Earnings Call Transcript - BR Q4 2021

Operator, Operator

Good morning, and welcome to the Broadridge Fourth Quarter and Full Year 2021 Earnings 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, Iley. Good morning, and welcome to Broadridge's Fourth Quarter and 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 Chief Executive Officer; and our CFO, Edmund Reese. Before I turn the call over to Tim, a few standard reminders. We will be making forward-looking statements regarding Broadridge on today's call 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 the comparable GAAP measures can be found on the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?

Tim Gokey, Chief Executive Officer (CEO)

Thank you, Edings. Good morning, everyone. And thank you for joining us today. I'll begin with our key messages and then provide an overview of our performance against our strategic objectives across governance, capital markets, and wealth and investment management. And I'll close with some thoughts about our future before Edmund reviews the financials. Let's get started. I have four headlines. First, Broadridge delivered a strong fiscal year '21. Recurring revenues rose 10%, adjusted EPS rose 13%, and our sales teams delivered a 10th consecutive year of record sales. Our results demonstrate how well positioned Broadridge is to take advantage of increasing investor participation and the growing need to digitize and utilize financial services. Second, we're executing against the strategic growth plan we laid out at our Investor Day in December. We're building a next generation of governance products, growing the scope of our capital markets business across the trade lifecycle, and building our wealth management franchise. Third, we remain committed to balanced capital allocation. In fiscal '21, we increased our level of investment on our internal platforms, completed the largest acquisition in our history, and returned nearly $250 million in capital to shareholders. Yesterday, our Board approved an 11% increase in our annual dividend per share. Broadridge has now increased its annual dividend every year since becoming a public company with double digit increases in eight of the last nine years. Fourth and last, we expect another strong year in fiscal '22. Our guidance calls for 12% to 15% recurring revenue growth, further margin expansion and 11% to 15% adjusted EPS growth and another year of record sales. The combination of strong fiscal year '21 results and our guidance for fiscal '22 leaves Broadridge extremely well positioned to achieve the higher end of our three year growth objectives. As we close out the first year of our current three year cycle, I want to give you an update on our progress against our strategic growth plans for each of our three franchise businesses starting with governance, or ICS on slide 4. ICS recurring revenue rose 11% in fiscal '21 to $2.1 billion, driven by both new sales and internal growth. The strength of our governance franchise comes from its position at the heart of a network linking broker-dealers, corporate issuers, asset managers, and tens of millions of individual and institutional investors. Our fiscal '21 results highlight how our strategy of innovating at the core while providing incremental value to all network participants drives incremental and sustainable growth for Broadridge. I'll start with our core regulatory business. The big story here is the very strong position growth we're seeing across equities. Equity stock record growth, which is our measure of the number of positions held by shareholders, grew 26% in fiscal '21, including 33% in the seasonally strongest fourth quarter. We continue to be struck by the broad-based nature of this growth. We're seeing growth across large and small issuers, not simply a handful of mega-cap tech or meme stocks. Looking across three sectors, tech and consumer cyclical stocks are leading the growth at 42% and 37% growth respectively. We're also seeing double-digit growth across virtually every other sector including 33% growth in healthcare names and 20% plus in basic materials and industrials. This broad-based participation is a key reason why we believe that fiscal year '21 strong growth is an extension of the long-term trend that's been driving higher equity and fund position growth over the past decade and why we're forecasting continued growth in fiscal '22. At Broadridge we were able to meet this increased demand because we've invested in scaling our capacity. After the initial coverage surge last spring, we invested in new distribution capacity to build incremental flexibility across our network, enabling us to seamlessly ensure that holders of more than 500 million positions got the communications they needed to participate in corporate governance. We've also invested in new digital capabilities, including QR codes that make voting on your mobile device easier than ever. Our governance franchise is also increasingly global, with gains on a Shareholder Rights Directive II solution and continued expansion of our European Fund Communications Business. We are also expanding the suite of data-driven solutions we provide for fund clients, driven in part by another year of double-digit growth across our data and intelligence products. We are growing our relationships with corporate issuers. We conducted almost 2,400 virtual shareholder meetings in fiscal '21, up from 1,500 a year ago. We became the clear choice for America's leading companies with more than three quarters of S&P 100 companies using Broadridge to host their annual meetings in 2021. In turn, increased demand for our VSM capabilities has enabled us to deepen our client relationships, leading to strong growth in our suite of other Annual Meeting services and disclosure solutions products. Finally, in customer communications, our strategy is focused on using our print capability as a door opener for growing our digital business. So it was encouraging to see strong double-digit growth in digital revenues, which offset lower print revenues and helped drive higher earnings. All in all it was a very strong year for our governance franchise. Now let's turn to capital markets on slide 5. In capital markets, we're driving trading innovation across the front office, enabling our clients to simplify and improve their global post-trade technology, providing strong enterprise and data component solutions, and building new network-enabled solutions using