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

Hi. Good afternoon. I'm Chris Donat. I'm a financial technology analyst at Piper Sandler. And thanks for joining us for the next fireside chat. We've got today as part of our Global Exchanges and Financial Technology Conference. With me is Patrick Pedonti. He's the Chief Financial Officer of SS&C Technologies. He's been CFO since 2002. I will mention that I'm grateful to Patrick for using our Piper Sandler background. SS&C, the tagline is -- hang on a second, Smart People, Great Technology (sic) [ Smart People, Superb Technology ]. And anyway, for those of you who are customers, I think you know the power of their technology and their people. So anyway, thank you, Patrick.

I'm just going to jump right into a question here because these are unusual times. But the first one I want to start at is in terms of how business is going, what are you spending your -- what's management spending their time on? I imagine your current clients are calling in with a lot of questions and needing to make sure everything is working. Does that distract you from dealing with prospective clients? Or is it still kind of business as normal in some ways for the -- as we think about future organic growth?

Yes. Thanks, Chris. Thanks for inviting us, and thanks for being on. Yes, our main focus initially when this crisis hit was servicing our clients. We've always had contingency plans in our business to operate remotely, and those contingent plans are you say around 1 building going down or 2 buildings going down and having to operate remotely. We never thought we'd have to have 22,000 employees working remotely. We essentially have 99% of our worldwide employees operating remotely right now. And the good thing we found out is that our contingency plans work really well. And I think the main reason is that we've always used our own data centers. We've always had our own data centers. We've managed our own data centers. We've managed our own technology. So when we have to move 22,000 people remotely, we were able to quickly add broadband capacity, other technology, so that our employees could work remotely. So that's been our main focus is servicing our clients. And it's obviously troubling time. Some have had some issues, and we've been there to service them as much as possible. So that's been our main focus. We've also got our sales force operating remotely. The difficulty there is we still can't travel. So to a certain extent, outsourcing deals, smaller deals are still easy to close and implement because those are generally done at our locations with our people. Large-scale deals are a little more difficult without being able to have salespeople or consultants visit our clients. But I think this is kind of an opportunity for us because we'll be able to showcase our capability. And either clients that have problems with their current providers or maybe are not able to operate their internal operations remotely, I think this will help us in the future and seeing more clients move to full back-office outsourcing.

Okay. And as we think about the -- how it affects sales, like people can't get on the road. You can't meet with clients. But one thing we're hearing from other companies is that there are certain opportunities that come with that, that now it's easier to get on a Zoom call and demonstrate things, which may be opens -- I think that the funnel -- opens the funnel a little bit wider. But then on the other side, doing due diligence in a complex implementation, getting all the Is dotted and Ts crossed is a little more difficult. Do you have any sense on how sort of that -- is that how it's shaking out for you and your sales force in the implementation side? Or any color there on...

Yes. Pretty much. I think what we had -- as always, we had a backlog of new deals and process, some closer to signing, some maybe a little further behind. But a lot of those are progressing pretty well. I would say that what took 30 days before now have taken 45 days. So we're actively using Zoom technology throughout the company and with clients. What's a little bit more difficult is complex software deals where clients are implementing those in-house. And typically, we would do that at the client's location. And those are ending up being a little bit more difficult and taking a little bit more time. And then I think things are opening up a lot more recently. Things are definitely improving. But if you look at March and April, I think it was hard to get clients to focus on implementing new software when they were probably having a lot of other problems to deal with. But I think we're starting to see things open up in May and June.

Okay. So I want to talk a little bit about your guidance for 2020, and SS&C, typically, you'll guide for the next quarter and for the full year from revenue and net income. In this scenario -- in the current environment, completely understand why you decided to go with 3 scenarios. But what really struck me about the 3 scenarios is they highlighted how resilient your business is and how much even in the scenario that was most pessimistic, you gave us, earnings would only fall 6%. So can you talk a little bit about where recurring revenue and how much you -- it's sort of like the dog that doesn't bark. And from a certain perspective of asking, like, it doesn't look like you're going to lose much in this environment.

Yes. I think that's true. I think we've proven that our business is pretty resilient the last financial crisis in '99, 2009. So let me just go through like our different segments, and I think that will be helpful. We've got like 3 factors in our business that make it resilient during these kind of uncertain economic environments. One is, as you said, we've got high recurring contracted revenue. Over 90% of our total revenue is contracted and recurring. And there could be price fluctuations in there, but it's recurring. The second is with the right critical software and services to our clients. And if they're running a portfolio, they need our systems. So even through this crisis, we've maintained high retention rates. And we'll probably -- we expect to continue to maintain over 95% retention rates. And so kind of those are the 3 factors: high recurring revenue, critical systems and high retention rates. And if you look at our revenue, our software-enabled services revenue, which is mostly outsourcing and hosted software, typically on a subscription basis, I think that's about 84% of our total revenue. That revenue is contracted. It can fluctuate based on assets under management or transaction volumes. But typically, even under these scenarios, it doesn't fluctuate up or down a whole lot based on economic factors. In that software-enabled services, there's about $1 billion of fund administration. That's typically priced assets under management. And then there's a significant amount of business, like transfer agency services, that are priced either number of accounts or number of transactions. And we're really not seeing a number of accounts drop during this period. And then there's about, I don't know, like 10% to 12% of our revenue that's term license and maintenance for software we sold. Those are typically either annual contracts or 3- to 5-year contracts, somewhere in that range. So those are fixed prices. They don't fluctuate based on the economy or assets under management. So that's pretty a resilient business. So when you look at it, 95% of the business is pretty resilient. And that gives us the ability to manage our costs because we've -- we know how much we've got a certain amount of business, and we can manage our cost structure around 95% of our business.

