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

Good morning, everybody. We're pleased to have with us today SS&C Technologies' Chairman and CEO and Founder, Bill Stone. Through acquisitions and organic growth, SS&C has become a financial technology leader with approximately $4.6 billion in annual revenue. Just so that everyone knows, we have 45 minutes today. So I'll turn it over to Bill Stone. And after that, we'll have time for Q&A.

Thank you, and thanks, everybody, for listening in this morning. SS&C has been around since 1986, and we're proud of our track record. And as you just heard, we did about $4.66 billion in revenue last year and about $1.828 billion in EBITDA. So we've been a pretty successful company. I do want to make sure everybody understands we have a safe harbor statement, in that all of our documents are on file with the SEC in Washington. We've been around for a while. I started this company. And so to go from 0 to $4.6 billion is an accomplishment that we're quite proud of, I'm quite proud of. We've become a leading provider of mission critical, right? So you have to have this stuff. Our stuff is cloud-based, so you can go into a server farm and get your information. It's very well secured. We run our own data centers. We're experts in this. And we have -- our software is targeted at the financial services and health care industries. We believe that the reason that we're a good stock to own, and, obviously, I own a lot of it, is that we have a very sticky customer base. Even through this COVID pandemic, we've maintained about 96% our last 12-month revenue retention. We also generate tremendous amounts of cash flow. In general, you'll go out and look at any year, and we're at about 110% of our earnings we have in cash flow. And the only year, I think we did it was 2018. I think we had a big acquisition, and they flowed through all the acquisition expenses. So we're very strong cash flow. We run at about 40% EBITDA margins, somewhere between 38% and 42%, depending on if we have any big development projects or big marketing pushes. And lastly, we're shareholder-focused. So our entire focus on what we do with that cash flow we generate is in order to improve our shareholder returns. So we look at acquisitions. In particular, with low interest rates, you can often find very good companies with very good software, very good people and a great client base. And at LIBOR at 15 basis points, you can really leverage an opportunity. We also pay almost 1% dividend. I think our dividend is $0.56 a share. And we also have bought back stock, and we'll continue to do that. And we're pretty well-known to pay down debt very quickly, and we're pretty much of a preferred credit for our debt holders. I'm currently on Slide 5. And if you look at this, it's -- when we say the financial services and healthcare industries rely on SS&C, here we have 12 things on what we do in these marketplaces. And our different products and services, we supply software to 40 fund administrators. We're the largest fund administrator in the world, and another 40 fund administrators use our technology. 9 out of 10 of the top prime brokers use our technology. 75 out of the top 100 hedge funds, right? All 20 of the top 20 asset managers use our technology and on and on and on, right? So we really do focus on what we do. And we focus on the success of our customers, the referenceability of our customers, the customer satisfaction. And then, obviously, that should translate into high retention and high profitability. In today's world, we're all competing for talent. So we have focused on talent. We have a very strong employee base of almost 25,000 people in 35 countries around the world. We have over 17,000 accountants and client service professionals. We have a big development staff of, I think, 3,200 or so, and we have a large sales and marketing department of over 1,000. We are out pushing our technology, pushing our services around the world. Now we have 18,000 clients. So again, we're a force in the markets we play. We also have a retention program for our top talent. We identify them, give them a mentor, make sure that they understand there's a career path form and there's an opportunity to really gain some wealth with excellent participation. I reach out to our employees every quarter through a video. I -- we write letters. I write letters to our employees, and I'm very open. So people can send me e-mails and they get them back quickly. And it's something, again, where our employee engagement is why we have retention rates that are in the 92% range. And again, we want to have some turnover. And I think it's something that's pretty important. I mean, in our top management ranks, the top 30 people or so in the last 5 years, we've had 2 voluntary people leave. And that's Stephanie Dimarco, who's now the CEO of Intertrust; and Rob Roley, who is now an operating partner at TPG. So we feel pretty good about where our people have gone, what they have done and how we have focused on making sure that we create an environment where people are satisfied and the best people have real opportunity. And it's something where, again, I think we have the best workforce in the industry. On Slide 7, you see some of our business wins just in the last year, 18 months from places like ICMA or nationwide to Tahkuna, Paloma. Again, we focus. We deliver excellent technology. We do what we say we're going to do, and that has allowed us to grow and remain profitable. We have gotten tremendous feedback from our clients about our ability to move 99% of our people to work from home and still not miss any of our deliverables. Our customer satisfaction rates have continued to rise. And I think it's important that we do that in order to be able to bring out new products and new services. We have done 3 acquisitions in the last 10 months or so. We bought Algorithmics from IBM. Algorithmics is a very sophisticated risk management tool. It does all kinds of scenario analysis, all kinds of Monte Carlo simulation. And it addresses a tremendous amount of regulatory requirements for various of our customers as they want to manage their risk and understand their risks and be able to deliver actionable information on a timely basis. Now we bought Algorithmics in December of '19. We also bought