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

Thank you all for sticking around. For those of you who I haven't met yet, I'm Matt Roswell. I'm part of the RBC fintech team. And joining me are Justine Stone, who's Head of Investor Relations at SS&C; and Rahul Kanwar, who is, let me get this right, President and COO. Do I have that right?

That's right.

Okay. Excellent.

So I guess, as my first question, for people who are unfamiliar with SS&C, can you give us a brief overview of the company?

Sure. I can take that one. SS&C has been around since 1986, and we are a large provider of software and services to the financial services and health care industries. And within financial services, which is over 90% of our business, we are the largest alternative assets fund administrator. We are the largest mutual fund transfer agent, and we have a number of market-leading software products that we sell directly to our customers for them to either run in-house or on a cloud SaaS type of service, or we can kind of take all of that work and do it for you and provide outsourced services on that same software.

Okay. What's the demand environment look like?

It's been pretty robust for us. In general, as Justine just said, most of the things we're doing are mission-critical, right? So we do things like NAV reporting, which if you have an investment portfolio, you have to tell customers what it's worth. We do regulatory reporting. We do tax reporting. We do transfer agency, help people buy NAV. So there's always a need for our products and services. And what we've done over our history is innovate and build technology to add complementary products and services to the things we do. That creates demand. We've been fairly acquisitive to our history. So we have, through that process, added groups of customers that we can then cross-sell and upsell into. And when you put all of that together, it leads to a fairly vibrant and strong environment in which we can sell our products and service.

The recent market volatility, is that impacting demand at all?

No, we're not immune to the pressure of the market, right? So of course, it is. But not in -- really mostly at the margins.

Okay. What percentage of revenue is asset-based, off the top of your head?

If you look at where we have some asset-based pricing in our revenue streams, it would be in our fund administration business, which is a little over $1 billion in total. And then we have an ALPS -- the ALPS Advisors, which is maybe $100 million and Black Diamond, which is $100 million. And that's not to say that $1.2 billion or so is completely tied to asset pricing. There's a bunch of different things built into it. And when you really look at where we see correlation with the market and with our pricing structure, it's probably less than 10% of our revenues that would move with any kind of market. And we've got minimums in place, we're protected on the downside. So usually, we see some little bit of uplift in tailwind when the markets are strong, and it's a little bit of a headwind when the markets are weak.

Excellent. Switching a little bit to competition. I mean we saw a lot of capital come into the fintech world last year. Has that increased competition with you all? And who are you really competing against?

We're in good markets with lots of competitors, right? So that's in play. It's rare that we don't compete with somebody on a deal unless it's a current client or something like that. That said, we're also in deep expertise markets, right? So you really have to understand the intricacies of products that our clients trade or you have to be deep into the regulatory. So it's not so much a -- it's not easy for a start-up or a new fintech to go and disrupt what we do, particularly when we're building technology and new technology as fast as anybody else, and generally because we have more expertise, we're building it faster. So there is a competitive dynamic. We're trying to stay ahead of it. But when we win, it's usually because the combination that we offer, which is, as Justine pointed out, you can buy our systems from themselves, you can license our systems and have us host it for you and deploy it in a cloud type offering or you could hire us to do the entire solution for you and just deliver a product and end result. That's quite different than a software company, particularly a small software company that doesn't have the resources, or a large-scale outsourcing provider that generally doesn't write source code and doesn't have the ability to configure technology.

Okay. Talk about sort of combining those thoughts. You just posted a little under 5% organic growth, if I remember correctly, and you guided to 2.4% to 5.6%. What are the sort of drivers to get to the high end or low end of that range?

Yes, I would say, in general, when you look at our organic growth, it's winning new business is the biggest driver and winning new clients. That probably is about 4% of -- or 40% of our growth rate. The next 40% is cross-selling and upselling in our existing client base. And then the last 20% is a combination of market tailwinds and pricing that we'll get. So I think the biggest drivers in general for us growing is we have strong pipelines and there's a lot of deals in our pipelines and getting that to close. And then once they are closed, converting that to revenue. So getting the implementations up and getting the full revenue benefit of those deals.

