Earnings Call Transcript - BR Q3 2021

Operator, Operator

Good morning, and welcome to the Broadridge Third Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Edings Thibault, Head of Investor Relations. Please go ahead.

Edings Thibault, Head of Investor Relations

Thank you, Andrea. Good morning, everybody, and welcome to Broadridge's Third Quarter Fiscal Year 2021 Earnings Conference Call. Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com. Joining me on the call today 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 and third 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 the comparable GAAP measures can be found on the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?

Timothy Gokey, CEO

Thanks, Edings, and good morning. I'll begin with an overview of our key messages and an update on our third quarter results, including our performance against our strategic objectives. Edmund will review our financial results, and then we'll take your questions. It's an exciting time to be at Broadridge, and we have a lot to cover, so let's get started. I'm pleased to share that Broadridge delivered strong third quarter results. Recurring revenues and adjusted operating income both rose 8%. Our results in both ICS and GTO are being propelled by long-term trends, including increasing digitization, mutualization and the democratization of investing. These trends are driving strong new business growth, record growth in the number of shareholders and higher trading volumes. We're also executing well against our strategic growth plan across governance, capital markets and wealth and investment management. I'll highlight some of those initiatives in a few minutes. A combination of those strong results and continued execution against our growth plans is giving us the confidence to continue to invest in our business. We've continued to fund attractive investments in our products, platforms and people, including the pending acquisition of Itiviti. We're also substantially increasing our guidance for fiscal year 2021 on both the top and bottom line. We now expect recurring revenue growth of 8% to 10% and adjusted EPS growth of 11% to 13%. While the new guidance reflects the impact of Itiviti, the bulk of this raise is organic, as Edmund will discuss. The net result of all these points, our strong third quarter results, our continued internal and M&A investment and our outlook for fiscal 2021 is that Broadridge is executing well and is on track to deliver at the higher end of our 3-year financial objectives, including 8% to 12% adjusted EPS growth. We remain focused on delivering long-term growth driven by secular trends and consistent investment across our governance, wealth and capital markets businesses and, in turn, generate consistent, sustainable top quartile shareholder returns. Broadridge's ability to generate those attractive returns is driven by executing on our clear long-term growth plan. So let me update you on some highlights of our recent progress on Slide 5. I'll start with ICS. Recurring revenues rose 11% to $586 million driven by revenue from new sales and very strong equity record growth. The biggest driver of ICS' strong growth was revenue from new sales, and I'm pleased to see the impact of recent investments on our results. Let me share two examples of our focus on product investment and strong execution translating directly into increased revenue growth. The first is the Shareholder Rights Directive II. Over the past two years, we've created a shareholder communications hub, linking millions of investors across the EU with hundreds of wealth managers, winning almost 300 new clients along the way. Now as we enter proxy season, we're starting to see those efforts translate into new revenues, helping to drive 80-plus percent growth in our international proxy business. Virtual shareholder meetings continue to be a great example of product investment translating into new revenues. Over the past year, we've upgraded our VSM capabilities to include the latest in virtual meeting capabilities, including state-of-the-art video and audio technology, improved Q&A functionality, one-click shareholder authentication and seamless proxy voting. Those upgrades have helped retain our existing clients and have driven additional growth. We are now on pace to serve almost 1,900 virtual shareholder meetings this proxy season, up from 1,400 last spring. The second factor driving ICS was very strong equity record growth, which was 20% for the quarter. It's clear the move to reducing trading commissions has triggered a significant expansion in the number of market participants, which contributed to the increase in equity record growth. That strong growth has been broad-based across our broker clients but