlier, we delivered record closed sales of $282 million, a strong year across all metrics.

Turning to the fourth quarter. Recurring revenue grew 15% to $1. 2 billion, driven by organic growth of 12%. Adjusted operating income grew 25% and AOI margins expanded 250 basis points as we lap Q4 '21 elevated investment spend, and adjusted EPS increased 21% to $2.65. Again, operating income growth was partially offset by higher interest expense related to the acquisition of Itiviti. Our fourth quarter results benefited from continued position growth, strong execution across our product lines and the ongoing strong performance of Itiviti.

Let's get into the details of these results, starting with recurring revenue on Slide 10. Recurring revenue grew by 15% to $1.2 billion in Q4 '22. Organic growth was 12%, driven by strong volume growth in new sales. Acquisitions contributed 3 points of growth in the quarter as we passed the one year anniversary of the Itiviti acquisition in May. Our 16% recurring revenue growth for fiscal '22 marks three consecutive years of double-digit recurring revenue growth. With organic growth at 8% in fiscal '21 and 9% in fiscal '22, well above our 5% to 7% three-year growth objective, we are well on our way to exceeding our three-year top line growth objectives.

Now let's turn to Slide 11 to look at the growth across our ICS and GTO segments. We saw double-digit recurring revenue growth in both of our segments. In Q4, ICS recurring revenues grew 14%, all organic, to $807 million, including double-digit growth across all four product lines. Regulatory revenues rose 13% to $424 million on strong equity and fund position growth. Data-driven fund solutions revenue grew 11% to $103 million, driven by strong growth in our data and analytics solutions and our mutual fund trade processing unit. Our issuer business increased by 18% to $125 million as we maintain share in our virtual shareholder meetings platform and continue to grow our other annual meeting and disclosure products.

Finally, our customer communications business had a very strong quarter, growing by 15% to $155 million, driven by a surge in volumes from onboarding new clients and double-digit growth in our higher-margin digital offerings. Customer communications is now delivering solid top line growth. That complements its strong earnings growth as it executes on its print to digital strategy. For the year, ICS grew at 11%, with all of our businesses at or above our organic recurring revenue growth objectives.

Turning to GTO on Slide 12. Recurring revenues grew by 18% in Q4 to $382 million, driven by continued strong performance from Itiviti, higher capital markets fixed income trading volumes and an increase in wealth management license revenue. Organic growth was 9% for the quarter and 5% for the year.

Capital markets revenues grew by 28% to $240 million, powered by Itiviti, revenue from closed sales and higher fixed income trading volumes. Organic growth in capital markets was 12% for the fourth quarter and 5% for the full year.

And let me also take a moment to emphasize the strong performance in Itiviti. Itiviti, now BTCS, contributed 7 points of growth to Broadridge's recurring revenue, right on track with the expectation that we set when giving fiscal year '22 guidance and ahead of our profit expectations. Tim walked you through the progress that we've made in the year since the acquisition. So I continue to feel good about our integration, the revenue synergies and strong financial performance in BTCS and the strategy for the business going forward.

Wealth and investment management revenues grew by 4% to $142 million, driven by growth from new sales and license revenue, partially offset by the impact of lower trading volumes at our wealth management clients. Full year organic growth was 5%.

Now let's turn to Slide 13 for a closer look at the volume trends in ICS and GTO. Position growth remained strong in the fourth quarter across both equities and funds. Equity growth was 17% in the seasonally large fourth quarter. Our testing of position data continued to prove reliable as we finish the full year in line with our late April testing. F or the full year, equity position growth was 18%. Mutual fund growth also remained steady at 10% in the fourth quarter and full year growth was 14%.

Turning to trade volumes on the bottom of the slide. Trade volumes grew 8% in Q4, driven by double-digit growth in fixed income volumes as investors sought to stay ahead of rising inflation in the more hawkish Fed. Equity volumes also increased as higher trading by institutional investors more than offset the lower activity at our retail wealth management clients. For the year, internal trade growth was 1%.

