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

I'm James Faucette, senior IT services analyst here at Morgan Stanley. And before we get started with SS&C, I just have a quick disclosure to read. For important disclosures, please see morganstanley.com/researchdisclosures. So I'm very pleased today from SS&C to have joining us, President and COO, Rahul Kanwar; as well as Justine Stone, Senior VP and Head of Investor Relations. So Rahul, before we get started, I've had multiple opportunities to listen to Bill Stone speak, obviously, in his -- in the investor calls, at other events. And I was really excited that you would be able to join us because the frequency with which he defers to you and your opinion, must mean that you carry a lot of weight, particularly for somebody like Bill, who not only is the Chairman and CEO, but also founder of SS&C. So thank you for joining us today.

James, thank you for having us. We're looking forward to it.

Good. Good. Well, for those that are joining us via the web you can certainly submit a question via the webcast. I'll take a look at those as they come in. And if we do have any come in, I'll be sure to address those.

But Rahul, to get started here, let's start with demand. We're 2 months into 2021. How are budget conversations progressing with clients and prospects? And are we seeing healthy demand in the pipeline for the larger deals to be signed? Or is that relatively slower to pick up given the aversion to larger outsourcing and licensing deals we've seen elsewhere?

James, what we have continued to see throughout this process, and I would say, pick up some steam in Q3 and Q4 last year, is a trend back to normalization, right? So hey, we're obviously still largely work from home as are many of our customers. And -- but we are seeing people more willing to transact and recognizing that the things that they want to do to improve their operations and to innovate and to make changes in how they deal with their end clients, those things aren't going to wait and so we do feel pretty good about the demand environment. There's plenty of prospecting out there and there's -- and we've transitioned from a in-person kind of model to much more of a digital and virtual model. And we're seeing our leads coming in, tick up appropriately. And we do think that even at the larger end of the spectrum, whether it's the larger outsourcing deals or other deals. There is appetite, and we ought to be reasonably successful there as well.

Got it. Got it. And in those pricing conversations that you've been having, have you seen any attrition from a client perspective in reaction to increased pricing? Or are you able to pass along wage inflation to clients? Just talk to us a little bit about the pricing dynamics and maybe how now and what today looks like versus what you had seen in the past? And any impact that, if you will, a pandemic may be having on what people or how they're thinking about their needs?

Sure. And I think, James, it starts about 12, 15 months ago where we did a review and decided that we were going to become a little more formal and a little more disciplined and now we're processed for annual price increases on current customers. And we already have some percentage of our clients that have contractual escalators built in. So there really nothing has changed. And -- but there were businesses where we had not been as formal about taken a review of the account. And as you point out, wage inflation and things like that, that happen to our cost structure. And then going back and having a conversation about what fees ought to be going forward. We did that for the first time at the end of '19 going into '20. We're somewhere midway in the process for end of '20, going into '21. And they've gone really well. And we're not -- we want to be constructive. We want to work with our customers. We don't think that absent something specific to a particular client, we don't think that anything we're asking for is out of the ordinary. And we're pleased that, that's really how it's been reported, and received as well. So there hasn't been any attrition or negative -- look, nobody wants a price increase, right? That's true for us as well. And at the same time, we try to have good partnerships with our customers where they understand where we're coming from and the other way around. And it's been a good process.

So when you go through these pricing conversations, a lot of times, at least, it seems like that there may be opportunity to expand footprint or services that you're delivering for the customers, a lot of -- it can open up to a broader conversation. Are you seeing that? And trying to get a little bit of a flavor for where are you sensing an incremental appetite from your customers where they're like, look, if we're going to be paying more, is there other things that we should be looking at more broadly?

And that's a really good point there because that's a natural part of this. This conversation is supposed to be about more than just, here's price, right? It is supposed to be how are we doing for you, what have you identified as strategic priorities for your organization? So how our customers are going to change their organizations over the course of the next 12, 36 months? And are there things that we have built or things that we now do that may be different than when they first became a client 2, 3, 4 years ago. And at SS&C over the last 3, 3.5 years, there's been a tremendous amount of change, right? Whether it's all the capability that we inherited through DST and Intralinks and Eze or all the innovation that we have done to build additional products and services and that is a part of -- a natural part of the process, and that does come up all the time. And we do find that we're able to, in addition to having some kind of reset on the baseline, we are able to a lot of times get some additional product and service capability.