has been most pronounced at the online brokers. It has also been broad-based across issuers with 20% growth across both widely held stocks and those with more medium-sized shareholder bases. We did see large increases at a handful of names, including so-called meme stocks like GameStop. But those increases only contributed one point of the overall growth. Commission-free trading is the latest step in a long-term trend. It includes the rise of ETFs, lower trading costs across all participants and changes in investor interfaces that help propel high single-digit equity and fund record growth over the past decade. Broadridge has invested to scale its capabilities to meet that rise in demand, increase the digitization of critical regulatory communications and ensure that both new and existing investors get the information they need to understand the risks and participate in the governance of their investments. Looking forward, we expect strong record growth to extend into the fourth quarter with our testing indicating 25% stock record growth for Q4. To close off on governance: let me touch briefly on regulatory. I want to congratulate Commissioner Gensler on his confirmation as SEC Chairman. As we have with every chair and administration of both parties over the past 40 years, we look forward to assisting by investing in the next generation of technology, to help the SEC achieve its mandate to better inform and protect investors, all while reducing cost for registrants and creating a fair return for our shareholders. Let's turn now to our capital markets franchise. Capital markets' recurring revenues slipped by 1% as steady international growth was offset as expected by lower license revenues. We anticipate this period of flattish revenue to continue through the fourth quarter before picking up again in fiscal '22 as we onboard our very healthy backlog. On the strategic front, our planned acquisition of Itiviti represents a significant enhancement of our ability to drive value to our clients. For those who may have missed our call a few weeks ago, let me remind you why we think this transaction is such an exciting step forward for our global capital markets franchise. As a leading provider of order management and trade execution technology and connectivity solutions for financial institutions, Itiviti gives Broadridge a compelling opportunity to extend our capital market service offering. The combination of Itiviti's front-office trading solutions, with Broadridge's leading post-trade back-office capabilities, will allow us to serve our clients' entire trade life cycle from order to settlement. With increasing high frequency and algorithm-driven trading, it's increasingly important to serve clients across traditional boundaries. This combination will bring critical data from the back to the front office to improve trading decisions, and it will enable our clients to simplify and improve their front-to-back technology stack and operating model. The combination also strengthens our joint capabilities across equities, exchange-traded derivatives and fixed income, and it substantially extends our global reach, creating significant cross-selling opportunities and enhancing our relationships with blue chip clients. The acquisition virtually doubles our business in APAC and further expands our reach in Europe. That expanded footprint and scale positions us to take advantage of growing mutualization trends in both EMEA and Asia. Itiviti adds more than $6 billion to Broadridge's total addressable market and will drive stronger growth, margins and earnings, as Edmund will discuss in his remarks. Early feedback from our clients has been overwhelmingly positive, giving us added confidence that our front-to-back thesis and our near-term to medium-term growth outlook are sound. Also of note in our capital markets franchise is the continued development of our LTX fixed income trading platform. LTX recently completed the first-ever multi-buyer digital block trade. Enabling a single seller to simultaneously access the aggregated liquidity for multiple buyers is a milestone for the fixed income market, and I hope one of the many steps towards creating a more liquid corporate bond market. To date, 10 dealers and over 40 asset managers have joined the LTX platform. An additional 14 institutions are signed in the onboarding process, including one of the world's largest fixed income managers. Let's turn next to our wealth and investment management business, where revenues grew by 7%, driven by new client additions and higher equity trading volumes. A key part of our growth strategy is to expand our sales of component solutions. So it's terrific to see new client onboardings across a full range of our wealth and investment