Yes. I wanted to ask one revenue-related question there on exposures because I think there's a perception in the market that -- and it might be because of investors who are -- or asset managers who use SS&C products or the ones I'm dealing with are often using it through the hedge fund administration business. And therefore, I think there's a natural bias that you think that the whole company looks like the hedge fund administration business and is based on assets under management and/or administration as the key revenue driver. Looking back at some comments that Bill Stone had made at a conference in March, he gave numbers that I think are probably still holding even though it's a couple months later. But then you got $1 trillion in hedge funds, but then 35% of that's long-short equity. And then -- and of that -- of the 35%, 40% is net long. So anyway, Bill said, you start with $1 trillion, but it can kind of walk you down to $140 billion being asset base so, call it, 14% of hedge fund assets. Is that still sort of true when we think about your sensitivity to market levels? It's just a fraction of your -- a small fraction of your revenues?

I think it's still true. And I'll point to our first quarter results. So I think overall, in all our fund administration business, including hedge funds or private equity funds and real assets, we had about $1.7 trillion of assets. And from December 31 to March 31, those assets were up about 1%. Now a lot of that increase was due that we signed a bunch of new business that helped us out, especially private equity and some of the real asset business. But if you look at the hedge fund segment there, hedge funds assets on our system from December 31 to March 31 were down 3.5%. And the S&P 500 on March 31 was down 19%, right? So I think that shows -- number one, they're hedge funds. So a lot of these guys are hedged. Our clients are typically large, worldwide hedge funds with very complex strategies and not typically, like you said, long/short hedge funds. So they're mainly maybe more impacted by the downturn in the stock markets. So -- and that factor is the same on the upside, right? So it's a pretty resilient business. And even when the market is down 19%, our assets on our system are only down 3.5% as of March.

Okay. So that's one area of concern I'll hear from investors is that you have -- that you've got some exposure to -- you're asset-sensitive basically for your asset -- call it, asset management under -- or assets under administration business. Second area of concern I often get from investors is what are flows doing from hedge funds. And SS&C does us a favor of putting out on a monthly basis your redemption indicator and some other metrics around what we see for hedge fund activity. I thought it was striking that the most recent data showed that assets were down -- or sorry, redemptions were 4%, which is pretty consistent for May with what we've had in prior years. I was just wondering if there were any trends below the surface of that data, the components that make up that 4% redemption number that we're striking. Or are we sort of surprisingly normal in dealing with all the volatility and economic dislocations?

The underlying data has been pretty normal. We haven't seen -- I mean, at least in our client base, I mean, we haven't seen any hedge fund blowups. We haven't seen significant redemptions. And I think -- I mean, I'm not an expert here, but I think we had a quick downturn, and then the market started coming back up again. So I think that really slowed down any redemptions of people getting out of the market quickly. But we haven't seen anything other than what's kind of normal seasonal during this period on hedge funds or any of the other underlying assets for redemptions.

Yes. To me, that speaks to the resilience of the business. And it might be a little surprising to people that you expect that there should be some changes here. And so far, there haven't been in the -- I would think the redemptions would certainly be where it's more likely to show up first, but like I said...

Yes. I think what helped is -- I mean, there was this, I think, like a 2-week debt market crisis, right? I think that can hurt us as much as equity markets, right, if you have like the debt markets kind of freeze up and hedge funds have to delever. And we didn't see that. I think the Fed came in really quickly, and the debt markets recovered quickly. And I think that's helped stabilize redemptions.

Okay. So moving on from some of those revenue-related questions on to expenses. In the scenarios you gave with your guidance for 2020, can you talk about what expense levers you have? I imagine T&E is going to be down way -- down significantly; marketing, I'm guessing lower. Anything with new hires that we should be thinking about? Or anything that might have a meaningful impact on expenses that you're doing differently?

