Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Broadridge Financial Solutions, Inc. (NYSE: BR)
NOTE TO EDITORS: The Following Is an Investment Opinion Issued by
Believes That Broadridge’s Claims of Being a Fintech Leader with SaaS Qualities and a
Raises Concerns That by Aggressively Capitalizing Hundreds of Millions in Project Development Costs Related to Building UBS’s Behind Schedule Wealth Management Platform, Broadridge is Circumventing a Debt Covenant Violation
Believes That Its Recent
Provides Evidence That Suggests a High Likelihood Broadridge Has Come Under Recent Regulatory Scrutiny From the SEC
Spruce Point Report Overview
However, Spruce Point’s forensic research findings suggest there are many valid challenges to Broadridge’s self-serving positive assessment of itself. The key findings of our research indicate:
- Broadridge is Not a Fintech Leader and Lacks SaaS-Like Qualities. Approximately40% of Broadridge’s revenues are tied to mundane, low value-added business process outsourcing (BPO) activities such as printing and distributing credit card statements and financial documents, some of which carry no margin. Broadridge also promotes its “Recurring Revenue,” but we don’t believe this business is high quality or worthy of a premium multiple to other financial technology peers. When recently probed by the SEC about the effects of pricing and volume on its revenue reporting, Broadridge revealed that it is mostly volume driven and changes in prices are not a primary driver. Lack of pricing power, through regulated or market forces, is suggestive to us of a company providing a marginally beneficial service. Moreover, Broadridge lists “Scale and Natural OpEx leverage from a SaaS business” as its #1 driver of Non-GAAP operating income margin. However, Spruce Point does not believe that Broadridge is a high-quality SaaS business as its financials look nothing like one. When conducting a benchmarking analysis of Broadridge’s deferred revenue relative to its recurring revenue, we find it to be 11%, which is wildly below notable SaaS companies such as Salesforce, ServiceNow or Workday at 50%. Furthermore, relative to Broadridge’s own selected financial and information technology peer group, we find that the Company’s gross margin of 28.0% is dramatically below its peer average of 55.3%.
Multiple Signs and Evidence of Rising Financial Stress. Broadridge is perceived as a stable, infrastructure-like investment that is immune to market pressures. However, Spruce Point believes the Company is experiencing both short- and long-term pressures that are impacting financial results. For example, we observe a multi-year decline in corporate issuers, broker/dealers, and institutional investors within its ecosystem. New technologies such as blockchain may also disrupt and disintermediate Broadridge. Recently, upon the departure of its CFO in 2020, the Company stopped providing Free Cash Flow guidance – which has continued its downward trend – and has also stopped reporting backlog that’s not yet live. Additionally, the rift between Broadridge’s GAAP and Non-GAAP results are diverging at an increasing rate. Absent the recent
Itivitiacquisition and UBScontract (discussed in the following sections), we believe the Company’s organic operating cash flow declined 18% in FY 2022. The Company’s working capital has been negative in six of the last nine quarters, and it recently made updates to its “Forward Looking Statements” and modifications to long-standing statements in its 2022 Annual Report. As Broadridge’s customer concentration increases, it has been putting less emphasis on its client revenue retention metric. Consistent with many struggling companies that Spruce Point has analyzed, Broadridge has made multiple recent revisions to its segment reporting, which even affected its “Closed Sales” metric. Ironically, the change was implemented in 2021 after Closed Sales grew just 1.4%, a multi-year low growth rate.
Aggressive Cost Capitalization Despite Evidence of a
Struggling UBS Partnership. In 2018, Broadridge announced a partnership with UBSto “redefine” wealth management technology in North Americaby developing a front-to-back end wealth management platform. However, Spruce Point believes it is a mismanaged project without any revenues recognized by Broadridge in almost four years. Throughout, management has struck an overly optimistic tone and only recently acknowledged delays, claiming revenue by mid-2023. Yet, Broadridge counted revenue towards Closed Sales in year one, allowing it to reap unjust cash incentive compensation in 2019. Broadridge is not disclosing how much it has sunk into the project’s development costs, which are accumulating on its balance sheet under “Deferred client conversion and start-up costs.” There is a large discrepancy between what’s shown in Broadridge’s investor presentations and the imputed capitalization costs on the balance sheet. We estimate Broadridge has invested between $1.0– $1.25 billion. By comparison, UBSannual revenue potential is at best $70 million, and margins are projected to be below average. Since 2018, the total number of UBS Americaswealth advisors has declined by approximately 11%. We estimate it will take Broadridge 71 – 83 years to recoup its total investment in the UBSproject, and its Present Value (PV) is only $209 million, well below the $1.0 billionor more estimated investment. Furthermore, we think it unlikely Broadridge will be able to extend the sale of the UBSplatform across other wealth management companies to plug the hole. Based on these findings, we believe the Company should immediately cease capitalization of costs, commence expensing, and take an impairment charge. Of note, Broadridge replaced its Chief Technology Officer in July 2022, added a risk factor warning about potential asset impairments when it filed its Annual Report in August 2022, and advertised an open job position for a Chief Accounting Officer. We believe Broadridge will be in violation of its Leverage Ratio covenant at 3.5x but has avoided tripping it through an aggressive cost capitalization policy.