management products. We also continue to make progress on building our industry-leading wealth management platform, which will help clients with the digital transformation of their wealth business. We're already live with our average daily balance billing solution, an industry milestone. We're currently in active testing of our front office workstation with select advisers, setting the stage for a period of extensive testing of the broader platform before going live. Our sales and marketing efforts with several prospective clients for this platform are advancing well. Clients see that using the Broadridge wealth platform to drive digitization by seamlessly connecting the back office functions we already provide, with additional select front and middle office capabilities, will drive a stronger top and bottom line by bringing new capabilities to advisers and clients while digitizing financial adviser, branch and back office interactions. Another important part of our wealth strategy is developing a robust partner network to ensure that we can integrate cutting-edge capabilities from innovative partners. Recent partnerships include Fligoo for predictive analytics, Core Bank for securities-based lending, and the Tiefen Group, a wealth management fintech accelerator. These partnerships and others represent ongoing steps in building a network that will enable our clients to rapidly adopt new technologies. Before I turn the call over to Edmund, I want to step back for a moment and reflect on how far we've come over the past year. When I spoke to you at the close of our fiscal third quarter a year ago, the economic outlook was deeply uncertain and much of the world was locked down. My remarks at that time were focused on the steps we were taking to keep our associates safe and meet the needs of our clients in an unprecedented time. Today, after 12 long months, there remain significant challenges, particularly thinking of our more than 3,000 associates in India and their families and friends. But the global outlook is unquestionably brighter, with increasing economic growth marching hand-in-hand with rising vaccination rates. The pandemic has also accelerated many long-term trends, including digitization, mutualization and next-generation resiliency. And the lower cost and friction for investing is bringing in millions of new investors. These changes are clearly having a significant impact across wealth management, governance and capital markets. They're causing financial services leaders to rapidly adopt next-generation technologies. And Broadridge is building the suite of capabilities that will help them navigate and win this period of change. We do so from a position of strength. We started the fiscal year last July expecting 2% to 6% recurring revenue growth and 4% to 10% adjusted EPS growth. Our focus then was on driving enough expense savings to assure that we could continue to fund critical growth investments. Fast forward nine months, and we are poised to deliver 8% to 10% recurring revenue growth, driven by a combination of strong new sales and healthy financial markets. After achieving our expense targets, we're now investing heavily in new product capabilities, enhancing our global post-trade platform and building next-generation capabilities across digital communications, wealth management and fixed income trading, among other investments. We're also adding talent and investing in our people to make Broadridge the best place for the most talented associates in our industry. Last but not least, we're on the brink of closing our $2.5 billion acquisition of Itiviti, expanding our capital markets franchise and further strengthening our global footprint. And yet even after those investments and the near-term dilution from Itiviti, we're positioned to deliver 11% to 13% adjusted EPS growth. Broadridge is at its front foot and leaning into the opportunities we see ahead. It has been a remarkable year. Looking further ahead, we're on track to achieve the higher end of our 3-year growth objectives, driving strong recurring revenue and double-digit adjusted EPS growth. We see long-term trends continuing to drive demand for our services. And our investments are creating new avenues for growth long beyond our current 2-year objectives. The future of Broadridge is brighter than ever. In my 10 years at Broadridge, I've never been as confident about our long-term outlook as I am on this call today. Before I turn it over, I want to thank our associates. We've asked a lot of our team over the past 12 months, and they're delivering. They stayed focused on clients, and through them on helping to build better financial lives for millions. Let me now turn the call over to Edmund for a more detailed financial review. Edmund?

