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

I am the fintech analyst at Needham. I'd like to welcome everyone to the conference. We have SS&C with us. Rahul Kanwar, who is President and COO; and Justine Stone, Head of Investor Relations. We're going to run through a brief presentation, and then we'll do some Q&A. Rahul, it's yours.

Great. Thank you, and thanks for having us, and thanks, everybody, for joining. So I think what we'll do is we'll take you through the company for the first 10, 15 minutes of this and then happy to talk about anything that any questions that people have. So safe harbor statement. I will not read that. I don't think I can see it, but it's up there. So what we do today is we're 27,000 people global, been in business since 1986. And really, the words I would focus on here are mission-critical and cloud-based, right? Most of what we're doing is deep in the essential have to have in really big financial institutions, hedge funds, banks, insurance companies. So we're doing things like investment processing and portfolio accounting and reporting, dealing with the trading departments internally and giving them P&L and things like that, that they need to run their day-to-day activities. We're doing the reporting out to end clients for hedge fund investors, private equity fund investors, folks that buy into retirement plans and mutual fund companies. So it is very sticky revenue -- it's stuff that even in periods like 2022, where there's a lot of volatility, it stays somewhat stable and predictable and things like that. And what the cloud base does is, in effect, give you the market differentiation. We're a technology company. We're a software company, have been since the beginning. We have, like a lot of software companies evolved into a mix of software and services, and I'll talk about model and delivery in a few minutes. But we're constantly building new products. We're innovating. We're taking what are generally not the most attractive parts of these businesses. It's not kind of what they go to market with, but it has to work. And we're making that different. And that's how we got to as big as we are today, and it's also what we think positions us for the next aspect of our growth. So just a little bit more detail. There's kind of -- 2 or 3 key ingredients to our business and how we're evaluated in the marketplace. One is the expertise. So as I already mentioned, we're deep into regulatory. We're deep into taxation. We're deep into hedge fund accounting. We're deep into complying with all kinds of regulations around the world, and that requires expertise, right? So we've got a labor force that is largely centered around the financial centers in the world: New York, London, Toronto, Hong Kong, Singapore, pretty big centers of excellence in places like Mumbai, where we're building up our own talent and also taking advantage of the engineering talent that there is. And we think that, that expertise is hard to replicate. We have also, over our history, done a lot of acquisitions, over 50 acquisitions. And with that has come a lot of talented expertise, much of which still is retained at SS&C today. So we -- it's not so much we built it all ourselves. We built, we bought. We've tried to observe best practices and have built up a workforce that in a lot of the markets we're in, is a pretty big differentiator. Track record of delivery, and I think this is important because, generally speaking, if you go into an RFP process for any institutional buyer or any sophisticated buyer, obviously, they want to hear about your credentials and your track record and how many have you implemented that look like them. And generally speaking, if you've got a lot of things that they can get comfortable with then they're willing to trust you on the last 10% or 15% that is somewhat aspirational, your new products, the things, the new integrations that you're seeking to deploy with whatever the latest acquisition is, and that's where kind of the revenue growth comes from. So we have 20,000 customers, just about every financial services company in the world of size is a customer in some form or the other. So when we buy something new and earlier this year, we bought a company called Blue Prism, which is digital workforce, digital workers, it's workflow automation and intelligent automation and robotic process automation. And really a lot of fancy ways of saying they take human-based workflow and turn that into so a machine can do it. We've got a pretty big use case for it internally within SS&C with 27,000 people doing a lot of repetitive tasks that we think machines can do over time. But we've also got a pretty good use case for it in our 20,000 customers. And so that track record of delivery gives us the credentials to be able to do those kinds of things. And just -- I think the other part of our business, I already talked about how it's fairly sticky because these are essential things. There's a pretty big barrier to entry because of the expertise and the ownership of technology. I think the other kind of characteristic of our business is broadly diversified, right? And here's one way to look at broadly diversified. These are some of the things that we do. So if I just take you through a few of them, GlobeOp is the world's biggest alternatives fund administrator, $2.4 trillion in assets. We do hedge fund administration, private equity fund administration, fund of funds and real estate administration. We also do a variety of middle office services. Eze is probably the leading order management system used by really anybody that trades equities and equity-linked derivatives and working its way to fixed income and other things like that. Intralinks, many of you probably have Intralinks accounts. It's where you go when you have a virtual data room or an M&A process that you're trying to do or secure document exchange, and it's the biggest one. Advent is a variety of different things. It's a software company that we acquired in 2015, but their flagship product is something called Advent Geneva, which is used by about half of the top hedge funds in the world, either directly or through a third-party administrator and a lot of those third-party administrators who are our competitors in the first business I talked about are also users of our technology, which is a dynamic that we think has a lot of benefits to us. On the right side of the equation, I think on the right side of the chart, rather, I think the thing I'd highlight is our GIDS business. We have 115 million retail accounts that we do their transactions. We provide their digital interface. We work on behalf of big wealth managers in the U.K., big regulated funds in the U.S. and kind of an ever-expanding geographical reach. And what that does is it gives us access to retail, which that blend of retail and institutional in the same organization, we think is pretty unique. It brings a lot of good discipline on both sides and strengthens our company. So I'll round it out and I'll turn it over to Justine. We're a technology company, right? We're a software company. It's a big part of our DNA. But we have monetized that software not just to sell software, but also to deliver services to our customers and turn that into some of the big services businesses in the world, whether that's in our fund administration business or our transfer agency business or several others. And in the process, we have grown those software businesses 5x or 10x to what they would have been stand-alone, right? So we think we can continue to do that. That combination of software and services also gives us a lot of flexibility and gives our customers a lot of flexibility into how they buy from us. Most of our large deals, and I would say large deal as, let's say, $10 million plus in annual recurring revenue, will end up buying a number of our products and services. Some will be systems that they deploy internally. Some will be wholly outsourced solutions that we run for them and some will be somewhere in the middle. And that combination is -- makes us different than most people. A lot of the markets we're in, we're competing with big custodian banks and things like that, and we're generally viewed as the independent provider. We're not really -- we're not a health plan trying to sell pharmacy benefits management system or really are just a pharmacy benefits provider. We're truly just a fund administrator, we're also not trying to be your prime broker, your custodian things like that. And we have now 15, 20 years of doing a lot of these kinds of things and in some cases, longer, become big enough that the largest firms in the place will look at us or the largest firms in these markets will look at us at us as credible, generally speaking, we're on everybody's RFP list, but they would also view it as public, transparent, independent. And those things are pretty important to us in our business. And then just this is kind of what it looks like in numbers. These numbers are really only helpful in the sense that they tell a story. We have widespread market acceptance, widespread market reach. There's a lot of access to distribution for new products and services. We've been focused heavily on sales and marketing and product development so that we can continue to tap into these things. But the foundation is already there, right? And we think that's what kind of leads to the next level of growth and the next level of success in our company.

