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

Hello, everyone. My name is Mayank Tandon. I'm the fintech analyst at Needham. I'd like to welcome Rahul Kanwar, the President and Chief Operating Officer of SS&C. Rahul is going to run through a brief presentation, and then we'll do some Q&A. If the audience does have questions, please write them up, and I will make sure to get them in before we wrap up with Rahul. Rahul, the floor is all yours.

Thanks, Mayank. We appreciate it, and we appreciate you having us. So I've got a few slides on the company, but just to start off, I'm going to pull up the safe harbor statement and leave it up for 10 seconds or so, trust that everybody can read it. I will not read it. And then if we could just talk about -- my goal for the next few minutes is just to give you a high-level overview of the company and then, as Mayank just said, be happy to take questions. So to start with what we do is we provide, to the financial services and health care industries, cloud-based software and cloud-based services that are, in general, mission-critical, right? And by mission-critical, I mean things that people have to have, whether that is regulatory filings that they need to make or investor reports that they have to make or portfolio-type reporting to support their portfolio management function. So things that are critical. And that -- because they are critical, they hold up pretty well. Revenue in general is very sticky. And as we keep making enhancements and improvements, the markets for our end products continue to be very healthy. Just next level of detail, it is very much an expertise-driven business just because of the kinds of things that I just talked about. So it's 24,000 people around the world. We have offices in over 38 countries. We're in every major financial center there is. And in general, we tend to hire experienced and talented CPAs, CFAs, lawyers, PhDs, those kinds of people. We also have a strong culture of ownership in the company. And more than half of our employees, I think something like 60% of our employees have equity in the form of stock option grants. So there's a pretty good culture of entrepreneurship and attention to the customer that flows through the place. We've been in business since 1986. We have 18,000 clients. We have the world's biggest financial institutions and health care companies as clients. And because of how long we've been providing services, we've got a strong track record, which as we go out into the market and try to acquire more clients and drive revenue growth is pretty important. So pretty simply -- and the kinds of things we do are we deliver, in the center of this graphic that I have up on the screen, is people and expertise that I just talked about. And we're a software company at heart, right? So everything we do is software-enabled, whether it's a direct service or an application that we sell out to our customers. And really what we're doing is taking in the large amounts of inputs, whether that is millions of transactions every day in somebody's investment portfolio or information on tens of millions of individual investors in our mutual fund clients or the latest in terms of nuances and business logic that's required to file a regulatory report. So we're dealing with all these things that are coming into us. We're processing them using technology. And we're delivering back to customers in ways that -- in which they want to consume it. So whether that's on the web, on a mobile app, push to them, things that they can pull on demand, APIs that they can access. And that's what we do. And we do that across all the financial services. We do that in health care, and we do that across a variety of different functions. So question as to when we go out and we compete against -- depending on the end market, we compete against somebody to win a particular engagement, some of the reasons we're selected, it does come back to technology is that the root and DNA of what we're doing. Most of the people that we're competing with are using third-party software. I think in some cases, they're using our technology. And we generally think we could run our own technology better than other people can. We've also built this business to have a lot of flexibility, and that flexibility shows up in -- it's modular, so customers get to select what they want us to do. Maybe they'll have us do a particular part of their middle office or a particular function or 2 or 3 functions. And we have the ability to grow that over time. So those 18,000 customers are also, in general, 18,000 prospects for us. The technology that we deploy has both a processing component to it in the sense that we're continuously getting deeper into asset classes. We're taking things that are done manually in the securities markets around the world and making them more and more automated. And it's also technology driven to the end investor, right? So web portals, places where people can log in and access their financial information and run queries and things like that. And off late, particularly in our transfer agency business and in our retirement business and a number of other businesses, that ability to deliver a rich digital experience has been a powerful differentiator for us. So just one e slide on kind of the technology. And what I would point to here is a couple of things, one being owning the means of production. So as I mentioned, most of the people we compete with, they either use third-party software or if they use third-party software, they use third-party hardware or some element of their means of production is outsourced. We try to control as much of that as we can, and that's served us well for a long, long, long time. There also is a really strong engineering culture that's backed by a lot of subject matter expertise. So where a lot of software companies have difficulty building new products because they're relying on their customers to feed them requirements and they're relying on their customers for testing, we are as well, but we also have big services businesses within SS&C with thousands of people that have a lot of the knowledge and are performing those tasks every day. So we've got 2 sources by which we build software, and we think that derisks the process. It allows us to deploy new tools and enhancements much, much quicker. Obviously, past performance is what it is, but we think we've had -- we're a pretty shareholder-focused company. We're very focused on the things that we think our shareholders care about, whether that's revenue growth or EPS growth or cash flow. And we've done well with that. This is since 2010, but really our company has been around since 1986. And we do believe, due to kind of some of the things I've talked about already, end market health, the products and services that we have, the competitive positioning that we have, that we're well poised to continue to deliver good results for our shareholders. A little bit, once again, next level of detail. These are some metrics on some of our customer segments. So we've got 40 other fund administrators like ourselves that use our technology. We provide technology to 9 out of the top 10 prime brokers, to top 20 asset managers. We process 99% of all the U.S. commercial paper in the country. We have 115 million, 120 million retail accounts that we do all of their work for, whether that's in our transfer agency business, which is what's on this slide, or in our retirement and brokerage businesses. So all of those are just different ways of saying that track record that I referenced. We've been around for a long time. We have scale. We're not standing still. We're innovating all the time. But when we go talk to a prospect and they're interested in who else do you do this for or do you have a case study or do you have a reference, there's a world of success stories that we can point to that then makes that future revenue acquisition a little bit easier. This is