Broadridge Financial Solutions Inc (BR) — Q4 2022 Transcript

Thank you. Good morning, and welcome to Broadridge's fourth quarter fiscal year 2022 earnings call. Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com. Joining me on the call this morning are Tim Gokey, our CEO; and our CFO, Edmund Reese. Before I turn the call over to Tim, a few standard reminders. We will be making forward-looking statements on today's call regarding Broadridge that involve risks. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report on Form 10-K. We will also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge's underlying operating results. An explanation of these non-GAAP measures and reconciliations to their comparable GAAP measures can be found in the earnings release and presentation. Let me now turn the call over to Tim Gokey. Tim?

Thank you, Edings, and good morning to everyone joining us. I'm pleased to update you on Broadridge's strong fourth quarter and full year performance for fiscal '22 as well as our positive outlook for fiscal '23. This performance is driven by strong execution, positive underlying trends and our acquisition of Itiviti, which exceeded our expectations in year one. We expect this strong performance to continue into fiscal '23 and beyond. I'll provide an overview, and Edmund will take us through the key details. Before turning to our results, a note about what we are seeing from our unique position at the center of the equities, fixed income and fund markets. Despite the uncertainty and market pullback in the quarter ending in June, investors continue to be engaged and position growth remains robust. Our broker and asset management clients continue to face the imperative for digitizing their business. At the same time, they face regulatory change greater than any time since the global financial crisis. Our conversations with clients, both in North America and globally remain very active as they pursue industry solutions for common needs and digital innovation for areas where they seek to differentiate. With that background, let's move to an overview of our results, which highlight the strength and resilience of our business model. First, Broadridge closed the year on a very strong note. Fourth quarter recurring revenues rose 15%, driven by exceptional 12% organic growth. Adjusted EPS rose 21% to $2.65. Second, these results were the capstone on a very strong year. For the full year, recurring revenues rose 16%, driving higher margins and after accounting for higher interest expense, adjusted EPS growth of 14%. We also delivered an 11th consecutive year of record closed sales, up more than 20%. Our growth is powered by execution against strong underlying market trends, including increased investor participation and diversification and the digitization of financial services as well as the successful integration and strong performance of our Itiviti acquisition. We continue to drive balanced capital allocation as a core part of our long-term value-creation algorithm. We continue to invest in modern, scalable technology platforms. And yesterday, our Board approved a 13% increase in our annual dividend. Broadridge has increased its dividend every year since becoming an independent company, with double-digit increases in 9 of the last 10 years. As a testament to our execution, the strength and resilience of our business model, and, of course, the long-term trends driving our growth. Fifth and last, our outlook for fiscal '23 is positive. Our business model is built to deliver growth to all economic cycles. Our fiscal '23 guidance calls for a strong 6% to 9% organic recurring revenue growth. This will drive double-digit growth in adjusted operating income and 7% to 11% adjusted EPS growth. We also expect another year of very strong sales. The combination of excellent fiscal '21 and '22 results, coupled with a strong fiscal '23 outlook, has Broadridge well positioned to deliver at or above the higher end of our three-year Investor Day objectives for the period that ends next June. That will mark the third successive three-year period in which we've delivered on our objectives. To build on those highlights, let's turn to a review of our execution against the three key opportunities that are driving our growth. First, extending our governance business by driving digital engagement; second, leveraging our acquisition of Itiviti to grow our capital markets business; and third, building on our wealth franchise by delivering capabilities that make up our Open Wealth platform. I'll touch on each of these initiatives as I review our businesses, starting with governance. Our ICS business delivered another very strong year as recurring revenue growth of 11% was powered by a combination of increased investor participation and revenue from new sales. Investor participation continued to