AI, digital ledger and other innovative technologies. Capital Markets revenue grew 8% to $700 million driven by new client additions and the acquisition of Itiviti, which has given us a new capability to drive innovation across the trade lifecycle. While the Itiviti integration is only just beginning, I'm excited about the progress we've made. Itiviti recently closed its largest ever sale, and we're on track to leverage Broadridge's relationships to drive more meaningful sales in the quarters ahead. Client feedback has continued to be positive, and the sales pipeline, especially in EMEA and APAC, is strong. A key driver of our revenue growth is our continued success at bringing clients under our global platforms, enabling them to simplify their global technology. We're also enhancing those platform capabilities. A great example is the exchange-traded derivatives platform onto which we're onboarding RJ O'Brien. I'm also tremendously excited by the continued progress in developing new capabilities based on next-gen AI and DLT technology. Our LTX fixed income platform continues to progress well; we have more than 70 buy- and sell-side users on the platform and we're adding more every week. The average initiated trade is north of $3.5 million, indicating demand for increased liquidity in fixed income markets. We also recently launched a Digital Ledger Repo platform, and are averaging $35 billion worth of transactions daily, a number which will grow as more clients, including UBS, come onto the platform. While both these products are small today, each is bringing an innovative and differentiated solution to multibillion-dollar markets. Now let's turn to our Wealth and Investment Management franchise on slide 6. In Wealth, we're extending our services around a core back-office capability, growing our suite of component solutions, and building a modular platform that will link our individual capabilities across a modern technology architecture. The biggest driver behind our 6% growth in wealth and investment management revenues was revenue from new sales. During the year, we added new clients to our core back-office platform and saw strong demand for a digital solution suite. Our work with UBS on the digital transformation of the wealth management industry remains one of our most exciting initiatives; the Broadridge wealth management platform is an important part of UBS' own multiyear transformation plan for its North American wealth business. As we align around UBS' goals and sequencing, we've already rolled out select components and we expect to roll out the additional platform components over the next 18 to 24 months. Based on the terms of our contract, we will begin recognizing revenue when we complete the delivery of the full suite. Meanwhile, this platform continues to draw attention from other clients. We were pleased to announce last month that RBC Wealth Management will become our second client on Broadridge's wealth platform. RBC is pursuing its own digital transformation journey, and our platform will accelerate their ability to enhance the client experience, optimize advisor productivity, and digitize its back office. We're excited to be a key technology partner in that journey. Beyond our work in the wealth platform, we continue to make progress in expanding our digital solutions with the AdvisorStream tuck-in acquisition and by extending our partner network. Lastly, I was pleased to see strong growth in our investment management technology revenues that grew by 12%. Strong revenue from sales and existing solutions, continued platform development and new product positions—we're making solid progress on our wealth and investment management growth strategy. As I wrap up my strategy update, I want to highlight the common denominator behind execution across governance, capital markets, and wealth and investment management. Broadridge is investing in driving near, medium and long-term growth. We've invested to process higher position counts, more virtual shareholder meetings, and handle surges in trading volumes, which were critical in fiscal '21 and will remain important in fiscal '22 and '23. At the same time, we're investing in initiatives that will carry our growth momentum forward, including data and intelligence products, the emergence of a European governance hub, and our wealth platform. And finally, I see tangible signs of products that have the potential to extend our growth runway well into the next decade, like digital communications, Digital Ledger Repo, and fixed income AI. These are solutions that our clients value, as evidenced by the traction that we're getting in the market for each. This mix of near, medium, and long-term growth businesses across the company is exciting. What does that mean for Broadridge? Let's turn to slide 7. As we enter fiscal '22, I've never been more optimistic about Broadridge's long-term growth prospects. When I look across our company, I see a leadership team that is stronger than ever, focus on how we engage our associates, better serve our clients and create value for our shareholders. That team is executing against our growth plans across governance, capital markets and wealth and investment management. We're finding ways to help our clients accelerate digitization, drive utilization benefits, and enable the increasing democratization of investing. Even more tangibly we are on track to deliver another strong year. Our strong backlog gives us visibility into new revenue over the next 12 to 24 months, and we see continued position growth as new investors enter the market, and current investors continue to diversify their portfolios. In short, we see another year ahead of low-teens revenue and adjusted EPS growth. The net result of strong fiscal year '21 results, continued execution against our growth strategy and outlook for continued growth in '22 means that Broadridge is well positioned to deliver at the higher end of our three year growth objectives, including high single-digit recurring revenue growth and 8% to 12% adjusted EPS growth. Before I conclude, I want to thank all Broadridge Associates for their work over the past year. Little in the past 12 months has been easy. But they have found a way to adapt to the new virtual environment. They stayed focused on our clients. And they are helping drive the transformation of the financial services industry that is enabling better financial lives for millions. Thank you. Let me now turn it over to Edmund.

