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

Hello, everyone. Good morning. My name is Mayank Tandon. I'm the fintech analyst at Needham. I'd like to welcome Patrick Pedonti, the CFO of SS&C to our conference. Patrick, thank you for joining us.

Thank you for inviting us. Appreciate it.

Great. We're going to do a fireside chat. So Patrick, I'm going to kick it off with a few questions. And then if there are questions from the audience, I'll read them out as well.

I think from the perspective of the first quarter, you came out with very healthy organic growth. You guys called out Intralinks, Advent and -- as I think as the key growth engines in the quarter? Could you maybe give us a little bit more detail on some of the underlying drivers for each of those segments? What drove that healthy organic growth and how sustainable that is for those 3 segments as we continue through the year.

Sure. So overall, in the first quarter, we really had strong growth in the Financial Services segment of our business, which is like over 90% of our business. And then we saw some weakness due to some client termination in our Healthcare. But if you look at the Financial Services segment of our business, I think organic revenue growth was about 5.9%, excluding the Healthcare business. And so we really saw a lot of strong growth across the board. Our alternatives business where we provide fund administration to hedge funds and private equity funds and investors and real assets was up about 11% organically in the quarter. Our Advent business, which is a combination of large-scale portfolio management system, specifically Geneva. And then we've got a business where we provide outsourcing to registered investment advisers. And that was up 10.4%. And then Intralinks also had a strong -- continue to have a strong quarter after a strong 2021, and they grew at 17.2%. So I think what's driving the vast majority of the growth is that I think we've surpassed our competitors as far as technology capability. I mean, we're one of the few providers in the industry, especially in the alternative space, where we own our own technology, and we're actually a software company that deliver services with our software. We're competing against companies like State Street and Bank of New York, which are software companies. And so I think we've become a dominant player there. Same thing in the Advent space. Our Geneva product is probably the premier portfolio management system in the world. And then we're providing services to registered investment advisers and those advisers are quickly moving to outsourcing and eliminating in-house software. So I think those trends are driving our growth.

Patrick, maybe breaking it down a little bit further. So obviously, we've seen a lot of volatility in the recent months in terms of just equity markets, and I think that's spilling over into other areas as well. So maybe it might be helpful for investors to understand how the SS&C business model works in times like this when you have this level of volatility, is it good or bad, a little bit of both and how it impacts the various segments of your business?

Sure. There's basically 2 segments that are priced assets under administration. And that's the alternatives business and the registered investment by the services we provide to RIAs. And -- so those -- I think the fund administration alternatives is about $1.2 billion, the RIA business about $150 million a year. And those businesses could be impacted since pricing is typically on a monthly basis based on assets under administration. But we don't technically -- we don't see much movement based on the markets. And that's either on the upside or the downside because you got to remember, our alternative clients are hedge funds, and they're generally a complex hedge fund that typically not short -- long-short hedge funds. And then they're made of our clients or either real estate or private equity funds and private equity funds don't typically mark down their investment with short swings in the market. So if it goes on for a long period of time, it can have an effect. But I think, generally, our view is that in the alternative space, our business could be up or down 1% or 2% based on market volatility over the short term, but not that significant. They are hedge funds.

Right.

And then I think a lot of people think we're like directly [ tied ] to the market. I mean I think there's still a lot of investors that think we'e directly tied to the market. And if you look at our history, I think Q1 2020 when during the pandemic, market was down and our business was still growing. Plus we're also winning new business, and that offsets any decline in assets from our existing clients. And the rest of our business is really not priced based on the market or assets under administration. Our software business is generally fixed pricing over a 2-, 3-year period. And our transfer agency business is typically long contracts and based on transactions, not directly impacted by market fluctuations.

Right. And Patrick, I would also take that given the diversity of the assets that you guys, in some ways, administer or manage for your clients that also probably is a mitigating factor in terms of it's not just equities, it's fixed income, it's commodities and all the other sort of financial instruments out there, right? So that should help maybe alleviate any concerns about direct volatility from the S&P going up or down?

It does because most of them are complex hedge strategies. And and they don't move as much as the market on the upside or the downside.

