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

Excellent. We're live. Once again, welcome back. I'm Brad Zelnick, software analyst here at Crédit Suisse. Today is Day 3 of the 24th Annual TMT Conference that we typically host in Sunny Scottsdale. However, this time around, virtual live, right into your living room, right into your office. For this session, we are delighted to be joined by SS&C. And today, we have with us, Rahul Kanwar, the company's President and Chief Operating Officer; as well as Justine Stone, who heads up Investor Relations. To both of you, welcome. Thank you so much for being here.

Thanks for having us. We appreciate it.

For sure. Just in terms of the...

Thanks for the opportunity.

Thanks, Justine. In terms of the format for today's presentation, this will be a fireside chat. [Operator Instructions] But without further ado, maybe we'll just dive right in. Perhaps to start off, there are a ton of interesting things happening at SS&C right now. Why don't you maybe give us a brief update on the business for those less familiar with what you do?

Sure. And I'll take that for us, Brad. SS&C has been around for a long time, I think, almost 35 years. And we do about $4.6 billion, $4.7 billion in revenue and operate with upwards of 40% EBITDA margin. The markets we serve are financial services and the health care market. And really, what we're doing are the mission-critical processes that relate to accounting, record-keeping, regulatory reporting, customer reporting, investor services and the like. We span from the front office to the back office. And we can provide our services either via a license, so a technology or a technology-driven service where we essentially become your operations or back office, and we have deliverables for you at the end of the day, end of the month. And we're really a true partner with your business. Things have been going pretty well. And this pandemic has really highlighted the mission criticalness and the effectiveness of our business model. We've been able to maintain very high revenue retention rates. Our transition to work from home has gone relatively seamlessly, and we've gotten pretty high praise from our client base for the jobs that we've done, keeping things up and running, addressing their needs, and especially the unique needs that are pretty apparent as of today. So, we think that this is -- it's good for our business. It's good that we've maintained a high level of customer satisfaction. And we think that perhaps in the future, this could be a catalyst towards more outsourcing and people using more of our services as we get back to a more normalized work environment.

Thanks for that overview, Justine. And maybe if I can, just to double-click a little bit more on the impact of COVID. I mean, I'm asking this question of every company that we're hosting in various different ways. I mean, it's affected sales cycles, especially for large outsourcing deals for SS&C. But you've continued to execute very well against this volatility, which you mentioned. Can you just talk about how you've navigated the past 9 months, maybe a little bit more detail? And if the selling environment has improved? And how you think the pandemic drives tailwinds for your products longer term? You touched on that, but if you can expand on it, that would be great.

Sure. Brad, I think that the most important thing is the one that Justine just said, which is, we've transitioned to remote and managed to maintain very high levels of customer satisfaction and delivery and operational capability. So, what that does is it drives confidence, right? And in parts of our business where, particularly in our Fund Services business areas, where we sell recurring licenses, things that are annual contracts, while we have seen some impact, we haven't -- it's really been pretty muted. There has not been a lot of pandemic impact. I think where we've seen the bulk of the impact has been on areas where there's a capital investment, so a perpetual license or something like that, which is not a big part of our business, but it's enough that we notice it. And there, I think there has been some hesitation, and hesitation driven primarily by customers trying to figure out how much change they want to put their own organization through. And even there, we are seeing signs that people are getting more comfortable. They've been -- one, they've had more time to adjust, and we've continued to deliver. And people recognize that the issues that they had and the challenges they had that caused them to look at alternate ways of providing their operational capabilities still exist. So, these changes have to happen. And we -- so, we do think that the pipeline has continued to build. We're seeing more decisions being made. And we think we come out of this pandemic stronger over the long term because of how well the business has held up and the delivery capability has held up in this process.

And maybe if I could dig into some of the actual businesses. Perhaps first starting with alternatives, this business has performed pretty well throughout the pandemic and at the high end of your expected 3% to 5% organic growth range. Can you discuss the recent upside that we're seeing there? And maybe diving into the various segments, looking at hedge funds, private equity and real assets. And what excites you about these respective opportunities the most?