Let's now move to Slide 14, where we summarize the drivers of recurring revenue growth. Recurring revenues grew 15%, powered by 12% organic growth and a 3-point contribution from acquisitions, primarily reflecting Itiviti revenue through mid-May. Internal growth, including strong position growth and fixed income trading, drove 8 points of growth and revenue from new sales contributed 6 points of growth. Our retention rate remained at 98%.

I'll finish the discussion on revenue with a view of total revenue on Slide 15. Total revenue grew 12% in Q4 to $1.7 billion. Recurring revenue was the largest contributor, driving 10 points of growth. Low to no margin distribution revenue increased by 12% and contributed 3 points to total revenue growth, driven by a combination of higher volumes in our customer communications business and higher postage rates. That growth had a dilutive effect on our reported adjusted operating income margins that I'll highlight in a moment.

EBIT-driven revenues were $70 million in Q4 '22, $2 million lower than last year, as lower contest activity was partially offset by continued mutual fund proxy activity. Looking ahead to fiscal '23, we are not forecasting any major mutual fund proxy events and we expect event-driven revenues to be in the $240 million to $260 million range in line with recent years.

Turning now to margins on Slide 16. Adjusted operating income margin for Q4 was 25.3%, a 250 basis points improvement over Q4 '21, driven by strong recurring revenue growth and lapping the increased investment in our digital and technology platforms. For the full year, Broadridge delivered 60 basis points of margin expansion, exceeding our objective of 50 basis points despite elevated growth in low to no margin distribution revenue, which diluted our reported full year adjusted operating income margin by 70 basis points.

As I have mentioned previously, we saw a modest impact from higher inflation, both in attracting and retaining talent and in material costs to offset that inflation impact and to prepare for a more uncertain economic environment. We took a series of targeted cost actions in Q4 '22.

First, given our new hybrid work model, we continue to rightsize our real estate footprint and took a $23 million onetime charge related to those incremental actions. We have now closed or reduced 49 offices or 14% of our total square feet since the beginning of the pandemic in fiscal year '21.

Second, we initiated additional business alignment initiatives that resulted in a reduction in both existing and open headcount. As a result of these cost initiatives, we expect to realize $70 million in annualized savings, which, along with the operating leverage inherent in our business model, will allow us to mitigate inflation, continue to invest in our long-term growth investments and meet our earnings growth objectives.

Following the decision we announced earlier this year, we are closing our offices in Russia and will relocate associates who want to move. We incurred $1.4 million in expense related to that effort in the fourth quarter and expect another $25 million to $30 million over the course of fiscal '23 to wind down our business in that market. Both the onetime real estate costs and the Russian wind-down expenses have been excluded from our calculation of adjusted operating income and adjusted EPS.

Let's move ahead to closed sales on Slide 17. We ended our fiscal year with another strong selling effort, closing $112 million in closed sales for the quarter. For the full year, sales grew by 21% to $282 million, ahead of our guidance range and marking yet another year of record closed sales. Importantly, these sales were balanced across ICS and GTO products, and we also saw a significant contribution from BTCS. Strong closed sales drove a further increase in our recurring revenue backlog, which reached $440 million or 12% of fiscal '22 recurring revenue. Importantly, our backlog gives us strong visibility into the revenue from closed sales that will power fiscal year '23 recurring revenue growth.

I'll turn now to capital allocation on Slide 18. We are a growth company, and our capital allocation model remains focused on balancing investment for long-term growth and capital return to benefit our shareholders. Broadridge generated $370 million in free cash flow in fiscal '22 after investing $447 million in free cash flow in fiscal platform accounted for the most significant part of this investment.

As we previously indicated, we are in a peak period of investment across multiple client platforms, including our wealth platform, where we are on track to reach code complete in fiscal '23. We also expect client platform investment to be lower in fiscal '23, with free cash flow conversion returning to more historical levels in fiscal year '24.

