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

All right. We'll go ahead and get started this afternoon with Bill Stone, CEO and Founder of SS&C. Thanks for being here. Before we start the chat with you, Bill, I do have a quick disclosure I need to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representatives.

So Bill, I know it's hard to believe you've been running this company for a long time, creating a lot of value for people over the years. But maybe for those that aren't familiar, can you give us a brief overview of your business and the problems that SS&C is solving and where you fit in the financial services value chain?

Thanks for having me. Thanks all of you for coming out here. I found this place in 1986, which was really when the PC networks really took off. So it was a really good time. And I would say 2023 with things like ChatGPT and other things like that, it's another really great time, and you're going to see a lot of new entrepreneurs come out. What I did in my whole career before I started SS&C is I work for the CEO of Advest, and I work for the guys that ran different practices at KPMG. And I learned quick that if you got them the information they wanted when they wanted it, they thought you were smart. If you didn't, they didn't think you were quite so smart. So that's the whole basis of the business is to get the information, slice it, dice it and deliver it back in the way they want it, when they want it, how they want it. And somebody might want it in an Excel spreadsheet because your number is freaking like to go all through that. Another guy might want it in a PDF because they want to make a presentation, and somebody else might want a wordsmith so they want it in a Word doc. So doing that kind of mass customization has been a very good thing for SS&C. So in '96, we went public. We did $26 million in revenue in 1996. In 2005, we went private with Carlyle, we did about $95 million in revenue. And then in 2010, we went public. Morgan Stanley helped us at $329 million in revenue. In 2015, we bought Advent, and we did about $1 billion in revenue. And last year, we did $5.3 billion in revenue and about $2 billion in EBITDA. And so I've always thought that was a pretty good growth record. Of course, all of you have corrected me that it's really not that good because you don't stick organic in front of it and all these other things, but I still think it's pretty good. And we went public at $7.50. We're now trading $58, $59, $60, been as high as $85. And like a lot of you, we think we're undervalued. But Wall Street makes that decision. And what we try to do is execute and have a great business, and we make money. We've always made money. We've always had pretty high margins around 40%, 42%. They dipped down to 34% in the middle of a great resignation when people we were paying [ 90 ] that were worth [ 70 ] would get recruited for [ 170 ]. So while we lost a bunch of people and had to hire a bunch more and had to compete, but I think we ended the year with margins back up at about 39%. And I think we're going to drive margin strong with the acquisition of Blue Prism, and our ability to deploy digital workers.

So let's talk a little bit about the growth and the growth rate is if we look at the flat organic constant currency revenue growth you had in the fourth quarter, it's definitely constructive to see that your initial outlook for '23 is kind of organic growth in that 2% to 6% range. Like how are you putting together the drivers and thinking about the drivers that will propel you to the -- what can get you to the upper end of that range versus the lower end? Just help us think through like what the drivers are of growth that you're anticipating for this year?

Yes. We've initiated price increases that we think will generate $100 million in revenue. We also have new logos. We think will drive a couple of percent in new logos, and we think we have an opportunity to drive a couple percent in cross-sell and upsell. We also have probably $100 million in already sold that we're implementing, and we have to get them implemented. The work from home and all of the COVID issues and challenges does not make implementing large-scale systems the easiest thing you've ever done. So we have a number of very large projects that we're coming to fruition. So we have some optimism. And also we should generate somewhere around $1 billion -- $4 billion, $5 billion in free cash flow.

Got it. Got it. And then with those price increases and the new business, et cetera, are those strongest in any particular segment? And what about the potential for recovery in Healthcare and DST in particular, given the declines we saw in 2022, particularly?

Yes. The Healthcare business has been a challenge is when we acquired DST, they had this business, but Cigna was one of their biggest clients, and Cigna bought Express Scripts. So using us was not in the cards, and so we can stretch that out as far as we could. In '22 as far as we could from '18. And so Cigna spun-off, and then we also did something called click fees that we got for every prescription in a lot of different states, and it was worth about $15 million a quarter to us, and states outlaw on that. And when they outlaw it, we don't do it. So right. So that went away. And I think that -- but we think DomaniRx, which is our pitch on a new claims adjudication and payment system for pharmacy benefit management, companies has got some really good traction. We're demonstrating it. We think we'll get at least $25 million in new revenue in '24. We'll get maybe $100 million in '25 and then maybe even quite a bit more than that in '26. So we have a lot of optimism around that. We've been doing demonstrations of it, and we've been getting great feedback. We've also looked at everything that's in the marketplace, and there's nothing quite like this. So we also view this prescription claims processing and information delivery is very similar to fund administration, a prescription and a trade ticket look about the same; number of pills, number of shares, price, price. Rx number, CUSIP number, doctor, trader. So it's 6, 7, 8 pieces of information and millions of them. So you got to grab them, process them, collate them, deliver information back.

