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

I'm Dan Perlin, I head up the payments processing and IT services practice here at RBC. And I'm delighted to have the team from SS&C, whom we've been long-time friends with. And so thank you for your support. We have Patrick Pedonti. Patrick is the Chief Financial Officer, and we have Justine Stone, who heads up Investor Relations. I'm sure many of you, you know the story. Probably know both, certainly have had time spent with Justine. So thank you both for being here. It's great to see you.

And the question that we are starting off with, not surprising with everybody, is just to kind of walk through demand. What you're seeing? Kind of are there nuances that are occurring in any one of those areas? So what I thought we would do is just go around -- like rounding out the horn literally. You've got a lot of businesses now. If I had done this discussion with you 5, 6 years ago, it'd be a little bit of a shorter discussion, but now it's a little bit more complicated. So I thought we would just start off with, what are you seeing as we think about alternatives? I know -- with the growth organically decelerated a little bit in the quarter, but like what are the dynamics that you're seeing? And then I'll just take you through each one of the areas.

Sure. So we've seen strong growth in our alternatives fund administration business where we're providing full back-office services for hedge funds and private equity funds. I think last year, the business grew 12%. We had similar growth in the first couple of quarters of this year. And then we saw a little bit of deceleration in the third quarter where it was growing 4%. What we're generally seeing is we're seeing clients continue to buy services. So we're winning new business. What we typically see in this kind of market environment where you've got declining equities and declining bonds and political issues in Ukraine is we're seeing a little less favorable market environment. And as a result, our total assets under administration are kind of staying flat. And the big factor between growing high single digits and growing 4% is that a lot of clients -- a lot of our clients in this environment are not launching new funds. Now once the market stabilizes and we get a little bit -- we don't need the market to go up 20% for our business to grow. But if it stabilizes a little bit, people have more favorable sentiment of the market, customers launch new funds, then we should be back growing in the high single digits.

The fact that the assets under administration are actually flat is actually pretty encouraging when you consider the down-market draft that you've had. So like what are some of the things that you're actually doing to offset the otherwise drawdown effectively that we've seen in the market so far?

No, you're right. I mean -- I mean there's a couple of things we're not seeing in this environment. We're not seeing blow-ups in hedge funds. So hedge funds closing down. We're not seeing those kind of activities. But what we're doing is we're able to replace the downdraft we're getting through the market AUM decline by winning new clients. So we're still winning new clients and we're holding kind of the assets flat.

Okay.

Competitive takeaways. And at our existing clients, we can sell more services to our existing clients. And depending on the type of client and how much they've outsourced with us initially, it could be pretty significant.

Yes. That's awesome. So you're finding that there's more opportunities because your product set is available now and some of the things you've been bringing to market? Or do you think it's -- that they maybe need some of those incremental products now in the current environment to maybe better prepare themselves to be competitive against others?

I think our clients want to outsource more of their back office. So we might do their portfolio now and do NAVs on the portfolio and they decide they want to give us investor services too, and we do redemptions and subscriptions, and then they might want us to do tax work or things like that for them. So I think most clients gradually outsource more of their back office to us over time.

Yes. No, that's been a trend for you guys for a long time, I think.

Yes.

It just -- it feels like maybe...

And the other thing that's happening is the part that's growing faster are private equity firms because they're quickly outsourcing their back office. Where hedge funds are, for the most part, completely outsourced, private equity funds aren't. And our private equity business, even in that quarter, still grew in the mid-teens.

Yes. I know that for a long time, there was a period when we were talking about private equity had an opportunity to have a real acceleration as some of the founders kind of move on and the next generation comes in and so on and so forth. Not to harp on the issue, but like do we feel like that's in our purview over the next several years? Or is that still a little ways off as you talk to those clients?

No, we think that's starting to happen. I mean the very large hedge funds are gradually outsourcing parts of their back office, like they might have some specialty credit funds and they'll outsource that because they don't have any expertise. So even the large private equity funds are starting to outsource portions of their back office.

Okay.

The environment, too, with wage inflation and a difficult labor market in hiring people can all be catalysts as well for more outsourcing. Not just in our alternatives, but throughout the entire financial services industry.