Okay. Do you have price of living increases in your contracts?

We do particularly in our software contracts, where they're indexed to CPI and CPI plus something, generally an escalator, and we have, over the last several years, been building those into our services contracts to a greater degree. It's still -- there's still many that don't and require an ongoing conversation, but we have more of that than we've ever had.

Justine, you mentioned pricing. I know you were thinking about trying to get some price increases over the last couple of years. How is that going?

Yes. I think it's an ongoing conversation that we have with our clients. And generally, they're -- well, no one likes to have the conversation. It's as well received as a [indiscernible]. And I think it's understood that -- almost expected that they're going to get that kind of a call. So I wouldn't say that it's not something that we put a blanket price increase over our 20,000 clients and send them a notification e-mail. It's much more of a conversation, and then we would have to look at each individual client and what our contract and what our relationship looks like. But generally, we can take more price.

Okay. This is kind of a difficult question to frame, but I'll try it. So Rahul, when you're -- historically, SS&C has done large acquisitions and organic growth has sort of slowed during that time period. And then you integrate the acquisitions and the organic growth comes up. Am I right in that, that's a trend? Or is that just a perception for me sitting on the outside? Is there a sort of a trade-off in terms of management's focus between M&A and organic growth?

I think there certainly has been -- not every time, but there certainly has been times where we've done great, big acquisitions and they have taken a lot of our time and energy, and that has been the most -- the best use of that time and energy. I think the thing that's maybe a little bit different now is we're a lot bigger place, right? So there's a lot more business units. There's a lot more executives. There's a lot more talent and bench. And so our ability to do an acquisition in one particular part of our business and still have an effect, the growth and organic engines remain undisturbed, and if anything gets stronger because we have more products to sell, is greater than it's ever been.

Okay. Excellent. Excellent. Speaking of recent acquisitions, Blue Prism, Hubwise, can you give a little bit of sort of what they are, the strategic rationale, et cetera?

Sure. So Blue Prism is a -- they call what they sell digital workers, right? It's a process automation company. It gives us AI and machine learning to help folks automate really across the world, largely repetitive tasks that are done by human beings today, and it frees those human beings up to be more analytical and progress in their careers. So they have 2,000 customers. It's a great business. It's been growing well historically, and we think that what we can do is plug it into our products and services and have really deep use cases, right, built on our outsourcing business and examples on things that we process today. So there's a fair amount of cross-sell capability as well as the ability to help them in what they've done traditionally, which has gone pretty well. Hubwise is an extension and a fairly small acquisition, but an extension of what we do U.K., in particular, in our transfer agency and wealth management business, where it's an additional set of products and services on a white label basis that U.K.-based and European-based fund managers can offer to their clients, particularly around custody and segregation of assets and reporting around model portfolios and things like that. So both of those are good acquisitions, and we're excited about them. I think Blue Prism, in particular, has probably 3 areas in which -- or 3 primary areas, one is we have the ability to help them in what they have been doing for a long time, which is making sure that the innovation that they have and the R&D that they have takes advantage of our larger R&D capabilities as a company, while being as productive as we can with our sales and marketing efforts. So that's one. The second one is we have 20,000 customers. Many of those customers, if not virtually all of them, are targets for Blue Prism. Because we are usually a large and strategic vendor, we can get them accessed a little bit quicker and accelerate that process. And I think the third one is an internal one. The revenue ones come first, but the internal one is important, too, which is we have thousands and thousands of people that are doing -- in our outsourcing businesses and our transfer agency businesses, doing tasks that lend themselves in some way to these technologies. So our ability to have productivity and drive productivity internally and add revenue without necessarily increasing headcount at quite the same rates, that's pretty valuable to us as well.

So is it fair to think about Blue Prism as a kind of service extension as opposed to you all trying to turn around a company?

Blue Prism is a pretty good business, good growth rate, right? I wouldn't say a turnaround other than historically, they haven't made much money, right? So we're going to have that focus on profitability that we intended to have. But on the growth side of it, they're doing a lot of good things. We're just going to try to add to them.

Okay. I think I'm correct in saying that only about half of Blue Prism's clients are currently financial services?

Yes, maybe not even.

