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

Great. Why don't we get started? By way of background, I'm Kevin McVeigh, services analyst here at Credit Suisse. Next up, we're thrilled to host Bill Stone and Justine Stone from SS&C. I'm going to sit down, go and do some Q&A. We're going to try to keep this as interactive as possible. So if anyone has any question, feel free.

But Bill, one thing I wanted to start with, I'm going to sit down, is we've listened to you a lot over the course of time, and you started the business about $86,000 of revenue over 20 years ago. Maybe just talk about some of the milestones from the time you started the business and highlight maybe some of the more transformational acquisitions, DST, so on and so forth and how you've been able to evolve the company in, almost revolutionary, over the last 20, 25 years.

I appreciate that. It's been 35 years, but I know I look so young, so I appreciate all of you -- they put me at the end of the day because they wanted to make sure I could stay awake the whole day.

That or the best for last, I think.

But yes, so -- but thanks, Kevin. I started us in '86. As you said, we did $86,000 in revenue. We got some venture capital in 1990. We were doing about $4 million in revenue. We got some more venture capital from General Atlantic partners. We were Bill Ford's first investment. He's still a friend of mine. Thank god he made some money. I think that's why he might still be a friend of mine, but -- in '94, '95. And so we had about $16 million that we had raised in venture. And then we went public in '96. We were doing about $26 million in revenue in '96. We went private in 2005, and we were doing about $160 million, $161 million in 2005. We went public in 2010, and we were doing $329 million in revenue, at about $120 million in EBITDA. I'm kind of a numbers freak. So -- and then we go to 2015, and we bought Advent. In 2012, we bought GlobeOp. And we kind of doubled our fund administration business, which we had started in 2002, and now we're the largest hedge fund administrator, private equity administrator in the world. And in 2015, when we bought Advent, we got control of Geneva, which is by far the platform of choice in the large hedge fund and asset management industries. So in 2015, we're doing about $1 billion in revenue, and we're doing about $400 million in EBITDA. And this year, we expect to do over $5 billion in revenue and over $2 billion in EBITDA. And in 2018, we closed on DST systems out of Kansas City, Eze Software out of Boston and Intralinks out of New York. So we deployed about $8.3 billion, $8.4 billion in capital, and we got about $3 billion in revenue and about $1 billion in EBITDA, which today, that would probably cost some multiple of the $8.4 billion. So that's kind of the background. We have world-class products and services. We have 18,000 clients. We have 25,000 people. And we are all over North America. We're all over Europe. And we're -- probably got 10, 12 offices in Asia Pacific. We have a couple of offices in China. We're in Hong Kong. We're in Singapore. We're in Sydney. We're in Melbourne. So it's broad-based business. No client represents 4% of our revenue, and so we're highly diversified. We probably have a cash conversion ratio on our earnings per share of about 110%, 112%. So we think we're going to earn about $5 a share and over that in cash flow per share this year. So we're -- and our organic revenue growth, which everybody wants because I've heard it 441,000 times, was 4.1% in Q1, 7.2% in Q2 and 8.2% in Q3. And knock on wood, we have a good Q4 and end up the year strong and continue executing going forward.

It was -- I prepared for this meeting. I went back and I listened to you over the course of the last decade at different conferences. And I think one of the things that you've always focused on is competitive advantage, really the people in terms of you hire a lot of accountants, some -- and accountant by background, so always have a natural bias towards them. But maybe to help frame the opportunity of the accounting, integrating with the systems and how that's even more of a competitive advantage today because as systems become more complex, markets become more exotic. It's really the people enabling kind of the functionality of your software platforms. Maybe talk to that a little bit, particularly as you scale from again, several hundred thousand of $5 billion of revenue, if you would.