grow at a very healthy pace in fiscal '22. Equity position growth remained well above trend at 18% for the year, and we benefited from increasing investor participation on the fund side as well, with mutual fund and ETF record growth of 14%. We remain positive on the trends driving long-term investor participation and diversification growth, and we see this growth normalizing in the mid- to high single-digit range in fiscal '23 and beyond as market appreciation slows and we lapped the benefit from zero commission trading. Importantly, we're delivering increased digitization across our regulatory business. For proxies, digitization rose to 86% from 81% 2 years ago. For funds, digitization rose to 78% from 69% 2 years ago. When you apply that change across some 2.2 billion shareholder communications, you can see that Broadridge generated tens of millions of incremental savings for issuers and funds, while significantly reducing greenhouse gas emissions. New sales were the other big driver of growth. Itiviti's focus on innovation is increasing shareholder and client engagement across the full governance network from broker-dealers and wealth managers to public companies, to funds, to end investors. For example, for our broker-dealer clients, we instituted end-to-end vote confirmation for nearly 3,000 public companies and are rolling out universal proxy functionality this month. For fund companies, we're helping the world's largest fund managers launch pass-through voting. We launched a new cloud-based European funds reporting platform, and we're growing our data and analytic solutions. For issuers, we rolled out an upgraded virtual shareholder meeting platform across more than 2,500 annual meetings, making it easier than ever for investors to participate. We also upgraded our proxy vote app, enabling deeper investor engagement. Finally, our continued focus on digitizing customer communications enabled us to close a landmark deal to serve as the core digital communications infrastructure for a Tier 1 wealth manager, while continuing to onboard and serve a growing roster of new clients. These innovations helped drive strong revenue growth and led to what's clearly another strong year for our governance franchise. Now let's move to our capital markets franchise, where the acquisition of Itiviti is helping to transform our position in the market. In capital markets, we're driving trading innovation, simplifying global post-trade technology and building new enterprise data and network-enabled solutions. Itiviti's leading front-office capabilities have meaningfully extended our franchise, deepening our relationships with key clients. Capital markets revenues rose 39% to $921 million, primarily driven by our acquisition of Itiviti. In the meantime, despite our focus on the acquisition, we drove organic growth of 5%. The biggest factor in organic growth was revenue from new sales as we onboarded multiple new clients to our global post-trade platform. It's great to see our platform investments converting to revenue growth. We're also developing enterprise and network solutions. Our digital ledger repo solution is now live with three clients, with a fourth signed and others in the pipeline. Our production volume is now averaging more than $50 billion a day, and we expect that will climb further by year-end. Today, our clients are using digital ledger repo to process intracompany transactions and reduce external counterparty expense. We're further enhancing our capabilities in early fiscal '23 to include sponsored repos. While the revenue from this business remains small today, the pipeline is strong, and we see a long runway for future growth. Another key network initiative is LTX, our fixed income trading platform, where we continue to make steady progress towards a full launch. The biggest growth initiative in capital markets this past year has been the acquisition of Itiviti, which is delivering even more value than we first anticipated. So let's turn to Slide 6 for a double-click on the performance of that business. I'm pleased to report that the integration is going very well. We are near completion on most streams. We're driving revenue and cost synergies, and we've strengthened and deepened the management team. We've also officially rebranded the business, Broadridge Trading and Connectivity Solutions, or BTCS. When we announced the acquisition last spring, we highlighted three key drivers for why we thought this is a strong fit and will generate significant value for our shareholders. A year later, these drivers have only been reinforced. The first driver was the compelling strategic fit with our capital markets franchise. We expect that the combination of Itiviti's front office and connectivity solutions, with our back-office capabilities, would give us an unmatched ability to add value across the