Maybe not even. Okay.

Yes.

So is the idea to expand verticals as well, like you did when you bought DST -- and got DST and got into health care?

I think so. I don't -- we view that as technology is somewhat industry agnostic. What helps it is if you can have some deep expertise and clearly, our deep expertise relates to financial services and health care. So those will be really good markets for us. But we're trying to have a robust product suite that can go across anywhere where people are doing the same thing in a repeated way that a machine or a computer can take over.

You mentioned sort of applying Blue Prism's automation to internal SS&C. What sort of margin lift you think you could get out of that?

Well, it's early days. We're a couple of months in, right? So don't quite know yet, but one sort of example I would have or a similar situation is when we bought GlobeOp in 2012, GlobeOp had built this capability in India, where they had 1,900 people. And they did a lot of great work. They used a 24-hour clock. They did a lot of reconciliation of other things in India. And we really liked it. The only thing we didn't like was that we're adding 75 people a month, every month kind of regardless of what was happening in the business, right? So we stopped that part of it. We treated those people really well. We paid them really well. We brought a bunch of technology into bear. And today, I think we have 2,300 people in that same business and a business that's 2.5x in size, right? So those -- that may be a -- that might be on the aspirational end of the spectrum, but those are the kinds of things we were trying to do. We try to make it so our people that we have today are paid really well and continue to grow, but we don't add a lot more.

Okay. I'm going to ask it another way, too. And that's if when you're at this conference 5 years from now and you look back at Blue Prism, do you think it will be about the revenue synergies? Or the margin potential?

I think it will be about both, but I think the revenue synergies lead the way, right? We're pretty confident in our ability to get the margin, and I think we'll do that, but the revenue is the important side of the equation.

Okay. Excellent. Speaking of margins, I mean, you've got a nice track record of annual margin expansion, but we've got wage inflation, we've got interest -- we've got the whole macro environment. How should investors think about margins rest of the year and then going out over a medium-term time frame?

I think in a normal environment and in the past, you've seen us raise margins in our core business, 50 to 100 basis points a year and then whatever kind of synergy we get from acquisitions is additive to that. I think this year is a little bit different. We've had to accelerate our rate cycles from Q4 to Q2. So we're getting that hit in Q2, which we'll see next quarter. And then they've had to be bigger. I mean, it's just the world that we're living in and talent is a really important part of our business, and attracting and retaining the right kind of people to service our clients, so that's important to us. I think that we have other levers to help with our margins and to help keep them stable. So I think stable is what we're shooting for in 2022. And we should see some improvement, stable within core SS&C, and then we should see some improvement at Blue Prism, too, going from wherever they are today to probably flat by the end of the year or breakeven by the end of the year.

Breakeven by the end of year. Excellent. Excellent. So I guess I'm going to switch gears again. Can we talk a little bit about innovation. You had Singularity which was released 2 years ago, 3 years ago? You had the timing, right? So how has that been? And anything else we should be looking forward to over the next couple of quarters?

Sure. And so Singularity is doing well and has been a good platform for us to showcase some of what we have as new investment accounting technology, which I appreciate, sounds fascinating, but it is what we do in large part. It's also -- any one of our businesses, right, whether it's Intralinks or whether it's Eze or whether it's our Fund Administration business, we're at the -- we're right at the forefront of new development, right? So we're constantly building new products and services. We think that what's different about us doing them versus, once again, a start-up fintech to come back to that, is we usually have deep subject matter expertise, right? So we're building about things that we really know about, and it's not just technology for the sake of technology. And so a lot of times, that turns into differentiators. That's some of the discipline and the process that we have brought to some of the acquisitions we've had, whether it's in DST and other places, which is there's this really good mix of, let's build some things, let's make sure we have sales and marketing focus, let's make sure they get deployed and then the cycle repeats and it resolves. And so that's the process we're going through. And Singularity is one of those pieces that's doing well for us.

Okay. Maybe a bit of an unfair question in terms of the numbers. Using a broad definition of investment, so CapEx, capitalized software, R&D on the income statement, what percentage of revenue does SS&C usually run at? Has that been increasing or decreasing? And if you're willing to kind of talk about the breakdown between the amount that's being spent on sort of running the business as opposed to investing for 3 years from now? It's a long question.