Well, as all of you know, the one thing you all are is insatiable when it comes to data and particularly insatiable if you think it gives you some sort of a competitive advantage. So if you think it's going to give you a little competitive advantage on an alpha basis, you're -- you'll be rabid. And then when it comes to something like performance or performance attribution, you'll split the last basis point into about 14 pieces. You're suddenly going -- you got a 7.625 performance. Does it really need to be 7.6254432176? I don't really think so. But I don't argue with my customers. I try to deliver to our customers. And that's what we've been able to do over the last 30 years. And when you think about the number of chartered accountants and CPAs that we have, we'd be one of the largest accounting firms in the country and are in the world. And if you -- we have -- we do taxes, thousands of tax returns. K-1s, 1065, so forth and so on. And people said, "Well, how big a tax department do you have?" I said, "I don't know. We've got 100 people in our tax department." So across everything that we do, we have depth and scale. And if you're going to get into this business in a big way, you're going to have functionality. And there's some new competitors to us that have gone public. And are we nervous? We make more money in a month than they make in 2 years. So I'm not too worried about them. And they're going to have to do things like EITF 99-20, which I'm sure you all know all about. But it's about derivative mortgage-backed securities and how you have to be able to do it on a prospective or retrospective way. Look, I'm the CEO of a place with 25,000 people. This is our business. It's minutia to the max. And so we focus on minutia to the max. And as accountants, you learn to get those little numbers in those little boxes, right? But any more, it's too complex. Like some of our clients -- individual client might do 2 million, 3 million, 4 million trades in a day. Well, that's a lot of trades. When you got to get all those trades in, they got to get reconciled. There's got to be a position statement. So when those traders come in that next morning to trade, you'd better not say file not found or something like that, right? So it is -- and we have about 12,000 funds, lead back guys and gals. Hedge funds, always understanding, right? Not exactly. So it has a lot of aspects of a pressure cooker. And so my job and my senior executive's job is to take that pressure down. Constantly give our people more leeway, right? So that your overnight process, we make faster and cleaner and smarter. So there's fewer breaks, there's fewer errors, there's fewer -- right? So when you're going to do wire transfers -- and we do thousands of them. But now we have artificial intelligence that looks at every wire transfer we do and matches at that bank, and that bank account number and that name are on the same wires that we've done before. And if it's not, some human has to look at it and override it to allow it to go. And again, most of these things are learned, most of these things -- like we have a standard process. If you want to do a wire transfer, we call you and confirm. Now you could override us and say, "We don't want you to call us." I'm an old auditor. It's a very good internal control. It's very good separation of duties. If it's my money, I would have you let us call you back, right? Because I'm only going to get robbed if there's collusion, right? I'm not going to have it so some individual can do it to me. You're going to have to collude to do it to me. And most people won't collude. They might steal if they think they're not going to get caught, but they won't collude. So that's our business, and that's kind of how we run it, and that's why we have so many accountants. We have all kinds of CFAs. We have all kinds of mathematicians. We have all kinds of quants. So we're really exciting at cocktail parties, but actually, we're almost always in balance.

And Bill, the 3 transactions you did in 2018, there was DST, the other 2 -- maybe talk about the strategic rationale for each 1. And obviously, the other thing you've been able to do is really turn around the organic growth at DST. Part of that, I think, was a shift in the go-to-market strategy. But maybe talk about what the strategic rationale was at the time and where you are in that process today. And obviously, you had a really impressive Investor Day a couple of weeks ago. You were able to frame out the organic growth. And maybe just tie in kind of some of those initiatives more broadly into the organic growth targets you said at Investor Day just given, to your point, the investor focus on organic growth.

