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

All right. Great. Thanks for joining everybody. This is the 49th Annual JPMorgan Technology, Media and Communications Conference. Very pleased to have Bill Stone, CEO of SS&C, with us this afternoon. Bill, I'll give you a chance to introduce yourself and the company in just a second. [Operator Instructions]

So Bill, thanks again for being here.

Jackson, thanks for having me. I wasn't at the first one, so just...

Probably the second, though, I would guess, yes.

I have been to a few.

Yes, yes. And we always appreciate your participation. Thanks again for being here. Do you mind just giving us a lay of land, a quick overview for those that may not be as familiar with SS&C?

Sure. I mean we're a 35-year-old company, [ went ] public in '96 with a predecessor of JPMorgan called Hambrecht & Quist and Alex. Brown, which was Bankers Trust. And then we went private in '05 with Carlyle and we came back public in 2010. And we have a whole suite of products for investment managers of all stripes from hedge funds, private equity funds, real assets, mutual fund companies and insurance company, hedging funds and institutional asset managers. We also have a health care business. We're one of the largest pharmacy claim payers in the world. We paid $500 million for pharmacy claims last year. And we went public in 2010, we did $323 million and we're doing $130 million in EBITDA. Last year, we did about $4.7 billion of revenue, and we did about $1.850 billion in the EBITDA. So we're highly profitable, large-scale company, about 25,000 people around the world. And we have 18,000 clients and they range from JPMorgan to a credit union. So we're -- and we're the largest [ fund ] administrator in the world. We get $2.1 trillion that we administer across about 7,000 funds. About $550 billion of that is through equity, and that was $250 billion in real assets and other funds, and then the rest in hedge fund.

Right. So just speaking in terms of that breakdown, the investor breakdown in your fund administration business, how did maybe the pandemic and the economic slowdown impact that kind of core fund administration business, if at all?

We performed very well through the pandemic. I mean the business still grew 5.5% I think in 2020. And it's -- I think first quarter, we grew 6.5%, and we expect to do that throughout '21. We really have the best product, we have the best people and we have the best processes. And we started administration in 2002 with 0 AUA, and now we have to $2.1 trillion. And we have household names: Millennium, [indiscernible], [indiscernible] and a host of other ones. And we focus on the business and we take market share from everybody.

Okay. Recently, the assets have actually outgrown revenue and I think that has to do mostly with the idea of growing your private equity assets maybe a little bit faster than the overall mix. Can you just give us a sense why that dynamic exists within your portfolio?

Sure. In the private equity business, it doesn't yield the same amount of basis points for $1 billion of asset, right? The private equity world doesn't trade like the hedge fund world, it doesn't have the subscriptions and redemptions like the hedge fund world and really -- while it's as profitable to us as the hedge fund world is, it doesn't have as much revenue. But it doesn't take as many costs, not as many people. And the hedge fund is that -- I mean generally, [indiscernible] where the private equity world could be monthly, even quarterly, right? So it's just a different kind of accounting business.

Got you. Bill, you might -- we're getting a little bit of breaking up on your audio. Do you mind just maybe trying to be a little closer to the microphone. We'll see if that helps at all. Yes, that would be great. Okay. So speaking of organic growth, and you mentioned fund administration has really been the driver of organic growth that'll last for a bit. So if we think about some of the other areas that you've gotten into over the last couple of years with the biggest acquisition being DST, what market did that bring SS&C into? And how has that acquisition integration gone relative to maybe what you had expected when you first grabbed the rudder?

Well when we bought DST, it was doing about [ $21 billion ] of revenue and about $400 million in EBITDA. So about 19% of EBITDA margin. We expect to about $900 million EBITDA this year out of DST business and still be about $2.1 billion, $2.2 billion in revenue. So we haven't quite gotten the rev growth, if you'd like, but we have really done a really great job of controlling expenses and creating profitability. So I think our challenge going forward is to sales in Jan and build some products and try to get that out of the marketplace in a way where we can take advantage of our scale and our capabilities.

Is there any worry at all that the high 30s EBITDA margin is maybe too high? Are you going to have to bring that down if you want to grow a little bit faster in that business?