Edmund Reese, Chief Financial Officer (CFO)

Thank you, Tim, and good morning, everyone. As you can see from the financial summary on slide 8, Broadridge delivered strong fiscal '21 results capped off by a strong fourth quarter and demonstrating significant progress towards our three year objectives. Fiscal '21 recurring revenues increased 10% to $3.3 billion driven by strong growth in both ICS and GTO. That strong growth enabled us to make near-, medium- and long-term investments in our technology platforms and our digital products, while driving 60 basis points of adjusted operating income margin expansion for the year. Higher revenues and higher margins drove 13% adjusted EPS growth to $5.66. In the fourth quarter, revenues rose 15% year-over-year to $1.1 billion driven by growth in ICS and the acquisition of Itiviti. Adjusted operating income rose 4% as we continued our ongoing investments and adjusted EPS grew 2% to $2.19. Our results came in at the high end of our latest full year guidance range and above our three year recurring revenue and adjusted EPS growth objectives. And as Tim has highlighted, our sales team closed the year on a high note. It pushed us modestly above our closed sales guidance range. So let's get into the details of those results starting with recurring revenue on slide 9. The momentum in our business driven by increased investor participation and demand for digital solutions continued into the fourth quarter and helped Broadridge post another year of 10% recurring revenue growth. Our recurring revenue growth is powered by 8% organic growth which came in well above our 5% to 7% three year growth objective. The combination of organic growth coupled with two points of growth from prior acquisitions (including FundsLibrary in fiscal 2020) and then Itiviti in May pushed our fiscal year '21 recurring revenue growth above our 7% to 9% objective as well. So a strong start to our three year recurring revenue growth objectives. Now let's look at this quarter's recurring revenue growth by business beginning with ICS on slide 10. ICS revenues grew by 17% to $719 million in the fourth quarter and all of that growth was organic. The biggest driver of that growth was in our regulatory business which grew 27% to $381 million. Fourth quarter stock record growth was 33% and mutual fund record growth was 11%, both key drivers of growth in regulatory. We also benefited from strong growth in international and our investment in the Shareholder Rights Directive II solution is paying back and contributing to recurring revenue growth. For the full year, regulatory revenues rose 20%. Issuer revenue also contributed to growth, rising 20% in the fourth quarter to $106 million and 21% growth for the full year. As Tim noted, our continued success in providing virtual shareholder meeting services has helped drive revenue growth of our other Annual Meeting services and document disclosure products. Fund Solutions lapped the drag from lower interest income; their recurring revenue grew 7% in the fourth quarter. Full year revenues rose 5% driven by the fiscal year '20 acquisition mentioned earlier and revenue from net new business. Customer communication revenues were down 1% in the quarter, with declines in the low-margin print revenue offset by digital growth. For the full year, customer communications revenue growth was slightly positive but more importantly, higher-margin digital revenues within customer communications grew by 15%. Turning to GTO on slide 11: GTO recurring revenues rose 10% to $346 million in the quarter driven by 18% growth in our capital markets business and 1% growth in wealth and investment management. Across both capital markets and wealth, solid revenue growth from new business was offset by $7 million of lower license revenue which declined as expected and modestly lower trading volume. Our acquisition of Itiviti closed in mid-May and contributed $29 million to revenue growth in the capital markets franchise. For the full year, GTO revenues rose 7% to $1.3 billion driven by four points of organic growth and three points from acquisitions. Organic growth was driven by new sales and internal growth was essentially flat as the benefit of higher full-year trading volumes was offset by lower license revenue which declined relative to an unusually high fiscal year '20 level. We expect modest growth in license revenues in fiscal year '22. So Broadridge's recurring revenue growth benefited from strong volume growth, both in ICS and our GTO business segment. So let's turn to slide 12 for a closer look at volume trends. Equity stock record growth rose to a record 26% in fiscal '21, well above the 6% to 8% trend of the past decade. Fourth quarter proxy volumes, which accounted for 55% of full year distributions, benefited from 33% stock record growth. We also saw strength in mutual fund and ETF regulatory communications driven by strong fund inflows as we lapped last spring's COVID-driven withdrawals. Looking ahead to fiscal '22, we continue to model stock record growth growing at a healthy low-teens pace, though