trade life cycle. That thesis is playing out, and we're in dialogues with multiple clients to increasingly see Broadridge as a critical partner in a multiyear process of modernizing their trading infrastructure. We're also well into developing the capability to enable common data sets across the trade life cycle, which will be a significant benefit for many clients. Our second driver was to use our expanded global scale and footprint to unlock additional growth. A year later, our international revenues have grown by more than 60%, enabling us to strengthen our position in both Europe and Asia-Pacific. Clients see us as an increasingly global player, and Itiviti clients are seeing the benefit of being partnered with a larger player, especially one with a reputation for investment in service. Last, Itiviti is delivering clear financial benefits. Fiscal '22 revenues came in ahead of our acquisition case at $256 million, and we exceeded our earnings target. We've actioned almost $10 million in synergies, including $3 million of revenue synergies and $6 million on the cost side. Our incremental scale helped fuel more than $30 million in closed sales, with multiple competitive wins in fiscal '22. Thanks to those sales, we are on target to delivering double-digit growth in fiscal '23 and beyond. So we're off to a strong start in realizing Itiviti's potential. Looking ahead, we have a clear road map for continued growth. Driving share gains in the near term, executing on revenue synergies in the medium term and over the long term, driving a suite of modular solutions covering the entire front-to-back trade life cycle. Now let's turn to Slide 7 for an overview of our progress in building the leading wealth tech player. In wealth management, we are building on our core strength as the leading back-office technology provider, to deliver new component solutions and developing an agile modular platform that will link the full suite of our capabilities. Wealth and investment management revenues rose 5% in fiscal '22, powered by new sales in the U.S. and Canada, which helped offset the impact of lower trading volumes as we lapped the peak of the meme stock phenomenon over the second half of last year. Our open component-based wealth management platform remains our top priority. To date, we've rolled out managed account billing and adviser workstation both to strong reviews. We recently delivered the second generation of the workstation with even more capability. Looking ahead, we're deep into integration on the remainder of the core suite with strong results and anticipate being largely code complete by the end of calendar '22. We remain on track to go live in summer of '23. Ongoing client discussions are enabling us to sharpen our open platform value proposition. Our ability to offer clients a set of modular solutions, linked by a common enterprise integration layer, enables them to modernize key parts of their tech step by step, with clear value at each step. This modular approach is drawing significant interest from clients, and we expect it to drive increased wealth sales in fiscal '23. So to sum up, we are executing well across each of our franchise businesses. Now let's move to Slide 8, and I'll wrap up my review with some closing thoughts. First, Broadridge delivered another strong year of financial and operating results. Second, we are executing on our growth plans in three attractive opportunities. We're driving digitization to extend governance. We're leveraging Itiviti to grow capital markets, and we're successfully building wealth management. Our investments in each of these areas are creating significant momentum in the marketplace. Third, our growth is being propelled by the accelerating pace of change in the financial services industry. Clients are evolving their business models, rapidly seeking to digitize and adopting next-generation technologies. Slowing global growth is likely to further accelerate these changes as our clients invest to compete for market share and drive productivity. By accelerating digitization and mutualizing nondifferentiating costs, our solutions help them meet those needs. And that brings me to my fourth and last point. Broadridge has never been better positioned for long-term growth. Our guidance calls for 6% to 9% recurring revenue growth in fiscal '23 and 7% to 11% adjusted EPS growth. We're on track to deliver at or above our three-year objectives, and with a $60 billion market opportunity, we see a long runway for growth. Before I finish, I want to thank our associates around the world. Their work is the driving force behind the innovation that we're bringing to the financial services industry. This work is critical for our clients. And through them, we're making a difference in improving the financial lives of millions around the globe. Edmund, over to you.