In terms of large deals, I wanted to ask you, what does the pipeline look like? How is client decision-making in this type of environment where, again, there is a lot of volatility, which may compel clients maybe to hold off on large engagements, even though it might be the right thing to do long term, there is sometimes a level of inertia when you have sort of these macro headwinds and geopolitical concerns, what are you seeing in terms of pipeline and conversion of that pipeline overall?

We haven't seen any impact on decision-making in the first 4 months of this year. The pipeline looks strong as it typically has been over the last 18 months. And conversion rates on signing deals continue to be very similar as they've been over the last 12 months. We haven't seen any change at this point on signing deals. Implementations are ending up being a little tougher and are getting stretched out a little bit after you sign the contract. I think mainly because a lot of companies still have people working remotely and implementing software when you're remote or not in the office, so that's a lot more difficult [ to ] get everybody's attention, everybody focused on it. So it's starting to improve, but we're definitely seeing implementations go a little bit slower, especially when we need the client involvement. And those are typical on large-scale deals, not necessarily fund administration deals.

Right. I think on the last call, Rahul called out several large deal wins like he has in previous quarters as well. And I just wanted to better understand, and we get this question a lot, what is sort of the differentiator for SS&C? Is it really coming down to scale in terms of being able to win these large deals. Is that the #1 driver behind these wins? Or are there other factors? Is it more technology? Is it having the people and the technology and the scale? What are some of the key determinants when you win these large deals against your competition?

Yes. I think you're right. I think the one factor is scale, that we're a large provider to financial services industries. And we typically -- our customers are typically very large-scale financial institutions, and they want a reputable provider that's got scale and has the ability to meet their needs in various areas, not just kind of focused in one area. So I think the diversity of our products helps us out. And our technology definitely helps us out. And so I think because these clients have specific needs and they might have specific type of investments, and we offer an array of products. So if you're an insurance company or a large-scale institutional asset manager or a private equity fund or a hedge fund we have -- well wealth manager. We have products that fit in every area. So I think it's scale, it's technology and customer service is very important. Reputation of the business is very important.

Right? And then maybe going into the segments a little bit deeper. I would think the volatility may actually help your [ Eze ] business, at the same time, if M&A slows down, and there are some early signs of that, just given, again, the volatility in the equity markets that could potentially maybe be a headwind for Intralinks. Is that the right way to think about how the impacts would work through this year, if that's the way it plays out?

If you look at Intralinks, I think 75% or 80% of the business is M&A and another 20%, 25% of the business is where we provide secure data rooms to have alternative asset managers or securities firms or banks when they're raising capital or offering or making some offerings. And that 25% segment is growing pretty fast. The M&A part of the business is impacted by the number of deals. Our experience is it's not impacted very much if there's a slowdown for a short period of time, 3 months, 5 months, and then it picks up, fix, back up again because people tend to leave the data rooms open and not shut them down. And so even though I think M&A activity was a little bit slower in Q1, our business continue to be strong. And I think it's -- if M&A activity slows down for a short period of time, it won't affect our business very much. But if it does for a long period of time, it can definitely affect the Intralinks' business. And on [ Eze ], the 30% of the revenue is transaction volume. And the rest is a fee for the software and if we have a lot of volatility and a lot of trading, [ Eze ] tends to do well because of the transaction volume pricing. Right.

Makes sense. And then on DST, I eked out a little bit of growth in the first quarter. Have you lapped all the headwinds that you had going back the last couple of years? Are we now at a maybe cleaner slate going forward where you can -- if we start to grow the business organically consistently or any factors that might weigh on that? And [indiscernible], what I'm asking really is on the mutual fund accounting side, it seems like it's a much more saturated market, but you seem to be the leader in that space. So is there maybe at least an inclination to grow that a little bit? And we're past some of those headwinds that you've called out in the past.

Yes. I think initially, when we bought DST, we had a couple of headwinds in that business. One was we were -- they were experiencing pricing deterioration. And our people said that was mostly related to their service delivery. I mean, you're not delivering good service and clients start pressuring you, you start giving away pricing. So we focused on service delivery and then we've -- and we've worked to hold the line on pricing. But I think that's kind of stabilized the business, and our retention rates have been high. We work hard to sign some of the major clients to long-term contracts. And so I think now we've kind of mitigated the pricing deterioration. We've got retention rates a little bit higher, and we need to win new business now. But it is not a high-growth market, but we think we can compete effectively against the competitors and start winning new business and have some low single-digit growth over the long run in that business.

