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

Good afternoon. This is Pete Heckmann with D.A. Davidson. Thank you for participating today in our Software and Internet Conference. For this session, we have SS&C Technologies and Rahul Kanwar, President and Chief Operating Officer. Rahul, thanks for participating.

Thanks for having us. We appreciate it.

Great. So let's start at the beginning. The company's primary original focus was automation software for investment managers, things like portfolio accounting, trading automation and the company really solidified their strong market position with several acquisitions, FMC, PORTIA, but really, Advent Software was the topper. When we look at just that market, market for investment management software, how would you characterize the current IT spending outlook? Can you outline any catalysts that may be causing firms to look at upgrading their software? And maybe talk about 2 or 3 or 4 of the current spending priorities that you're seeing in the marketplace.

Sure. Now Peter, if you kind of look at most of the organizations and we have 18,000 customers. And they're in different parts of financial services, and we have a health care business as well. But their priorities, in addition to generating on the financial services side, in addition to generating investment returns is to have as good of an experience for their end clients as they could possibly have. So that -- I think it all starts there, whether we're talking about our fund administration business, where we're dealing with investors in hedge funds and private equity funds; or we're talking about our retirement business for the plan sponsors and members in the various retirement plans; same with our transfer agency business, is how rich is their experience when they're interacting with our client and that experience is driven a lot by our software, whether it's web portals or mobile devices and things like that. So that's a pretty big area of investment for us. It has -- it is also an area where we have seen that as we put money and time and expertise into these products, they become pretty big sales differentiators for us. So we've announced some big wins in our retirement business, driven off of these kinds of digital enhancements. The other thing or the other trend that I would highlight is we continue to search for performance, right? And that kind of leads you around the world and it leads you to different asset classes. And as you get into more and more complex asset classes, you really do need to have sophisticated workflows to take what people do traditionally manually and make that more and more automated, right, whether that's private credit and direct lending that obviously have been hot asset classes recently. Real assets is another example where there's a lot of data at that underlying property level that then needs to get captured and analyzed. So product and asset class coverage and geographical coverage is kind of another big area of investment for us. And I think the third thing I would highlight is people are looking to have strategic vendors, right? And almost by definition, that means they do more than one thing. And they might even do multiple things and lots of things, right? And so adjacencies, things that we do today, things that we can do around the things. For example, we have built over the last 8 or so years a $300 million, give or take, regulatory solutions business that's driven around no matter where you are in the world, whether you need to do Form PF or FATCA or some other local regulatory requirement that you need to comply with, we can help you do that. And that's been a nice add-on to many of the activities. And those are the kinds of things we're investing in.

Got it. Okay. And just would you remind us that just because the business had changed fairly materially with the acquisitions of DST and Intralinks, but when you think of the overall business and think about the 5 or 6 main pieces: investment management software, alternative fund administration, mutual fund processing, health and Intralinks, how do those businesses break down in terms of percentage of revenue?

Sure. So our alternatives business is a little over $1 billion in revenue, right? So if you kind of use $4.8 billion or something like that, that's obviously one of those big pillars. Another one is mutual fund processing, and by mutual fund processing, it's transfer agency, middle office services, things like that. That's roughly $1 billion in revenue as well. We've got the software businesses that we made reference to. What we're selling, portfolio and accounting software as well as reporting and other tools to investment managers and in some cases, the asset management parts of insurance companies and banks as well. And that's -- the product names there are those in our Advent business as which is order management, institutional investment management and all that together is probably another $1 billion or so of revenue. We talked about RegTech a little bit. It's about $300 million. Our health business is about $400 million. And then Intralinks is also another $400 million or so in revenue.

Got you. Got you. Okay. That helps us think about the business. And we were really impressed in the second quarter with the 7% organic revenue growth constant currency. And -- but that was aided a bit by some easier comparisons with the prior year period where things like medical claims, prescriptions filled were down. And then in this year, where the virtual data rooms were very busy with M&A and the SPAC IPOs, what do you think is the sustainable organic growth rate of the current set of businesses across a period of 2 or 3 years?