Yes. What -- I mean, if you look at our expense structure, there are really 3 categories. There's personnel-related costs, technology and facilities. And then there's a bunch of discretionary spending like marketing and travel and some other stuff. What we focus on is controlling personnel costs. So I mean, we're constantly hiring for growth, and we're constantly hiring for attrition. And during these times where we've seen a slowdown possibly in our revenue or it's running flat, we just slowed down hiring and slowed down attrition replacement. And that gives us the ability to manage costs. So about 65% is personnel costs, and about 60% of those costs are cost of sales personnel costs. So we'll manage those costs there to maintain our gross margins during these times. We'll continue to invest in sales and development. We won't hold back there. But we'll manage our gross margin line during these periods, and it's mostly done with personnel.

Okay. I realize I meant to ask one more question when I was on revenues. Just your outlook for organic revenue growth, and I recognize this represents the scenarios. But because your organic growth in the last couple of years had lagged a bit what it had been historically. I would attribute that to -- you did 3 large acquisitions in 2018, then you had to integrate them in 2019, and management's time is probably better finding expense synergies than growing the business. So at the start of this year before the pandemic, I thought we'd see a nice lift in organic revenue, but that was before the pandemic. So how are you thinking about organic revenue and your ability to either sell new offerings to existing clients or go out and generate new business with new customers?

Yes. You're right, Chris. I mean the key to our growth is going to be winning new business. And that's a little -- it's difficult in this environment. So in the scenarios, we expect organic growth to be anywhere between negative 2.1% and around flat in the best scenario. So that's what we're expecting now. If you look at our business, I know you mentioned some of our growth was not what people expected in the last couple of years. And I think it's a result that we did a large acquisition, which is DST, which essentially doubled our revenues. DST was a company that was struggling. I mean they had really struggles in growth. The growth was either down single digits, sort of down mid-single digits. I think their customer service was deteriorating. So we focused on improving customer service at DST, client retention and then spending more money on sales and marketing. And I think that started to help us last year where DST was kind of flat. And the rest of our core business was probably up single digits, mid-single digits during that year. So the rest of our software business and fund administration business had pretty good performance. And in fact, our fund administration business grew 8% in the first quarter. So I think we're starting the year pretty good. So I think the key is we stabilized DST. Client retention rates are up to 96%, 97% at DST. We're starting to hire more salespeople. And we need to go out and win big business at DST, have big contracts and get that back rolling. And I think then we'll see our business go back where it traditionally has been.

Okay. We've got a couple of minutes left. No discussion of SS&C is complete without talking about M&A because SS&C has acquired over 50 companies over the years. I was a little surprised at Bill's appetite for acquisitions that he talked about on the first quarter earnings call. I just thought he might be a little more cautious in this environment. But I shouldn't second guess Bill, I think. Anyway, what is your view of -- given your leverage ratio and capacity and what might be available on the market and how the world looks? How are you thinking about the opportunities for acquisitions here?

So I think over the last couple of years, prices on acquisitions have been higher than we normally like. I think as we've always said, we're mostly opportunistic on acquisitions. We don't target companies. DST put them up -- put themselves up for sale. Advent put themselves up for sale. Citi sold their fund administration business. So we tend to be opportunistic when people are ready to sell their business. I think there's a little bit of slowdown right now on people deciding to sell their businesses that might pick up this summer and later in the year, as maybe large companies decide to divest divisions and/or private equity firms decide to sell some of their investments. We've seen prices down a little bit from where they were last year. So we'll continue our same strategy. I mean we won't hesitate to buy businesses where we think it adds a good technology, provides additional services we can sell to our clients, and we return value to investors. So those are always our 3 goals with acquisitions. And if we find some that meet those criteria, I mean we'll continue doing the acquisitions during this period.

Okay. Is there any temptation to maybe sit it out and see how long? Because I would think that there are some smaller providers out there who -- one advantage SS&C has is you are known to a lot of asset managers, and getting inside their firewalls and things like that is not a hard sell. And when you're a start-up working out of a garage, you're off a couple of card tables, that's a harder thing to do. And I would think this might be a more challenging environment for smaller companies here. Anyway, I'm just wondering if you see more opportunity there. Or is it still too soon to tell on valuation coming down from elevated levels?

It's a little bit too soon to tell. I mean we did see -- the acquisitions that we announced recently in the last couple of months, I mean, the prices, when we signed, were a lot less than they were in January. So I think everybody was hesitating a little bit. And we clearly saw people that were like, "Okay. Well, yes. Okay, we'll take that number. We'll agree there." So we did see prices come down a little bit in that period. And if we continue to see that, we'll take advantage of it. And if small companies are struggling or larger companies decide to divest of maybe some struggling divisions, I think that's a good opportunity for us.

Okay. With that, I think we're out of time here, unfortunately. Patrick, I want to thank you for your participation today and for being there in the past with us when we've been able to have actually the physical conference and do that. So we appreciate you taking the time to join in, in the virtual realm with us.

Well, Chris, thanks a lot for inviting us. We appreciate it.

Yes. You're welcome. And for everyone listening here, we'll pick up again in a couple of minutes with GreenSky with Vice Chairman Gerry Benjamin. So we'll see you in a few minutes. Thanks again, Patrick.

Thanks. Bye-bye.

Bye.