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

Good morning, everybody. We're thrilled to have Bill Stone, Chairman and CEO of SS&C., real privilege to have him help us out today at our tech conference. Background, I'm Kevin McVeigh. I cover vertical services, software here at CS and thrilled to have SS&C under coverage. What I'd like to do is start out with a little Q&A. I'm going to sit down a minute and try to keep this as interactive as possible. So I'll start with a couple. And to the extent anyone with any questions, please feel free to raise their hand, but I'll periodically open it up to the group as well.

So Bill, thanks again for your time. It's thrilled to have you here at the CS conference. I think I asked you the Same question, I started with last year, but going to start again because I think it's so relevant. You started the business in '86 with $86,000 of revenue, and you've built it in excess of $5 billion over that time within LBO in between. I want to talk about the competitive dynamics of the business, what you saw when you initially did it and really helped, I think, the audience understand what I think are really competitive moats in the business. And I see a lot of dynamics in terms of how you've aggregated the company relative to competitive dynamics that just make you very, very difficult to displace. But what I wanted to do is that's not a 2-year build. It's been a 25-year-plus build. Just to understand the dynamics around that and maybe some of the more pivotal transactions Intralinks, obviously, Intralinks' DST in 2018 and then maybe more recently in Blue Prism?

Yes. So thanks for having me. It took me a few minutes to find this place. I went to Track 6. I went to Ballroom G. And finally, there was Ballroom H. I appreciate that. A lot of you weren't even around when I started this business in 1986. But I started in and we were selling broker-dealer systems, and I had worked in a broker-dealer and I knew that pretty well and something in October of '87 happened in the stock market, which was at about 2700, fell 600 points in a day. So if markets we now 33,000 or something. So if it was to do the same thing and it would fall 8,000 points in a day. So you know the magnitude of what happened is pretty dramatic. But what SS&C was always based on was somewhat on an expertise scheme. I had been fortunate enough to work for the CEO at the broker-dealer, and I work for the Head of different practices at KPMG. And I learned early if you could get your losses, the information they wanted one of the -- how they wanted it that you'd be pretty popular. And that's kind of how we have based the business. And we did some smart things. We raised some capital in 1990. My board was against it, said that the valuation wasn't high enough and I'm said they're going to put $4 million in my bank account. Are you crazy? I'm taking it. And ever since in 1990, we've always had plenty of cash. Companies don't go out of business because they have a low stock price. They go out of business because they run out of cash. So you kind of got to be careful about how big your eyes get when you start to do different types of things and acquisitions, and you've got to be a little bit wise about how you raise money with your equity. Because you're dealing with the PE firms, the venture capital firms and the bankers, and they're all really smart and they're also really good salespeople. So if you're not careful, pretty soon, you have sold all your equity. Once you sold all your equity, I'd say tell people when I give speeches to -- to college kids that you sell all your equity, they -- they don't call you owner anymore. They call you employee. So you've got to be wise about when you take money, how you take money and you can't take every opportunity you have, you have to take the best ones and you have to pass on a lot of them. So we bought -- we bought Financial Models Corp. in 2005. They were based in Toronto, they were going to merge with Linedata out of Paris. And a great thing about Canadian takeover rules are very similar to U.K. takeover rules and I'll get to Blue Prism, which we just recently did. But they exposed to price. So Linedata and FMC are emerging at $12 I said man, that's a bargain. So we ended up paying [ 17 ]. But -- and we got $55 million in revenue. We paid $165 million, so a little over 3x. We're making $11 million in EBITDA. So we paid about 15, 16x EBITDA. By the end of the year, this was April of '05, by the end of the year, they were doing $34 million in EBITDA and by first year anniversary, they're doing $44 million. So we're doing $44 million in EBITDA. We paid $165 million. So it's 4x. Similar when we bought DST in 2018, they were doing $400 million in EBITDA. Now they do $900 million in EBITDA. And we didn't grow as fast on the revenue line on DST, but we have $900 million more in EBITDA. So we have flexibility. We have optionality. We have ways in which to pounce when we see something that we like, and we liked Blue Prism. And this is in there. They got to publish their price. We thought, again, it was expensive. Blue Prism was expensive for us but it was 6.5x revenue, I think, which is high for us again, but UiPath was ran selling at about 20x revenue. and automation anywhere was similar. So we thought Blue Prism was relatively a bargain, and then they weren't making any money, but they make money now, and they'll make more money and they'll make more money. And we also think that we're going to be able to deploy 2,700 digital workers in 2023, and that's 2,700 people, we won't have to hire. So it'll save us at least $50,000 per head. So that's $135 million just internally, plus we're selling it all over the world now, and we're adding our several thousand person in sales force to Blue Prism and that's working very well. And knock on wood, it's going to continue to work. So it's doing those things and not getting too hyped up because a shareholder says this or an analyst says that or some other external force -- we know our company better than anybody. So we're going to do things that we think are going to be long-term shareholder value. I think I'm by far the largest single shareholder in the company, and I can assure you, I prefer a higher stock price to a low stock price. But I'm not going to do anything that doesn't protect our business. So when we had the great resignation which was like started maybe in the third quarter last year and in the fourth quarter, first quarter was brutal and the second quarter was brutal where people are getting offers that double what they make and they're getting told they work from home. So all the people were coming at what we're going to do we're going to compete. You have to have the talent. If you don't have the talent, you kind of don't have a business. So we competed in the third quarter or in the second quarter. Our EBITDA margins dropped about 300 or 400 basis points, but we knew it. And we said, look, we can make that up, that's not a problem. And I think we've made up 180 or 190 basis points in Q3, and we'll make some more up in Q4, and we'll go into in 2023 with a lot of confidence. So -- but you have to have some patience and then when you're ready to move, you've got to move fast. And that's what we try to do.

