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

All right. We are live. Good afternoon, everybody. I'm Patrick O'Shaughnessy, and I cover capital markets here at Raymond James. Thank you for joining us this afternoon. Up next, we have SS&C. On their behalf, we have Chairman and CEO, Bill Stone. Format for this is going to be just a fireside Q&A chat between myself and Bill. There is a functionality to submit questions online, and if you submit them, I will do my best to incorporate them into the conversation. And with that, let's go ahead and get started. So Bill, a virtual hello to you.

Same to you, Patrick. How are you?

I'm doing well. Looking forward to seeing you in person in Orlando next year, but for the time being, we'll do this online. And to start us off here, when I look back at SS&C's acquisition history, the company has tended to do a flurry of deals about every 3 years. So in 2012, it was GlobeOp and PORTIA. In 2015, it was Advent shortly, followed by the Citi Fund Admin business. And in 2018, it was DST, Eze and Intralinks. Is that 3-year pattern just a coincidence? Or is there a natural cycle of deleveraging and integration? And what does it imply for M&A in 2021?

Well, that's an interesting question. I don't necessarily know that it's a natural cycle, but it is depending on the integration process and the opportunity process. The more bandwidth you have, there's a little bit like the more open leverage you have, right? So once you put things down, it's pretty easy to lever back up. When you're already levered at 6x, it's pretty difficult to either issue a whole lot of stock to do an acquisition or you're not really going to lever to 9x, right? So I think there might be a natural rhythm to that. But we really bought DST, Intralinks and Eze because they were good assets, and they were for sale. There's other good assets that are out there, but they're not for sale. And if you go try to make them for sale, I mean, then you're striving for perfection. And in the M&A business, I think striving for perfection is recipe for something that blow up.

I suppose. And you probably end up bidding against yourself as well, to some extent. But on the M&A front, this past September, SS&C hired Frank Egan to head up your effort. How is the quantity or the nature of deals that you guys are seeing changed since Frank joined the team?

Well, I think Frank brings access to different pockets of -- particularly, VC, earlier stage companies, companies that are, in some ways, a lot smaller, some ways in kind of hypergrowth mode, which also means let's lose money for a while together, which has been a more difficult process for us to embrace. We tend to be pretty fundamentalist when it comes to M&A, or anything else we do is we expect returns on our money. We expect certain margins, certain amounts of cash flow. And I think we should have explained some of the challenges that we had at DST when we bought it, not that we wouldn't have bought it, we would have, but they had $160 million in -- they called it out of pockets. So I would pay for -- or I would pay for your mailing to all of your investors, and then you would pay me back. And I would book it as revenue, but I got no margin. So that's a bad way to run the railroad, we feel. So we quit, but we've cut half of it out. But we've got another half to cut out, but that doesn't do a lot of good for organic revenue growth. But it doesn't affect earnings, it doesn't affect cash flow and gets us to focus on our business. I mean, we would have people literally say, "I think out of pockets are up." Not a good way for higher earnings per share.

Got it. So you mentioned kind of talking to earlier stage companies, and then on the fourth quarter earnings call and then again at another conference a couple of days ago, Rahul reiterated that the company's next deal is probably going to be more inclined to be targeted towards a business with attractive growth characteristics. Is your acquisition return criteria on high-growth businesses any different than it's going to be on a lower growth, but a highly accretive deal?

Well, I think time line, right? I don't think necessarily ultimate return and sort of that much different, but the ability to get instantaneous massive accretion is tended -- will tend to be less likely, right? They're going to have a reason why they're high growth, whether that's high growth because they're very, very heavy in M&A, and M&A and -- I mean, sales and marketing, S&M, and S&M expansion or they're trying to go into new geographic areas, small tech companies. And I've got to tell you, all we got to do is -- Europe is greenfield to us, wide open. We just need to hire a sales force. As if that's a forgone conclusion, then we'll go try it. It's not the easiest thing we've ever done, I can assure you with. And you start to figure out that the EU is really still Italy and France and Germany and Switzerland and Denmark and Sweden and Norway and Spain and Portugal and a bunch of -- it's just not -- it's not the United States.

Yes. It's not a united market for sure. To what extent are scale acquisition opportunities still out there for SS&C? Have industries like asset management software and fund administration consolidated to the point where it's increasingly challenging to find those scale deals where -- I mean, I'm probably oversimplifying it, but like the Citi Fund Administration deal, like, you can probably integrate pretty -- you can do it with your eyes closed. Like you know that business inside and out. Are those types of consultant acquisitions just harder and harder to come by these days?