And so on that DomaniRx, like where is the product differentiation versus other systems in the market, et cetera. I think you your explanation of how it looks a lot like what you've done historically is interesting, but what about in the competitive environment and landscape?

I mean I would say it's a little bit like your Captain Kirk with your flip phone, and I came out with an iPhone, so the difference is pretty stark. And it's a 40-year-old technology to today's technology. It's all API-driven and cloud-based and lots of new ways at looking at the information with interactive portals and information that people can integrate in their systems. And like I said, what demonstrations we've done so far, we've gotten great feedback. And as I said, we've looked at everything that was in the marketplace, and we have not seen anything like this. Now we have 350 people working on this, and that's a big systems project. It can easily get screwed up. We've done it a few times. But so far, this is working pretty well, and we're all over it.

And what's that sales cycle time and then time to implementation and that kind of thing on the DomaniRx?

We're -- as we're building the system, we're also building conversion processes and commercial routine we're going to have as automated. So we think we're going to be able to cut the conversion times down 50%, 60%, 70%. And again, there's all the hospitals, all the clinics, all the doctor practices, all the dental practices, all that. There's millions of them, particularly, you start thinking about financial services and how regulated it is, you are not seeing nothing yet. You ought to read HIPAA. Every one of the state health departments, all of the different things that you see in different jurisdictions around the United States. So it's very regulated. It's massive numbers of users. And then the populous as a whole is getting older. So the demographics of the entire around healthcare industry are positive for tech and service companies.

And then there's obviously been -- or at least for us, there's been a lot of talk about like the macro environment, et cetera. And so what are the types of trends that you're seeing kind of so far this year across each of your segments? And are you seeing evidence of weakness or slower-decision cycles, et cetera?

Well, I mean, Jay Powell is kind of a precursor of all good and all bad, right, so everyone pays attention to the Fed. I mean it always has, but maybe not quite as intently as it is now. And so -- but we go across every asset class and supply information to 20,000 entities. We have the largest clients in the world. Our largest financial services companies in the world such as Morgan Stanley and JPMorgan and Goldman Sachs, Bank of America and so forth and so on. And we also have all the largest mutual funds and all the biggest hedge funds. So the platforms, the Citadels, the Millenniums, the Baupost, the Point72, those are all clients of ours, very laid back, easy going people [indiscernible]. But it's stuff that if you can deliver, they pay. So it's a great market. And we look at some other fintech companies that have way higher multiples than we do, and I keep thinking do people really think community banks are smarter than hedge funds? And that's the only thing, they must be smarter. But I've met a lot of community bankers. Most of them aren't smarter than those hedge funds.

Right. So on -- talking about M&A, Bill, it's very, very easy to acknowledge that you've delivered a lot of value over time through M&A as you integrate assets and realize both revenue and cost synergies. I mean -- and being able to do both is obviously been a big driver of that value creation. What kinds of assets either public or private are you targeting in the current environment? What would make sense for you?

Well, the first thing if you're going to do M&A, it is to realize it takes two to tango, right? And what you start to do is pursue, right? You better be ready to really open up your wallet, and overpaying has not been a SS&C hallmark, right? So we will bid and when we want something. We'll bid pretty high. And generally, we have the financial resources and we have the partners that we can get the money, it's a question of can we get the returns we want on the outlay that we put in. And taking -- we don't do things where the margin is so narrow that we have to be perfect. We are not perfect. We're going to make mistakes. And we're going to screw things up, and we're going to have to fix them. And there's got to be enough margin in there that, that's still okay. So we watch a number of our competitors buying these things at prices we think are ridiculous. And then we just wait until they fall, then we'll buy them. So it's having patience that's looking at it in a way that's ice cold and then trying to continue to execute. So people -- we've always made money through this whole time, and I know we were only supposed to grow and we weren't supposed to make money, but we made money anyway. So we should make close to $5 a share in cash this year. And I know people don't like cash anymore, but I've always liked it.

They might like it more now than they did 6 months ago.

Yes, it's nice of them finally. But -- so we think that gives us flexibility. And if you have patience, you're going to have an opportunity to pounce, and then all of a sudden, it's going to be, wow, those guys finally started eating smart pills again because they dump pills for so long. But we always made a lot of money. And like I said, we did $115 million or $120 million in EBITDA when we went public in 2010. This year, we'll be $2.2 billion in EBITDA. So it's not the growth everybody wants, but it's really made a difference in my life.