Vidado, which is the main product of a company called Captricity. We just call it Vidado now. But Vidado is a very high level artificial intelligence product and machine learning solutions that enables us to take hand written notes and turn it into a machine readable format and do it at scale. So that's been very good for us to embed in some of our products and for us to sell as a sell alone -- stand-alone system into our client base. And then we bought Innovest in May of 2020, and they have some excellent technology. Their InnoTrust product is a world-class product that we're marketing all over the place. And Glenn Schmitt and his team have done a great job for us already. We've done a lot number of joint sales. They also have a great product in InnoPay. So it gives us a platform, allows us to go into our current client base with additional capability and additional functionality. And that's something, I think, we're going to continue to be able to do over the next number of years, and we're excited about what it does for us. If you look at Q2, we had a very strong cash flow for the first 6 months, up 33%, $555 million in the first 2 quarters. In the second quarter, we earned $1.04. The analysts had us at $0.91. So we beat pretty strongly. We -- our adjusted net income was up 14%, and our operating earnings were up and our adjusted revenue in the midst of the COVID pandemic was only down a little over 1%. And we're focused, right? So our expenses were way lower. We are doing tremendous outreach into our addressable markets, our marketing department has shifted completely to social media and webinars and information delivery through the web, as conferences and everything have really dried up. So I think that's something that we're driving forward to. And I think we will continue to do that over the next number of years. Hopefully, we do it with COVID well in our memory. We have a lot of solutions from our Eze Eclipse front office system that is world-class. I think we're up to over 120 systems that we sold the Eclipse system that we just rolled out about 18 months ago. It's very popular. It's very slick. It's very capable. It's very cloud-enabled. Intralinks, which is the #1 virtual data room, continues to perform. It's driven up its EBITDA margin. It is growing again. Even in COVID, right, it is spooling up a lot of data rooms. It is -- have a great sales force, and Bob Petrocchi and Ken Bisconti do a great job for us there. Our institutional investment management business is a good, great business with a lot of talented products and services and people. Christy Bremner runs that, does a great job for us. The challenge with it is it's a license business. And in the COVID pandemic being able to sell large-scale licenses with very little human interaction from an in-person standpoint, has proven to be challenging. But we're still fighting it. We're still selling some. We're still going after it. And I think it will rebound as the pandemic starts to subsist. I think the DST Systems, I think DST -- company that we bought in April of '18, we really have created it into a very profitable business. It does $2.1 billion or so in revenue. It's now generating 37%, 38% operating margins, and that's up from 18% to when we bought it in -- again in April of '18. So it's generating almost $800 million in operating earnings. And when we acquired it, it was less than $400 million. So we're just excited about what we have. GlobeOp continues to perform. We bought that in May of 2012, we bought Advent in July of '15. It continues to perform. Geneva is the #1 investment accounting system in the world. GlobeOp is the #1 fund administrator in the world. We're the #1 private equity administrator, the #1 hedge fund administrator, and we're the largest transfer agency in the world as well. On Slide 11, we're just a highly diversified business. Whether it's private equity or it's family offices, it's managed accounts or its banks, it's health care or it's RIA, we're players. We're big players in the businesses we're in. We're a strong player. We generate tremendous cash flow, and we're here for the long-time -- for the long-term. We have excellent technology, and we're excited about our opportunities. We've got some new managers and new executives in parts of our business. Nick Wright is doing a great job internationally. He's based in London. Danny DelMastro is running our health care business. He's based in Connecticut. He's doing a great job. Karen Geiger and Steve Leivent have taken over for Rob Roley on the Advent business. They're doing great. We're just driving, and I think it's going to prove out to be -- the next several years to be really good for us. If you look at the spread of our revenues, our alternatives, of which we're probably best known, is about 34% of our business. And as far as its impact, if there's a market dislocation or anything, we're so diversified. We have about $1.8 trillion in assets in our fund administration businesses. We're in every strategy, from commodities, to distressed debt, to all kinds of different credits, all kinds of long-short equity, paired trade, all the different types of arbitrages, whether it's statistical arbitrage or any of the other ones, right? I just think that we have a very broad-based alternatives business. As I said before, we have the top 20 asset managers in our institutional business. And those are well-known names, from Capital Group, to Fidelity, to Wellington, to Eaton Vance, to MFS, the Columbia Threadneedle. I mean we're just a big player there. Our Black Diamond product is a very successful 1,600 to 1,700 RIA, I think $1.4 trillion in RIA asset. It's still growing at 15% to 20% a year. It's a great business. And our health care business gives us a platform. Health care continues to grow at a good clip. We have some great products. Our Rx Nova pharmacy, claim processing business, the system Rx Nova was up 100% of the time in 2019. And I don't think it's been down in 2020. So again, it's very reliable. When you go into Walgreens or you go into CVS, our system is up, right? So you have a prescription for your child. And we're there, right? We're checking what your co-pay is. We're checking your insurance capabilities and coming back to you in a second or 1.5. So that's going to work out for us, and we're