the seasonally light first half is expected to revert to more trend-line, mid- to high-single-digit growth in a much more meaningful seasonal second half. We're also expecting mid- to high-single-digit fund record growth. Turning to trading volumes on the bottom of the slide: Fourth quarter volumes slipped 1% driven by a combination of tough year-over-year comps and lower overall market volatility. Fourth quarter volumes also declined on a sequential basis as elevated levels in Q3 '21 driven by market volatility subsided. Trading volumes rose 12% for the full year. As we look ahead to fiscal '22, we expect trading volumes to be essentially flat for the year, with modestly higher volumes in the first half of the year, offset by lower volumes in the third quarter. Shifting to a view of growth drivers for recurring revenue on slide 13: organic growth rose to 11% in the fourth quarter driven by a combination of new sales and the seasonal impact of higher proxy volumes. New sales contributed six points to growth with balanced contribution from both ICS and GTO. Internal growth of seven points was primarily driven by proxy volumes as is typically the case in our fourth quarter. Acquisitions contributed three points. Almost all of that came from Itiviti with only a modest contribution from our mid-June acquisition of AdvisorStream. Client losses subtracted two points of growth in both the fourth quarter and for the full year, marking another year of 98% client revenue retention rates. High retention rates reflect the value of the services we offer, our commitment to client service and the tangible outcome of our service-profit chain culture. I'll round out our revenue drivers discussion on slide 14 with a look at total revenue. Total revenues rose a healthy 12% in the fourth quarter. Recurring revenue was the primary contributor to that growth and Broadridge received a further boost from an uptick in event-driven revenues, as well as two points of growth from higher distribution revenue. While higher distribution revenues contributed to our overall growth, their share of the full year total revenues declined to 31% down from 32% in fiscal year '20 and 38% five years ago. We expect that the share of low- to no-margin distribution revenues will continue to decline as we remain focused on growing recurring revenues. FX was a modest positive reflecting the weakening of the US dollar. Looking down the slide, event-driven revenues rose $5 million year-over-year in the fourth quarter to $73 million, driven by higher proxy contest activity. For the full year, event-driven revenues rebounded from a cyclical low to a healthy $237 million. That rebound was broad-based across the full range of event-driven activities. Higher mutual fund communications contributed to roughly a quarter of the growth as did higher revenues from proxy contests as well as higher revenues from capital markets activity and other communications. Going forward, we're not forecasting a major fund complex proxy. And while there might be some quarterly cyclicality, we expect full year fiscal '22 event-driven revenues to be approximately $220 million in line with the fiscal year '15 to fiscal year '21 long-term average. Turning to slide 15: for the full year, adjusted operating income margin expanded 60 basis points to 18.1%, slightly ahead of our latest guidance and multi-year objectives. Adjusted operating income margin declined 180 basis points to 22.8% in the fourth quarter on the back of our planned fiscal year '21 investment spend. We have a strong track record and high confidence in our ability to make growth-accretive investments while still expanding margins and delivering near-term profit growth in line with our adjusted EPS three year growth objective. Before I move to our uses of cash and our balance sheet, let me touch on closed sales and our revenue backlog on slide 16. Thanks to a strong fourth quarter, Broadridge recorded another year of strong closed sales. With balanced growth across both our ICS and GTO segments, I was especially pleased to see strong growth in our smaller sales, those under $2 million in annualized value which rose 11%. These small sales represent the bread and butter of our long-term growth and reflect the broad demand we are seeing across our businesses. Our sales performance pushed our overall backlog, a measure of past sales that have not yet been recognized into revenue, to $400 million, up from $355 million last year and steady at 12% of recurring revenue. As a CFO, I appreciate the added visibility into our future revenues that our backlog gives me. Moving to capital allocation on the next slide, Broadridge remains committed to a capital allocation policy that balances internal investment, M&A and capital return to shareholders. In fiscal year '21, we generated $557 million of free cash flow, up $58 million from fiscal year '20. Given the size of the market opportunity we see in front of us, we're continuing to prioritize making investments in our business, both internal and external. The biggest use of our cash was a $2.6 billion acquisition of Itiviti, which was completed in the fourth quarter. And late in the fourth quarter we also completed the additional tuck-in acquisition of AdvisorStream. Since the close of the quarter, we've made two more very small tuck-in acquisitions for the assets of Jordan & Jordan and the remaining share of Alpha Omega. We invested almost $300 million in continued platform build-outs as we add to our capabilities across wealth management and capital markets, and another $100 million in CapEx and software development. Total capital return to shareholders was $248 million. The 11% increase in our annual dividend approved by our board was in line with our long-term 45% payout ratio policy. It will increase capital returns in fiscal year '22. As a result of the Itiviti acquisition, our total debt rose to $3.9 billion, up from $1.8 billion at the end of fiscal year '20. Our leverage ratio at year end was 3.5x. We remain focused on an investment-grade credit rating and target a 2.5x leverage ratio by the end of fiscal '23. I'll close my prepared remarks this morning with some comments on our fiscal year '22 guidance which is on slide 18. Our guidance for fiscal '22 calls for low-teen recurring revenue growth, healthy margin expansion, and another year of strong adjusted EPS. Let's take each point in turn starting with recurring revenues. We expect to grow recurring revenues by 12% to 15% in fiscal year '22. That includes organic revenue growth of 5% to 7% with growth balanced across both ICS and GTO. We're not modeling in any revenue contribution from the UBS contract in fiscal '22. As Tim noted, we expect to complete the rollout of the full wealth management platform suite over the next 18 to 24 months and will begin to recognize revenues at that time. We expect the contribution from acquisitions to add an additional seven to eight points with most of that coming from Itiviti. Our more recent acquisitions of AdvisorStream, Jordan & Jordan and Alpha Omega should contribute less than $10 million combined to fiscal '22 recurring revenues. As always, we do not forecast the impact of any future tuck-in acquisitions that we might make. In addition to recurring revenue, we expect mid-single-digit distribution revenue growth driven in part by a postal rate increase. And event-driven revenue should, as I indicated earlier, be more in line with our fiscal '15 to '21 seven-year average level of approximately $220 million. For modeling purposes, between recurring revenue, distribution and event-driven revenues, total revenue growth should be in the range of 9% to 13%. We are expecting our adjusted operating income margin of approximately 19%, up from 18.1% in fiscal year '21, driven by a combination of incremental scale, digital efficiency gains, as well as the addition of higher-margin activity businesses. Finally, we expect adjusted EPS growth to be in a range of 11% to 15%. Included in our EPS outlook is an expectation that our tax rate will essentially be flat at approximately 21% and that we'll see a modest increase in our overall share count. On our last guidance point, we expect another year of record closed sales. Our outlook calls for closed sales in the range of $240 million to $280 million. This guidance emphasizes the strength of our financial model and our ability to drive sustainable revenue growth, expand our margins, while maintaining a balanced capital allocation policy in delivering steady and consistent adjusted EPS growth. That concludes my remarks on our fiscal year '22 guidance, but before I turn the call over for your questions, I have one more final administrative note. Beginning with our first quarter results, we will be updating how we report foreign exchange. As you know, we've historically used a fixed exchange rate for our segment revenues and for recurring revenue. The difference between the fixed internal rate and the actual rate is recorded in our FX revenue line which was negative $132 million in fiscal year '21. With the continued growth in our international revenues, especially after the acquisition of Itiviti, the time is right to adjust our reporting. Going forward, we will be changing our internal rate to one that is much closer to the actual rate. This will have the impact of shrinking our reported negative FX revenue to a much smaller number, and lowering our segment or recurring revenue numbers by the same amount. These changes will have no significant impact on our reported recurring revenue growth rate, nor will they have any impact on our reported total revenue or profitability metrics. We intend to publish our historical revenue results at a restated rate ahead of our first quarter earnings so that you have a chance to adjust your models. Again, this is a change that will begin with our first quarter earnings report. It will lower our reported recurring revenue with little if any change to growth rates and will have no impact on total revenue, operating profit or adjusted EPS. With that administrative note out of the way, let's open up the call for your questions. Operator?