Sure. So I think I got most of that. So look, we're doing 2 things, right? We're building technology and we're providing services on the base of the technology. So there's kind of 2 streams of revenue that help pay for the R&D. So on the whole, we probably spend 10% of our entire revenue on R&D, but as a percentage of the software businesses, the pieces of technology, it's more like half, right? So it's a massive spend on the technology base relative to what a standalone software company without that additional revenue base would be able to do. That's one part of it. I think the other part of it is we would like to think that in general, not always, we spend that money wisely, right? So we've bought any number of companies and they've had massive IT budgets, and DST is one example. And then you look around and you figure out what they spend it on and you realized half of it is less than fully productive, right? So that's the other what we get for and not only are there -- is there a big spend associated, but what we get for it is also, I think, pretty optimized. And then the third part of the question, where does it go? The majority. It varies a little depending on the kind of the business we're in. But anywhere between 60% to 80% of it is spent on new, right? That's not necessarily always new product. It's not the next product, but it is also building new functionality into current products or upgrading the code base in different areas to allow it to have some kind of market advantage.

Okay. We talked a little bit about M&A. What are you seeing in terms of the private company valuations or the target valuations given what's happened in public markets?

I think M&A in general, we're seeing a little more opportunity today than maybe a year ago or 18 months ago. Prices have come down a bit. But at the same time, we're very disciplined with the price that we pay for acquisitions but also with what we're getting. We want to make sure that what we get and what we're acquiring is accretive to our revenue growth, I think, more so than maybe it has been in the past. So things like Blue Prism, where we think that they've got a really strong growth rate that we can both improve upon and we can improve their margins, we like those kind of acquisitions and we think we got that for a pretty good price. So things are coming down, and we're looking at everything. And I wouldn't say that there's anything imminent that -- or super actionable at this point right now, but these things tend to move quickly when we do find something that we like.

Can we talk about the health care vertical a little bit. Can you give a little bit of the history as to why you got into health care? What you like about it? And then, I guess, this year, it's -- the revenue growth is negative, if I remember correctly. Sort of what's going on there?

Sure. So we have a health care business that does primarily pharmacy claims and medical claims, so the processing of those claims. We inherited that when we bought the DST. It's -- our view has been and continues to be that it's a great area for us as a company. It's -- all the secular trends are in our favor. People use more health care, they use more services. They have more transactions. In a sense what we're doing in health care is very much like what we're doing in financial services, which is we're processing transactions and ensuring that they're validated and accurate and they settle to use a trading term in a way that is -- that our clients would want to have, right? So when we talk about -- when we went and saw those health care customers for really the first time and any number of times that we've been since then, what they would like to have from us is very similar to what our big financial services customers would have. And we get to use the same infrastructure. The processing windows aren't quite the same. And so there's a lot of benefits, right? So that's why we're in it. It's a relatively small part of SS&C, less than 10% of our revenue, but we think it's got a big opportunity and we launched a joint venture with 2 really well-known partners, Humana and Anthem, it's called DomaniRx, where we're seeking to deliver the next generation of cloud-native pharmacy claims processing, and they are both lined up to be big customers, and we've had a number of others approach us. So once again, a smaller business within SS&C with a potential to perform at a high level that would move the needle.

Okay. I'm going to -- anybody have any questions from the audience?

Everybody awake? Just checking.

Can we talk about the alternative space a little bit? Can you size it? What's going on with the hedge funds? And then what's happening with real assets and private equity?

