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

All right. Good afternoon. We'll go ahead and get started. Thanks, everybody, for joining us. I'm Patrick O'Shaughnessy, and I cover capital markets here at Raymond James. Up next, we have SS&C Technologies. And on their behalf, we have Chairman and CEO, Bill Stone. The format is just going to be fireside chat Q&A. And then towards the end, I'll try to remember to open it up to audience questions. So with that, Bill, welcome.

Thanks a lot, Patrick, and thanks, everybody, for coming out this afternoon. Patrick though I might want to give you a minute or 2 about where we are, where we came from and then let him start asking me some questions. But SS&C is the leading provider of financial and health care technology worldwide. We have 25,000 people. We have 140 offices in 40 countries. We have about 100 products and services. We service upwards 20,000 clients, and we are the #1 hedge fund administrator in the world, we're the #1 private equity administrator in the world, and we're the #1 mutual fund transfer agency in world. We processed between 400 million and 500 million pharmacy claims last year. And we did a joint venture with Anthem and Humana called DomaniRx that we're very excited about. We think it will revolutionize how pharmacy claims are paid in the United States. And we currently have about a $250 million business in that area. And we think that's probably about a 5% market share. So there's a lot of running room. And lastly, we're bringing out some new products. We just announced a new treasury management system. And we also just announced something called GoCentral that is being demoed in London as we speak. Our financial statements are about $5.1 billion in revenue last year, $2.066 billion in EBITDA. We grew the year at about 6.3% organic revenue and 8.1% overall. And we think -- you got about an hour to make some trades if you want to.

Terrific. Well, thank you very much for that overview. And then -- as the company has grown over the years, there's been a lot of acquisitions in SS&C's history, and some of them have been transformative. As you kind of think back, what do you think was the company -- was SS&C's best acquisition and why?

So I started this company in 1986 in my basement by myself. And given that I didn't have any money, I would say the best acquisition was one we made in 1994 -- 1995 called Chalk. And Chalk was an actuarial software. And the reason it was the best one is because they got it big enough that we could go public, right? And so when we went public, which was 1997, I got to be rich. So that made that the best one. If you want to talk about the best one financially that we have done since we've been public, we -- it's probably Financial Models that we bought in 2005. And it's interesting because that helped us get private. But Financial Models was doing about $55 million of revenue, $11 million in EBITDA, and we paid $160 million. And that was April of 2005. By September of 2005, they were doing $34 million in EBITDA. And by December of 2005, they were doing $44 million in EBITDA. And on our 1-year anniversary, they were doing $48 million in EBITDA. And so we bought something at about 15x EBITDA. And within a year, it was less than 4x EBITDA. So there was just all kinds of costs and all kinds of things that they did that were, in our opinion, very unnecessary. And so we were able to really drive profitability very quickly.

And then fast forward to today, given the company's size, given deal multiples that are out there, do home run acquisitions still exist? Or now do you kind of have to shoot for singles and doubles?

Well, I think -- I don't know that given size that we are probably even if we did one like Financial Models again, which I would do in heartbeat, but it's $48 million back then, we were doing $95 million in revenue and probably $25 million in EBITDA. And you add probably, we're up to $65 million, $70 million in revenue and $48 million in EBITDA. That's a grand slam maybe for that size company. And $48 million worth of EBITDA today is a little more than 2% of our EBITDA. So it's tough to be a grand slam. But there are some big companies out there that would be pretty attractive to us where we might be able to cross-sell and upsell and maybe make $500 million in EBITDA. But this is a pretty tough group here, right? I mean we bought DST, and took EBITDA from $400 million to $900 million from April 18, 2018, until the end of -- probably the end of June in '21. So a little more than 3 years, we took it from $400 million to $900 million. For those of you who don't know, that's $500 million, and everybody goes why did you do that acquisition? It's a tough crowd. But it's just where -- what is driving shareholder value? And then do you want to chase everything that's driving shareholder value right now? Because in 6 months, that may not be what's driving shareholder value. And we like to think that we have kind of a focus and mindset. We're going to go from here to here. And here to here means revenue is going to do this, earnings is going to do this, cash flow is going to do this, EBITDA is going to do this. Revenue per headcount is going to do this, right? And what we consider as productivity increases is going to do this. And then we used to say, let the market decide if we do those things, we ought to be in good stead. But maybe not enough. There's too many opportunities for you to put your money where you want to and we need to be more open and share more data and show you the sausage making as well as the sausage. And so we're trying to do that. We're trying to send out more information and have it easier for people like Patrick and others that aren't quite as bright as Patrick be able to put reports together that make some sense.