Yes. I mean -- I think on Investor Day, we said 4% to 8% growth. And if you break it down, it's probably a couple of points now on pricing power. It's new fund launches and land and expand at current clients, that's worth a couple of points to us and then another 2 to 4 points in new names. And our names are getting bigger. So we have a prospect now that if we can win, and we're going to try hard, but it's $100 million a year. So again, when you think about scale and size, when you can go after very large, very sophisticated companies, and you could save them tens of millions of dollars, they get interested because all of you know, it's not as easy to grow assets. It's not as easy to raise prices. It's not as easy, but it's still a great business, and that's why all of you are in this business. It's still very lucrative. There's still all kinds of opportunities. And so in '18, money was cheap, and these places were for sale, so you could get something done. Doing a kabuki dance for 12 months sucks, right? Because all it does is take management time and you can't -- you're not getting stuff done. At SS&C, we work. I work. I'm not in some ivory tower and I come down twice a week with an oracle and everybody goes, "Grand Poobah, good job." No, that's not how it works. I get to read EITF 99-20. And let me assure you, it's like watching those 10 years of our quarterly statements. I hope you did it at night, so you didn't have insomnia. But again -- but it's all about getting the right people in the right places, giving them the right tools, having them motivated. Just like when you work for people that you like, you work harder. And if you work for somebody who don't like, it's like, how in the hell do I get out of here? So one of our tenets at SS&C is no jerks as managers, right? We can have individual contributors that are brilliant and are jerks. But we kind of put them over here and lock the door. But really, they can do things that really help us. But if they have people working for them and they pick them off all the time, you're going to lose good people. And in today's world, you'd have to have a motivated workforce and as little attrition as you can and as you want. So we talk about attrition in both voluntary and involuntary. So we want to make sure that the voluntary attrition is as low as we can have. And then we want to run an efficient force. And our margins and our cash flow and the things that we've been able to do over the last 30 years indicates that we run a reasonably efficient business. We run at 41%, 42% EBITDA margins. So we have cash flow conversions of 110% to 112%. We've had pretty good organic growth in the first 3 quarters, and we think we have some momentum. And one of the things that gives us some confidence is we've had 250 takeaways from our competitors into the first quarter of '20. And also since the first quarter -- and by the way, that's about 35 a quarter. And also since the first quarter of '20, we've added $480 billion to our platform. And that's about $70 billion a quarter, right? And if you look at the lead tables, I think $480 billion might get you in the top 10, right? And that's just our growth since the first quarter of 2020. So it's a very strong business. We think we're ahead of our competitors. And it's like a horse race, we're ahead and we're running faster. If we can keep it up -- I'm sure all of you will understand this math, but they can't catch you. If you can run faster than them and you're already ahead, they'll never catch you. And that's kind of what we expect, right? So we got into the fund administration business in 2002. And Stevie said "Wow, that's dominated by Credit Suisse and Goldman Sachs and State Street and Bank of New York and Northern Trust and JPMorgan. Why would you go into that?" It's not a banking business. It's an accounting business, and it's a technology business. So Credit Suisse got out. Citi got out. Wells Fargo got out. CACEIS got out. A bunch of others got out. And we just kept going up. So we went from 0 AUA to now we have $2.3 trillion in AUA. And that's a very steady, strong -- if you look at our redemption indicators and capital movement indicators, you look at what the hedge fund industry has done for the -- since we started these indexes in, I think, '09, straight up. So the value in the hedge fund industry has gone straight up even though Stevie Cohen came out against it and Tony James and Warren Buffett. It's overpaid and undertalented. That really hasn't been -- particularly this year has been a particularly good year. But just in general, an awful lot of really smart people work in the hedge fund industry. And it's pretty understandable because they make more money if they work in the hedge. It's funny how that works. Like most people, if you're going to play ball, let's say baseball, you want to go to the Major Leagues. Most people don't strive to get into CCC. They don't get paid very much if they're in CCC ball either. So it's the same kind of dynamic. And we don't think it's going to change, but we build all kinds of new software. We're bringing in all kinds of new products, all kinds of new uses of AI and machine learning and natural language processing. We've got something called GoCentral. It's going to change how all the hedge funds use our services, and we think we're going to be able to go from having 2 people per $1 billion of AUA to maybe having $1.4 billion. Now that's a 30% increase in productivity. That's not going to happen overnight, but it's just going to seep into that business. It's going to make it more efficient all the time. And that's the value proposition.

Let me see if there's any questions in the audience.

Bill, there's a lot of competition in all your sectors that you play. And all these other companies claim they have better, great technology. What's been your win rate and maybe loss rate versus the competition recently?

Well, I mean, again, if you have 250 takeaways and you've only lost handful, that's a good indicator that the win rate's pretty good. We think the 2 new public ones are Infusion and Clearwater Analytics. I think -- I call it clear workaround, but they call it Clearwater Analytics. But -- because if you can't do syndicated bank loans or you can't do derivative mortgage backs or you can't do private equity or you can't do 4 other things, well, then they can't use you. Or they can but then they have a workaround for every one of those. So pretty soon, you have 20, 30, 40, 50, 100 spreadsheets because you've got a spreadsheet for every asset that the system can't handle. You know what happens when you have 100 spreadsheets? You get errors. And you know what happens when you do a bunch of errors in front of a bunch of hedge fund guys? Very bad. Very bad. So that's why people have systems because they have controls. They have checks and balances, right? They're constantly checking. And so our win rate vis-à-vis Infusion versus our product -- it's called Eclipse, which is all SaaS. It's all one system. But it's difficult -- you have the really big customers and tell them that, "Yes, we don't do that. But we have money. We don't want your money, we want to be SaaS." And well, we want their money and we want to be SaaS, so we're going to have 2 SaaS systems. And it's always -- and you want the biggest ones, you want somebody to pay you $50 million a year, you better not tell them what you can't do. You better answer yes. And then you better scramble to make sure you can do it. So that's what we've done. But Infusion versus Eclipse, we think we went over half, right? And with Clearwater, we have history, and it's not good for them. And we are very confident in our Singularity product. We've been wanting the great big deals. And we now have, I think, 60 clients on Singularity. We've just brought it out. We've got some great big clients, over $100 billion in assets that were -- and those are like snowballs on the top of a mountain. They start rolling down and pretty soon, they get big and they crush everything in its way. And that's what we view we're going to do. Now we have to do it quick because we got to do it while I'm still running the place. And make no mistake, I'm plenty competitive. And I think that we have a great opportunity. And I think our recent results are pretty indicative of what we think we can accomplish.

