Earnings Call Transcript
BROADRIDGE FINANCIAL SOLUTIONS, INC. (BR)
Earnings Call Transcript - BR Q3 2023
Operator, Operator
Good morning, and welcome to the Broadridge Fiscal Third Quarter 2023 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, Kate. And good morning, everybody, and welcome to Broadridge's Third Quarter Fiscal Year 2023 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 this morning are Tim Gokey, our CEO; and our CFO, Edmund Reese. Before I turn the call over to Tim, let me make a few standard reminders. One, we will be making forward-looking statements on today's call regarding Broadridge that involve risks. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K. Two, we'll 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 in the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?
Tim Gokey, CEO
Thanks, Edings. Good morning, and thank you for joining us. I'm pleased to be here to review our strong third quarter results. I'll start with a quick summary and key headlines followed by a review of our business. Then I'll close with some thoughts on why I think fiscal '23 has been such a strong year for Broadridge across key operating, strategic and financial milestones and why that positions us well for the future. Let's get started on Slide 3. First, Broadridge delivered another strong quarter. Recurring revenue rose 9% in constant currency, with double-digit growth in our governance business and strong growth in GTO. Debt revenue growth helped drive 10% growth in adjusted operating income and 6% growth in adjusted EPS. Importantly, those earnings translated to strong free cash flow, which nearly tripled year-over-year as we continue to step down our wealth platform investments. Second, investor participation remains strong. Q3 equity position growth was 10%, and fund position growth was 6%, with over 90% of equity record dates completed through last week. We continue to expect position growth to be in the high single digits for fiscal '23, underlining the power of the trends driving that growth. Third, Broadridge continues to execute across governance, capital markets, and wealth. The investments we have made to innovate in our governance business, to put in place front-to-back capabilities in capital markets, and to build a transformational wealth platform suite are resonating with clients. Fourth, as we move through our seasonally large fourth quarter, Broadridge is on track to deliver another year of steady top and bottom-line growth. We expect to report recurring revenue growth at the higher end of our 6% to 9% guidance range. And we are reaffirming our outlook for continued margin expansion and 7% to 11% adjusted EPS growth. Finally, our fiscal '23 outlook has us on track to deliver at or above the high end of our 3-year financial objectives of 7% to 9% recurring revenue growth and 8% to 12% adjusted EPS growth. That would mark a fourth consecutive cycle in which we have delivered on our 3-year financial objectives. Now let's turn to Slide 4 for a review of our results, beginning with our governance or ICS business. Governance recurring revenues rose 11% in constant currency driven by strong growth across all four product lines. Our regulatory business with its connections to broker-dealers, funds, public companies, and tens of millions of individual investors continues to benefit from strong investor participation. As we move to the peak of proxy season, equity position growth, in particular, remains strong at 10%, led by low-teens growth in managed account positions, and solid 7% growth in self-directed positions. Broadridge is benefiting from broad-based growth across both mid- and large-cap equities and across sectors. And as Edmund will share, we see further growth ahead for the all-important fourth quarter. That growth, especially in the context of declining equity and fixed income markets over the past 15 months, really underscores the secular technology-driven trends driving increasing investor participation. On the fund side, position growth also remained solid at 6%. We continue to see double-digit growth in passive fund positions, including ETFs and money markets, with basically flat growth in active fund positions. For all the growth we've seen in passive funds over the past decade, passive positions still account for less than 40% of the total, giving us confidence this trend can continue to drive growth for a long time to come. Outside of the regulatory core, our governance business posted double-digit growth in recurring revenue. Our Customer Communications business is benefiting from strong growth in digital solutions. Our issuer business is benefiting from strong demand for our registered and disclosure solutions, and higher interest rates are contributing to the growth of our data-driven funds business. Partially offsetting the strong recurring revenue growth is lower event-driven activity. The weakness we noted last quarter has continued and will likely extend into the fourth quarter as well. In the past, we've seen these levels of activity extend anywhere from 2 to 4 quarters in periods of market weakness and uncertainty. As a reminder, most of this deferred activity involves elections for mutual fund boards of directors. As such, they need to happen eventually. And when they do, they grow with positions. Turning now to GTO, Capital Markets revenues grew 5% to $246 million. The integration of BTCS continues to deliver long-term benefits. During the quarter, we onboarded a leading global multi-asset class clearing firm, providing them with ultra-low latency connections to 40 global member markets and displacing a major competitor. In addition, one of our goals has been to develop a suite of applications that bring together our capabilities across the front and back office to simplify workflow across the trade life cycle. These efforts are now translating into multiple pipeline opportunities for bundled front-to-back sales. Outside of BTCS, our distributed ledger repo solution, while still small in revenue terms, continues to generate strong market interest. UBS recently executed the first real-time intraday DLT repo trade on our platform. This represents a major step forward in