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

Good afternoon, everyone. Thank you for joining us for Citi's 11th Annual Fintech Conference. I'm Andrew Schmidt on, Citi's Fintech Research team with a focus on software. For this session, it's my pleasure to host Rahul Kanwar, our President and COO of SS&C; and Justine Stone, Head of Investor Relations. Rahul, Justine, thanks so much for joining me today.

Thanks for having us. Good afternoon.

Thanks, Andrew.

Thank you. Thanks again, everyone, for joining. [Operator Instructions]. I think you guys had a good Analyst Day last week in -- some of these questions kind of rehash that. But I think it's still helpful to kind of level set people who weren't able to make the Investor Day or less familiar with the story. I think starting at the top just a brief overview of SS&C and the end markets would be helpful, and then we'll dive into some maybe sizing and how you think about the growth a little bit later, but just starting off a high level question in terms of just how the company is set up, that would be helpful.

That sounds great and happy to do it. So I think at a very simple way of thinking about it, what we do is we have software applications that help people deal with complicated requirements that they might have in the financial services and health care industries. And financial services is, by far, the -- the larger portion of that representing over 90% of our revenue. So then you kind of -- if you dig down below that and you get 1 level deeper, we're really in all of the different types of financial services, whether that is alternative asset managers, banks, insurance companies, registered investment advisers. And the kinds of things that we are doing for them include helping them manage their trading functions. So front-office systems like our Eze tool or helping them keep track of their books and records as we do in our fund administration business and we're the world's largest fund administrator. We're also helping them interact with their end investors. And that could be through GIDS, which is our transfer agency business for retail clients. It could be through Black Diamond, where we're offering web portals and information delivery to clients of registered investment advisers. And we've got in really every one of those areas, we have both a software offering where folks can run our software in the cloud or on-premise or whatever they choose to do and a services offering where they can hire us to really deliver that software for them along with other aspects of their service level agreement that they would like to have. So Andrew, that's kind of at a high level, that's what we do as a company.

Super helpful. That's a good high-level overview. Now please take a step down when we say, okay, what are the various pieces and the growth rates, obviously, at the Analyst Day, you addressed this a little bit, but Bill laid out that nice slide to had all the components that build up to that 5% plus organic growth. If you think about the components of the business and how those contribute to that sort of view that stepped up growth versus what we've seen in the last couple of years, that'd be helpful.

Sure. So in round numbers, right, our fund administration business, roughly 20%, 25% of our company that has grown in excess of 5%, and I would say, somewhere between 4% to 8% on average for as long as we can remember or as long as we can track, and it's been growing a little bit faster this year. We think that's a function of a strengthening competitive position as well as a healthy underlying market. And so we expect that growth rate to be sustainable over the long term. And that would be one of those big pieces, SS&C Intralinks is a fast-growing business for us. That's where we're doing virtual data rooms for -- to support the M&A process, but we're also doing things to facilitate the alternatives business such as providing information delivery to LPs and private equity firms. And that's been growing 10% plus in some quarters closer to 20%. And so we think that that was a healthy grower before we acquired them, and we think that that's really reverting to form plus Bob Petrocchi and Ken Bisconti who run that business have done a really nice job building some competitive advantages for themselves and investing in the product. That's one of those fast growers. I think the third area that I would highlight is the Advent business and the Advent business has both Geneva, which is we think the flagship portfolio accounting system that's used by the hedge fund industry and really buy-side firms as well as Black Diamond, which is a portal delivery and information delivery for RIAs and the wealth management industry. And those are both some of the faster aspects of Advent. But that business, as a whole, is in that kind of high category as well, high single digits kind of category. So those are the some of the faster growers and some on the other side, some of the businesses where we have high aspirations, but will set -- will target more moderate growth are our transfer agency business, which is GIDS. There, we probably expect low to bordering on the mid-single digits and as well as our institutional and investment management business, which is still large software deployments, which have been somewhat challenging in pandemic and post-pandemic kind of times. And so those are some of the areas where we have less growth and the average of kind of all of that works out to mid-single digits or a little better.

