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

Welcome back, everybody, on the webcast. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. And I'm delighted to have joining me today, Rahul Kanwar, who's the President and Chief Operating Officer; and Justine Stone, who heads up Investor Relations for SS&C. Thank you both for joining us today. Really appreciate your time.

Dan, thanks for having us. We appreciate your time as well.

So I thought what we could do at a high level, as we've been having these discussions, is just to talk initially about the current demand environment. And I think one of the things that you guys did uniquely, which you laid out a few scenarios on the last earnings call, I think by way of reminder, it would be helpful to maybe talk through what those potential scenarios look like? And if anything's changed in terms of, which one looks like it's got the higher probability of occurring these days?

Sure. So we're obviously trying to be as helpful as we can in providing some color as to what we're seeing in our business. And as you point out, we did provide 3 different recovery scenarios and really the primary factor that distinguishes them is timing. So the timing of when we think things can get closer back to normal, people back at work, folks making normal purchasing decisions. And perhaps the first place to give color is, in our business as a whole, we've been pretty pleased with how it's held up in this period of time, certainly from a customer service and deliverable standpoint, that's been going well. Customers that are already engaged with us have continued to purchase additional products and services, and we continue to convert new prospects. Just not at the same rates as we had anticipated pre the coronavirus scenarios. So our scenarios are, there's a Q3 recovery scenario or Q4 recovery scenario and a 2021 recovery scenario. And in each one of those, we're anticipating that a return to work and closer to normal conditions occurs some time before that period of time. So our Q2 recovery scenarios that will sort of happen before the start of Q3 and the same for Q4 and the 2021 recovery scenario. There hasn't been much that has changed. It does feel like the -- somewhere between the Q3, Q4 and 2021 scenarios, the Q4 and '21 scenarios look a little more likely right now, just given that more time has elapsed, but more still somewhere in the middle of those kind of different outcomes.

Okay. So the cadence seems pretty in line with what you had expected, no discernible change, but as the timing of things start to continue to evolve, you're gaining more visibility, and it sounds like if I'm not putting words in your mouth, it sounds like things are a little bit better than maybe the original thought. So that's encouraging to hear. If we could just kind of walk through the various businesses and start with alternatives, this has historically been the fastest-growing area for the company by far in a lot of areas. I'm just wondering as we parse this down, how are you seeing the hedge funds perform in this kind of world? Like how is that vertical holding up inside of alternatives?

It's holding up well. Sorry, Justine, go ahead.

Yes. No, that's just what I was going to say. I think that, obviously, when you look at where market movements can come into play, you would see that more in hedge funds than in private equity and real assets. But I think it's still held up well. Alternatives overall grew over 8% in the first quarter, with private equity probably growing high single digits and real assets in the mid-teens and maybe closer to 20% -- hedge funds still obviously make up the bulk of that business. So that still suggests that they were growing in the mid -- in the mid-single digits, which is pretty strong for that business.

Yes. That's very encouraging. And have you seen any kind of discernible changes there in terms of their behavior? I mean I know a lot of the conversations we have over the years with those clients is that you manage a lot of them that have some pretty complex structures, and so they're not always super tied to the equity markets, but any changes that you're seeing there in terms of their behavior on spending?

Well, I think that what this has done is validated some of those discussions that we've had over any number of years. We have a lot of diversity and diversification as it comes to asset classes, and things that these folks so included in our hedge fund client base are things like distressed and private credit and direct lending and a variety of different things that aren't as correlated to the equity markets. And we did see some pause on bigger mandates as particularly bigger mandates where folks were selecting somebody new. And I think driven by concerns over what implementation might look like, et cetera, in a remote working environment, but people are getting more comfortable, and those decisions are continuing to be made.

Okay. So the demand environment still seems to be there. What about the implementation cycle as it pertains to that workgroup? Is there -- are there any real challenges that you have to deal with? Or is that easily done remotely?

Our business has held up very well as it relates to remote operations. So we were able to transition our workforce to -- 99% of our 23,000 people around the world are working out of their homes. And we haven't seen any discernible impact on deliverables. And that's true both in the regular processing, but also in the setup and conversion and implementation process.

Okay. Can you remind us of the kind of where we are in terms of opportunities and penetration rates around private equity as well as real assets, looking at those 2 a little more finely?

Yes. So...

I think...

Go ahead, Justine.

Go ahead, Rahul.