Operator, Operator

Our first question today comes from David Togut with Evercore ISI.

David Togut, Analyst (Evercore ISI)

Thank you. Good morning, for your fiscal '22 guidance, could you discuss some of the potential tailwinds that take you to the high end of the 12% to 15% recurring revenue and 11% to 15% EPS growth range and the headwinds that might land you toward the lower end of that range?

Edmund Reese, Chief Financial Officer (CFO)

Yes, thanks. Hi, David. Thanks for joining this morning. First, I'd start off by saying that the fiscal '22 growth is strong across both our organic business and the contribution from acquisitions, including Itiviti, and I think positions us to be toward the high end of our three year objectives. We still need to execute on sales, convert our sales to revenue and execute the Itiviti integration. We feel very confident with that. And I think that will actually position us well. As we think about some of the areas, you heard us say earlier that we're modeling volume growth to return to mid-single-digit levels. That obviously can be a tailwind. But we feel confident based on our view into the next two quarters that we can expect that level. Event-driven revenues are also something that on a quarterly level has been quite cyclical. We've returned to more historical levels this year in fiscal '21 and that growth was broad-based. So we feel confident about that as we go into fiscal '22 as well. And I'll tell you that we feel good about the margin expansion that helps us get to a strong point from an adjusted EPS growth standpoint as well— that's driven both by Itiviti and the continued scale and efficiency gains that we get in our core business as well. So as you think about the variability in our model going into fiscal '22, I think we'll continue to focus on executing on sales, converting those sales to revenue, driving the Itiviti integration. Event-driven revenue is more in line with what we've historically seen and volumes are back to mid-single-digit levels. I think that's what drives the range for us. Tim might want to add a point—

Tim Gokey, Chief Executive Officer (CEO)

Yes, just to add to how Edmund started: as we looked at the strong year we had this year, we initially wondered if we could keep that same momentum going. As the trends came together in the second half of the year and we put together plans for next year, it became apparent the strong underlying momentum in the business. We're definitely benefiting from Itiviti, but if you peel Itiviti out, the organic growth underneath is right in line with our three year metrics. So we feel really good about the guide for this year and about what it says for our momentum as an overall company.

David Togut, Analyst (Evercore ISI)

Appreciate that. And just as a follow-up, Tim, in your prepared remarks you underscored your focus on near, intermediate and long-term growth. That's a bit of a shift for Broadridge which historically has focused more on intermediate and longer-term growth. Is it just the strength in the underlying metrics that you referenced? Or are there other factors that give you more conviction in the near-term growth prospects of the company?

Tim Gokey, Chief Executive Officer (CEO)

Thanks, David. I didn't mean for that to sound like a shift, I just think with the volume increases we've been seeing, making sure that we have everything in place in all of our facilities and our technology to support those organic numbers was what I was referring to. We take a long-term view and invest for the future—that's what we're doing—but there are some near-term tailwinds and we need to make sure that we provide great service to our clients.

Operator, Operator

Next question comes from Michael Young with Truist Security.

Michael Young, Analyst (Truist Securities)

Hey, good morning, thanks for taking the question. I wanted to maybe just start, high level, things last year were ahead of schedule, I think this year will be the same. So maybe just big picture Tim, what areas have you been able to invest in more on a strategic basis to accelerate some of those medium-term growth dynamics that might sustain this kind of growth rate beyond some of maybe the macro support?

Tim Gokey, Chief Executive Officer (CEO)

Absolutely, Michael. We were really pleased to be able to invest in our products, platforms and our people this year, and we have committed funding in our budget for next year from the investments we made this year. You can see investments across the board. In the regulatory business, we're investing to build out in Europe between the Shareholder Rights Directive and our European Fund Communications Business. In our funds business, we continue to invest in our data intelligence business, which is strong and has runway. We've been investing in VSM capability and in our disclosure business for corporate issuers, and our ongoing investments in digital communication. Across the governance suite you see investments. On the capital markets and wealth management side, investments include Digital Ledger Repo, LTX, applying AI to fixed income trading, which are all making a difference. We're excited across the whole portfolio and that's why you're seeing strength in the underlying growth in each of those areas.

Edmund Reese, Chief Financial Officer (CFO)

And I'll just add, we were able to make those investments while continuing to expand margins in line with our three year objectives and continue to deliver double-digit EPS growth. So it really is the right time for us to invest for growth.

Michael Young, Analyst (Truist Securities)

Great. My follow up is on sales and the sales backlog obviously being up 13% from where it was at the end of last year, but closed sales were pretty similar year-over-year. So is there an expectation that more of that is going to come to fruition in 2022? And would that be sort of pull forward or additional closings as a result of reopening from the pandemic? Should we expect maybe a slight reduction in the size of the sales backlog, or do you think things are placed to continue to drive growth or stability of that sales backlog into 2023?

Tim Gokey, Chief Executive Officer (CEO)

Michael, we're really excited about our sales guide for next year of $240 million to $280 million. As we add new solutions like Itiviti we see an increased market and more sales resources. We do see higher sales. In terms of how that affects backlog, the mix matters: this year we had a lot of smaller sales and many of the Itiviti sales tend to be a little smaller and faster to implement. Singles and doubles usually come online within a year versus some strategic projects which can take longer. So we may see fluctuations in backlog but seeing the backlog grow to $400 million gives us confidence in revenue from sales that will come live over the next two years. That visibility into sold projects in flight gives us a lot of confidence in the revenue component of our growth formula.