That's helpful. And then I think just maybe another high-level question before we dig in a little bit deeper. Bill made an interesting comment during the Analyst Day that look, if you're not focusing your best people [on] acquisition, you kind of focus more on organic growth, product development and things like that. It's something you focused on for some time, obviously, you turn the switch on and off. But if I think of the business' growth profile post DST acquisition, maybe 3% to 5%, and now we're thinking somewhere 4 %to 8%, 5% to 8 %. So that implies that there's been some change in the business, whether it's end market demand or whether it's product cycles, maybe approach to sales. But maybe you could just help us characterize some of the more fundamental changes that have occurred in the business to help that more sustainable kind of higher level organic growth going forward.

Yes. Well, one of the things that hopefully came through for those of the audience that we're able to make Analyst Day and I know there's some information out there, Andrew. I would just say that across our business, we're investing in things that we're excited about, right? So there's a lot of innovation going on. There's product road maps and new products and adjacent products and there's management teams that are truly enthusiastic about their opportunity. We are -- and all of that translates then into enthusiasm on the part of the sales force and what they go out to market with. And so that's one aspect of it, right, which is individually each of the businesses that we've talked about are getting better and they are evolving. The second part of this is we have a pretty big initiative within the company called One SS&C where we're building enterprise solutions for various markets, right? And by building Enterprise Solutions, I truly mean that if you're a hedge fund and you want to have SS&C be a strategic vendor, we would show you our order management system in the front office, we'd show you our fund administration business, we would show you our shadow accounting platform, Advent, we would show you our RegTech business and our taxation products and all the way through investor interaction on our web portals and through Intralinks. And when you take all of that together, you might end up using 7 to 10 of SS&C's different products and services. At that point, we become a strategic vendor to you. it generally means we get one of the early calls when you're trying to do something new. That same dynamic is present for our banking clients, for our insurance clients across our business. And as we get better at putting those solutions together and making sure we're delivering value, the deals get bigger. Yes...

I would just add that I think we've really made an investment in these kind of enterprise solutions and this go-to-market strategy. I think when we put Eamonn Greaves in the global head of sales position back in the beginning of 2020, we really realized that more and more of our clients and prospects wanted multiple products from SS&C across multiple business lines and how do we package this up nicely and create a customized solution for them without having 3 different or 4 different salespeople trying to manage the deal. So it's just kind of making sure that we're organized in a way that we approach things with -- thoughtfully and make sure that our clients feel like this is something that we're really building for them, and we can deploy it in many different ways. And it ends up with a better solution for our clients and a better revenue uptick for us across all of these different deals.

Yes, those are really great points. And especially the sales one, after Rahul's comments I wanted to hit on that. So it's good you addressed that. So it sounds like with the new organizational structure, you're going to market in a more consolidated fashion, bringing on product suite versus being, for lack of a better word, a little more siloed from a sales perspective in the past. Is that -- I mean the business has also evolved a lot in the past few years, probably required some sales restructuring. But is that the right way to characterize it in terms of growth market?

I think it is. I think the only thing that I would add to that is it is intended to be -- in addition to all those efforts that we already had in individual markets, right? So this is another avenue of revenue possibility where we have these bigger, more holistic solutions. And it forces -- it encourages and forces collaboration within the organization. It forces integration, makes the products better. It means the R&D dollars are better spent because in a lot of cases, we're only building something once as opposed to multiple times. And so all of that is a net positive.

Last question on this one. Had the sales metrics evolved? Kind of sell more ancillary products in addition to kind of the core for what a person is responsible for? I guess, just emphasize on the larger initial deal size?

Yes. And we had a strong -- sorry, Justine, go ahead.

I think Bill highlighted some of those sales metrics, too, in the -- in our Analyst Day. I think 250 or something like that client -- competitive takeaways from clients, our average deal size, initial deal size has grown, I think, 25% or 30%. And all of these are a result of the way we're going to market and how our sales teams are really working together. And they're getting to know not just while they have a focus and they are aligned to a business. To be successful at SS&C, you know all of SS&C, and you know all of the different things that you can sell.