Private equity and real assets are not as outsourced as hedge funds are. So there's more greenfield opportunity there. A number of those firms have traditionally done that work in-house. And I think as we go through periods like the last several months, it likely creates a bigger incentive for them to look at what else is out there in terms of an outsource environment that can handle these kinds of disruptions at scale.

Right. Yes. I'm wondering what are those businesses, like some of the vulnerabilities that have been exposed? I mean have you -- have those conversations actually been accelerated as a result of that? Like I'm wondering if this is acting as a bit of a catalyst to have more broad discussions, in particular with private equity?

We're seeing some new incoming from folks that we wouldn't have expected to see. And -- but that's really true across our client base, not specific to private equity.

Okay. Well, let's pivot for a second and go to health care. This is still a relatively new business. I mean we've had it for several years now, but I'm wondering what's the demand environment and kind of scenarios that you're seeing play out in that vertical?

Go ahead, Justine.

Well, I think that a few things are happening to the health care industry overall. While obviously, the focus on the -- in the crisis has been a surge in very ill patients and hospital volumes there. There has been an impact in the health care industry. If you look at elective procedures and preventative procedures, that have been fairly low over the past several months. So that will impact our business the same way that this crisis is impacting other businesses. And for the pharmacy part of the business, initially, we saw some very high volumes as people rush to fill prescriptions, but that has been -- that has since normalized back to where we would have expected it to be in a normal environment. I think that going forward, if you just look at, in general, where we see opportunities in health care, it's the fact that these middle market -- these smaller and middle market providers and health plans don't want to give their business to the big 3 in health care. They don't want to give it to CVS, Aetna, Cigna, Express Scripts or United Optum. They'd rather go with an independent provider as long as we are able to provide the level of service and technology that is needed. And that's really what we've been working on over the past couple of years, to enhance customer service in that business, to build more value-add services, more data services, things like our fraud, waste and abuse program that we've talked about and those kind of things that are value-add that makes our offering more attractive.

Okay. Well, that's interesting because you're right, the demand on the health care system generally would seem to be incredibly elevated, but you're right, depending upon where you guys play in that ecosystem, there's probably been some slowdown. Are you finding that companies are really looking to accelerate this demand to outsource, that is automation and data analytics and all those things that you guys provide. Is that -- are those conversations happening? Are you finding more demand there? Is there kind of a growth trajectory that you think could become more elevated as we get on the other side of this?

Yes. There's a pretty robust pipeline in -- of folks that want to have those discussions. And I think it's driven by -- it is a competitive marketplace, and they're all trying to innovate and generally speaking, building new technology within a big health plan. It's challenging at times. And so we have any number of prospects and they're pretty interested in some of the ways in which we're shaping this business.

Yes. Now you mentioned a second ago, maybe some of the data assets. Maybe you could just touch on what those are, what are the unique data assets that you have in this vertical that you think will be helpful in helping clients kind of manage in the current environment?

So we have, obviously, all of the processing data from the transactions that we process, and we also have a unique reseller relationship with Johns Hopkins, which is an exclusive, where we can provide outcomes data that they have collected through their research and efforts. And the goal being to help our customers manage and optimize, what are the best treatments and modalities that give them the right kinds of outcomes and results and what's the best results for the members. So those are the kinds of things that we've been doing and in addition to having the data, it's the ability to deliver the data in a technologically intuitive way, and that's what we've been working on.

Okay. All right. Let's pivot over to the wealth management side for a second. I'm interested to hear what, if anything, is changing maybe in and around kind of the RIA space in the current environment? Are they looking to reduce or even alter their technology spend? And if they -- if they're not, what are the big asks that they have in terms of the demand for you guys?

The RIA space continues to be pretty dynamic. Folks are continuing to spin out of warehouses and broker-dealers and set up their own organizations, and that's been a strong trend that we expect to continue. For the most part, they have remained focused on digitizing their business and spending on technology. They're also dealing with having to do things like meet with their clients remotely. And so the demand for tools to collaborate with their clients in that electronic environment. And those are the things that we're pretty well placed to help them address.

What's the competitive environment looking like there today? Are you finding that the markets maybe shaken out some of these weaker competitors that were in there or even some of the early stage fintechs that kind of were coming into the market that maybe aren't getting the same kind of liquidity that they would have originally had? Are you finding the market to be more conducive to your product set?

We've got a good market opportunity, but it's a competitive market, and we think that a number of our competitors have good opportunities as well. The entire market is growing, and there's certainly plenty of healthy competition in this part of the segment. But we've got good offerings. And as our business gets bigger and we continue to get more scale, we do have an opportunity to win a fair amount of business here.

