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

Good morning, everyone. Thank you for joining us. My name is Andrew Schmidt. I am a research analyst on Citi's fintech research team with a focus on fintech software. It's my pleasure this morning to host Rahul Kanwar, who is the President and COO of SS&C. Thanks, Rahul. Appreciate you joining us.

Thanks for having us. Good morning. .

It's great to have you here. So I think as we typically like to start these things out, there's some people in the room who are less familiar with SS&C, especially because the business has evolved over the years. Maybe just get us up to speed in terms of just the business and the end markets that you serve.

Sure. So SS&C is 27,000 people, 100 offices in 40 countries around the world. Largely financial services, 95% of our business is financial services, 5% is health care. And what we do in financial services is primarily mission-critical back office and middle office and front office services and software. So most of the big portfolio accounting systems that funds use is a big product line for us. We have the world's biggest hedge fund and private equity fund administrator. That's a big area for us. We're also the transfer agent/client interface for hundreds and hundreds of wealth managers and insurance companies. We've got a pretty big financial software business that really goes across banks, insurance companies, broker-dealers, funds. And one way to think about us is we really do 2 things across all these markets. We provide systems that folks use to run their internal operations. And generally, these are essential systems, so it's not -- very sticky 96% revenue retention. Once people put in these systems, they stay in there for a long time, and we have an opportunity to sell products and services around them. And the other thing is, increasingly, and we've been doing this now for a decade plus, we provide outsourced services that use that very same technology but deliver a solution as opposed to them having to run the system themselves. And so we've benefited from the trend towards outsourcing in many of our markets.

Right. Thank you, Rahul. And I think a big question we get is on visibility, especially given the market volatility and everything like that. But maybe when we think about FY '23, if you talk about sort of the puts and the takes and your visibility at this point. For example, theoretically, we should get some health care stabilization. Blue Prism is pretty resilient. But there are macro factors [ that affect ] alternatives, Intralinks, et cetera. So maybe we could talk through kind of FY '23 and how to think about a reasonable framework for organic growth as a starting point.

Sure. So I think it kind of starts with -- and I didn't really talk much about Blue Prism, but I will as we kind of go through this. I think it starts with just what our current revenue base and our current customer base is, and as I mentioned, a pretty high retention rate. So that obviously provides a really good amount of visibility and flexibility. And our sources of new revenue are more sales to current customers. We have some element of price increases, which obviously is better now than it has been. Just simply, that's the silver lining in the inflationary environment, I think. We have new customers that buy one of our products and services or, in most cases, on the larger side, a suite of our products and services that we either operate for them or they operate themselves. And that's really the entire kind of revenue mix and model. There are some macroeconomic things that impact us, like most companies. In terms of absolute revenue, FX has been a little bit of a challenge for us this year with -- particularly with the pound in that we've got a U.K.-based insurance business and wealth business that once again caters to end clients. So very sticky. But when the dollar strengthens, that hurts us a little bit. And we've got a business called Intralinks that does virtual data rooms largely for M&A processes and secure document exchange for a bunch of other different kinds of processes. So depending on what the M&A environment looks like, how many deals are out there at any point in time, that fluctuates a little bit. But by and large, I think the way I would characterize our revenue base is very predictable, very stable. Most of the things that we're talking about impact us really at the, let's say, within 2% to 3%, 4% in either direction.

Okay. That's helpful. And then I think a sort of related question is just on sales cycle given the current environment. I think despite everything that's going on, you've been able to pull through a good number of deals, which is great. But how should we think about the sales cycles and pipelines across each business given what we're seeing in the macro?

We've been pretty pleased with how our business has held up in what's really been a pretty choppy year. So customer retention remains strong. The sales force is out there generating bookings and contract wins and [ verbals ] and all the kind of stages of the pipeline that you would expect to have them track. We have done a lot of reorganization internally in terms of collapsing and simplifying our business. So we have products and services that ought to go together as part of the same portion of our organization with a joint sales force and joint marketing process, and that's worked pretty well. As I talked about, there's a little bit of an impact where when there's a lot of uncertainty out in the marketplace, some people are -- maybe they don't execute quite as fast on a sales decision or something like that or a contract. But once again, I would view that to be happening at the edges of what we're talking about. In general, our bookings and win rates have been pretty robust, and we would hope to see them strengthen going into 2023.

