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

Good morning, everybody, and thank you for joining us today at the Oppenheimer 2020 Tech Conference. I'm very pleased to host and introduce Bill Stone, Founder, Chairman and CEO of SS&C. [Operator Instructions] And we'll go ahead and get started. Bill, good morning, and thank you very much for being here.

Thanks for having me.

Why don't we start, Bill, with this current environment that we're all experiencing and all having to adjust to? How is SS&C been performing during this pandemic? I know 99% of your staff are working from home currently. How has that transition been? Have you had to adjust in the short term? And then what's your sort of long-term view coming out of all of this?

Yes. As you know, that's kind of the $24 question around the world and trying to be able to operate in what I would call a wise way. Don't get precipitous. Don't think you know more than you do. At least I'm not an epidemiologist or anything like that. And so I listen, right? And then I try to make decisions based on the inputs that I get. We did transition. 99% of our people are still working from home. We have started the process of reopening some offices. We have had Beijing open now for a couple of weeks and that’s gone very well. Obviously, we're doing all the things we can to make sure our workforce is safe. We're taking temperatures or sanitizing, all the types of things, as you can imagine, safe distancing. As far as the pandemic from start to now, at the beginning, it was extremely uncertain. Right? And what's really going to happen to the financial markets. And obviously, over the last 3, 4 months, they've proven to be quite resilient. And the institutions that make up the financial markets and different intermediaries and buy side and sell-side that -- so forth and so on, acquire customers to a large extent. Have done pretty well, and they have been extremely complementary of our ability to continue to have a high level of customer action, a high level of deliveries on our daily delivery schedules, weekly, monthly, quarterly. We do NAVs. We do client reports at all. We do some performance and performance attribution. And I have been fortunate with a lot of our large customers, to have been on the phone with them, and they could not have been more complementary.

That's great. And so how has that sort of client engagement changed in this period, the sales process, bringing clients on? Has there been any meaningful change to how you normally do it?

Well, I think it's been more the impetus of this pandemic kind of energizing our sales force and our closing processes to get very familiar with things like Zoom and other things and be able to create presentations and openings and middle -- and closings of meetings. And so we've done very well. We've had a very intense process of reach out. So I think we used to get 3% or 4% of our leads coming through these kinds of social media mechanisms. In April, we got 39%, right? So there's been a real engagement in webinars and different types of things that we've done. Normally, we would go to maybe 20 events a month around the world. That went from 20 to 0.

Yes. So your sourcing methods have had to change as a result?

That's right. And really have hands on sales management, sales executive leadership and be able to close business. And we've done fairly well, I would say.

Great. Are there parts of the business that have been more resilient than others as you've...

Yes. I think the businesses, where we're doing all the work. We're using our technology. We're doing all the work. We're making sure security masters are accurate, the trends are right, all of that stuff, pricing and stuff like that. Valuations, that's gone extremely well. Large license sales has been a little more of a challenge because, generally, it's multiple in-base demonstrations and walk-throughs and proof of concepts and stuff like that. So that's been a little more difficult, but we're adapting to that environment as well, okay? I think I'm optimistic about what we have done and what we're going to continue to do.

Great. And then, sort of lastly on this topic, the performance of the capital markets, I mean, in March, you had a massive correction, and then you've had this prolonged rebound. How has that sort of impacted your business? Is that -- did you see much fluctuation? Is there any type of correlation there that you can point to?

I think the biggest thing has been you get large fund managers, like you would be if you left Oppenheimer and started a fund. I mean you might decide, hey, I've got some guys. I know they're really good, and I'm going to bring him to run my CFO and my IT guy and all those kind of stuff. And then you have something like this. And you find out that, oh, my goodness, we had no idea how we would work from home. We had no idea of what kind of processes, procedures would be necessary to do this. And all of a sudden, you're not getting your positions at 8:00 in the morning. It's 10:00, and being the smart guy you are, you know that the market is open at 9:30, right? 10:00 is not a good time. A lot of that's really driven business to us, right? Because we have that kind of redundancy in-depth and breadth.

Good. Great. Let's switch gears a little bit and talk about your sort of earnings and cash flow philosophy. I know that SS&C has always sort of been focused on generating steady cash flow. How does your view or the company's view change if we find ourselves in a sort of a prolonged recessionary environment? And how do you sort of balance the growth versus cash flow dynamic? Is that something that you've given much thought to? And is that changing? How are you thinking about that right now?