Well, I think it's a -- in some ways, it's validation and recognition of the fact that we have over the last decade or so built what we think is a truly differentiated capability, right? And we approached really -- as a bit of background, we've approached the alternatives business as 2 key ingredients. One is you have to have great technology. And two, you got to have experts that are very committed to client service and focus. And so, we've gone from being a -- in effect, a start-up in the early 2000s to being the biggest one administration provider. And we continue to build on that with technology differentiators as well as making sure that our teams, we're investing in our teams and we're growing talent. And so, we've held up -- that business has held up well in this pandemic. And while we do appreciate the confidence of our customers and prospects, we also think that there's a lot of capability there that they're getting the benefit of at a time where their own organizations might be somewhat stressed. So, seen -- just to comment on kind of the different parts of the business. In our hedge fund business, while we continue to win new mandates for fund administration, we're also seeing more and more mandates for people taking internal operations where they might be supporting their trading staff or doing middle office functions or a variety of things that happen in terms of reporting to portfolio managers and things like that and for the first time, at scale, considering putting that out of the organization. And our hedge fund business has benefited from that and we think will continue to benefit from that. And private equity and real assets, in particular, are areas where outsourcing has not been sort of the norm of the day as these organizations have grown to size. So, we're still, I would say, half of the market is done in-house, particularly at the larger end of the scale. And those organizations are waking up, looking around and saying, "hey, gee, if anybody that starts a new firm these days can outsource and get access to all these capabilities, why can't we?" So, we -- that's probably a gift that keeps on giving for the foreseeable future.

Thanks for that overview, Rahul. Maybe if I could pivot over to Intralinks, which has really been performing nicely. Organic growth of about 6% in Q3. Can you talk about what's going well within Intralinks? I mean, going forward, should we think about Intralinks growth prospects -- appreciating both the rebound in the M&A market and corporate use cases beyond M&A, such as the large PPP win in Q2. Like how should we think about these different dynamics in the end markets that you're serving within Intralinks?

So, Intralinks does -- just once again, a little bit of additional background. But they do virtual data rooms, right, which service the M&A market. But they also do -- and this was the part, I think, that was originally a pretty good synergy for us. They also do alternatives, LP communication for big private equity firms and big real estate firms. And there's a good amount of overlap between that in our Fund Administration business. And then they've got targeted solutions, really driven around that same capability, which is secure mission-critical information, things that you want to protect and are highly sensitive. How do you exchange them in a way that's electronic, right? So, whether that's in the transactional world when -- with banking and settlements and things like that, or as you pointed to, the Paycheck Protection Process, where that program required large-scale secure document completion and exchange. And Intralinks was able to pivot and take advantage of an opportunity starting in Q2 to service that. But a couple of things that we have going in that business. It starts with leadership, and we think Bob Petrocchi, who used to run sales and Ken Bisconti, who's very product focused, and we put them jointly as co-leaders of that business about a year ago. They've done a really nice job, right? They've done a nice job bringing capabilities to the product side of the equation, focusing on customers and building out the sales force. It's nice to see that effort paying off as the M&A market comes back. We do expect Intralinks to continue to grow well. And it was a good business when we bought it, and we think we have the right team in place to build on that.

Excellent. I want to get into DST. I've got several questions asked about what's going on there. But maybe before I do, if I can just switch over to Eze for a brief moment. Maybe we could talk about what's been driving the momentum there over the past couple of quarters. I know there's synergy and a lot happening as it relates to the alternatives business. But additionally, I just wanted to dive into Eze Eclipse. Can you explain how it differs from your existing offerings and the good pace of new customer adds and expectations that we should have there going forward?

Sure, sure. So, the biggest thing about Eze Eclipse is brand new, cloud native, right? And I know those are the buzz words that are thrown around all the time. But it means architected to be run in a browser, right? That's really what it is. And because it's brand new, it's built on the latest set of not only functional capabilities that we have as an organization, but also the latest set of technology capabilities, which means, in addition to business users that might want to use it for trading purposes and managing their orders and their executions and so on and so forth, it's also what IT departments want to buy, right? And the other thing it does is it's easier to hook into a variety of different products and services. So, we have -- and Mike Hutner runs that business. He's run it for the past year. Similar to the conversation about Intralinks, Mike comes from a sales background. And it's very focused on how do we grow revenue and the user base and user adoption and make sure we have satisfied customers on Eclipse. So, we've got a brand-new product that has some momentum. We think the momentum is going to continue to build. It gives -- it's a pretty good avenue for us to plug in different of our products and services that go with the front office capabilities. So, whether it's interfacing with Advent Geneva on somebody that wants an accounting system in-house or for us to run one for them or interfacing with a singularity, if it's an institutional manager that wants to run, once again, their portfolio function through us. There's a variety of different ways in which Eze harnesses, and Eclipse in particular harnesses the power of SS&C, and that's been helping.