Okay. All right. So if we shift gears and go over to more of the traditional kind of institutional side of the house, maybe you can talk to what you're seeing there in terms of the current environment, growth rate trends and maybe some expectations around how that business is being managed today in the environment that we're in?

Well, I think that long term and even medium term, what we think -- how we think this business grows, stays the same. I mean it's really going to come from increased outsourcing. And it's possible that the current environment like how we talked about with private equity, it could push traditional asset managers to look at their operations, look at their cost structure and potentially move to a more variable cost structure if they've struggled with their work-from-home operations. So it's possible that COVID is a catalyst in the traditional space. But at the same time, these are large deals, usually kind of a bureaucratic firm that mean sales cycles are longer, 18 to 24 months, but the deal size can be in the tens of millions.

Right. In that regard, if this is a catalyst, and you start to see some trends, and this is maybe a broader question towards outsourcing across the entire platform, maybe not just traditional, but will you need to make incremental investments in order to support what could potentially be a bit of an accelerated demand environment?

We've got a pretty good process where we're making those investments in a continual way. So I think we're already doing it, and we have the ability and the scale to be able to support a better demand environment.

Okay. So you've got capacity, you've got scale. And as it turns out, you've been making these investments. So there's not going to be this kind of big influx of incremental investment to the extent that demand starts to pick back up on this? It sounds like it's a little more balanced. Is that fair to say?

Yes. I think that's right. I think most of our customers are looking for innovation in the products themselves. And that's a process that we're constantly working on, and we're doing product releases and enhancing functionality. It's not so much driven by how much volume grows on those systems. We're certainly able to take on more customers.

Got it. Okay. Well, maybe let's talk a little bit about the acquisitions that you've done recently? And I'm thinking of Innovest and Capita. If you think about what those acquisitions really brought to SS&C, that would be helpful in terms of framing that structure right now?

Yes. So Innovest is -- we paid $120 million for it, roughly a $40 million-ish in revenue, growing nicely in the high single digits. And we've got a number of different opportunities. Glenn Schmidt, who runs that is a very capable executive, and he's had a lot of -- and he's had a pretty tenured management team in that business. So they're into trust accounting. And so they support the needs of trust companies, banks, private banks, things like that. They also have a payments business called InnoPay that we think is interesting given the payments that we do across our company in a variety of different ways. And in general, they've got big competitors that we don't think innovates just to kind of play on that a little, I guess. Quite offensive as we can, right? So if we build technology, I think we've got a chance to get bigger market share in what seems to be plenty of business out there, and we're looking forward to that. I think the other one you mentioned, Dan, was Capita. And Capita is -- yes, it's an add-on to our U.K. business, where we're doing, life insurance and pension servicing. We've got some built-in advantages in the sense that they are already a provider to one of our biggest customers. So we're going to get some overlap and some synergies out of that process. And that is a business that is similarly sized from a revenue standpoint to Innovest.

Okay. So as we think about additional opportunities in the M&A environment, I think your leverage was around 3.7 at the end of the quarter. I know your covenants are much higher than that. So you have a lot of capacity to the extent that you wanted to use it. Are you finding your dislocations in the market between kind of private values and public values of assets you might want to consider looking at?

I think we're seeing opportunities. We continue to look at those opportunities. And it's clear when things like this happen, things get paused. So we're not -- what we are seeing things out there that we're not seeing assets trade at quite the same pace as they were. And -- but as we cycle out of this downturn and things get closer to normal, we will likely have some -- an opportunity to deploy some capital.

Okay. Are there any areas of focus or verticals or size? Or are these going to be more tuck-in? How do you think about the M&A strategy going forward?

We've been pretty opportunistic thus far, right? So driven by the merits of a specific prospect. And I think it will likely continue in that way. So we're open to any incoming that we get, and we look at it carefully, and we try to figure out are they in businesses that we have some expertise and some momentum, and will they help us accelerate the momentum we have or could we help them. And I think we're going to continue to look at it in that way.

Okay. Let's look at organic growth for a second. It was a little over 2.7%, I think, in the quarter. And that was down obviously from the 4Q level. And I think your commentary has been around flat to down 2%. So maybe can you just give us some thinking around how you contextualize that kind of forward look for organic growth to be kind of flat to down 2%? And what would be the big verticals, i.e., alternatives, health care, wealth, and those businesses where you might see potentially better-than-expected growth or maybe areas of pockets of weakness? That would be really helpful.