Thank you, Tim, and good morning, everyone. I'm really pleased to be here to discuss the results from yet another strong quarter and strong year. I'll also provide you with some additional insights into our guidance for fiscal '23, which will position Broadridge to deliver at or above the higher end of our three-year financial objectives. As you can see from the financial summary, Broadridge's full year results came in at or ahead of both our fiscal year '22 guidance and our three-year objectives across all metrics. Recurring revenue rose to $3.7 billion, up 16% year-over-year. Organic growth was 9%. Adjusted operating income margin expanded 60 basis points, outpacing our annual margin expansion objective despite the drag from increased low to no margin distribution revenue and adjusted EPS grew 14% to $6.46. Finally, and as Tim noted earlier, we delivered record closed sales of $282 million, a strong year across all metrics. Turning to the fourth quarter. Recurring revenue grew 15% to $1.2 billion, driven by organic growth of 12%. Adjusted operating income grew 25% and AOI margins expanded 250 basis points as we lap Q4 '21 elevated investment spend, and adjusted EPS increased 21% to $2.65. Again, operating income growth was partially offset by higher interest expense related to the acquisition of Itiviti. Our fourth quarter results benefited from continued position growth, strong execution across our product lines and the ongoing strong performance of Itiviti. Let's get into the details of these results, starting with recurring revenue. Recurring revenue grew by 15% to $1.2 billion in Q4 '22. Organic growth was 12%, driven by strong volume growth in new sales. Acquisitions contributed 3 points of growth in the quarter as we passed the one year anniversary of the Itiviti acquisition in May. Our 16% recurring revenue growth for fiscal '22 marks three consecutive years of double-digit recurring revenue growth. With organic growth at 8% in fiscal '21 and 9% in fiscal '22, well above our 5% to 7% three-year growth objective, we are well on our way to exceeding our three-year top line growth objectives. Now let's turn to the growth across our ICS and GTO segments. We saw double-digit recurring revenue growth in both of our segments. In Q4, ICS recurring revenues grew 14%, all organic, to $807 million, including double-digit growth across all four product lines. Regulatory revenues rose 13% to $424 million on strong equity and fund position growth. Data-driven fund solutions revenue grew 11% to $103 million, driven by strong growth in our data and analytics solutions and our mutual fund trade processing unit. Our issuer business increased by 18% to $125 million as we maintain share in our virtual shareholder meetings platform and continue to grow our other annual meeting and disclosure products. Finally, our customer communications business had a very strong quarter, growing by 15% to $155 million, driven by a surge in volumes from onboarding new clients and double-digit growth in our higher-margin digital offerings. Customer communications is now delivering solid top line growth. That complements its strong earnings growth as it executes on its print to digital strategy. For the year, ICS grew at 11%, with all of our businesses at or above our organic recurring revenue growth objectives. Turning to GTO. Recurring revenues grew by 18% in Q4 to $382 million, driven by continued strong performance from Itiviti, higher capital markets fixed income trading volumes and an increase in wealth management license revenue. Organic growth was 9% for the quarter and 5% for the year. Capital markets revenues grew by 28% to $240 million, powered by Itiviti, revenue from closed sales and higher fixed income trading volumes. Organic growth in capital markets was 12% for the fourth quarter and 5% for the full year. And let me also take a moment to emphasize the strong performance in Itiviti. Itiviti, now BTCS, contributed 7 points of growth to Broadridge's recurring revenue, right on track with the expectation that we set when giving fiscal year '22 guidance and ahead of our profit expectations. Tim walked you through the progress that we've made in the year since the acquisition. So I continue to feel good about our integration, the revenue synergies and strong financial performance in BTCS and the strategy for the business going forward. Wealth and investment management revenues grew by 4% to $142 million, driven by growth from new sales and license revenue, partially offset by the impact of lower trading volumes at our wealth management clients. Full year organic growth was 5%. Now let's turn to a closer look at the volume trends across our segments. Position growth remained strong in the fourth quarter across both equities and funds. Equity growth was 17% in the seasonally large fourth quarter. Our testing of position data continued to prove reliable as we finish the full year in line with our late April testing. For the full year, equity position growth was 18%. Mutual fund growth also remained steady at 10% in the fourth quarter and full year growth was 14%. Turning to trade volumes on the bottom of the slide. Trade volumes grew 8% in Q4, driven by double-digit growth in fixed income volumes as investors sought to stay ahead of rising inflation in the more hawkish Fed. Equity volumes also increased as higher trading by institutional investors more than offset the lower activity at our retail wealth management clients. For the year, internal trade