Operator, Operator

Next question comes from Darrin Peller with Wolfe Research.

Darrin Peller, Analyst (Wolfe Research)

Hey, thanks guys. I want to start off with the record and the position growth we're seeing being so dramatic and really the infrastructure you've expanded to handle the capacity from a physical standpoint. Can you also remind us the difference in the margin profile of digital versus physical, what that's going to be for you going forward both from a revenue yield and margin standpoint? And then a quick follow-up on that same segment: when you think about your assumptions for next year—I think you said back to mid- to high-single-digit record growth—is that really what you think is the likely outcome or is that conservatism in your outlook? Thanks.

Tim Gokey, Chief Executive Officer (CEO)

Darrin, let me step back and then Edmund will add. It was a remarkable year for position growth. We see it as part of long-term trends: democratization of investing, managed accounts and direct indexing. The record growth this year was broad-based, reinforcing that it's part of a long-term trend. Regarding investments to support this growth, they focused on resiliency of the network and producing output from multiple places to ensure continuity—these are ongoing investments we always make and are not a one-time massive capital item. I'll let Edmund comment on the margin profile and our confidence for next year.

Edmund Reese, Chief Financial Officer (CFO)

Let me start with confidence in next year. We have insight into stock record positions for companies we expect to proxy in the next one to two quarters. That testing, which covers the large majority of distributions, has been quite reliable. When you look at that, you see the low-teens growth through the first half of the year. Keep in mind that's coming off very strong comps in Q1 and Q2 last year, so low-teens is a healthy pace. The first half is seasonally light—what matters more is the back half of the year, and we are modeling a return to more normal levels in the second half, which gets us to mid- to high-single-digit growth for the year. On margins, across our businesses, bringing on new customers without proportional incremental cost gives us scale and efficiency gains that help expand margins. In customer communications, moving from lower- or no-margin print to higher-margin digital is a clear benefit. You may see lower total revenue in print, but that shift comes at a higher margin and we feel good about progress there.

Tim Gokey, Chief Executive Officer (CEO)

Darrin, one other point: historically when we've seen very large growth years we haven't seen a large fall back after that. Positions tend to consolidate at a new level and then resume growth at a more modest pace. That's the pattern over multiple market cycles.

Darrin Peller, Analyst (Wolfe Research)

That's helpful, thanks. Quick follow-up on GTO: how should we think about growth of the components of the segment when just looking at the current quarter? I know organic growth excluding the deal looked lower than expected, but underlying trends and bookings are strong. Can you touch on that for a minute?

Edmund Reese, Chief Financial Officer (CFO)

Darrin, I don't focus a lot on quarterly noise in GTO components. Q3 had a different mix than Q4. We came off a year of 7% growth in GTO; three points of that was driven by the Itiviti acquisition and four points was organic. Going forward, trading volumes came off strong comps and maybe less volatility, but we expect to get back to the 5% to 7% growth range across both capital markets and wealth driven by net-new sales. In Q4 we were growing over higher license revenue in fiscal '20 and lower trading volumes. You should expect growth driven by new sales to push us toward our three year objectives.

Operator, Operator

Next question comes from Chris Donat with Piper Sandler.

Chris Donat, Analyst (Piper Sandler)

Good morning and thanks for taking my question. Tim, wanted to ask one more question on equity position growth. Can you give us some color on the brokerage firms involved? Are you seeing more growth from online brokers or also from the traditional wire houses?

Tim Gokey, Chief Executive Officer (CEO)

We're seeing higher growth rates in online brokers, but we're also seeing very strong growth across all segments of brokerage firms, including traditional firms. The traditional firms have larger absolute position counts so while the percentage growth might be greater at some online brokers, the absolute contribution from traditional firms is significant. We also did a landmark study across $7 trillion of assets showing millennial investing patterns and their increasing share of positions. Overall, growth is broad across brokerage channels.

Chris Donat, Analyst (Piper Sandler)

Okay, and then on recent news and customer concentration with Robinhood acquiring Say Technologies, which has investor communication solutions: I know Robinhood is a Broadridge client; can you help think about Robinhood's size as a customer and any risks to your business?

Tim Gokey, Chief Executive Officer (CEO)

We view that acquisition as positive because it validates the importance of retail shareholder engagement. Robinhood is a Broadridge client, but it's not a proxy client, so we don't see direct revenue impact on our proxy business. We welcome the heightened interest in retail engagement. Broadridge plays a unique role at the center of a network linking tens of millions of investors, corporate issuers and broker-dealers, and that network is powerful for helping corporations engage retail shareholders. The move by Robinhood should accelerate interest and create more opportunities for our products and APIs that enable engagement.

