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

Great. Can we get started?

All right.

Sounds good.

Awesome. Great. Thank you, everyone, for joining us. My name is Andrew Schmidt, Citi's payments, processors and IT services analyst, with focus on fintech software. It's my pleasure to host SS&C today. I have with me, Rahul Kanwar, President and COO of SS&C; and Justine Stone, Head of IR. Thank you both for joining us. Really appreciate it.

Thanks for having us.

Thank you. Yes.

Yes. So I find it's always useful to just have a brief level set. Just for those listening in, we do have a lot of international folks who may -- may or may not be familiar with SS&C. So I would just start with a high-level overview of just SS&C? How the addressable market has changed over the past several years? And I think it's important to focus also just on the components of DST because I don't think that's often not well understood, but I think it's starting point, that would be great.

Sure. I'll get started on that. SS&C, the markets we serve, in general, are financial services and health care. We really got started and are very kind of heavily involved in the alternatives industry. So hedge funds, private equity funds and fund of funds and real assets as well as traditional asset managers, wealth management and insurance companies. I'd say that, that's kind of SS&C's legacy client base. And we do any -- we do, basically, front-to-back office software and services. So your operations software, your accounting, your books and records, your trading platforms are kind of what we sell. We acquired DST in 2018, April 2018, and that has brought in a big business in the mutual fund industry, a big business in wealth management internationally, in the U.K. and Australia as well as a health care business that for sure is both a pharmacy benefits manager and a medical claims processor. So that's definitely expanded our reach into some of the more traditional pieces of financial services. And retirement, which has been kind of a highlight in the recent quarter, and we think has a lot of opportunity, has also kind of come under our umbrella.

Got it. And I think that was a good overview. And just -- I just want to mention for anyone in the audience who wants to ask a question, email me, andrew.schmidt@citi.com, or you can answer a question -- or ask a question in the interface in front of you. I'll be fielding email questions.

So I think the next question is on sales cycle and COVID impact. Clearly, like the big theme this year is COVID's impact on the sales cycle. And it seems to me you guys have been able to pull-through some deals, which is great. But the sales cycle has been impacted, specifically for larger deals. Can you talk about just across the business lines, maybe how the sales cycle is impacted and then just how buying behavior has changed? And maybe where we're at now versus, let's call it, 6 months ago from a buying behavior perspective?

Yes. Sure. Andrew, as you pointed out, right, it's changed throughout the course of the year and certainly, over the last 6 months. We saw some hesitance in -- hesitation, particularly in, I would say, the March, April, May time frame, that people are getting more comfortable now with working in a hybrid or remote environment. And quite honestly, the requirements that led them to consider using us or somebody like us in the first place, they've only continued, and in some cases, there's even more of a requirement because working remote does expose any weaknesses in your operating infrastructure that you might want to improve. So if we kind of think about it by business, our alternatives business, which, Justine pointed out, is, obviously, a big business for us, has held up pretty well through this process. And we're seeing people converting to us from competitors, but also from in-house infrastructure, where they may find that, in a remote environment, they want a little more scale, they want more team capacity, things like that. So that has held up well. Our Intralinks business, which is virtual deal rooms and LP communications, ticks up and down with the M&A markets to a certain extent. As the M&A markets have come back in the last several weeks and we're starting to see that activity pick up that had a pretty good quarter, this past quarter. Where we have seen continued impact from the pandemic is in our institutional and investment management business, in large part, where, it's -- to some extent, their sales are large perpetual licenses and multiyear projects. And I think that's been the one area where we have seen some impact. For the most part across our company, we're starting to see signs of things getting a little bit closer back to normal.

Okay. That's helpful. And then in terms of pipeline, over the last couple of quarters, you guys have talked about a pipeline building, particularly on the DST side. Has that continued to kind of improve quarter-over-quarter from a large deal perspective, just comments on the deal pipeline, given -- obviously, as Bill said on the last call, we're not close to normalization yet, but it seems to be people are maybe a little more comfortable interacting in a virtual environment. So just any context on pipelines at this point would be helpful.

Yes. I think that the -- we have announced some large wins at DST in the last 60 days or so. And the nice thing about that is behind those large deals, there's a slate of accounts in the pipeline that, "Hey, we won't win them all, but at least, we'll win some." And that's been -- so we think we have more momentum at DST than certainly in the recent past. And what people are subscribing to, the thing that goes across DST is they really want technology capabilities, right? And the exact nature of the technology capabilities that they want varies a little bit by end market. So in the retirement space, it's very much about digital and having a means of communication with their investors. In our health business, it might be more about the analytics, but also the end-user experience. And so as we invest more and ratchet up the pace of the execution on our digital and innovation capabilities, we're starting to get some momentum.