And Bill, as you think about those 250 wins, was that more kind of versus legacy or emerging competition? And I think the other thing, it seems like, to your point, the size of the engagements are getting larger and larger, which would imply, I think, kind of end-to-end solutions as opposed to point. Maybe just any thoughts as to that in terms of framing the 250. And then it seems like, again, the size of the engagement is getting a little bit larger as well.

Yes. I mean we have -- I think our relative deal size is up -- in excess of 25%, 30%. So -- and it's growing. And our pipelines are as strong as they've ever been. And the 250 includes a $50 billion hedge fund and includes all kinds of $5 billion and then asset managers and some big retirements. I think we've sent out a few press releases at the -- like the third quarter of '20 where we won Nationwide, we were on -- we won MissionPoint and we won Everywhere 401(k), I think. Would you -- Everyday 401(k), which is a JPMorgan product that were the underpinning accounting and reporting solutions. So we have a lot of great big things that we're just now getting the revenue off of because these implementations sometimes can take up to a year. So now that revenue starts coming in -- and we have a lot of revenue that we've already sold that haven't hit our financial statements. And then when you start talking about license sales, again, you probably are all familiar with 606, which is the new accounting standard on how you recognize revenue and who knows what they'll do next year. They might change it to 12012 or something, who knows? But it's always unintended consequences of what happens to comparable numbers. And you have to sit there and explain to people, well, the 7-year deal, it renewed and we have to take 65% of the revenue. A 7-year deal and the deal's $12 million a year. It's $84 million times 65%, which is $51 million. And hey, we don't get a $51 million revenue kick every quarter. So it's just -- it's got some lump in it, and that's what GAAP says and that's what we do.

Well, you bring up an interesting point because I think another thing -- the business is a lot more predictable. Like when you think about the range of revenue, there's only a handful of -- whether they close in a quarter, whether it's a big software sale -- or maybe talk to that a little bit. And then I guess the geographical opportunity, too, because when I think about where you pursued transactions, whether it's in Australia as opposed to the eurozone, I think there are certain attributes that lend itself to what you do, whether it's law, things like that, but maybe talk to that a little bit, too, if you could, just the predictability of the business as well as just the geographical opportunity.