Well, really, the consolidation in the fund administration business started aggressively with Citi bought Bysis and then Goldman Sachs sold out to State Street, right? And then we bought GlobeOp, right? So what happened was a lot of players decided that, that wasn't a business they wanted to be in. Goldman, Wells Fargo, Citi, Crédit Suisse, a number of other ones that decided that there was made off and that exposed it as a risk business, more risk than they have assumed. There's a few other, and they really did well in that process, too. And so we put a bunch of them on the market. So where are we now in 2021? Well, there's still probably 8 or 10, JPMorgan, Morgan Stanley, U.S. Bank, Mitsubishi, HSBC, a few more that might sell. Less likely probably is State Street or Bank of New York or Northern Trust, even though we went all done. We run at a 40% margin. And I was with the CEO of one of those places, and they told me they run at 0 margin. So how long can you do that before you're not making the right investments, you're not hiring the right people or you're not getting the right processes? Everything is fragile, so I just think that -- then they start to get irrational with pricing, but people are too smart. They're not going to bet their business on something that's a creeky old ship. And I think last year, including the -- about $140 million or $150 million in acquisition, we plowed $600 million back into our platform. That's a lot of money.

And then on the asset management side of things, are there consolidating deals in asset management software? Or you guys are obviously very big in that space. There's a couple of other players in there, but maybe there's not more opportunity to do deals in that area.

Well, I think for the best ones, if you want to buy Clearwater or you want to buy SimCorp or you want to buy maybe SCI or FactSet or something along -- yes, a little bigger, a little -- maybe more strategic, maybe more opportunity wise, I think there's things out there. It's just doing it at a time and in a way that 2 and 2 makes 5. And certainly, at least make 2 and 2 make 4. Don't do 2 and 2, and then you came up with 2.5, right? So that's a challenge. And you saw with Fiserv and FIS, right? I mean, bang, bang. One was First Data and one was World Bank. And that kind of transformed those businesses, I think. So I think we have a really, really good business. It's really sticky. There's tremendous cash flow. There's high margins. We have some big moats around us, and there's opportunities because of the complexity of the business that we serve, that it's not getting less complex. More regulators, more taxing authorities, right, more structures, more asset classes, there's just a tremendous amount of complexity that lends itself to us.

And I think speaking of some of that complexity, as you look across the breadth of capabilities that SS&C currently has, do you see any gaps that you maybe want to plug with acquisitions? Or do you feel like you have that broad breadth and you have an ability to internally build software and grow capabilities, and so acquisitions are less about plugging gaps?

Yes. I mean, we're way bigger place now, and we have way more capabilities and way more services and way more products. But long time, my mantra has been that we don't have gaps. Gaps is like cane and a crutch to anybody running a business. I would have done better if we haven't had this gap, right? Baloney. You've got plenty to sell, plenty of capabilities much broader than your competitors, let's go sell. But if you ask me 10 years ago what I think is the most important thing to money managers, I'd say performance and performance attribution. So the more sophisticated you can do that, broader-based, deeper. I had a big guy, a COO at a big broker-dealer who wanted new performance attribution on their 7 million accounts. And I told them, I said, "You start that thing on a Friday night, it will get done on a Friday night, but Friday night might be a month from now, right?" So it's recognizing that if you got 2 municipal bonds in their account, you don't need to run performance attributes, right, and just let that individual portfolio assistant in one. But I mean, otherwise, that's a lot of calculations and it's unreasonable and, in some ways, a little bit ridiculous. But performance, performance attribution. And then the other big thing that is not nearly as clear, I think, is tax. There's almost nothing a money manager can do that will equate to cut in that tax rate. You can cut that tax rate, and that drops to the bottom line, like, the fastest thing you've ever seen. So we spent a lot of time and a lot of money for our various businesses about tax, so that on a fund, we can do it at the individual investor level. We can do it at the fund level. We can do it at the general partner level. And then we can also do it at the management company level and personnel. So there's a lot of ways to manage gains and losses and different taxing authorities and where to structure, how to structure, and you work with the lawyers, you work with a bunch of CPAs and chartered accountants, and you can get pretty slick.

Makes sense. And then as we're thinking about your current capabilities, both those that you've developed internally and via past acquisitions, how integrated do you view your solutions to be across client workflows? For example, for a hedge fund, you have Eze for trading. You have Geneva and APX for portfolio accounting. You have GlobeOp for back office. I'm sure there's a half a dozen other things that you're trying to sell those hedge funds, too. Do you sell those components as a fully integrated comprehensive solution?