We also remain committed to funding a dividend that grows in line with earnings having returned a net of $25 3 million to shareholders in fiscal year '22. We are pleased that our Board has approved a 13% annual dividend increase to $2.90 per share in fiscal '23, in line with our targeted dividend payout ratio of 45% of adjusted earnings.

Finally, we repaid $95 million of debt as we continue to prioritize debt repayment over share repurchases until we reach a leverage ratio that is in line with our objective to maintain an investment-grade credit rating.

I'll close my prepared remarks this morning with some detail on our fiscal '23 guidance, which is on Slide 19. Our guidance calls for mid- to high single-digit recurring revenue growth, continued margin expansion, solid adjusted EPS growth and another year of strong closed sales.

Let's take each point in turn, starting with recurring revenues. We expect fiscal year '23 recurring revenue growth of 6% to 9%, all organic, with balanced growth across both ICS and GTO. The biggest driver of our growth is expected to beat new sales as we work to onboard our $440 million backlog. We also expect mid- to high single-digit position growth and flat trading volumes. And as always, the recurring revenue guidance reflects a constant currency view.

In addition to recurring revenue, we expect low double-digit growth in distribution revenues, driven by solid volume growth and additional postage rate increases. As I indicated earlier, we expect event-driven revenues to be in the $240 million to $260 million range down from $270 million in fiscal '22. Factoring recurring, event-driven and distribution revenues, we expect total revenue constant currency growth to be in the 6% to 10% range.

Second, we expect to expand our adjusted operating margin in fiscal '23 by approximately 50 basis points, driven by the scale in our business, the ongoing mix shift to digital and deficiency gains, including our recent cost initiatives. These drivers should enable us to offset inflation-related increase and the dilution from double-digit growth and low to no margin distribution revenues.

Third, we expect adjusted EPS growth of 7% to 11%. Embedded in our adjusted EPS outlook is the impact of higher interest rates, which will drive a $35 million to $40 million increase in interest expense and the impact of the stronger dollar, which will lower our adjusted earnings growth by just over 1%.

Keep in mind that while higher interest rates are impacting our interest expense line, the impact on Broadridge as a whole is largely neutral as our $1.6 billion in variable debt outstanding is essentially matched by cash balances held in our mutual fund trade processing and stock transfer businesses. So any increase in interest expense is offset by an equivalent increase in float revenue in ICS. We are also projecting an overall tax rate of 21% and a modest increase in diluted shares outstanding. Closing our discussion of EPS we expect to complete the integration of Itiviti and incur expenses related to winding down our operations in Russia. These expenses are not included in our calculation of adjusted EPS guidance.

Turning now to our final guidance point, closed sales. We expect another strong year in sales, with the fiscal '23 guidance range of $270 million to $310 million including balanced sales between ICS and GTO.

So to sum up, our fiscal '23 guidance emphasizes the strength and resilience of our financial model and our ability to drive sustainable recurring revenue growth through any economic environment, fund growth investments while expanding margins and delivering steady and consistent adjusted EPS growth, all while maintaining an investment-grade balance sheet and a balanced capital allocation policy.

Before I move on from guidance, let me briefly discuss our Q1 outlook. Historically, Broadridge has generated 10% to 17% of our earnings in the first quarter. In fiscal 2023, we expect our Q1 earnings to be at the low end of that historical range, driven by lower event-driven revenues and the carryover impact of higher fiscal '22 expenses.

And one administrative note for fiscal '23 and moving forward, beginning with our first quarter results, we will be completing the final stage of our recasted FX reporting. Given the increased size and scale of our international business and global operations, it is a appropriate to incorporate FX changes more fully into our reporting.

You will recall that last year, we implemented the first phase of this transition by updating the fixed exchange rate for our segment revenues and for recurring revenue, which reduced the difference between the fixed rate and the actual rate that was recorded in our FX revenue line. We will now be translating changes in FX into our segment and recurring revenue reporting, allowing us to eliminate the FX revenue line entirely. As a result, you'll see the impact of changes in FX directly in our recurring revenue line rather than as a change in the FX revenue line.

