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

Hi. Good afternoon. I'm Chris Donat with Piper Sandler, equity research analyst covering fintech. We're continuing our fireside chats. We now have SS&C Technologies. So with me is Patrick Pedonti, he's Chief Financial Officer of SS&C. Patrick is the long time CFO and has been a lieutenant to CEO and Chairman Bill Stone on financial matters.

So I'm going to jump in with the question that is one I get most from investors around organic growth, which is in the first quarter, organic growth turned positive after being negative during most of the pandemic, and you actually increased your guidance for full year 2021. And so what's changing with organic growth and what products or offerings are driving the improvement?

Thanks, Chris. Yes. I think as we're seeing the environment improve. We're seeing strength in several of our product lines, definitely, as compared to last year, but even as compared to our view early this year in January. The product lines we're seeing strength in our alternatives fund administration business, where we provide full back office outsourcing to alternative asset managers. The DST, certain segments of the DST financial services business, Intralinks, which is our secure data room services, and we're also seeing improvements in our core software business where we're selling either perpetual licenses or term licenses where clients are using the software in-house. And as a result, as you mentioned, we've increased our outlook on organic growth for the year. Early in the year, we expect it to be at about 2% in the overall company. And our view at the end of the first quarter where we had a strong quarter was that now we'll be at approximately 3.2% organic growth at the midpoint of our guidance. Just to give you a couple of examples. Right now, we're seeing our fund administration business, we expect it to grow about 6% or 7% this year, definitely an acceleration from last year. Intralinks business, we expect in the high single digits, somewhere around 7% to 9% organic growth. On our software business, which struggled last year I think due to the pandemic and our customers being reluctant to implement software in-house, where we thought it would be down a little bit this year, we're now seeing some strength in our backlog and we think it will be up low single digits.

Within the DST part of your business -- because when you acquired DST in 2018, it represented about half of SS&C's revenue, I mean of total revenue at that point, double what your prior revenue was -- sorry, the equivalent to what your prior revenue was before the acquisition. Can you help us understand what's working within DST? And it seemed like there were parts of the business that have been lagging that might be moving into better position now for growth than they were over the last couple of years.

Yes. I think when we bought DST, they were clearly struggling and had multiple years of declining revenue. But I think their service delivery was failing, they were having trouble retaining clients and they were also giving out price concessions as a result of deteriorating service. So we really focused on improving service and technology, and our retention rates have been high since we've owned DST. And we worked hard to improve technology in several areas. So right now what we're seeing is that the DST financial services business is about $1.7 billion on an annual basis. I think about $1.1 billion, $1.2 billion of that is transfer agency. So it's a large segment of the DST business. We're starting to see that stabilize and grow a little bit this year. I think we're offering new products, we're offering improved technology, our retention rates are up and we're starting to win new business. There's about 3 segments in there that are growing pretty fast this year. We have a retirement business at DST which is about $150 million. We're providing services to 401(k)s and IRAs. We've got a brokerage business for client services to brokerage firms. And then we've got the asset management business called ALPS. All 3 of those businesses are growing high single digits to double digits this year. We've signed a lot of new deals in the retirement business, they are helping that business grow; improved technology in the brokerage side; and we're seeing good fund flows in our investment management system, the ALPS system. So those are the 3 businesses, and they represent about $500 million and $600 million and are growing fast. And then we're seeing good stabilization and some small growth in our transfer agency business.

Okay. Also within DST, you've picked up a health care business, how has that been affected by the pandemic? And what's the outlook there? Or has there been any impact from [ there ]?

No, we did. You're right. We picked up a health care business that is about $400 million a year. They're basically processing medical and pharmacy claims for large-scale insurance companies. So that business clearly struggled mid-last year when pharmacy claims dropped significantly, especially in the second quarter when kind of the pandemic started and people were mostly in lockup and there were very few doctor visits. Sequentially, that started improving in Q3 and Q4. And by Q4, it was pretty much at a normal run rate on pharmacy claims and Q1 was pretty much running normally. That business has also -- there's been a lot of consolidation on the high end of that market, where a lot of the large-scale insurance companies have bought claim processors and then brought that work in-house. So that's impacted that business. But right now, what we're doing is we're focusing on the middle market. Middle market really is looking for independent claim service providers and we're getting some traction in that. So where we expect the business to be is still be down this year due to the client losses. But we expect to lapse most of that next year, and we should start seeing some growth.

Okay. And then just to try to drill down a little bit more into Intralinks, which I think is a really interesting business with the virtual data rooms. You mentioned that, that's a place where you're seeing some organic growth. Is that driven by -- it feels like there's a whole lot more M&A activity going on these days, is that's what the driver? Or are you -- because there are other parts of the business that aren't as beholden to the M&A cycle within Intralinks, right?

