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

Good afternoon, everyone. Welcome to our fireside chat with SS&C. I'm Surinder Thind, the technology and information services analyst here at Jefferies. Our guest today is SS&C Chief Financial Officer, Patrick Pedonti. So welcome, Patrick.

Thank you, Surinder. Thank you for inviting us. I appreciate it.

Yes. So we have about 25 minutes today. And so going to try and work through a relatively diverse set of topics here, so I may kind of jump around a little bit. I think to begin, Patrick, I just want to ask a really high-level question about where we are kind of in the process relationship to the pandemic. And so I think from my perspective, when I take a step back, I think the pandemic's forced a lot of companies to kind of revisit strategy and operations to some extent. So when I ask how has the pandemic, I guess, if at all, changed kind of the end markets that you target, given that your products and services tend to be much more focused on kind of core processes such as accounting and so forth. So are you seeing any kind of a shift in your clients in terms of -- or have you seen, I guess -- are they more or less cost conscious? Do they -- are they thinking more about change? Or are we just kind of fully back to [ normal ] at this point?

I think what we have been noticing over the past 9 months or so is that a lot of financial services firms are reevaluating how they handle their back offices. So our view is a lot -- this has moved a lot of our clients to outsource their back office because their view is that it de-risks their back office by giving it to a third-party provider. I think a lot of companies' investment firms realize during the pandemic when they had to send all their employees home that they couldn't really run remotely and they had trouble accessing their system and it was slow. And so we're clearly seeing a trend, and we've seen this with several customers at DST where we're actually lifting out their whole back office and gradually moving their back office over to our technology. So I think that's one clear trend we're seeing as a result of this pandemic.

Then if we were to kind of think about where we are at this point, and that seems to kind of be the longer-term story, but are clients willing to kind of commit at this point? Or is there still some hesitancy in terms of how long it takes to maybe get deals closed. Obviously, there's been the delta wave. Or is everybody just kind of used to the environment at this point and it is -- business is normal in the new normal?

I think you're right. I think this is the new normal and clients have gotten to that point now where we saw really some hesitancy, especially in acquiring systems that they will use in-house, run in-house. We saw -- we definitely saw hesitance in people signing deals and trying to implement new systems during the pandemic when all their employees were remote. But we've seen -- over the last 6 months, we've seen a big shift in that. People are now signing deals. They're moving on with their business. If they need to buy software and improve their systems, they're going ahead and doing it. So when we saw -- we didn't see that we were losing business last year. It just seemed like people were hesitant to sign a deal and move on to implementation. And now we seem to be back to normal pre-pandemic. And we don't see any hesitancy in people moving on with improving their technology.

And then when I take a step back and I think about just kind of how the market's evolved over the last year or 2 to where investors are kind of maybe rewarding more growth-focused companies at this point or at least the divergence in the multiples have [ gotten on both ] last year. So maybe can you talk a little bit about when you look forward, the firm-wide growth framework that you have in place at this point kind of in the new normal and what you think the firm is kind of capable of at this point.

We think under normal circumstances and kind of normal market conditions, we think that the business can, in the near term, grow in the mid-single digits organically. And we've got segments of our business that are performing above that now. Our alternatives business, which is about $1 billion is probably going to grow in the high single digits this year. Our Intralinks secure data room business, which is about $400 million, is probably going to grow -- I think it's grown in the high single digits for the full year also. And we've got -- we're seeing improvements in our software businesses where people are signing deals now. And then the DST business, which we acquired in 2018, we're really seeing that business stabilize, retention rates are high, service delivery satisfaction is very high with customers. I think we're running 97% client retention rates over the last 12 months. And we're starting to sign new deals. And from a business that was declining for the last 2 years, we'll probably be around 2.5% growth in that DST financial services this year. So I think if we continue those trends, we'll have our overall business be growing organically in the mid-single digits. And those are the targets that we're trying to attain.

And is that -- would also that be kind of the 2022 targets or longer term? Or how should we think about the near-term versus the longer-term opportunity here?

Yes. We haven't set specific targets for 2022. We will early in the year, and we'll have to assess market conditions at that point, determine what our guidance is. But we think over the long run, over multiple future years that, that business is capable of growing in the mid-single digits.

Got it. And then before we kind of dig into some of the individual products here that you offer, can you maybe talk about any geographic trends that maybe we should be aware of. It seems like Europe has generally been recovering a bit more slowly than U.S. economically. Maybe how has that impacted business? And should we be taking a more global view of your business at this point? Or is it still very regional in how we think about it? Because it feels like you're starting to think about the business more globally, but I just wanted to kind of understand that regionally how things are trending at this point.