So I'll kind of.

That's the...

Oh, sorry. So I'll just kind of take us through a bit of our financial numbers in our capital allocation strategy. We're a very strong cash flow characteristics in our business and over $1 billion in free cash flow a year, $1.4 billion in 2021. I think one of our -- we're really known for our ability to allocate capital, whether that's for one of our 65 acquisitions that we've done to stock buybacks to debt pay down. Currently, we're guiding a 50-50 split between buybacks and debt pay down and that will kind of tilt one way or the other depending on where the stock is trading. We have $1 billion buyback authorization. We have a modest dividend that we've kind of increased over the years and kind of aim to have a 1% yield. So we've utilized leverage in the past to fund our acquisitions. And over the past couple of years, this is kind of what our leverage profile has looked at. We've been as high as 5%, 5.5% to do some bigger deals, and we work to pay that down as quickly as possible. Currently, we're at about 5.5% or 5.5x for our total leverage. And I think we're pretty comfortable there given our cash flow characteristics. We don't ever really leave leverage stagnant, and we'll continue to pay it down. And I think we aim to be below 3x at some point and I think that's where the market would be happy to see us. We view acquisitions as one of our core competencies. Like I said before, we've done, I think, about 65 since we really started doing acquisitions in 1995. Some of the big ones over the past few years, Advent Software in 2015, or GlobeOp in 2012, Advent Software in 2015. In 2018, we allocated about $8 billion towards acquisitions with DST Systems, Intralinks and Eze Software. And then our most recent acquisition is Blue Prism in March of 2022. Blue Prism, like Rahul said, is an intelligent automation software and digital workers for mostly the financial services industry but also manufacturing, health care. About $200 million in revenue and growing nicely at 15% to 20% a year. So we're really excited about that acquisition, both as a stand-alone business unit, but also our ability to take that software and that RPA technology and deploy it throughout our organization to kind of change our margin profile and how we look at our cost structure and can make our processes a bit more resilient in the future. We're a global company, although about 75%, 80% of our revenue comes from the Americas, and we still think that, that is really our biggest opportunity to grow but we have been seeing good growth in EMEA and in Asia Pac. We do have some currency exposure, especially to the pound, which has been a bit of a headwind to our revenue growth this year. We're a high-margin business model. 2021, a little over $5 billion in revenue. We operate at about 40%, 42% EBITDA margins. It's come down a little bit in 2022 because of the wage pressures that we've seen and some of the recruiting costs and things that we've had to do to protect our workforce, but we anticipate to exit 2022 back to our historical margin levels of around 40%. We also have pretty high retention rates. Like Rahul said, we are mission-critical and we have very sticky software, very sticky businesses. So as long as you're in business and you're running a portfolio, you have to use us or someone like us to get the job done. And I think that leads to our 96.5% last quarter revenue retention rates. And we've consistently grown adjusted diluted EPS. And over the past 5 years, it's been a 21.7% CAGR. And I think you can look at any 5-year chunk of SS&C's history, and it will be a similar type of growth rate for our EPS. So it's definitely a focus of ours, and it will continue to be. And that's it, so we'd like to open it up to questions if you guys have any.