a little bit the same thing, but more from a product and service standpoint. So just to quickly run through this, we have the world's biggest fund administration business in GlobeOp with over $2 trillion in assets. We've got a leading order management system in Eze. We've got the biggest provider of virtual data rooms, amongst other things, in Intralinks. We've got the biggest independent transfer agency and wealth and insurance business and our Global Investor and Distribution Solutions and any number of other verticals that we either have a really, really compelling product or a fast-growing product that we're very bullish on. And more than just the individual components and products and services is the fact that when you kind of bring it all together, most of our big customers use several of our products and services, right? So it's just like there's increasing conversions in internally within SS&C as we integrate these products and tools. There's also increasing convergence in our customer base where they look at us to provide an enterprise solution. So they're interested in how we can help them across multiple facets of their organization. And by having this holistic solution and portfolio of products and services, we're able to meet that requirement. Just -- I've talked about a lot of this. I think I would just highlight the fact that we're both simple where we need to be and complicated where we need to be, right? So the getting -- buying a piece of software and getting it up, it's highly configurable, highly flexible, it can adapt to, so that's a simple part of it, right? The scalable part of it is, hey, if you're a large hedge fund, then you trade, I don't know, 5 million trades a day, you have to deal with things like trade compression and handling cancels and correct set volume and dealing with hundreds of counterparties. And we can do both of those things, right? And that's the real strength of the model. The strength of the model is you can start at one place and grow with us. And over time, if your business becomes more complicated and needs a lot more things, there's a good chance that we can handle that for you and that we do it already. So how do we keep growing, right? And the nice thing about our business is that we think that the playbook we have run for a number of years continues to be the right playbook. A lot of focus on the end customer, a lot of focus on customer service, making sure we're innovating and building the right things that they're interested in. This is an expertise business. So continuing to invest in our teams and our talent, our training process, making sure we've got the right long-term incentives for folks to build their career and their personal wealth. We do all of that reasonably well. We think we are poised for growth for the foreseeable future. I talked about sales initiatives a little bit. One of the biggest things is we've got this wealth of products and services, and it's just when we go into an organization and we're trying to sell them a solution that covers multiple parts of their business, right? It covers their investor services function, maybe their portfolio manager, perhaps their regulatory team, perhaps their tax team, et cetera, really requires a lot of expertise to sell. Sometimes it's a consultative sell. And so making sure that our sales teams are trained up, they are knowledgeable and they know how to tap into the right parts of the organization to help them sell has been a big focus for us. We're happy to say that, that focus is paying off in the sense that ticket sizes go up, bookings go up. We have more larger deals. And then there's a trickle-down effect, whereas the offering gets richer, it helps us in the middle market. It helps us at the start end of the market as well. So we're really coming up with these dedicated solutions for asset managers, for banks, for insurance companies and other parts of financial services and health care that are increasingly attractive because how many different things we can do for them. So I'm just going to quickly pivot and talk a little bit about a few of our businesses, and then we'll take questions. So our -- we're the world's biggest fund administrator. We have a hedge fund business that has $800 million in revenue. And we think the growth opportunities there are both current clients that are asking us to go deeper in their organization and support more functions than we have traditionally in addition to NAV production and things that we have done. It's new launches, and it's competitive takeaway. We've been a taker of market share in this business really since we started it in the early 2000s. And that continues to be an important way for us to grow. Private markets, similar to the hedge fund business, part of our Fund Administration business. It's a fast growing business. This is where we handle private equity and real assets and infrastructure and a number of other closed-end type vehicles. This actually has a faster growth rate because there's a large percentage of this market that still isn't outsourced. So we've got, in addition to kind of the 3 that I mentioned as it relates to hedge fund services, we also have the ability to take on internal operations. Folks that started 10, 15 years ago, there wasn't a sophisticated fund administration offering. So they built it themselves. And as they continue to raise new funds, they don't like the thought of continually adding headcount in the back office and are more than willing to look at outsourcing, and that's been a growth opportunity for us. I talked a little bit about our Investor and Distribution Solutions business. This is obviously a big business for us. It's over $1 billion in revenue. And we think our opportunity here is, in addition to competitive takeaways and things like that, there are really large investment organizations that have still a lot of retained infrastructure as it relates to their client servicing and client managing activities. Those investment organizations include mutual funds where we do transfer agency, but they also include wealth management firms that have interactions with their end clients that we support. And in fact, some of our largest customers, that's what we do that for. So there's an opportunity to have some really large wins as those organizations decide they're ready to outsource those functions. And that's been one of the areas in which we're growing. Intralinks, one more of our businesses that I'd like to highlight is the leading provider in virtual data rooms in addition to they also provide LP communications for private equity funds primarily, and they have got a banking and securities business. This business is growing pretty close to 20% right now. And it's certainly helped by strength in the M&A markets, but we're also doing things from a technological differentiation standpoint, putting in AI, putting in insights. Ken Bisconti and Bob Petrocchi who run this business have done a great job of creating those competitive differentiators, and I think we'll continue to do that. And then finally, the last one I'd highlight is our Health business, a little bit different than the rest of what we've talked about, but a processing business, very much similar to kind of a trade processing business or things like that. We help people process pharmacy and medical claims. What they're really looking for is insights that come out of that wealth of data that we handle for them. And it is a technological function. So that's how we've approached it. It's been very successful. We recently did a joint venture with a big customer and a big prospect, where we're building the next generation of this technology, and we've had a lot of interest in that. And we think this will continue to be a growth opportunity for us. So I will -- in terms of kind of comments on slides, I'll pause at this point. Mayank, I'll turn it back to you and happy to kind of talk about whatever is on people's minds.