Yes. That's actually a point we're going to dig into a little bit because it seems like your product rollouts have been accelerating a little bit. So you want to talk about how that approach has changed. But I think just kind of get it out of the way upfront, the fiscal -- I get a lot of questions on fiscal '21 in terms of visibility. And obviously, it's very difficult, given the environment that we're in. But from where you stand today, is there a way to kind of frame from the deals you signed, an assumption of, let's call it, your volume-based drivers continue to improve. Is there a way to help people think about your visibility to obtain some top and bottom line growth for fiscal '21?

Yes. I think it starts with, at a very high level, we've got a large part of our revenue is annual recurring revenue, right? Whether that's outsourcing contracts that are tied to multiyear contracts with a high degree of predictability or term license revenues. So the vast majority SS&C, as a company, we expect the revenue to repeat. Most of what we talk about on -- when we're answering questions and what folks are interested in is what happens at the margins, right? And what happens at the margins, things like volumes, whether it's volumes in our M&A business at Intralinks or it's the trading volumes that drive some degree of volatility in our Eze business, which is trying to be in order management systems or the volumes of claims in our health business. Those are the kinds of things where we don't have as much visibility, and it will really depend on what happens with the pandemic from this point forward as well as what happens in the markets in general. But we do have a pretty high degree of predictability on the core business.

Okay. And let's dig into just DST, specifically. If we can -- if you talk about kind of -- that's obviously been a drag to growth for the last couple of years. Talk about what's been sort of -- what's been dragging the business down? And then correspondingly, how we can expect that to evolve over the next year or 2 from a growth perspective?

So we've made a lot of progress at DST, right? And that goes back from April 2018, where I think margins were a little less than 20% and now they're pretty close to 40%. So that's one part of it. And obviously, the thing that everybody is focused on is, can you do that and grow, right? And I think that, that is why when we -- the recent deals that we have announced as well as extensions on big customers, right? And some of those are public. And I think if you kind of take the revenue that we have recently won and the extensions that we've had over the years, it really is pretty significant as a part of the revenue profile of the company. So we feel good about that. And the pipeline has correspondingly improved as well. Some of it has to do with personnel. We're on now new management or certainly, management that, I think, is more aligned to how we would want to operate the business into various parts of DST. And so that's making the people -- people make a difference and leadership makes a difference, right? And so whether it's Kevin Rafferty in retirement, or Nick Wright, who manages now the global transfer agency business. We think these are good executives, that have a lot of capability, that will continue to focus on innovation and sales culture and attention to the customers and also speed up execution, right? Which was, I think, the one -- probably the biggest change from -- is how many internal meetings are we going to have and how many external meetings are we going to have. And the external ones make a difference because those are the ones that'll -- they might buy something from you. So it is -- it's more than just a feeling of optimism. There are some recent wins to back that up, and we think that will continue.

Specifically on the transfer agency side, in order to improve that business, obviously, part of it's selling. You mentioned just more vigor in terms of go-to-market. But is there also a product component as well? What are you doing -- I guess the question is, is this just -- is this something that clients look at their commodity? Or is there a way you can differentiate the product from a technological perspective?

I think it's the latter. I think you can differentiate the product in a -- from the technological perspective, and it's 2 components. The first one is the end-user experience, right? And that has to do with the quality of the digital channels, whether it's mobile apps or websites or things like that, that folks interact with. And the more modules and calculators and tools you can give them that make the end client have more insight into their wealth, right? Whether it's their wealth in retirement or their wealth in the mutual fund company account that they might have or whatever the case may be, those make a difference. And we're seeing our clients compete for assets. And so the quality of that infrastructure and the quality that investor experience is really important to them. The other one has to do with just service levels, right? So things like how good is that interaction? Did the customer get what they want? How much attention did you pay? And there, we think -- in both of those, we think we have a leg up on some of the competition. We're not a big bank or some other giant bureaucracy that would take a lot of time to write code and be constrained -- have all kinds of constraints. We have to execute, but we've got the right factors in our favor, and that's what customers are responding to.

Okay. That's helpful. So that's transfer agency, on the health care side. Aside from the volume-based recovery, what needs to happen there? Is there a product? Obviously sales component, but what needs to happen to -- and you have won some deals over the past year, but what needs to happen there in terms just to accelerate the growth?