I think the other thing that was really amazing about Blue Prism too was the revenue opportunity across your existing client base. And I think we've spoken to that on prior conference calls where the run rate of the business is $250 million at the time we acquired it. Seems like the organic growth there is really -- I think it's fair to say you probably outpaced even what the initial expectations were. And just the adoption rate across the client base seems like it's been a nice incremental opportunity as well.

Well, the great thing about Blue Prism is a technology company through and through. So it's a horizontal technology company, not something that we had really done much in the past and what you bring is vertical expertise to a horizontal technology company and you really have an opportunity to create these digital workers and the digital workers are only as smart is the person that's teaching the digital worker what to do. So if you have a dumb person teaching the digital worker, you got to dumb digital work. If you got a smart one, you got a smart digital work, right? So we're putting our best people that are the best people in the industry on creating these digital workers that expand your capability. So things that you do that you just as well have an assistant do, now you can have a digital worker do. And I kind of equated to automatic teller machines. I mean a lot of people never go into a bank branch anymore. Never see a human teller. In automatic ATMs, they work 24/7. Don't take much vacation, don't b****. Feed them a little money and they're happy, right? I only got to pass it out all day. So I mean that's really a analogy that I think works pretty well with -- and with what we hope to do with Blue Prism and we think all of our businesses that are somewhat high end, well-paying intellectual jobs, it's going to be increasingly difficult to hire people. So you're going to have to figure out ways in which to continue to grow the business, whether it's difficult to hire and retain. People go to more I mean they don't ask me if they can move to California. They call me from California. They already moved. And if they're good, what I tell me you're fired. -- really was in a nice trip. Inside you might be fuming, it doesn't matter. They're already gone. So either they're good enough that you want to keep them, or you get rid of them. And I'm not -- at SS&C, we're pretty flexible. We think they do the work. And as long as the customers are happy, I hope you like California. That's just kind of the nature of what 2022 is. It's unique time in world history, I think.

There's no doubt. Bill, I think one of the competitive advantages you've created over the course of SS&C's the culture and to your point, the people that work around you and even in the tightest labor markets, while you did have some elevated attrition a little bit last year, you've always been able to source people and grow them and build them. And then Blue Prism gives you the additional efficiencies that the technology affords. I think one of the undercurrents is how complex your client operations are. And I think that's one of the more underappreciated parts, particularly as there's been some new competitors emerge in the space. I think the de facto view was there's going to be a lot of displacement and your retentions held very consistently, 95%, 96%. Maybe help the audience understand a little bit not only kind of the scale of your clients today but where that opportunity goes because it seems like just the size of the average client base continues to expand. And with that complexity, and it's really moated very, very hard to displace you.

Yes, that's kind of how we view the business too is that we can bring people in and give them career paths that depending on how ambitious they are and how willing they are to learn, there's kind of the sky is the limit. And even the most of our salespeople come out of our operations because what we sell is operational excellence. And when you're selling into the largest investment organizations in the world, they don't bring dumb people to the meetings, right? They bring smart people in. And they ask difficult questions, and you have to have people that can field those questions and be able to make that prospect comfortable so that you have your best chance of winning. But we have any number of people that are salespeople that were making $125,000 as an accountant and now make $1.5 million as a salesperson. When there's an opportunity, we don't cap them. So somebody sells $10 million deal, they get 6% -- they get $600,000 that's nice payday. And for our view, a number of our competitors kept commissions at $50,000 or something on an individual deal. That's why we kind of get the pick of the litter when it comes to who we want to recruit and how we want to we want to pay them, but we also have created several hundred hours of online learning, online training. So you can go out and study for a CFA exam website for the CPA example, all along, it's all up and running 24/7. And so again, it's trying to invest back into that talent base and give people increasingly interesting work to do and then also be willing to take some risks. Buy some assets and stuff that you can kind of fit into the puzzle of what needs to get done. And as organizations get larger and more complex and go geographic as well as more deeply in the countries that they're -- that maybe they were founded in, there's new rules, there's new tax regimes. There's new accounting, whether it's -- whether it's Bill S-3, up in Canada for Canadian insurance company or it's H2 accounting in Germany or GAAP and tax and statutory in the U.S., there's all kinds of different and they're not the same. They might all be based on double-entry bookkeeping but that was founded in Italy about 700 years ago, right? But there's all kinds of nuances and just like on stock buybacks that all of you might know about and we're in the midst of one, now there's a 1% tax on stock buybacks. So the government has decided that stock buybacks are bad, I guess, or maybe it's good to raise revenue. If you start thinking about economic theory and why on an economic basis, it'll blow your head off, right? Because there aren't any economic theory that I can figure out that they use. So you have to react and kind of be a little bit nimble as far as what you're going to do in order to optimize the things that you can do to create some shareholder value.