Yes. So we have. This is a big business for us, right? Over $1 billion in revenue. It's been a big part of our strategy for a long time. We're the world's biggest fund administrator, over $2 trillion in assets. We have also, in the last couple of years, added $500 billion in assets, something like that, $400 billion, $500 billion in assets, which is more than if you kind of look at the list of providers, it's more than #5, #6 on that list, right? So it's a really good business. And in terms of opportunity, which I think is the -- in the private equity and real asset space, we still think half the market is not as yet outsourced to somebody like us. These are the firms that started long time ago, they built up their own infrastructure. They've continued to do it themselves. So all of that is available. We think new funds had launched today, invariably select somebody like us. We have, by far, the best business, certainly the biggest business, right? And we're also a little bit different than most of our competitors, which is we run and own our own technology. Many of our competitors use our technology, and we're happy to have them do it, but we certainly think there's an advantage to being able to modify the source code rather than have to deploy some other either ancillary system or go back to a vendor and ask for a change and things like that. It just -- it's a lot more effective. In the hedge fund business, our opportunity is both new fund formation, it's competitive takeaways. We've been steadily taking market share, and we anticipate that, that will continue. And also going deeper into the processing. Most of our clients, even though they have outsourced their NAV production, are still doing their own middle office activity. They're doing pricing support. They're providing support for the trading desk. They're doing the daily P&L, all kinds of internal tests that, increasingly, we get the opportunity to take on. So we feel really good about that business.

And then on the wealth management side?

Similarly, a somewhat smaller business for us. We've got a product called Black Diamond, which is for registered investment advisers. They're kind of method of interacting with their customers, it's where their clients log in to see their statements and self-serve. They also have lots of integration built in with third parties like planning systems and other kinds of systems. And we have software investment accounting software, once again, that we sell out to wealth managers and others. So really good business for us, growing 20% plus, still small as part of the company, probably $150 million?

Yes. $150 million.

$150 million in revenue, but we have high hopes.

Okay. And what about traditional financial services? They tend to be very late in terms of technology adoption? Where are they? And are you still mainly competing against inertia, I guess?

Inertia, but what tends to happen is when the markets come under pressure and we're in volatile environments like we are today, those tend to be catalysts, right, because it forces people to look at their operating environment and force people to look at how they go about getting operating leverage. It forces people to evaluate who their vendors are and the strength of their business models. And we have tended to do. We've been around a long time, 1986. So we've been through several cycles. And certainly, if you look at the financial crisis as one example, we came out of it with increased market share and therefore, had a period of growth following that for a number of years. And that -- I suspect that's sort of what we're going through right now.

Are we still seeing vendor consolidation?

In general, we think our customers would like to have fewer vendors and would have -- would like to have them be more strategic, right? And that's a little bit -- when we acquired DST, we had a lot of overlap in the customer base, but because DST was touching their end clients, the individual investors, they generally had a bigger spend and were more strategic. So we got to have -- we inherited a lot of strategic relationships that we've then been able to do a good job for them and have them buy others of our products and services.

Okay. Excellent. Trying to think how I want to ask this question. So when you look at the portfolio of services you have now, what do you think you will need in 5 years?

Yes. So I think the nice thing about our business is we're -- we have a lot of market expertise. We're in the market every day. We're talking to prospects every day. We're talking to customers on a regular basis as well. And we are actively and continuously exploring where else we need to go, right? So the adjacencies are -- they happen in the normal course of, whether it's go out and buy a Blue Prism or build something like Singularity, they happen every day. Similarly, the product enhancements that we need to have if we need to get deeper into private credit, which has been a big growth area for us. That happens on continuous time. So over 5 years, all of that adds up to a much deeper product set and a much deeper services capability without ever really having to take that or now I got to step off this cliff and I hope there's something soft to land on underneath. It just -- it's a continuous process, and that's worked out really well.

And I think if you look at where we like to maybe see more services that we provide is something -- is what affects the decision makers at our firms. Performance and performance attribution and tax and things that affect the pockets of the LPs and the owners of these businesses. And I think that just makes us all that more strategic and gets our attention.

As we're coming up on time, the final question is, what should the investors in this room expect out of SS&C for the rest of this year and then over the medium term?

We have a really resilient business, one that's been around for a long time. We've had great EPS growth, cash flow growth, all those kinds of metrics for decades, right? So we'd say past performance is not an indicator of future performance other than sometimes, right? And so we -- sometimes -- so we expect to do reasonably well, right? And how well, there's a lot of work left to be done, but the mix of products and services we have and the customer relationships we have, we think, is unique in the markets we operate in.

Okay. Thank you very much.

Okay. Thank you.

Thank you.