SS&C Technologies Holdings, Inc. (SSNC) Earnings Call Transcript & Summary

All right. We will go ahead and get started. Thank you, everybody, for sticking around to join us. I'm Patrick O'Shaughnessy, capital markets analyst here with Raymond James. Up next, we have SS&C Technologies, and presenting on their behalf, we have Chairman and CEO, Bill Stone. Bill is going to go through a few slides, and then we will sit down and do some Q&A.

Thanks, Patrick. Just our safe harbor statement, and I think, all of our documents are in Washington, D.C., if you want to go take a gander. We've been around for a while, and we continue to do what stick to the knitting, I guess, is that we're a large-scale mission-critical supplier to financial services worldwide and health care delivery here in the U.S. We were founded in '86, from the grand old man that went down in my base and started this by myself and wondered what the hell I was doing, but it really kind of worked out. So now we have about 22,000, 23,000 employees. We have another couple of thousand contractors. We're in 93 offices in 35 countries around the world. And I think that some of the things that are pretty impressive is, is that we have 18,000 clients. We have a retention rate of over 96%. I think our recurring revenue is about 95%. And we had full guidance for this year with earnings of around $4.12 at the midpoint. And over the last 4 years, we did $1.33, $1.64, $2.92 and $3.83. So we've been very profitable. The last quarter and fourth quarter, I think the big thing is, is that if you look at that 80% operating cash flow and cash flow for the year was $1.328 billion and our EBITDA was $1.828 billion. So we've been very profitable consistently over a long period of time. We were often criticized from being too heavily into the hedge fund industry. So we're now 34% in the hedge fund industry and now we're criticized for being too heavily in the institutional business, but that's 38%. So it's not really that much of our business. We have 9% in health care. And our targeted solutions or things like we do some like 95% of all the municipal bond structure in the United States are structured on our software. 99% of all the commercial paper issued by corporations is issued on our software. So we have a number of those kinds of things. And then we have Black Diamond, which is our wealth management product that has about 1,500 RIAs. When you look about us, often people know our products more than they know our name. But we have Geneva, we have Moxy, we have Eclipse, we have TRAC 2000, we have PORTIA and CAMRA and MAXIMIS and a whole host of other ones, Intralinks. So 999 of the top 1,000 Fortune or Fortune 1000 use Intralinks. What does that mean? Well, we sell a lot of stuff into treasury management. So we have opportunities going there with a warm introduction now versus a cold introduction. One of them that we're meeting with is DuPont. So those are the kinds of opportunities we have. 40-plus fund administrators. We're the largest fund administrator in the world; 40 of our competitors run our software, 9 of the top 10 prime brokers. We have 75 of the top 100 hedge funds. We're the largest provider of retirement solutions. There's just a whole ton of stuff that we do for people around the world, and that's what makes our business so sticky and also highly cash flow positive. I got one of these slides like everybody else you've seen today, where we have a lot of big customers around the world. And I think that trend is going to continue. I think the opportunity for us is, is to figure out how to knit some of these things together and come out with new offerings for our clients all over the world and be able -- to be able to do more of the land and expand in each one of these big clients that we have. We build a lot of software. So in the last year, we built a fraud, waste and abuse application for our pharmacy business that can show you which physician practice or which pharmacy is writing or filling 10x as many opioid prescriptions as anybody else in a 5-mile radius or 50-mile radius, for that matter. So there's lot of insights that you have when you have our kinds of data. So there's a lot of stuff that we can do where we strip away the names and social security numbers and then be able to repackage it and sell it. We have a product called WalletShare that shows different wealth managers, who is buying what product, in what geographic -- geography and then also what demographic group they are in. So it's a lot of stuff that we've been doing. We do a lot of stuff with loans, and we do a lot of stuff with information processing. Our singularity product is rolling on AI and RPA and machine learning. And we're getting some traction there, and we've pretty excited about that, too. We've bought 55 companies. The largest was DST for $5.4 billion. We've deployed almost $8.3 billion in 2018 on acquisitions, '19 was a little bit less. We bought algorithmic side of IBM in December. But we've been acquisitive the whole time, and we like to get the kinds of people that come with those acquisitions, right? They're entrepreneurs themselves. They don't think we set the moon. They have better ways of doing things. And I think it makes for a really stronger organization. And it's kind of worked out for us. It really gives us, what I'd call, a kind of a quarry of intellectual property that really allows us to drive our business forward. We're primarily in the Americas. But again, we're a bigger company now. So 19% in EMEA, of $4.66 billion in revenue is like $1.7 billion in revenue. So it's a pretty big business. And Asia Pac is small, but it's growing pretty quickly. We've always had a high-margin business. You can see where we dipped in 2018 when we bought DST because their margins were about 19%. We now have their margins up, I think, the last year were 37.5%. So we do know how to drive earnings. We know how to drive revenue. We've always been a low CapEx and a high cash conversion company, and that continues. We also know how to pay back debt. So we're pretty focused on it. I get a cash report every week, every Friday. And if I don't get it every Friday, our CFO gets a call, and I get it every Friday. So it is something that we really pay attention. Now we would tell you management matters, focus matters. It matters every day, it matters every week, it matters every month, it matters every quarter, and it matters every year. And the more you pay attention, the better things will get. And so that's how we do it. And you can see where we've paid down debt on each one of these times that we've done this. And I think we got up to 6.8x when we went private with Carlyle back in '05. Again, this is that -- I know your portfolios of -- this is probably only okay. But it's really done wonders for my portfolio, right? So we do try to make more money, right? That's what we think we're in business for. That's what we try to do. We try to make more money. And we work for our shareholders. Okay, we also work for our stakeholders, and we love mankind, right? But mostly, we work for our shareholders. And I think that's our job and that's what we focus. And we've had a 26.9% compound annual growth rate since we went public in March of 2010. So sticky customer base, strong cash flow, high margins, and we have a focus on our shareholders. And so I think our capital allocation policies are stuff that people would agree with us on. So that's who we are, and I appreciate all of you staying this late to listen.

