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

[Audio Gap] sticking around for the afternoon. We're not deep into the afternoon, but we're getting later into the afternoon. So I very much appreciate it. My name is Dan Perlin. I head up the fintech practice here at RBC. And I'm delighted to have the team of SS&C joining me, longtime friends to RBC. So we very much appreciate that.

Thanks for having us.

Yes. So we have Justine Stone, who heads up the Investor Relations department. And we have Rahul Kanwar, who's the President and Chief Operating Officer to her left. So again, thanks. I know you've had a busy schedule. So it's all good to see you.

Thanks for having us.

What we're doing as we start with most of the presentations is just trying to discern what's really going on in the world kind of fact from fiction. What's going on in terms of the demand environment. You guys touch and see a lot of different transactions. So if you wouldn't mind just starting to kind of level set for everybody, what are you seeing out there just in aggregate, and then we'll drill down into all the various subsegments of the business.

Yes, no, that sounds good, and we're happy to be here and appreciate the interest. For us, it's obviously the world is a really volatile place, and there's a lot of different things going on around the world that potentially have an impact. But it's somewhat offset by the kinds of businesses that we're in, right? We're in mission-critical. We do regulatory services. We do investor reporting. We do taxation services. We provide software that folks use to run their back office. So these aren't luxury items, and they're also not -- they're not optional. So our demand environment, for the most part, stays pretty steady. We do see some impact in particularly choppy times at the periphery in some of our businesses. But on the whole, pretty healthy.

Yes. Anything to call out in terms of just moderately or even lengthening sales cycles? Some today have said yes. Some have said no. Hard to know what's really going on. But it feels like they are getting a little bit longer or have been. I'm just not sure what you guys are seeing.

We haven't really seen somebody that was going to do a big outsourced deal with us or a big some kind of business process augmentation or something like that say, "Hey, we're not [ in the market to traffic ]. We're not going to do that." I think where we may have seen a little bit of dragging of the feet is in license sales, particularly on-premise license sales. But that's a pretty small part of our revenue.

So one of the things I wanted to talk about was organic growth. The trend line had been kind of going in the wrong direction for much of '22. It feels like it's troughed a little bit in the fourth quarter and now it's starting to trend back up. So directionally, it's looking a lot better. Maybe you could talk to some of the attributes that are driving that and kind of help support it longer term.

Yes. Look, I kind of think SS&C is a complicated place. And in order to...

It is.

And I know we're going to get into some business-specific things, right? So in order to kind of understand any of that, you have to decompose it. But in general, the vast majority of our businesses have actually been growing pretty nicely in the last couple of years, right? The reason why the trend line, Dan, that you talk about is, hey, we did a number of big acquisitions in 2018. And we've had any number of years where we've been working on improving sales and marketing, improving product development, improving the kind of the quality and leadership and making sure we're staying connected to our customers. And some of those businesses haven't grown as fast as we would like, but they are turning the corner. So really, what you're seeing in terms of some added strength is the businesses that were performing well are continuing to perform well. And the businesses where we were heavily focused on making sure we turn them around, we're now starting to turn the corner.

Yes. And the acceleration in the second half is just an extenuation of that point because I think the guidance -- you did just under 2% organic growth in the quarter. If you excluded health care, which we'll talk about in a minute, it was even better than that. Guidance at the midpoint for second quarter is like 2%. But for the full year, midpoint is like 4%, but it could be as high as 6%. So there is an acceleration in that back half that's implied, and I'm just trying to make sure we understand...

Yes. I think we've got a number of things that we're seeing that will kind of -- that builds into that guide. First of all, when we issue our guide, it's really looking at the economic backdrop as being pretty consistent with the day we issue guidance. We're not really building in any kind of market acceleration or any kind of deterioration, and that kind of accounts for the range that we give. I think we've got a few things going for us. We've got some backlog that we're converting to revenue that will come to fruition in the second half of the year. We've got price increases that we've been pushing through since probably Q2 of '22. So we'll get the full benefit of some of those price increases that we've implemented last year as well as we're continuously going through our client base as contracts come up for renewal and raising prices on those contracts. So that will count for us as well in the second half. And then we've got a pretty full pipeline. And obviously, there's execution risk whenever we give a guide, but we've got some high confidence deals in the pipeline that we should be able to convert and get that sales revenue.

Yes. So pricing is an interesting one. So I feel like you've talked about roughly 2% on average across the board, maybe gives you like $100 million as you think about run rating it. But I also feel like last time we chatted that there were some contracts that you didn't even have price escalators in or COLA contracts built in. Have you since rectified that? And how have the clients received it?