Right. That would be clearly an incremental positive, just given our trajectory in the past. So that's good news. And then just on pricing in general, Patrick, we all know of the inflationary pressures across the board and I'm sure you're seeing that with maybe your ability to recruit and retain talent. Are you able to pass on some of these increases on to your clients through pricing across your portfolio of services and solutions?

Yes. Well, we're a little different than most companies that can institute -- send a letter to their clients and say you get a 7% increase. Most of our contracts are long term. And if you kind of break out the business, if you look at on our maintenance business, on our traditional software sales, that has annual built-in price increases that generally tied to CPI and in some cases, CPI plus a couple of points. So all our maintenance contracts have built-in price increases every year. Our software contracts, which tend to be multiyear. I think they average about 3-year contracts. So they're generally fixed over the 3-year period. But when they renew, and these are typically subscription-based or term-based contracts, software contracts that were -- recently when they renew, we're averaging about 7% increase in those. But again, not all of them renew every year, right? So maybe you get 1/3 of them that renew. On our outsourcing business, it's pretty much the same. They are typically long-term 3-year contracts or multiyear contracts. We're instituting price increases when those renew. And I would say in our kind of outsourcing business, maybe we're averaging a couple of percent a year right now because only maybe around 1/3 of the clients are renewing every year. But I think over the next 2, 3 years, we'll be instituting full price increases across the board.

So looking at the margin impact, the net of all this, and I know -- I don't want to put words in your mouth, but Patrick, I think you've said organically, you can drive about 50 basis points of margin expansion. And we'll get into the M&A impact shortly. But just organically, is that still the model? And if that is the case, what are the levers to be able to get to that 50 basis point annual margin expansion on an organic basis?

Yes. That 50 basis points is clearly our internal target. And we've generally -- I think, in fact, last year, it was even higher than 50 basis points. It might have been closer to 100 basis points where we've got our core business up. This year it's clearly going to be a lot tougher because I think like a lot of companies, we're also seeing wage inflation. I think we've got this "Great Resignation" that everybody is experiencing. I don't know where everybody is going. But clearly, retention rates on employees have deteriorated over the last 6 to 8 months. We're seeing wage inflation in India double -- close to double what it used to be. And we're seeing high demands for experienced technology and accountants to run our outsourcing business. So our goal this year is to work to offset that wage increase and hold our margins stable year-to-year. That's the goal we're working towards this year. But I think -- and we've taken several actions to increase base pay, improve benefits, use more equity comp retention, long-term equity comp retention and that's going to be our focus because employee retention is a key to delivering our services in customer service.

Patrick, I think the operations in India go back, if I'm not mistaken to the GlobeOp acquisition several years ago. Have you thought about other so-called delivery hubs for your services beyond India to maybe in some ways, derisk the delivery and also maybe manage some of the wage inflation pressures.

Yes. We've got -- DST had also had an operation in Thailand. And we also have one in Malaysia. They're both much smaller than our India operation, but we are a little bit diversified with a fairly large Thailand operation, a little bit smaller Malaysian operation. But -- we have -- we run our own operations, we're not outsourcing to a third party in India. We run our own operations, and we have a talented management team with a lot of experience. And so our focus will be continue in India. And I think if you look at the GlobeOp operations, that business has been growing 5%, 6%, 7%, 8%, 9%, 10% a year. And our headcount has been pretty stable over that period. So we're offsetting some of the wage inflation with productivity and technology improvements.

Right. It's great to hear. Maybe turning now to healthcare. Patrick, as you said, you did have some impact in the first quarter from sort of client erosion. So could you talk about the trends in Healthcare. Was that a one quarter event? How does Healthcare progress through the rest of the year? And then I'd also love to hear about the joint venture with DomaniRx, your investments there? And what is sort of the long-term game plan for that segment?