We're funding everything that we [ have ], there's no, well, lack of -- if we wanted to drive margins higher, we could easily drive margins higher. So the issue more for us is having the right ideas that we're backing so that we're not building things that people think are cool, we're building things that people buy, right? So it's giving the focus and then [ capabilities ] to compete.

I think retirement plan services is one of the areas that you're investing in with DST. You've announced a number of pretty sizable wins or at least some exciting potential opportunities even if they haven't necessarily come into revenue yet. Can you just explain a little bit what you're doing in retirement services? And where you think it can go?

Yes. I mean we did Everyday 401(k) with JPMorgan and we did nationwide. And we have [ Elizia Matthew ], a large manager of municipal workers, primarily. It really is bringing technology to bear so that people's retirement savings is easily accessible to them and that they can see how that is being managed and be able to take advantage of some of the digitization that you're giving now in 2021. That really wasn't available on a large scale 5, 6, 7 years ago. So our key is to continue to invest in that business. And we've brought in some new executives that have done a nice job. Kevin Rafferty is doing a remarkable job for us and we're optimistic that, that will continue to grow.

On the DST side, you mentioned that there's another part of the business being in the health care business. How was that impacted during the pandemic?

Well, we -- just pharmacy claims and the number of collective surgeries was down substantially. And we still processed about $500 million last year, but it probably was a $50 million to $100 million less than we've done the year before.

Okay. I'm glad you gave me you that context. You say $500 million, I say, I'm not really sure how much that is, to be honest but okay. So how much do you expect that business maybe to bounce back here in 2021 in terms of its contribution to the organic revenue growth?

Well, I think elective probably is bouncing back. And obviously, when people have surgery, generally, they have some pharmaceuticals that they use to control the pain or the swelling. And so we would guess that, that's going to come relatively strongly, maybe more so in the second half than the first half. And we've got a lot of great things going on in health care that we think will help drive business.

Okay. I meant to ask you this earlier when we were talking about private equity. The acquisition you made with Intralinks has a private equity flavor to it with their data rooms. Just curious if you actually have been able to successfully pivot maybe some private equity customers that Intralinks had into full-fledged private equity fund administration customers and whether that's part of the additional growth that you've seen in private equity funds under administration.

Well, we are bundling and we are doing joint calls. And the 2 guys that are running that business, Bob Petrocchi and Ken Bisconti, are doing a great job. And I think they brought in the widest virtual organic readout. I think he's doing a good job for it, too. And we are more and more bundling our solutions to solve our clients' problems and trying to get closer to our clients so that we could point exactly what it is that is causing the problem and then presenting attractive [ solution ].

Now doesn't that also have a double-edged sword where you've got bigger deals, more signatures, more approvals that elongate some sales cycles. So how do you combat that?

Well, that's a good problem to have, right? That you're getting into bigger deals and they want to buy. And it's just streamlining the process using DocuSign and other automatic signature capabilities. And being attentive, right? That's the key thing. You being attentive across the entire client base and throughout the sales cycle.

Yes. That makes sense. A good problem to have is a good way to frame it. We have a question from the audience on M&A. But before we get there, if we think about the entire -- we think about fund administration or the services provided to hedge funds, investment managers or whomever on the finance side as kind of this front, middle, back-office function, right? SS&C has all 3 of those and you acquired a market leader in Eze for the front end. What are you using today in terms of -- is Eze becoming increasingly the tip of the spear going in with trying to sell front end and then expanding to middle and back-office? Or is it more the legacy strength of SS&C being middle and back-office and then bringing Eze along?

Well, I think -- remember, in systems and front-office trading systems, primarily in equities and derivatives, right? It's not -- you don't really trade private credits. You don't really trade some of the other esoteric assets. So in the equity long/short, it is very much a point of the spear. But we also have 35% of our assets in hedge funds are equity long/short. So we have a lot of opportunity to bring Eze into our platform very well.

Okay. All right. Question from the audience. And this is a good reminder to people, if you do have questions, make sure to submit them online. All right. A question for Bill. Does he expect M&A to continue at the same level as it has in the past, i.e., can revenue be 4x again over the next 5 years?