While this change will modestly reduce our reported recurring revenue, it will have little impact on our reported recurring revenue growth rate and no impact on our reported total revenue or profitability metrics. As we did last year, we intend to publish our historical revenue results at a recasted actual rate ahead of our first quarter earnings so that you have a chance to adjust your models.

So where does that leave us? Let me wrap up by putting our fiscal '23 guidance in the context of our three-year financial objectives on Slide 20. Our guidance for fiscal '23 has Broadridge well positioned to deliver above the three-year growth objectives for organic recurring revenue and recurring revenue, in line or ahead of our margin objectives and with adjusted EPS growth at the higher end of our three-year growth objective range.

Of course, we need to execute in an increasingly uncertain environment in fiscal year '23. By doing so, we will have delivered again on another set of three-year growth objectives. Just as we did in fiscal '14 to '17 and fiscal '17 to '20. That performance underscores the strength and consistency of our business model. Our strategy of growing our governance and capital market franchises and building a wealth management franchise as well as the long-term trends driving our growth.

With that, let's take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from David Togut from Evercore ISI. Please go ahead.

[David Togut, Evercore ISI]

I appreciate the call outs on the fiscal '23 guidance, Edmund. Can you talk to your expectations, though for Itiviti, which is clearly growing solid double digit and has margin well above your corporate average. And any expectation we should be incorporating from the UBS contract?

[Edmund Reese, CFO]

Let me maybe say one to Itiviti, and then turn it over to Tim to talk about long-term view on Itiviti in the UBS contract. First, David, I was very pleased. We said at the beginning of the fiscal '22 guidance that we'd expect Itiviti to contribute 7 to 8 points. And that revenue performance that Tim mentioned, we're very pleased about that. We expect to see mid- to high single-digit growth in Itiviti, as we said when we made the acquisition, and we feel very good about the profit outlook on it as well. So I feel good going into fiscal '23 and the contribution that we expect from Itiviti.

And Tim can give further view on what we think going forward.

[Tim Gokey, CEO]

Yes, Dave, from a modeling perspective, it's really incorporated in the guidance that Edmund gave. But just stepping back from it a little bit, obviously, we're pleased with the integration. What we were really pleased by is the confirmation around our strategic thesis with our clients and the conversations that we've been having with them about how we fit into their road map.

And really as we look at our -- the way our technology architecture, the way our product roadmap overlaps with what our client needs as well as the real commitment to service that both Itiviti and Broadridge have and how that is resonating, so we really are seeing market share gains, and that's delivering the financial benefits that we talked about.

And just to expand a little bit of the outlook I gave when I was talking is as you think about that as you think about that short-, medium- and long-term goals in terms of how we see this unfolding, we think there is a real opportunity over the next few years to take share in the front office. There is a real need out there for a next-generation solution, and people are really looking to us as the right partner for that. And we saw that with multiple competitive wins in this last year, which drove more than $3 million in sales, which we see continuing to grow.

In medium term, we think there is opportunity around geographic and asset class expansion. And we're seeing the pipeline grow in North America. We saw some good sales in North America. So we're really having the opportunity to bring Itiviti to North America where it traditionally hasn't been as strong. We're getting introduced by Itiviti in Europe to their clients, and there's also a lot of opportunity in exchange-rated derivatives.

And then longer term, that ability to really create a true front-to-back solution -- and some clients -- some of our clients are very excited about that because there's a lot of inefficiency today where the data in the front office and the back office don't match, and it creates a lot of internal inefficiency and brakes. And ability to bring that true back-office data all the way to the front, can really increase traders' effectiveness and ability for them to be effective in their business.

So we are incredibly excited about this. Everything that we thought about it has been happening. And we're very excited about the long term.

Now your second part of your question was on UBS, which I'm sure others will have that same question. And specifically related to '23, there's nothing in our guidance about for this. We're really expecting the revenue to begin to be recognized after our '23 fiscal year as we talked about sort of in summer of calendar '23, which will be in our fiscal '24 calendar year.