So you mentioned DST, and that has continue to see at least some headwinds. But you've recently talked about potential for growth in '21 given deal signings and some of the investments you've made there. What has been the feedback from clients and prospects? And how much of the historical softness there has been around the purchasing environment versus what DST was actually offering?

So I think what I would characterize feedback as being very positive, and market reception has been very good. But it really, really comes down to just to kind of spend a little bit on background. For the past almost 3 years now, we've been very focused on taking what was, at least in our view, a reasonably internally facing organization and making it much more externally facing, right? So more go see your customer, less have the internal meeting, right? And I know some of these things sound obvious, but organizations change over a long period of time, and some of these become cultural. So we have been very focused on getting people out of their offices and going to see clients and listening to what they have to say and making sure what they have to say, comes back into our technology build process. Similarly, just having the right kinds of salespeople out there, facing off against competitors, but also learning from prospects what would make a difference and why would they select us and making sure that goes into the product and service mix. And we've been at it for almost 3 years now, and we're starting to see some of that have an impact. We're -- that process of incremental improvement that we've been able to do in a lot of our businesses, and over time, it really does become something quite compelling. We're at the early stages of that at DST now. We have a good product mix. We have a good set of personnel out there. We have made the right management changes and have a number of people leading these businesses that I have a lot of confidence, that we have a lot of confidence in. So that's all contributed to pretty good feedback.

So it's -- if you pardon the metaphor, but I can understand where -- I mean, if you're -- have shifted the focus to be more sales oriented. You think you've improved the product itself and the offering itself. But what are the points of customer feedback that you're getting? I mean, for example, like I could go out and I can start doing all the right things, talking to the right people, and going through the right exercises, but I'm probably still not getting drafted for the NBA next year, right? So like what kind of feedback are you getting from customers that are building your confidence there? And that you can see an inflection of growth? Or how much of it may just be a reflection of the easier competitors?

Yes. So I think if we kind of try to think about historical, what has been the reason this hasn't grown as fast as we would have liked over the last couple of years, right? And some of that does have to do with attrition that we knew about coming into this, right? And some of it has to do with the factors that I talked about just becoming more sales and marketing oriented, but also building technology and building product to meet those requirements once you have that feedback loop in the right place. And so I don't -- James, I'm sure you can really play basketball, but I don't really view this as we're trying to get into the NBA, and we don't -- we can't, right? This is much more. We're trying to do to the DST businesses what we've been really successful doing in other businesses over a long period of time. We started in Fund Administration as in the early 2000s, and our big competitors were generally big custodian banks and we thought our ability to build technology and then deploy that technology at a quicker rate, would be a pretty good differentiator for us, and we built the world's biggest business, right? And we view whether it's transfer agency or health care or retirement services or brokerage services is all businesses that are clamoring for technology. Our competitors are similarly constrained as they've been in some of our other businesses. And if we can go faster and execute with some discipline, we ought to do really well. That's what's happening, right? And the external validation, which you point to, right? It's great to believe it, but somebody else tell you, right? Somebody that doesn't already work here is I think there's a couple of examples of some pretty big deals in our retirement business that we announced towards the end of last year. These are people that ran institutional level RFPs. They compared us to a pretty wide set of peers, and they picked us. And there's -- so those are some large examples, but we have smaller and midsized examples that give us some confidence.

Well, it's good to hear. That's good to hear. So turning to the business as a whole. You talked about getting to around flat to roughly 4% growth. What is contemplated in that range from a business unit perspective, if you can help us break that down? And what are the -- where do you have confidence and perhaps cushion in some areas versus where do you need things to happen? And where -- what would be the key things that would drive results kind of outside of that range, do you think?