Well, some of what you gave -- like we would sell Eze, we would sell GlobeOp, which uses Geneva, right? So 75%, 80%, 90% of all the assets in our hedge fund business are on Geneva, right? So we'll sell Eze. We'll sell GlobeOp. We'll sell a bunch of parts and pieces around. Like we have a mobile app for wires, so that people could get a wire off for one of their customers. If they're on the train going home or coming in or at lunch, whether it's all secured, pretty, pretty well received application. Same thing with trading, you can do with mobility. There's all kinds of things that we can sell, in addition to our fundamental fund administration business. You might want our tax services. You might want our financial statement preparation services. You might want any number of things that we do for our clients. You generally won't use Geneva and APX at the same place, right? They're both portfolio accounting systems. APX is much more targeted at long-only money managers, probably need in shorts, too. But Geneva is much more high volume, lots of different strategies, lots of different asset classes. So there's a -- but we do bundle more and more and more. And we're setting up various compensation structures that people get paid more as that bundle is sold together, right, because there's lots of things where -- I was talking earlier about Eze has 999 of the Fortune 1000. So now we get a warm introduction to every CFO in the Fortune 1000, except one. And we have a treasury management system. We have derivative systems. We have compliance systems. We have all kinds of things that we can do for that. And so our challenge is, is to have the right package, have the right pricing, have the right people, marketing and selling it and then replicate it. Replicate, replicate, replicate. And then get the cadence. It could be much more rapid. That has been the biggest challenge at DST, for instance. You've got to get the cadence up, and we do not have sales meetings once a month. What you guys want to have them once a day. And generally, we have it once a week. But if people aren't paying attention and moving the step forward, then you have to create the momentum. And you have to have enough people inside those businesses, but that spark of momentum creates a chain reaction, and that momentum keeps going versus you show up the next day and create it again. So that's what we do.

Got it. And Bill, you've dragged the conversation into organic growth, so I'll take it there as well. You are obviously SS&C's largest shareholder. What role do you think that achieving higher organic growth can and should play in driving long-term shareholder value for SS&C?

Well, I mean, I think, Patrick, you've been around for a while, and I've been around a long while. It used to be earnings per share, growth in earnings per share, right? So -- then it became cash flow, right? So if you had intangible assets, and they were making to amortize them, that was baloney exclude, right? So then it became -- it's a GAAP, it's an adjusted GAAP, it's adjusted to consolidated, and it became EBITDA, right? So we were a Carlyle company from '05 to '14. I think they finally got out in '15. So they were around for a long time, and we were EBITDA dudes. That's what -- and now you come back and it's not EBITDA. Now it's organic revenue growth. Organic revenue growth is important, but it's one thing. I always say, "Look, organic revenue growth is very important if I can't get growth anywhere else." But we've grown from $329 million in revenue in 2010 to $4.7 billion in 2020. Our EBITDA has grown from $135 million to $1.856 billion. We're proud of those numbers. We think that we have created lots of shareholder value. But I can assure you, it's helped my personal financial statement. So it's focusing on that for the next 10 years. How do you go from $1.856 billion to $20 billion EBITDA, not revenue? We're going to have a 40% margin and a 20% EBITDA, that means you have to have $50 billion in revenue. We're at $5 billion. So we've got to do things that give us 10x, but the market is out there. It's big enough, the TAM and just what we do right now, not including health care. It's probably $100 billion in the United States and $100 billion outside. It's $200 billion. I mean, you have to have a 25% market share to get to $50 billion. I got it. But health care is probably another $100 billion, $150 billion TAM in the United States. No. So we have opportunities. We have to execute. We have to come out with innovative things. We have to have high win ratios, and we have to manage constantly.

Got it. That's really interesting history and perspective. And then I think as we're looking forward to 2021, SS&C's organic revenue growth outlook calls for 0% to 4% growth for the company overall. What do you anticipate leading the way in terms of returning to growth for the company? And where do you still see lingering headwinds in 2021?

