Broadridge Financial Solutions, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Broadridge Financial Solutions, Inc. is a global Fintech leader providing investor communications and technology-driven solutions to banks, brokerage firms, and corporate issuers. It also provides services to wealth and asset management, and the financial markets in general.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Broadridge operates primarily through two segments:

  1. Investor Communication Solutions (ICS): This segment focuses on providing regulated communications, data-driven fund solutions, customer communications solutions, and various other services related to securities and mutual funds. These services are typically provided to broker dealers, banks, and other financial intermediaries. It includes services such as trade confirmations, prospectuses, proxy statements, and other regulatory communications. 2. Global Technology and Operations (GTO): This segment provides technology-driven solutions and data analytics capabilities for various financial operations including trading, investment management, wealth management, and global clearance and securities services. This segment works mainly through their platforms and other enterprise solutions.
A notable trend for Broadridge is its shift towards recurring-revenue models, away from transactional-based revenue which provides more stability. In the Investor Communications segment, the company seems to be going further into digital communications and mobile engagement. There's also a big push towards integrated solutions that can meet the evolving needs of clients.

Industry Trends

  1. Digitization and Technology Adoption: The financial services industry is undergoing rapid digitization, with increasing demand for digital communication solutions, automation of processes, and cloud-based platforms. Broadridge, being a tech player, is poised to benefit from this trend and further enhance the demand for their products.
  2. Regulatory Landscape: The financial services industry is heavily regulated, and regulatory changes can significantly impact companies’ operations. The need for compliance solutions continues to be strong as regulations change. This benefits Broadridge since they provide solutions in this area.
  3. Shift in Client Preferences: Clients are focusing on solutions that improve cost, enhance efficiency, and provide enhanced user experience. This shift also favors companies with a focus on technology and a digital client experience.
  4. Increase in Complex Financial Transactions: As financial markets and instruments continue to increase in complexity, demand for robust and efficient infrastructure to facilitate such transactions, which Broadridge provides, also increases.

Competitive Landscape

Broadridge operates in a competitive landscape where it is seeing increasing competition, especially from smaller and new companies that are building their own tech stacks, or are providing niche solutions. They tend to specialize in a single thing while Broadridge is trying to provide many different products. The company faces competition from:

  • Internal IT departments of large financial firms that could develop their own in-house solutions. This can be a threat if a big client switches over to this method. * Specialized FinTech companies focusing on specific niches in the financial services industry. These can sometimes be more disruptive because they’re more flexible to take advantage of new things.
  • Large enterprise software providers with broad technology offerings in multiple industries. These usually have much more resources and are always trying to find new industries to enter into.
  • Other data and analytics firms that might offer niche solutions and try to steal a piece of their client base by making it more valuable for the client.

However, despite competition, Broadridge’s scale, network of clients, and long history give it some competitive advantages. Its focus on innovation, strategic acquisitions, and expanding to new markets and solutions also makes them competitive.

What Makes Broadridge Different?

  • Scale and Breadth: Broadridge possesses a massive scale and broad product portfolio, which helps it meet varied client needs.
  • Client Relationships: They have a long history in the industry, and with that comes strong and long-lasting client relationships. They act as a trusted partner, and usually, their customers are very reluctant to switch to any competitors.
  • Technology Focus: Broadridge is seen as a technology leader in the industry, with a continued focus on building new and better platforms for their clients.
  • Recurring Revenue Model: The company is continuing to shift its business towards recurring revenue which creates a predictable stream of cash flow.
  • Compliance and Regulatory Focus: Given the company’s history and compliance and regulatory focus in the financial industry, they are well-suited to benefit from stricter regulations.
  • Strategic Acquisitions: Broadridge has made key acquisitions, which allow them to enhance their solutions and expand their reach.
  • They are not afraid of exploring new areas or sectors, which is evident from them expanding into digital communications and mobile engagements.

Financial Analysis

Broadridge’s financials are generally strong, with stable and recurring revenue.