Sure. So look, we have a number of different businesses in a just a number of different places, right, both in terms of where we are, but also where the end markets are. So that range does encompass all of those different deviations across the business. But just to kind of give you a little bit more color on the business levels. We do expect our alts business to continue to grow in line with historical type performance. So towards the higher end of that range, right, or maybe even a little outside that range from a positive standpoint. Similarly, we think that the Intralinks business, were under Bob Petrochhi and Ken Bisconti, both as a function of the things they have done to improve their product, and they've made some pretty significant investments, both in terms of infrastructure and speed and things like that, but also just functionality, right? The machine doing things for you that you would end up having to do yourself in a due diligence process. Use of embedded artificial intelligence, things like that. And so they're starting to grow faster again, and Intralinks traditionally has grown mid-single digits or better, and we do expect it to return to that. Towards the middle end of the range are probably some of our businesses that have a heavier license component to them as well as the financial services part of DST, right? So our Advent business, our institutional business, the financial services part of the business, we would expect to be growing, but maybe not as high as the couple that I mentioned. And then in our health business, we have some attrition to overcome. A lot of attrition we knew about as well as some things related to how much preventative care and screening and things like that people are still getting in this pandemic environment. And so right now, our expectation is that's towards the lower end. So all that blends out to a 0% to 4% kind of outcome. And then to your point about what drives excess, we really need a bunch of these businesses that we're thinking are at the lower end of that range to get closer to the middle and the ones that are at the middle to get a little bit better, but there is enough opportunity for us to do that.

So working our way down the P&L quickly. On an expense basis, investors are used to SS&C for years and years being able to manage expenses, cut costs, improve margins, et cetera. What incremental cost levers do you have beyond the workforce? And now what have we seen -- what were you able to do in 2020 to improve margins?

I think it's a broad set of categories, right? So productivity, and we want to invest in our workforce, and we continue to do that. And we do a lot in terms of career development and electronic training and making sure people have opportunities to have bigger and better jobs and get paid more, right? I know that's the opposite of the question you asked. But I think those things go together, right? It sort of means that you have -- you deploy enough technology, so that computers are doing a lot of the work and the people we have by definition, have higher level jobs, right? So that's an ongoing process, and we think we can get productivity every year. There's still lots and lots of opportunity. It's what our engineers are focused on. So that's one part of it. Outside of the personnel part of it, our entire expense base is -- continues to have opportunity for some optimization, right? Whether it is the fact that we have still a number of contracts with third parties that are not quite at the enterprise level. So individual contracts that DST may have entered into before acquisition or since, and Eze and Intralinks as well as within our business units and our opportunity to turn that into a global contract and have a strategic relationship with some vendor and get some pricing benefit as a result. That continues to be a portion of this. I think our entire infrastructure, what we can do with compute, how we deploy our private cloud, what we do with IT spending in general is another opportunity. And I think probably one more that I'd highlight is just footprint, right? Real estate footprint. How much office space do we use going forward? We do think and we haven't arrived at any conclusion yet, but we do think that the work model of the future is a little more flexible and probably a little less geared towards in-person than it has been in the past. And we'll have some mix and will allow for lots of flexibility, but that will mean that we'll need likely less office space than we have in the past.

Interesting. So I think those are -- all those things make sense. One of the questions that we've had coming in over the last few weeks, I'm sure you've had the same, which is with the recent move in rates, how are you thinking about that impacting your '21 and the way that at least you formulated your outlook a few weeks back?

Yes. I can take that one. I think if we're talking about the interest rates and on our debt levels, we've got about $2 billion in notes at a fixed rate. I think that rate's about 5.5%. And then the remainder of our debt facility is at LIBOR plus 175 bps. And I think that portion is, for now, the best we're going to get. And we're pretty happy with the way we've managed our debt levels and the interest rates on it. And we can look at the $2 billion of notes and see what that cost to get out of that and turn it into a variable, but there is a premium to that. So that's just something that we would have to consider.

Got it. Got it. So right now, it's pretty arithmetic in terms of just breaking that down, et cetera, in terms of how you're thinking about that impact. Is that right, Justine?

Yes.