Edmund Reese, CFO

Thanks, Tim, and good morning, everyone. As you can see from the Q3 financial summary on Slide 7, Broadridge delivered another strong quarter. Recurring revenue grew 8% to $900 million. Adjusted operating income also grew 8% to $284 million. Margins declined 60 basis points to 20.4% as we successfully made the investments that we discussed last quarter in our technology platforms, in our products and our people. Our operating income was partially offset by a higher tax rate in Q3 '21 as we lapped discrete tax benefits in Q3 '20. So our adjusted EPS grew to $1.76 in the quarter, up 5% over Q3 '20. Now let's turn the slide and get into the details of the quarter, starting with recurring revenue growth. As I said, recurring revenue grew 8% in the quarter, powered by 7% organic growth, comfortably within our historic mid- to high single-digit growth performance, demonstrating the strength of our sustainable recurring revenue growth model. As a result of that strong organic growth and an increase in our outlook for the fourth quarter, we're raising our guidance for recurring revenue growth to 8% to 10% for the full year, up from our prior guidance of growth at the higher end of 3% to 6%. Now let's look at this quarter's recurring revenue growth by business on Slide 9. I'll start with our ICS segment, where revenues grew by 11% to $586 million. Regulatory revenues rose 20% to $290 million driven by the 20% equity record growth, higher mutual fund and ETF communications volumes and net new sales, including from our Shareholder Rights Directive II solution that Tim highlighted earlier. We expect strong regulatory revenue growth to continue in the fourth quarter with our current testing indicating 25% equity record growth. Our Issuer business also contributed to our overall growth rate, thanks to continued growth in VSMs and increased issuer communications. After a strong 12 months, we now have significant penetration of our VSM solution across the S&P 500, and we expect issuer revenue growth to ease going forward as we start to lap the increase of VSM activity that began in Q4 '20. Fund solutions revenue was flat as double-digit growth in data and analytics was offset by lower interest income from custodied accounts in our funds processing business. Customer communications revenues were also flat with double-digit growth in our high-margin digital products, offset by lower print volumes due in part to pandemic-depressed activity levels. We expect growth in both our data-driven solutions and customer communications business to pick up in the fourth quarter as these headwinds ease. Turning to GTO. Wealth and investment management revenues rose 7%, driven by the onboarding of new component sales and higher retail trading. Capital markets revenues fell 1% as strong growth from international sales was offset by $6 million in lower license revenues, which declined as expected. As we said last quarter, this flat revenue growth will continue into Q4 '21 before picking up in fiscal year '22. Let's turn to Page 10, where we show more detail on volume trends. Broadridge's recurring revenue growth benefits from underlying volume growth trends, including stock record growth. Over the past decade, record growth across equity, mutual funds and ETFs has grown 6% to 8%. Recently, equity record growth has accelerated to 11% in Q4 '20 and continued to increase through the year to 20% in Q3 '21, surpassing the estimates from our January testing. As I said, we expect these growth trends to continue and reach 25% in Q4 '21. Mutual fund and ETF record growth picked up as well to 7%, more in line with our historical growth rates. We are modeling a return to more moderate mid-single-digit growth across both equity and mutual fund/ETF records for fiscal year '22, with stronger growth in the seasonally smaller first half and more moderate growth in the second half. Touching briefly on trade volumes, which you'll see on the bottom of this slide. This is the fifth consecutive quarter of aggregate double-digit volume growth. This growth reflects the increase in volatility in retail investor engagement over the past year, which continued to be quite strong well into the third quarter. More recently, trading volatility subsided during the second half of March, and we expect tougher trading volume comps in Q4. Let's move to Slide 11 for a closer look at the drivers of our recurring revenue. Organic growth at a very healthy 7% continues to be the largest component of our recurring revenue growth, and new sales remains the biggest driver with strong growth contribution from both ICS and GTO. We also continued our long track record of revenue retention above 97%. Internal growth contributed another three points as growth in ICS regulatory volumes more than offset the decline in GTO license revenue. And finally, acquisitions. We've now fully lapped all of our fiscal year 2020 acquisitions. Looking ahead to the fourth quarter, we expect Itiviti to add 3 points to fourth quarter recurring revenue growth. Now we'll turn to Slide 12 to briefly touch on our total revenue performance. Total revenue growth this quarter was stronger than usual, reaching 11%, with distribution revenue contributing three points due to the increased mailings that correspond with the high record growth and the increased event-driven activity this quarter. Moving forward, we continue to expect the low- to no-margin distribution revenue to decline over time as we focus on increasing higher-margin digital revenue across our governance business. Event-driven communications remain an integral part of our client offering. Event-driven revenues have climbed over the past four quarters to be more in line with our historical norms of about $50 million a quarter and reached $74 million in the third quarter, well above last year's unusually low $39 million. Broadridge benefited from an increase in mutual fund proxy activity as well as a rebound in proxy contest volumes and capital markets transactions. We expect fiscal '21 event-driven revenue to be more in line with the average that we've seen over the past seven years. For modeling purposes, we're assuming $50 million to $60 million of event-driven revenues in the fourth quarter. Turning to Slide 13. Adjusted operating income grew by 8%. Our adjusted operating income margin declined by 60 basis points, reflecting the continued investments that we're making in our technology platforms and product capabilities that we highlighted on