$2.5 BillionLevered Acquisition of Itiviti Likely to Disappoint, Leaving Broadridge Vulnerable in the Current Economic Correction. In May 2021, Broadridge completed the acquisition of Itiviti, a private equity backed roll-up, thereby extending its capital markets capabilities to front office trading connectivity technology. Broadridge paid €2.1 (~$2.5) billionfor Itiviti, placing a 10x multiple on its €210 million of sales and increasing debt by $2.2 billionwhile pushing its leverage ratio from approximately 1.5x to 3.6x. We believe Broadridge was attracted to Itivitibecause: 1) Its high operating margins, claimed to be 30%, 2) It presented an opportunity to increase its overall Total Addressable Market (TAM) by $6 billion, and produce revenue synergies, and 3) It also presented the opportunity to increase its recurring revenue by 100% of Itiviti’s revenue contribution. Spruce Point finds multiple holes in this story. According to Moody’s, a credit rating agency which was privy to Itiviti’s management and insights about its business given its public debt rating, contracts were shorter than Broadridge management’s claims, and the recurring revenue mix was less than 100%. Furthermore, nearly $4 billionof the promoted $6 billionTAM are financial institutions’ in-house solutions, which we believe will be harder for Broadridge to crack. In addition, in less than a year after the acquisition, Spruce Point observes that the Company switched the story by claiming $6 millionof unexpected “cost synergies.” We believe the 30% promoted margins look closer to 20% and have been dilutive to Broadridge’s GTO segment performance. Going into the current economic correction, Broadridge is the most levered it has been in its public history, with the least amount of cash liquidity, and has extremely low cash flow available for debt reduction since it has made a growing commitment to paying a $340 millionper year dividend obligation.
Multiple Indicators Suggest a High Likelihood Broadridge Has Come Under Recent Regulatory Scrutiny. Spruce Point observes that Broadridge updated its Code of Business Conduct and Ethics Policy (“Policy”) twice in February and
August 2020, and yet again in August 2021. In these updates, the word “fraud” was added three times, and the 2021 update specifically added eight points regarding accurate period reports and accounting. In 2022, the Policy was updated again with strongly worded changes that suggest it is dealing with active audits and investigations. The Policy contains more explicit guidance as to how to respond to a regulatory or governmental inquiry for information. We believe these multiple updates are highly concerning in context. For example, Broadridge’s CFO departed in 2020, and it subsequently revised its Clawback Policy specifically in the event of an Accounting Restatement. Broadridge also recruited a new Chief Legal Officer with six years of SEC experience and added a former SEC Commissioner to its Board, as well as the outgoing Chairperson of FINRA. Lastly, the Company also recently received a SEC Comment Letter in March 2022questioning its financial presentation and disclosures.
We Estimate Between 65% – 75% Downside Risk to Broadridge’s Share Price. We believe Broadridge trades at material premium to the sum-of-its-parts at approximately 3.7x and 16x 2022E revenue and EBITDA, when approximately 40% of its revenue is tied to low / no margin printing and distribution services. However, we’ve detailed numerous reasons we believe it should trade at a discount to peers, including its below average gross margins, declining free cash flow, an aggressive cost capitalization policy allowing it to avoid tripping a debt covenant, and consistent insider stock sales. Based on our application of a generous 1.0x – 1.2x and 2.5x – 3.0x multiple of 2022E ICS and GTO revenues, we estimate a price target of
$37.35– $52.30per share price target, representing 65% - 75% downside from today.
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.
As disclosed, Spruce Point has a short position in
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