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

good afternoon. I'm Rayna Kumar. I'm part of the payment processors and IT services team at Evercore ISI. And today, I'm joined by Patrick Pedonti, Chief Financial Officer of SS&C. Patrick, welcome, and thanks for doing this fireside chat with us today.

Thanks for inviting us. Thank you.

Great. So the #1 question I get on SS&C is really to break out your revenue from your largest businesses and end markets. Can we start with that where you provide us your expectations for each of your businesses in 2021, including fund administration, DST, including financial services and health care, e-software, Intralinks, alternatives, Private Equity, Wealth Management. And help us understand what needs to occur to be at the high end of your 0% to 4% organic revenue guide versus the low end?

Sure. So I'll quickly go through our major businesses and the targets for next year. So the first one is the fund administration business, and that's where we provide full back office portfolio management to hedge funds, private equity funds. And in some cases, they've got real assets funds like real estate and infrastructure. That business is about $1 billion in revenue in 2020. In 2020, it grew 5.7% organically, and we expect similar growth in '21 at the midpoint of our guidance. I would expect the range of that business to be somewhere between 4% and 7% growth. And that will really depend on market conditions during the year and how many new fund launches we have from existing clients. Either way, whatever the market conditions are or the fund launches are, we would expect, as we've had in the past, to continue to gain market share. So we're typically growing faster than the market. Private equity funds are growing faster than hedge funds and real estate assets, which are a lot smaller than the other 2 are growing even faster than the other 2. The next business is DST, and there's both the financial services component and a health care component in that business. We did about $2.075 billion in business last year. It had a negative 2.4% organic growth. The health care piece is about $375 million. The rest of that business is typically transfer agency and retirement -- servicing retirement accounts. Overall, we kind of expect that business this year to grow about 1.5% to 2% organically with the health -- with the financial services piece is positive and the health care continue to be a little bit negative. We're seeing a lot of strength in the retirement account segment of that business. And we've won several large-scale deals that we announced back in the third quarter and the fourth quarter, that's going to help growth drive in that business. So we signed maybe about $60 million of annual run rate revenue. We probably need to sign another $60 million to hit the targets for the year. In the health care, I think we're making progress. We've been impacted by consolidation at the high end of that market. Examples are Cigna buying Express Scripts. And so now there are 3 large providers, and we're one of the few independent providers where our focus is going to be on middle market health care providers. How are we doing that business? The range we do in that business depends on new business signing. I think we've stabilized the business. We've improved technology. We've had very high retention rates in that business since we've owned it. So the success rate's going to depend on the timing of the new deals that are in our pipeline. The next large business is our software products. This includes portfolio management systems that we sell to large-scale institutional asset managers, insurance companies and hedge funds. Most of these are sold on a term license or a perpetual license basis, and they're all in-house software. These clients are running the software in-house. We might be hosting it in our data center, but they're running the operations. This area, we saw pretty significant impact due to COVID and stay at home environment last year. We saw clients delaying implementation of in-house systems due to the fact that they had all their employees working remotely. We expect that to start improving over the latter part of 2021. And this business was down about maybe 5% last year, and we expect it to be somewhere around flat for this year. And again, it's going to depend on where we're back in the office, when we're able to travel when we're able to meet clients and do demos face-to-face deal stays to face and clients are a little bit more comfortable in closing there in implementing systems. Eze, which is our company we acquired back a few years ago, is sells front end trading systems, mostly the hedge funds, it's about a $280 million business, it's generally growing 3% to 4%. And we are working on expanding that product offering with our new Eclipse product in that area, so that we expand the market outside of hedge funds and start selling the product to large-scale asset managers. The revenue is very dependent on trading volume. The systems are price based -- you pay a software fee and then you pay the amount of trades that run through the system. So volumes could impact it, and that probably would be the biggest impact of where growth ends up in 2021. The next piece is Intralinks. They are about $350 million. They've been growing about 4% a year. We expect pretty much the same in 2021. Probably 70% of that business is supplying secure data rooms to M&A sellers. It's going to depend on how the M&A market is in this year. But we are also expanding those offerings into securities, banking and alternative asset managers, and we've made good progress in those sales last year. So it would grow in the range of 3% to 6%, probably somewhere in that neighborhood, depending on the conditions in those markets and our success rate in selling into the new securities banking and alternatives markets.

Great. That was extremely helpful. And then can you talk about -- actually, could you quantify how much of your revenue is today tied directly to AUA? And maybe give us some detail on the type of hedge funds you service and what types of exposure do they have with strategy and size of hedge funds that you serve?