increasing settlement velocity and collateral mobility and therefore, reducing the amount of capital needed by clients to manage their intraday liquidity needs. In wealth, revenue grew 10% to $143 million. I'm pleased to announce we have completed both the platform development and testing of our Broadridge wealth product suite. We've made significant progress towards finalizing a phased rollout approach with UBS that delivers solid economics to Broadridge while addressing T+1 and giving UBS the flexibility to deploy modules on its own timetable, as it continues its digital transformation. We remain confident that we are on track to recognize revenue in the first quarter of fiscal '24, and that we will see notably improved free cash flow conversion going forward. We have invested significantly in the past 3 years to reach this point. Working closely with UBS, we've created a suite of modular solutions that enable our clients to drive adviser productivity, improve the investor experience, and digitize front-to-back operations. This is a differentiated capability that others are talking about, but that only Broadridge can deliver now. Our componentized approach means that firms can step into this transformation based on their needs. These conversations are resonating, and our pipeline continues to grow, now up over 40% from the beginning of the year. All in all, this is a proud moment for Broadridge. Finally, speaking of client conversations, closed sales rose 8% to $62 million in the third quarter. We are now entering our critical selling quarter with a record pipeline, and we are seeing significant interest in digital solutions, capital markets, and wealth. At the same time, we're clearly in a highly uncertain economic environment. Like others, we're seeing longer sales cycles, especially in Europe. With some deals slipping into the summer, we now expect full-year closed sales to be near the low end of our $270 million to $310 million guidance. Our record pipeline gives us confidence the variation we are seeing is timing, and our strong backlog of solutions already sold and in the onboarding process means that we expect minimal impact on FY '24 revenue growth. I'll close my remarks on Slide 5. Broadridge is poised to deliver another strong year in fiscal '23 across key operating, strategic and financial metrics. First, on the operating side, position growth remains very healthy. After 2 years of strong markets and ultra-low rates, market dynamics have shifted significantly over the past 12 months. And yet our results year-to-date, the activity we're seeing early in Q4 and our forward testing, all give us a high degree of confidence that we'll end the year with position growth in the high single digits for equities and mid-single digits for funds. These results, in turn, give us added conviction that the long-term trends driving increased investor participation remain very much intact, even in a choppy market and even after 2 above-trend years. Beyond position growth, we've taken steps to strengthen our governance business by implementing a voting choice for funds or pass-through voting, as we referred to it in the past and universal proxy, all while developing a new offering for tailored shareholder reports. Between the fundamental drivers and these enhancements, the regulatory business is the strongest it's ever been. Second, our investments in digital communications capabilities have begun to translate into significant momentum. Broadridge has become a leading omnichannel communication hub, giving our clients an enhanced digital experience while preserving best-in-class print. For many years, after we acquired DST's communications business at the beginning of fiscal '17, the combined business contributed double-digit earnings growth by delivering strong synergies and scale. More recently, we've seen these efficiencies help us drive new client wins. And now our digital capabilities are enabling Broadridge to play a new and more central role in how our clients service and grow their business. This is the vision we laid out when we made the acquisition, and it's exciting to see it bear fruit. Third, our capital markets business have never been in a stronger position. Our ability to address the entire trade life cycle puts us in a unique position to help our clients simplify their complex operations. As we integrated Itiviti, we have built the capabilities that will link our front and back-office solutions, and the market receptivity has been strong. Fourth, our Broadridge wealth platform will enable our clients to drive digital transformation on their terms through a wide set of modular solutions targeting adviser productivity, improved investor experience and digitized operations. We've now completed the elevated investment phase of our growth strategy, and we are well positioned to attack this growing market. Lastly, we're delivering another year of strong and consistent financial results. After a strong third quarter, our full year outlook calls for high single-digit recurring revenue and adjusted EPS growth. The successes we are discussing today require investments, significant investments in the case of BTCS and wealth. Now we're exiting that investment phase, which means that our free cash flow conversion is starting to return to historical levels, which we expect will result in improving ROIC as well. In summary, Broadridge is delivering strong fiscal '23 year results across multiple fronts. Our key operating metrics continue to grow. We've made important steps in strengthening key parts of our governance, capital markets and wealth franchises, and we are reaffirming our outlook for another year of consistent financial results backed by improving free cash flow. Broadridge is well positioned to drive long-term and sustainable growth. I want to conclude by thanking our associates, many of whom are listening to this call. Our commitment to client service consistently sets us apart with our clients. That is a big testament to the work of our highly engaged associates around the world. They continue to make a difference for our clients and for millions of investors every day. Thank you. And with that, let me turn things over to Edmund.