excited about what our opportunities are. If you look at the industry overall, right? For all the hand wringing of hedge funds, they've added $1 trillion in AUM, assets under -- our AUM, assets under management, $1 trillion since 2015. I think that the demise of the hedge fund industry is a little premature. And I think that it will continue to perform. Mutual fund assets is another area where it has grown significantly in the number of assets from $15.7 trillion in 2015 to $21.3 trillion in 2019. There's lots of opportunity. Sure, there's a lot more passive investing, but they have to do accounting. They have to report. They have to do regulatory reporting. There's still tax ramifications. There's lots of things to do. There's lots of valuable products and services to sell into passive as well into active. And so we're excited about what we can do here. If you look at the retirement assets, and we have won 2 really great deals in the last, just in the last month that we've announced from ICMA, which is based in Washington, D.C. to nationwide, obviously, out of Columbus, Ohio, 2 great deals, multiyear, right? 7, 8, 9, 10-year deals and large money for us. So we're excited about getting them live and driving a better client experience for them and a great relationship going forward. Same thing with banking and security spending, what are they spending on IoT and information processing software? They really have -- in the COVID era, it's technology that is going to be the thing that drives them and allows them to continue to satisfy their customers even as they have less person-to-person contact. And SS&C is at the forefront of helping them, and I think we will continue. I'm now on -- I think its Slide 18. And again, some of the things that we're bringing out, right, from our singularity product, to our site line product or our Advent Genesis product, to the apps that we've brought out in health care that allows you to look fraud, waste and abuse, so we can tell you which pharmacy in Greater Dallas is selling the most opioid, filling the most opioid prescriptions or which practice, which physician practice is writing the most prescriptions. In your health plans, you want to know that information, right, and want to make sure that everything is on the up and up. So there's stuff like that that's very valuable to our clients. And we're going to be able to drive that when we bring these products and services out because we spend $400 million a year on R&D. And that doesn't include acquisitions, right? So we're spending another, I think, over the last 10 years, almost $14 billion on R&D -- I mean, on acquisition R&D. So again, we're in this business. We're committing more capital than other people to this business, and we intend to be a winner in this business. If you look at our capital allocation, you can just look at our cash flow. I think since 2015, our compound annual growth rate and cash flow is 54.8% compound annual growth rate. Now again, we're not going to do that forever, but 5 years' a pretty long time. And I know in your portfolios that this is probably middle of the road. But it's done wonders for my portfolio. We have announced the $750 million buyback authorization. We have done very high quality acquisitions, like I talked about with Algorithmics and Innovest and Vidado. We have raised our dividend 12% in August. So again, we're trying to make sure that as we have success, we're giving money back to our shareholders and really working hard for a great total shareholder return. Remember, we went public March 31, 2010, at $7.50 a share. I think, yesterday, we closed at something like $61.33 or something. So again, I got it. It's not Tesla. But it's pretty steady business, pretty steady cash flows, 18,000 clients, 96% retention and high cash flow characteristics. And you look at our acquisitions and the capabilities, whether it's GlobeOp in May of 2012, or it's Advent in July of 2015, or it's Citi in March of '16, Citi Fund Services, our Intralinks and DST and Eze in 2018, again, people said, "Well, why did you do so many acquisitions in 2018?" Look, it takes 2 to tango. If people aren't selling, it's very difficult to buy. Yes, you can go overpay, which, in my opinion, has happened a number of times this year, but we're not going to overpay. We're going to be disciplined. We're going to spend our shareholders' money like it's our money, and we're going to deliver a great shareholder return with at least risk as we keep. If you look at some of our financials on -- starting on Slide 23, you can see our geographic distribution is -- we're still pretty strongly in the Americas, with 3 quarters of our revenue coming there. We get about 19% of our revenue within is in EMEA, but 19% of $4.662 billion is a big number, right? It's $800 million, $850 million. And APAC is growing pretty quickly. It's still only 4% of our business but still, it's $180 million, $190 million in revenue. And then similarly, on our currency exposure, primarily U.S. dollar, but we also have some British pound. And then we have 1% across a number of currencies, such as the Canadian dollar and the euro. We're a high-margin business. On Slide 24, you can see that in 2015, we did $1.56 billion in revenue and $44 billion in -- or $442 billion in adjusted EBITDA. 2019, those number were $4.69 and $1.828 billion. That's growth, high margin, great growth, lots of cash flow, a strong company that is also still an ambitious company. And if you go down to the next slide, you can see how we pay down debt, whether it was GlobeOp, whether it was Advent, and now with the DST as an Intralinks. We paid down -- I think we paid down $2.3 billion since April of '18 on net debt paid. So again, we're focused. We think we use our cash flow wisely. We have a great team, and we're excited about our opportunities. And again, if you look at the next slide, it really is our compound annual growth rate in earnings per share from 2015 to 2019, grew at over 30% a year compound annual growth rate. Once again, I realize this is probably middle of the pack for such a -- groups are on this call, but it really has worked out well for our shareholders. And that's really my remarks. Again, I thank you for being on this call. And I'll turn it back over to Morningstar for any questions you might have.