Okay. So it sounds like the incentives have also been there as well in terms of how people are compensated for this as well. Okay. I guess just switching gears to kind of the sales cycle quickly. I guess over the last couple of quarters there's been a pretty significant step up in terms of the sales cycle and deals being pulled through. Are we at a point now where the sales cycles are relatively stable across the businesses? I guess, are the pipelines sort of large relative to historical standards. Just any comment around sales cycle and demand pipeline would be helpful. And I know this isn't a one-size-fits-all question because there's different parts of the business. But anything on just the demand environment now that hopefully we're close to a steady state recovery will be helpful.

I think the way you just characterized it, Andrew, is the way I would as well, which is, I think, we're getting to a steady state. Steady state is not exactly the same as it was, right? Clearly, there's a lot more virtual and -- but in some ways, it's -- there are some positive things that come out of that, which is I think when folks look at their internal organizations and they look at smaller teams that they have, and they're dealing with a hot labor market and perhaps there's more turnover in the back office that they would like, it makes them easier to approach with outsourced solutions, right? They want it done at scale. They don't want to have to deal with -- had some amount of turnover and now I'm having trouble trading or whatever the case may be. And so that, I think, is a long-term shift, which is already benefiting us, but will continue.

Yes. So those initial conversations maybe are getting a little bit easier from a client perspective, it sounds like.

That's exactly right.

Great. Okay. If we switch gears now, just think about -- just a little bit more near term FY '22. I guess first question is that 5% plus organic growth number, does that pertain to FY '22? And then as I think about the business, you mentioned this, Rahul, there are parts of the business that have really good visibility, like, for example, fund administration, very, very solid. Intralinks doesn't look like the deal cycle is going to fade anytime soon. That looks like that's going to continue to be strong. But DST transfer agency is still part of it, it's going to be account-driven health care, some client headwinds that you guys are addressing and things like that. So maybe just talk about kind of the puts and takes as it pertains to FY '22 and kind of the visibility there as we think it out just over the next year.

Sure. So I guess the overriding comment would be we feel pretty good about our growth opportunity, right? Some of that has shown up in the last few quarters, and we feel like it's not an accident, right? It's the result of the things that we did really over 24 months or longer investing in our sales force, investing in our product process, making sure we have the right leadership in place in different parts of our business. So those are all -- I think those are all good things. Really, there's 2 or 3 things that no matter which business you talk to, they are kind of the unknowns or one is macroeconomic, right? One of the kinds of things you talk about, which is asset flows or the number of health care claims or M&A market, number of transactions, things like that. And right now, we have -- there's nothing we see that suggest softening in any of those things that drive revenue for us. It's also important to note that all those things really only drive revenue at the margins, right? They're not very negative for us when they turn the other way, and they're not incredibly positive for us when they're growing, they're a nice lift, right? So I think the second category is execution, right? It really is. We've got a stable revenue base. We've got 95%, give or take, or more recurring revenue. We've got Sweden products and services that are increasingly integrated, which then lends itself to more cross-sell and upsell. So when we talk about 95%, that's really kind of using the most rigid criteria, right? All we're counting is the losses. We're not counting any increases in sales and things like that. And so we feel good about it, but it does require -- in order to achieve those growth rates, it does require that we sell some new customers. It requires we sell some products to current customers. And so there's some variability, right? So the degree of the amount of visibility we have is very high, but it's not perfect. And there will -- there's work that's required.

Yes. Understood. That makes a lot of sense. And maybe if we think about just kind of skipping down because to the DST business. And I think one interesting highlight at the Analyst Day and what you just mentioned was, I think, transfer agency growing in the low to mid-single digits, which is a pretty massive change compared to -- I think, we'll see a more flat to down behavior a year or 2 years ago. So maybe kind of talk about what you've done in that business to sort of get that more into growth mode and how sustainable that level of growth is in the DST business.