Excellent.

And I think we put out a press release that we've gotten upwards of 150 clients on Eze Eclipse now, and it's really accelerated over the past few months. And I think, again, Eze Eclipse has had momentum before the pandemic. But with this work-from-home environment, having that cloud-based trading platform has been very important to our clients.

Very fortuitous. Makes sense. Maybe if we could dive into DST a bit here, Justine and Rahul. I mean this has been a drag on organic growth in recent quarters, but we started to see some positive signs. You've had 3 high profile retirement deals in Q3 alone. And recently, a partnership announced with Pro-Invest. Can you share any more details on the economics of these deals? And how we should think about the health of your pipeline here going forward?

I think there's a number of kind of pretty, as you said, positive characteristics to some of the recent events, right? One of them being market validation. So, we have -- since we acquired DST, and then I would say, we're going to continue to do this, we've been really focused on making sure that we're delivering at a very high level and that the products are continuously getting better, right? And continuously getting better means investing in the technology and making sure that there are upgrades and enhancements that customers want to use and that help them in their business, right? So, what you saw in valid -- in the retirement spaces, folks that went out and did a competitor survey, looked at us, looked at a number of our peers, and then -- and selected us. And so, that is both a complement to that current team, whether it's Mike Sleightholme, who manages that for us or Kevin Rafferty, who joined us, or John Geli, who works for Kevin, they've done a real nice job. And they have -- and I talk to them regularly, they have a number of deals in their pipeline that we think will run similar processes. And if they do it right, we think they'll arrive at similar conclusions, at least that would be our hope. So, that part of it is going pretty well. We're going to keep trying to build capabilities, right? That's really -- we -- in a lot of these markets, technology and being able to deploy technology and take care of our customers has been the key to why SS&C has been successful for a long period of time. That's what we think we bring to DST. And we think we have the right pieces in place.

And Rahul, if we could just double click a little bit deeper on your retirement solutions. Can you share some color on what would lead a customer to want to change their existing solution? Who else would they be assessing? And why DST wins? Just trying to parse through and better understand the competitive dynamics and what DST offers that makes you confident in smarter customers choosing the right solution or SS&C or DST as it is, as you mentioned.

The biggest factor is, in a lot of these organizations -- and the pandemic has sort of accelerated this a little bit, but it's a continuing trend. The quality of their digital experience is very important to them, right? And as more and more of us transact digitally, even with our retirement accounts, but really all of our accounts, it becomes even more important to have both a really robust and scalable way in which that happens, but also a differentiated way, right? Some way in which when you go to one organization, you can tell that it's different from some other organizations. So, they have a way in which to compete. And so, we've seen our customers and prospects very focused on, what is the quality of that user interface, whether it's on the web or on a mobile device or if they're calling somebody? And do they get the same kinds of functionality? Is it one channel, right? So, regardless of where they go, it's the same experience, it's the same modules, it's the same numbers, it's the same things they have access to, and how seamless is that process. And I think when people look introspectively in their own organizations, they discover that they're going to have to make a pretty big investment to get to the next generation of those kinds of systems. And picking us allows them to make that leap in a much more -- it already exists. So, the risk is lower. They get a number of additional service capabilities that go with that. And that's really what's driving some of the momentum that we're building in the retirement business. In order to keep that going, we have to keep building modules, keep building enhancements, make sure that the current set of customers that we have remain very happy. But that's something that we're -- we've been doing for a long time, and we're pretty comfortable.