Yes. When we acquired Intralinks, they were mostly focused on the -- providing secure data rooms for M&A. We've worked to diversify that business to provide those type of services to either security firms, banks and alternative asset managers when they're raising capital. So I think today, the M&A part of that business is maybe about 70%. So what we're seeing now is we're seeing strong growth in the M&A segment, a lot of M&A activity this year, and we're seeing good growth in the other segments as security firms, banking and alternative asset managers. And over the long run, we really want to diversify that business. So we're not totally beholden to the M&A market, but have other segments where we can provide secure data rooms. That's been going well.

Okay. Okay. In terms of your asset servicing. So we we're big fans of the SS&C redemption indicator, the GlobeOp Redemption Indicator, partly from what it says by your business, but also what it says about what's going on in the broader financial services world. What we've seen in the last year, really there's 11 consecutive months of year-on-year decreases in redemption notices from hedge funds and other alternative managers. Anything you'd attribute that recent strength to? And is this a trend you expect to continue? Or are we just in a -- currently a favorable market in terms of redemption terms -- just trying to figure out something has changed in the broader market that would cause lower redemptions on a secular basis.

I think you're right. I think we're in a good market overall over the last 10, 12 months. And there are about 3 factors that impact that market. The net redemption subscriptions, our clients launching new funds and then winning business and taking business away from competitors. And all 3 are going really well over the last 6, 9 months. I think, clearly, wealth around the world is growing and investors are looking for places to put their money and hedge funds and private equity funds and some of the other services we provide to real assets like real estate, have been doing really well. And so our clients are accumulating a lot of assets and they're getting good net flows. I mean it's hard to predict. The market could take a tumble. But like you said, we've seen this trend for over 12 months and we don't see anything changing so far this quarter.

Okay. And then you said away from the redemptions, you're doing well with bond launches and wins. Can you say a little bit about if you're winning business from other fund administrators, any generalizations you can make about where you are taking business? Or what are people turning to SS&C for in the fund administration side?

Well, I think there are a couple of factors. I mean we're #1 in the industry. Of the top players in the industry like State Street and Bank of New York and SEIC, we're the only one that's a technology company that owns our own technology. So I think that's an important factor for our customers and that we've got more capability and we have more control of our technology. And I think as a result, we provide better service to our clients. So I think that's an important factor. I mean if you look at a lot of those competitors, several of them are buying software from us to provide the services. And I can assure you we're better at running our software than they are. So I think we're in a good competitive advantage in that space and we continue to grow faster than the market.

Okay. I want to ask a question around capital allocation. So dividend press releases aren't always the most interesting ones, but Bill Stone's last year made one a little more interesting. In August of 2020, around your dividend increase, Bill stated in the release, "In the absence of high quality acquisitions at a fair price, we will increase cash dividends, allocate more capital towards stock buybacks and continue to pay down debt." I'm just wondering, do you see anything different now in terms of acquisition candidates at a fair price?

We haven't seen a lot different. I think if anything, the asking price for very good quality software companies are going up. We are right now in the middle of bidding for an Australian company. But that's a fairly small company. I think they're doing about $60 million or $70 million of revenue. And what we're seeing is that asking prices are really high. And I think as Bill said, we'll be patient, we'll focus on our core business, focus on organic growth and we'll use our over $1 billion of free cash flow to return capital to investors and pay down debt.

Okay. You just referenced that you've been involved in bidding for mainstream group in Australia. It seems like there's been -- I know each country is different in terms of their acquisition rules and stuff like that. Is there something unique to this process that's generating what seems like an abnormal number of incremental price hikes on the deal? Or can you even say anything about it given Australian takeover rules? I don't know enough to ask what question I should ask on this one.

Well, I can say that the -- I'm learning about the Australian takeover rules. But essentially, how it works in Australia is up until the day that somebody closes on that business, somebody else can come in and bid higher. So unlike the U.S. where you usually kind of deal with a company, you get a vote and it's done, right? You might have a small period of bidding process. This goes on until we close. So I think this is an indication, at least -- this is a very good company. Has been very successful, has talented employees and is clearly strategic to a couple of parties interested in it. And they're growing pretty fast. So -- but we'll see where this goes. But we're clearly interested in this company. We think it's a very good, high quality company.

Okay. I want to ask a couple of questions around the pandemic. Just in terms of the business you're doing now, do you expect to have any lasting impacts from the pandemic? Either in terms of customer demand for your offering or in terms of what your -- what products do you expect to be rolling out and any cadence there?