So in terms of the macro, are there other areas that you're watching more closely than others? Like, for example, like -- within alternatives, new fund creation is -- tends to be a big driver. So can you just talk through kind of how macro impacts sort of the business across different business lines and which areas you're watching more closely?

Yes. And I think in specific, the one you raised is a good one, which is our alternatives business. So as I mentioned, we have the biggest fund administrator in the world. It's got $2.4 trillion in assets where we're the books and records and the interface to investors and a whole bunch of other things that we do for these clients. And within that business, there's a number of different revenue opportunities that we have. Some of them are the same ones that I've talked about, which is can we sell more to current clients and then can we win new clients, but it's also an expansion of products and services. It's a taking away of market share from some of our other competitors. We tend to be a technology-led offering. And as the pace of innovation and technology changes in this area, like a lot of different areas, that's created some opportunities for us. I think in this specific macro trend is what happens to new fund formation, what happens to fund flows or allocations to the alternatives industry in general and then what's performance like, right? Because there is an element of AUA-linked fees in this business. And I think what we've seen historically and we would expect to see going forward is this business tends to grow somewhere between 3.5% and 8%, 9%. And when we are in a very challenged operating environment, we might be closer to the lower end of that range. And most times, we're somewhere in the middle to higher end of that range, and that's really where we are. So we're not -- obviously, we would just as soon have a lot of new fund formation, but it's not a huge revenue driver for us, at least in the first couple of years.

That makes sense. So even in an adverse macro environment where we see lackluster fund formation and things like that, we can still think about kind of low single-digit growth. Is that a function of pricing? Is that a function of wins when we think about just like the building blocks of alternatives? Kind of skipping ahead here, but when we think about the sustainability of that growth, if we take away like new fund formation, what does that look like?

Well, I think the -- obviously, pricing and things like that are factors for sure, but I think the most important thing, too, for us is within our alternatives business, we've got a private equity and real assets business. That private equity and real assets business has been growing north of 15% or so for any number of years. We would expect that to grow consistently at similar levels for a long time. A lot of that has to do with how underpenetrated administration is in those end markets. A lot of private equity and real estate firms started out by doing this themselves, so many other functions that we offer are in-house. With labor market challenges and kind of the changing role of technology, that is becoming increasingly outsourced. So our opportunity to go into great big places and either lift out or transform a big part of their operating infrastructure, we think, is a pretty compelling opportunity for us, and that will continue for a long time. So it's greenfield. It's market share. It's the kind of the strengthening nature of our business in general and then if we can get a little bit of help from the macro, right, a little bit of allocations or maybe some return in the markets, then it gets a lot better very quickly.

Got it. Very helpful. And I want to jump to another point that you made just on product innovation. Maybe you can talk about just whether the approach to product development has changed in the past few years. I can think of a few things. I think of Singularity. I think of Aloha, DST. Even transfer agency, you've made some improvements there, which can be a little differentiated versus competitors. But maybe you could talk us through kind of whether there has been a change to organic product innovation in the last couple of years and then if there is an opportunity to kind of improve the stability of organic growth with a steadier cycle of product rollouts.

Sure. And I think the answer to the second part of that is we think there's a tremendous opportunity in building technology and having enhancements. And I would put -- I would sort of answer that through a couple of different views, one being what has SS&C traditionally done versus what have some of the businesses we have acquired done, right? So traditionally, I would say we have really invested in sales differentiators, and that's usually functional enhancements and capability enhancements and things like that. So our alternatives business that I've referred to a couple of times, one of the reasons we went from being a start-up to our current #1 position is because we approached it the whole time as we were going to build software in the form of user interfaces, web portals, mobile apps. And in contrast, most of the market was very much how good are your accountants, how good are your operations people? And we all know there's no substitute for expertise. There's no substitute for human talent. But if you can make the systems better, those humans -- their efficiency multiplies, too. And that's what we've always done. So we bought businesses that have at times approached technology differently than that. And so what you're seeing in what used to be DST, which we now have a number of different businesses that have come out of that, whether it's the insurance business or the retirement business or the brokerage business. Similarly, even in Advent Software, which is a strong software company, been a strong software company for a long time, but the focus has been much more on, hey, let's get -- let's go build a prototype. Let's go get commercial validation. Commercial validation means, in general, somebody is willing to buy it or fund it or -- let's market test it. The build cycles are of less duration than they were in the past so we're not starting to build something and we all convince ourselves that 2.5, 3 years from now it will be this great product, and you've spent all this money, and you never really get -- sometimes it doesn't work out the way you want. But ours are much more, "Let's do this for 3 months, and here's a milestone. Let's do it for 6 months. Here's another milestone." So that kind of discipline to sticking to commercial viability and making investments where the returns are reasonable -- it's not that you don't take risk, but you take risk in a way that can be measured and quantified....