our last quarterly call. These investments, which support our long-term growth, have a short-term impact on margin expansion, but we remain on track to deliver approximately 50 basis points of margin expansion for the full year, right in line with our fiscal year '21 guidance and 3-year growth objectives. This formula—foregoing near-term margin expansion and consistently investing in our technology platforms and products to drive long-term sustainable recurring revenue growth—will continue to be an important part of how we manage our business. As a CFO focused on long-term growth, it's encouraging to see us making these types of investments across all of our product lines, giving us momentum towards future growth. Before I turn to capital allocation, let's turn to Slide 14 and spend a moment on another key operating metric, closed sales, which, as I mentioned earlier, is the most consistent driver of our long-term recurring revenue growth. Our $124 million closed sales year-to-date are in line with our performance over the same period last year. We continue to see strong demand for our ICS solutions, including regulatory and issuer communications and data solutions. We remain on track to achieve our full year guidance of $190 million to $235 million for closed sales, which implies a fourth quarter range of $66 million to $111 million. Historically, the closed sales performance in the last quarter of the year has been impacted by the timing of larger deals. A handful of larger signings could propel us to the top end of our guidance range, and conversely, delays could put us at the lower end. And I'll also note that we continue to feel good about our recurring revenue backlog, which was 12% of our fiscal '20 recurring revenues as of Q4 '20 and gives us great visibility into our top line growth. Moving to capital allocation on the following slide. We generated $136 million of free cash flow year-to-date, up $54 million over the first nine months of fiscal year '20 driven by higher earnings and strong working capital management. During the first nine months of the fiscal year, we invested $205 million in building out our industry platforms and another $71 million in CapEx and software spending. Our M&A investment through the first nine months of the year was zero, but that will change with our announced $2.5 billion acquisition of Itiviti, which I'll touch on in a moment. Even after completing the Itiviti acquisition, Broadridge will remain committed to a balanced capital allocation policy, which prioritizes internal investment, growing our dividend, M&A and returning excess capital to shareholders. Importantly, we are also committed to maintaining an investment-grade credit rating, which means we'll prioritize debt paydown over share repurchases and expect to limit ourselves to smaller tuck-in M&A opportunities over the next several quarters. Given our strong free cash flow, we believe that we can comfortably achieve our new 2.5x leverage target by the end of fiscal year '23. Turning to capital returns on the right-hand side of the slide, our dividend has grown and remains in line with our historical 45% payout ratio. On Slide 16, we are on track to close the Itiviti acquisition in the coming weeks. So let me take a moment to give you some additional clarity about the expected impact that Itiviti will have on our financial performance. I'll start with fiscal year '21. We expect Itiviti to add $25 million to $30 million, or approximately 1 point to our full year recurring revenue growth, which equates to 3 points to our fourth quarter growth. And the acquisition is expected to be modestly dilutive to our adjusted EPS growth. In fiscal year '22, we expect Itiviti to add approximately $250 million or about 8 points to our recurring revenue growth. And we expect the acquisition to be accretive by approximately 2 to 3 points or roughly $0.10 to $0.15 to adjusted EPS growth. Please note that Itiviti's results in both fiscal year '21 and fiscal year '22 will be negatively impacted by the accounting treatment of acquired revenue, which will reduce revenue recognition by approximately $30 million in total with two-thirds of that impact in fiscal '22. This revenue haircut is incorporated in the numbers that I just shared with you. Finally, I want to reiterate the commentary that I gave you when we announced the deal, about the impact on our 3-year growth objectives. We expect Itiviti to add 2.5 to 3 points to our 3-year recurring revenue growth CAGR and, after interest, more than 2 points to our 3-year adjusted EPS CAGR. Now turning to guidance on Slide 17. We are raising our outlook for fiscal '21 recurring revenue growth to 8% to 10% from the higher end of 3% to 6%, and that includes one point of growth from Itiviti. We are raising our guidance for total revenue growth to 8% to 10% from the higher end of 1% to 4%. We continue to expect our adjusted operating income margin to expand to approximately 18%, up from 17.5% in fiscal year '20 as we balance near-term returns with continued investments to sustain long-term growth. We expect adjusted EPS growth of 11% to 13%, up from the higher end of 6% to 10%, and that includes a 1-point drag from Itiviti. Finally, as I noted earlier, we continue to expect closed sales in the range of $190 million to $235 million. And before we begin to take your questions, let me share some final thoughts. The Broadridge financial model is working. We are on track to deliver strong 8% to 10% recurring revenue growth. That growth is fueling our ability to both invest and expand margins. At the same time, our strong free cash flow business model enables us to pursue balanced capital allocation, commit to a rising dividend, fund investments in our platform and products and step up and make a significant M&A investment to grow our capital markets franchise. And finally, thanks to our consistent investment in our capabilities, we are on track to deliver another year of $190 million plus of new closed sales, which, combined with our strong backlog, positions us well for additional recurring revenue growth. The end result is that we're on track to deliver at the higher end of our 3-year financial objectives of 7% to 9% recurring revenue growth and 8% to 12% adjusted EPS growth. It's a great example of how we manage our business to drive sustainable revenue growth, steady and consistent adjusted EPS growth and historically top quartile TSR. Let me now hand the call back to Andrea to take your questions. Andrea?