Great. Well, thank you so much for that. That's a good foundation for some of the questions I have for you. So Rahul, maybe I'll go back at the Analyst Day where Bill, you and Patrick talked about improving organic trends. Could you maybe unpack that a little bit? What is driving that improvement in organic growth? Because clearly, investors are focused on that. And maybe if you could talk about it in terms of the different product offerings that you laid out?

Sure. Mayank, I think a broad characterization would be that we have businesses that have done really well organically for a number of years. And those include our alternatives business, they include our Advent business, our Intralinks business, a couple of other ones. And in those businesses in large part what we're seeing is they are continuing to do what they've done, but they're, for the most part, strengthening, right? So we have businesses that have performed at the higher end for us that are getting better, right? And in businesses where we've had -- look, we bought DST in April of 2018, and we have not had quite the level of growth within that business that we've had in some of the other ones I've referenced, but we've made a lot of changes, right? We've made changes in executive leadership. We've made changes in sales and marketing. We've made changes in how technology is rolled out. We've made changes in the discipline with which we approach kind of what customers are asking us to do. And a lot of those changes are starting to bear fruit, right? So of late, we've seen better growth. We've also decomposed that business into a retirement business, our GIDS business that I just talked about, a brokerage business and a few other ones. And that focus, the right people running a focused effort has also had a positive impact. So when you kind of take all of that together, I think that's where we get to an improved growth profile.