All right. Well [indiscernible].

Can I? Maybe. He's pretty talented, wouldn't you say?

Bill, so I think, as you touched on, SS&C's financial performance was pretty darn good during 2019. Your EBITDA margin grew by 240 basis points year-over-year. Your adjusted EBITDA grew by 43%. Your adjusted EPS grew by 31%, and you paid down $1.1 billion in debt. So your net leverage is back below 3.8x. Was that kind of the plan to start out the year? How did the year progress relative to how you thought it would play out?

I like those numbers. But I think that we started off, we thought things were going pretty well, and then like a number of very big deals, we thought we were going to close, like didn't close in the second quarter. Like what's going on? And we didn't know really what was going to happen in the third and fourth quarter. So we got conservative, and we came out and said, this is the -- this is our view right now. And then, of course, we hold a bunch of big deals in Q3 and Q4. We're a lot better than what we had expected. And I think the organization is bigger, and we're getting better. We're managing that tighter all over the place. And -- but it is something where DST added 14,400 employees and 2,100 contractors, and basically, took us from about 9,000 people to about 25,000 people. So that's a big deal, right? And so making sure that we did that right and kept the best people and start to kind of change from being passive to being an actively managed company that was aggressively going after new sales and had a very much of a focus on customer satisfaction. We've really driven customer satisfaction at the highest level. So that's something that we think we're going to be able to build on in 2020 and 2021.

So speaking of DST and speaking of 2020 and 2021, it's roughly, I don't know, I think I've estimated maybe 45% or so of your revenues, maybe somewhere in that ballpark. You estimate -- you expect that business -- the revenue to be roughly flat in 2020. I think you said plus or minus 1% on your fourth quarter call. What's the optimistic scenario for that DST business as you get the employee base more engaged, as you try to sell more services into the client base, what's the upside of that business?

Yes. I think it's really recognizing that the size of the clients that we got with DST are enormous, right? So if you look at it, it's Fidelity, it's Wellington, it's Capital Group, it's Janus Henderson, it's Columbia Threadneedle, it's Humana, right? It's these huge clients. And I think that they were content, right? They were content. But we're not content. We have a land and expand, right? So you have to get your supply lines right. You've got to get the right part of your team there. You have to listen. What do they need? How can we help you? We've had these big clients tell us that they have $200 million a year to give to us. But you've got to go earn it. And that term give, it is not true. You've got to go earn that money, and you got to be able to show them how you can do things for them that is going to make their business better. Now they are large institutions. And in a lot of ways, they can't get out of their own ways. And so we can come in, have a way more nimble approach, start showing them the things that we can do, and that makes a big difference. We re-signed Humana when the whole industry didn't think we had a chance. And not only did we re-sign them, but we're going to get into more and more deals with them. They're excited about what we can do for them. And I think that's something that we're proving with our client base on and on. And so once you get beyond the skepticism, which there was plenty, I think, we have a chance to start driving that. And then you can get to mid-single digits and then be able to maybe drive it even faster.

And I think building off of that, historically, the perception was that SS&C was a 5% to 10% organic revenue growth company. And that was, I think, the goal that you've typically set out for the company. You grew, I think, 3.5% on an organic constant currency basis on the top line in 2019. Your guidance for 2020 at the midpoint is slightly below that. So do you think the perception of SS&C's organic growth rate needs to change? Or do you think sort of things that you're doing with DST as can bring that growth rate back up to maybe where you were historically?