I think rectifying it is a continuous process. So it's generally triggered around contract renewals. And so the ones that have come up for renewals, we have ended up at, I think, a better -- on a better footing than we had previously. And that means we got some current price increase, and we also agreed, in most cases, to some mechanism for that price increase to become more automatic going forward. But we're by no means done. And so that's going to be something that will be a benefit for us for probably the next couple of years.

That's great. Okay. So let's get into some of the businesses. We won't go through all of them. We're going through a lot of them. So the Global Investment -- or Investor and Distribution Services business, I think it's like 20% of your revenues. It actually grew 3.6%, I think, organically in the first quarter, but that's after being down almost an equal amount in the fourth quarter. So what have you done to change that business over the past several years such that now it's really growing again?

So the GIDS business, which was formerly at DST the big mutual fund transfer agency business, we've kind of restructured DST financial services in general and created GIDS, which is really a global business that services the end investor of our clients. So whether that's at a big wealth manager or a big mutual fund, we do that kind of recordkeeping for that an investor. It's obviously been kind of a business that hasn't performed on the revenue side for the last several -- or not several -- we've -- but the last few years has been a weakness. But we've made a lot of investments in the technology and the customer service and really being close to the customer, as Rahul said, and finding out what the customer needs and what the customer wants and making sure we have the right leadership and the right sales leadership in that business. So I think kind of all those things that we've been working on over the past few years have really kind of come to fruition or starting to show in the numbers this year. It's mostly recurring revenue. So we expect this business to grow 3.5%, 4% for the year, which we're pretty happy with considering what they were doing before.

It's a [ fear ] image really. I mean it was negative -- almost -- I think it was [ 3.4% ] or something.

It was a drag on our overall growth rate, and now it should help.

Is this as much a sales reinvigoration, go-to-market strategy, change incentives in terms of how you compensate? Or you're getting brand-new people that just think about the business differently and attack it in a different way?

I think it's a little bit of both. Probably, I would say, more of the former where we're really, as Justine just said, we've invested in leadership. We've invested in product. We've invested in making sure that we're -- we have the right kinds of people facing off to our customers. And that is starting to have some positive impact. There's also plenty of doom and gloom about, gee, how much transfer agency can you really win. But the other thing Justine just said is if you're a big wealth manager, and some of our big clients in this business are big wealth managers, we're taking care of your end clients.

That's right.

Right? And that has been a pretty big growth area for us. And the other thing that's happening is we're bringing together solutions that are some combination of GIDS and Advent or some of our other businesses. So we're offering a much more complete set of things, which means we get paid more and we also have a higher win rate. And so those are all some of the factors that are helping us. And kind of like the pricing comment, there's plenty left to do, right? So we're happy with and encouraged by what we've seen so far, but we do think that there's more to get here.

So the alternatives has been a bright spot for you guys for a number of years. It remains so today. I think it grew just under 7%. We oftentimes get the same kind of question, how much growth, how much share can you actually get in that business where you've been super successful. I know recently you talked a little bit more about private markets and what that could mean. So maybe if you would elaborate on that a little bit, it would be great.

Yes, well, I think alternatives has been kind of the strength in our growth story for a while now. I think it's a good market to be in, and we have a very strong position competitively. If you look at it kind of the 2 big pieces, you've got the hedge fund piece, which is the larger piece of the private markets business, maybe $800 million or $900 million in revenue. And hedge funds are pretty close to 100% outsourced. They almost all use a third-party fund administrator to do their NAV calculations. I think our opportunity within the hedge fund piece, and it's a little more tied to market increases in the equity markets, just a bit more, but I think our opportunity is getting deeper within those big organizations, taking over more of their funds, doing more middle office and putting more value-add services and then competitive takeaways from our biggest competitors, the traditional kind of big banks that have been doing this for a long time. I think private markets, on the other hand, $300 million to $400 million of revenue. It's a pretty exciting market to be in. There's been a lot of assets going in there, a lot of new kind of -- new types of asset classes coming that have gotten pretty popular, private credit being a really big opportunity in the last 12 to 24 months. And there, the business is probably only 30% to 40% outsourced where there's still a large portion of that is done in-house. So we're both able to do competitive takeaways, take advantage of the assets flowing into that market as well as helping out these big firms that are still doing a large portion of their operations in-house. And we can run it more efficiently. We can provide them with better technology and hopefully a more resilient business.

Yes. So let's touch on Institutional and Investment Management. Here again, the trend is the same, right? You're actually way better than the fourth quarter. You're up almost 10% organically in the first quarter versus, call it, 5%. So massive acceleration here. Talk about client wins, implementations that are happening that are actually starting to drive this acceleration. And is that also going to be supportive of your visibility into this business into the second half of the year as that potentially continues to accelerate?