And I'll leave it at that for right now. But if others have questions, I have a lot to say about the wealth platform and how excited we are with it.

[David Togut, Evercore ISI]

And just as a quick follow-up, Edmund, you called out some impact of carryover expenses from Q4 into Q1. Can you kind of walk us through the cadence of investment spending throughout FY '23? You said you were being increasingly disciplined in your planning process.

[Edmund Reese, CFO]

Yes. I mean, David, where I'd start there is we have seen volatility over the past two years and we've continued to see Broadridge continue to expand adjusted operating income margins. Over the last three years, it's been over 50 basis points. You know that we set as an objective 50 basis points, and we did 60 in fiscal '22, despite the inflation impact, despite the distribution impact that we've had and 60 basis points in fiscal '21 as well.

Inherent in our business model is operating leverage that we get from bringing on new revenue onto our fixed infrastructure without seeing additional costs that we get from moving from -- as we continue to become more of a digital business and then the efficiencies that we see in the business as well, from things like moving to the cloud and in our technology expense. That, I think, allows us to continue to expand margins each year and create capacity for investment.

Now like many other companies going into an uncertain economic environment, I thought it was prudent for us to take -- to be proactive and take actions to drive down the cost and create more capacity for us. And so we have started those actions as we went into our fiscal '23 planning process. They're underway, which is why I felt confident in giving a number today in terms of the annualized savings associated with that. That is going to allow us to mitigate the inflation impact, continue to create capacity for investment, which is our objective to have ongoing investment in our revenue initiatives and continue to deliver these kind of -- the earnings that's in line with our objectives and with the guidance that we gave. So ongoing investments are going to be a part of our business model. And I think we have the operating leverage in our business and the proactive actions that allow us to continue that.

[Operator]

Our next question comes from Peter Heckmann from D.A. Davidson. Please go ahead.

[Peter Heckmann, D.A. Davidson]

I wanted to ask customer reimbursables are growing quite a bit faster than I would have expected given some of the secular decline in paper and going to electronic, it was about 11% last year, about 10% to 15% this year. How would you break down the contribution from the increase in postage? And then kind of that core growth rate, would you attribute that to just additional customer communications wins?

[Tim Gokey, CEO]

Peter, we didn't quite hear the very first part of your question. Growth in what?

[Peter Heckmann, D.A. Davidson]

Customer reimbursables.

[Tim Gokey, CEO]

Let me just -- I'll take a little bit of an overview, and let Edmund add on to that. But we are seeing good growth -- well, first of all, it's the factors you mentioned. So postage was a significant factor, and there's going to be another postage increase in this coming year. And the customer communications business, which has a lower digital percentage than our regulatory business, had some very nice growth as you saw this year. And that's growth both from bringing on new clients and from increased -- some increased volume inside existing clients.

So good growth in both those things. I will -- I know it's not your question, but I just have to point out the increased digitization rates that we've seen over the past couple of years are now at 86% for proxy, 78% for funds. And so we continue to think that the long-term piece, as we get to digitization, is that the distribution revenue should be a smaller piece of our business. We were a bit surprised by that this year. And -- but it looks like with the postage increase, it will be significant again next year.

And just I'll ask Edmund to...

[Edmund Reese, CFO]

Yes, I'll just add to what you just said because your comments were spot on, Tim. On an ongoing business as usual basis, I'd expect the distribution revenue to be in sort of mid-single-digit growth levels. But because of what the strength that we've had in our customer communications business with strong wins there, we have seen an uptick in and that moves us to these low double-digit rates plus the postage increase that Tim has seen.

And as a result of that, you're seeing top line growth, by the way, in our customer communications business in line with the strong earnings that we've put in there. I think the important point on that is that both of those components, the customer communications distribution plus the postage, is that no margin -- very low to no margins for us and that doesn't have whether the growth rates are higher -- when the growth rates are higher because of that it's not having a big impact on our overall earnings. It is having an impact on our reported margins, but we are still able to be able to drive the margin expansion despite that. I think that's the key thing to keep in mind as you think about the distribution revenue.