Rahul, as we look at the different offerings -- and you have the alternatives, you've got as Intralinks and other products and solutions that you mentioned. As you look at 2022, can you call out which ones you expect to be the bigger contributors to growth and which maybe are facing some headwinds? Or is it pretty even across the board? What is maybe your sort of best crystal ball at this point in the year?

Yes. So hey, I'm not -- we're in the middle of that developing a plan process, right? So I'm not anxious to let anybody off the hook by saying we don't expect them to grow. We expect them all to grow. At the same time, some of our fastest growing businesses have been, at least in recent -- our Fund Administration business, our Intralinks business, our Advent business, right, and components of our retirement business within the former DST is another example, and there's a few other ones. So the ones that have grown really well traditionally, we expect them to get stronger, right? The ones where there's been some room for improvement, we do expect that improvement to happen as well. And so on the whole, we're pretty optimistic about kind of the entire mix.

And you mentioned about competitive takeaways. I think on the last earnings call, you also called out several large deal wins, which were competitive takeaways. Can you maybe just walk us through what is driving that share gain? Is it, again, better execution, having a more comprehensive product portfolio? Are there other factors that investors should be aware of that are driving those share gains? And in terms of timing of those large deals, how long does it typically take for them to start to really scale and hit their stride?

Yes. So in terms of why we win, right, or why we're winning more of late, a few different things. One being that at a very detailed level, whatever somebody is trying to have done, they're very interested in the level of expertise and the level of technological capability, right? So if somebody has got a portfolio of bank loans and they want you to keep track of the bank loans, they're very interested in how many did you do already, how deep of the workflow can you facilitate through your systems, how many trustees you reconcile with and tens of things that are minutia, right? In our entire businesses, that minutia, it is expertise. And the more we have, the more likely it is that we will have somebody check a box on that particular service, right? So that's one part of it. One part of it is specific subject matter expertise. I think the other part of it is the one SS&C initiative that I quickly referenced when I was going through the slides, we have done a better job and we've had more focus on knitting together different parts of our enterprise to have a cohesive solution for a particular type of customer. So in my example, perhaps that bank loan portfolio is a part of a great big asset manager that also has a retail focus, and therefore, our transfer agency business makes a difference. They also have regulatory requirements. Maybe they've got some risk requirements. And our Algorithmics product is an offering. And we've done a better job of bringing those things together, integrating them, so they can access them in a way that feels cohesive and also being able to sell them as a package, right? And I think that when that happens, then people say, gee, I don't need 5 vendors, I can do this in one place. Let me have one relationship that I can manage well, and that leads to success for us also.

And Rahul, in terms of the large deals scaling, what is a typical time line in terms of them really hitting their stride and impacting growth? Does it have long lead times, just given the complexity of some of these large engagements?

It varies a little, Mayank, depending on what we're talking about. I would say, an existing operation that we're taking on will usually have a somewhere between a 6- and 18-month conversion window, where we're not getting paid full fees, we're getting some percentage of the fees, and those fees ramp up as we go. Every now and then, we'll get a brand new operation that starts at scale, and obviously, revenue kicks in on day 1. But in general, we're talking about that 6- to 18-month time frame.

We've seen a recent spate of IPOs in this broad space, a company called Enfusion, Clearwater Analytics. There's been some concern in the market in terms of more competition, next-gen tech. Could you, Rahul, speak to what you're seeing in the market, competitive dynamics? Are these players making a dent in your portfolio? Or is the market so large that you're not seeing any sort of competitive encroachment by these sort of newer players in the absence of another term for them?

Yes. I guess what I would say is there's quite a bit of difference in the scale of our organization versus some of the other ones that are out there, right? In some cases, we have individual clients that are bigger than some of the entire business, right, of one of these competitors. So we're not -- it's also quite a bit different to have a start-up hedge fund that you can go provide an order management service to versus a $40 billion fund, right? And when you go to that $40 billion fund, you discover, gee, they've got all these requirements that our systems don't handle, right? And I think that's a little bit challenge that some of these competitors face. I think we've been around long enough. It's battle-tested. We're building new technology every day. We have the large brand name clients in our client base that we service every single day, and we work hard at continually improving that offering. So I wouldn't say that we're particularly concerned about any one of these competitors. What we do have to do is coming back to kind of the slide I referenced about what does it take to keep being successful, we have to continually listen to these customers, we have to continually knit together products and make sure that the product offering keeps getting stronger. That's been our track record. That is our focus. And I think if we do that, we'll be just fine regardless of who else enters the market.