Yes. There are -- the Healthcare business that we inherited when we bought DST is really in 2 segments. One of it is pharmacy claims and the other one is medical claims. Our focus has been more on the pharmacy side. It's more automated. The margins are better than on the medical claim side. So the recent client terminations we've seen have been on the medical claim side. I mean not that we like client terminations, but still, our main focus is on the pharmacy side. We think that's a better business. So we knew about these 2 clients that terminated on January 1. They were technically -- they were planning on terminating in 2021. They weren't able to get off our platform. So they both came off and caused a significant reduction in that medical claim business. We think the business will be pretty stable for the rest of the year. We don't see any -- at this point, we don't know of any other client terminations. And on DomaniRx, so again, that's in the pharmacy claims side. We've partnered with Humana and Anthem. They're both 10% owners, approximately 10% owners in the joint venture, and we own about 80%. But I think Anthem is with CVS and they view CVS as a competitor, and they don't necessarily want to be with a competitor handling their PBM. So they're looking for another opportunity. And Humana has been a long-term client of SS&C. So the plan is to develop a cloud-based new technology that handles all phases of pharmacy claims. The current goal is to have that new technology available in the first quarter of 2022. The first client that will go on will probably be Humana so that won't add incremental revenue at that point. But sometime down the road, maybe in late '22, '23 or early '24, we're hoping that Anthem goes on the platform. And then at that point, we'll be able -- we'll start selling it to other third-party Healthcare providers. So if we're successful in the development and in the implementation of getting Humana on the platform, then I think it's going to -- well, provide a base for growth because, clearly, some Healthcare providers don't want to be on Cigna's or CVS' platform, and they would rather have an independent platform. So that should give us an opportunity for growth in the latter part of '23 or '24.

Right. So I think what I'm sort of hearing is that given the organic growth guidance for the full year, we should still expect Healthcare to be a drag on the overall business. But then you've got some of these positive engines of growth that you identified, which I think that then gets you to that low to mid-single-digit organic growth for all of 2022. Is that a fair assessment?

Yes, I think so. I mean I think as the midpoint of the guidance we provided for the year will be at about 4% organic growth, including the Healthcare business, Healthcare business will probably be down mid-teens or so for the year. So our financial services will be much better than the 4%. But that's at the midterm -- midpoint of our guidance, that's what we expect.

And then it sounds like Healthcare could -- the type could turn in 2023 so maybe an incremental positive 12 months out next year.

We think so. I mean, Humana is a very large client, Anthem has a potential to be just as large and then we've seen other interest from other Healthcare providers.

Patrick, let me turn to the recent acquisitions. Maybe talk about Blue Prism and Hubwise, both. But given the size of Blue Prism, would love to hear the motivation behind the transaction. I know it's a well-known automation software tool. So what motivated SS&C to go down that path? How does that fit into your overall strategy? And then we can talk about the financial impact as well.

Sure. So as you said, Blue Prism provides process automation software. About 50% of their revenue is in financial services companies. Our view and I don't know, process automation software is a $1.5 billion market. I think some more -- I think it's a large market and growing fast. I think Blue Prism has been growing in the high teens over the last couple of years in the top line. So I think our view strategically is that there's high demand in financial services institutions for process automation software. They've got a lot of transaction processing in their back offices. And our client -- and that's our client base. And so we think that by augmenting Blue Prism's sales force with our sales force and our client base, we can accelerate their business. And if -- it fits well in selling technology to financial services and selling process automation at the same time. In addition, we've got -- we've got -- we have a large back office also. And I think over 70% of our employees are providing back office outsourcing services to our clients. And our goal is also to automate that back-office process in our own business and help us improve customer service and improve operating margins. So I think there's really a 2-pronged strategy. One is, we view it as a hot area for financial services firms, and we need the technology also in our own back office.

Patrick before we go into the financial impact, I wanted to ask you around the potential cannibalization of your existing revenue by providing these automation tools. So is it more complementary? Or does it, in some way, supplement what you're already doing with your clients? So there is some potential cannibalization of your existing revenue from Blue Prism's automation tools.

I don't think there's any cannibalization. I think it's an addition to our revenue. We really -- we have a product called Chorus that has some automation features. It's not a very significant amount of revenue. And it's also geared towards the Healthcare industry Chorus. But we view Blue Prism as much more modern and has much more capability. And I think over time, our focus will be on Blue Prism.