Operator, Operator

Next question comes from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy, Analyst (Raymond James)

Hey, good morning. If I recall correctly, the UBS go-live was originally expected to be completed this summer, and today you said 18 to 24 months. What's driving the extended implementation timeline versus prior expectations? And how does that impact your ability to win other wealth mandates?

Tim Gokey, Chief Executive Officer (CEO)

Patrick, wealth management continues to undergo significant change and firms are evolving strategies and technology to compete. The UBS partnership is part of their transformation and our mandate with them has grown since our initial agreement. We are live with select components and are optimizing sequencing to align with the pace of their broader digital transformation. That has extended the timeline. On the broader market, the RBC win validates the demand for similar digital transformation. Our guidance excludes any UBS revenue in fiscal '22, and we continue to pursue other opportunities while working with UBS on rollout sequencing.

Patrick O'Shaughnessy, Analyst (Raymond James)

Got it. And then speaking of RBC, can you speak to the implementation timeline for that install?

Tim Gokey, Chief Executive Officer (CEO)

RBC is an important and broad client across our businesses in the US and Canada. We're working with them on their US wealth management business and expect that to go live over the next 18 to 36 months. Since RBC is already a back-office client for us, the scope of incremental services is more limited than UBS, but it's an exciting win because their business spans high net worth, regional broker-dealer and correspondent capabilities, which hits on many industry segments.

Operator, Operator

Next question comes from Pete Heckmann with D.A. Davidson.

Pete Heckmann, Analyst (D.A. Davidson)

Hey, good morning. I missed a little bit of the call, but I believe you expect roughly $220 million of event-driven revenues in fiscal '22, about a 6% decline versus fiscal '21. Would you expect about a normal level of event-driven proxy revenue in fiscal first quarter, maybe something in the $45 million range?

Edmund Reese, Chief Financial Officer (CFO)

Thanks, Peter. If you look at the last seven years, the average has been about $220 million. On a quarterly basis you'll see cyclicality; the average has been roughly $50 million to $55 million per quarter and that is a reasonable range to model. In fiscal '21 the growth was broad-based across mutual fund, contests and capital markets activity. We don't expect a single item to drive fiscal '22 and so we expect event-driven revenues to average back toward that historical average.

Operator, Operator

Next question comes from Puneet Jain with JPMorgan.

Puneet Jain, Analyst (JPMorgan)

Hey, thanks for taking my question. On margins, can you break down expected margin expansion into ICS and GTO? It seems like there are segment-specific dynamics like record growth in ICS and Itiviti in GTO this year.

Edmund Reese, Chief Financial Officer (CFO)

Puneet, across our businesses, particularly recurring revenue in ICS—regulatory, data-driven solutions and issuer businesses—these are scale businesses and bring attractive accretive margins as they grow. SaaS platforms in capital markets and wealth also have high margins. In customer communications you see margin dynamics as you shift from low- or no-margin print to higher-margin digital. Overall, we expect to balance growth across these businesses with investments and deliver the collective margin expansion in the roughly 50 basis points range we discussed. Tim might want to add a comment on the businesses.

Tim Gokey, Chief Executive Officer (CEO)

I'll just add that we think about margin delivery on an overall basis and it can be affected by where investments fall in the year. Both businesses have attractive margin characteristics and as they grow they create additional margin, which allows us to reinvest and deliver long-term value to clients, associates and shareholders.

Operator, Operator

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

Tim Gokey, Chief Executive Officer (CEO)

I'd like to thank everyone this morning for participating in our call. Before we conclude, I do want to highlight two directors who recently joined our board. Our board plays an important role in the oversight of Broadridge, and I'm pleased that we have continued to add valuable insight and diverse experiences. Melvin Flowers brings valuable experience in both technology and finance, and Annette Nazareth brings deep experience at the confluence of corporate governance, financial markets, and regulatory matters. Broadridge's ability to continue to attract this kind of talent to our board highlights the important role that we play in governance and financial markets. We're really excited to have Annette and Melvin joining the board. We just had a meeting earlier this week and were able to be with them, at least virtually. So welcome, Annette and Melvin. With that final note, I want to thank all of you for your interest in Broadridge. We look forward to updating you again in a few months and are really excited about the opportunity going forward to continue to make a difference for our industry and for millions of investors. Thank you.

Operator, Operator

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