Well, we feel pretty good about the progress we have made on a variety of fronts. That's both the products themselves and the competitive positioning of those products relative to kind of just our peer group and the executives we have running the businesses, the investments in sales and marketing, et cetera. So hey, the comparisons obviously do matter. But we think mid-single digits is probably a pretty good and reasonable expectation, at least in the short to medium term.

And with the DST Systems acquisition, that deal really wound up being a home run from a position of margin improvement and cash flow, but maybe a bit of a drag on growth. Where are we now? You noted a large win in retirement, been restructuring the management team a little bit there. How do you feel about DST as a contributor to the overall growth rates?

I feel better about it now than we have -- we've done a lot of work since 2018. Obviously, a lot of work initially on the margin profile and the cost profile, but also sales and marketing and externally focused on customers and prospects and getting the right people -- as you noted, getting the right people to run the various businesses. And then the most recent change we made in the last 6 months or so is we've actually formally separated the various businesses that used to be DST and in effect, made them their own important parts of our company with the right amount of visibility, whether that's retirement or our GIDS business, which includes our transfer agency or brokerage services, health advisers. And so we feel really good that not only are they contributing more than they have in the last couple of years to our growth rates and our growth profiles, but that we expect to get stronger from here.

Good. Good to hear, good to hear. And then let's talk on fund administration, an area that you headed for a long time and oversaw. SS&C going from a large player to really the clear leading player, over $2 trillion in assets under administration. But we see others growing, too. And we've seen private equity-backed Apex doing a number of deals and growing their base of assets under administration. Earlier this week, we saw State Street with a deal, a relatively large deal for Brown Brothers' investor services business. Within fund administration, how do you think about the underlying growth of alternative assets? And then how do you feel about competitive dynamics? Has it become easier to compete as a leader and then essentially, in some ways, a low-cost player versus some of the other players that are struggling to maintain their share?

Well, scale and resources do have some advantages, right? But how we got here was we focused heavily on technology, right? And so as you noted, I've been a part of SS&C and a part of the fund administration business since 2005, right? And before my current role, I managed that business. And really, what we always try to do was make sure that we understood what the customers and prospects needed in terms of technology and expertise, and that became our product plans, right? And when we did acquisitions, we did acquisitions that not only brought more customers and more talent to the organization, but also brought complementary technology so that we can now do more things for them than we did before. And I think that remains kind of the essence of what we're trying to do today, but we have 2 avenues to do it, right? We can build technology, and we can go out and make acquisitions. And we're just trying to allocate capital in what we think will result in the best return for our shareholders, but also the best experience for our customers. And so going back to kind of the resources, we have the resources, we have large-scale development, large-scale engineering, plenty of budget that we can continuously improve the product and kind of separate ourselves or try to separate ourselves from the other competitors we have in these marketplaces. And at the same time, we look at acquisitions, and we try to pay attention to what's out in the marketplace. And we've been fairly acquisitive in the fund administration space, and we expect that, that will become -- that will continue to be a part of the strategy going forward.

Got it. You talked about RegTech and how you had made some internal investments and made a pretty sizable business out of RegTech. Can you talk about some of the other areas that you're investing, in product development, Singularity would be something that would be interesting to get an update on. But any other -- 1 or 2 notable things that really -- have really more germinated from an internal investment.