I think our I&IM business, it's mostly a license business, so it tends to be a bit chunkier. And it has -- it's been strong for the past year or so. We brought out some new products, in particular, Aloha, which has been pretty successful as we -- as a very nice upgrade path for some of our older products. So I think we've had success there, and then we were also able to get pricing increases that are pretty automatic within the I&IM business. So I don't know if 10% is a necessarily sustainable number for that business going forward. I think they're more low to mid-single digits going forward, and I think they might have some hard comps in the second half of the year. It's not a huge business for us. It's about $300 million or so?

Yes.

Yes. These are definitely not all created equal as we go through them. I should probably put that in there. What about Advent? Advent seems like it was -- had a difficult comp, a license comp. But last year, second quarter was pretty strong, too. So I'm wondering, how should we be thinking about the cadence potentially? Any things that need to be called out as we think about building out the Advent business going forward?

I think the underlying foundation of the Advent business is -- and Advent, as many of you know, we acquired, right? So that was an acquisition in 2015. Justine, is that...

2015, yes.

2015. So what we have really done over the last 7 years, 8 years is we've improved the growth rate, and we have improved the profitability, right? And so I think any given quarter, particularly because it's a license business with accounting 606 kind of implications where you have to early recognize a portion of the license, things like that, and you get some spikes and the growth rate isn't quite as stable and -- as we would prefer it to be, but the underlying -- once you normalize all that, the reality of the Advent business is they're doing a great job of bundling in services with their licensed products. So they have -- we have much more of Advent on demand outsourcing being done now. And if you buy Advent license product, you're much more likely to run it in our data centers, which means there's a continuous recurring revenue stream that comes out of that process. And we do expect that to continue.

Yes. How do you think about the wealth management business, I guess, just broadly in the context?

Well, that is probably one of the shining stars in that Advent area, which is our Black Diamond business combined with a few small acquisitions that we did. Salentica is one of them. Tier1 is another one. And that business has grown north of 15%, maybe closer to 20% a year. And it doesn't seem like we're running out of opportunity anytime soon.

Yes. Yes, which leads me to kind of the health care business. I mean this is, I think, the one that optically has been the biggest drag on the overall company's growth. But it's gotten less bad, let's say, in terms of how it's trending. But you're still calling for it to be down, I think, $20 million to $30 million, maybe 10% for 2023. So maybe just remind us here again. You made some improvements in the business. I think there's also some comps against client losses that are getting better. But is there a point where you can see a crossover in your model, maybe not [ nor as ] necessarily, that, that could turn flat to positive at some point?

I think health care, it's gotten less bad, and it's less of an impact because it's a smaller business. So it's not a huge piece, and it's not going to be a huge drag this year and then next year. I think right now, what we're in is we're in investment mode. We're building DomaniRx with our 2 partners, which are pretty big players in the health care industry. So we think we have good perspective as we build this technology and we build it to the requirements of a big, complicated health plan or health insurer. So we're pretty excited about the DomaniRx opportunity. We think that while there's been some attrition, and a lot of times with this attrition, it's real hard for our clients to actually get off our system, so it just kind of elongates the weakness as they are taking a longer -- it's not like it's one and done. They just take a long time to roll off. So there's that kind of ongoing weakness. But we think that we're going to lap that next year. They'll be completely off, and we don't see any other additional attrition as of now. And then we've got DomaniRx launching our new PBM platform that we think can be a pretty big game changer in this industry that doesn't have a whole lot of new technology, hasn't had new technology in a long time and also doesn't have an independent provider of that technology where you can trust to go to someone other than one of your biggest competitors to do your processing. And I think that, that will have a pretty positive impact on the industry as a whole. We think that we should at least be flat in '24 to start and then should see some acceleration in the back half.

Got it. Since you brought up DomaniRx, can you maybe talk -- maybe just take a step back and explain to the audience kind of like how that journey became so important where you decided to build into this and really what it's designed to ultimately do long term?

Sure. And I think even before that, if you take one more step back, really what we're trying to do in a lot of these businesses, as we've talked about, is we're trying to make sure that there's continuous innovation, right? So whether that's Aloha that we talked about as it relates to I&IM or it's putting more services in with the sale of Advent license products, including data center-type services, we're just -- we're making this so that it's easier to buy and there's -- you get a lot more value out of it. Domani is, in some ways, an extension of that. And in some ways, it's completely brand new. What we saw in the tens of millions, hundreds of millions of claims that we process for pharmacy and medical is that our customers were really looking for data, right? They were looking for easy access to the data. They wanted to build APIs to the data. They wanted to analyze and optimize, and they wanted to basically use those business insights to drive their strategy. And the health care industry, kind of like the financial industry in part, runs in large industrial systems that don't readily provide that kind of transparency, which is kind of why us and others like us get to have brand-new businesses and get to build lots of cool new technology. That's what we're trying to do in health care. So we're building cloud-native, brand-new technology that we have the benefit of unlike a traditional software company that takes a lot of risk. We're already doing the work now, right? So we kind of know what it takes to do the work. We have steady revenue streams. We have 2 big partners that put up their own capital to invest with us, which is a pretty big endorsement of how they viewed our capabilities and the risk profile. And we think when it's done, it will be the only system of its kind in pharmacy benefits. And so there will be lots of opportunity.

