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

Good afternoon, everyone. I'm Pete Heckmann. I'm one of the fintech and payments analyst at D.A. Davidson. I want to thank all of you for participating in our FinTech and payment Spotlight Conference. For the next half hour, we'll be talking with Bill Stone of SS&C Technologies. Bill was the founder and currently serves as CEO and Chairman. Is that correct Bill? Thank you for participating today. I really appreciate it.

Let's get started. Start at the basics, I guess. The company's primary original focus was on automation software for investment managers, and that continues to be a primary focus of the company. But portfolio accounting, portfolio management systems. The company solidified their strong market position with the acquisitions of FMC, Advent, Portia, others along the way. But how would you characterize that business? What are investor managers looking for? What would you say is the outlook for IT spending? And it's -- like an overall view, if you would, of the global addressable market for portfolio accounting, trading and other investment management software?

Well, as you know, the investment management business is a pretty good business, right? I mean, people get paid on assets and particularly over the last almost 40 years, I guess. The market in August of 1982 was at 776. So now the market is at 33,000 or something like that. And so with that kind of growth and all these really smart, good-looking people get into asset management, investment management. So that has proven the test of time and -- and what has happened is, even though there's less equities in public markets now, there's way more derivative type securities -- in all the financial markets, whether that's mortgage-backed securities or contracts for difference or certain kinds of derivatives that allow you to bet on the up or down of a basket of assets and -- so forth and so on. They're all over the place. So that complexity and that rapidity of turnover requires a lot of automation. So we started delivering investment accounting and reporting systems in the late '80s. And as you pointed out, we have purchased the numbers and we have built numbers of them. And we think that that's still a very good business. And indicative of how Advent, which we bought in 2015 and was doing about $400 million in revenue and about $120 million in EBITDA. And this year, it's going to do over $550 million, close -- maybe close to $600 million and close to $275 million or $280 million in EBITDA. So we're able to take that and drive it forward because of that size and complexity and volumes. And I think others of our products like Aloha, which we're bringing out that will augment and replace PORTIA and high portfolios and then we have singularity that's going to be the upgrade path for CAMRA and MAXIMIS and we've won the Hartford, we've won Cigna, very close to winning a number of other very large mandates. We have now about 60, 65 -- 75 clients on singularity. We have about 450 on Aloha and they're accelerating. So I think that will continue to be a pretty strong business. We'll always get a little more tailwind if the markets are going up and if the markets are going down. But I think that's the nature of what's going on. And I think that we'll continue to be beneficiary in metals, whether it's trading systems, accounting systems, performance systems, reconciling systems, tax, we think all of those are good areas to be in.

Yes. Definitely. Well, you mentioned Aloha in singularity, and that's something I wanted to talk about a little bit. Singularity I think we first talked about 5 or 6 years ago, Aloha, maybe more recently in the last 2 years or so. As you know, you've won some new logos and also provide creation path off of older systems. But can you talk about kind of the development work that went into those? And really, what is the added functionality or capabilities or the way that those systems are built that provides significant additional feature functionality to the investment manager?

Yes. Well, if you take singularity for instance, it's now all cloud-based, it's multicurrency, multi-basis, multilingual. It has integrated mortgage loan processing and besides securities. It does syndicated bank loans, which was the notices and stuff like that, that comes with syndicated bank loans, they can be a real pain in the neck. So it does that. It has a full suite of derivatives and it has a very modern user interface. So that's been very well received by the marketplace, and we're getting large-scale players to convert to it. And I think that's going to accelerate throughout '23 and '24 and '25. And so I think that's a really great opportunity for us to grow Aloha, tends to be more on the investment operations, look like the investment book of record and the client book of record and being able to deliver investment operations at a different level than what PORTIA or high portfolio was able to do in the past, and it gives them both a migration path which is what we want to be able to continue to service those clients.

Okay. That's great. And one of the things that's always been really interesting to me about SS&C is, the company a leading provider of automation software, but also a leading provider of tech-enabled services or process outsourcing and the company is able to do all of that at very attractive margins. But within fund administration specifically, thinking back, I think '08 was GlobeOp, and that deal might have taken you from maybe the eighth or ninth largest player to the fourth or third or fourth. And now over the years, you've built up to be a clear #1 based upon assets under administration with over $2 trillion in assets. How do you think about the underlying growth there? We know that complexity, additional tax, additional compliance, you've been successful in getting pitch funds and other alternative managers to outsource that to you. It sounds like more recently private equity, also convincing. But it really SS&C it seems like you basically take on any task [indiscernible] that the asset manager would like to consider converting from a fixed internal relationship?