Yes. I would kind of say that our cash flow has grown rather dramatically. But 10 years we've been a public company from about $100 million in 2010 to $1.328 billion last year. And we'll be well in excess of $1 billion this year. So we have plenty of cash flow. We can pay down debt. We can buy back stock. We're going to invest in our products and services. We can -- acquisitions, we can pounce on acquisitions that we really like. And we really only start prioritizing our cash flow when we buy something as big as DST or Advent a few years ago when we acquired the company. Other than that, we have plenty of cash to do the things that we think we should do. And we try to do it wisely. Like we never cut back on sales. We don't cut back on marketing. We're going after it as hard as we can. And then we also don't -- we don't try to do Don Quixote things, right? We're not trying to get the first investment sales on Mars and stuff like that. We're not trying to do things. No we're not. If it was the 1970s, we would not be the people trying to set the flag in China.

Yes. Yes. Got it. So take a more conservative approach.

Correct.

You mentioned buying back shares. So I wanted to ask you about your overall sort of capital allocation philosophy and sort of any decision framework you may use around uses of capital. You've been very acquisitive over the years. I think over 50 acquisitions done. But -- so how do you think about that now when you are the size you are of using capital towards M&A or share repurchases or dividends or reinvesting in any type of organic growth? Do you have a general sort of view currently on how you think about capital allocation?

Well, I think that we try to support all internal product development, right? So that -- we spend $500 million or so in research and development. And I think that, that's not unchanged. So we're going to continue to spend. And remember, people sometimes take that $500 million and realize that the way you did $4.6 billion in revenue last year. So that's barely 10% of your revenue. We have a big service component, right? So the same software that we use in our services, we sell. Take the services out, then what you're really looking at is, is that we have a business that's about probably less than $2 billion in just software. $500 million is a 25% allocation to R&D. And not only do we get that, but by being such a large consumer of our technology, we're the experts in our technology, not just the techies. We're the accountants. We're the portfolio assistants. We're the ones that come up with all the reporting for the GPs and all that kind of LPs. So that's been a -- that's always a primer. And then we, like, if we can find it, we'd rather buy it to build it. When you buy it, you get customers, you get [ orders ], you get revenue, you get a lot of smart people that don't think the way you think. So absorbing those and being able to create a coherent team when you're getting new ideas, and they're different than what you've done and what you have done has been pretty successful. You've got to be pretty open-minded and you got to be able to take that new stuff and be able to absorb it in a way that those people feel good that we're listening. We're adopting some of their processes. As I say all the time, people say we're SS&C, this is the way we do it. No. No. No. We're doing it the way we think is best. I mean it has a better idea. We now have a new best. It has to be willing to adopt and you have to be willing to change. And so after we do product development, then we do look at acquisitions and then we look at, okay, now when we still have this gigantic pot of money left, buy back debt, are we going to buy back stock, or we're going to raise our dividend. One of that enhance shareholder value.

Good. Let's talk about acquisitions for a minute. You did 3 very significant acquisitions in sort of the 2017, 2018 time frame, DST, Intralinks and Eze. Can you tell our audience a little bit about the strategic rationale for each of those, how they're going to shape the future of SS&C? I think all 3 bring something unique. And then tell us a little bit about how they've been performing, how the integration has been? And anything you can share on sort of those 3 transactions that I think were pretty significant and meaningful for your business?

Sure. So we start with DST, which we announced in December of '17, and we closed April 18, 2018. A very large company, right? 14,400 people, 2,100 contractors and $2 billion -- $2.2 billion in revenue company. So at the same time, it was running at 17%, 18% margins and now it runs at 37.5% margins. And the revenue has been flat, right? It's still $2 billion to $2.2 billion, but we have gotten rid of a lot of revenue that was no margin. So they did an out-of-pockets revenue where they were just a flow-through teabag with no margin. No, we don't do that for a living. You have a hard time paying people great bonuses when they have no margin in their business, right? So we've changed that, that's probably -- it was $100 million worth of revenue that we don't deal with anymore. And on a $2 billion business, that's 5%. So yes, we've had some headwinds as far as organic revenue growth in the DST business because we're unwilling to do stuff where we don't make money. And it's not like it's an investment, and it's going to make money. That's a long-term make no money. We don't do long term make no monies. So we have changed that. We are just about done. I think maybe at the end of August, of the 2,100 contract, we won't have any, right? So we've either absorbed them into employees or we just part the company with the -- so that's a big savings. And we've done some reductions enforced in our DST business originally June of '18 was the only really significant one. But we've got $800 million in cash flow coming out of that now. And we're paying down debt fast. We've paid over $2.3 billion in debt since we bought DST. And so -- and we got 200 enormous relationships from Capital Group out in L.A. to Fidelity in Boston [indiscernible] Mass Financial Services, Janus Henderson, the St. James's Place, to American Century, to -- all kinds of views. And what we have done is start building stuff that they want, right? You can't build what you want. You have to build what they want.