I mean I don't see why not. For me, it's all about execution. And I don't know that M&A will be the driver of that 4x as much as maybe internal growth might be. And obviously, internal growth products are really growing in our view to do 4x. But I think when things get too pricey, like it's what's kind of happening in M&A now, then we'll just build it. With this technology, we'll just go. And if it's a services business, maybe we'll just go invade an area rather try to buy it, right? Just send the very talented people down there and just go win business. But you can't overpay, right?

I'm glad you brought up Australia. It seems like every other day, I'm seeing more headlines about the Mainstream acquisition and SS&C matching another offer, another unsolicited offer. What's going on down there? And when do you think this process will come to an end?

Well, I mean we could bid more, but we don't think that makes any sense. We are going to win as long as it's going to meet our parameters. And a, if Apex's parameters are way higher than ours, then they're probably going to win. Apex is levered already. And -- but they have a private equity firm who maybe doesn't mind being 7, 8, 9x levered. We wouldn't do that. And we think our business is somewhat superior those business and I think Mainstream thinks our businesses are better home for them, I think. But their own -- they're a public company. Who will win? Whoever bids the highest.

Now this is your third attempt to acquire a business in this region of the world. I mean is this -- why is it such a strategically important region?

Well, I would say that we think the best market is the U.S. market, then we would say probably it's -- maybe in Australia are the second best markets and then probably the U.K. and then the EU. So we like the Australian market. They track similar to us. The legal system is similar to us. They have the superannuation funds that creates a tremendous amount of money for investing. So there's a lot of investment managers, a lot of opportunity and that's why we find it attractive.

So if we think about rather than expanding regionally, what are some of the technological pieces within your portfolio that you think could either be bolstered or whether it's bought or build? Like you said, whether it's bought or build, where do you think that there are particular places that could be strengths that aren't today?

Well, we think Singularity is going to be a strength. We just passed its 50th customer and it's gaining momentum. We also think Eze has eclipsed us, now over 200 customers, so it's got some pretty good momentum there, too. And then we like what we're doing in the DST business around [ Lyric ] and Chorus, which are some modernizations of our transfer agency platforms and puts in some newer technical way, more modern and more capability and starts to migrate away from the main frame.

The Singularity platform I think it was announced, gosh, was it 2018 or '19 at an Analyst Day with that -- so can you just give us a refresh because we haven't had a ton of discussion about Singularity, I guess, in the investment community since then. What does Singularity bring to the customer base?

Well, it's brand new, right? So everything about it. If you want to go in and switch from English to Spanish to Chinese, boom, it's all ready, right? So it's just set a parameter and off you go. Secondly, it handles very difficult asset classes with ease. So some limited partnerships or other things of more complicated nature, it's quite slick. And also have a full new reporting paradigm that is very fast and very capable. It also does all the insurance regulatory reporting natively. And so it's quite impressive on how it handles multiple bases and then also, obviously, multicurrency. So it's multicurrency, multi-bases, agnostic to which language, multi-language. It has a very robust security platform. Its cybersecurity, all of its data is very secure and it's available in a SaaS basis, people can have us host it for them. And yes, those are some of the things that make Singularity work.

Is there any particular type of investor, whether it's alternatives or traditional asset managers, you mentioned insurance, is there any particular type of investor that it's particularly well suited for?

Well, insurance has its own query paradigm and its own accounting, statutory accounting, so it well-suited to that. It's also well suited to large-scale investment managers and they've handled hedged funds and other asset classes. But we have a very strong offering in other -- in hedge fund already in Geneva. And so we're just optimistic that it's going to have a long life. It's going to grow. It will probably double over the next few years, every year, but still starting from a small base. So it's not yet tackled.

You mentioned 50 customers, how many customers does it make sense for this to possibly penetrate?

Over 500.

Yes. Great. So the area we haven't really touched on yet is retail with the RIA function that you've acquired from Advent. What are some of the trends in retail in terms of people maybe going more of the independent RIA, breaking off from the large kind of broker-dealer wire houses. How does that trend impact SS&C's business there?