Rahul, as we think about the growth over time, organic and then I'm sure we'll get some contribution from M&A over time, and we can touch on that briefly. But in terms of the organic profile of the company, how does the growth break down between contribution from new logos versus more opportunity from crossing and upselling into the installed base? And maybe as the environment normalizes, some pricing leverage, which might come into play as well to drive growth?

Sure. So -- and those are the components, right, what we've just mentioned, which is a little bit of enhancement from pricing. And we've tried to be pretty reasonable in those discussions, and our customers have approached that in that same way, right? So we do expect that to be a small positive for us. And the rest of it is I would put the sales to current customers in kind of 2 categories. I put the sales of the same product, right? So they're a Fund Administration customer and they go out and start new funds. So they buy an additional point of administration module. That's one set. Versus they're a Fund Administration customer and they go buy Advent, Geneva or they go buy Eze or they go use our regulatory, that's a different kind. And the reason that, that distinction is important is we now have 18,000 customers. So almost anybody that we talk to is a customer in some way already, right? And that's incredibly powerful. Because somewhere in the company, we have a relationship that we can generally harness to help us. And this split is probably -- current customers buying new products is probably half to -- and current customers continuing to grow is maybe the other half. And in that current customers buying new products is obviously some brand new logos as well. So they're not quite current customers. But like I said, with 18,000 of them, almost everybody does business with us in some way.

Right. And then I want to touch on something you mentioned earlier in the presentation around improved sales execution. Is it hiring more seasoned salespeople, re-skilling them in this environment? What is sort of the underlying drivers behind that improved sales execution that you have called out, and so has Bill, in terms of helping that organic growth to get a little bit of a lift from historical levels?

Well, I think talent matters, right? So that's the -- I'd say that first. And I would say that we have grown a sales force within SS&C that has had a lot of success. And we've also been pretty disciplined about making sure they have access to training, making sure we're learning from the ones where we did well and learning even more from the ones that didn't quite go the way we would have wanted them to do, right? So -- and management makes a huge difference, right, whether it's Eamonn Greaves who runs sales across the company or any of the individual sales heads that we have. We have the right people in the right roles looking at their teams, continually adding talent, making sure we've got training and other things available. And so the human component of this is a big one. I think the other one is, I talked quite a bit about technology and product development and making sure that the products are integrated. We do have a portfolio of products and services that we think is a competitive differentiator, and it's unique in the industry. Probably there isn't -- certain kinds of organizations, there's nobody else that can do everything that we do and do it in the different ways that we can, which is if you're ready to buy some software, we've got an application you can have. If you want us to do a service, we can provide a service. If you want to do some combination of those 2 things, we can do that as well. So there's a lot of choice in how you transact with SS&C, which has been pretty helpful. And as that keeps getting richer, as the number of things we can do grows and the ways in which we can do them at venues to growth, salespeople have more that they can sell. And it's those 2 things together that have been pretty positive for us.

Rahul, turning the topic to M&A. Historically, SS&C has been excellent at acquiring assets, integrating and then driving synergies above target. So maybe just in general, how does the M&A pipeline look in this virtual-led environment? Are valuations still steep out there? I know SS&C has been a very disciplined acquirer historically. So would just love to get commentary around M&A pipeline, where you're really targeting potential acquisitions and your expectation in terms of valuations out in the market that maybe sort of preclude you from being more aggressive, at least based on what we've been hearing in terms of expectations in the private markets around M&A.

Yes. And Mayank, I would say that valuations continue to be full, right? So we're not -- this isn't -- this is very much a -- you have to be somewhat discerning about what's the price we're going to pay and what are we going to get. Now that said, as you have seen, we've been reasonably active, and we would continue to be reasonably active. And we certainly look at a lot more things than you would hear about in the news. And we would continue to do that. I think what it does is it sharpens your focus, right? It kind of -- it makes you get pretty precise on how much growth are we going to get, how good is this really, right, how much definition do we have around the revenue synergies we can have and the expense synergies we can have and so on and so forth. And then all that done, there will be a number of companies that meet the criteria and therefore want to take a next step and the next step on. So we do expect to be able to do M&A, but there's no doubt that valuations continue to be on the higher end.