[Tim Gokey, CEO]

That's a great point, Edmund. I just -- again, I know you all know this, but you obviously hear me say, it is you really -- when you think about Broadridge, we're thinking about fee revenue. And both in terms of growth and in terms of margin, when you look at fee revenue, that is really what is our economic driver.

[Peter Heckmann, D.A. Davidson]

And then just thinking about M&A, Broadridge's has been an active acquirer over the years. But should we expect that the M&A activity might be a little less frequent and maybe smaller deals for the next two or three quarters as you get down towards your target leverage ratio?

[Tim Gokey, CEO]

Yes, thanks, Pete. That is -- as we look at the environment, first of all, in terms of the attractiveness of the price of assets, which even though the market has come down, is still not amazingly attractive. And then as we look at really prioritizing paying down the debt from Itiviti and getting to more normal levels of leverage. So I think it's never say never for the right thing. But really our emphasis is on paying down the debt at this time.

[Operator]

The next question comes from Puneet Jain from JPMorgan. Please go ahead.

[Puneet Jain, JPMorgan]

So it looks like ICS internal growth trends inflected higher in the quarter. Even related to the last quarter, it seemed like year-on-year trends improved a lot, adjusted for comps and seasonality. Is that right? And what would you attribute that, Tim?

[Tim Gokey, CEO]

Yes, it is a -- I don't know if I would say it was necessarily stronger than the year before because we had exceptional position growth in the prior year. But when you look across the business, and obviously, we had really strong performance in customer communications on top of everything else this year. So it was a really good strong quarter for ICS.

And the interesting thing, Puneet, that I want to make sure we call people's attention to is the revenue from new sales that we saw in ICS as well. So we do a lot of talk about position growth. And in the past, there was a time when ICS was largely just about position growth. But when you look at the revenue from new sales, it's a very significant portion of the growth this year, which is something that we think can be a long-term trend as we've really done so much innovation and new product launch there that is a much bigger component of the whole growth mix.

[Edmund Reese, CFO]

And let me just add, and I think it's a good observation, Puneet. In Tim's point, let me just maybe add 1 or 2 points. You're right, you did see sort of elevated growth in the issuer business and then the customer communications business. Remember, issuer last year on the full year grew at 21%. We're now seeing 14% this year.

In the quarter, we continued to have strong retention of our virtual shareholder meetings platform. That wasn't a big growth driver. There was some incrementality there, but that retention is very important. And then our disclosure products had very high growth -- as well, some of that, the disclosure business has been growing very healthy over the past couple of quarters.

We got a little bit of an uptick as companies look to revamp their proxies and annual reports. We do a good job of winning that business. And I don't know to expect that kind of growth on an ongoing basis. And then in the customer communications business, just onboarding a bunch of the large sales that we've had over the past year print and digital sales that we've had drove growth there.

I think the big point that I've asked you to take away, Puneet, is we still very -- feel very comfortable with our long-term objectives of 5% to 7% organic growth from these businesses. And I think that's what you can expect as we look at them moving forward.

[Puneet Jain, JPMorgan]

And then for VSM within issuer solutions, how should we think about penetration rate for that market? You've been offering that for a couple of years. How -- is there a way to think about like you are at X percent penetrated of the addressable market or of total number of issuers that are out there within the VSM solutions?

[Tim Gokey, CEO]

Yes, it's Tim. On that, in terms of penetration, I think that we saw, obviously, a very big jump up in that over the past few years. I think in 2019, we did 300 meetings. And then -- and we're 2,500 now. It is, I think, from here -- so then the first question is, will it go back? And I think what we're definitively seeing there is no. What we hear from our clients is once they have moved to this, they see the benefits. They see the increased investor participation. They see the convenience not needing to have people travel. All those things is obviously really the benefit.

