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

Good morning, everyone. I'm Ashish Sabadra, business and information services analyst at Deutsche Bank. We are excited to host Patrick Pedonti, CFO of SS&C.

Patrick, we'll kick off the conversation with the discussion of the alternatives business. This business has been really resilient even during COVID with roughly 4.6% organic growth last quarter. I was wondering if you could help us understand what percentage of alternatives is coming from the private equity versus the hedge fund and the growth rates in the respective business? And how you think about the growth going forward? Thanks.

Thank you. Thanks for inviting us. So our alternatives business is about running at around $1 billion a year. Most recent quarter, hedge fund was probably somewhere around 76% of that total business and has been growing at around a little bit under 4%. So that's a little bit better than the market. Assets under management growth and hedge fund, so far this year, I think is down a little bit overall. And it kind of shows we're taking market share in the hedge fund space because we clearly have the best service and the best technology. I mean we own the best technology to provide portfolio management systems to hedge funds. The PE and the Real Assets group, which we combined together, is the remainder, about 23% of the business on a year-to-date basis. And that's been growing. That's grown at about 13% in the quarter. The Real Assets are growing much faster, but it's a smaller business. Real Assets has probably grown around 20%. And the hedge fund -- and the Private Equity business has probably grown about 9%. We're seeing strong growth in that area because, as probably most people know, most PE funds and Real Assets funds have not typically outsourced in the past. And they're -- not only are they accumulating a lot of assets, they're all looking to outsource their business. That gives you kind of an overview of the alternatives space.

That's great. I think it's very exciting, the growth profile in that PE and real estate (sic) [ Real Assets ] business. And as you mentioned, PE is still in very, very early days of outsourcing. The question that we get always is what will drive the big push to outsourcing? Are there certain regions, products or certain PE firms which are ahead of the curve?

Yes. We're -- I mean the 2 segments are a little bit different, PE and Real Assets. PE funds have been pretty much established with in-house back-office capability. But what we've seen over the last 5 to 7 years is that smaller PE funds and midsized PE funds have clearly been moving out to outsource their back office. The large-scale PE funds that have been around for a while and came from the investment banking area that typically had in-house capability, and we're seeing the large funds now start moving parts of their business to outsourcing. And in fact, one of the large clients is Ares and -- one of our large PE clients is Ares out in California, and they've moved their whole back office to outsource. And the main reason they did that was so they can move more quickly into markets. So if they decide to move into market, they don't have to go out and get the software capability and the personnel capability to manage those type of assets. It's easier for them to give it to us, and we can manage the back office. So I would say maybe 40% of PE funds are outsourced at this point. And clearly, it's moving towards 80% in the long run. In Real Assets, the issue with Real Assets is that most of those fund managers have not had that really good software capability in that space typically, historically in the market. And they've been running software in-house and had a lot of problems. And so those guys are more quickly moving to outsource their capability, outsource their back office, so that they've got better controls and better systems. And that -- we started that business about 3 years ago, and it's been growing about 20% a year.

That's great. And in terms of penetration, where would you say Real Assets is?

Very low at this point, yes, most of them are still running software in-house.

Okay. That's great. And maybe just staying on the alternatives itself, SS&C also raised pricing at the end of the last year or earlier this year. I was just wondering if you can talk about the pricing opportunities going forward. Is there opportunity to be more selectively raising prices going forward?

We think there is. I mean we're clearly the leader in the market with 20% of the market. Our view is we're clearly the technology and service leader. And I think that gives us opportunity to raise prices. Now most clients are on long-term contracts, would be up to 3- to 5-year contracts. So going through the cycle of clients to evaluate price increases, it'll take a 3- to 4-year period. So we started that last year. And so far, it's been going well. We haven't -- I mean nobody likes to get price increases, but we haven't received a whole lot of pushback. And it hasn't hurt our retention -- our client retention rates at all because they still remain up at 96%.

Yes. The value -- the profit that you're providing and the market share that you have definitely shows that you can command pricing increases. Switching gears with, going to Eze. Eze obviously delivered a very strong quarter, second quarter. A lot of it was driven also by higher trading volume. There have been some management transition in that business also. Can you just talk about how we think about the Eze growth going forward?

Sure. Well, Eze historically has been providing front-end order management trading systems to hedge funds. And they've got a real solid market share in hedge funds. But what Eze has been working on over the last couple of years is to develop new products in the traditional asset management space, which is a much larger market. So we introduced Eze Eclipse, which is a cloud-based solution that's focused on traditional asset managers a couple of years ago. We're seeing good traction in that business, and that's helping our growth also. I think that product might have been running around a couple of hundred thousand dollars of revenue a quarter last year. And in the most recent quarter, it's running at about $2 million of revenue. So I think that's what we need to do to get growth out of Eze and not be solely relying on trading volume in the industry. We saw a spike of trading volume in the first and second quarter. That helped the business. But I think our main focus to get growth in the long term is to penetrate the traditional asset manager market. And we think, as we accomplish that, that that business grows 3% to 5% on an annual basis.