Edmund Reese, CFO
Well, thank you, Tim. And good morning, everyone. Today, I am going to review our Q3 financial performance. I want to provide some additional insights on our rising free cash flow conversion. And I'll outline the drivers of our Q4 growth, which give us confidence in our recurring revenue and adjusted EPS guidance for fiscal '23. Starting with Q3, I am pleased to share the results from another strong quarter where recurring revenue growth and continued disciplined expense management drove mid-single-digit adjusted EPS growth despite weaker event-driven revenue in the challenging macroeconomic environment. We continue to see robust organic recurring revenue growth from converting our sales backlog to revenue and healthy position growth. And as you can see from the financial summary on Slide 6, recurring revenue rose to over $1.1 billion, up 9% on a constant currency basis, all organic. Adjusted operating income increased 10% as we lapped elevated investments in fiscal '22 and realized the benefit from targeted cost actions that we initiated in Q4 '22, both of which more than offset the impact of lower event-driven revenue. AOI margins of 21% expanded 60 basis points and adjusted EPS rose 6% to $2.05. Finally, we delivered closed sales of $62 million, up 8% over Q3 '22. And I'll remind you that while higher interest expense partially offsets the operating income growth, the interest rate impact at the Broadridge level is fully offset by the higher float income in our ICS segment. On taxes, we continue to project an overall tax rate of approximately 21% for fiscal '23. And let's get into the details of the Q3 results, starting with recurring revenue on Slide 7. Recurring revenues grew 9% to $1.1 billion in Q3 '23 and was at the high end of our full year guidance range of 6% to 9%. Our recurring revenue growth was all organic, again, keeping us on track to exceed our 5% to 7% 3-year growth objective. Let's turn now to Slide 8 to look at the growth across our ICS and GTO segments. We continue to see strong growth in both of our segments. ICS recurring revenues grew 11%, all organic to $693 million, with regulatory at 8% and double-digit growth across all other product lines. Continued growth in equity and fund positions underpinned an 8% increase in regulatory revenues to $346 million. Data-driven fund solution revenues increased by 14% to $102 million, primarily due to the higher float revenue in our mutual fund trade processing unit. Our issuer revenues grew 25% to $58 million, led by growth in our registered and shareholder disclosure solutions. Finally, we continue to benefit from strong demand in our customer communications business, where recurring revenue rose 10% to $188 million, led by new client wins and higher volumes in print as well as double-digit growth in our higher-margin digital business. Turning to GTO, recurring revenues grew to $388 million or 7%, driven by new sales revenue and wealth management and strength in our global post-trade products and capital markets. Capital markets revenue grew 5% to $246 million propelled by new sales growth and higher fixed income trading volumes, which offset the grow-over impact from higher license revenue in Q3 '22. Wealth and investment management revenue increased by 10% to $143 million, led by healthy growth from new sales and professional service fees. As a reminder, license revenues can impact quarterly revenue growth, and we expect a grow-over impact in Q4 for wealth management. Looking forward, I have a high degree of confidence in our ability to deliver GTO full year organic growth within our targeted 5% to 7% range, given our strong results over the past 9 months. Let's now turn to Slide 9 for a closer look at volume trends. We had healthy position growth for both equities and funds in the third quarter despite the market volatility. Equity position growth was 10% in the quarter, and growth was driven by continued double-digit growth in managed accounts and more modest continued growth in self-directed accounts. We are now in the peak period for annual meetings and proxies. And through the end of April, we have received record data for 92% of the proxies that are expected for the year. Position growth results have consistently been in line with our testing. So this data gives us high confidence in our Q4 estimate. For the full year, we expect equity position growth of approximately 8%. We continue to be encouraged by expanding investor participation in financial markets serving as a long-term tailwind that drives growth in our business. Mutual fund position growth remained steady at 6% despite outflows from equity and fixed income funds to money market funds, and we anticipate growth in a similar range for Q4 and for the full year. Turning now to trade volumes on the bottom of the slide. Trade volumes grew 1% on a blended basis in Q3. And once again, we saw a difference in asset classes with increased volatility driving double-digit fixed income volume growth now for 7 consecutive quarters and a modest decline in equity volume growth given the lower activity at our retail wealth management clients. We will be lapping a strong Q4 '22, but we expect full year trading volume growth to be better than our initial guidance and slightly up for the year. Let's now move to Slide 10, where we summarize the drivers of recurring revenue growth. Recurring revenue growth of 9% was all organic and balanced between net new business and internal growth. Revenue from closed sales and our continued high retention from existing customers provided 4 points, and internal growth primarily positions, trading volumes, and float income contributed 5 points. Foreign exchange impacted recurring revenue by 1 point with the