So we haven't seen people going back. So that's step one, which is very important. I think the growth from here will be much more incremental. It is -- many of the people who are going to make a decision have made it over the past few years. And do you think it will be a very solid offer in the future? But I don't think we expect to see the kinds of growth that we've seen in the past, with just very solid one at a time kind of growth.

[Operator]

[Operator Instructions] Our next question comes from Patrick O'Shaughnessy from Raymond James. Please go ahead.

[Patrick O’Shaughnessy]

I'm trying to square your positive comments about Itiviti with the actual revenue trends. So it sounds like it performed relative -- or in line with your plan for the year. You just seem pretty happy with it. But it was a $250 million revenue business when you bought it in early 2021, it did $256 million of revenue this past fiscal year. So it doesn't seem to be exhibiting a lot of revenue growth, at least over the past year. So why square your positive tone with those numbers?

[Tim Gokey, CEO]

Yes, sure, Patrick. There is a -- there's a sort of a revenue here cut that takes place as part of sort of the accounting of software businesses. And so when you look at the revenue that there was previously, there's a bit of a sort of downtick built in, in the first year, which we grew over and more. We'll get some of that back in this coming year. And so we'll have a nice continued growth this coming year that will be sort of above that high single-digit trend that Edmund talked about, which we see as a long-term trend.

And so really, we have to measure it relative to our objectives, which was sort of on a like-to-like basis, it was double digit this year. And so we feel very good about that as well as the sales goals, which were -- when you think about $30-plus million on a $256 million business, that's a really nice percentage of sales relative to the base. And then the earnings was quite a bit above our expectations as well. So across all three of those metrics, it performed well. And then just the outlook feels really good, too, in terms of meeting our acquisition case and more.

[Patrick O’Shaughnessy]

And then Edmund, you kind of mentioned this in your prepared remarks, but there is the interest income upside within the data-driven fund solutions business. Can you help us think about quantifying that? Is there a certain amount of float times in interest rate that we should be thinking about? Or kind of what is the upside to that in a further rising rate environment?

[Edmund Reese, CFO]

Well, the short important point on it is that it really offsets and makes our overall rate impact neutral or slightly positive as I think about the interest expense line. And then the prepared remarks, I talked about interest expense for the $1.6 billion in variable debt that we have, having about a $35 million to $40 million impact.

Our treasury teams and our business teams worked very hard to be able to recognize the rate increases that we see in the asset side as well as mutual funds. So you can expect the impact to be roughly the same amount on the asset off balance sheet side of the ledger. So it's about a neutral impact as we think about those two impacts, both on the interest expense side and on the balances.

[Operator]

The next question is the follow-up from David Togut from Evercore ISI. Please go ahead.

[David Togut, Evercore ISI]

Just a quick follow-up. You gave some kind of guide rails, Edmund, around Q1 FY '23 EPS as a percentage of total annual EPS kind of characterizing it as toward the lower end of the 10% to 17% range historically. Can you put some guide rails around your revenue growth expectations as well? We're getting some incoming questions on that.

[Edmund Reese, CFO]

Yes, I think we've seen -- on the Q1 overall, you're right, I think the -- when you think about total revenue, I'd expect the recurring revenue to be in the strong position growth. We continue to feel very good, as Tim mentioned earlier, about onboarding our sales from the revenue backlog of $440 million. That is the key driver of our growth, and those things are healthy going into each of the quarters, including Q1.

When you think about total revenues, where you start to see the impact being lower, if you think about Q1 of '22, where we saw almost record levels of event-driven revenue, it was over $76 million in Q1, and we're going to be lower than that. And then the incremental expenses is what drives -- or the full year impact of expenses that were in fiscal year '22 is what drives Q1 to be at the lower end of that 10% to 17% range.

[Operator]

This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

[Tim Gokey, CEO]

This is Tim. I just want to thank everyone for joining us. We are really pleased with the performance we had this past year. We're really excited about the upcoming year and about the future for our company, our ability to help our clients and improve the lives of millions of investors.

So thank you very much for joining, and we look forward to talking to you next quarter.

[Operator]

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