[ Empirical ] way.

Exactly. And we're also doing -- so we're doing a lot of that, right? So that's one part of it. I think the other part of it is there are opportunities within our product set and our service base to bring things closer to other, right? So for example, we own Eze, which is an order management system and an execution management system. We also own Geneva, which is the leading portfolio accounting product for hedge funds. And we have any number of reporting tools plus middle office services and capabilities in our GlobeOp fund administration business, right? So those are now more tightly integrated and more a cohesive joint sell than they've ever been in the past, and things like that help improve it, too.

Got you. Very helpful. Thinking about just some of the trends in the industry, we think about -- this could be marketing or this could be actual adoption. We think about front to back. And you have a product, Aloha, that does that in a single area, which kind of helps automate some of the flows within that. Demand for Aloha is pretty significant, I think you mentioned on the last earnings call, but is that -- are you seeing that demand across the board with the clients or particular types of clients where that's more in demand? Just curious about sort of the front to back trends. Clearly, I mean the lack of siloed data, streamlined workflows makes sense, but sometimes different customers like best-in-class. I'm just curious kind of what the demand is like for -- just for front to back in general and then for Aloha specifically?

Yes. We're -- so we have a number of systems, and Aloha is one of them, and Singularity is another one. But we're, in effect, rearchitecting and replatforming and rebuilding these, so these are brand-new systems. They're single database, cloud native. They -- largely API-driven, all kind of the technical -- lots of machine learning and AI-type applications. So kind of technically modern, right? And they are -- as you can imagine, because that's what CTOs want, that's what portfolio managers want, that's kind of what users want, they're gaining some traction, right? On the other hand, most of our business, and not just ours as in SS&C, but most of the industry is built around purpose-built applications that serve, at a very deep functional level, things that they've been doing for a long time. And there's so much functionality in there that it's really hard to replace all at once, right? And I think the way to think about SS&C is we do both, right? So -- which allows us to capture both ends of the market. On the one end of the market, you have these really deep, broad, complicated systems that nobody wants to rearchitect, right? And what they would rather want to do, honestly, is give it to somebody else and say, "Run it for me. I don't want to do this anymore." And so that's our opportunity because we've got a big services business, and we can take those things and turn them into very large deals. On the other hand, there is a segment of the market, which I think will continue to grow, that would really like to buy these just to use latest technology, and we're building that, too. And so what we've tried to do is put ourselves in a position where we can capture the opportunity in whatever form it materializes.

I see. That make -- okay. That makes a lot of sense. If we could just move to Blue Prism. Maybe talk about how demand has trended for Blue Prism and if you could just remind us sort of the value prop in terms of acquiring it. It seems pretty straightforward, but just for people who are less familiar. I guess when it comes to demand trends, I think the question mark here is, clearly, there's a value add during times of distress. You had more sort of automation for capabilities, and maybe you can reduce your cost base. But we've also heard that during time of distress, the companies just cut back all together because these are fairly significant projects. So maybe you could talk us through kind of just the rationalization for Blue Prism and then kind of the demand trends you've been seeing within that context.