Sure. Our fund administration business is about -- was $1 billion last year. About 20% of it is private equity funds. About 5% is real assets and 75% are hedge funds. It's all priced assets under administration. It's typically billed on a monthly basis based on the NAV at the end of the month. Some smaller hedge funds and private equity funds are billed quarterly, but the vast amount of the revenue is billed on a monthly basis. Our markets in hedge funds tend to be large scale hedge funds, with complex strategies or income hedge funds. We also provide services to typical long short hedge funds. But that's a very small portion of our business. We would prefer to be in large-scale hedge funds with multiple complex strategies. And the business is susceptible to -- clearly to assets under administration at those hedge funds. But it doesn't tend to move very much because they are hedge funds, and they do have hedge strategies and even at the end of Q1 '20, when we saw, I think, the market was down like 30% at the end of the first quarter last year, our business was still up 8%. So the business can have impacts depending on the long-term trends in the markets. If the markets are down for long periods of time, it can impact our business. But it's nowhere near the impact. If markets are down 40%, our businesses might be down a couple percent. So it doesn't have a direct one-to-one relationship.

Got it. That makes a lot of sense. Since you acquired DST, how has the business performed versus your expectations? And what other investments do you think you need to make in both the financial services and health care to get it back on track?

Well, I went back and looked at -- when you sent me this question originally, I went back and looked at what our projections were for DST back when we acquired them. And clearly, that the revenue turnaround has taken longer than we expected. Revenue is probably running 5% lower than what we thought we would be at this point. But the profit margins are about $250 million higher than we expected at this point. And our client retention rate's running 96% to 97% are much higher than DST had previous to the acquisition. So I think we've made good progress in both driving earnings, driving customer service and improving the technology at DST. You asked about technology, and that's a good point. I think that was our main focus in the first couple years because if you can't retain your clients, you're never going to be able to grow the business, and retention requires good technology and great customer service. And I think we've accomplished that. We've proven to the industry that we're a very good service provider. We're good technology. And now we need to win new business. And I think our targets was to get that accomplished in 2020. I think the pandemic put us behind a year, but we expect to get growth out of DST this year. And the key is going to be signing new business. And we're focused on transfer agency, but we're seeing much more opportunity in the retirement space so I would suspect we would get a lot of the growth in the retirement space in the future, which is an area that DST really didn't focus on.

Great. No, that's very helpful. And just so everyone knows all our participants, you can type in questions for Patrick on -- in the dashboard in front of you, and I'm happy to read out those questions as they come in. Yes. So moving on to the current sales environment, how is the current sales environment trending? And how is your 2021 deal pipeline looking? I know on your fourth quarter earnings call, you had mentioned lower visibility on 2021 license sales. Now that we're few months into 2021, what are you seeing out there?

We're pretty optimistic on our current state of our pipeline and the sales environment. We've probably hit our targets for -- I mean, we've got a high level of recurring revenue. I think a lot of our investors know. But to hear our growth targets, we have to replace client losses, and then we have to get some growth. I think we're probably, at this point, about 30% to 35% of the way there to get that new business to hit the 2021 targets, which is good at this point at the end of early March. So -- and we've got about another 10% of what we need to hit, that's near in contract. And the rest of it is in the pipeline new pipeline we need to generate. So we feel pretty confident at this point. We've seen the pipeline pretty strong in all areas. We're seeing M&A activity strong at Intralinks. We're -- we've seen good growth in our Eclipse product that adds. Second half of last year, we signed about $60 million in new business for DST. And we continue to have real confidence in our fund administration business. So at this point, our software business, I think, through the first quarter, continues to be pretty similar to last year.

Great. And then you've discussed over the last several quarters strength from your black -- from Black Diamond. Help us understand what the economics are for a Black Diamond deal?

Sure. Typically, a registered investment adviser would have -- will be priced on an annual minimum service their book of clients. And then there would be -- and then it would be based on either assets under administration or number of accounts. So typically, most clients are running above the minimums, right? So the asset fee or the account number fee is higher than the minimums. And you got to remember, that's -- quite a certain investment advisers are growing assets and consolidating. So regardless of market conditions, they're accumulating assets. So I think last year, it grew about 13% -- 13% to 15%, and we expect a similar growth this year. I think yesterday, I talked to the manager that runs that business. He's still seeing new RIA formations at record paces so far this year. Most of those independent advisers have been growing about 10% a year in accumulating assets. We're seeing -- in our clients, we're seeing a lot of M&A. They're acquiring smaller registered investment advisers and putting their assets on the platform. So we'll continue to see a good environment, registered investment advisers. And a lot of them that had typically been using software in-house are all moving to outsourcing.

Got it. Okay. Well, in 2020, you doubled your client base for Eclipse. You ended the year with 170 clients on the platform. How material are these clients to your revenue and earnings? And who are you winning against?

It represents about $15 million of revenue. Now Eze is running at about $280 million, right? So last year, represented about $15 million, both the software fee and the trading fees of new clients on that -- on the Eclipse system. Generally, the main competitor is Charles River, which is now owned by State Street. That's generally the #1 competitor in that industry.

Understood. Moving on to...

There are a few other...

Sorry, go ahead.

Yes. Rayna, there are couple -- I think, Infusion is another competitor, Bloomberg is a competitor. But the main competitor is Charles River.