So on that point around valuations and what the market prefers or not, what are you seeing around valuations? And I know that it's -- to your point is that you're going to be patient and frankly, accrue some of that cash to give yourself some optionality. But what are you seeing in terms of valuations? Are they coming down? Or are you seeing things that are starting to come into the right range? And I get it that as you put it, it takes two to tango. But is there at least opportunity for better conversations than there have been?

I think there's some swing back of the pendulum from growth at all costs to grow at say -- just ridiculous, but the sellers, the entrepreneurs or the private equity firms, they're not yet at decision point where they're going to have to take considerable haircuts in order to be able to move their assets. I mean even FIS, which has got a couple of activists in there and they're looking to spin out Worldpay, I guess. And then maybe their capital market.

Maybe their capital markets.

But those are some assets that are out there. I think Infusion has had some changes in its management, which makes it pretty difficult to not maybe be in play. And Temenos itself has had a few challenges. And there's a number of fund administration businesses that are still owned by large financial services companies that we think will be sold because they'll be in kind of purgatory as far as concentrating their businesses and sticking to the knitting and doing what they do best versus kind of the technology debt that most people that compete against us and fund administration, they don't pour in there as much money at it as we do, right? So we think we're ahead in the race, and we're running faster. That means we're not going to get caught, right? So that's something where -- if we spend $500 million, and you're behind us, you're going to have to spend more than $500 million. If you want to catch us then, you don't have near as big of business, it's not nearly as profitable, right? It's not nearly as expansive. It's not nearly as many different asset classes and different kind of strategies, and it's not global. Those are all benefits to us that over time, we'll continue to be able to execute against.

How do you think about the right amount to pay for an asset vis-à-vis your own valuation? How much does your own valuation fit into the lens through which you look at potential acquisition prices, et cetera?

Really not too much. It's much more of what are you getting, and what do you have? And then what can you put together? And does it give you some multiple value, right? Like we really -- we bought this company called Innovest in the middle of COVID, spent, I think, $125 million, bought it from Bluff Point capital. And now we got to take Intertrust -- Innovest trust system with our Black Diamond system, and we're going to go to RIAs and say, hey, as these clients of yours get older and start setting up trust for their grandchildren or children or so forth and so on. Now we have a very smooth trust accounting system. And trust accounting has been dominated by SEI and FIS and their technology is 40 years old. So you again have an opportunity to drive newer technology and more simplified workflows, and that's been pretty popular. So we got one small bank in Indiana. That's going to pay us $900,000 a year for 5 years, 1 small bank. So we think that, that's a huge market that we can go. Now you got to get the references and they got to give you a great time and -- but the opportunity is pretty big.

So let me make sure, first, I've dominated the conversation here. [Operator Instructions] But let's talk about Blue Prism. On the most recent earnings call, you mentioned you expect about $50,000 of cost savings per deployed digital worker. I guess if we were -- even if we were to assume the number of deployed digital workers comes in at the lower end of, call it, 1,350 to that 2,700 range, that's like $60 million of run rate savings. On top of that, in addition to your expectation for Blue Prism margin expansion, how much of those run rate savings are captured in the overall expansion outlook of 50 to 100 basis points.

Well, not that much. So we think that we're just getting started with what we're doing with Blue Prism, and the use cases that we're coming up with are getting increasingly sophisticated and its ability to perform is -- continue to surprise us positively. So we've deployed a number of them. And just for one use case, we have a great big hedge funds, got a couple of hundred limited partners. They're fanatics on everything that they deliver has to be perfect. So I can't say your address is Mr. James Faucette [indiscernible], rather than I'd have dear Joe.

That's a mess.

Really bad, right? So we put 1 digital worker on this. They used to take humans 2 or 3 days, 2 of them to go through every one of these statements. Digital worker does in 2 or 3 hours. Digital worker does it perfect. Humans get tired, make mistakes, right, get bored. Digital workers don't get bored, don't get raises, don't bitch. I think they're kind of model digital workers we go on. So if you can deploy them and you got to have smart people build the algorithms that build these digital workers. If you do that, you have smart digital workers, that reverses through too. You got dumb ones to do, you get dumb digital workers. They're not so good.

So I guess as a follow-up to that then, how much are you thinking about or what are you thinking about as the right amount of those expense savings to let drop to the bottom line versus reinvest in the business?