So I think the topic of what our investors are looking for, I think is pretty interesting because you probably see this with private market valuations. But it seems like now there's a pretty big divergence between new tech and old tech. And new tech is new, it's disruptive. I don't care if it's not making any money. It's the new thing. Old tech, I don't care that you're making piles of money, you could be disrupted, you're at risk. What do you think investors are kind of missing about old tech? Maybe the name old tech probably isn't fair in the first place, but what are the misperceptions regarding "old tech."

Well, it's a little bit like I always think I look a lot like Tom Cruise, but he doesn't. And that's a definition between old tech and new tech. People think that new tech does things that old tech can't do, which, of course, it is, right? But what it doesn't do is it doesn't have the riches of functionality and the capability that you need if you want to maintain control of your business. So you go into new tech and let's say that you do buy-write programs. So you buy equities, you write options against them because you want downtime protection and you want some upside. But let's just say your new tech can't handle options. Doesn't really know what a strike price, doesn't know what expiration, doesn't know how those things, right? So you're going to put that in the spreadsheet. An old auditor says you better not have too many on the spreadsheets, right? Because one of these times, you're going to post to that spreadsheet, and you're going to post wrong. And then one time, you're going to find out you've got a lot of naked options out there, and the market is going to go the wrong way, right? Because the market always goes the wrong way when you make a mistake, right? So I think what new tech doesn't do is protect you and particularly right, as you -- if you start your own firm or something like that, protect yourself. You don't go out there bleeding edge. Bleeding edge you know whose blood it is? It'd be yours, right? So you want to be really careful about how far you step out on there. And even when you are very successful and you have chances to experiment, don't experiment with all your money, spend a little part of it, right? And that's something, again, where our -- we used to have a tag line 10 years ago or 15, get rich, stay rich. Use us as your fund administrator. Because we're accountants. I'm not going to help you pick stocks. I'm not going to help you pick sectors. I'm not going to help you pick strategies. But we're going to protect you, right? We're going to be in balance, and we want to give you the information that you need, how you want it, where you want it and when you want it. So those are kind of pillars of what we're trying to do, and that's why we think we still have opportunity out in the marketplace.

And then circling back to the topic of M&A. We had S&P Global here yesterday. It took them almost 1.5 years to get their deal for IHS Markit closed. Now big insurance brokerage dealers shut down. Some other ones have been turned down by the regulators as well. As you look at the current antitrust landscape, does that impact your thinking at all in terms of the types of deals that you're looking at, maybe pushing more into adjacencies rather than pure scale deals?

I don't really think so yet. I think we look at anything that we might do, kind of the landscape is so broad, right? It's accounting. So who's in accounting? All the big 4 firms are in accounting. The next 20 CPA firms are in it too. They'll all do it for you. They'll as do your family office. They're all do here your tax return. They'll all do your different financial statements for you. And then when you look at -- I think I just read where the world's financial assets are in excess of $100 trillion. When you start talking in $100 trillion, it's pretty easy to kind of slide by at $5 billion in revenue. And S&P and IHS Markit, those are 2 pretty big data providers, right? And -- but even for them, right, if you added Bloomberg and FactSet and Reuters and some other ones, you have a pretty big market. So most of the time, you can get it done, but how you define the market and how articulate you are with the regulators. I mean we bought Advent. They were complaining that we were dominating the space in hedge fund systems. Well, the Department of Justice is going to get involved in hedge fund systems. I mean, give me a break. And so it was the fastest review of -- the lady said, this is a fastest review we ever had in one of these HSRs or [indiscernible] checkups. So I think it's more of the articulation of what you're buying and how you define the market and make sure -- like we own Intralinks. Probably a bunch of you have used Intralinks and probably our biggest competitor is DataSite. That would be an interesting acquisition for us. But then we would have to define that Box, DocuSign, Microsoft, Google, they're all in virtual data rooms, we think so.