growth was 1%. Let's now move to the summary of the drivers of recurring revenue growth. Recurring revenues grew 15%, powered by 12% organic growth and a 3-point contribution from acquisitions, primarily reflecting Itiviti revenue through mid-May. Internal growth, including strong position growth and fixed income trading, drove 8 points of growth and revenue from new sales contributed 6 points of growth. Our retention rate remained at 98%. I'll finish the discussion on revenue with a view of total revenue. Total revenue grew 12% in Q4 to $1.7 billion. Recurring revenue was the largest contributor, driving 10 points of growth. Low to no margin distribution revenue increased by 12% and contributed 3 points to total revenue growth, driven by a combination of higher volumes in our customer communications business and higher postage rates. That growth had a dilutive effect on our reported adjusted operating income margins that I'll highlight in a moment. EBIT-driven revenues were $70 million in Q4 '22, $2 million lower than last year, as lower contest activity was partially offset by continued mutual fund proxy activity. Looking ahead to fiscal '23, we are not forecasting any major mutual fund proxy events and we expect event-driven revenues to be in the $240 million to $260 million range in line with recent years. Turning now to margins. Adjusted operating income margin for Q4 was 25.3%, a 250 basis points improvement over Q4 '21, driven by strong recurring revenue growth and lapping the increased investment in our digital and technology platforms. For the full year, Broadridge delivered 60 basis points of margin expansion, exceeding our objective of 50 basis points despite elevated growth in low to no margin distribution revenue, which diluted our reported full year adjusted operating income margin by 70 basis points. As I have mentioned previously, we saw a modest impact from higher inflation, both in attracting and retaining talent and in material costs to offset that inflation impact and to prepare for a more uncertain economic environment. We took a series of targeted cost actions in Q4 '22. First, given our new hybrid work model, we continue to rightsize our real estate footprint and took a $23 million one-time charge related to those incremental actions. We have now closed or reduced 49 offices or 14% of our total square feet since the beginning of the pandemic in fiscal year '21. Second, we initiated additional business alignment initiatives that resulted in a reduction in both existing and open headcount. As a result of these cost initiatives, we expect to realize $70 million in annualized savings, which, along with the operating leverage inherent in our business model, will allow us to mitigate inflation, continue to invest in our long-term growth investments and meet our earnings growth objectives. Following the decision we announced earlier this year, we are closing our offices in Russia and will relocate associates who want to move. We incurred $1.4 million in expense related to that effort in the fourth quarter and expect another $25 million to $30 million over the course of fiscal '23 to wind down our business in that market. Both the one-time real estate costs and the Russian wind-down expenses have been excluded from our calculation of adjusted operating income and adjusted EPS. Let's move ahead to closed sales. We ended our fiscal year with another strong selling effort, closing $112 million in closed sales for the quarter. For the full year, sales grew by 21% to $282 million, ahead of our guidance range and marking yet another year of record closed sales. Importantly, these sales were balanced across ICS and GTO products, and we also saw a significant contribution from BTCS. Strong closed sales drove a further increase in our recurring revenue backlog, which reached $440 million or 12% of fiscal '22 recurring revenue. Importantly, our backlog gives us strong visibility into the revenue from closed sales that will power fiscal year '23 recurring revenue growth. I'll turn now to capital allocation. We are a growth company, and our capital allocation model remains focused on balancing investment for long-term growth and capital return to benefit our shareholders. Broadridge generated $370 million in free cash flow in fiscal '22 after investing $447 million in capital. As we previously indicated, we are in a peak period of investment across multiple client platforms, including our wealth platform, where we are on track to reach code complete in fiscal '23. We also expect client platform investment to be lower in fiscal '23, with free cash flow conversion returning to more historical levels in fiscal year '24. We also remain committed to funding a dividend that grows in line with earnings having returned a net of $253 million to shareholders in fiscal year '22. We are pleased that our Board has approved a 13% annual dividend increase to $2.90 per share in fiscal '23, in line with our targeted dividend payout ratio of 45% of adjusted earnings. Finally, we repaid $95 million of debt as we continue to prioritize debt repayment over share repurchases until we reach a leverage ratio that is in line with our objective to maintain an investment-grade credit rating. I'll close my prepared remarks this morning with some detail on our fiscal '23 guidance. Our guidance calls for mid- to high single-digit recurring revenue growth, continued margin expansion, solid adjusted EPS growth and another year of strong closed sales. Let's