Yes. I mean the easiest place to make money is in the United States, right? So we make as much money as we can. But we service multinational companies, both those that are based here in the U.S. and then those that are based in Europe and in Asia and literally any other place. But the idea is that you want to be able to deliver for your customers so that when they look at something new that they're going to do or some other kind of service they want to offer, that they turn to you first and you get the opportunity. And that means that you have to stay on top of that client. You have to listen, right? And then you have to be prepared. And as I'm always telling our sales force is that, "Look, you're the point of the spear, right? If you hear something out of the marketplace or if there's something that you need, you need to make sure you come back, right, because we can build it. If we can't build it, we can buy it. So you have to get that sense of urgency that I'm going to make one more call. I'm going to send one more e-mail, right? I'm going to write one more letter." So that has to be the entire organization. And the organization needs to understand, that's what gets people a bigger raise. That's what gets people a bigger bonus. That's what gets people more equity. That's what allows them to send them to better schools or go on better vacations or live in a better house or whatever they want to do with their money. But what we want to do in -- we have any number of things where we have some increased costs in labor. But that's fine. I don't mind paying people more. I want to pay people more. But you have to have productivity when it comes with increases. You can't do the same thing and then think you're going to make triple the money. If you want to make triple the money and you're a quarterback, don't throw a whole bunch of interceptions, throw completions. And don't get confused, interceptions are not touchdowns, right? And you got to be clear, and you have to be like honest. And that's very difficult for a lot of people when they're on the spot. I didn't do that. Well, if you didn't do it, well, who did? And it's -- again, it's -- we don't -- people get to make mistakes. They're humans. Now don't keep making the same one, right? You had like 6 pick 6s in the first 3 or 4 games is probably not going to be my quarterback anymore, right? But in general, we're supportive of our people, and we think we have the best sales force, by far, and the biggest one. And we're competitive. And we can do things that we think other people can't do. We run our own data centers, large, sophisticated, world-class. We run our own private cloud, right? So why do we do that? Well, because if Ajay Nagpal, who's the COO at Millennium, calls me and says he needs something. I don't want to stand in line when I call AWS, and I finally get them on the phone and "Hey, this is Bill." And they say, "Bill who? Bill Gates? Bill Gross? Bill who?" If I call our CTO, Anthony Caiafa, and I say, "Hey, this is Bill on the phone." There is no Bill who, right? I get right to the issue that he can help me with that I get to call Ajay back and say, "We have a solution." And that's how you get customer satisfaction. It's not, "Could I put you on hold? Put you -- and please remember that your item number now is 4631827." So you forget 4631827. And you call back and you say, "I got ticket number 4631826. We don't have that number." I mean all that does is frustrate people to no end. And again, we're in a competitive business. We have demanding clients. And when we execute, we get paid well, and it shows up in our financial statements.

I know we're close on time, but if you wouldn't mind to just close out on COVID because the way you were able to pivot the company, go remote and then just maybe talk about it in terms of clients from a more distributed workforce perspective, but also your ability to serve those clients in the toughest of times and how that's impacted the -- obviously, there was an operational impact. But just from a more fundamental perspective, it feels like that's only accelerated the shift towards your services longer term.

Yes. I mean what COVID did for most organizations is expose our weaknesses. So if you were using third parties and so you have contractors, well, then you're at the mercy of who's ever running that contracting company because that contracting company has multiple big customers, right, and they got problems with all of them. So all they're doing all day long is playing triage, right? Whereas our company, we really don't use contractors. They're all our employees. The only triage is going against our clients. And we have a way -- and proved that we had a way stronger workforce in India, in particular, that really kind of came out very strong. Now It wasn't like -- it was no cupcake, but we sent thousands of laptops. We improved our network. We did all kinds of remote training. And 95% of our workforce work from home, 96%, 97% probably. So even today, our workforce is our business. So we're not enforcing, I'm not dictatorial. We need that workforce, and we want to motivate that workforce. And if you have 1.5 hour commute into New York, you might want to work from home. Surprise, surprise, surprise. So I'll tell some of our best people that, "Oh, no, you got to be in that office. By the way, I want you there by 9:00. It would be good if you're there 8:45." Maybe the guy taught me [ the perdu clip ]. I don't know, that was kind of a dumb way to play that, I think, right? So we're trying to figure out what's the most productive way to get all the work done, and half our people have the best work life they can have. Now if we can't get the work done, then you have to move to plan B. But right now, we're getting the work done. It's all voluntary. Our offices are open. So we have room for about 1,000 people at 4 Times Square. If any of you need any space, just call me, I can help you out. And about 30 or 40 people show up every day. So if you need to play Nerf, football or whatever you want, there's plenty of room. And -- but what's that going to do is it's just going to reduce our real estate costs. And I think we spent something like $145 million a year on real estate, and we think we can probably drop that maybe 30%, maybe more. We're not re-upping. And like we get some of our -- "We really like our space. So okay. So if you want to keep that space, we're going to take it out of the bonus pool. We don't like it that much." Amazing how that works. So you just -- you have to be honest again with people. You can't have space that's empty. And if you're going to force people to come back and they're going to quit, that's a bad strategy. And that's why you see all of them backing off. It's -- the power has moved to the workers. It's moved away from the capital and away from the corporate, it's moved to the workers because labor is so important to get this stuff done and the tasks are increasingly complex. So you really can't -- you can't pull it off with simpleton routines. It doesn't work.

Awesome. Anybody else before we close it out?

Well, Merry Christmas, everybody.

Great. Likewise. Thanks, Bill. Appreciate your time.

Okay. Yes.