Sure. And I think I'd start by, a lot of this comes down to focus, and it's not that there wasn't a focus before, but we've found that, in effect, separating these businesses and not -- they're not DST anymore. We've got a GIDS business, right, Global Investor and Distribution Solutions, which is run by Nick Wright, and it's got a singular purpose, right? Similarly, our retirement business, which is run by Kevin Rafferty. Their job is to sell retirement plans on our suite of products and services, which are largely kind of around digital, right, and giving -- having a better experience around web portals and mobile apps and self-service for the members in those retirement plans. So that's one part of it. One part of it is dedicated business, dedicated leadership, dedicated sales force, technology team and not a lot of artificial constraints on what they can or can't do to advance it. That's making a difference. I think the second thing is that business, actually, the -- what we refer to as GIDS, actually does a fair amount more than transfer agency for mutual funds, although historically, that was the biggest client base. It also does the same kinds of things for clients of wealth management firms, right? And wealth management and registered investment, advisers are -- that's a hot area, right? There's a fair amount of disruption there. There's a lot of new entrants in the marketplace. And so that's a big part of it. There's also a -- I mentioned digital as it relates to retirement. But that's a big trend in really anything that touches a -- individual investor, right? We are increasingly, in our personal lives, that we're used to operating in a certain way, and we expect the financial organizations that we give our money to or that manage assets for us or give us advice or whatever else they might be doing to really have -- they need to have apps, they need to be able to do things on the web. They need to have rich experiences everywhere. And a lot of our customers look at those things and say, do I really have to build this one-off? Or can I go to somebody like SS&C and get it all in one place? So there's a trend there to buy -- to want to buy the next generation of technology that helps us as well. And so we think Nick's got a good plan. He's got good leadership. He's got a revenue drivers that aren't solely correlated to how many mutual funds there are going to be, and that modest single digit kind of target is one that, obviously, we would subscribe to.

Yes. I think that last part what you said is key in terms of linkage, like the linkage versus the retail front-end market because obviously, there's some volatility there. So that's an important concept to consider. That's good to know. If we switch gears to health, maybe talk about -- the money Rx initiative is pretty interesting. I don't think many people are doing much in that space. It's the fact that you guys are doing something that's really interesting. And I would love to understand kind of -- I think the timing for that is more like 2023 from like a rollout perspective made towards the end, correct me if I'm wrong. But what does the business look like once that gets rolled out? And then what's the kind of the path from here to there before you kind of have that, let's call it, next-gen kind of product in place? What's out there from a product perspective and growth and competitiveness and opportunities and things like that?

Yes. So just a little bit of background. We partnered with 2 great big health organizations, Humana and Anthem to build the next generation of pharmacy technology. Humana is already a big customer. Anthem, at least, would plan to be a big customer once this product is complete. And since we announced it, we've had any number of folks that want to join us in some capacity, right? They want to join our joint venture, they want to be a customer, whatever the case is. And we're welcoming all calls and we remain really focused on what we need to accomplish over the next couple of years. But the thing to remember is we already have a current platform that is fully functioning, right? So this truly is in -- it's not a start-up that someday we'll have a new product and then we'll have revenue. We have revenue today. We have many of the capabilities that we're seeking to build, already exist in some form. And we think that this is an important initiative that's going to make them a lot better. It's going to completely modernize the tech stack. It's going to give people access to data that they don't have today and really in unprecedented ways, and it'll give us a platform on which we can build new modules that extend the capabilities of the system in ways that -- you can have -- you've got this wealth of data that goes through the system. You can have more analytics, you can have more outcomes data, things that are truly important to the health care organizations that are seeking to provide high-quality care. And so that's what we're trying to do. There's a time line in the sense that we've got a couple of years before our big customers or our big partners would like to be on this system. And -- but they're on -- we're processing claims every day, and it's working well now.

Got it. Maybe we'll jump back to that if we have time, because I think it's interesting in terms of what the legacy PBM setup looks like versus NextGen, but if we have time, we'll come to -- back to that. I wanted to talk about fund administration. Clearly, like the very -- continues to be a very, very bright spot in the business. Has the -- if I think about your sweet spot historically, it was middle and back office for hedge funds, obviously, expanded pretty significantly into real assets, private equity. Private equity has been a pretty significant growth area. But maybe if you could comment on where the growth is coming from today? Hedge fund, it looks like pension formations are coming back continue to be pretty good. Obviously, asset retention and growth continues to be pretty good. But just relative to the past 2 years, have there been any changes in terms of parts of front, middle, back that you're addressing? Is there a shift in terms of growth contribution to private equity, anything? Just give us an update in terms of the contribution of growth for that business, that would be great.