Great. Very helpful. And then just moving on to your margins. Your financial guidance for 2021 implies that you get your margins back up to 40% plus. Longer term, how high could your EBITDA margin go? And how much of the COVID-19 cost savings do you think will stick when we go to a post-COVID world?

Yes. Well, our targets for 2021 are to improve operating margins or EBITDA margins by about 50 basis points. So we're through most of the synergy work at DST and Eze and Intralinks. And so the 50 bps margin improvement is really around productivity improvement, leverage of new business and using better technology to service our clients. We think we can -- excluding any acquisitions, we think we can continue improving our core margins by 50 basis points a year over the next couple 3 years. I'm sure, Rayna, we could expand our margins wider if we wanted to, but we will continue to invest in R&D and sales and marketing. And most of the savings will come out of cost of sales. In 2020, when we look at our costs and what we can directly attribute to COVID, the savings is -- we probably saved about $45 million. It's mostly made up of travel and trade shows, marketing costs. Typically trade shows, right? I don't think anybody is doing any trade shows anymore. And anyhow travel went from, I don't know, $10 million a quarter to $2 million a quarter. So I don't -- I think we'll continue when the country opens up again, we're going to go back at trade shows. So I don't think that's a long term savings. I do think some of the travel is a long-term savings because as we're doing today, video technology is really good and getting better. And I think there are certain amount of travel that's required to customers. And I think there's certain amount of travel that can be done on video instead of traveling. So maybe hard to predict at this point, but maybe our travel costs will be half of what they were previously. The other thing we have an opportunity on is we're -- we really don't know at this point how much square footage we're going to need in our facilities. And what percentage of our employees can permanently work from home. We think we'll have the majority of our employees in the office, but we're currently shedding floor space as leases renew. And I would expect that our facility costs would be down in the coming years.

Understood. Okay. For 2021, if you could provide us your expectations for your fund administration business, the pricing?

Sure. Sure. I think in 2020 -- I'll back up a little bit. You got to remember, like most of our contracts are multiyear contracts and don't renew every year. So you can't increase every client every year. And some of the large-scale hedge fund, it's going to be hard to increase their prices. But last year, we got about $9 million of price increases in that business. So that's about almost 1%, right? A little bit under. I would think the number -- our best estimate for 2021 is probably be less than that because there's less clients that are scheduled for renewal in 2021. So 2021 might be in the neighborhood of $5 million. But it's pretty significant, and we're seeing the price increases stick.

Great. Okay. And then your capital allocation priorities and what's your target leverage ratio at this point?

I think we would -- I mean we're comfortable with our current leverage ratio. We'll generate over $1 billion of free cash flow. Interest rates are really low today. But I think we would like to be under 3x. So instead of having a 3 handle leverage, have a 2 handle on our leverage, excluding any acquisitions. That -- I think that perceives this better when people see it 2x versus this year 3x. So that would probably be where we would like to be. In spite of that, we view the stock really fairly cheap now and paying down debt where we're paying 2% interest. It seems like buying back stock makes a whole lot more economic sense. So I would suspect that we would allocate a lot more free cash flow to stock buyback in 2021 versus '20.

Okay. And how about your acquisition strategy? How is your pipeline looking? And what kind of businesses are you most interested in acquiring at this point?

The pipeline looks pretty normal. We've probably got 4 to 6 businesses. We're looking at it at any time. Doesn't necessarily mean that they're all good businesses, but they typically are in financial services software space. There are typically systems around managing portfolios. What we see so far is that true play software companies are pretty expensive, whereas services companies are a little bit cheaper and carve-outs from large corporations are a little bit cheaper than classic software companies. I think it's mainly because private equity firms are really interested in software companies, and they're bidding them up, and they're not so interested in service companies because that's a lot hard to work. So I mean we're always looking at businesses. I think that we haven't seen anything recently that meets the criteria of either the correct price or its revenue growth within.

Got it. I mean, you've been a consolidator, of course, in the fund administration industry. And I just noticed that you didn't mention fund administration, but do you expect to continue to be a consolidator in that part of your business going forward?

I didn't mention it because I haven't seen any sales in the fund administration business. But we would be very interested in acquiring businesses in the fund administration space.

Yes. Okay. Understood. Well, since we're up to last few minutes of our fireside chat. And 1 final question for you. What keeps you up at night? What do you worry about the most for SS&C?

I sleep pretty well. I have a lot of confidence in our business, and we've got a lot of recurring revenue and generate good cash flow. I think the main concern is the economy and the conditions of the market. I mean, recently, they've been a little volatile, up and down. And I think for us to accomplish our growth targets, we need a fairly reasonable market. That doesn't mean it has to be up, but it can't be down a whole lot. But -- so if it trades within a reasonable range, that would be fine for our business. If we see a big down graph in markets, that could have some impact on our business. So I think that's the biggest concern. Otherwise, we have a lot of confidence in our business.

Great. Well, Patrick, thank you for joining us today. Very insightful meeting, as always, appreciate your time.

Thanks for inviting us. I appreciate it.