majority of that impact coming in our GTO business, as you can see in the table on the bottom of the slide. I'll finish the discussion on revenue with a view of total revenue on Slide 11. Total revenue grew 7% in Q3 to $1.6 billion including 5 points of growth from recurring revenue. Event-driven revenue was down $7 million and was a modest headwind to growth as we saw continued lower mutual fund proxy activity. I will again highlight that lower mutual fund proxy activity is driven by the timing of fund and ETF board elections, which may be pushed back but are not an optional activity. Looking ahead to the balance of the year, we expect activity to remain weaker in Q4 with full year revenue in the $210 million to $220 million range, below the $240 million to $260 million level that we've seen in recent years. Low to no margin distribution revenues increased by 8% and contributed 3 points to total revenue growth as the higher volumes in customer communications and the impact of postal rate increases more than offset the lower event-driven activity. We continue to expect double-digit distribution revenue growth for the full year, and I'll again reiterate that the elevated distribution revenue from postal rate increases and higher customer communications volumes have a dilutive impact on our reported adjusted operating income margin. Turning now to margins on Slide 12. Adjusted operating income margin for Q3 was 21%, a 60 basis point improvement over the prior year, driven by a combination of operating leverage in our business, higher float income, and continued disciplined expense management and the impact of targeted cost actions that we initiated at the end of Q4 '22. Our progress through 3 quarters gives us increased confidence that we will be able to offset inflation and FX impacts and deliver on our margin expansion objective of approximately 50 basis points for fiscal '23. Let's move ahead to closed sales on Slide 13. Third quarter closed sales were $62 million, up from $57 million in Q3 '22 and bringing our year-to-date total to $156 million, $13 million below Q3 year-to-date '22. Over the last 5 years, we have closed on average 46% of our full year sales in the fourth quarter, so meeting our full year close sales objective continues to be heavily dependent on Q4 performance. I'll turn now to cash flow on Slide 14. Q3 '23 free cash flow strengthened to $162 million, up 189% from $56 million in the prior year period. Free cash flow conversion over the last 12 months calculated as free cash flow over adjusted net earnings improved 12 points sequentially to 63%, driven by operating cash flow improvement. And this improvement was the product of strong working capital management and most notably, a year-over-year decline in the level of client platform spend consistent with our expectations. Total client platform spend for Q3 '23 was $74 million, a reduction from last year's $114 million. The wealth platform was the primary component of the investment in the quarter and the lower spend demonstrates our progress in completing the testing and development phase of that project. We are clearly managing the investment spend, and we now expect to deliver fiscal year '23 free cash flow conversion that is significantly higher than fiscal '22, and we remain confident that we will continue to return to more historical levels of free cash flow conversion in fiscal year '24. And before moving on from our client platform spend, I'll add that consistent with our prior comments, we are on track to complete the spend on the wealth platform in Q4 '23 and recognize revenue during the first quarter of fiscal 2024. And as Tim said, we've made progress on finalizing a rollout approach that delivers solid economics to Broadridge, and we'll share more on the near-term economics when we finalize the plan with UBS. We continue to have confidence that the operating leverage and the ability to prioritize other investments inherent in our business model will allow us to mitigate the dilutive impact and continue to deliver on our earnings growth objectives. Let's now move to Slide 15 to discuss capital allocation. On Slide 15, you see that year-to-date, we've spent $315 million on investments for growth and returned $214 million to shareholders. Our capital allocation model balances investment for growth with capital return to shareholders while maintaining an investment-grade credit rating. And we feel very good that the combination of our earnings growth and free cash flow after lower client platform spend in fiscal year '23 has us on track to pay down debt and continue to make progress towards the 2.5x leverage ratio objective that we communicated at the time of the Itiviti acquisition. Next, let's turn to our updated guidance on Slide 16 and some final thoughts on our fourth quarter. First, we expect to deliver recurring revenue growth at the higher end of our 6% to 9% guidance range. And as always, this guidance reflects a constant currency view. And it's important to note that year-to-date, there is a 1.8-point differential between the reported and the constant currency recurring revenue growth. Second, we are reaffirming our adjusted operating income margin expansion guidance of approximately 50 basis points and adjusted EPS growth of 7% to 11%. Finally, on closed sales, we expect to be near the low end of $270 million to $310 million. And I want to reiterate that the delays in the timing of sales have only a very modest impact on our medium-term revenue outlook given our strong sales backlog. Embedded in this full year guidance is a strong Q4 '23, and there are 3 items worth highlighting as the primary drivers of growth in Q4. First, continued conversion of sales to revenue, and I'll emphasize