Yes. I think the fastest growing business, which we have, will continue to be, Black Diamond, Real Assets, regulatory and analytics, private equity, hedge funds, right? Those are the fastest, fastest-growing. Wealth management, right, and some of the areas within the license business [indiscernible], such as APX or Geneva opportunity. Good chance. And Intralinks and Eze. So that's a pretty broad spectrum of where we see some outperformance. We think way better performance is DST Financial Services, and it will grow both in the U.S. and in Europe. So -- and that's been a long time coming. And then I think the headwinds are -- so there's some Cigna and a couple of others, health care clients our contract is over. They own Express Scripts. They're not trying to keep using us, right? So -- but there's other things that are happening in health care that I think we have a tremendous opportunity. And I'm pretty sure it's true because I keep getting incoming about health care. It's really only about 8% of our business, right, 7%, 8% of our business. So -- but it's an opportunity to grow into a very big TAM, and we kind of -- our TAMs, and we kind of look at it like we did with fund administration back in the early 2000s. We don't have any AUA in 2002, 0. And now we have 2 [ trillion ].

I think that's actually a good time for me to reflect a question that came in. The question is, like, how do you see the health care business as adding value to the whole of SS&C, which I think really kind of gets to the -- yes, there's a big TAM. But strategically, why is SS&C is the right owner for this asset?

Yes. I mean, think about the biggest section of our health care is we pay somewhere between $700 million and $1 billion pharmacy collect. So what's a prescription look like? It looks like a trade ticket, number of shares, number of pills, right, Rx number, CUSIP number, pharmacy, destination or exchange. There's about 5, 6 pieces, both of them capture, process, deliver, fast and be up, right? That system can't go down. How many minutes our system was down last year? 0, right? So that's pretty important because a lot of pharmacies, 24/7. You can get a prescription filled 24/7. And maybe not all of them, but if you put a mosaic together, so you can't go down. And so we have a very bullet proof pharmacy claim management system. We also have some good health care solutions businesses. We have some great clients. We have a great relationship with Johns Hopkins, where we get to commercialize their discoveries, right? So -- and let me assure you, there's a lot of smart people there, a lot of smart people. They even know how to count COVID. But -- so we brought out a fraud waste and abuse application. We've brought out some other applications we have in our pharmacies. We have applications to track who's been vaccinated, who hasn't and putting reminders out to their customers, customer service things that make a difference to people when it comes to where am I going to shop, who am I going to get, right? And so there's a lot of stuff there. And then last thing about health care is, is that there's been a lot of talk about health and wealth. And you're a little young, but when Sears bought Dean Witter, it was stocks and stocks. That didn't play out quite as close. I think health and wealth might play out. But if you think about it, and you think about long-term care products and then long-term investing products, whether they're long-term life insurance products or long-term annuity products or other structured product that goes out for your lifetime, that's often tied to, okay, which care facility are you going to put me in to first, and which one are you going to put me into second, and on those last moments before I'm long dead, hopefully in heaven, where am I going to be. But each one of those things, the more care you need, the more expensive it gets, right, and being able to work with some of these big health care providers and these big wealth providers to create products, right, that deliver on that and then have us be the infrastructure underneath it, I think it's something we think is a pretty interesting strategy that's going to play out over the next 10 or 15 years.

Very interesting. Yes, I obviously cover Envestnet, and financial wellness is kind of their big mantra these days. And so yes, you do see the world is combining between finances in health care. And certainly, it does sound like some of the core functionality that you provide has similarities across the financial services and health care space.

If you're really sick, you're not going to care how wealthy you are, right? As long as I'm wealthy enough for somebody to get me well, right, I mean that's what becomes important is that you feel good, you don't hurt, you don't have trouble breathing, you don't have trouble walking, you don't have trouble seeing or hearing or other things that are even more important than a high-performing portfolio.

So SS&C has posted a relatively consistent 96% revenue retention for a while. I think that compares pretty favorably to most companies, and it speaks to the stickiness of your relationships and the service that you're providing. When that 4% of revenue does slip away, those tend to be industry consolidation events, competitive losses or something else.

Well, it's primarily things like Cigna buying Express Scripts. That instantaneously changes the -- you can go pay it a moon, and you're not going to keep it. You just spent $69 billion, and I don't think they'll keep paying you, right? So there's a lot of those kinds of things that happened. There are consolidations in the asset management world that you see. And sometimes, we're on the right end of that. And other times, we're not. We love to sell to predators. And when we sell to [indiscernible], we're sometimes at risk. But you can embed yourself pretty deeply into those companies, and the acquirer loathe to upset the acquiree from a standpoint of taking out their systems and putting in inferior systems. It's one thing if we put in superior system, but if you put inferior systems, that is not a very good first step in the marriage.

And I think kind of building off of that, I've had a couple of questions come in on competition. So just can you provide any commentary on the competitive landscape and, I think, in particular, the impact of fintech and maybe making the competitive landscape a little bit more crowded than historically it might have been?