Yes. And what happened was in 2011 [indiscernible] Goldman Sachs sold their fund administration business to State Street. 2012, we bought GlobeOp. And when we bought GlobeOp, we were like ninth and they were eighth. And when we combined, we were third, and State Street was first and CITCO was second. And now we're first by about $500 billion and State Street second and CITCO third, I think maybe Apex might be fourth and then Bank of New York and HSBC and a couple of others. But in general, the breadth and depth of what we offer, almost every one of the large-scale platforms that does hedge funds uses us. And I was with one of the big, big platforms and very well-known hedge fund manager says, I understand the best system out there is Omnium. I said, Omnium? I said the only place that uses Omnium is Northern Trust. Omnium was built at Citadel. Citadel uses us now. They don't use Omnium. So I don't necessarily know that building your own software system as an individual organization is necessarily a very wise way to go because -- not that you can't build it or not that you're not putting smart enough. But what happens is, the people that built it for you once it's built, they're not maintenance programmers. And as soon as you ask them to be a maintenance programmer -- that's why you ask them to come into the office, right? They're going to work from home, right? And they're not going to work for you, right? So then you're going to have maintenance programmers that aren't as smart as the people that built that system. So every new release the system gets dumber, right? Pretty soon it gets so dumb, you can't use it anymore. So what you have with SS&C is we spent $500 million a year of building software systems. So once people get done with one, they can move to another and a real advantage for us. It doesn't mean we're immune at people quitting, we're not. But if you think these 22- to 25-year-olds are coming out of these MITs and Barclays and Stanford on going, what I really wanted to do is work for a big bank. I've been thinking about that since I got the college, and I'm going to put on a suit going there. Talk banking talk. I don't think so. I'm just not where it's at. And so you got to be as adaptive as you can be, and people tell me you make people come into the office? That's what we suggest they come into the office 4 to 6 days a month. Last month, 63% of our workforce didn't come at once. So you know they don't listen to us either. As long as they get the dam work done, and I can call their clients, and the clients tell me good things about them. Okay. A lot of times, they call me and say, I'm living in Nashville now. I say, are you asking me if you can move to Nashville or telling me that you live in Nashville. I can ensure you, -- it's the latter. And once again, you find out what do the clients say. Is the work getting done? Does it get done on time? Is it of a quality area? Can we look it up? How are we doing right? And realize, look, it's 2022, we're not changing. I don't care who you are. You can be captain of the industry [Indiscernible] everybody is going to be by conjugate. Okay. Well, nobody shows up what we're going to do, very difficult to leave an army when there's no one behind it. So I'm way more practical about those things and try to see if there's ways in which to accomplish the goals of the organization in a way that permit people to have as much flexibility as possible.

Let's talk about that. Look, dive just a bit deeper in the fund administration. I think one of the testing dynamics is how many other fund administrators use SS&C's technology. And of course, you use it for your own fund administration business. How is that dynamic working? Do you feel that there is any credible up-and-coming real-time alternative portfolio accounting solution that can represent a second source for a lot of these fund administrators?

I don't think that the customers would be willing to move their assets to an untried system when -- what they have is satisfying them even maybe as their most satisfactory system, right? So it becomes the same thing. If you're that fund administrator and you're going to tell your customers that you're going to move to an inferior product, and by the way, we want to raise your price probably too. That's not really very popular, right? So we think we pour enough money back into that to those platforms, and we also bring out additional functionality all the time. And if you haven't seen our real central product, it's quite slick and also our [Indiscernible] loans and a number of other things that we brought out that are just, in some ways, light years ahead of our competitors. And something that I think will continue to be advantageous to that entire business. Those 40 fund administrators that use our technology, probably, on average, pay a couple of million dollars a year, which means we generate $80 million from competitors. I like that side of the ledger lot better than the other side.

Definitely. Earlier this year, you closed the acquisition of Blue Prism, a leading provider of robotic [indiscernible] automation. This is still a business that -- are you sometimes have a little bit of a hard time figuring out exactly what it does, and I think so people aren't familiar with the term. But you've talked about potentially using the technology internally to combat a little bit of wage inflation. But then as well, you see the opportunity to sell it to many of your current customers. Can you talk a little bit about that deal?