Yes. And Pete, just as a broad context, what I would say is in every one of the areas that we've identified as a part of the company, one of the things that our executives that lead those businesses, [indiscernible] was doing is making sure that there is continuous improvement, right? And continuous improvement means that we're building products and services that we expect people require and want to have. And so there's any number of those kinds of things. So just to give you a few highlights, you talked about Singularity. And so if I started there, that is our next-generation platform built natively in the cloud for insurance companies primarily. And we've had a lot of success. We announced that we have over 50 clients on it. We've had a lot of success with both outsourced clients as well as people that want to just buy the software itself. In our Real Assets business, which Bhagesh Malde runs and ran for a long time, and we recently promoted Bhagesh to run our entire private markets, including our private equity business. But there, we're very focused on the amount of data that real estate managers need to capture and consume in order to be able to properly analyze their portfolio. So we're using some of our data analysis and insight products called CORE and SightLine to build and provide access to that information in a way that we think is pretty differentiated. The regulatory business, all of that was really homegrown, right, one product at a time. So their road map consists of, at any point in time, 3, 4, 5 new things, and we're very focused right now on taxation as one example and helping people understand their -- the tax characteristics of the trades that they're making in their portfolio, the trades that they could make in their portfolio in real time and allowing them to make decisions on that basis, which is something that is still somewhat of a batch kind of process that takes a long time to truly understand economic impact, and we're trying to make it real time. So those are some examples, but we have innovation going on all over the business.

That's helpful. With one little niche we haven't talked about yet, but I do want to mention, the acquisitions of both Advent and DST brought exposure to the financial adviser technology space. And certainly with Advent's Black Diamond, you called that out a number of times since the acquisition of Advent that, that business has been growing robustly in the high teens, low 20s, benefiting from the secular trend of advisers leaving the wirehouses, going independent and moving to fee-based portfolios. But it's in one area where I've been a little surprised that SS&C hasn't been more active in terms of acquisitions. Number one, could you kind of size the overall financial advisory business within SS&C? But then as well, maybe comment on the relative lack of acquisitions, whether you have a different opinion of the longer-term outlook there or maybe just circumstances, you didn't see the right deal at the right time.

Peter, I think our financial advisory and in particular, registered investment advisers is north of $100 million for us in terms of revenue. It is a fast-growing business, 15%, 20%, I would say, on average the last couple of years. So while it's still a smaller part of the company, it certainly has an attractive growth profile. And we're both deploying our own capital into organic-type initiatives, and we're continuously aware of what's happening in the marketplace. And we did -- we bought some small businesses, Salentica is an example, which is a part of that. We have not done significant M&A in that, and we remain open to the possibility of doing it. But in the meantime, we've got a nicely growing business where we can do lots of things organically to keep improving the product and service, and we will do that.

Got it. Got it. Okay. So it's not that management has a differing view necessarily of a secular opportunity there?

That's right.

Okay. And then let's -- we talked about a number of the businesses. 90% of the business really is around capital markets, investment management. But with DST, you did get a Health Solutions business. I think generally, this business is not really well understood by the markets. But under DST, it was generating some interesting growth, and it did have a very interesting market position within prescription processing within the U.S. Can you talk about some of the current thoughts about the relative fit and the opportunity within Health Solutions. And with that, maybe also just touch on the recent joint venture announced with Humana to develop a next-generation prescription processing platform.

Sure. Our opportunity in the portion of the health care business that we're in is very much like our opportunity in fund administration and some of the other businesses that we came up with, which is we have a technology development capability that we think is pretty different than most of the people we compete with. And if we can build technology fast enough and deploy it fast enough, we have really an opportunity to be disruptive, right? And one of the biggest challenges to deploying technology or building technology fast enough is making sure you have the expertise so you're building the right things and then you get adoption, right? And so this joint venture that we have recently done with Humana and Anthem, we think, helps us address both of those issues because we've got 2 very big organizations that are large-scale players, just like we are. And so the collective expertise that go in into this next generation of technology that we're building is really quite high. And we also have customers, so to speak, right? So not only are we taking advantage of the joint expertise to build the products, but we also have real-life markets and customers and transactions to test it on and to deploy it on. And we've really seen a pretty big buzz in the marketplace since we announced that, and there's lots of incoming and people trying to understand how they can participate. And we're happy to have all those conversations. But we're also really focused on making sure we do what we set out to do. And if we can do that, then we feel good about the prospects we have in the health business.

Correct me if I'm mistaken, but one of my historical impressions of the opportunity there was that most of the big PBMs rely on a markup business, where they're marking up the underlying price in the pharmaceuticals and customers are complaining about price transparency, but the Health Solutions pharmacy benefit administration platform really allows more price transparency, and it's really more a fee-based model than a markup-based model. Is that still correct?