Sure. And so once again, Blue Prism is robotic process automation, machine learning, artificial intelligence, really a tool set that seeks to complement the human workers that we all have with what they call digital workers, right? And there's lots of success stories. There's pretty big organizations where they have transitioned to 20%, 30% of their workforce is Blue Prism digital workers. So it does lend itself extremely well to a lot of different kinds of processes, but in particular, things that you're doing at scale that can be mechanized. And so we've owned Blue Prism since April of this year, I think, and demand has remained strong. I think Q3 was a good quarter for us with 16% growth, something like that. And so our thesis and really some of the things we're excited about going into it are that we have, at SS&C, a company of experts, right? We've got 20,000 customers where we're deep in their operation. We're either providing services or software that is deep in text, deep in regulatory, deep in investor analytics, dealing with industry bodies, doing portfolio accounting. Complicated things, right? So a lot of times, what makes these automation software-type things successful is, do you have the knowledge, right? Do you have specific use cases that you can help architects so that you can go to somebody with that problem and say, hey, I solved it already, right? And so that's really what we're working on, whether it's in know your customer and AML-type applications, whether it's in fund administration and reconciliation-type applications, we are building applications with Blue Prism that we think give them a way to sell even deeper than they have. So we expect that -- we don't -- we think with the labor market -- and the labor market is stabilizing a little bit, but it's still plenty of moving parts, right? And folks are looking for some opportunity to, with rising wages and inflation and things like that and really just for efficiency and accuracy and timeliness and to create better jobs for the people that work there, to use some of these technologies. So we think that, that demand trend is going to continue to stay strong. The things that we're doing will make it stronger because we'll have more pointed use cases that folks can use. And then the other part of this, which is for us internally, we're 27,000 people. We run large workforces that do outsource services. We have lots of tasks that lend themselves to this kind of technology. So internally, we're a pretty good use case for Blue Prism as well.

And where are we at with the integration process, both in terms of integrating sales forces and also using Blue Prism internally?

I think we're getting started. We're -- so today, there's probably a couple of hundred digital workers that are being deployed in different parts of our business. We do expect that, that will go from a couple of hundred to a couple of thousand next year, maybe by the end of the year. So that will be pretty powerful. And we think this is a trend that builds on itself. We gained some momentum, and it kind of goes from there. From a sales standpoint, the process of cross-selling to SS&C clients has already begun. We've had a number of deals where folks have bought different parts of our service, including Blue Prism. And the process of integrating and embedding AI and Blue Prism in -- specific into our software technologies, we're just getting started. So there's a lot of exciting stuff here that we expect to be able to do over the next 12 to 36 months.

Got it. Very helpful. And then kind of tied to that is just sort of margin expectations. And we talked about revenue visibility for 2023 earlier, but -- and some of this is a function of top line growth. But what's the right way to think about margin expansion in 2023? Like should we expect margin expansion? Are there costs that might weigh things down? It seems like the exit rate is pretty optimistic in terms of being able to expand margins in 2023. You have Blue Prism coming in. You have the labor cost, which is a big hit this year. If they stabilize potentially, that could bode better for next year. But what's the right way to think about margin visibility as we go forward?

We're really very optimistic about our ability to control costs, right? That's kind of -- personnel is the single biggest expense we have, and that's not to say that, that's not going to remain a really big factor for us. But what we have found in these technology initiatives is a way to manage that, right, and optimize it in a sense. So really, what things like Blue Prism do is it's a catalyst for not only folks to look at how do we deploy some of this technology, but also how is the rest of the business set up, right? So there's 2 ways to solve a problem typically. So if you're doing a reconciliation or something like that, right, one is you try to figure out, okay, when I compare this to this, how many differences do I get? That then human beings have to go solve. So what Blue Prism does is it says, "Okay, when you compare this to this, you get 200 differences," and a human being does these 8 things, and we're using software, highly trained software. Out of those 200 differences, we can do 160 for you, right? The other way to do that is to say, why do I have 200 differences in the first place, right? And what can I do at the root cause? And that -- so we're doing both of those things. And as a result, the folks that run the businesses within SS&C are pretty optimistic about what headcount looks like for them and what personnel cost looks like for them, which then gives us a fair amount of confidence in what we can do with margins.

Okay. That's helpful. And then just switching to everyone's favorite topic, which is capital allocation and M&A. It's -- recently, more recently, there's been more tuck-ins a part of that, is the debt market part of that valuations. So I guess maybe talk about just the M&A philosophy heading into 2023. Are the valuations starting to get rightsized? Are there larger deals to go after? I guess what's the right way to think about just the M&A strategy? And then I guess just to add to that, I mean, it seems like there's been a little bit of a shift to go after growth assets maybe versus some that are a little more value-oriented. Talk through that philosophy as well in terms of the M&A strategy.