And then speaking of regulators, what sort of opportunities might open up for SS&C in light of the SEC's proposal to enhance private equity fund disclosures?

Well, we'll get services revenue because we do it for you and you don't want to do it, right? So we have lots of -- like 7,000 hedge funds, I think we do accounting for. And I think we have something like $750 billion in committed capital on our private equity funds. So there'll be a lot of opportunities, but it's probably a $50,000 item, not a $500,000 item. I mean if the government makes it a $500,000 item then everybody will wail and gnash their teeth. They'll still pay it, but they'll wail and gnash their teeth. And I don't blame them. People get mad at me, you're making money off this regulation. I would just say they aren’t regulating me, they're regulating you. You don't want to use our services, don't use them. But ours will be the best, and they'll be the most efficient for you and go yell at the regulator. Don't yell at me. I didn't do it. It's not like I'm lobbying for them to give you more regulations. That's not what we're -- something we're doing. I mean we do best when you guys start your own firms or you ladies start your own firms. That's what's good for us. Start your own firm and grow. We'll help you. That's really the best thing for us.

Speaking of folks starting their own firms, the hedge fund flow data continues to look really, really good, the best it has in a number of years. Why do you think hedge funds have proven to be so resilient in aggregate despite being criticized for their perceived underperformance?

So if I was to take a poll and you guys and gals could all be anonymous. And I said, if you were to start a new entity, you get to pick 1 of 5. You get to start hedge fund, a private equity fund, a registered investment adviser -- you get 6 actually, a registered investment adviser, a mutual fund, a bank or an insurance company. What percentage do you think would pick hedge fund? I'd bet high, right? So -- and also in the investment management world, who makes the most money? I think it's those hedge fund guys. And how come? Because they attract the most money. And a lot of them are really bright. Really bright, really capable and they're nimble, right? So that nimbleness when there's periods of high volatility is pretty attractive to people. And I think that it's the platforms that are really gathering the assets in the hedge fund. It's the Millenniums and the Point72s and the Citadels and those types. And then in private equity, it's the Ares and the KKR and Blackstone. It's just they're like big vacuum cleaners on gathering cash. And so I think that will continue for a while and there's more dry powder out there now than there has been, I think, in the history. So I don't see it changing much -- hey, if there's thermonuclear war, all bets are off. But...

So you guys provide a lot of different services these days to hedge funds and private equity funds, whether it's trading or secured data rooms or middle office accounting, back-office accounting. What do you see as your biggest growth opportunities with those customers?

Well, the one great thing about the investment world is all of you are insatiable. As soon as somebody says, oh, hey, there's this new information, I got to have it. Or there's this new metric, I've got to have that. Or, there's a new Greece, there hasn't been a new Greek in 2,000 years, but there's a new one. I've got to have that, right? And so there's never any lack of demand because everybody wants an edge, and it's pretty competitive, right? So it's not like you have 1 competitor or 2 competitors, there's hundreds of them, right? And so I think that's our opportunity is to, as much as we can, continue to simplify the process so that you can ingest more information, but also in digestible pieces, right, rather than, hey, you want some steak tartare, well, here's a cow. That doesn't quite cut it. And so it is trying to take things into measurable portions and realize that there is no way to consume all the information. I have a cousin that ran oncology and hematology, #1 guy for the U.S. Navy. He retired when they were going to make them an admiral and he told me that in medical journals, the amount of medical journals that are written in 90 days will fill the Library of Congress. So when you go see a doctor, you just realize I wonder how many libraries of Congress he or she hasn't read.

So current events question. Obviously, the markets are not off to a great start this year. I think SS&C has somewhat limited direct exposure to the markets. But are there second order risks that we should be thinking about, if funds are down, buying habits potentially change?

Well, potentially, I think confidence is a key element of activity, right? So starting a new strategy, starting a new fund, starting a new fund complex with leaving your current job and starting out on your own, is all tied back to confidence. So when markets are real choppy, generally when they are way down, people start to lose a little bit of confidence. And so buying behavior changes. And in large-scale organizations, procurement slows with down markets and then also volatility.