the visibility that the revenue backlog provides. Second, proxy revenue from position growth and as I said earlier, we have strong visibility into this seasonally important quarter, having already received over 92% of record data. Finally, significant margin expansion as we grow over discrete growth investments in fiscal '22 and see the impact of targeted cost initiatives that we initiated at the end of Q4 '22. And before I close, I want to quickly address some questions that we've received over the last few weeks about our exposure to regional banks. First, our revenue exposure from the banks that have stopped operating is less than 20 basis points of our $3.7 billion of fiscal '22 recurring revenue. Regional banks more broadly make up less than 2% of our overall recurring revenues across the more than 900 client relationships. Finally, the overwhelming majority of our banking operations and deposits with systematically important banks is our internal policies prioritize safety of capital. So again, we have very small exposure to these institutions. With that final note, I will close by reiterating my key messages. Broadridge delivered strong Q3 financial results. We are positioned to deliver strong fourth quarter results and more importantly, another strong fiscal year. Our updated guidance calls for the higher end of 6% to 9% recurring revenue growth, constant currency, higher margins and 7% to 11% adjusted EPS growth. We have finalized the wealth platform development and testing, passed our peak investment spend and once again, driving strong free cash flow allowing us to pay down debt and progress on our investment-grade 2.5 leverage ratio objective. The strength and resiliency of our business and financial model is visible in our performance and as Tim noted, we are poised to deliver against our 3-year growth objectives for the fourth consecutive time. And with that, let's take your questions.
Operator, Operator
The first question is from David Togut of Evercore ISI.
David Togut, Analyst
Could you just go perhaps a level deeper, Tim, on some of the delays you're seeing in new bookings, particularly why you think some of the longer sales cycles in Europe will kind of reach fruition over the next couple of quarters and not materially affect FY '24?
Tim Gokey, CEO
Yes, thank you, Dave. Our overall pipeline is stronger than ever before. The quality of our conversations and the exciting, transformational opportunities we are pursuing make it clear that we have many ways to significantly impact the industry. We are very pleased with the discussions we are having. However, there is a lot happening globally, and this affects the timing between agreement and finalizing contracts, which can fluctuate based on circumstances at specific institutions. No opportunities have been lost. Typically, we see a lot of our sales occur in the fourth quarter, which complicates the ability to predict exactly when things will close. Ultimately, all of this contributes to a backlog of projects that we need to manage, staff, and initiate. Whether something closes in June or July doesn’t significantly impact our long-term revenue. We are experiencing strong demand and are excited about the new solutions we are developing across various areas. While we are aware of the ongoing developments with our clients and are working diligently towards our objectives, we will stay adaptable as we move forward.
David Togut, Analyst
Appreciate that. And just as a follow-up, Edmund, I've received some investor questions about the implied fourth quarter guide, perhaps suggesting a steeper-than-normal ramp versus the March quarter. And I know you did call out kind of extensive testing pointing to a strong proxy season. But is there anything else in the implied fourth quarter guide that would suggest a steeper June versus March quarter ramp?
Edmund Reese, CFO
So David, thanks for the question. And I think you hit on one important key component, and that is the position growth from equities. And we've been saying the entire year that that would be mid- to high single-digit growth, and now having 92% of the record data in strong visibility for this year, we can point directly to approximately 8%, right in line with what we've been saying all year. The other component, though, to call out, and I did mention this in the remarks, is on our continued ability to drive operating expansion in the business. We had this operating leverage in both of our businesses. So as we bring on new revenue, we see benefits there. We had 60 basis points of expansion in Q3, right in line with our expectations, and we expect that operating leverage to continue to drive impact in Q4. And I know you'll remember that in Q4 '22, we announced some targeted actions. So we continue to rightsize our real estate footprint, particularly as we think about the new hybrid work environment. We slowed our hiring. We took other targeted cost actions as well. And we expect to see those benefits come to fruition in our Q4 '23 as well. So when you add that equity position growth and you add the operating leverage in our business and the explicit actions that we are taking for Q4 '23, that gives us high confidence that we'll be able to have the margin expansion and drive the earnings growth for the full year.
Operator, Operator
The next question is from Dan Perlin of RBC.
Daniel Perlin, Analyst
I wanted to just touch base on the free cash flow conversion. It was great to see that that's ramping back to kind of 63%. The question is, how do we think about the pacing of that kind of from here given the heavy lift is kind of behind us. Anything that you can help us kind of reconcile as you think about it getting back to closer to 100% free cash flow conversion?