Sure. I think what we've always tried to do is just calibrate how much M&A we're going to do at any moment in time, depending on what the economic environment is, what's going on in our business, and where do we think we have -- where we can get the maximum return, right? So where we are right now, given some of the factors that you just raised, with kind of interest rates seemingly staying at somewhat high levels, right, or more than somewhat high levels, and in general, not a lot of lending available and things like that, is there isn't as much of opportunities out there, right? There are not as many deals out there. Folks are -- if they can delay their plans, then that's what they're trying to do. So obviously, we're in that same environment. We do look at opportunities every single day, right? I think we will continue to be interested in things that complement our products and services. And at the right opportunity, we might even do something more transformational or bigger than that. But really, right now, we feel pretty good about the set of assets and capabilities and services that we have. There's a lot we're doing internally. There's a lot we can do from an organic standpoint. And so we're focused on driving our business. And in the absence of M&A, we'll continue to do buybacks and pay down our debt and continue to put us on a really good financial footing. And then if the right deal comes along, I think you'll see us be -- execute it in a pretty confident way, like we have in the past.

Are there still opportunities in the fund admin side? Or are -- is it more blocking and tackling there? Just curious in terms of the environment there. Just consolidated -- just curious if there's more opportunity there.

I think there are more opportunities out there. And I think the opportunities are both some of the smaller tuck-in type opportunities, which give you a specific capability in a market or a -- some segment of either geographical presence or some niche in some particular kind of asset class or fund structure. And then I think there are some larger opportunities because some of the trends that we're talking about here do impact the global servicing banks as well, right? So their ability to hire and deal with inflation and keep on -- keep current on technology and deal with regulatory pressure at the same time is a challenge. So we do think that there will be a number of larger deals that become available that we'd be interested.

Okay. That's helpful. And then the flip side, I know that we discussed this before, but how do you feel about the current portfolio? Is it -- we've seen kind of a trend for other companies in the space kind of clean up a little bit via divestitures. Are there things that don't fit as well as they used to? Are there opportunities for divestitures? Or kind of more or less happy with the structure of the portfolio today?

We're not actively looking at divesting any part of our business. One thing -- history being what it is as a predictor of the future, we've never sold anything in our entire -- but that's not to say that we're not commercial and reasonable. And if somebody shows up with a big checkbook for something, hey, we're trying to do what's best. I think the thing about the portfolio of products and services is really some of the efforts that we have made to link them together, to integrate them, to make sure it's not only a joint sell, but it's also a -- they operate as one and some of what's happened with technology, with web portals and mobile interfaces and things like that, it's easier to do that, right? So what you have is micro services operating in the background that are specialists and calculating specific kinds of things, but the client gets served up one user interface. That's made it easier for us to tap into some of the wells we have, the functional wells. So we feel pretty good about the portfolio.

That's great. Okay. And then a question on labor costs. Obviously, that's been a big issue over the last few quarters. Where were you seeing the most labor costs? Was it implementation? I don't think it was sales, but implementation. Was it general R&D? And then it seems like, obviously, given all the headlines out there, the labor market seems to be stabilizing a little bit. But what are you seeing in terms of your specific labor pool?

I think consistent with that, right? So where we saw inflationary pressure, and for the most part, was one is what kind of job, and I would say, technical jobs. So software engineers, computer programmers, those kinds of things. We actually saw an inordinate amount of pressure in our fund accounting business, so private equity fund accountants and things like that. And so that was a part of it. The other part of it was region-specific. So we have a pretty big workforce in India. And India has always been somewhat inflationary, but more so the last 18 months than it's sort of ever been. But we're seeing all of that settle down, right, starting to return to -- I mean you see headlines every day about tech firms saying they're going to pull back on hiring and things like that. And that kind of goes all over the market, right? It means more people are available, and our opportunities to hire are greater. So we're definitely seeing labor costs and the rate of change of labor costs settle down and start to approach what we would view as historically okay for us.

Okay. Got it. And then I guess just jumping back to alternatives and focusing specifically on the hedge fund business. I agree that there's tremendous opportunities, still, private equity, real assets that are tremendous and underpenetrated. Hedge funds, the penetration in terms of middle and back office is a little bit higher. So which sort of -- there is some greenfield, but means it's more about winning new deals to come up and competitive takeaways. So I guess the question is, has the competitiveness changed at all in the hedge fund sort of fund admin space? I guess, particularly sort of -- maybe you're less focused here, but midsized funds, for example, where there might be some overlap. How would you characterize the competitiveness there?