Yes. So Blue Prism is we call it intelligent automation. Historically, it's been robotic process automation. And we create digital workers. So for one of you a digital worker might be the one that goes out and scans the Internet all day long and put articles into different whale boxes that you've defined on your portfolio or other companies of interest or areas of interest. And it can update it as often as you want it to. It can get rid of what's in there. It can have all kinds of sorts and stuff in order to make you way more productive than you're going through the Internet, trying to find out using this symbol or that symbol. So that's just one use. We use it now. We have a big hedge fund that has 1,200 limited partners and one of their big funds and the general partner maniacal, he wants us to validate each statement before it goes out to the LP. So we used to have 2, 3 people spend a couple of days validating that we spelt Mark, M-A-R-K or M-A-R-C, depending on which is the way people spell it, and everything else about their statement. So what's that? So if it's 2.5 people for 2 days, that's 16 hours a day x2, 40 hours. So we put a digital worker on it, digital worker doesn't get tired. It doesn't take any breaks, work 7 hours, doesn't make any mistakes, and it's done. So we save 40 hours to get it done in 7 hours, and it's of a higher quality and we can do that all over our business. So we probably have 5,000 people every day that do 2 hours of reconciliation. That's 1,250 people. So if we can put these digital workers in there to do those reconciliations, it means those people can do things that aren't those reconciliations. So we think that our digital workers, which we will have deployed at least 300 by the end of 2022, and then we think we'll deploy between 5% and 10% of our workforce, which currently is at 27,000. So between 1,350 and 2,700, and we're quite confident that we're on the high end of that. So let's just say that we do 2,500 next year. So each one of those digital workers, we conservatively estimate saves us $50,000 a year. So 2,500 x 50,000 for all of you who are very good at math is $125 million. We're also going to do that in 2024. And then we're going to do it in 2025. And then we're going in 2026. So we think over the next 5 years, we want to deploy between 10,000 and 15,000 digital workers that are going to save us between $50,000 and more for you. So $50,000 x 10,000, everybody got that number $500 million. And $50,000 x 15,000, I think everyone is going to get -- $750 million. So we think our margins are going to get driven up because the productivity that we're going to get through these digital workers, plus, we continue to sell Blue Prism out across the entire horizontal stream that they sell to. And in the third quarter, it was up 16% in revenue and fourth quarter is pretty strong, too. So it is better than I expected it would be, and it's living up to its expectations. And we think -- and we're -- it's maybe the highest priority in the company is to get that smoothly running. And we think as we go through it, we'll be able to productize individual digital workers. So we might name them. Ray Recon, you're going to buy a Ray Recon for so many hours a year, and then we can have Suzi search, digital worker and brand these things and kind of put them out on the app store and you click on it, and it will reconcile your prime broker, right? Or it will go through and validate all your positions and its performance between any dates you've given. So it has a lot of capabilities. And we've got a great group of people that came with Blue Prism that are really enthusiastic, and we're really excited about.

Two quick things on Blue Prism following up. So the revenue model, talk about that, and how do your customers contract for Blue Prism? And then -- well, we'll get into the next one, but I want to talk about shifting towards these last 2 horizontal acquisitions, we can get to that in a moment. But in terms of how you price it, and the relative recurring nature of it, can you talk about that a little bit?

Yes. So Blue Prism is sold on a license basis. So you license, however, many digital workers you want, licensed by digital worker and it's an annual license fee that you pay. So it's got a really good pricing model in it that's been well received. I think we have something like 75,000 digital workers out in the marketplace now. And it does some big places. It does national health servicing in the U.K. and it does British Petroleum or British Gas, one of those things. And a whole number of other ones where it's -- where it's quite effective, and it has a big financial services component. So I think about 35% of its revenue comes from financial services, which obviously we can accelerate and extend and expand.

Okay. And so on the comment of horizontal, not just focused on financial services, you did another acquisition 2018, called Intralinks that also served a number of different industries. And generally, it sounds like Intralinks has done well despite some of the volatility in M&A volumes, which is one of its key markets. Talk about how you expanded the markets for Intralinks?

Yes. So Intralinks does virtual data rooms, and when we bought it, it was doing about $330 million in revenue and probably $110 million, $115 million in EBITDA. This year, we expected to do somewhere around $400 million of revenue and somewhere around $220 million in EBITDA. So it's been pretty effective for us. It also does -- we were able to deploy it to help Bank of America and its PPP program. So you can put it up. It's very secure, right? And as you know, with M&A, it's pretty -- it's pretty close math about M&A. So all the documents have to be watermarked and security is quite high. So that's been pretty effective, and it's also now being used as a portal for the private equity industry, and that's been very effective for us as well. We are the largest private equity administrator in the world, as well as the largest hedge fund administrator in the world and the largest mutual fund agency in the world. So we're excited about what Intralinks can do and the capabilities that it has, and we're adding things to it and allowing us to create new products and services.