Great. Thank you for that Bill. For those of you in the audience, feel free to ask a question kind of using the chat function. I'll get started with some of my questions. Can you talk about how COVID-19 has affected the sales cycles and budgets of your clients?

Yes. I mean, we wouldn't call it a tailwind. So it's not like a hurricane of a headwind, but the ability to get capital spent, particularly on licenses. And also, people don't want to deploy technology at their sites anymore. They want us to deploy it. They want us to run it. They want us to take care of it all. And they're realizing that they're in the money management business. They're not really in the investment operation and data reporting businesses. So that's given us a number of clients because they see the robustness in our technology and our ability to fail over to another data center that we own. So it's been something about -- eye opener for a lot of money manager, a lot of hedge funds, private equity funds, that maybe they should be using a professional organization like us to run their operation.

Got it. So I guess, in your presentation, you touched on your fund administration business, which is, as I understand it, roughly a $1 billion revenue business. In what ways do you think SS&C is advantaged relative to your custody bank, investment bank and other fintech competitors?

Well, I think in the presentation, I showed where 40 fund administrators run our technology. 9 of the top 10 prime brokers run our technology. Do you think other people can run our technology better than we can? I don't think so, right? So -- and we own the source code, right? So we think we can deploy it faster. We can modify it faster, and we can give a better customer experience than our competitors can.

Got it. And then, I guess, on kind of your asset management software business, including Eze and Advent, like in what way do you think you're differentiated against some of your other competitors such as Charles River, Bloomberg or SunGard or some of the others you might face?

Well, once again, right, I mean Eze has been a leader in trading technology for a long-time. And their new product, Eze Eclipse, is cloud-based, very functional. We've got a great team building it. We like our chances in the front office space. And particularly, as we integrate Eze into Geneva and APX and other of our platforms, it gives people a front-to-back capability that is really unrivaled. And then we also have a very strong middle office business that helps our clients with collateral movements, FX, reporting to different banking regulators and U.S. Treasury or the office of supervision of financial institutions in Ottawa or the Ministry of Finance in Tokyo or the financial control authority in London. I mean, it's -- again, it's a holistic business. We don't see SunGard particularly and vis-à-vis the custodian banks. We just think that we're more nimble. It's a focused business of ours, and I think it's something where we have some really great competitive advantages.

Got it. That's helpful. We actually have an audience question on your capital allocation and your buyback strategy. So you've had your stock buyback authorization in place for some time, and you talked about it on your earnings calls. But you've been hesitant to buy back stock even when it declined significantly earlier this year. Can you explain your process in determining when you buy back stock?

Yes. Hey, I wish we had bought a bunch back on March 20 or whatever the day was when our stock hit $29.51. I wonder how much stock that questioner bought that date when all of us thought the world was coming to an end. We weren't buying back stock. We were pulling down our revolver, right? The one thing you want to make sure you do is that you stay in business. And if there was a liquidity crisis in March, the last thing on earth you want to do is tell your shareholders, "Yes. Well, we didn't expect this liquidity crisis, so we used all our cash to buy our stock." And now we're -- this thing called Chapter 11, sucks. So why you do that, right? We're prudent. We're conservative, right? So I think you'll see that we were pretty active in the third quarter of buying back our stock. We bought -- I think we bought 28 million back in the second quarter, and we've bought back more in the third quarter. And again, we try to be opportunistic. We try to be opportunistic in our acquisition strategy. We try to be opportunistic in our -- in how we manage our capital structure. We tried to get debt at the lowest rate possible and with as much flexibility as we can. And we do view, right? Last year, we generated $5.03 a share in cash. Our stock's trading at $60 or so. So I think that $5 is about 8%, a little bit better of $60. And so that seems like a better finance deal than paying down debt. It's costing us $0.02 -- I mean, 2%. So we hear you. At the same time, I don't think we haven't thought of all of the questions, and we think we have rational reasons when we buy and when we sit on the sideline.