Edmund Reese, CFO
Yes, thank you for joining the call, Dan. What I would like to point out is that we have observed a sequential increase of 48% from fiscal '22, which was when we had our highest level of investment. We mentioned that client platform spending would decrease starting in Q2 of '23 after reaching its peak in Q1. In fact, client platform spending declined by 50% in Q2 and 35% in Q3, and I anticipate this downward trend will continue year-over-year into Q4 as well. Consequently, we have seen free cash flow conversion rise by 10 points over the last two quarters, with improvements noted sequentially in both quarters. As client platform spending decreases, we expect to see further enhancement. While we are not ready to specify the exact figure for fiscal '23, the trend we are observing gives us strong confidence that we will perform significantly better than in fiscal year '22, moving towards our more typical levels as we approach Q4 '24.
Daniel Perlin, Analyst
Yes, that's great. My follow-up is that it was a strong quarter, with a 10% increase on a recurring basis. You mentioned a pipeline that is up 40%, indicating good demand. I'm curious if there are specific modules that clients are particularly interested in. Are they looking for books of record, order management, or alternatives? You have many options in this platform, so I'm interested in where the most interest lies these days.
Tim Gokey, CEO
Yes, Dan, thank you very much. This is Tim, and I appreciate you being here. As we have mentioned in previous calls, we're really excited about our approach to the market, particularly our componentized strategy. This allows clients to transform at their own pace, aligning solutions with their vision while creating value along the way. We're seeing significant interest in our foundational technology, specifically our client and relationship master, which integrates well with our onboarding solution. There's also strong demand for corporate actions, and we currently have multiple firms in the pipeline for that, addressing a longstanding challenge in the industry. Additionally, our existing solutions, such as securities-based lending and digital marketing, are experiencing high demand as well. It’s been encouraging to see this quarter's growth, but what’s even more promising is how our pipeline is evolving over time.
Operator, Operator
The next question is from Peter Heckmann of D.A. Davidson.
Peter Heckmann, Analyst
I just wanted to see if you had any additional thoughts on tailored shareholder reports and where Broadridge might see opportunity to offset some of the revenue loss related to notice and access.
Tim Gokey, CEO
Yes, Peter, thank you very much. This is a very important topic. In the tailored shareholder reports, we will enable deeper engagement by investors, driving digitization. We believe this is ultimately beneficial for funds and enhances Broadridge's value to its clients. It is part of a series of innovations in the industry that have proven advantageous for both investors and the industry as a whole. However, as we've discussed, it does present challenges for us, with approximately $30 million in revenue at risk, and for funds as well, since the number of tailored reports by share class has significantly increased. For instance, I mentioned last quarter that one fund is escalating from just under 200 reports to over 1,000, which poses a real challenge for the industry. We are developing what we consider a unique industry solution that will effectively tackle these challenges faced by funds. Although 80% of this shift is to digital, there remains 20% that still relies on print. We are creating a distinctive print-on-demand solution that eliminates the need to keep inventory of tens of thousands of SKUs and can save funds millions in postal costs by allowing them to combine mailings and print directly for clients receiving printed materials. Instead of mailing five different envelopes, we can print all five items at once and place them in a single envelope. This solution is gaining strong interest from funds. Additionally, there is a significant opportunity in the area of composition, which has largely been a stronghold of one of our competitors. A couple of years ago, we acquired a composition engine that is ideally suited to help funds manage multiple versions of the same document and deliver data directly into these composed documents, whether they are sent physically or digitally. By integrating the composition engine with our unique print-on-demand solution, we offer a comprehensive end-to-end solution that simplifies processes for our clients. We are actively demonstrating this end-to-end solution to our clients and have received positive feedback. We believe that with this combination, we can offset or exceed the revenue losses we are anticipating.
Peter Heckmann, Analyst
That's helpful. Can you remind us if the retirement account trading business is the one that generates the float? Also, please explain some of the mechanics involved and what type of flow we are discussing.
Tim Gokey, CEO
Yes. Thank you. So yes, in our retirement business, one of the businesses in there is trading mutual funds on behalf typically of smaller plans and working on behalf of the record keeper to do the fund trading on their behalf. And that does generate float. It's fairly significant. And so as interest rates go up, we get the benefit of that. Our team has been extremely effective. I think the flow-through from interest rates to us has been something in the order of 95%. And so that is something that has really been a counterbalance so that as we have seen interest rates go up on the debt that we have, we've gotten the counterbalancing here. Now I'll say, certainly, as we pay down the debt as we're talking to, that balance will shift positively for us.
Operator, Operator
The next question is from Darrin Peller of Wolfe Research.