Okay. One thing I've been curious about and certainly, one of SS&C's core competencies is sourcing and negotiating and integrating acquisitions. But the acquisitions of Advent and DST provided the company with a pretty decent foothold in the financial adviser, financial advisory tech market. But the company really hasn't followed through and has kind of sat out a lot of the acquisition activity that's gone on in that niche, the last, let's say, 6 or 7 years. Is that because you have a different idea of the secular growth trends or the outlook to that business? Or you just haven't seen the right properties at the right prices?

Yes. As you know, wealth tech is pricing on say the least. And Black Diamond has been very exciting for us, continues to grow in 15%, 20% growth rates. We have about 2,000 RIAs. We have about $1 trillion in assets that are on Black Diamond. It continues to do very well. And we've added Tier 1. It was a recent acquisition, we have that extends our capabilities in Salentica, which is a CRM that attaches to Salesforce. So we continue to build out that the Black Diamond platform, but paying 10x revenue for more wealth tech we think is fiscally irresponsible. And it's not what we do. It's -- it has worked for people, and particularly people that get drunk on growth. We do not. We like cash. We like earnings, and I know that's assay, but your raises and bonuses are better when we get cash. So we have some focus on that. And over time, it's been pretty effective. We went public in 2010. We did $329 million in revenue. We bought Advent in 2015, we did $1 billion revenue. Last year, we did $5.4 billion in revenue. Maybe that's not growth to you guys. But in my calculator, it says up, right? So -- and whether you do organic or you do inorganic, it's not as necessary as -- did you get the margins of what you bought or what you built. If you think, oh, organic, I mean, there's no risk to that -- why don't you go build a big system. And want to see how many you shoot where you get one that works, right? So there's a lot of risk in building big new systems. We're building DomaniRx right now, and I can assure you there's plenty of risk, but there's plenty of opportunities. So you've got to measure that all the time and it's art. It's a guess. And -- are you always right? Really, I've always tried I'd be in Vegas. I wouldn't be answering this question. So I mean -- I think it's just having a practicality about what we're doing and not jumping on to every fad, I'm sure we all wish we had been deeply invested in FTX, right? What does Jamie Dimon call, crypto now? Somebody just told me, one of my [Indiscernible].

That's great. Well, you keep segueing into my next question. So DomaniRx, with DST, you acquired health care, health insurance administration, claims management, prescription processing. And you're in the midst of doing a fairly big build-out of a new platform called DomaniRx and with a couple of partners. Can you talk about how that's going? And then talk about some of the changes in that marketplace that for building a brand-new platform that has transparency on fees might really be really well positioned going forward compared to some of the competitors like the PBM space?

Yes. Well, again, if you think about a prescription, it looks a lot like a trade ticket, right? [Indiscernible] number are excellent. Now shares number of pills, right? Trader, physician, right? So there's 5 or 6 pieces of information, and there's hundreds of thousands of them. So, you got to be able to process them, collate them and distribute information back to people like you might want to know Oxycontin. Which pharmacy fulfill more Oxycontin prescriptions? Which doctors practice doubled the number of pills and every other one? Which SIP codes, which neighborhoods. So there's a lot of stuff regulators want. There's a lot of stuff other people want. And we think with the new platform, it will be at everyone's fingertips. It's all cloud-based. It's going to have a user interface that's intuitive. And it's going to use a lot of micro services and the health care information universe is fraud, right? Every pharmacy, every doctor, every hospital, every pharmaceutical company, there's just so many people that touch -- help, and it's highly regulated. HIPAA is a very detailed and stringent rule making state. Every state has its health departments and what you can and can't do. And so -- so we think it's a very huge opportunity, but it's a big investment. We're doing that with Humana and Anthem. They're great partners. Sometimes we have to add optimism to the [they could] -- point that we're in the insurance business right know. There's a sun I swear, there's a out there. So -- but we're optimistic about where we are. We have really, really smart people working on this project and knock on wood, we'll complete it, and that will give us another giant leg to our stool about how far we can grow in the health care business.