You have to be responsive to your customer. Yes.

Right? You get people in technology and said, wow, isn't this cool? Well, maybe. The coolest ones are what famous people bought, right? So that's changed the philosophy of how you look at, how you build software, what the go-to-market is and when we expect a return. So that's a very popular product called WalletShare that we basically scrub data and sell it to these big customers about where individuals are buying mutual funds. Are they buying international funds? Are they buying long-duration funds? Are they buying balance funds? Are they buying value funds? Are they buying growth here? What are they doing? And so it's been very, very popular. And we were going to -- DST had a plan to roll it out. Remember, we bought them in April '18, and they were going to roll it out in the first quarter of '20. We rolled it out in the fourth quarter of '18. Again, the cadence, right? Go fast, right? Go fast, learn, right? Keep your eyes open, your ears open and learn and move fast. And don't have too many meetings. You're the Boss. Get the information you need.

Be decisive.

That's right. You're wrong, be decisive again. Double down necessarily. Don't be a rocket. You double down -- we don't want to double down anymore. Next time you double down, you double down on your own money, right? But you have to give people rope. Most times, they don't hang themselves. Occasionally, they do. But I think that's what we've done. And DST is going to prove to have been one of the best acquisitions we've ever done...

And you've done a lot. So that's saying something, yes.

So that was DST. We bought Eze in September. So we're kind of the largest fund administrator in the world, right? And primarily, we're from middle office to back office, all the regulatory reporting, and we have 7,000 different funds that we do this far. And it's something like $1.8 trillion in assets. And we started from scratch. In 2002, we had 0, right? So we started from scratch, we built it up to $1.8 trillion. And that's a big accomplishment. We bought Eisnerfast in 2005 and that's where we got Rahul Kanwar, who is now our President. We got Mike Megaw, who runs our RegTech business. We have Renee Mooney, who does our or private client and family office business, a whole bunch of really talented people. And we've grown, right? And then we got Citi Fund Services, and we got guys like Mike Sleightholme who's running the DST business and we got Joe Patellaro, who runs our private equity for the business. Ken Fullerton, who came in with GlobeOp runs our hedge fund business. A lot of really talented people, really capable, and we've built that business out, right? So we're excited about the opportunity to continue to build. And with Eze, we now have the premier front office business, right? So they have a lot of hedge funds, a lot of money managers. Their new Eclipse product that's really gaining traction. Mike Hutner, who runs that business, is doing a great job for us. We have a lot of talented people in Eze. And that DST is running at 37% margins. I think Eze is running at about 45% margins, up from 38%, 39% when we bought them. And then we bought Intralinks and...

Something where many of us are familiar with as bankers. I've been using Intralinks for 15 years. So I know it well. Tell us a little bit about what that does for you.

Well, once again, right, it gives us all of those relationships. Everybody knows it. You know when I talk to people and they go, "Oh, my god, you own Intralinks." Yes. We own a few of them. And so that's a great business. And we have Bob Petrocchi and Ken Bisconti are Co-Heads of that business. They're doing a great job. Ken is a very talented technologist and operations person and Bob's a tremendous sales executive and manager that they're really doing a great job, and that business is running at high 40s mark. And growth is coming back. COVID put a dent in the M&A business if you will. But it's coming back. You probably saw Ellie Mae.

I did, with ICE. Yes.

$11 billion and...

$11 billion. Yes.

Optimal Blue got sold to Black Knight, I think, for $1.8 billion, at least 30x EBITDA.

Yes, that's right. And that's just in my -- in the fintech sector. I mean there's a fair amount more that's happened elsewhere. Yes.

And again, I think that there's good assets for sale, and you have to be disciplined. And I think that we'll see some more stuff. We're looking at all kinds of things. And we like M&A. But we like to be able to see a clear path to return on invested capital for our shareholders of cash flow to pay down the debt, pay our people well, be able to have great returns for our shareholders. And then we preach patience. When you swallow something like DST and Eze and Intralinks in, literally, less than a year, that was $8.3 billion in capital. But it will prove out that it's generated tremendous cash flow, tremendous earnings per share. You might have seen it the last quarter, I think we beat our numbers by $0.14.