Yes. There are parts of our business that we can think of globally like the alternatives business, we can think of globally. We service alternative asset managers out of one main operation center, whether they're in Singapore or Hong Kong or Australia or Luxembourg or Ireland or the U.S. So those, we think of as a market because all the characteristics are the same, and they generally all operate in U.S. dollars, and they have generally the same needs. When you look at investment accounting systems, portfolio management systems for large-scale asset managers, the needs are very different depending on what region you're in because they've got different investment categories they're investing in. They've got different regulatory requirements. So we tend to focus on the markets that are pretty similar in that area. So that would be the U.S., the U.K., Hong Kong, Singapore, Australia. The Mainland Europe operates a lot differently and it's not an area that we've necessarily invested in because we don't think the payback is very good. So we kind of stick with those main worldwide financial centers, and their needs tend to be very similar.

Got it. And then you talked a little bit about kind of global delivery. Can you talk a little bit about maybe the investments that you've made there in terms of operational efficiencies and stuff. And obviously, a lot of firms have kind of used the pandemic as an opportunity to kind of take a step back and think about how they're operationally organized including globally and stuff. Have you guys given other additional consideration to maybe part of your delivery model or anything there that we can think about. I know in the past that maybe the increased use of India has helped margins to some extent as well in a while back and stuff.

Well, we've always kind of had a global delivery model where we service clients -- same clients around the world so that we can operate 24 hours a day, right? Because when the U.S. stock market closes at 4:00, by the next morning, you've got to deliver information to all our clients. So we generally use operations in India and Thailand and Malaysia to service those clients overnight so that we're delivering services the next morning before the market opens. So we've always had a kind of a global operation. I think one thing that we've all come to realize during this pandemic is in a matter of 30 days last year, we took 22,000 employees and moved them remotely. And I think like a lot of companies, we never thought we would be able to do that. That our data centers will be able to handle it, but we realized that it can and we didn't miss a beat. So I think in the future, we realize that we can service clients on a more remote basis. And not necessarily be locked into offices worldwide and that we can service clients globally having our employees work remotely. So I think that's given us a lot of confidence in our delivery service and our capability of delivering services to clients even under dire situations.

So I guess as a follow-on to that, the current operating structure that you have in place, should we expect a meaningful level of return to things like travel? Or are you -- in terms of maybe the opposite effect on margins and stuff at this point, what, is the cost savings coming back? Or are you guys effectively comfortable with the model you have and this is going to be kind of the new model going forward?

I don't expect travel costs to go back to what they were before the pandemic. I think we've all come to realize that there are certain situations where you have to travel to a customer, and there are certain situations now that everybody's kind of gotten used to using video conferencing. So I don't think we'll ever go back to that structure. And I think over the long run, we probably will have more of a flex work environment for employees, and that will give us the ability to reduce square footage in facilities and save some costs there. So I think over the next couple of years, we'll continue to be able to save on travel, and we'll probably have some significant savings on facilities costs.

Got it. And then I think kind of turning to the individual kind of product lines. A few months ago, you made a number of changes at DST. There is a press release about that as well with a lot of detail. Can you talk about the genesis of the changes that you did at DST. Obviously, that business has been transformed quite significantly over the past few years, but it almost looked like you kind of -- I don't want to say broke it up into its different pieces, but it almost seems like that was kind of what was occurring. So maybe any color on what the genesis there was and what you're trying to do.

Yes. We basically broke up DST by the markets that they serve. I think since we've owned it, we've come to realize that there was no really cross-selling synergies between the businesses at DST. So the first thing we did a couple of years ago is we had this health care unit be a stand-alone business reporting to our President. And then the remainder of the financial services segment at DST, there were really 3 major businesses. There's a transfer agency business that services mostly mutual funds. There's a large retirement business that handles IRAs and 401(k)s. And there's an asset management business. So we felt that those markets are very distinct, and we were better off having 3 organizations in that group attacking those markets. So we broke them up into 3 businesses, and each one of them has a Senior Vice President that reports to our President, and their task is to attack that market specifically.

Yes. So it sounds like we should think about it less as DST going forward. But if we were to kind of still package that, I think it's probably been the headwind that you've had to deal with. The rest of the business has done fairly well over the last few years. It's been a good turnaround story. You seem to be putting up good growth. That's in the end markets for DST generally aren't -- especially -- like with transfer agency, aren't really growth markets. How should we think about longer term? Do you see -- can you put up the 2% to 3% growth rate for DST? And then what was the headwind that you had? It sounds like it was the transfer agency business but it's kind of stabilizing back to growth? How should we think about that.

Yes. I think after we bought DST, one of the things we came to realize right off the bat was that they were having some problems with delivery service to clients and client satisfaction and their delivery service. And that was resulting in poor retention rates and pricing compression, where they were offsetting the poor service by giving clients price reductions. And that's just a spiral. And so our initial focus at DST was to improve the delivery service, improve the technology, improve the customer service, and that clearly resulted in very high retention rates. And since we've owned DST, I think the retention rates have been around 97% retention of revenue on an annual basis. As a result, we're no longer seeing price compression. We're not giving away pricing to clients because they're satisfied. They're getting good delivery. They're happy with the technology, and we're not getting any pricing pressure. So I think we stabilized the business. And in the back half of last year, we started winning new business that's helping the growth. So our overall financial -- the DST financial services business, which I think is about $1.7 billion, will probably grow around 2.5% this year compared to last year organically. The asset management piece and the retirement piece will grow faster than the transfer agency, but it's a much smaller piece of the business. So I think we're pretty confident if we -- we've improved the technology, improved the service and that we've got the opportunity to win new business in that segment, and have the overall DST financial services business grow 2%, 3%, 4% over the next 3 years.