Sure. And Andrew, I think you touched on 2 pretty important things. One being the product set has evolved a lot and continues to evolve, right? And that evolution takes a whole bunch of different facets to it. But some of those are within individual asset types and product types, we get a lot deeper, right? So whether it's derivatives or bank loans or real estate or whatever our customers try to generate return from or deepen that flow, right? So if you're a real assets company and you need to track a whole bunch of data on your underlying properties because that helps you manage your portfolio better we now have a product around that, right? Or if you're doing a whole bunch of private credit and you need help with the workflow around that rather than move a bunch of paper around, we are sitting there automating those and creating web portals for you to be able to track that documentation move in real time and things like that. So that product expertise then means that the most complicated funds tend to look at us when they're talking to us and comparing us to others and say -- well, they really get it. They understand the same challenges that we face every day, they're dealing with and in some cases, have solved successfully and in other cases, have good progress towards that ultimate solution. And that -- all of that enhances the win rate, right? So that's kind of one aspect of this. I think the second aspect of this is there is some change in the mix in the sense that for a while now, while our hedge fund business is growing nicely, our private equity and real asset business have been growing faster. And because that's happened for a number of years, they are becoming a bigger and bigger part of the overall total, which then means that the growth rate as a whole on the alternatives business is going up. And maybe the third thing I would highlight is, in addition to product set expertise, we're also in different functions within those firms than we have been before. People are more willing to give up trade support, daily reports that go to the portfolio manager, real-time dashboards that they get support for compliance, support for risk, dealing with counterparties on things like margin and collateral. Things that were once considered no, we got to do these. These are secret sauce kind of things, right? And then realized, okay, maybe not so much and you can take advantage of scale. And I think that's where we are.

So you're seeing -- on that last comment, you're seeing more adoption on the front office as people are more willing to outsource more of those functions, the portfolio management functions, order execution management and things like that. Okay.

That -- I think that's right.

So that's become an incremental growth area relative to historical standards, it sounds like.

Yes. And it also gives us an entry point closer to that front office than we've had prior to it.

Got it. Okay. Cool. That's helpful. And if we -- so just switching gears to kind of the expense profile and the margin profile of the business. One of the big things at the Analyst Day was, and you had kind of highlighted this on the earnings call prior to that was that there's incremental opportunities to drive efficiencies across the business. Obviously, real estate is one of them. But in addition to that, kind of doing things more efficiently. And I guess you're tying into your overall kind of margin progression, I've always thought about SS&C as kind of a 50 basis points a year. Usually, you can exceed that because there's scale in the business. But starting point, 50 basis points expansion a year, kind of, opportunity. Maybe you could kind of talk about just remind us beyond real estate rationalization, what you're doing in the business. And at least for the next couple of years, it seems like you might be able to expand margins above that trend because there are these opportunities that you think you're addressing and focusing on more. So maybe kind of walk us through all that, that would be helpful.

Andrew, I think there are both some immediate post-pandemic type things such as how many offices we have. And we've been -- and we'll continue to be extremely employee-friendly when it comes to providing as much flexibility as we can. And one of the results of that process is that we're not going to need quite as big of a real estate footprint as we had before. And so there are some savings associated with that. I do think that the entire world has recognized that more can be done virtually than we ever thought possible, right? So travel and entertainment, those kinds of things. While there's no substitute for that in-person interaction, I think you're going to find that duplicative in-person interaction can be replaced with, okay, we're going to have 5 meetings. Let's have 2 in person and 3 over the computer. And that will not only increase productivity, but it will also reduce some of that spend. And the most important thing, outside of just things that came out of the pandemic is there's a pretty transformational technological shift that's happening in -- around the world, but in businesses like the ones we run where there are a large volume of complicated tasks that have to be done each and every day to support investment portfolios or really a variety of other activities, and you can take something like machine learning or robotic process automation and have digital workers, right? This concept of digital workers 5 or 10 years ago, what's that, right? But guess what, digital workers, they don't need a raise every year, right? And it's those kinds of things that I think are pretty big margin opportunities for us. Now we're not in a rush. We have -- we really have a very talented workforce. And what we want to do is create better and better opportunities for them. And the one way to do that is to take some of the grunt work, the day-to-day processing, things like that and make that as automated and mechanized as possible, frees up people to do analysis, and that's what's happening in our business.