Got it. And then in terms of the financial impact of Blue Prism, I think you said about $200 million of revenue in 2022 and then growing mid-teens plus, is that right? And then also from a margin perspective, I think they're just about EBITDA profitable. So maybe you could help us understand what the drivers are to get margins to more SS&C levels long term?

Yes. I think -- so Blue Prism today is running about -- depends on the FX rate because the British pound has deteriorated recently, but somewhere around $250 million of revenue a year. That's the current run rate. We're not going to own them for the full year, right? So and the estimates we provided for this year are about high teens revenue growth on a constant currency basis. And on margins, I think Blue Prism in 2021 lost about $20 million in EBITDA. We think this year that we'll break even or have a little bit of profitability on EBITDA line. And our focus -- clearly Blue Prism is a fast-growing company, and it's got a fast-changing technology. And the key is going to be to keep up with technology and continue that top line revenue growth. So we're going to be very careful on the cost structure. Our initial growth is -- our initial plan is to kind of hold costs flat in most areas and let the business grow into operating profitability. We probably won't do that on the development side. We'll continue to invest on the development side, but on the sales and G&A side, our focus will be to hold costs flat or down mostly by getting synergies out of repetitive costs that we don't need as we integrate the business. But the main focus, I think, will be on holding costs and letting the margins expand and continue 15% to 20% top line growth which is what the business has done over the last year, but they had been spending $1 for every new dollar of sales, but we think we could control that, and we can make their sales more effective by having our full sales force also complement theirs.

Patrick, what about the Hubwise deal? What does that bring to the table? And I think the motivation there seems to be more around international expansion. So maybe if you could talk on that as well. And I don't know, it seems to be on the smaller side. So any sort of notable financial impact that we should be aware of?

Yes. I think that run rate today is about $5 [ billion ] or $5.5 [ billion ] of revenue that might be a little bit profitable. And this isn't really a technology buy. So they provide a platform in Europe, mostly the U.K., essentially a kind of white labeled adviser platform for investment firms. And it's kind of designed to meet regulatory custody and some other specific rules that exists in the U.K. So -- and it is a fast-growing area in the U.K. And so we think that this kind of adds to our technology capability in the U.K. And we think by having this technology, we've got a large client base in the U.K. that requires some of these adviser platforms. And so that gives us the ability to offer this to some of our existing clients. It gives us a fast growth area that we can now offer products. So we think it's important for our overall growth in the U.K., even though today, it's a fairly small business.

Right. And we only have a few minutes left, so I'll turn to the balance sheet. You did increase leverage to consummate these 2 deals. Maybe if you could provide some thoughts around your overall capital allocation strategy? Where you would like to see leverage go as you move forward, potentially by the end of this year into next year? And then also just around future M&A and then, of course, potential share buybacks that you've been doing, I think, opportunistically over the last several quarters?

Yes. Generally, recently, our plans for free cash flow, excluding acquisitions has been to allocate 50% of free cash flow to debt pay down and 50% of our cash flow to stock buyback, approximately. And sometimes as a corporation, we restricted in stock buyback, and we end up focusing more on debt. But generally, that's kind of the approach we take. It's currently going to depend on where the stock price is, how we allocate that because even with the -- I know everybody's panicking with the interest rate hikes, but even with the most recent hikes, the interest rates are pretty low. So -- and we get better bottom line payback by buying back stock, especially at today's prices. So I would suspect that we'll be around 50-50, and it might trend more towards stock buyback. On leverage, I mean, we're comfortable with the 3.5x leverage. I mean we'd rather -- we'll focus on getting that down below 3x. So I think if we go by the 50-50 guideline on free cash flow, we'd probably be around -- we take that 3.5x to about 3x by the end of the year. I think we'd be comfortable there. And I think when we do that, it keeps the rating agencies happy. And it makes it much easier for us to raise that in the future. So we will focus on paying back debt also.

Right? Well, that's a great way to end our conversation. I know we're getting close to the time, but really appreciate all the perspective, Patrick, on the business and the recent M&A, which I think is clearly on the minds of investors. So thank you so much for your time, and have a good rest of the day.

Great. Thanks a lot. Appreciate it.

Thank you.