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

Get started here. My name is Jeff Schmitt. I am a research analyst here at William Blair. I cover wealth tech stocks and our financial services in Technology Group. I'd like to introduce SS&C. It is a leading global provider of enterprise software solutions for the financial services industry. It's the largest fund administrator for alternative asset managers, the largest mutual fund transfer agent, and it's also a leading provider of software for just the broader investment management industry. It's a real leader in the software space for financial services. So we have with us today Patrick Pedonti. He's the CFO to discuss the business. And also just real quick, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. And with that, I will turn it over to Patrick.

Right, Jeff, thank you very much. Thank you for attending. I'll give like a brief summary of the business and what markets we're in and our recent performance, just to give people that aren't familiar with the company a little bit of background. And I understand we're having kind of a breakout session after if anybody's got any questions. I won't bother to read the safe harbor statement, but you guys are probably very familiar with it. As Jeff said, we're a leading provider of cloud-based software for the financial services industry. And our focus is pretty much completely on investment managers and providing portfolio systems and systems around portfolio management, whether they're front-end trading systems or middle office systems or back office systems like reconciliation and cutting NAVs and performance and compliance. We serve -- our biggest markets are alternative asset managers, our private equity funds and hedge funds. We're the #1 provider. In that area, we provide full back-office services for those investment managers. And that's about a $1.2 billion business for us. And it's all priced assets under management on a monthly basis. We also provide transfer agency services to large mutual fund complexes. That's also about a $1.2 billion business. That business is generally priced by number of mutual fund accounts. In addition, we've got a large software business where we provide portfolio management system software to investment managers, and we will -- we'll sell those either on a perpetual license, where they install it in-house or they can buy a term license, which is typically a 3- to 5-year license. And that can run either in-house with the client or we can host it for them on our systems. We also are in various other areas in financial services. We provide services to registered investment advisers. We're the largest municipal finance aggregator in the world. We do -- we handle commercial paper for large banks. And we also have real estate products for real estate managers. And we also have a health care system that we acquired when we bought DST in 2018, which is about $250 million, $260 million in revenue, so about 5% of our total revenue. But the rest of our revenue is all financial services industry. So as you know, we're publicly traded on NASDAQ. We've got about 27,000 employees, and we operate in about 40 countries and about 104 cities, mostly financial centers around the world. The vast majority of our business is in the U.S., the U.K., Hong Kong, Singapore and Australia. We have about -- as I said, we have about 95% of our revenues, financial service industry and about 5% is health care. We own and operate all our data centers, and we provide -- we also have our own private cloud, where we host term licenses for clients. And as I said, we sell our software in various methods, either on a SaaS basis, on a perpetual license, and we also provide full back-office services where we run the back office for asset managers. That is mostly today in hedge funds and private equity funds. There are also some insurance companies and large-scale asset managers that outsource our full back office to us. We have about 20,000 clients on our systems where we provide full back-office services. We have about $3 billion or $4 billion (sic) [ $3.4 trillion ] of assets, and those are priced assets under administration. And we handle about 47 million transfer agency accounts. I think if you look at our strategic advantage compared to our competitors, most of our very large competitors are large custodian banks, so Bank of New York, State Street, some of the other smaller -- some others investment banks also compete with us like JPMorgan and Morgan Stanley, and there are some -- also some independent providers in the industry. One of the advantages that we have over most of our competitors is we own our own software. So if you look at large custodian banks like State Street or Bank of New York, they're generally buying software to provide services from software providers in many cases from us. Most of them have not been able to maintain their own software internally. So that's definitely a key advantage for us against the competitors because we know our software much better -- much better than they do. In addition, we're fully independent. So a lot of hedge fund investors or investors in large-scale institutional asset managers want to make sure that the asset manager has an independent fund administrator that keeps track of the portfolio and values the portfolio. And they don't have any other ancillary business like FX trading or loans or other things that might conflict with that business. So that's definitely an advantage to us that we're an independent provider. We've got proven ability to execute. We've got high retention rates. We've got large-scale clients that generate over $75 million of annual revenue. And we're proven capability in the industry. We also provide flexibility for clients. I mean, if clients want us to host their portfolio and they want to have their own servers for privacy issues, we'll also provide those services, obviously, at an additional fee, but we're very flexible in what clients require. Couple of indicators of our business. As I said, about 40 competitor fund administrators use our technology. Nine of the top 10 brokers use our portfolio management software called Geneva, 75 of the top 100 hedge funds outsource their back office to us. We have top 20 largest asset managers are on our system, as I said, and then we handle about 47 million transfer agency mutual accounts for large mutual fund complexes. And our systems handle about 99% of the commercial paper and 95% of municipal bond issuance in the U.S. We recently acquired Blue Prism. Blue Prism is a process automation company. They provide process automation to the industry. The vast majority of their business, about 50% of their business is with large-scale financial institutions. They provide automation software to reduce back office costs. So we're -- we think that fits well with our business that where clients are acquiring our technology and our portfolio management software that they will also need process automation in their back office if they're doing it internally. We're also using that process automation in our own back office when we're providing services to our clients. We currently expect over several years that, that process automation will improve our operating margins by 150 to 200 bps. We've got a current target of replacing about somewhere around 1,000 to 1,500 employees in our back-office services by using process automation to handle the task of managing back office portfolios. At this point, in the implementation, we've got