Darrin Peller, Analyst
It's encouraging to see the progress on the wealth side and the development of our free cash conversion. Last quarter, you mentioned expecting to reach 100% in fiscal '24. You may be hesitant to provide guidance now, but can you share any directional insights on where we might head in the next couple of years regarding free cash conversion? Additionally, on the same topic, you've scaled the business significantly. Can you explain how we should expect improved operating leverage as we bring on new clients now that the foundational work has been completed? Also, could you give us an idea of what is involved in onboarding new customers beyond UBS once we initiate that process?
Tim Gokey, CEO
Yes, absolutely. Let me start with the second part first. The platform we built has been a significant investment for us. Going forward, while the investment needed to attract new clients won’t be negligible, we anticipate it will be much lower. The main costs now will involve data conversion and similar tasks. Additionally, our componentized approach simplifies testing dramatically. Therefore, the investment required to onboard new clients will resemble our usual GTO business, which enjoys attractive incremental margins. As for your question about free cash flow, I want to clarify that we did not indicate it would reach 100% in 2024. Historically, it has hovered around that figure, and we expect to revert to those levels. We aren't making a firm commitment at this time as it feels premature in the cycle. However, as we transition back to strong free cash flow conversion, it will positively impact our capital allocation strategy. While our approach to capital allocation remains consistent, the outcomes can change. We are committed to maintaining an investment-grade credit rating, growing our dividend, funding high-return internal projects, pursuing strategic acquisitions, and avoiding excess capital accumulation on the balance sheet to return value to shareholders. As we head into 2024, we expect to return to more typical free cash flow conversion, and as we conclude 2023, we are making significant progress towards our targeted 2.5x leverage, which reduces our need to focus on debt repayment. Once we achieve that, we will have greater flexibility to revert to our traditional capital allocation strategy that balances share buybacks with strategic acquisitions. As I mentioned last quarter, we anticipate that this will lead to increased return on invested capital in the mid- to high teens over the medium term. We wanted to emphasize the cash flow aspect this quarter because we believe we are turning a corner and moving towards a more favorable outlook.
Darrin Peller, Analyst
Okay, that's really helpful. Just a quick follow-up. Do you have any early thoughts on what the merger between UBS and Crédit Suisse means for that business? I also wanted to discuss position growth. It seems to have accelerated recently when we consider equity position growth. Given that it has been strong for the past couple of years, can you clarify if we are now in a new normal? What do you think we can expect over the next 12 months, considering the changes in savings rates and unemployment levels?
Tim Gokey, CEO
Sure. Let me take the Crédit Suisse, UBS piece first. And to be clear, the transaction hasn't closed; UBS has not completed its integration plan. So all of this is very preliminary. But if you look at the footprint of the two institutions and how it lines up versus us, first of all, on the wealth side, Crédit Suisse does not have a significant wealth business in the United States. There's very little impact there. I will note that UBS has reaffirmed that continuing to grow U.S. wealth will be a strategic priority for UBS. And so in terms of the work that we're doing with them on the wealth side, that will continue. And we've seen really no slowdown in their focus on that. The other side of things is the capital market side. And as you may know, UBS is an important client for us on the capital market side in North America. Crédit Suisse is not a client for us on that side. And so that's an opportunity. UBS does plan what they've said certainly as speculation. What they said is that they will be reducing the size of that business in Crédit Suisse. But that said, whatever is left. And again, I don't have any specific information on this, but it would be logical for them to try to consolidate infrastructure and to bring that on to the Broadridge infrastructure. So we think that will be a modest uptick for us. So as we look at that overall transaction, we're seeing it as a modest uptick. Then on to position growth, it's a bit of a two-fold question there, Darrin. But on to position growth, it has been elevated the past 2 years, and investors have wondered if we'd see positions decline to pre-pandemic levels or if it would grow from that new base. And that's been a question throughout this year. I think now with 92% of the data in for this year, we feel pretty confident in our outlook. We do have early testing on the first half of next year. It's pretty early to make any real reference about that, and that is a relatively small part of the year. But all that said, there's nothing in that that indicates anything other than a continuation of the trends next year that we're seeing now. And so I think our conclusion on this is that there was a sort of a fundamental one-time lift that took place during the pandemic as people moved on to some of the new free trading apps and other kinds of things. And then what we're seeing is on top of that new base the continued growth from the other long-term drivers that you and I have discussed before, including managed accounts and more recently direct indexing. So that's sort of how we're seeing it play out. We have a little less insight on sort of specific economic indicators and things like that, but really just more focused on the long-term trends.
Operator, Operator
The next question is from James Faucette of Morgan Stanley.