Yes. Cool. One of the things that's held up incredibly well and I thought it was pretty resilient here was Advent. There's other stars in there, but that one held up almost flat, considering. So what are some of the dynamics there? Here again, I think of like wealth management and those kinds of businesses when markets are difficult, like advice all of a sudden becomes more valuable as opposed to like when you're in highly correlated markets, everyone is kind of so smart, they don't need advisors. But that changes a lot, and I think we saw a lot of that in the beginning of the year. Is that playing into this part of the business or not so much that, but there's something else that you've managed?

Well, I think what we're seeing on our software business, where we're selling software to clients, is we're not seeing any demand slowdown in this environment. Like you said, it's still growing 7%, 8%.

Yes.

So we're not -- typically in these type of environments, you see clients kind of like back up a little bit, delay implementations, but we're not seeing that at all. And then the Advent Group has got a big segment in RIA. And RIAs continue to grow in the mid-teens.

Yes. So that outsourcing trend from an RIA perspective feels like, irrespective of maybe where the markets are going right now, assuming it's not going to be draconian, are actually a big tailwind for you guys.

Yes, because more and more of -- in spite of assets going down, at RIAs, more of them are outsourcing their back office.

Yes. Yes. I hear you. All right. What about DST Financial? This one seems like it's getting better, but it's still under pressure. How do we think about the trajectory on that business as we think about maybe the next several quarters or your expectations for it?

Yes. I think -- there are 3 pieces to that DST Financial Services. There is -- the biggest piece is transfer agency work for mutual funds and ETFs. Then we have a retirement business where we do 401(k)s and IRAs. And then there's the asset management business. So the biggest decline we've seen is in the asset management business because assets have gone down 15% or 20% and the fees have gone down 15% to 20% as a result. The retirement segment, which we see a lot of opportunity and continues growing. So that's growing in mid-single digits, and a lot of firms are looking for a better provider in that space. Where we're seeing a little pressure with the business is the transfer agency. That typically has built a number of accounts -- number of mutual fund accounts. In these type of downturn markets, you typically see less accounts. People close accounts. You don't see people open new accounts and do new investment. So we grew like 2% last year, we're seeing about a 2% decline this year.

Got it.

But we've got some opportunities in our backlog that could help the growth next year.

The one that has really taken off as of late is this I&IM, as you refer to it, which I think was up almost -- was it 15%?

15%.

When you adjust for things. So that had a material uptick from mid-single digits when you adjust for certain things. Why is that the one that's kind of winning over clients today? I feel like it's a little bit new for you guys, too.

That business is large-scale institutional asset managers and insurance companies. They've been really slow to upgrade their technology. A lot of them are running technology 20 years old. And this year -- last couple of years and this year, we've introduced 2 products to upgrade our current products into Singularity and Aloha. And both products, they're faster, better interface, more modules integrated. And we've seen an uptick in purchases of institutional asset managers buying new technology.

Yes. So that's not just kind of client-specific, that feels more like a broader trend that hasn't happened yet and now is starting to take place.

What do we have, 25 new clients?

I think Aloha has almost 30 new clients, about 1/3 of those clients are new SS&C.

Completely new, right?

Completely new. And the ones that are upgrading, the price increase we get from the old technology to the new technology is significant. It's anywhere from 30% to 150% increase in price that we get when they choose to go on the new technology.

Well, so not only you win new clients in that example, but when they choose to upgrade into that, it's a much higher price point for you guys.

Right.

Unit cost to process all that stuff is not really changing relative to that. That's a real price increase, right, fall through?

Right.

That's right.

Yes. Yes. The health care business has kind of been your Achilles feel for a little while. Obviously, you have some clients that haven't yet fully kind of rolled off. Tell us about when that crossover point can actually start to take place, and then we can start talking about flat to potentially positive growth there.