I would say that, that combination of Eze front end; Geneva as a shadow accounting/middle platform for somebody that wants it; the fund administration business that we have kind of added things like CORE and SightLine, which are data processing and business intelligence tools; or Algorithmics that we acquired a couple of years ago, which is a risk process, makes it so we have a very deep and very broad servicing capability. You put against that a backdrop where some of the labor market challenges and other pressures have meant that service levels at some of our competitors are not as high as they were even a couple of years ago. So there's some inherent dissatisfaction. And we can do this at scale. We don't believe there's another fund administrator that operates at 40% margins like we do, right? So financial scale, compelling product offering, the biggest business. The competitive opportunity for us to win in RFPs is better than it's ever been.

Okay. That's good to hear. I think if we just jump to the health care business, this tends to be a less understood part of the business, smaller part of the business, admittedly. But what are the components of that between kind of -- I think it's medical and then prescription claims process. Maybe describe kind of what you do in the business and then your visibility on stabilization for FY '23.

Sure. So we do -- similar to what we do in financial services, really, we facilitate the transaction, right? So when you -- we're a prescription benefits manager or a pharmacy benefits manager, and we're also a medical claims processor, right? So that means that our software is what makes the transaction work from the time somebody goes to a pharmacy and hands over their prescription. The formulary that the pharmacist checks, the method of payment and settlement, all those things happen through our systems. So what we're trying to do in our health care business, what we're working on actively is we're building a brand-new system that is cloud native, API-driven, kind of all the buzzwords, right? And that's driven in part by Humana, which is one of our biggest customers, and Anthem, now Elevance, that we have partnered with. So we set up a joint venture with them to rearchitect functionality that we already have and things we do already but in a more modern way, which then unlocks for them the power of the data that flows through that system. We're working through that process. It's a multiyear process. And we feel pretty good about, given the amount of incoming that we have and the amount of interest we have and people either wanting to learn more or potentially partner with us or things like that, we feel pretty good about the end results. In the meantime, we're -- our core business, we still have to have sales and marketing. We still have to have high levels of client service. And those are the things we're focused on.

Yes. I think there's a real lack of modern solutions out there. So when that gets into the market, it will be interesting to see what happens.

Yes. For sure.

Maybe just before we sort of turn over to you for any closing remarks, just talking about sort of DST financial services. I think you've done a good job stabilizing the business. What -- is there more that needs to be done? I guess what are you doing from a product perspective, from a go-to-market motion? Some of this is just the end market itself through the transfer agency. But what's controllable versus what's not?

Sure. So I think the biggest change that we've made is we kind of have very focused business areas that are targeted towards particular types of customers and things we do. So GIDS, which is obviously a big piece of this, is our transfer agency business. It's also where we do end client management for big wealth managers and things like that. And it's a -- it's sort of a -- we're building new products. We have big customers. We have big wins that are in the backlog and implementation phase that we expect to have revenue, right? And that helped mitigate any macroeconomic kind of challenges. The other parts of that are our retirement business, which is we have at least 3 big customers that we're currently implementing that we expect to help us in 2023 from a revenue standpoint, and then a pipeline that kind of builds off of those big wins, right? So we feel good about that. Brokerage is a strong business and we think made stronger by our alternatives focus because liquid alternatives is a really big kind of trend in brokerage. So to answer the original question, I don't think there's anything really big that we need to do. The reorg things, the technical things. I think we're much more in steady state. We need to execute at a high level, but not very different than the rest of our businesses.

Okay. Very helpful. Anything you want to close this out with?

Yes. We really -- we appreciate the interest. It's nice to be able to do these things in person. I would just say that we feel very good about where we are given a choppy macroeconomic climate. We have a strong business. We're producing a lot of cash. We're -- remain very profitable and very predictable from a revenue standpoint, and we think we're strengthening going into 2023.

Great. Thank you very much, Rahul. Good to have you.

Sure. Thank you.

Thanks a lot. Thanks, everyone, for joining.