So -- yes please, Justine.

And I would say that those productivity enhancements not only help us on our margins and our expenses, but it's a better sale to our customers, too. So it really makes our products and our offering better. You have less human error. Computers can do things a lot faster and all of those things just make us -- make our products and our service that much more valuable.

Great. That's a good point. I would also imagine that with the efficiency gains you can reinvest more in product and things like that. So maybe it's -- maybe there's upside of 50 basis points a year, but there's also opportunity to kind of reinvest in product growth, sales, et cetera. Is that -- am I thinking about that correctly?

I think that's exactly right. I think that there's a lot of benefits that come out of that process and that's one.

Okay. Okay. Few minutes left. It's funny, I think maybe a couple of years ago, we wouldn't have waited this long to talk about M&A, but me talking about the core business for the whole conversation. So -- but we have to sneak in the question on M&A because it's very topical, given the environment. And I guess, SS&C is very discerning -- very, very disciplined in terms of the -- what you would consider for a deal. And it seems like post DST, you're even more discerning, which is a good thing in my opinion. But I guess, has the philosophy to M&A changed? Is there a pipeline out there with larger assets that larger opportunities and things like that, that might be in place? Clearly, there's still a lot of things that will be highly complementary to the business, particularly on the fund administration side. So I guess just kind of just general philosophy, how that's evolved and then how does the pipeline look today?

Yes. I think the pipeline is healthy, and I don't know, Justine, if you would comment on that as well. Maybe just one overriding comment, which is I don't think there's been any change in philosophy. I think what we've always done is tried to make sure we were reasonably commercial, right? So that's not so much what level the market's at as it is what are we going to pay and what are we going to get, right? And if that means that we're going to have to pay more, our degree of confidence in what we're going to get rachets up accordingly, right? So we're going to pay a multiple of revenue, let's make sure that we have a good amount of confidence in what that revenue growth history has been and that we can maintain it going forward. And I think that narrows the lens a little bit. It means that maybe we don't do quite as many deals, but there's any number of opportunities out there. And I think you'll see us continue to be active. Justine, I'll turn it back to you.

Yes, I agree. I think that we've always been disciplined with our acquisition strategy, and we never do acquisitions for the sake of doing acquisitions. It's always the right asset at the right price. And then what can we do with that? What can we do with that asset? And I think that in today's world with prices where they are, we're going to be even more disciplined like Rahul said, and make sure that we're getting what we pay for. And in the meantime, we're able to focus on our core business, which is probably why all the questions thus far have been about that. We've got a lot of opportunities that we can take advantage of. And we don't really want to impede that by doing an acquisition that isn't the right acquisition. So again, we'll continue to look at everything, and we'll be disciplined and opportunistic when the right deal comes our way.

Makes a lot of sense. That's helpful. And then we're over time here, but just one closeout question in terms of just platform evolution. If you look out over the next 3 years, are there adjacencies that are interesting to get into? Is it adding scale to existing businesses? What's the right way to think about kind of the evolution of the platform over time?

I think both of those are absolutely part of the strategy. We're -- we feel really good about the management teams we have today and their vision for what they're trying to do in their individual markets and product segments. We think that naturally results in us taking advantage of some adjacencies because they're thinking about how they get to maximize their opportunity. And then we think that with this new lens that Justine talked about and I've talked about about just trying to make sure that we're collaborating and building enterprise solutions and going after things in a holistic way, we can really put the resources and scale of our enterprise behind what we think are the best ideas and get there faster. So it is a product set that is going to continuously keep evolving.

I'll leave it at that. It's been a great conversation. Thanks, Rahul. Thanks, Justine. Appreciate the time.

Thank you.

Thank you, Andrew.

Thank you.

And [return] the conference. Appreciate it.

Thanks a lot.