Yes, sure. So we -- when we bought DST, we got their health care business. They were in health care business, both medical claims and pharmacy claims. It's a pretty good business. I mean it's all automated. There's good growth in the market. Medical claims and pharmacy claims probably have grown 5% a year in the U.S. What we've seen is -- I think DST has some fairly old technology that they hadn't upgraded. And as a result, we've lost a few clients, which this year impacted revenue by about 20%. The health care business is only about 6% of our total revenue, but it's had an impact on our overall growth. So what we did last year is we partnered with both Anthem and Humana. We started a JV to develop a new platform for pharmacy claims. And so we own 80% of that JV and each one of Anthem and Humana own 10% of that JV. The projects are going well. It's basically on time. The plan is -- Humana is an existing customer already today. So the plan is Humana will move to a new platform gradually over 2023. That won't add much incremental revenue. But then the potential in 2024 is that Anthem moves to the platform, too. And they're just as big a client as Humana and with significant -- then we see some significant growth back in the business.

Okay. So we still got to kind of work our way through. It seems like it gets better throughout '23, but then in '24, there's actually an opportunity of that?

I think '23 probably won't be a headwind. It will be fairly flat year-to-year. And then the growth opportunity would be '24.

Yes. And you say, it's not a big piece of the business, but it seems like it gets a disproportionate amount of attention.

Disproportional amount of attention.

In terms of our conversations. I totally get it.

Yes, because if you look at -- I mean we're basically the financial service investment, right? And the health care business has had a big negative impact on us this year on the top line growth. But if you take care of -- if you ex the health care business, I think our financial services business will grow over 3% and 3.3% this year, which is pretty healthy in a market that's down 20%. So the business is hanging in there pretty well.

Yes. Yes. We're almost done rounding out the horn. See, this is business is a lot more complicated than it used to be, we know. So for Eze, if you kind of take out the onetime partnership revenues and stuff like that, I don't know, 4% versus maybe 7%. So it's down a little bit, but not a ton. How are you feeling about that business? What are some of the dynamics at work that we need to be mindful of?

We like that business. I mean it's -- when we acquired Eze, it was mostly targeting hedge funds. And the real growth opportunity in that market segment are asset managers -- traditional asset managers, which is where like Charles River compete. And I think that -- we've been developing a new product to go after the asset manager segment. And that's been providing the vast majority of the grower. But that business can fluctuate because it's price -- you pay a software fee and then you pay for trade. So if you've got -- if your clients are trading low during that period, you get a little bit less revenue.

All right. Then the last one is Intralinks. I'm assuming just a downdraft there is a function of M&A activity period of time right now. And as that picks up to the extent it does, then that business will pick back up. I mean I don't know if there's a lot of incremental client wins that might be able to overshadow some of that?

It's a great business. I mean when we bought Intralinks, a lot of people were scratching their heads, why we were buying Intralinks. But I think that business, since we've owned it, has probably average high single-digit growth. Last year and early this year, it was growing in the mid-teens. It's got operating margins in the high 40s. And we're starting to diversify the business out of just M&A, where we're providing secure data rooms to alternative asset managers and banks and security firms. Alterative asset managers, when they provide information to LPs, in a secure data room. So that piece is growing fast and it's now 30% of the overall business. But -- and in spite of the slow M&A market, it grew 7% in the third quarter.

Yes. No. I mean it was pretty reasonable considering all the things that went down. If we think about just regionally for one moment, U.K. versus kind of Continental Europe versus APAC, what can you tell us about the slotting differences between each one of those in terms of demand? Like there's a lot of concerns, obviously, over Europe right now. I'm interested to know what you're seeing and hearing from clients there. You said you're not seeing kind of a lot of pullback or elongated sales cycles and yet everyone seems to be worried about those geographies.

Yes. We're not seeing much difference in our overseas markets that we're seeing in the U.S. I would say that -- I mean we're mainly -- we're in the U.S., we're in London, Singapore, Hong Kong, Australia. These are our main markets. And we're seeing a little bit of weakness in the U.K. because we have a lot of transfer agency business there in the U.K. We are seeing lower account volumes and things like that because of the conditions there. But we're not seeing a whole lot of difference between the markets at this point.