Operator, Operator

And our first question comes from David Togut of Evercore ISI.

Millie Wu, Analyst (Evercore ISI, on behalf of David Togut)

This is Millie Wu on for David Togut. So my question is the event-driven business continues to shift back to strong growth after several years of decline. How sustainable is the reason turnaround in the event-driven business? And how high were the incremental margins this quarter?

Edmund Reese, CFO

So Millie, thanks for the question. Event-driven revenue, as you know, is about 4% of our recurring revenue. It's a bit more cyclical, but it's an important part of our total offering. It's high-quality revenue and it's strong margin in that business. And as you mentioned, Q3 has continued to increase and go back to our historical norms. We've done about—on average—about $50 million a quarter. You've seen a pickup in mutual fund proxy business and contests in capital markets. It's not unusual to see us have an unusually high quarter or an unusually low quarter. But over the long term, I do expect event-driven revenue to pick up and grow in line with stock record growth. During Investor Day, I said that event-driven revenues averaged about $180 million over the first seven-year period we looked at, and over the last seven years it's been above $200 million. I feel comfortable anchoring to that historical full-year number for event-driven revenue, and we expect it to be at that level as we look through our objectives into '22 and '23, again at reasonably strong margins in that business.

Operator, Operator

The next question comes from Michael Young of Truist.

Michael Young, Analyst (Truist)

I appreciate the guidance on the Itiviti growth contribution for fiscal '21. Would you hazard a guess or any guidance as to how much you expect that to contribute to kind of the long-term 3-year growth guidance?

Edmund Reese, CFO

Yes. Michael, let me jump in there. And Tim, you might have some commentary on the business itself. When we were bringing Itiviti on, first, we were looking for very strong assets in the capital market space after deploying most of our M&A to wealth management and governance over the past three years. The thing that looks great from a financial standpoint for Itiviti is the strong growth outlook. The core business by itself is mid-single-digit growth from a revenue standpoint. I talked earlier that we committed to about $20 million in synergies by 2025 in that business. So you should see high single-digit growth in that business. The recurring revenue models are predictable. They're subscription-like revenues, with healthy operating margins in that business. And I think that's a great time to finance it in this low interest rate environment. I also said that we expect, because of that profile, to get to double-digit IRRs in this business. So I think we'll focus on integrating it, but I do expect it to have that high single-digit revenue growth at roughly 30% margin, so a strong return over a very long time for us in that business. Tim, I don't know if you want to add some comments to the profile.

Timothy Gokey, CEO

Yes, Michael, just remember at the time that we announced this, we said we felt confident that we'd be at the high end of our 3-year guide. So in terms of what the impact would be beyond '22, I think that also gives a bit of a flavor. And just to add on to what Edmund talked about strategically, we are really pleased with the way it strengthens our capital markets franchise and really allows us to drive front to back. That has been emphasized in some of the client conversations that we've had since the acquisition was announced. We've talked to our top 50 clients and many of them have engaged in conversations about this. It's really gratifying to see that level of interest. Specifically in the vision of front to back, and having an alternative in the market with someone like Broadridge investing in this business, we feel really good about that piece on the capital markets, and we also feel good about how it adds to our global scale and reach—it really deepens our relationships with some of our most important clients. So we're excited about it. And we do think it's going to add to our growth and our ongoing organic growth in terms of the rate, specifically bringing us to the top end of the 3-year guidance.

Michael Young, Analyst (Truist)

Okay. Great. And maybe just a bit of a departure from that question. But just as we look to kind of postpandemic and reopening and sales trends, are you seeing any increased conversations or willingness of clients to take on new products, new conversions, et cetera? Is that a tailwind at all for the business at this point?

Timothy Gokey, CEO

I would say on the sales side it's interesting because we've been this past year in the situation where we have been originating new opportunities and then working them through the long cycle of business case, requirements and things like that, doing that all remotely. That's been a very interesting evolution over this past year. I think the productivity has been remarkably good. We'll see as we get to the end of the year here in terms of timing of some of the larger transactions. But what we're seeing certainly is real pressure for next-generation technology. The digitization that is happening has just accelerated—people often say what they expected to happen over three years happened in 12 months, or over five years happened in 18 months. They're really looking to make change. It also means they're very busy. So it's a matter of getting on their agenda. But we feel very good about our ability to continue to drive our business through net new sales.

Operator, Operator

The next question comes from Chris Donat of Piper Sandler.

Christopher Donat, Analyst (Piper Sandler)

I had one question. I just wanted to check in as we're thinking about—as we refine our 2022 fiscal models—with the UBS Wealth Management platform, can you just remind us on where we stand with that? And once it goes live, how that starts to affect revenues and expenses?

Timothy Gokey, CEO

Yes. Chris, it's Tim. Just on UBS, we continue to have a great partnership with UBS. We continue to support their ongoing technology and digital transformation. There are parts of this that are already live and creating benefits for UBS and its financial advisers. We're continuing to invest for both UBS and for other clients, and we're having very good conversations with other large clients. I think our results show the momentum we have in our components. When we get into the timing of specifically when this is going to happen, that is really UBS' announcement to make. When we get to August and really talking more specifically about '22, we'll have a further update then. But right now, I can't comment more on it.