I think the competitive landscape is pretty similar. So if you go business by business, trading systems, it's Charles River and it's ION and it's Eze, Moxy maybe. And if you look in the portfolio accounting systems, it's Singularity now, it's SimCorp, and it's the big custodian banks. And they have -- we have some other FIS with to Invest one and -- but in general, it's Clearwater, Singularity and a few SimCorp and a few also [indiscernible] kind of. And then when you get into like transfer agency, it usually us and FIS and Bank of New York. We have joint ventures with State Street, so we're pretty tight with them in the financial agency business. And then in hedge funds and private equity in the funds business, it's us. And second, I think, is State Street and third is CITCO and fourth is Bank of New York. Fifth might be Northern Trust or HedgeServ or one of those. But we're a clear leader. We have probably 25% to 33% more assets under administration than anybody else. We have [indiscernible] at $2 trillion. I think the next is about $1.6 billion -- $1.6 trillion, I mean.

Got it. So Bill, I'm going to wow you with some high-level math here, so try to bear with me. So the organic revenue growth algorithm, if you have a minus 4% contribution from client attrition and you have, call it, a 1% benefit from pricing, if you want to generate mid-single-digit positive organic revenue growth, that means you need to get about 8% growth from gross sales. That would equate to about $375 million based off of your 2020 revenue. Can you get to that $375 million number with a bunch of singles? Or do you need a bunch of triples and home runs to get there?

Well, let's try to define it for people what a single is and what a triple is and what a home run is, right? So today, a single for SS&C is probably $0.5 million to $1 million a year, right? And probably, a double is $2.5 million to $5 million a year. And a triple might be $5 million to $20 million. And then a home run might be $20 million to $50 million. And we're going to go grand slam if we get above $50 million, right? So I think you have to have a mix of those in order to get to $375 million. And then you have to have more organic pricing power. So that 1 has got to start moving towards 2, right? And then you have to have land and expand. So we win a big mandate from Henry Ellenbogen that left T. Rowe. And so now, he outsources everything, and we have a pretty broad ability for him to outsource. And he's really, really smart and understands what he really, really likes is to find great companies and invest in them and raise the assets and have great returns. And this, hey, calculate NAV and performance and compliance and risk and accounting and internal audit and financial statements and tax returns, and he don't really want to do all that. And that's pretty smart because we probably hire 2,000 people a year, 3,000 people a year. That's what they do. And if you hire 2, bet you I'm better at. So it's just repetition, repetition, repetition, and what are you looking for, what skills, what capabilities, what do you need on the team. In general, you don't need home run hitters at every position, right? Somebody has got to get base. It might be nice if you could get to second base in less than 30 seconds. So it's -- again, you're creating a team that wins, and that means you need different skills and you need different skills in different positions and then -- but then you need to play conductor, right? You've got to conduct that orchestra in a way that you create music that people buy. And I think $375 million sounds like an enormous number before you get a few of those 30s to 50s, which we sold in this third and fourth quarter. And then it becomes more manageable.

Got it.

Yes. We had a good January. I think we're going to have some tailwinds, and it will help before we keep winning.

It cures a lot of ills. Time for one last question. And I guess, on the sales team, this one came in. Question is what percentage of your sales is cloud-related software? And how do you see this evolving over time?

Yes. I mean, the challenge with cloud, somebody was telling me earlier today, true cloud. That used to be a true client server. So it's sort of thing it's definitionally, but almost everything we do is browser based. So you come in, you're going to hit some server fault in either one of your data centers or one of ours. And so almost everything we do is that. On-prem software, it might be $200 million, $300 million in revenue. It might maybe up to $400 million, but it's not a very large portion of our business. But some big places, that's all they want. They're cybersecured to the max They're not more going to co-mingle their assets with somebody else. I think their view is, is if we're going to shoot ourselves in the head, we're going to hold the gun, right? We're not going to let Amazon, we're not going to let Azure, we're not going to let people blow our head off. If we blow our head off, we're going to have done it ourselves. So that's not gone yet. In very large financial services companies that have a large retail segment, you can't take the black guys of cyber leaks or made-offs or those kinds of things. Those things are terrible from the reputation. And in financial services, that reputation is pretty important.

Risk management is job number one. I think on that note, we're at the top of the hour, so we should wrap it up. But Bill, thank you very much. It was entertaining and informative as always. So we appreciate you coming.

Okay, Patrick. See you soon.

All right. Take care.

Okay. Stay safe.