Well, I mean that's Black Diamond. It's our primary product in the wealth platform space. And it's probably towards $100 million in revenue and it's been growing at 15% a year for a long time. And we continue to bring out additional capabilities, more and more sleeves, more and more unified [ multi-platform ] capability. And the areas that -- what happened was they both consolidate and then -- and I would say that the last big splintering was when Wells Fargo's acquisition of A.G. Edwards hit some milestone, I think 7 years, and all of those for 7 years. And so we started seeing all of these new RIAs and all coming out of the old A.G. Edwards. And so that's what you see. I don't think that's going to change. The kinds of investing for people your age and younger is going to change. I mean stuff like Robinhood, other things like Schwab Slices (sic) [ Schwab Stock Slices ], and Everyday 401(k) for them and stuff like that, there's infinite turquoise and it's going to confuse a tremendous amount of people. So it's going to be incumbent upon the financial advisers, the financial consultants to be able to help people through that, through the myriad of new products and make sure that things are suitable for the people that are acquiring them and recognizing that everybody is not in finance, right, not a CFA. Everybody can't swallow financial statements the way you and your company have more in other places, but I do think that the variety of product and capability. I think that down at the Federal Reserve has a big -- or treasury sector issues that empowered Federal. But I think they have a big job. I mean I think that unintended consequences have very low FX rates. Retired people's CDs going from 5% coupons to 5 basis points. Money market funds paying 8 basis points in negative rates throughout EU would -- I just think unintended consequences are things to be cognitive of and stuff that we -- hopefully, we can help with.

If we zoom out a bit and we think about just the wave of passive investing versus active investing, what role does SS&C see itself playing as if the wave just continues to move passive, what does that mean for the company?

Well, we do a lot for passive, too, right? We do -- just because you're passive doesn't mean you don't have to do accounting. You've got returns, you still got to collect your income, you still have to send reports for your clients, you have to meet the blue sky laws of various states. It's different. The yield on the assets of the passive investors are not nearly what an active manager gets. But -- no, I don't think active management is going away. And the larger passive gets, the more it is already known what they're going to do. And really if smart active mix, it's boom. They'll already know. And that sounds like that's a little bit of a competitive advantage, I think.

Yes. I think you talk about private -- because the company has been so active in M&A in the past, you've talked about private valuations a lot and now things are a little stretched. What did private valuations do during the pandemic? And were -- was it just too short of a period of time for SS&C to be really aggressive?

Well, I mean we bought Innovest right at the height of it, right? So -- I mean, that was $125 million, I think. Tax that you are trying to get somebody to advance. If they won't advance, there's no deal. So -- and if you try to make them advance too hard that deal. And so it's -- in 2018, Innovest wants to buy 3 big companies. In 2018, they wanted to advance, right? I can get it done. And now when you look at today, it's 6x EBITDA. And probably -- Intralinks is probably 8, 8.5. Eze is probably still at 10 or 11, but has helped us in other parts of the business. So those have all proven pretty effective for us.

A question came in and this is a good follow up. So in the environment that M&A targets remain expensive, and if in your view, the stock remains inexpensive, do you think you'd consider allocating a larger percentage of cash flow to share buybacks? I know you did some recently. But historically, it hasn't necessarily been as big of a focus for uses of cash. Would you consider?

Sure. Yes. We think we're undervalued. And at the same time -- we went public at $7.50 on March 31, 2010. When the stock was trading at about $75, that's 10x. It's really done wonders for my net worth, I can tell you that. And so I would suggest to people that bears make money and pigs get slaughtered. We're planning to be wise with what we do with our cash flow. But in general, over the next 5 quarters, free cash flow may be $7.5 million, $1 billion. And so -- the things you can do with $7.5 million. I don't want to revolve that.

All right. Well, look, Bill, this was great. It's always so great to have you at the conference. I really appreciate your candor and all your thoughts. So thank you, everybody, for joining as well and for the questions, the interactive questions. Really appreciate it.

Okay, Jackson. Stay safe.

You, too. Take care.

Cheers.