Yes. Our model is very much a service-based model. It's sort of a transactional type of model, similar to what we would have over at trade processing in a middle office business or things like that. So you're absolutely right, Pete. It is driven around where we bring value is we help people understand trends so that they can optimize what they're doing. And that's very much a data and getting insights out of the data kind of business, and [ that's how its priced ].

Yes. Okay. And one of the core competencies I always tell investors of SS&C has really always been sourcing, negotiating and integrating acquisitions. The company has done dozens of acquisitions over the years. Obviously, 2018 was a big year with over $8 billion, I believe, directed towards acquisitions and then maybe a couple of digestion years where the deals are a little bit smaller. More recently, I think you've walked away from 2 midsized deals of Australian publicly traded companies. But maybe give us an update on the M&A appetite relative to the balance sheet the company has. I mean should we be thinking that there certainly is the potential for other larger deals, multibillion-dollar deals? Or has there been a change in the appetite where you're really looking for more tuck-ins?

I don't think there's been a change in the appetite. I think what we have always been is both open to looking at just about everything, right, and at the same time, being somewhat disciplined in what we choose to pursue and then making sure that the things we choose to pursue fit in nicely with the products and services and objectives that we have and improve for our customers, right? That's really what we're trying to do. And as I mentioned earlier, we've got 2 avenues. We can build our own technology or we can go out and buy technology. We can develop services in-house, we can go [indiscernible] so it's always a what's the more economically wise. And when valuations are high and, let's say, conviction isn't quite as high, the building part of it and the organic prospects seem more [ attractive ]. but these things go in cycles, and you get a year like [ 2018 ], where we do 3 big acquisitions, and we fully expect that those kinds of cycles will repeat.

Got it. Got it. And then just in terms of -- and I may be over generalizing this, but it seemed to me both of those Australian deals dealt with the administration of the superannuation-type retirement plans. And I believe that the U.K. is also on that model. Is that something that you're looking at strategically of building out those capabilities? I believe DST has one very large customer in the U.K. with those capabilities. But is that something where you see an opportunity?

Yes. I think the opportunity is, for sure, superannuation, particularly in Australia, but it's also broader than that. It is financial advisory and the retail investor in Europe and in Australia in a variety of different forms, right? So regulated funds, unregulated funds, a variety of different things and very much focused on the digital experience for that end client. So it's in keeping with our strategy. We're interested and we look at potential acquisitions all over that spectrum, but we're also -- there's a number of products that we're pretty excited about.

Okay. Okay. And then just thinking about the next 5 years, I think we only have a minute or 2 remaining. But what are some of the really broad trends -- let's focus just on the capital markets and investment management side, but what are some of the really broad trends that we should be watching? Either changes in terms of regulation, the desire to reduce costs through outsourcing, the increasing complexity of assets, people looking harder at more complex assets to get yield. What are some things that you think are interesting dynamics that might represent opportunities for SS&C?

Well, Pete, I think all the ones you said are absolutely on point. Those are all -- and I would -- the things that I would sort of add or supplement would be as the world gets richer, right, we facilitate that investment process all the way from somebody making a transaction to somebody having to report the results of the transaction to an investor or a regulator or a taxing authority, whatever the case may be. So we think that, that amount of work is going to keep increasing all over the world in many different forms, and that's a great opportunity for us. We also think that most of the people that we compete with are either software companies or service providers, and it's rare to find both of that in the same organization. We think that's a pretty unique advantage because there's a lot of synergy between those 2 kinds of things. And then this is one of those where scale matters, resources matter, 18,000 customers all over the world running $50 trillion plus on our platforms is a pretty nice foundation to be able to build that next set of growth off.

Yes, that's very true. Well, Rahul, we're out of time. I really appreciate you participating today. It's always interesting to get an update. We will definitely stay tuned and see how things develop at SS&C over the next couple of quarters.

Great. Thank you so much.

Thank you, Rahul. Thank you, everyone else for participating.