Christopher Donat, Analyst (Piper Sandler)

Okay. Understood. And then Edmund, with Itiviti, I'm not sure I caught the comments fully on the impact for fiscal 2022. Well, I guess, first, did you say that the—and was it $250 million of revenue? And did that include purchase accounting adjustments? And then if we start thinking about fiscal 2023 as the impact of purchase accounting adjustments fade, would we expect optically higher revenue growth without the purchase accounting adjustments?

Edmund Reese, CFO

Yes. Understood, Chris. Thanks for the question. Specifically on fiscal '22, we said we expect Itiviti to add approximately $250 million in revenue, and that does include the purchase accounting of about $30 million. I mentioned that about two-thirds of that is in fiscal '22, and the other one-third is in fiscal '21, impacting the revenues that we expect over the next two months. That will be about 8 points to the recurring revenue growth in fiscal year '22 and, as I mentioned, about 2 to 3 points to the adjusted EPS growth. So you can expect the revenue contribution to be fully reflected in fiscal year '23 without any further impact from the accounting adjustment that I was just talking about. We feel good about the contribution that it will make as we end '23, and as Tim said a moment ago, it helps propel us to the top end of our range. I'll also add, Chris, when we gave the 3-year objectives, we talked about 5% to 7% organic recurring revenue growth and 1 to 2 points from M&A and acquisitions, and Itiviti makes us feel good about the objectives because it comes on and adds this type of contribution, putting us at the higher end of those 3-year objectives.

Operator, Operator

The next question comes from John Rodrigues of D.A. Davidson.

Unknown Analyst (John on behalf of Pete Heckmann), Analyst (D.A. Davidson, on behalf of Pete Heckmann)

This is John calling on for Pete Heckmann. Now that you gave additional time to dig into the Itiviti business, I wanted to just see what are the main solutions that you guys see that are best poised for cross-selling?

Timothy Gokey, CEO

Yes, John. We haven't closed yet, so we'll be digging in. On the cross-selling opportunities there are several. They have a strong position in continental Europe, a stronger position than we do. So the ability to bring our products to their clients in continental Europe and Asia is opportunity one. Opportunity two: we have a much stronger position in North America, so the ability to help them better penetrate North America is opportunity two. Then there are asset class opportunities: they have a very strong position in exchange-traded derivatives, which is a more nascent area for us, and that's attractive. We have a very strong position in fixed income and they have a building position there, so that's another attractive area. Between geographic cross-sell and asset class cross-sell, there's a nice degree of revenue synergy. Most of the things we do are for revenue growth; that's our model. So we think this will add nicely to our organic growth for a long time to come.

Operator, Operator

The next question comes from Patrick O'Shaughnessy of Raymond James.

Patrick O'Shaughnessy, Analyst (Raymond James)

On LTX can you speak to what sort of participation you have at this point from some of the largest fixed income dealers?

Timothy Gokey, CEO

Yes, Patrick. I'm glad you asked because it was in the prepared remarks. In the last quarter we've signed one of the top three fixed income managers; they are not on board yet, but they will be coming on in the next few months—that was a real milestone for us. The milestones we're excited about on LTX are: the patent we received on the best execution protocol, which allows aggregation across buyers and sellers; the first execution of an aggregated trade, which is important because electronification of trading has been slower in fixed income and hasn't penetrated larger trades; and the signing of one of the top fixed income managers. We think that aggregation capability will help unlock digitization of fixed income, and we're confident momentum will pick up through the year.

Patrick O'Shaughnessy, Analyst (Raymond James)

Got it. And certainly, I think one of the interesting aspects of LTX is that it's dealer-centric. I appreciate that you guys did that big trade and signed up one of the biggest buy-side firms. But on the sell side, are you working with the biggest sell-side broker-dealers at this point with LTX?

Timothy Gokey, CEO

At the moment, we are working a tier below the very largest ones, which is a great first mover opportunity for those firms. We're working closely with them, including some strong regional firms such as Raymond James. We're in conversations with two of the Tier 1 firms and we'll see how those go. It's dealer-centric so it enables them to grow their business, and the AI and the ability to aggregate counterparties adds real value. It helps salespeople identify less-obvious counterparties and increases efficiency, allowing them to serve clients better. That AI capability, even independent of the marketplace, has real value.

Patrick O'Shaughnessy, Analyst (Raymond James)

Very interesting. And then switching gears to an expense question. To what extent does your updated fiscal year '21 guidance reflect incremental organic investment relative to your prior outlook? And assuming there is some incremental organic investment, where are you directing those dollars?