Okay. We get a lot of questions on Blue Prism as of late. I suspect you do you as -- you do as well. So I guess, 2 things. One, what really attracted you to this asset? I mean you bought it in March, so you've had it for a little bit. And then how do you play this dynamic of like outward growth opportunities with clients but also seemingly bringing this in-house to create some cost efficiencies within the organization? So it seems like a pretty important deal, but it has kind of 2 fronts to it, which normally your acquisitions don't.

That's right. Well -- I mean we -- I think Blue Prism came into play because they got a bid from a private equity firm. And even the private equity firm thought they were undervalued, obviously. And we thought it was a pretty reasonable price for a company that's growing in the mid- to high teens. I mean they were losing money, but they are growing fast on the top line. And they had -- 50% of their clients are financial services firms. So that fits well into our markets and the markets we address is that a lot of financial services firms, especially banks and investment banks have big back offices, have wage inflation like the rest of us that need to have productivity improvement and are using automation software in their back office. So we thought it was a good fit that we could bundle that technology when we sell clients back office portfolio systems. And we run big back offices. I mean we have 18,000 employees that run back offices for investment firms. And we work hard to improve the margins in that business, improve productivity. And we thought this was a good tool to improve productivity and client service to our customers. And your -- we've always thought that -- we've always been a company that likes to own our own technology that we use because that gives us -- we're able to protect our markets better, gives us price characteristics. So we thought that was a good technology to use -- to own, to use in our own back office and to sell to our existing clients.

Now you've talked about this kind of stated goal of being able to drive revenue growth while exiting this year with margins, I don't know, kind of near historical averages, which would put you in the 40-ish kind of range. How important is Blue Prism to that on the cost side in order to achieve that? And then secondarily, what are you doing on the revenue side? Is it pricing? You talked a little bit about that earlier, but like what are some of the other attributes that are going to make this kind of dual mandate come together for you, especially as we're kind of exiting this year and jumping off that next year?

Yes. I think -- well, I think a couple of things. If you look at our own operation and using Blue Prism in our own operation, we think that we can probably improve our operating margins by somewhere around 100 bps -- 80 to 100 bps by using that technology. And we need to do that because where we've traditionally seen 3% or 4% wage inflation, now we're seeing 7% or 8% wage inflation. And we've generally offset wage inflation with our productivity improvements internally with super margins. So now we need to kind of double our efforts and Blue Prism gives us a path to do that. On the top line, we think there is -- Blue Prism is a fairly small company, 1,000 employees and sales coverage in the U.K. and the U.S., but that's about it.

I really didn't mean Blue Prism so much with the top line as I did for costs. But there are other things that we need to be mindful of, like broader price increases. It does sound like you're pushing those through a lot of the products outside of Blue Prism and into other areas. It sounds like they're sticky, which is interesting in the current context because it would seem as though you get some pushback, but I don't know the extent of these price increases. So maybe if you have any measurements, it would be great.

Sure. So it depends on the market segment. But in our software business, it's about $1 billion a year and about -- I think about $200 million of that is maintenance and those contracts have built-in price increase that's tied to CPI every year. So as those renew this year, they're getting 7% price increases or more. On the software deals, our software deals tend to be 3-year deals. So the price increases can be implemented when the contract renews. So theoretically, 1/3 of them renew every year and it fluctuates. But -- and we're implementing about 7% price increases there. And that's going fine because I think clients are happy. They understand there's inflation. And the last thing they want to do is swap out systems.

Yes, especially now.

Especially now, right. So -- I mean I know the software we're using internally, we're getting price increases, too, but it's not like we have a whole lot of choice. We're fighting as much as we can. On the fund administration business, it's not built into the contract. It's negotiated. That typically has been pretty flat pricing over the last 10 years. Hasn't gone up, hasn't gone down. And this year, we're starting to implement price increase one by one through the client base. And we started that in June or July. And we think it will take about a year to get through the clients and to get the price increase. But I think it will be in that 5% to 7% range when we finish. Other small businesses, you know, we're doing typical stuff. You send a letter out and price goes up. But the one that's hard is the transfer agency business. That's a very competitive business, very price-sensitive, sold to mutual funds. They have a lot of cost pressure. We have very long-term contracts, 8- to 10-year contracts, in that space. So that will be more difficult for price increase, but we can probably get price increases in 2/3 of our business.