I'm going to just see if there's any questions from the audience. I've got a ton more, but I just want to try to start weaving them in.

I was just wondering how you're thinking about the future acquisition set and how much the next 10 years will look like the past 10 years in terms of opportunities in your space?

Yes. I don't think the world is going to get less complex, and I don't think that the various regimes across the world are going to get less voracious for your money and mine. So there's a lot of forms that people have to fill out that they don't want to until they'll allow source it to places like us. And as long as we can do it in an efficient manner and sometimes our clients get -- you're making money on all this regulation. They regulate me, they regulate you, so you can use us to help -- yes, you do it yourself. They're not regulating accounting and systems company. They're regulating money managers. So what we're trying to do is make it as efficient as we can in that. And I just don't think that that's going to change. And I think there will be all kinds of opportunities like what you're seeing now in fintech, where there's challenges at [indiscernible] or FIS or infusion or a number of other ones. There's -- it's a complex business, and there's a lot of pressures on different companies to do different things. And I think that's -- you were lucky you couldn't hear me before, but there's a lot of things that are going to continue to evolve and all of you are investing or analyzing the things you're going to invest in based on all the history that you have. And that history is getting wiser and wiser, I that in the medical field, for instance, there's enough medical journals written in a month that will fill the Library of Congress. So that's all the new knowledge that take every month, right? So that's also happening in finance, that's happening in asset management. It's happening all over the place. And so the world is going to continue to get complex and companies like ours try to simplify it as best we can.

Sorry about that. Kind of just following up on that last question. Do you think you're going to be more acquisitive or less acquisitive moving forward?

Yes. Again, it's not as formulaic as people -- we are going to do an acquisition, why did you do the 3 acquisitions in 2018, they wanted to sell, right? It takes 2 to tango. If people don't want to sell. It doesn't matter. You can't get it to happen. So -- and then you -- when they're ready to sell, if you're not ready, doesn't happen again. So I think there will be acquisition opportunities. I think there's going to be a lot of restructuring in this. I think, stuff like robotic process automation and machine learning and artificial intelligence is just coming into its age, right? And it's really the newest technology that's hit in 30, 40 years. There's been technologies that have really changed, like mobile technologies and how much better it is to look at a film lip or a film on your iPhone or iPad or whatever. But the real thing of server farms, flow of information and smart clients going out and getting it has been around for 34 years. But this other stuff where it's electronics that are deciding what to go out and get and how to deliver it to whoever is making the decision. That really is the last 2, 3, 4 years. And we've had futures come and talk to us, and it used to be more small was compute power doubled every 18 months. This guy was saying that many things that are happening in technology now are doubling every 90 days. So you think about it in 90 days, it's going to be twice as fast as it was. So do you wait 90 days. You can't wait all 90 days, you get old, right? So you're going to have to jump on the train and you're going to have to choose wisely. And the people that choose wisely, we chose Wintel in 1990. Of course, you did. Not really, OS/2 was a hot thing. IBM was trying to reclaim what they've already given to gates and others. And so those choices of in, did you chose Unix, did you choose this, did you choose that? A lot of times, what you decide is how successful you can be.

Bill, I want to talk about the competitive environment a little bit. Maybe you can help frame the opportunities? Because when I think about it, you've got the legacy folks, whether it's State Street, BlackRock, [indiscernible], and then there's been some newer competitors that have come to market that clearly, I think, endorsed your strategy, but maybe help the audience kind of how you think about the competitive moat around business and maybe from a client perspective, how much of the clients are kind of end-to-end versus point solution and maybe tie that into the longer-term growth framework. We've talked about 4% to 7% is a target kind of cycle to cycle. And Obviously, things like Blue Prism start to come into the base in '23, which should help that organically, particularly as that starts to scout maybe just frame the competitive dynamics and within the consumption of your clients?