Yes. That's great. Are there also opportunities for cross-selling with some of your other product suite? Because you obviously had a strong business on the hedge fund side, but you also have a lot of product suite for the traditional asset managers, is there a cross-sell/upsell opportunity there?

There is. I mean, as I said, we have a $750 million hedge fund business, just in fund administration. We probably have another couple of hundred million dollar hedge fund business in the software space -- portfolio management space hedge funds. And clearly, one of the reasons to acquire Eze was that we can bundle order management system with our back-office system, and that's what our sales force has been focused on. And that's been also going pretty well.

That's great. Maybe switching gears to Intralinks now. Again, Intralinks had a pretty solid quarter last quarter. There was that one benefit from a large PPP win. How should we think about the growth expectations going forward? IPO market continues to be pretty strong, so just any thoughts around the Intralinks business?

Well, as you know, Intralinks has got a dominant position in M&A secure data rooms. And we think that's a really good business and very profitable, but it clearly can be affected by the ups and downs of the M&A market. So we've worked hard to diversify the offerings at Intralinks. So that PPE business is one example where we're offering capability to banks and investment banks when they're doing offerings. We're also selling secure data capability to private equity funds when they're raising capital and the security space when they're raising capital. So that area has been growing. So I think, in the second quarter, Intralinks grew year-to-year. Even though the M&A space might have been down, I think, about 7% in the second quarter, our capability in the securities, banking and private equity space more than made up that loss. So I think as the M&A market restabilizes and we've seen some improvement in the third quarter, and we continue to penetrate some of the banking and security space, we should see good growth in the Intralinks business. And the business runs at mid-40s operating margin, so it's very profitable.

And that is a pretty strong margins for that business. Just moving on to the licenses, can you just talk about the demand for Advent software license or other key software licenses? And then just from a comp perspective, I understand there is some difficult comps going into the fourth quarter of '20. Can you just address that as well?

Sure. Well, I think, as you know, our software business did really well last year and kind of what we expect that business to do in the long term. I think it was growing in the mid-single digits last year. While we hit the current -- the economic downturn in the second quarter, end of the first quarter and part of the second quarter, and we've got the situation where -- with COVID where it's hard to visit clients, there's travel restrictions and everybody is working from home, it's been a little harder to sell large-scale software deals because clients are focused on other areas of their business, and they don't want to necessarily tackle an implementation when they've got all their employees working from home. So we've seen a little bit less demand in that space so far this year. And then in addition, as you mentioned, it's somewhat of a difficult comp in the Advent business in Q4 of 2020 when they signed a large, onetime, I think it was around a $10 million deal for the Geneva product. And as you know, under 606, you get to recognize the vast majority of that revenue upfront, it's not recognized ratably. So there's a little bit of a comp comparison difficulty. But we think as things get back to normal, and you start getting back face-to-face with clients and companies get back in their offices, which I think we're starting to see a little bit of that, that business should pick back up.

That's great. Just shifting over now to the Healthcare business, again, a pretty resilient business, but we saw some impact just because of the pushout of the elective surgery. Our health care analysts have been a lot more positive on what we saw on those surgeries in July and August. I was just wondering if you can provide any color on what you see for the health care trend near term?

Sure. Clearly, as we all know, medical claims and prescription processing dropped dramatically in Q2 due to COVID. I mean it was kind of a strange phenomenon. At the beginning of COVID, we saw big increases in prescriptions, and then they dropped off like a rock. We're seeing little better volume transactions so far in the third quarter, so we're clearly seeing improvement in that space. But from what we're seeing, it's not up to Q4 2019 levels at this point.

Okay. But it's definitely moving in the right trajectory. So that's...

Yes, definitely improving over Q2.

That's great. And there was also a client loss, which was prior to your acquisition that was weighing on the Healthcare business. Has that finally migrated off the system? Or any color on that front?

The vast majority have. There are still some clients that haven't completed migrating off the platform. So we'll see a little bit more impact over the next 4 quarters but not as much as the past 4 quarters. So that's starting to wane off, and we'll see less of an impact. And then we've got some solid opportunities in signing some new business, and once the gets completed, we should be able to offset any of those declines.

That's great. Yes, can you just talk about the opportunity pipeline there? And how do we think about the sustainable growth in that business? And particularly, I think the Blue Shield Blue Cross (sic) [ Blue Cross Blue Shield ], those franchises, you've signed a couple of them, that seems to be a significant opportunity in that space.