Right. And then maybe, Rahul, you can put your CFO hat on, since we don't have Patrick here, and I can ask you a few questions around...

He always likes it when I do that.

There you go. Around margins, I think at the Analyst Day, again, you guys laid out a pretty good road map for margin expansion and maybe you could help unpack that for us in terms of what are the levers organically. And then when you do M&A, of course, there are synergy opportunities. But really more organically, what are some of the key drivers of margin expansion over time?

Yes. And there's a number of different avenues. Some of that is just -- while we have done a lot of work at what used to be DST, taking those margins from maybe $400 million in EBITDA to close to $800 million or north of $800 million in EBITDA. So there's been -- but we're not done, right? We're not -- there are still vendors that the contracts haven't come up for renewal. There are still opportunities where we have spent in multiple business units across SS&C that we can consolidate and drive a better price or get a better value. We're not really trying to take the last nickel out of these things either, but buying power makes a difference, right, just like it makes a difference for anybody that transacts with us. So I think that's one aspect of it, what we pay third parties. Another aspect of this is in this hybrid environment, we are continuously looking at, okay, how much space do we really need, right? So real estate footprint, et cetera. And we think some of those things will shake out over any number of years, and I don't think anybody really knows what the optimal end state is. But it seems pretty clear that we have far too much real estate, right? So as those things come up, they'll have some beneficial impact. And I think the most important one is just productivity. We've got a really talented workforce. We think we're very automated. But there's still lots of things we do that we think machines can be doing for us, and it would free up those people to have higher level, more analytical roles and bring more value to customer relationships. And so as we grow our business, we don't expect to be able to or have to grow headcount at quite the same rate, which then is another opportunity for us to expand the margins and pay people better as a result.

Right. And Rahul, I'll close off with one question. We've always viewed regulation as a tailwind. It's a good thing for SS&C historically. Could you just maybe walk us through anything on the horizon that we should be aware of, both domestically here in the U.S. and internationally, that could potentially serve as a tailwind, maybe not in the short term, but sort of on a medium- to long-term basis, things that the investors should be aware of that could be a potential catalyst on the regulatory side? But historically, that's been a tailwind for you.

Well, I think, Mayank, the thing to note is anywhere in the world, right, whether it's the United States or really almost any developed financial center, the amount of regulation and the amount of compliance that investment organizations and health care organizations and others have to do, it's not -- nobody has taken away entire regulatory regimes, right? They're adding them. So there's lots of different things that we can help people comply with. What I would kind of point to, to kind of give you and really the people on this call something to kind of think about, is what the pandemic has done is exposed for a lot of our customers that they don't really want to be in the business of having to comply with these things all by themselves without help, right? So what you've learned is, hey, I used to have 4 people in my IR group that took care of my investors, and they also took care of FATCA and perhaps they helped with Form PF and they helped with a couple of other -- maybe they helped with the K-1 production for the clients or so on and so forth. And now it's a hot labor market, and instead of those people, now I'm down to half, right. Or I discovered I have some key man or key person risk right? And I think it's those kinds of things that people wake up and they say, gee, I better go find a better way to do this. And the fact that we do it at scale around the world makes us a more likely target for somebody to come to and say, could you take this on for me. So I think it drives outsourcing more then. So it's not the regulation in and of itself so much as it is kind of what it does to behavior because generally speaking, when we then provide a service to that organization, there's usually other things we can help with.

Rahul, I'm not seeing any questions from the audience. I'm out of questions, but I want to just give you the floor. Any sort of key takeaways that you want to leave investors with before we wrap up?

Yes, I would just say thanks again for having us. We really do appreciate it. We think we've made a lot of progress over the last 24 months or so. We've got -- we think we've got a business that's strengthening, and we look forward to being able to continue that, but we appreciate it.

That's great to hear, Rahul. Thank you so much for your time. Really appreciate you coming to the Needham Growth Conference.

Great. Thank you.

Thank you.