about 250 digital workers operating in our back office. We're implementing the processes on about 80 different processes. And we've trained about 250 employees on our staff to implement process automation in the back office. On capital allocation strategy, I mean, our -- as many of you know, we're -- we've done a lot of acquisitions in the past. And we -- our -- our #1 priority in capital allocation is acquisitions to improve our technology capability and other strategic reasons might be to enter certain markets that we're not in currently in portfolio management or certain regions that we don't have current strength in. And in addition, I mean, as many of you probably know, pricing in M&A market is pretty steep currently. We -- I think our CEO says that, when people ask him what our M&A strategy is and he just says one thing, price. So we don't -- we don't target companies for acquisitions, because generally, we view that when you target a company, you're going to overpay for an acquisition. We wait till companies put themselves up for sale. And at that point, we think we can get a reasonable price. In the last year, we've done 1 major acquisition, which was a Blue Prism we acquired in March of '22. And since then, with prices elevated for good stand-alone software companies, we've done maybe about 5 or 6 kind of smaller tuck-in acquisitions. Other than that, our main focus with capital allocation is we have a dividend, which we target at about 1% to 1.5% and the rest of the free cash flow, which is probably around $1 billion a year, we're currently allocating to -- 50% to stock buyback and 50% to debt pay down. Now that will fluctuate in any given quarter, but over a period of a year, we would expect to be at the 50-50 point. Our goal really is -- our leverage right now is about 3.4. Our goal is to get our leverage down below 3x. And we think we'll be close to that by the end of the year. And then with -- with what we view as a depressed stock, we'll also significantly buy back stock in the open market. Last July, our Board authorized a buyback of about $1 billion. And through the first quarter, we've spent about $400 million on stock buybacks. So we expect by July we'll be somewhere in the neighborhood of $500 million to $550 million, somewhere in that neighborhood through the second quarter. One thing that's important is, I think, on the cash flow is we're a company that really focuses on cash flow. Our strategic goals with our Board and what's tied to the executive compensation is EBITDA growth, top line revenue, organic growth and cash flow. And those are the 3 metrics that determine the executive compensation. We issue weekly cash flow reports and we monitor each one of the businesses as to their cash collections on a weekly basis throughout the quarter. And a couple of examples of some acquisitions we've done. In 2012, we bought GlobeOp. They were 1 of the top 10 providers of fund administration in the alternative space. I think at that time, it took us from number -- about #10 in the industry to #5 in the industry as top fund administrators. And today, as a result of that acquisition and also the Advent acquisition where we've got the Geneva product that's used in our fund administration business, we're the #1 provider in the software -- in the alternative outsourcing space. In 2015, we bought Advent. Advent got us into large-scale portfolio management systems for institutional asset managers and hedge funds with Geneva. Also in back-office outsourcing for registered investment advisers, which today is growing about 15% a year. And in addition, they've got a front-end trading systems for hedge funds and asset managers. In 2018, we did 3 large acquisitions. We bought DST. DST is a provider of a transfer agency business for mutual funds. They also do outsourcing for retirement accounts like 401(k) or IRA accounts and they had a health care business. That was about $250 million that did both medical claims and pharmacy claims for health care providers. We bought Intralinks. Intralinks is about a $500 million business. They provide secure data rooms for M&A activity, also for banks and securities firms when they're raising capital or issuing loans. And that business has generally grown anywhere between 4% to 11% a year. And it also provides secure data room capability for our outsourcing business when we provide information to our customers so that they can -- that way, we don't deliver them via e-mail or other methods, and they've got a secure data room to get their information. And I mentioned Blue Prism that we did last year. A couple of financial highlights. Most recent quarter Q1, we reported adjusted revenue of $1.363 billion. That's a 5.2% increase. Consolidated EBITDA was about $509 million, down 1.1%. And operating cash flow was $254 million, up 39% from previous year Q1. We've seen -- in spite of tough market conditions, we've seen fairly decent revenue growth, mostly because these systems are critical to customers. They can't eliminate their portfolio management system unless they go out of business. And we've seen a little bit of compression on margins as a result of wage inflation that we've seen over the past year. We typically see about 3.5% to 4% wage inflation. And in 2022, with kind of the post pandemic change of employees view and a very competitive labor environment, we saw about 7% wage inflation and we're seeing abated a little bit this year, where we're kind of back to normal 3.5% to 4% wage inflation. We have a very high margin business model. And that's why we really focus on asset managers and portfolio management system because we like the pricing characteristics in that industry and it gives us the ability to the complex nature of the requirements of our clients to generate high margins. And we generally run around 37% to 41% EBITDA margins in our business. As I mentioned also, the business is very sticky and very repetitive. About 90% of our business has high retention rates and it is recurring. And most recently, as you see from this slide, we run about 96% revenue retention rate. That's not a client retention rate, but we measure it based on revenue, what revenue we retain year-to-year, and it runs about -- we run about 96%, which is pretty much at the height of where we've been historically. We've probably run historically between 96% -- 93% and 96%. So over the last couple of years, we've been running at the high end of the client retention. EPS. Over the last 5 years, we've had about a 9.8% CAGR on EPS. During 2022, the main impact on the reduction of EPS was higher interest costs on our debt. The average interest cost on our facility has gone from somewhere around 2% to about 7% over the last year as the Fed has increased the Fed rate. But our EBITDA total has been fairly stable throughout the last couple of years. For guidance for this year, we expect organic growth at the midpoint to be about 4% and EPS in the range of $4.67 to $4.97 for the full year and operating cash flow of approximately $1.3 billion at the midpoint for the year. And then we'll have about -- on net operating cash flow, we'll have about 3.8% to 4% of revenue for capital expenditures, and then about a $200 million dividend. So that will give us free cash flow of about $1 billion for the full year. And I think I'm all set, Jeff.

Thank you, Patrick. We are going to stay here for the breakout. They're going to breakout room. We'll allocate about 30 minutes as people want to take a couple of minutes. I don't know if we need a microphone.