A lot of it similar to the conversations we just had have to do with, one, taking care of customers, right? And that's focus, that's attention to their issues and what they're trying to do in their business. And the second one is technical innovation, right? Our clients in our health businesses are looking for better interfaces for their end clients, the members in these plans, to be able to interact with, but they're also looking for ways in which to get data and analytics that help them optimize and manage their businesses better, right? And then there's modules around individual things, whether it's how much fraud or wastage there might be and reducing that defect rate down or whether it's clinical data and using that clinical data to guide outcomes or whatever the case may be, it's harnessing information and delivering it in a way where people can use that to get a better result in their business. And I think that is our opportunity. And a little bit, we're competing with the big health plans. And so when somebody in the middle market wants to go and hire a pharmacy benefits manager or a medical claims processor, their choices are somebody like us that is very innovation focused and independent, or going and giving their data to one of their competitors. And we think -- we like the way we're positioned in that.

Okay. And you mentioned a couple of times innovation, approach to product. And historically, there's been a view, and it's not necessarily correct, that you'd acquire assets, you wouldn't -- you put a lot of money into internal innovation. But could you talk about how your approach to innovation and product cycles may have changed within the past couple of years. You put a lot of money, I think, $400 million into R&D. Talk about where you're targeting that? And how that might translate into growth in the future? Anything on product innovation, how that might change would be helpful.

Yes. I'd say the -- I would not agree with that historical characterization, right?

Sure.

I'd say that we've always invested in our products. The thing that I would highlight is, most of the businesses where we have great big businesses today, where we did not really have great big businesses, let's say, a decade ago, it's been because of technological differentiators, right? If you look at our fund administration business, as an example, where we have the world's biggest fund administrator going from essentially being a start-up in the early 2000s, and we have managed to compete with the big custodian banks and win big chunks of business, it's been because we built a better technical interface, we built better capability. That's really what we're working towards doing in the businesses that have recently been acquired. Intralinks is starting to get some momentum because of what Bob and Ken are doing. And a big part of what they're doing is they're improving their product in addition to being focused on the customer and sales and marketing. That's what we're doing at DST. I think that the reason people look at technical innovation and they question it sometimes is they mistake how much money you spend on it is a proxy for how many results you're going to get on it.

True.

Right? And what we would say is that we think people spend all kinds of money that isn't very invaluable, right? It's not nearly, and there are some examples of this. But if you go out and spend $20 million on a piece of hardware, but you never deploy it. It doesn't deliver any results, right? And I know it sounds silly, but we have examples of that in companies we have acquired. So we would much prefer to have real focused targeted spend tied to measurable outcomes, preferably with validation from key customers and anchor clients. And so that's how we do it. So the total spend stays within bounds, but the results we get from it are much better.

That makes a lot of sense. And I've seen the product rollout for the past couple of years, and it seems like you've stepped up the pace, which is good. I guess one product innovation that stuck out to me that you guys talked about at your last Analyst Day was singularity. In that sort of an AI/ML based sort of front-to-back platform, how -- is that seeing good adoption? Just talk about how that product is resonating in the market. Anything around that would be helpful.

Yes. That's a real valuable product for us in our institutional and investment management business, and then, over time, bigger parts of our business, there really has not been a cloud-based machine learning and AI-focused new platform in that space in a long time. So we are seeing good adoption. It's not yet the giant business we expect it to be, but we're hopeful it'll get there. And it's also very valuable for us in our outsourcing business, where there is a pretty big pickup for us in productivity and the kinds of modules we can deliver our customers using singularity.

Okay. That's helpful. And then there are some bank competitors that do pitch the benefit of having a front-to-back platform integrated. What's your view on that? Are there benefits in having an integrated platform front-to-back, it might depend on the client. But just curious, from a competitive standpoint, how you see that?

I think the sales pitch has to do with those integrating custody with core accounting functions have some benefit or not. And I'd say a couple of things. One being, what we have found or our customers have found themselves is when they separate the two, they tend to be able to go out and get bids on the custody that are economically to their benefit, right? So there's some economic benefit there, and they also get the best-in-class from a technology and services standpoint with us, right? So that's pretty valuable. And I think the second thing is, if you kind of talk -- if you look at the integration within those organizations, you'll find that it's less than fully integrated to begin with, right? So some of these are, what's the reality versus what's the sales pitch. And the market is pretty sophisticated. They can pick up on those kinds of things.