And maybe then for Rahul and Justine, is that when you guys -- obviously, I think this goes back to maybe one of the key points around acquisitions is SS&C has always been very good at being -- finding the right acquisitions to do, finding the right technologies, good valuation to do it at, et cetera. I mean, I think that over his career, Bill, has done an amazing job from that perspective. And it's reflected in how big SS&C is today in part. So how are you balancing out kind of those different elements of like potentially contribution of inorganic growth, acquiring new technologies or capabilities versus where valuations stand versus a rising interest rate environment that maybe creates more incentive to pay down debt. So how are you balancing all those things out? And what do you think are the strategic imperatives and opportunities right now?

James, I think there's a lot that we do today that is very consistent with how we've looked at acquisitions in the past. And then maybe there's some tweaks, right? So the parts that are very, very consistent are we continue to look at just about everything, right? That's part of being methodical, and it's a pretty good way to learn what's in the marketplace, what people are doing, et cetera. And we continue to be pretty disciplined and filter that down to a much smaller percentage of things that are actionable on the basis of a variety of different metrics, including what we think of the management team and how we think that the product and service mix will complement what we have and whether it's an adjacency or something that we know really well, those kinds of things. I think probably the tweak is -- this kind of comes down to mix more than anything else. We are likely for the foreseeable future, more focused on the organic growth characteristics of whatever company we're looking at. That's not to say that growth is not always important. It is. But you do have great assets that you can make a lot of money at. You can get a lot of synergies and you can have good products and services that maybe don't have that quick growth potential. And we did one of those with DST, and we're now starting to turn the corner and starting to see some of the efforts of the last couple of years come to fruition. I don't know that we're anxious to take on another multiyear project and have to explain it for the next couple of years. I think we'll probably get to a place where we've done a couple of quick-growing assets, and the growth profile is one that people are a lot more comfortable in, and then maybe there's another financial type transaction that we can do. So it's a mix. But right now, we're pretty focused on historical growth and what we think growth will be going forward.

And so within that, and I think that makes sense if you're looking at businesses and the potential acquisition targets. What about on the core SS&C, does that put upward pressure at all on your own internal R&D? Or how is that factoring in? How are all those elements factoring into your own decision making in terms of what you want to do internally?

I think it does put upward pressure in a pretty positive way, right? So one of the things we do -- we're at the start of March now, one of the things we do with our business units every year is review their plans for the year. And we talk about a lot of different things. But obviously, revenue and revenue growth is a pretty important one. And the -- if you look at the levers we have for revenue and revenue growth, that does include customer retention and taking care of customers. It includes some of the things we've talked about like the pricing process and our opportunity to cross-sell and upsell and things like that. But one of the biggest things is, hey, are we going to sell more, right? And are we going to sell more both to current customers, but also new ones, and that requires building differentiators, right? It requires improving the core products and building additional modules that our customers would prefer to buy from us so they can't find elsewhere. And we are about as focused as I've ever seen us been and why I've been here 15 years, on making sure that, that technology investment is going towards things that we can turn into success in the marketplace in short order.

Got it. Got it. And then what about international? There was news items that you were looking at a business, cited maybe that didn't make sense. But where do you feel you are international versus where you would like to be? And I just raised the question because, obviously, we see tremendous growth in assets under management and activities throughout parts of Asia, but you've got to imagine that there are going to be other parts of the world. So what do you think is your footprint today versus what you would like it to be at maybe some point down the road?

I think part of being opportunistic about these things is not starting with kind of the end game and -- not operating to a here's the optimal mix we would like, because we found at least is what that forces you to do sometimes is overpay for things that you think help you get closer to whatever that desired outcome is. And we would prefer to evaluate each individual opportunity on its merit. So we're looking at any number of international opportunities driven by the people that operate our businesses in Europe and Asia and other parts of the world. But we're not -- it's not with -- we have to get this much bigger in APAC, because it's faster growing for us. That's not the criteria. The criteria for us tends to be what does this business look like on its merits, and do we think we're going to make it better?

No, I think that...