  • Revenues: Overall, they have seen growth, with a total of $5,847M in the fiscal year ended June 2022, a 9.5% YoY increase. Investor Communications Solutions makes up the vast majority of the revenue with 73% of the total, and Global Technology and Operations makes up 27%. Both segments saw YoY growth.
    • Recurring fee-based revenues (including recurring contractual and recurring processing) in 2022 were 84.4% of the total, indicating its high and stable customer base.
    • A worrying trend could be a drop in the share of variable fees to revenues in the ICS segment, indicating that less value may be generated by these services. It is vital to keep a close eye on the development of this category.
  • Earnings: Net earnings for 2022 are $572.2M, which is a 5% increase YoY. Basic earnings per share were $4.84, and diluted earnings per share were $4.61. This shows a healthy growth.
  • Looking at adjusted earnings (non-GAAP) tells a little more of the story. Adj. earnings for 2022 was $891.8M, or 13.7% growth YoY. This indicates that GAAP figures may include a lot of restructuring costs, asset write-downs, and other one-time items which makes their profitability better than what GAAP figures would portray.
  • Margins: Operating margin increased from 13.1% to 14.1% and adjusted operating margin increased from 19.6% to 20.2% YoY, indicating a very profitable enterprise.
  • Balance Sheet: A healthy balance sheet overall, with total assets of $7.21B and $3.38B in equity.
    • Cash on hand was $227M which should be more than enough to handle their day to day operations.
    • Long term debt of $3.5B needs to be paid back in the future, but the company has consistently demonstrated its ability to pay back debt.

However, there are some problems to note:

  • They have a fairly large long-term debt of $3.5 billion, which constitutes a large portion of their capital structure.
  • Some revenue streams, especially in the GTO segment, are highly dependent on transaction volume, which can be volatile.
  • Their reliance on long-term contracts also make them vulnerable to disruptions if something goes wrong.

  • Goodwill makes up almost half the assets, which isn’t that concerning at the moment, but goodwill tends to lose its value over time. This may cause problems for the company in the future.

    Risks to the Moat

    • Technological Disruption: Rapid innovation in fintech can render some of the company’s offerings obsolete. To defend against this they need to be vigilant and continue to innovate and provide solutions that are state-of-the-art.
    • Increased Competition: Increased competition may erode the company’s market share and profitability. They need to focus on strengthening relationships with their clients and provide solutions that are extremely sticky.
    • Regulatory Changes: Changes in financial regulations could require expensive modifications and reduce the demand for Broadridge’s compliance solutions. They should remain agile and be able to quickly adapt to new requirements.
    • Mergers and Acquisitions: Rapid M&A in financial industries could impact the need for certain types of solutions, and the company must understand the landscape of companies to properly integrate them.

Business Resilience

  • Recurring Revenue Model: This provides a stable source of income.
  • Diversified Product Portfolio: They have different products and services across many different areas in the financial world, reducing reliance on any one client.
  • Long-Term Client Relationships: They have long term relationships with established financial institutions and companies that usually don’t switch to a different provider, reducing the risk of losing clients.
  • Compliance Expertise: Given the complex regulations of the industry and the risk of big fines and problems for financial institutions, the company will likely continue to stay relevant due to their expertise and know-how.
  • Strong Financial position and cash generation: This also allows them to quickly react to crises and to fund future opportunities.

Understandability Rating: 3/5

Broadridge’s business is relatively complex, but it is still understandable with effort. The core idea behind the company’s operations is easy, as it provides important solutions for securities trading and financial instruments. However, delving into the specifics of those technologies and the various regulatory constraints, as well as many one-off and extraordinary expenses they have, can make it more difficult for someone to understand the business fully. The structure of a financial services and technology provider requires an understanding of both, which can also increase the complexity.

Balance Sheet Health: 4/5

Broadridge has a mostly strong balance sheet. It has high revenue, profits, a consistent free cash flow. However, it does have a high level of debt and a large proportion of goodwill that may need to be written down in the future which lowers the score a bit.

Overall Moat Rating: 3 / 5

Broadridge has a narrow but solid moat, mostly because of high switching costs and client lock-in, but it faces major risks in areas such as competition and technological disruption. Its moat needs to be reviewed frequently to ensure its future success.