Rahul, I'll kick things off.

Sure.

Just in terms of the macro impact, then you mentioned [indiscernible] as well, can you talk about the impact of each of the key businesses? What is maybe more durable versus what could be less durable given some of these headwinds that we are seeing right now?

Sure. So I think that the macro impacts are -- there's probably 4 or 5 big drivers for us that impact us in different parts of our business, inflation and we're by no means unique in this, but the impact that, that has had on wage inflation and kind of our workforce. And Justine talked a little bit about this in terms of what we've done. I think we did a raise in October '21. We did another raise in April of '22 in places like India where traditionally, we've had a lot of tenure and retention relative to everybody. We've done some of the highest increases we've ever done in our history. The good news for us there is it does seem like we're turning the corner. It seems like while labor markets continue to be healthy, they're no longer nearly as heated as they were even a year ago, and you start to read headlines about really big places announcing a whole bunch of layoffs. And that does -- some of those pools of talent are the same kinds of pools that we're going after. So I think the conditions are easing there a little bit. The other thing is the health of the financial markets overall, right? And the health of the financial markets impacts us in a couple of different ways. There is a percentage of our revenue, and it's not incredibly material, but enough that it matters at the margins, that's linked to assets. So in our fund administration business, we have contracts that are linked to how much assets are in the fund. In some of our software businesses, it's similar. So that goes up and down a little bit at the margins. And there's some natural protections built in, in terms of minimums and fees that are driven by transactions and other things outside of just AUA, but that's a factor. But I think the bigger impact is when the financial markets are healthy, people are more optimistic. They go out and they go start a hedge fund or they start a new venture or something like that. And generally speaking, when they do that, they buy software and they set up their systems. Current organizations are a little bit more risk averse when things are really volatile. So taking on a big software project or something like that has been a challenge. But we've been in now for, I would say, since 2020, been in an altered environment, right? So it isn't -- I think people are realizing that the things they need to do, they need to do anyway, and they can't wait forever, and we're starting to see demand normalize as well. Some of the other things that impact some of our specific businesses, the M&A environment impacts our Intralinks business because it supplies data rooms to M&A companies. And while they've done a good job of finding other use cases and applications for secure document exchange, which is really what that is, that has had an impact. And those are -- none of those things in of themselves are terribly material, but when you put them all together, they are probably a couple of hundred basis points of growth in one direction or the other, depending on what they -- how they come out.

Right. But even in this macro environment, do you think the company can grow organically, given these headwinds that you talked about at the same time, maybe there are some indications that M&A is picking up very early, but who knows how the year will progress? Any sort of indicators out there in the market that gives you some reassurance that maybe this could still be a year of organic growth versus a down take?

Yes. Yes. No, I would say we're pretty optimistic, right? And that's driven by kind of the fundamental analysis on each of our businesses, what's in the pipeline, what have we sold, what's being implemented, so on and so forth. Hey, we do better when -- just like everybody else, we do better when everything is rosy and healthy and optimistic, but we expect to be able to grow.

[indiscernible].

Sure. So I think our health care business has been kind of -- has not grown, right? And it's actually declined fairly and to kind of put it in perspective, health care about $300 million, $350 million in revenue. And we've had some pretty significant attrition in that business in 2022. We think a lot of that is behind us. I don't have an outlook for '23 yet because we haven't put out guidance, but we do expect to lap that and kind of return to a more solid footing. And we are working on a next-generation platform called DomaniRx which is a pretty big bet for us in 2024 and beyond. So Justine talked about Blue Prism a little bit, which is the digital worker aspect of this, and Blue Prism is growing 10%, 15% plus. It's in the company we acquired earlier this year, we expect to be able to accelerate that growth rate or at least maintain it at current levels, but improved profitability. They were losing money a little bit. Now they're slightly profitable, maybe 10%. We expect over the course of 18 to 24 months to be able to get that a lot closer to our corporate margins, which is more like 40%. But I think the question on deployment is we announced at our last earnings call that 5% to 10% of our workforce, we expect will be digital workers by the end of 2023. And that doesn't mean we're going to lay off 5% to 10% of our workforce, but it just means that the natural attrition that happens, we're not going to replace, and we're going to rescale and upscale and do some other things like that. And that is well underway, right? So we feel good about that process as automated as we think we are. And in a lot of the markets, we have really the best margins, there's still lots of jobs within SS&C that are done in a fairly repeated way with a large level of human intervention, right? And I think that's where technologies like digital workers and bots help us, and that's what we're focused on.