I saw that. I'm getting to your last quarter earnings next, yes.

It's just those things propel, right? They gives us opportunities to absorb the technology spend, absorb all the separate company expenses like boarding Directors and stuff like that and compliance. And then it also gives us opportunities to package new products, help with the PPE or the PPP for the government, right? We contribute that with some of the largest banks in the country. So there's a lot of stuff that we have, a lot of technology we have, a lot of capability, and we're going to earn tremendous amounts of cash throughout the entire process.

Great. And then just to tie up the M&A point. I think in the last 6 months, you've announced 3 new acquisitions, smaller ones albeit, and you've closed on Innovest already. Tell us a little bit about those 3 acquisitions. And what was it like executing those deals when you're -- everybody is working from home and having to do due diligence remotely, et cetera. How did that sort of change your approach?

Yes. Well, in each case, it was begun prior to COVID. So you did get to know people a little bit better. And we closed Innovest and Glenn Schmidt is doing a great job for us there. We have a tremendous product in InnoTrust. We're excited about putting our sales and marketing capability, our technology capability behind it, then going out in a massive way to win business. So we're excited about InnoPay. We do a lot of payments already. I think, $35 billion or so last year across all of our different businesses. And we think there's opportunity there. So we're excited about that. Vidado was a product we bought Captricity's. We did close that one. And it's artificial intelligence can read handwriting, create it into digitized format. It gives us 97%, 98% accuracy before we have our client or our personnel look at it to make sure we have right at 100% accuracy. So that's been really good. It's really been highly embraced by SS&C, and it has quite a following outside of SS&C. And then we have this Capita that we've announced that it's a policy processing business in the U.K. that does life insurance and annuity policies, very similar to hedge fund processing or private equity processing. And we're doing it with the blessing of St. James's Place, which is one of our largest clients in -- and they're based in London. And we're excited about what it can do for us and how to expand into another market.

Excellent. Congrats on getting those done or getting Innovest done and the other 2, I think, are in process. Let's shift gears and talk about last quarter's earnings for a minute. I did see that. Congratulations. Saw a 96% revenue retention. And I saw -- what I found interesting was your -- the scenarios you laid out for your sort of base case, bull case, bear case. There was very little difference between the EBITDA coming out of those 3 different cases. Tell us a little bit about the quarter and what, if anything, surprised you, what exceeded your expectations in terms of performance? Give us some context there?

Well, I think the strength of the hedge fund industry and the private equity industry was reaffirming the number of times that people say the hedge fund industry is going out of business. It's premature for 20 years, probably. And people forget, there's an awful lot of really, really smart people. And they move very quickly, right? So the amount of money that is going into distress and loan funds and private credit and it's a flood. And that's what gives you optimism about coming out of this pandemic. There's a lot of young guys like you and others that are in this business and are going to make it happen. And you're going to see opportunity in your accounts, and there's an awful lot of capital. That's not by one of them. One of the Fed presidents that said, somebody asked him are you worried about all this stimulus that we're putting into the economy? He said, have you seen the savings rate? The savings rate is so much higher than it has been that we'll be able to finance all of this without going to overseas at all. We'll refinance it with all money in the United States. I mean how long have you heard...

Remarkable.

Remarkable, right? It's just...

Yes, absolutely.

And it again comes back to the resiliency. So another thing about our quarter was we spent a lot of money on travel and entertainment.

So your costs have come way down, yes.

But we used to, right?

Same with our firm. Same with our firm. Yes.

And what does that teach you? I don't think it really teaches you that it's not going back. It is. But it will probably never go back to the levels it was, right? People are getting more efficient. They're more comfortable with this process, right, and jumping in an airplane and flying to Sacramento, there may be less of that. And so it doesn't mean there won't be any of that, and you have to compete.

Yes, the longer you get -- the longer this environment lasts, where we're doing Zoom and we're doing things the way we're doing it, the more comfortable people are will be doing it longer term, right? That's the longer-term implication, which I think is for most companies is a positive in terms of expense saving. And you only will travel for the essential travel rather than as a matter of course, right?