Yes, it's funny. We try to -- we like to have high total shareholder return too. So we like to have a higher stock price rather than a lower stock price. But we also think that once we have 42%, 43%, 44% EBITDA margins than anything above that, you're not going to pay as far anyway. So why not plunge it back into the business and see if you can get your growth rates up, right? Because what that does is it allows us to get our growth rates up without sacrificing our margins. And I can't help it. I'm an old accountant, we like to make money. So we're not going to do growth at any cost. And we think there's lots of ways in which to return cash to shareholders, whether that's buybacks or dividends or even paying down debt. So we're going to look at all 3 and do M&A as well. I know you're a big advocate of M&A. When I go talk to my shareholders, they said, "don't do what he says". I say, "well, he's pretty smart client," and then they say, "hey, he's good looking too, but don't do what he says." So I just look at it that we like M&A. But we like M&A at a price where we feel like we can get them returns that -- the risks that you're taking are commensurate.

No, for sure. And then talking about implementation and with some of the new wins, et cetera, one of the challenges to implementation is just keeping the employees around and so that they're trained up, et cetera. But I'm wondering how our implementation time lines trending? And it seems like retention should help improve that sum. But -- and you've done a really great job of that throughout most of your history. But what's playing out right now in terms of implementation time lines and then associated employee retention, et cetera?

Well, it's difficult. And the clients are justifiably frustrated. But they don't realize that they're not the one going through this great resignation and this implementation cycle and that we're now running their call centers, and they're the ones taken care of. They act like it's business as usual, and you guys are just screwing up. Hold on. right? Here's how many calls we're getting. Here's what we've done. Here's how much new people we've deployed on this. And like we take 100 of their people, right. So we rebadge them as our people, and they forget that they have all that savings. We don't have all that savings. We have now that 100 and we have had 50. So you have to have a good relationship with your clients and be up-front with them. And and have them understand that, look, this is a process. And almost for, when it first was work from home, I don't know how many of you have operations in India, but it was really in mess, right? But it wasn't too much of a mess for us because all of those people are our employees. We're not using third-party contractors. So our triage is our own, those places, triage is, oops, Morgan Stanley is really mad at us today, move everybody to Morgan Stanley. Oops, State Street, move all over there. Oh, my God, let them have -- and all in all there's another one, right? So I mean that's what happens when you're using third-party contractors as they're moving to whoever the squeaky as real it is, right? These people are our people. And they don't get to go to anywhere except our clients, right? So it's a better model, and it's worked out very well for us and very well for our clients. So we have done a pretty good job. And we sell our technology to 40 fund administrators that we compete against. They use our stuff -- others probably small ones. Well, you know, we're not that small. JPMorgan, Bank of New York, State Street, Mitsubishi, HSBC, that's 5 of them. So they're all paying us to run our technology. I like this side rather than their side. And then when you compete against them, you get to sell that prospect. We own the source co...

So last minute or a couple of minutes here, I wanted to ask quickly on -- as you mentioned Infusion, which is somewhat of a competitor to that. But for as itself, it's obviously a strong player in the market, at least traditionally, we've thought about one of the key drivers for it as a growth component has been new fund launches. Last year, new fund launches were down 50%, 60%. It seems as though that headwind may abate and maybe we're flat in 2023. What's your general perspective on the pace of new fund launches this year? And how does that impact your Eze Eclipse business?

Well, yes, it's important. And then also volatility is important in the business, right? So we prefer more trading than less trading. And -- but we're making some changes in as we -- we have great client satisfaction and it's just -- you need to get more people on the gas pedal, right? You get people to jump on that gas pedal. I tell people all time, I'm not in charge of the brake. I'm in charge of gas pedal. Let's go. And so I think we have a great opportunity with this. We have really begun to integrate it very, very tightly with Geneva, and we think that's going to be very attractive to our clients. And we also have a number of other new technologies like real-time tax process. so that everybody can look at what they are going to do from a tax standpoint before they execute.

Before they execute well. Yes.

Right. Because that might save you 200, 300 basis points on your taxes. And as many of you know, getting that amount of return, that is not easy. So there's a lot of stuff like that, that we're doing that we think differentiate us from them. And like deal, I think you do that in taxable I said I have 150 tax accountants and lawyers that work for us. We have 1,500 CPAs or chartered accounts. So we really view ourselves as consultative in delivery of our technology and our services.

That's great. Well, Bill, we're out of time. Really appreciate you joining us today. I mean like I said at the outset is by your own history, you've obviously created a lot of value over a long time. And definitely feel like the opportunity set to continue to add to that is coming your way, especially it seems like they're like -- they're assets that are floating around out there. And if they make sense at the right price, be part of SS&C, I think they would be pretty compelling for sure.

Thanks for having me.

Thank you very much. Appreciate it, Bill.