James Faucette, Analyst
Appreciate your comments on capital allocation and how you expect that to change or return to previous uses. I'm just wondering on particularly acquisitions. We saw acquisition of one of your BTCS competitors in SimCorp over the past week? And how does that impact your thinking on acquisitions generally and how should we be thinking about the assets you could be targeting either by geography or product, et cetera?
Tim Gokey, CEO
Thank you, James. Firstly, regarding the merger between Deutsche Börse and SimCorp, I believe it has a minimal impact on us. We rarely compete with SimCorp, and they have a unique approach to integrating their data assets with a back-office product, so it will be interesting to see the outcome. However, we don't face direct competition from them, so I don't anticipate any significant competitive effects. As for the market, it has been somewhat fortunate for us that there has been very little activity while we've been out. Many predict increased activity in the next year, though asset levels and pricing remain quite high despite some downturns. We intend to be very selective in our approach, maintaining a high threshold for our investments. We're specifically looking for opportunities where we truly excel as owners. Over the past few years, we've focused on investments in the GTO segment, and there are several opportunities on the ICS side that we are exploring. However, if suitable options are not available, we will prioritize returning value to our shareholders.
Edmund Reese, CFO
And the only thing I'd add to what Tim said, which was spot on, James, is that we continue to have our revenue growth model focused on organic growth. We drive 5 to 7 points of our recurring revenue from organic growth drivers. And if we find, as Tim just said, the right sort of tuck-in strategic fit, then we could expect to see 1 to 2 points of growth from that.
James Faucette, Analyst
I want to get more specific about the UBS and Crédit Suisse situation, especially regarding any updates you may have about ACV. Previously, your target was around $100 million once we go live in the first quarter of fiscal '24. Do you still anticipate that quarterly run rate will remain in that range? I understand there are many variables involved right now, but based on past experiences, how long should we expect before you have a clearer view of where this will land and what opportunities might be present?
Edmund Reese, CFO
Let me begin, James, and Tim may add to this. As mentioned in our prepared remarks, we have completed the development and testing and are still on track to launch this calendar year, allowing us to start recognizing revenue in the first quarter of fiscal '24. Once we finalize the rollout plan, we will provide more details on the financial aspects. As previously stated, we will recognize revenue in fiscal '24 during the first quarter, although it will have a dilutive effect on us. As Tim noted, we have a robust pipeline, and we will be able to secure additional sales at attractive margins to help us return to the historical returns we've achieved during previous rollouts. This is our current focus, and we will share further information once our plans with UBS are finalized.
Tim Gokey, CEO
Yes. I think the only thing I'd add to that is just qualitatively, as UBS has shifted to this more agile modular approach where they are implementing in phases, when the revenue comes on, it will be less than that $100 million number and not dramatically, but it will be less. And also the investment in the amortization will be less, and we'll be able to lay that out when we can.
Operator, Operator
The next question is from Puneet Jain of JPMorgan.
Puneet Jain, Analyst
I just had like a question on closed sales, like the lowered expectations for this year. Like is that something you would attribute to a weak macro? Like are you seeing any, like the clients delaying decision-making like in your pipeline?
Tim Gokey, CEO
Sure, Puneet. A part of the good news is that our clients are continuing to prioritize their technology spending, viewing it as essential to drive their business forward. It's noteworthy that we haven't observed any decline in the volume of conversations. This leads us to believe that the situation is more about timing. It’s challenging for us to determine if it’s due to a weak macro environment or other factors they are dealing with. However, we are encouraged that the conversations remain very positive.
Puneet Jain, Analyst
Got it. And then on the Q4 guidance, the implied guidance for Q4, what should we expect for contribution from internal growth, like the trade volume, record growth versus new sales contribution?
Edmund Reese, CFO
So Puneet, we have seen balanced growth in those two areas, not only this year but also historically over the past few years. Half of this growth comes from converting the sales backlog that Tim mentioned earlier into revenue, which added 4 points this quarter. The other half stems from the position growth and other trading growth in our GTO business, contributing 5 points in this quarter. I believe we will continue to see that same balance from these two areas as we move into Q4. Additionally, as I mentioned to David earlier, I think the actions we've taken on expense management will significantly impact our ability to meet the Q4 objectives.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Tim Gokey, CEO
Thank you, operator, and thank you, everyone, who has joined us today. I hope, as you can tell, we're excited about our progress against our long-term objectives and about the way those are playing out within this year and how that sets us up for the future. We are making important progress on our key strategic milestones across each of our businesses of governance, capital markets, and wealth. We're seeing the benefits of that in our business results, and we're seeing the benefits of that in really increasingly strong free cash flow. So thank you very much for your interest in Broadridge. We look forward to reporting the results of another strong and consistent year to you when we meet in August. Thank you.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.