That's exactly right. And like I don't know how many people are on this call, but I know there's dozens. And the technology works. And it's going to get better, and better, and better. And I think that's the excitement about -- for businesses, you don't want to let a crisis go without improving your business.

That's right. Absolutely right.

And I think that's what most people are doing. And I think SS&C is doing it with aggression.

Good. Good. You mentioned the strength of the hedge-funded PE industry, and I wanted to just spend a minute on your alternatives business and GlobeOp. Tell us a little bit about sort of how that business has performed, what's driving it? I think it's been very strong for you in this environment? And how do you see it growing in the long term, in the context of GlobeOp?

Yes. If you think about that fund administration business over the last 18 years that we've been in it. We first got in it everybody told us we were nuts, right? It was dominated by Goldman and Credit Suisse and JP and State Street Bank of New York, UBS. So since that time, Credit Suisse is out, Goldman's out, Citi is out, Wells is out, a whole bunch of other ones have gotten out of the business. And we have been the beneficiary. And that business is not an investment business, the transaction processing business and a data reporting business. And we're really good at that. And that's something that has allowed us to really take our strengths, which are software development and accounting and reporting. And you're a little young, but I always claim that what we are like is like Secretariat in the 1973 Belmont, right? It's 1.5 mile race. At 0.75 of a mile, Secretary was up 10 lengths. A mile, he was up 20 lengths, and he won the race by 31 lengths. And that's who we are. We're ahead by a lot, and we're running faster. So when you're running faster and you're ahead by a lot, nobody is ever going to catch you.

Yes. I like that analogy.

And they're not going to, certainly not it might work lifetime for another 5, 7 years. And there's nobody catching us. We're investing a lot of money. We have new products and services coming out, and we're really excited about what we can do for our clients.

That's great. That's great. Last question on products. Geneva, you had 2 large license wins last year. Can you provide our audience some context on the implications of those wins? And what's your outlook on sort of future client growth in that business?

Yes. We took 2 large competitors of ours, and they adopted our technology. So they adopted Geneva, they're long-term contracts. We probably -- you have counting 606, which I'm sure the accounting types that are on this call realize that 606 requires you to book a bunch of it upfront. So these are 5- to 7-year deals. And so we probably booked somewhere in $30 million, $35 million in revenue in '19. We've won a lot of great deals in '20. Nothing quite that big, but about a lot of deals, we're having more and more adoption of Geneva. It's a dominant, dominant product, but they've got lots of competitors. And as much as we would like them to concede to us, they do not. So we're competing all the time. And we think that we're investing heavily. Karen Geiger, who now, along with Steve Leivent runs our Advent business. She's kind of been the architect of Geneva over the last 5 or 10 years, and she's doing a great job. She's very steep in what it can do and can't do it. And now we have a number of the largest funds in the world coming to Geneva, and we're having a lot of that long-only type funds rested in Geneva.

Great. That's great. I'm going to turn it to audience questions. And we have maybe 3 or 4 minutes left. So for anybody that wants to submit a question, please do. But the first one, can you tell us, Bill, what's next for SS&C? The business has evolved so much over the last 10, 15, 20 years. You're much more diverse business than you were even 10 years ago. What sort of business line that you're not in do you want to be in? And is there anything that you can tell us about that you see out there that you like and is sort of is on the horizon for SS&C?

I mean I'm really excited about our health care business...

I was actually going to ask you about that, yes.

Yes. I mean we're not doctors. We're not nurses. But what we do is transaction processing and information delivery. So last year, we adjudicated $1 billion pharmacy claims. We paid $750 million. Prescription looks a lot like a trade ticket. Number of pills, number of bidders, right? Rx number, CUSIP number, right? Trader, doctor, right? So there's about 5 or 6 pieces of information that you have to get right. You have to process a tremendous amount of them. And you have to deliver the information back. But now we can like tell you in Westchester County, which pharmacies have the most prescriptions of opioids, which ones have the number of pills that are double the average.

It's very valuable data.

Very valuable data. And it allows you to pinpoint either physician practices or pharmacies that are abusing some of these things, and there's a lot of information when you're processing 1 billion of that.

That's -- yes. That is valuable, and that is a very promising business line. We -- I've been told we have 1 minute left. So I think what we will do, Bill, is wrap it up here. I want to thank you so much for your time. I want to thank our audience for joining us. This is SS&C's first time attending and participating in this conference, and we hope that it's the first of many. So thank you so much, Bill, and we look forward to a long and storied relationship with you.

Thanks for having me.

Pleasure.