Yes. Usually people want growth so that they can get earnings. We like earnings, and we like cash flow. We think those are good things. So we've taken DST's EBITDA from $400 million to over $800 million. I think it threw off $800 million in cash last year. So maybe we could have got organic growth to go up 2% more, and then maybe we'd have got 40% of that. So 2% on their $2 billion is $40 million, and we'd have made 40%. So we'd have got $16 million more. Instead, we got $400 million more. Dumb s*** that I am, I should have went after that $16 million. But that's not how I look at it. I'm going to go get that $400 million. And if I don't get it now, it will be gone forever. Because pretty soon, you can't really do that. Bud runs that business, and bud's a good guy. Bud hasn't sold anything in 5 years. I don't want to hear about bud. I want bud to have a happy retirement. I don't want to get that $400 million because I'll get that every a year from now on. This year, we'll get $500 million. So we won't do $800 million, we'll do $900 million. And next year, we won't do $900 million, we'll do $1 billion. And all that money will go back into businesses that we can grow faster. And for instance, all the debt will be paid off, we'll own it free and clear, and we'll be throwing off $1 billion here. We think that's smart. Now we think organic revenue growth is smart, too. And I think that the market would pay us more if we had 3% organic revenue growth, and we had $3 a share instead of $3.83 a share. But being the old accountant I am and the cash flow focus that I have, I always thought you'd pay us more if we did $3.83 than if we did $3. But it's not true. We can lose $3 and you pay us for. We had $5 organic or 5% organic revenue growth. Just for me, it's very difficult to not go after that $400 million. And I'm telling you, when you have your companies that do these big acquisitions, if they don't go get those synergies right then, they're never getting them. They're never getting them because, humanly, it's very difficult, it's very hard. And if you don't go get them right then, right there, you've already done the analysis, you know. I was with a private equity guy, and he told me, when I told him we had 16,500 people, he says, "How many people do you think you need? 4,000?" I went, "No, it's more than that." But think about he sits there and thinks, you need 25% of that workforce. I think that's aggressive and probably wrong, but this guy's anything, but dumb. So if the opportunities in most of corporate America isn't how slender we all are, right, there is opportunity in every corporation in America all over the place. So it's trying to do it in a way that you keep as much morale as you can, you keep your best people and you keep your best opportunities.

I think that point that you just raised about private equity is interesting because, obviously, when you're competing for acquisitions, private equity is one of the entities or several entities against what you are competing. If they're going in with a mindset of, hey, we can take out 75% head count, how do you actually win these deals?

Well, that's a great question. And that's why they're kind of way more competitive player. And I think this truth is the one that really taught them that, that's a possibility. And we're pretty tough guys, too, but we ain't that tough. Life's too short. We like to make money. We like to make money for our shareholders. We like to make money for ourselves. We like to be able to be good citizens. We ain't cutting the 75% of workforce. That ain't happening. I mean, I've got to wear a flak jacket now, I don't want to cut benefits out of the workforce. So you think you've got to kind of take -- you've got some of this and try to understand. But it is true, the United States corporate businesses are very flabby, and there's opportunity all over the place. And it's very difficult for the communities where these places are that their workforces have ballooned, right? Their growth rates have stagnated. Their profitability is falling. And the only way to change it is to put a change agent in there, and that's very, very difficult.

You spoke earlier about reinvesting your cash flow savings in other faster-growing parts of the business. What are some of those parts of the business that you are investing heavily in right now?

We really like real assets, so we're doing a lot of stuff in delivering solutions in the real asset space. We really like private equity. Real assets are probably growing 30%, 40%. The private equity is growing 10% to 15%. Our Black Diamond business is probably growing 20%, 25%. We think our RegTech business is probably growing 40%. So we have a lot of really good business. Hedge fund business is still growing 5%, 6%. So we're trying to look for both bolt-on acquisitions and other technologies that we can bring in those spaces and add to our repertoire.

So with your Fund Admin Business, and more broadly, not just real assets and private equity, but also including hedge funds, when you have a week like we did last week, how sensitive is your business model to market downturns? How resilient is it if there were to be an extended bear market?

Well, I mean, we've all gone through the biggest bear market in our history, right, '08, '09, of S&P 500 from [ a height to a slow ] drop 43%. And our revenue dropped from $280 million to $270 million, and our EBITDA dropped from $113 million to $111 million. Now we're a way bigger place than we were then, but nevertheless, right, we don't have that much exposure to the market. We have a probably $1 trillion in hedge funds. 35% of that is long/short equity. Of that 35% that's long/short equity, it's probably a net 40% long. So 40% times $350 billion is about $140 billion. That's what would be impacted by a long term.

Is there any market risk on the private equity side? I mean, I know that they don't like to cut valuations, but how long can they wait before they say, hey, the market is down, we've got to mark-to-market?