take each point in turn, starting with recurring revenues. We expect fiscal year '23 recurring revenue growth of 6% to 9%, all organic, with balanced growth across both ICS and GTO. The biggest driver of our growth is expected to be new sales as we work to onboard our $440 million backlog. We also expect mid- to high single-digit position growth and flat trading volumes. And as always, the recurring revenue guidance reflects a constant currency view. In addition to recurring revenue, we expect low double-digit growth in distribution revenues, driven by solid volume growth and additional postage rate increases. As I indicated earlier, we expect event-driven revenues to be in the $240 million to $260 million range down from $270 million in fiscal '22. Factoring recurring, event-driven and distribution revenues, we expect total revenue constant currency growth to be in the 6% to 10% range. Second, we expect to expand our adjusted operating margin in fiscal '23 by approximately 50 basis points, driven by the scale in our business, the ongoing mix shift to digital and efficiency gains, including our recent cost initiatives. These drivers should enable us to offset inflation-related increases and the dilution from double-digit growth in low to no margin distribution revenues. Third, we expect adjusted EPS growth of 7% to 11%. Embedded in our adjusted EPS outlook is the impact of higher interest rates, which will drive a $35 million to $40 million increase in interest expense and the impact of the stronger dollar, which will lower our adjusted earnings growth by just over 1%. Keep in mind that while higher interest rates are impacting our interest expense line, the impact on Broadridge as a whole is largely neutral as our $1.6 billion in variable debt outstanding is essentially matched by cash balances held in our mutual fund trade processing and stock transfer businesses. So any increase in interest expense is offset by an equivalent increase in float revenue in ICS. We are also projecting an overall tax rate of 21% and a modest increase in diluted shares outstanding. Closing our discussion of EPS, we expect to complete the integration of Itiviti and incur expenses related to winding down our operations in Russia. These expenses are not included in our calculation of adjusted EPS guidance. Turning now to our final guidance point, closed sales. We expect another strong year in sales, with the fiscal '23 guidance range of $270 million to $310 million including balanced sales between ICS and GTO. So to sum up, our fiscal '23 guidance emphasizes the strength and resilience of our financial model and our ability to drive sustainable recurring revenue growth through any economic environment, fund growth investments while expanding margins and delivering steady and consistent adjusted EPS growth, all while maintaining an investment-grade balance sheet and a balanced capital allocation policy. Before I move on from guidance, let me briefly discuss our Q1 outlook. Historically, Broadridge has generated 10% to 17% of our earnings in the first quarter. In fiscal '23, we expect our Q1 earnings to be at the low end of that historical range, driven by lower event-driven revenues and the carryover impact of higher fiscal '22 expenses. And one administrative note for fiscal '23 and moving forward, beginning with our first quarter results, we will be completing the final stage of our recasted FX reporting. Given the increased size and scale of our international business and global operations, it is appropriate to incorporate FX changes more fully into our reporting. You will recall that last year, we implemented the first phase of this transition by updating the fixed exchange rate for our segment revenues and for recurring revenue, which reduced the difference between the fixed rate and the actual rate that was recorded in our FX revenue line. We will now be translating changes in FX into our segment and recurring revenue reporting, allowing us to eliminate the FX revenue line entirely. As a result, you'll see the impact of changes in FX directly in our recurring revenue line rather than as a change in the FX revenue line. While this change will modestly reduce our reported recurring revenue, it will have little impact on our reported recurring revenue growth rate and no impact on our reported total revenue or profitability metrics. As we did last year, we intend to publish our historical revenue results at a recasted actual rate ahead of our first quarter earnings so that you have a chance to adjust your models. So where does that leave us? Let me wrap up by putting our fiscal '23 guidance in the context of our three-year financial objectives. Our guidance for fiscal '23 has Broadridge well positioned to deliver above the three-year growth objectives for organic recurring revenue and recurring revenue, in line or ahead of our margin objectives and with adjusted EPS growth at the higher end of our three-year growth objective range. Of course, we need to execute in an increasingly uncertain environment in fiscal year '23. By doing so, we will have delivered again on another set of three-year growth objectives. Just as we did in fiscal '14 to '17 and fiscal '17 to '20. That performance underscores the strength and consistency of our business model. Our strategy of growing our governance and capital market franchises and building a wealth management franchise as well as the long-term trends driving our growth. With that, let's take your questions.