And I would add that we are still 75%, 80% based in the United States. And we do think that, that's still where the most of our opportunity is. And there's also both organically for growth, but also for M&A. I mean we obviously looked at some international deals, but for us to do a deal in the U.S., it's easier for us to do it. There's more opportunity out there in terms of number of deals and things like that, too.

That's good. And I mean, I think it's a very pragmatic approach is, to your point, is whether it's SS&C's own experience or what you see in really every realm of business generally is that if you're just so focused on what you want the strategic footprint or size or whatever to look like. Sometimes you get sucked into things that maybe don't make as much sense, right? So I think it speaks to just the ethos of SS&C over many, many years. Earlier, Rahul, you were talking a little bit about the workforce and you mentioned that there's some opportunities to get efficient -- more efficient there. How closely can you manage headcount to demand? And is there a ramp period where you might need to hire more if demand resumes or how far in advance do you need to be able to do that?

We're able to optimize the number of people and tie that pretty closely to revenue without having any real big lag in timing or anything. And some of that is there's some bench naturally built into our services businesses, which tend to be more people intensive, have -- whether it's our Fund Administration business or other ones, they have had a steady growth rate that we can anticipate pretty well. And so we're always ahead of the curve. We're out there. We're recruiting both for skilled hires as well as people that are -- this may be their first job out of school or whatever the case may be. And that investment in training and development is pretty important to us. We're also -- probably won't surprise you, we're pretty close to the numbers, right? So we tend to manage how many people, how much revenue we're going to have, where we need and with kind of this overall lens that, hey, we want to get some productivity, right? So this isn't a default. Every client we add, we go and hire X number of people. There's a little bit of that, but that metric has to keep getting better over time. So we feel pretty good about being able to adjust those dials as we need to.

Yes. No, that makes sense. And I kind of laugh at the way that you said you're pretty close to the numbers. It's hard for me to imagine anybody at SS&C management being surprised at what happens at the end of any given period. So yes, I can understand that. Just in the last couple of minutes here to wrap up, and we haven't had any questions come in through the webcast, but going back to capital allocation. We talked a little bit about M&A or acquisitions as part of that capital allocation. But what about just pure capital, you recently increased your dividend. How should we be thinking about like where you want capital allocation or how you want that to be divided up in the future between dividends, debt repayment, repurchases, et cetera? And it seems like with the current leverage, there's enough dry powder that other than interest expense, maybe there isn't much of an issue. But I just want to hear from you kind of how you're thinking about the different uses of capital from a financial perspective?

Sure. I can kind of start this one off. I would just say that our focus is always to increase our shareholder returns. And I think having a dividend that we increase every so often is important to our shareholder base. It's important to attracting new shareholders that may have a dividend requirement as part of their holdings. So we think that, that's important. And then beyond finding good acquisitions at a reasonable price that we are excited about, I think Bill said on the call, we're going to continue to pay down debt and probably pay down debt and buy back stock at a fairly similar rate, although we think that getting below 3x levered is also important just to the comfort of our shareholder base and -- of potential shareholders. So I think that, that's what you'll see us do in the absence of a mix -- an acquisition that we're excited about.

And then what about just the dividends in that equation? There certainly are -- obviously, you mentioned some of the preferences of at least some potential incremental shareholders, but there are others that put a lot of weight on dividends and consistency of that. So is that -- with that increase we saw earlier, is that something that we should be looking forward to being more consistent or as consistent, I guess, going forward?

I would say that it's going to be similar to how it was in the past. I mean we look at the opportunities out there where we have to put our capital. And if there is an opportunity for us to increase our dividend modestly, we'll do that. And I think that's what you've seen us do in the past.

Got it. Got it. Well, Justine and Rahul, thank you very much for joining us today. Any last things you want to make sure that we take away from today's conversation, Rahul, before we wrap up?

James, I would just say, once again, we really appreciate it, and thank you for doing this. We do feel pretty good about our business, and there's a number of things that we think will help us in 2021 and beyond. So thank you.

Thank you very much. Thank you to all of us -- to all of you for joining us today. And if you have any follow-up questions, please feel free to reach out to us, and have a good day. Thank you very much.

Take care. Thanks.