Got it. All cool. Maybe within DST, if I could just touch on the transfer agency side of the business a bit. Can you maybe just talk about the trends that you're seeing there? Is the current focus on existing client retention and cross-sell? Or is it also pipeline building for new client wins? And if you can as well, maybe you touch on the launch of the Global Investor & Distribution Solutions, and what that has meant for your TA business overall?

Sure. And maybe if we start with the last one first, right? DST before -- certainly before this most recent change, operated their worldwide transfer agency business outside of the United States, and the U.S. is 2 separate businesses. And while there was a fair amount of collaboration, we think that combining those and having one organizational chain of command and one person in charge and Nick Wright, who we selected to run that business for us, he's a very, very capable executive that we have a lot of confidence in. And what that allows us to do is focus our resources in a way that we're building technology where we can once. And as our bigger clients are increasingly global, we can service them around the world in a way that they would find consistent, right? So, we think that, that ability to take the investment that we already make around the world and focus that in some areas will improve the business. It will allow us to go faster and will mean we have a better experience for our customers. In terms of your -- the first part of the question, on opportunities, it's all of the above. We do think that we have a pretty good opportunity in terms of new wins in that business. And it is amazing to me how many of the customers we have today and many of the prospects we have today, still do their own transfer agency's work in-house in part, right? So, we have competitors. And we think that technology and some of the things we're doing with personnel and some of the organizational shifts we make will help us in that competitive dynamic. But we're also seeking to improve and take over in-house operations where people realize that there's not a lot of added value to doing something one firm at a time where you can go with somebody like us and take advantage of the scale we've already built.

That's really great to hear. And just maybe to round out the DST mix. I'm reflecting back on when you first acquired the business and Bill's comments around the health side. And I like the way he always had put it. It's a lot of the same stuff. It's data. It's record keeping. It's process. It's following a bunch of rules. And he said you'd give it a good try. And if it didn't work like anything, I know you guys -- if nothing else, you're very disciplined about how you manage the portfolio. But maybe on the health side, which has faced now COVID-related headwinds from elective surgeries and prescription processing, where are we point in time? What can you best see as it relates to that? And what keeps you -- even post-pandemic, what keeps you optimistic about the future?

Yes. So, traditionally, this has been one of the best businesses within DST, right, fastest growing, more profitable. And so, Danny DelMastro, who took over as head of the business in the summer, comes from a revenue background, his focus is customers and sales. And we think that's the right focus for this business. So, from a leadership standpoint, we feel good about it. From a product standpoint, the ingredients that SS&C brings to this is we're -- we listen to the customers. We try to figure out where they want to go in their business. And we build technology, right? Lots and lots of technology. And so, where we've been successful is in these modules and enhancements that we build to the core claims processing, right? Whether that's in areas that help them identify fraud, waste and abuse is one category. Clinical documentation and management is another category, or it's data and analytics that help them optimize. So, it is going to be a -- and some of the reason for our optimism about this business is, from a feature set standpoint, we think we're building that feature set that's different than what's out there and it's what people are looking for. From a leadership standpoint and from a sales standpoint, we think we've got the right people in the business. And it's a good area, right? There's a lot going on. And so, we did see some temporary impact, we hope, temporary impact, but -- from COVID-related. People just not going to the doctor as much and not doing preventative stuff. That's starting to come back. We're seeing volumes starting to go back in the other direction. I'm pretty hopeful. I saw this morning that the U.K. approved a vaccine. And I'm hopeful, right? And I think a lot of us should be. So, as that starts to come back and the world gets a little bit closer to normal, we've got a good business that's well positioned.

Great to hear that you still feel good about it. And maybe as I round the bases here, we've got, I think, about 5 minutes left. I just wanted to touch on one more corner of the business, which is on the wealth management side. We've seen Black Diamond continued to take share, record strong 20% plus kind of growth. What are you seeing in the RIA market? And how is Black Diamond able to differentiate and grow at such a strong pace?