That's pretty good. But in aggregate, so like some of the companies we follow, it feels like they've had a tsunami of input cost increases, and they've just not been able to pass on price increases to the same extent. So they're kind of like on the wrong side of history right now, even though they're good businesses. It doesn't exactly sound like that's really what's happening to you. I mean the 7% increase in the front end for a pretty big chunk of your business is pretty significant. The fact that, that sticks and then you've got some other negotiated ones. So I guess the question I'm trying to figure out for you in comparison to some of our other companies is like, are the input costs greater than what you're able to pass on right now? Is that a wide margin? Or are you actually still able to take prices enough so you can offset those? And that benefit may actually last you through '23, quite frankly, as you just pointed out some of the duration of these contract lives.

Yes. I mean if you look at our cost structure, we're -- our cost structure is personnel, facilities and IT infrastructure. There's nothing else, right? So we're not seeing, I think, inflation that -- in a lot of our costs except for wages, which is about 60% of our costs. So this year, it's probably going up 7%. So overall, it's affecting our cost structure maybe by 5%. And I think we can offset that with productivity improvements and price increases.

Right. So that weighted average contribution is actually kind of neutral when you put it all together, which is better than most, I think quite frankly. Okay. Let's talk about leverage and debt structure for a minute. We get that question fairly often as much as -- we didn't use to. But the 3.5 turns levered on a net debt-to-EBITDA basis, your target, I think, is still plus or minus around 3-ish. Seems like you're moving in that direction, but you've got a lot of variable rate debt. And so the question is like how fast are you planning on paying that down? And then how does that dovetail into some of your capital allocation decisions given that level of variability?

Yes. I mean -- our priority, and you can look at us historically, has been to use our free cash flow to do acquisitions. And then when we do the acquisitions using the cash generated, we will not be able to pay down the debt and get our leverage back down. That's been our overall strategy. The M&A market right now is pretty slow. People haven't really reduced their price expectations at this point. We're just delaying. The credit markets are not terribly reliable. One day, they will open and the next day they're closed. So that's a risk. So I think in the near term, though this stabilizes, we'll do some small tuck-in acquisitions. We might spend $100 million or $200 million a year doing small tuck-in acquisitions with our free cash flow, which is over $1 billion. And then we'll allocate the rest to stock buybacks and pay down debt. And I agree with you, like today, you're like looking well, interest rates are going up, maybe we should focus on debt paydown, but we think our stock is really undervalued at this point. And as a result, we're going to allocate more of our free cash flow to buy back stock in the near term.

Okay. So that trend should continue for a while.

Yes.

Okay. Just last one, we've got just maybe a minute left. I wanted to just ask you about the revenue retention rate. It's been pretty consistent for a little while now, 96.5%, plus or minus. The question really is, can you get that to 100%? Or is it always going to be in this 96.5% range? Like is there a certain amount of churn? Are you going to be able to get to a point where maybe some of these things that have been putting pressure on your revenue retention rates go away and then all of a sudden now you're closer to 100%? I just don't know if, structurally, that's how you think about the business?

Yes. If you look at us over a long period of time on retention rates, we've been in the range of, I think, 92% to 96.5%. That's been our range. And so we're on the top -- we've been hanging in on the top end of that range for the last 2 years.

Definitely.

And I think it's a testament to our technology and our customer service and that our competitors are weakening because a lot of them don't have good technology, don't own their own technology, and we do. So I think that gives us a competitive advantage. I think we're always going to have funds closed down, we're going to lose some of the competition based on price. There are some people that are lowballing price, and we won't go there. So we'll lose the competition on price sometimes, and that's fine with us as we're not going to deteriorate our price structure. And we'll have some fund closures. And I think that 96%, 97% has probably [indiscernible].

Okay. Well, look, we're out of time. But keep fighting a good fight. When the market comes back, things will be better. But thank you so much for being here today. Really appreciate it.

Thanks so much.

Awesome. Thank you.

Thank you.

Thank you.