Well, I think when we look at -- when we look at what we expected for the rest of the year, I think we expect our current business to stay pretty stable. We've built in 96% retention rates. And so far, there hasn't been any kind of client shutdown or disruption that would suggest we shouldn't be able to maintain those kind of levels. And really what's going to determine our organic growth is signing new deals and the timing of signing these deals. And that's where these different types of recovery scenarios come into play.

Okay.

I think that we've said that we still expect growth from alternatives, albeit probably on the lower end of the range than we historically see. But if we see 3% to 5%, we'll probably come in at about closer to 3% for that growth, although we had a very strong Q1, so we'll see what happens.

Okay. Anything else on the other verticals?

I think that even before COVID, we expected the software business to be flat just because of 606 and the timing of deals and the strength that they had in 2019 for new deals and renewals in the software business. As software has had some tailwinds from the increased volatility. And Intralinks, while there has been some pressure because of a slowdown in M&A, we're able to pivot and use those -- use the virtual data rooms for other purposes. One would be doing -- one of the largest banks in the country used Intralinks to help implement their payment protection plan and everything associated with that. So we have found ways to maintain some level of business at Intralinks despite the low -- slow M&A environment.

Got you. That's interesting. Okay. So being able to pivot that to some nontraditional sources maybe is a good way to keep some stability there. Can you talk about the cost containment efforts that maybe you've undertaken and the other thing is, are there things about the business that will structurally kind of remove cost out? I mean I'm taking a more remote delivery and those types of things. Do you think that they're going to remain permanent? So I guess 2 parts to the question. One is near-term cost levers that you've had? And then secondarily, are there some permanent cost savings that actually are now going to be absorbed in the company longer term?

Yes. So the cost structure is largely personnel and IT and facilities, things like that. And so we certainly have the ability to control the rate of change of those things. So as there's been some muting in different parts of the business, we have certainly adjusted our spending to kind of keep up with that. And then there's also some structural things going on right now. People aren't traveling quite at the same rate. We do a fair amount of marketing and sales events and things like that. And that's clearly not happening. We're doing a bunch of that remotely, and that's quite a bit more efficient from a cost standpoint. I think over the medium term, as things come back to normal, it will be interesting to see how we -- where we think we have good productivity out of this remote working process, which so far has been pretty good for our business as a whole. And if that gives us an opportunity to, over time, perhaps change the mix a little bit and get some cost optimization levers out of that as well.

Okay. Anything on the regulatory front that we should be mindful of? In some instances in the past, it would seem like as these regulatory changes kind of get put in place, technology is a way in which to solve and be compliant. And I'm just wondering, what have you seen in that environment today? And is there anything that potentially could be a net positive or negative, I guess, but for you guys as we think about the future?

I think that the environment that our customers are in continues to be that of heavily regulated. And in addition to heavy regulation, there's also increasing constituent demand, whether it's customers of a big asset management company or what you have to do to comply with privacy and other regulations in the health care business. And the common thread has been that you need really strong control processes and you need the best technology you can find. So that's been our strategy for quite some time, Dan, to try to build to those specifications and create market differentiating products, and that continues.

Okay. And then I was thinking, you guys have done a few -- it seems like pretty significant technology updates that you've pushed out, in particular, maybe around Advent solutions. And I'm wondering, what were some of those major changes, were there unique impetuses to it? Or are these just kind of the standard issue upgrades you guys continue to push with innovation?

Yes. I would...

Go ahead, Justine.

Yes. I mean the Advent products are pretty regularly on a semiannual product release schedule and the current environment did not impede our ability to continue with those releases. So I think that, that just kind of shows our ability to maintain a high level of productivity even with all of this work-from-home. And we're always looking to add flexibility to our product scalability, new workflows, and we invest in our products really based on what our -- really based on client feedback and what our clients are looking for, so to enhance their experience.

That's great. We're bumping up right against our time. So I would say, it sounds like the business is holding up well. It sounds like these recovery scenarios that you're putting out there are maybe coming in a little bit better, hopefully. And then again, timing is kind of everything as it pertains to the shape of the recovery for you guys. But in the interim, it sounds like business is holding up pretty well. So thank you again for your time today. I really appreciate it, and I hope you both can stay healthy and safe out there. So thank you.

Thank you, Dan.

You too. Thanks, Dan.