One, it's a really good market, right? It's a good market. There's plenty of new formation. There's plenty of people that are looking to go become independent RIAs and manage client money. And so, those trends are positive for us. And we think we have a combination of services and technology where we're competing against either technology or services or something like that. So, we've got a combination of services and technology that's pretty different. And it allows people to self-select wherever they are at a point in time, but also go from there. That's the one part of it. Two, I think the technology truly is different than most other people. And we've also taken this open-architecture approach. So, we get lots of integrations, right? There's lots of partners that we have. And there's lots of different modules that people can acquire through the Black Diamond platform in addition to our core set of capabilities. So, the incoming and the amount of pipeline that we can get through some of these channel partners and other things we have is different than some of our peers who may be locked into one particular solution in planning or something else like that. And that works pretty well.

Excellent. Now just to maybe finish things up here, I had a few questions at the higher level of the business and its overall strategy. M&A has been a cornerstone of the strategy. You guys execute very, very well in this regard. Very strategic approach, mindset and discipline for that matter. But this year, you've made a few smaller acquisitions, hired Frank Egan as a Managing Director of M&A. Can you just remind us of the M&A strategy? How it's evolved? And what you've been seeing out there in the market for potential deals and the appetite to do another large-scale acquisition? I feel like it's been a little while. I feel like DST was a lot to digest. I think you guys were the ones to pull it off, and you're still pulling it off. And we certainly see the value there. But how should we think differently about SS&C as it comes to flexing this muscle going forward, if we should be thinking any differently at all?

Well, I think we're -- from an appetite standpoint, right, I think we are ready, right? I think we have been ready, right? We feel real good about the people we have in different leadership roles across the company and how much bandwidth they have and the depth of their team. So, whether it's executing on a small, medium or large-scale acquisition for the right one, we do have the bandwidth and the capability to do it. We also think that there are some things we have done over the years that are pretty good indicators of difficult deals that others might not be as successful at, and generally speaking, large-scale carve-outs out of different organizations, right, where execution risk is high and successful execution is really valuable because whatever our organization is carving out, they want to have a good ongoing relationship with those customers that are usually shared, right? So, whether it's buying Citi Fund Services out of Citi or buying Algo out of IBM or those kinds of things, it's more and more organizations around the world trying to focusing post-pandemic on what is core to them and what its capability that belongs elsewhere, we'll have -- we'll continue to have lots of opportunity. But the pipeline is reasonably full. We think Frank helps us just get a little more coordinated perhaps across our business and just a little more insight into some of those deals. And just -- we arrive at, I guess, the right conclusions in the right way, and at least that's our hope. And so far, it's been going pretty well. There's a number of opportunities. But we're a disciplined buyer. Well, we're not going to do M&A just for the sake of doing M&A. And so, we do think there's enough deals out there where it's likely a market we can operate in and have some opportunities. But it's going to have to be that it meets our criteria, and we're getting there.

That's good to hear. And when I think of SS&C, I think about discipline. I think about the track record in controlling what you can control. And a lot of that comes down to delivering on profitability, on adjusted EBITDA commitments at a minimum. Maybe just to add -- ask a real quick last question. You've consistently delivered margins, cash flow. Can you talk about the -- just the general philosophy about balancing cost efficiency with investing for top line growth and also anticipating a likely return of T&E expense at some point next year as things ramp up and economies open back up and people are in the field? How should we think, if at all, differently from where we are today?

Well, investing for top line growth is the priority, right? I think the difference between the way we do it and the way it's been done in, let's say, some of the companies we've acquired is, we're really focused on, okay, what are we going to invest and what are we going to get, right? It comes back to being disciplined and paying attention and making sure that there's a return. And sometimes, hey, sometimes, that return is a little fuzzy, and that's okay, as long as then we can be incremental about it and make sure there's some checkpoints along the way. So, I think you'll see us continue to invest for growth. We do think we've got the ability to drive margins certainly further from where we are right now, but also to drive significant synergies in the companies that we acquire. So, we ought to be able to do both. And while there are some changes to the expense framework, to the third part of the question, and some of it will come back, we haven't had any dramatic changes to our expense base outside of some muting on sales and marketing expenses that, generally, when they come back, they come back with associated revenue. So, we ought to be well positioned to deliver margins over the long term.

Excellent listen. With that, probably we're out of time. Justine, both of you, thank you so much once again for joining this year's conference. It's really great to see you. I hope to see you again one day soon in person.

Great. Thanks so much.

Thanks, Brad.