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

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

Yes, from a modeling perspective, it's really incorporated in the guidance that Edmund provided. Stepping back a bit, we are pleased with the integration. What we are particularly satisfied with is the confirmation of our strategic thesis with our clients and the discussions we've had with them about how we fit into their plans. As we evaluate our technology architecture, we see how our product roadmap aligns with client needs, along with the strong commitment to service from both Itiviti and Broadridge, which is resonating well. We are observing market share gains that are generating the financial benefits we mentioned. To expand on the outlook I provided earlier, we believe there are significant opportunities in the front office over the coming years. There is a significant demand for next-generation solutions and we are being recognized as the right partner for that. We had multiple competitive wins this past year, driving over $3 million in sales, and we anticipate continued growth in this area. In the medium term, we see opportunities for geographic and asset class expansion, especially with a growing pipeline in North America where we have seen solid sales. We have the chance to introduce Itiviti to this market where it hasn't been as strong traditionally. Itiviti is also introducing us to clients in Europe, and there is considerable potential in exchange-rated derivatives. Long term, we aim to create a comprehensive front-to-back solution which has generated excitement among some clients due to existing inefficiencies where front and back-office data do not align. Bridging this data gap can significantly enhance traders' effectiveness. We are very enthusiastic about this direction and it aligns with all our expectations. Regarding your second question on UBS, there won't be any impact on our guidance for '23. We expect to start recognizing revenue after our fiscal '23 year, likely in the summer of calendar '23, which will fall into our fiscal '24. I'll stop there for now, but I’m happy to discuss the wealth platform further if anyone has questions.

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

Certainly. Over the past two years, we have experienced volatility, yet Broadridge has consistently expanded its adjusted operating income margins. In the last three years, we've seen an increase of over 50 basis points, with objectives set at 50 basis points, achieving 60 in fiscal '22, despite facing inflation and distribution impacts. We achieved the same 60 basis points in fiscal '21. Our business model allows for operating leverage by generating new revenue on our fixed infrastructure without incurring additional costs, especially as we shift towards a more digital operation. The efficiency gained from transitioning to the cloud also contributes to this. This enables us to continue expanding margins annually and provide additional capacity for investment. Given the uncertain economic landscape, we've decided to proactively implement measures to reduce costs and increase our investment capacity. These actions have already begun as we entered our fiscal '23 planning process, which is why I'm confident in sharing our projected annualized savings. This approach will help us address inflation impacts and maintain our investment strategy aimed at revenue growth, allowing us to align our earnings with our objectives and guidance. Ongoing investments will remain integral to our business model, supported by the operating leverage we've developed and our proactive initiatives.

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

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

Customer reimbursables.

Let me provide an overview, and then Edmund can add to that. We are experiencing good growth. First, the factors you mentioned are significant, with postage being a major element and another increase expected this year. The customer communications business, which has a lower percentage of digital compared to our regulatory business, also saw nice growth this year. This growth comes from acquiring new clients and increased volume from existing clients. We're pleased with these developments. While this isn't your question, I must highlight the increased digitization rates we've experienced over the past couple of years, now at 86% for proxy and 78% for funds. We believe that as we continue to digitize, distribution revenue will become a smaller part of our business. We were somewhat surprised by this year's results, but with the postage increase, it will be significant again next year. I'll now turn it over to Edmund.

I'll add to what you said, Tim. On a regular basis, I would expect distribution revenue to grow at mid-single-digit levels. However, due to the robust performance in our customer communications business and strong wins there, we have seen an increase that has pushed us to low double-digit rates, along with the postage increase Tim mentioned. Consequently, you are witnessing growth in our customer communications business consistent with the solid earnings we've achieved. It's important to note that both the customer communications distribution and postage contribute low or no margins for us. Therefore, even with higher growth rates, it doesn't significantly affect our overall earnings. While it does impact our reported margins, we are still able to achieve margin expansion despite these factors. This is a crucial point to consider when evaluating distribution revenue.

That's a great point, Edmund. I want to emphasize that when considering Broadridge, our focus is on fee revenue. In terms of growth and margin, fee revenue is truly our economic driver.

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

Yes, thanks, Pete. As we assess the current environment, we find that while the market has declined, the asset prices are still not particularly appealing. Our primary focus is on reducing the debt from Itiviti and achieving more normalized leverage levels. While we remain open to opportunities, our current priority is to pay down the debt.