Got it. And then a question on the health care part of the business. Obviously, the announcement of a JV recently, can you talk a little bit about that. It sounds like you're taking a more organic approach to building the health care business where -- versus more of an M&A-type approach. And can you -- is that the right way to think about that? Or how should we think about that trade-off?

No, I think you're right. I think we have looked at acquisitions in that space. We've come to realize that we've got good technology and very good customer relationships, and we really didn't have fine businesses that had our capability. And as we went down that road, one of our major customers was interested in committing long term and having us commit to a new technology platform for pharmacy claims. That resulted in the formation of the joint venture with Humana. And during that process, Anthem, who is not a customer also, was interested and joined the joint venture. So the goal of the joint venture will be to develop a new platform from our capability, our current technology, have that platform ready in early 2023. That's the initial target. I think it's a -- the joint venture has accomplished a couple of things. It's reenergized our business. We've gotten commitment from 2 major health care providers. And it's legitimatized us in the market, and we've seen a lot of interest in our capabilities since we've announced the JV.

And then just maybe a really quick near-term question on the health care business. A lot of it is volume driven with the PBM. So does something like the current wave -- the Delta wave that's going through the U.S., does that impact the business? Like is there like a quick impact of when there's -- in terms of like the claims processing and stuff so that we should expect a falloff this quarter perhaps? Or how should we think about that business versus maybe last quarter?

Yes. No, we haven't seen -- we saw a significant claim drop-off in Q2 2020, and then it gradually improved sequentially. And then kind of claims resumed back to normal in Q1 '21 from pre-pandemic levels. And we pretty much saw that in Q2. And our expectation is that claims will be kind of at the same level in Q3. And we haven't seen any really reduction in claims as a result of the Delta variant.

Yes. And I see we have a couple of minutes left here. Maybe a question on M&A. It's been a little quiet on the M&A front. That's generally been a part of your guys' longer-term strategy. Can you talk a little bit about what you're seeing in the marketplace. It seems like you're taking a bit more of a cautious approach. It seems like your valuations may be stretched. Is this kind of the near-term new norm? Or are you guys still looking at a lot of deals? Or how should we think about the M&A front?

We're still looking at a lot of deals. We always are. I think you're right, is I think valuations are very high right now. And that means that we have to be much more selective. So we're willing to pay up for acquisitions. We did when we bought Advent back a few years ago. And we need to find acquisitions that have good technology, good management, has some growth and are strategic to the company. And if we can find those characteristics in an acquisition, we'd be able -- we'd be willing to pay higher multiples. But we haven't -- what we're seeing so far is people are paying high multiples for kind of mediocre businesses. And we're just going to be patient and wait for the right opportunity. But we wouldn't be reluctant to do acquisitions in this environment if we find the right one.

And then in terms of just, obviously, as you kind of build cash, how do you think about the -- one is just the trade-off between investing more to growth in terms of -- is there an opportunity to maybe increase investment within -- for -- to accelerate product development? Or have you guys kind of -- you've invested all the capital you kind of need or -- and then now it's more about share repurchases and paying down [indiscernible]

Well, no, we'll be -- we did make a $70 million investment in that JV for health care. So we will make investments that improve our technology, and we'll continue to do that. We mainly focus on the areas that we think there's growth opportunities, whether it's the alternative space or segments of DST or software -- our software business. So we'll continue -- I think if we wanted to, we could take our margins from 42% -- from 39% to 42%. But we're not going to do that because we're going to continue to invest in sales and marketing and development and drive for growth.

And then I see we've got about a minute left so final question here, Patrick. Maybe any color on kind of the top 2 or 3 things that you're kind of focused on, on a day-to-day basis for that's kind of on management's priority list.

Sure. I mean I think the life of the CFO, I think the priorities change every day, whatever the daily crisis is. But I think there's probably like 3 major areas that we focus on. And that's number one is we have a sales culture. So everybody's priority is to support any salesperson that needs any information or any help closing any business. So that's number one priority. Number two is that we monitor cash flow on a daily basis. And we have business units set targets. We monitor against those. And if they need any help, we allocate resources to help them. So cash flow is a top priority. And then the third is helping the businesses with their cost controls and their pricing. So we have a pricing group that helps their businesses with pricing new products and pricing new contracts and looking at existing clients and managing cost control initiatives. So those are the 3 major ongoing initiatives other than the daily crises that happen.

Fair enough. I do see we are over time at this point. So thank you so much, Patrick. We really appreciate your time here.

Thanks for inviting us. I appreciate it. Bye-bye.

Take care. Bye.