That's great. And can you tell us, based on your development timetable and the thoughts about converting Humana, would you be able to convert all clients? And then potentially you've got duplicative systems for a period of time, but would be the intention be to sunset the old ARGUS platform after a period of time?

Of course, yes. And then -- and hopefully, we will have a conversion program that allows them to do it with as much ease as possible. But it's still -- you're dealing with big organizations that have lots of people that are managing what they do and so you have to have a well laid out plan with lots of checks and balances.

Okay. Investors in this space love to talk about organic growth and certainly it looks to us as if SS&C has a couple of tailwinds going into 2023. Of course, the Blue Prism falls into the organic calculation in March, I believe. You anniversary some attrition on the health care side that has been a drag. And then we'll see FX is moving target, but that seems to be maybe moving in the right direction a bit. But -- how do you think about a sustainable range of organic growth in boom and bus markets?

Yes. Traditionally, we wanted 5 to 10. I think, more recently, we've been talking about 4 to 7. And I don't think we're ready to back off of 4 to 7. I think we can do that. I think, again, there's going to be a lot of tailwinds on growth characteristics of SS&C all around given that these digital workers and what we believe is going to happen with Blue Prism pans out, right? You're going to have opportunities to drive stronger sales and marketing. We've already consolidated a lot of that. I just think that when you have markets like we've had over the last couple of quarters, 3 quarters, maybe what you do is that you get better at everything you do, right? Because going out there, I have bankers come to see me all the time and would you like to buy this? Would you like to buy that? Would you like to buy this An I was going to -- there's no financing out there I can't get this done. I don't want to waste any of your time. I don't want to waste any of our time. So we tell something is possible. We'd like to come in and do a value in the parts. How about now? And it's not going to happen anyway, right? So why don't we let us go get better. And we're not going to do things that take a lot of time. If you're going to do right, you got to put your best people on it. But those best people, they got other things to do, too. And so we like to focus on stuff that's accomplishable. And when it's not as accomplishable, we're happy. We're only going to get $4.50 to $5 a share in cash this year. And -- we'll pay down some debt. We'll buy back some stock. We'll do a few tuck-in acquisitions, if we can, and then we'll drive Blue Prism and digital workers and will start growing faster. Everybody will go that's pretty smart strategy. Where we go grab that goose and try to rip out all those golden eggs that are in her, now you end up with us as a dead goose. So we kind of don't want to do that, right? Have patience. Don't get too cranked up by wise analysts and brilliant bankers, all kinds of other things, right? You've got to stick to your knitting and stay with your strategy and execute strategy that takes about a date, that execution, that takes a lifetime.

Last question, we're a little bit over time. But as I said earlier, the company has done a great job of allocating capital to acquisitions over time. It sounds like you won't be elephant hunting anytime soon given some of the fixed income markets, but with over $1 billion of cash flow and leverage in the low 3s, I guess, what is your capacity to do deals? Just talk a little bit about your M&A machine in terms of like how many deals you might be looking at any given year? And how do you kind of think about the return targets, whether you formalize that or how do you think -- what does it have to pass in terms of a hurdle rate in your mind to be a deal you really want to pursue?

Well, traditionally, we've been -- we were at $250,000 of revenue per headcount, and we wanted to see our way to where they could be 40% EBITDA margins. Those were 2 kind of high-level criteria and not that we weren't perfect about it, we weren't. We believe this is also art, not science. How much synergy do you really have the opportunity to do it. And then also does it give you some -- like we believe in Blue Prism, it really gives us a technology that we get to make a lot of money on Blue Prism itself, and then also going to make it other bite of the apple on our internal capability. So that gives us a double whammy that we really like. There's going to be a lot of assets come into the market here, right? Because a number of fintech companies have taken it on the chin, and what are they going to do? They're already talking about skinning down and [Indiscernible] so there will be stuff in the marketplace, and we'll look at it. And if we can get it at the right price, then will pounce. But we won't spend tons and tons and tons of time, right? Because at SS&C, we all work. We don't have too many great thinkers. And I don't send Oracle's down. I don't have a cherry, always one-one. But I'm optimistic about where we are. And I think that we've -- I started this business in 1986. And if you take our compound annual growth rate since we published the second time in 2010, I still think we're at 20% on revenue, 20% on cash flow and 20% on earnings per share, and I know those numbers aren't good for -- your guys' portfolios and your ladies portfolios, but it's really worked for my portfolio. I can assure you.

It's coming back in fashion. Well thank you, Bill, you been generous of time. Really appreciate you participating. Thanks again.