I mean, I think most of those guys in private equity would have to be in a hospice before they're ready to cut their valuations, talking about something they're allergic to.

Fair enough. So your leverage was 4.5x at the end of 2018. It was down to slightly below 3.8x at end of 2019. Where are you in terms of having the capacity, I guess, not just financially, but also operationally to engage in more transactions of meaningful sizes?

We'd do it now. If we could find something, we would spend $5 billion, $10 billion. And we want to have a right price. We want to have a pathway that -- to high profitability and big cash flow and all kinds of things that we operate for. And I think we would like to have maybe more revenue per head count. And I don't think we want to do something that has so much head count like we did with DST, but sometimes that's all you can get if you want something that you're not paying 10x revenue for. And we're a little allergic to 10x revenue.

Does the fact that the credit markets have locked up a little bit recently, does that give you any pause in terms of your interest in doing deals? Or is the assumption that OEMs, they lock up for so long, rates are actually low, they're very attractive, that actually makes financing deals that much easier?

I mean, I haven't tried to raise a lot of debt right now, but generally, SS&C is a very, very well-respected debt credit. And basically, most of the big banks have told me I could borrow whatever I want. So that's a little scary that they say that, but I think they mean it. So we -- right now, our term loan B, which virtually have $5 billion outstanding, is at 3.6%. 3.6%, when you're generating $800 million in cash flow on DST, 3.6% times $5.4 billion is a couple of hundred million dollars. You generated $800 million, you paid $200 million in interest. That's a pretty good trade. I mean, again, for me, and not for you guys, but...

All right. I'll pause for a second to see if there's any questions in the audience. All right. Then I will keep going. So I think when you bought DST a couple of years ago, there was some speculation, hey, how long are they going to hold on to the health care assets. But now you spoke today about re-upping the Humana contract. And it seems like that is an asset that you intend to hold on indefinitely at this point. Is that kind of the right way to think about it?

I think so. I mean, I think we see that as an enormous TAM. We see it's primarily dominated by health organizations and insurance organizations. And we think it's a transaction processing business and information delivery business. And the more we bring technology to bear, the more they're not going to be able to keep up. And we will get consistently stronger, and then, relative to us, they'll get consistently weaker. And that's what happened in the Fund Administration business. And we went from 0 assets under administration to where we're almost at $1.8 trillion in the last 18 years, and we think we can do the same thing.

And then maybe one last question. Share repurchases. So you have, I think, probably higher and better uses of your capital sometimes. But you have -- you did do some share repurchases during 2019. What is your philosophy on those relative to the dividend, which you have raised, and then, obviously, acquisitions?

Yes. I mean, the dividend, we raised 25%, I think, from about, what, $0.10 a share to $0.125 a share per quarter. That $0.10 a share on 250 million shares outstanding is only $25 million. So it's -- that is relatively insignificant. We have between a 7% to 8% free cash flow yield on our stock and buying that back from a finance standpoint versus paying down 3.6% debt, that's tax deductible, which means it's really only 2.8% debt. And I got the finance. The question becomes is, what makes the most sense at that point in time and then how many shares are you willing to buy and at what price. So we try to go through that all the time. We try to be thoughtful. We try to do what any owner would do, right? That's what -- we're trying maximize shareholder value. And it's not always as clear as some people think it is. And I can assure you, I'm a pretty large shareholder, and I like the stock price high better than I like the stock price low. And so we do what we can do, but we don't do stupid. We're not going to do stupid. So we're going to execute. We're going to generate more revenue. We're going to generate more earnings. We're going to generate more cash flow. We're going to have a good sales force. We're going to have a good employee base. We think we have a very good morale inside our company. We pay them very well. They get large swaths of bonuses and options. We bought DST, they had 300 people in their equity program. 300 out of 14,400 employees. Within 60 days, we granted options to almost 7,000 people, right? They had 800 people in our bonus program. Within 60 days, there were more than 10,000 people in their bonus program. And the only people that aren't in the bonus program get paid over time. So it is trying to spread the wealth across the entire employee base. And when we bought GlobeOp, we had 2,400 people, they had 3 people in sales. We thought that's a bad ratio. So we're trying to turn these organizations into businesses where you have some predictability. You have some incentives and people driving themselves rather than us in our ivory tower trying to come down with an oracle here and there. That's not the way we operate. Rahul Kanwar, my President, and myself, we go out and meet customers. We go out and try to win deals. We get on the phone. And that's what we think is our business. We're not run-the-company people. We're not the corporate types that are up in our offices, gazing out, thinking great thoughts, trying to decide what shall we do tomorrow. I think maybe I'll have an omelet. We go out every day and try to close business. We're a very high-margin company. If we get sales, life works.

I think that's a good place to end it. Thank you very much.

Good seeing you.

Good seeing you, too.