Why don't I pause -- we have a few minutes left, to see if there's any questions in the audience. All right. I don't see any hands up right now, so I will keep going. You guys spoke in your fourth quarter earnings call talking about wage inflation is a double-edged sword for the company. On the negative side, it's clearly leading to expense pressures on your labor. But on the positive side, you noted that investment firms with in-house operations can't hire talent fast enough and competitors aren't able to replace their talent. Can you drill down a bit deeper into why SS&C has a talent advantage over potential clients as well as competitors?

Yes. So in our business versus our client's, we don't have a front office and a back office, right? And so if you work for one of your firms, how many of you would like to work in the front office versus how many of you would like to work in the back office. And those of you that work in the front office that want to get to the back office, you're generally deemed to be a moron. And if you want to go from the back office to the front office, you're pretty savvy, right? So that's just how it is out in that marketplace, right? So that gives us a competitive advantage because our front office people are all accountants and systems people. And that's really the whole company. There's no star manager. Did you see the code that guy wrote last week? He's a superstar. Nobody ever says that. So you don't have that pressure in our business. And then vis-a-vis our competitors, if it's against one of the major financial institutions that we compete against, can you just imagine these guys are coming out of Caltech, really smart techy. I can't wait to go work for a big bank. Do you think they ever say that? I think not, right? So we might not be able to compete with the startup in Silicon Valley. But relative to who we compete against, we're pretty attractive. You get to the choice of different products in different markets. And when you build something, you can go build something else. You don't necessarily have to be in the maintenance programmer, right, because we have other projects. Because there's a lot of times you build a product, they want you to maintain it and then you quit, and that's what happens all over the place. So vis-a-vis our competitors, we just have more scale and more size and a broader geographic reach, and that gives us an opportunity to be a little more effective at talent retention and talent acquisition.

What sort of role do you see artificial intelligence playing both, I guess, in terms of what you can provide to your clients as well as your own internal operations?

Yes. I think what's going to happen over the next 24, 48 months is that digital workers are going to be replacing human workers. And it's no different than an ATM, automated teller machine in a bank. I mean, I don't know how many of you have been in a bank branch in a while, but there's not many tellers. And there's plenty of machines that you can stick a card into, right? So that's one thing. Or you go to a fast food joint and you walk in and it's a kiosk. Once again, it's digital workers. And that's what's going to happen on trade reconciliation. That's what's going to happen on break resolution, that's what you're going to have on NAV calculation, that's what we're going to be on, on valuation. On valuation it's going to go out to different websites and find similar type of assets. It's going to be able to pull down interest rates. It's going to be able to pull down FX rates and other things in which to build a model and then execute and then a higher paid and more experienced person will review what that bot or that digital worker did.

Last call for audience questions. All right. Maybe one last one for me then before we shut it down up here. Crypto, obviously, in the news, I cover exchanges and everybody is starting up a crypto exchange. I wouldn't anticipate you guys to do that. But what are the opportunities that you guys can play? What roles can you play in the crypto space? And I presume maybe starting out with your clients who might trade stocks and might trade commodities, say, hey, I want to trade crypto, and what role can you guys play for them?

Yes. I mean we can help them, right? We can account for the crypto and we can interface to who their custodian is, and we can hopefully write really good contracts so that when they're codes get stolen, we're not the one holding the bag. So there's plenty of risk out there in our friends crypto, but it's an attractive asset class. And we're doing things in a -- we have a bunch of crypto clients, we have a bunch of funds that invest in crypto, and we try to manage it the best we can. I think -- there's, I think, a Chicago-based firm that just lost $350 million worth of crypto codes. And I think it's harder to get back than a lost wire transfer. So there's risk in there. And we tend to be risk averse on those kinds of things. And again, we try to be wise and the challenge with wisdom is it's always in the rearview mirror, right? So that's kind of where we're at.

Terrific. Well, with that, we're out of time. But thank you, everybody, for joining us. And thank you very much, Bill.

Okay. Patrick, thank you.

Thank you.