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

Yes, I wouldn’t necessarily say it was stronger than the previous year, as we had exceptional position growth last year. However, across the business, we had really strong performance in customer communications this year. It was a solid quarter for ICS. I want to highlight the revenue from new sales that we observed in ICS as well. We often discuss position growth, and there was a time when ICS was primarily focused on that. However, when we examine the revenue from new sales, it represents a significant part of this year's growth. We believe this can be a long-term trend due to the innovation and new product launches we've implemented, making it a much larger component of the overall growth mix.

Let me add a few points to Tim's insights. You're correct that we've seen elevated growth in both the issuer and customer communications businesses. Last year, issuers experienced a growth rate of 21%, and this year we are seeing 14%. During the quarter, we maintained strong retention of our virtual shareholder meetings platform, which, while not a major growth driver, is crucial. Additionally, our disclosure products have shown significant growth, particularly as companies are looking to refresh their proxies and annual reports. We have been successful in securing that business. However, I don't anticipate that level of growth to be sustained consistently. In the customer communications sector, the onboarding of several large print and digital sales from the past year contributed to growth as well. The key takeaway for you, Puneet, is that we are confident in our long-term goal of achieving 5% to 7% organic growth from these businesses, which is what you can expect as we proceed.

For the VSM within issuer solutions, how should we assess the penetration rates for that market? You've been offering this for a couple of years. Is there a way to determine the percentage of the addressable market or the total number of issuers that are engaged with the VSM solutions?

Yes, it's Tim. In terms of penetration, we have seen a significant increase over the past few years. Back in 2019, we had 300 meetings, and now we have 2,500. Regarding whether this will revert, we are seeing that it won't. Our clients tell us that once they transition to this model, they notice the benefits, such as more investor participation and the convenience of not requiring travel. These advantages have kept clients from returning to previous methods. It’s important to note that future growth will likely be more incremental. Most of those who are going to make a decision have done so in the recent years. We anticipate a solid offering moving forward, but we don’t expect the same levels of growth as in the past; rather, we expect steady growth, one step at a time.

I'm trying to connect your positive comments about Itiviti with the actual revenue trends. It seems like it performed in line with your plan for the year, and you appear quite satisfied with it. However, it was a $250 million revenue business when you acquired it in early 2021, and it only generated $256 million in revenue this past fiscal year. This suggests it hasn't displayed significant revenue growth over the past year. So, how do you reconcile your positive tone with those figures?

Yes, Patrick. There is a revenue adjustment that occurs as part of the accounting for software businesses. When examining the previous revenue, there's a slight decline factored in during the first year, which we have since grown beyond. We expect to recover some of that in the upcoming year. This will lead to continued growth that exceeds the high single-digit trend mentioned by Edmund, which we view as a long-term trend. We need to evaluate it against our objectives, and on a like-to-like basis, it was double-digit this year. We are very pleased with that, as well as with our sales goals, where achieving over $30 million in sales from a $256 million business represents a significant percentage. Furthermore, earnings exceeded our expectations. Overall, all three metrics performed well, and our outlook remains positive regarding our acquisition case and beyond.

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

Well, the short important point on it is that it really offsets and makes our overall rate impact neutral or slightly positive as I think about the interest expense line. And then in the prepared remarks, I talked about interest expense for the $1.6 billion in variable debt that we have, having about a $35 million to $40 million impact. Our treasury teams and our business teams worked very hard to be able to recognize the rate increases that we see in the asset side as well as mutual funds. So you can expect the impact to be roughly the same amount on the asset off-balance sheet side of the ledger. So it's about a neutral impact as we think about those two impacts, both on the interest expense side and on the balances.

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

Yes, on the overall Q1, I expect that recurring revenue will show strong growth. We feel optimistic about our sales pipeline supported by a revenue backlog of $440 million. This backlog is a crucial factor for our growth, and everything looks healthy moving into each quarter, including Q1. Regarding total revenues, we anticipate a decrease compared to Q1 of 2022, which experienced nearly record event-driven revenue of over $76 million. We expect to come in below that. Additionally, the increased expenses from the previous fiscal year are contributing to Q1 being at the lower end of the 10% to 17% growth range.

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