Edmund Reese, CFO

Patrick, we signaled during the Q2 call that we would continue to invest in the business. We remain committed to delivering about 50 basis points of adjusted operating margin expansion for the year, and we still expect to do that, but it does include organic investments. Those investments are across our technology platforms—post-trade, wealth management and our infrastructure. Investments in network resiliency have been paying dividends given record trade volume growth. Product investments such as VSM and SRD have driven regulatory business growth. We continue to invest in LTX and in go-to-market and sales organizations, particularly expanding internationally and focusing on premium accounts. These are investments directed to drive recurring revenue growth. We'll continue these investments while producing margin expansion and delivering the high returns we target.

Timothy Gokey, CEO

Patrick, I just want to add that we've always reinvested to drive growth, and I'm pleased to be talking about increased guidance, increased margin and increased investment in our products and associates. We're investing in digital, in LTX, in wealth, and in governance, including data and analytics. With Itiviti, we now have many growth paths beyond the near term. That gives us confidence to talk about the upper end of our 3-year objectives and what happens after that.

Operator, Operator

The next question comes from Puneet Jain of JPMorgan.

Puneet Jain, Analyst (JPMorgan)

How do you reconcile strong internal trade volume growth in capital markets with flattish revenue? Even if you adjust for $6 million in license sales, it looks like volume growth was much higher than revenue growth.

Edmund Reese, CFO

Thanks for the question, Puneet. When you think about our GTO business, we show capital markets and wealth management separately. Coming into Q3, we were lapping record trading volume comps from the prior year—26% combined equity and fixed income and 28% for equity—which primarily benefited the capital markets business last year, so we faced a tougher comp. In the capital markets business you also had lower license revenue that we expected, which brought results to flattish revenue. The continued growth in trading volumes this quarter was primarily retail trading, and you saw the benefit of that in the wealth management business where revenues grew 7%. So there is a tale of two markets: capital markets faced higher comps and license revenue headwinds, while wealth management benefited from elevated retail trading activity.

Puneet Jain, Analyst (JPMorgan)

Got you. And while it might be a little early, do you expect any changes in regulatory focus under the new administration and the new SEC Chair?

Timothy Gokey, CEO

Puneet, we always support the SEC's mission to inform and protect investors. From conversations in the market, one area that appears to be a focus is ESG and related disclosures. We stand ready to assist if that becomes an area of regulatory emphasis. Other initiatives from the prior administration may or may not continue; there are topics such as end-to-end vote confirmation where we've participated in pilots demonstrating how that can work. Virtual shareholder meetings and universal proxy changes are other areas we support and stand ready to help. There's also discussion around streamlined communications in funds. Many items remain in flux, but ESG looks likely to be an early focus.

Operator, Operator

The next question comes from Andrew Bauch of Wolfe Research.

Andrew Bauch, Analyst (Wolfe Research, on behalf of Darrin)

This is Andrew on behalf of Darrin. Tim, you mentioned in your prepared remarks that you're expecting 25% stock record growth in the fourth quarter. Could you unpack this a little bit? I mean obviously, that's an impressive acceleration considering the level of growth you're at today. And if I'm not mistaken, I believe the comps get harder in that regard.

Timothy Gokey, CEO

Andrew, great question. We have a fair bit of visibility into Q4 because there's a lag between when records come together and when they go out, so our testing gives us good insight. What we're seeing is very broad-based growth across issuer types, broker-dealers (stronger among online brokers), industries and across account types—not just concentrated in meme stocks. There's a broader rise in equity holdings and participation in the market. We're also seeing record growth driven by stronger inflows and healthy markets to a lesser degree. We often get asked about the impact of market changes. Our historical work over the past 25 years shows that growth might flatten or be slightly negative during market downturns, but investors tend to stay invested, and holdings reach a new plateau. We're not modeling this level of growth as permanent, but we do believe these levels of holdership are sustainable in the near term and see a return to more normalized growth in the future.

Operator, Operator

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

Timothy Gokey, CEO

Thank you, and thank you all for joining us this morning. As I think you can tell, this is just an exciting time to be at Broadridge. Our business is strong. We're on our front foot. We're investing for growth, and we're on track to deliver at the higher end of our 3-year objectives. We appreciate your interest and ownership. We look forward to speaking to you again in three months to tell you about our fourth quarter results and to share our guidance for fiscal year '22. Thanks again.

Operator, Operator

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