Well, I think these type of environments are drivers for our business, right? Because in the middle of pandemic last year when everybody had to send their employees home, there are clearly some investment management firms that struggled in managing their back office. They might not have the remote capability or they might not have the security in place to run remotely from home. And I think what we're seeing so far is that a lot of people did struggle running their back offices. And we didn't miss a beat. I mean in a couple of days, we moved 22,000 people remotely. I'll be honest with you, we probably never thought we'd be able to do that, but it worked. We moved 22,000 people remotely, including 6,000 people in India, which -- it's a bigger challenge because Internet broadband is not as good there as in the U.S. So I think we're seeing and we're starting to see it this year is a lot more people have interest in fully outsourcing their back office. And it's not their core competency. It's a risk for their company. And we've proven that under very duress situations, we can continue managing people's back office without missing a beat. So I think that's one trend will -- that I -- I mean that trend's been going on for 20 years, but I think it will accelerate.

Okay. And that's the sort of decision that companies don't undertake lightly and they don't flip a switch and they outsource it the next day to you. It's a -- that's a multi-quarter or multiyear process, typically, right?

It typically is, especially a large investment firm. I mean a hedge fund or a private equity fund might do it faster, right? Because their systems aren't necessarily integrated with a whole bunch of other internal systems. So they could do it a lot faster. But a large scale asset manager, yes, that could be a 9-month process.

Okay. You just mentioned you had a large workforce in India. We'd looked at the 10-K to see how big it was and it's about a quarter your headcount. So it sounds like you've been able to manage with the pandemic and the workforce there. The one thing we noticed is that it's increased by about 2,000 people in the last year in terms of the number of employees in India. Is -- what's driving the higher headcount there? Is that sort of an offshoring thing? Or is it -- anyway just help us to understand that.

Yes. No, actually DST had an operation in India. They had about 2,000 staff there, but they had it outsourced. So they were all contractors. We don't tend to like that model, hiring an outside consulting firm and contracting employees from them. So last year, we acquired additional facilities and we started moving those 2,000 employees to in-house employees that are managed by our staff now, and we finished that process last year, and that was about 2,000 employees.

Okay. That makes sense.

So we think that they're much more productive, much more cost-effective to have in-house employees.

Okay. Got time for a couple of more questions here. So I want to ask one about just an announcement you made this week about the Singularity platform, which is the announcement was that you've now signed more than 50 clients to it. So it sounds like it's really gaining traction. The platform is for digital investment analytics, operations and accounting. Just can you remind us what Singularity is about? Why customers are joining? And then is this a complement to SS&C's existing offering? Or can it be used a little -- is there a little bit of channel conflict going on? Help us understand how it fits into your old product suite.

Sure. I think the focus of Singularity initially is mostly insurance companies. We've been selling a product called CAMRA for a long time to the insurance companies. And insurance companies have been really looking for a new platform, a new technology that they can use either on the cloud or on a semi-outsourced basis. So over the last couple of years, we've been developing Singularity. It's at the point now of development where it can run for insurance companies. It's being sold both as a hosted kind of subscription model and an outsourcing model. And then we're continuing to invest in that product where we can provide services to traditional asset managers. So we think it's an improved platform, improved interface and much faster functionality. And I think that, that group, especially insurance companies, have been looking for new technology and we're getting a lot of interest to that.

Okay. And then just last question for me here. In terms of your EBITDA margins, they've been steady around 40%. And is that a fair way to think about your -- where they should be over the long term? Because historically, your EBITDA margin have oscillated around M&A activity, but without any big M&A activity, it looks like we're steady case. Or should we expect some improvement in margins going forward is your natural scale and cost control?

Yes. We think our internal goals are 2 things: one is to improve gross margins by about 50 bps a year, so 0.5%; and to continue to invest in sales and R&D. So we would expect -- I mean if we wanted to, we could take margins up much higher. But we think we need to continue investing in the business for growth. So we'll continue spending as much as we can on R&D and sales. And we'll continue to manage our cost of sales by using more technology, improving productivity and getting about 50 bps of margin improvement per year, excluding acquisitions.

Right. But it sounds like in the current environment, one would not expect some large acquisitions, but who knows.

Things change fast, but probably not.

Yes. Your leverage ratio is 3.35x last 12 months, which for you is low.

Well, it's low. And the interest rate on our term facility is like 1.9%. So it's -- we'll continue to pay down debt, but it's hard to pay down debt when you're only paying 1.9%, right? But if we keep paying down debt, we'll have more capacity if an acquisition comes around over the next couple of years.

Got it. Understood. Okay, Patrick. We're out of time here. But I appreciate you taking the time to participate in the Piper Sandler Global Exchange and Fintech conference. Always good to chat with you and hear the SS&C story.

Well, thanks for giving us the opportunity and appreciate the invitation. Thanks a lot.

All right. Take care, Patrick.

Bye-bye.