Yes. Our clients are in various segments, as you know. So some of them like private equity and private credit, private markets are growing quite rapidly. And they're going to continue to grow rapidly. The private equity markets still probably 60%, 70% of the assets are still done in-house. Whereas in the hedge fund world, it's probably 90% is done by third parties. Private equity will go this way too. It's just that the largest private equity firms that have the most money are still pretty much run by their founders. And they're not ready to get rid of their staff. They're the ones that make them wealthy and they're loyal to those teams. But it gets competitive new people start running the businesses and they'll outsource because it's too expensive to build technology and you have to absorb all the cost of maintaining it, whereas we have 20,000 clients. and we don't have 20,000 clients on every one of our systems, but we have hundreds. So we're going to spread that cost across hundreds and versus spreading it on one, plus when you get these young hotshot engineers, once they build your system, if you think they're going to maintain it, still balls chance in how they're going to go build another one. And then they're going to go build another one. And the people that maintain your system aren't as smart as the people that built it. So every time there's a new release, it's a little dumber. So you're kind of catch [ 22 ] all the time I need to get these hot shots to build it. But then I got to figure out how to maintain, how to improve it even though I don't have quite that talent level that I had in the initial build.

Spend a minute on capital allocation. We've always historically been really good stewards of capital. I think from '18 to '21, '22 is more deleveraging from some of the M&A that was done given where the stock is, maybe just remind us how you're thinking about capital allocation this year within the context of the leverage. And obviously, the cash flow just continues to accrete to us how we should think about that?

Yes. I think that we're going to generate something like $4.50, $5 a share in cash. We pay an $0.80 dividend. So every share we buy back, we get, say, $5.80, something like that. On a $52 stock, that's about 11%, I think, my arithmetic is reasonably good. So our debt -- it's still -- I think yields about 4.5%, 5%. So we got 11% if we buy back our stock, we get 4.5%, 5% if we pay down our debt. So the CFA maths buy back your stock. At the same time, we think allocating part of our cash flow to paying down debt, buying back our stock and then primacy has always been really good acquisitions. But if you can't find them, we don't want to go out and pay 10x revenue. Maybe it's superstar and rent-a-car, but maybe not. I did buy a racehorse here, but 18 months ago. Her name is [indiscernible] Philly. I think she might win the Kentucky Derby. It's the first racehorse I've ever owned, and she's a Philly. So she runs in the Kentucky Derby and wins, there's only been 3 of them in history. So '23 might be a really good year. So I'm allocating part of it towards horse race.

I wanted to end if there aren't any other nowhere on time, but -- maybe spend a minute, Bill. I think there's perception that there's a lot more volatility in the business than there is. Like if you look at the revenue in any given year, really a couple of percentage points of volatility, if you would, around from where you initially died or even just outcomes. So maybe just remind us of that because it gets very surprised how stable the business is in terms of where the level of volatility is even in a tougher year where we're seeing Intralinks slow a little bit. We're still looking for 2% organic growth despite a lot of market volatility -- so maybe just help frame that a little bit. I know we're up on time, but I think it's a really important part to the story as well.

Well, I think people forget, since we've been the largest fund administrator for I guess, going on 6, 7, 8 years, people think hedge funds are risky investments. And if you're in a mutual fund, you're going to follow it. And if you have a CD, it's all wonderful, right? But that's all b*******, the smartest people investing money or the people in the hedge funds. Why do you see that? Because they make the most money. If you're going to do the same thing, don't you go to the job that pays the most. No, I always go to who pays the least. They don't call you bright. So it's -- that's what's happened. So guys like [ Casey ] England or Seth Klarman or Ken Griffin or all those guys, right? It's -- they're the ones that are gathering assets like crazy. And almost all of those people are our client will all of those are, but almost all of them, Steve Cohen and all the rest of them, the ones that are really growing, use our platforms, plus it's accounting. They ain't going away. And it's -- we do thousands of tax returns. That's not going to leave. And they also have to send out financial statements to all their limited partners. So it's all regulated. So all of our revenue streams are almost all insulated. So yes, there's a little market volatility, and that gives us the a little tailwind or gives us a little headwind, but not very much. So as long as we can continue to gather new clients and more difficult lately has been we're getting such big clients, that giving them converted, brutal. There's all these committees and all this in that and come on somebody's got to make a decision. And so that's -- we'll probably have $100 million in revenue, tied up, trying to get these people converted. So that's a good problem to have, but it's a problem. And the better we get at it, that's all we're doing, right? When the markets are kind of strange like they are now, we just try to internally get better, internally get better, internally get better. Markets get better, it looks like some good acquisitions, pounce. So that's kind of our strategy, not to get in too big of a hurry, not to grab that golden goose and rip out all those eggs. I think all end up with is a dead goose, so we try to have some patience and try to make hay when the sun is shining.

Makes sense. I think we're up. Bill, thanks so much. Great time.

Thank you so much.