Got it. And the time line to be thinking about when you're really complete with everything in terms of its investments and then ready to go general availability to the market.

I think commercially available in 2024. That is likely -- since we're putting it out on a modular basis, there are some modules that are available in 2023. But most of the system will be available in '24.

Got it. Okay. In the past, you've talked about, I think, Intralinks as being a little bit of a swing factor for you guys. Like there's $30 million, $40 million or something like that to the extent that M&A is elevated, but maybe not. So can you just talk about how you're thinking about Intralinks in the context of what you see currently in the M&A environment? And are there any things that we can kind of glean from that business that would influence whether we're going to be seeing a bigger M&A cycle or not?

Yes. I mean I think if you look at our Intralinks business, it's been a strong business for us. It's probably $450 million, approaching $500 million in revenue. And in a really booming M&A environment, in M&A, virtual data rooms probably account for about 70% of their revenue or so, 65%, 70% of the revenue. They can be growing 20%, 25%. In a weaker M&A environment where we're not really seeing M&A, this past quarter, Intralinks probably grew 3.5% or so. And I think that growth is better than a lot of the analysts I talked to would assume that Intralinks would be negative just based on harder comps against that M&A environment. But the other pieces of -- the non-M&A pieces of Intralinks have continued to perform. The things that we sell to alternative investment managers for LP communications and things like that continue to grow in the teens. And then the Intralinks M&A piece is pretty stable because there are data rooms -- we get paid for a data room being open, having data on it. We get paid usage fees. So -- per document per people accessing it, that kind of thing. So if these data rooms open and stay open and a deal might not get done, people might just be kicking the tires, we'll still be getting paid on that. So it's a little more resilient than you may think. And I think early indicators from what we see in that business is things are improving [indiscernible].

They are improving. Yes, so [ you're going to heat up ] a little bit on the M&A side. [indiscernible] but a little bit. Okay. Let's talk about cost side. We talked a lot about the top line. You have a lot of cost initiatives underway, obviously, one of which is the asset of Blue Prism that you acquired. So maybe, I guess, first, kind of level set what Blue Prism is, why you bought it and how you think you're going to be successful in helping turn that kind of asset inward so that you can take some cost out of your business?

Sure. So Blue Prism is a workflow and automation company, right? So what it does is robotic process automation and machine learning and uses AI to help automate large scale, complicated workflows in -- unlike the rest of our businesses, which are focused on financial services and health care, Blue Prism is really cross industry, cross function. It's about $250 million in revenue. We acquired it last year. We're coming up on, I think, the first year, we met our targets, both from a growth standpoint and from a profitability standpoint. I think Blue Prism was losing a little bit of money when we bought them. And we expect that over the course of the next -- we've been in it about a year. And let's say, over the course of the next 1.5 years or so, we'll get to our corporate margins, which is about 40%, right? So we're going to go from not making any money to making, whatever, $100 million in EBITDA we'll have grown to by then. And so we're pretty happy about that. We're -- but our enthusiasm goes beyond kind of that particular metric. It's also -- it gives us a pretty big opportunity internally to take much of this automation and apply it in our GIDS business that Justine talked about where we have 10,000 or 11,000 people doing, in some cases, routine functions and procedures that are -- they lend themselves to this kind of automation. We also have a fund administration business with about 6,000 people in it that, once again, are routine. And so what we've said for this year is we think we can take the Blue Prism technology, what they call digital workers, and use it internally within SS&C so that by the end of the year, 5% to 10% of our workforce, measured in full-time equivalents, is digital workers, right? And because we own the Blue Prism technology, we're not paying digital workers, right? It's a little bit different than -- so that's really good for kind of our cost control measures. But it's also really good for the product because we get to build all these use cases and validate all this technology internally. And then you can go out to market and say here's how we use it in investor statements, here's how we use it in cash flow processing or 100 other functions and makes that sales cycle even easier.

Yes. So I think you said $65 million roughly was kind of the number? That's about...

Yes. That corresponds to like the 5%. Yes.

Yes. And that -- I think you said that will be like 1,300 worker -- digital workers, 50,000 [ a pop ]. But to your point, like it's important to train it on yourself to create product then and know-how to go out and sell it. So although you're still growing that business, I want to say it was 10% or something like that last quarter, the possibility for that to accelerate as you learn how to use it is probably pretty high.

That's right. And we also think that -- look, Blue Prism was up for sale for a couple of years, right? So some of that backlog and pipeline generation and so on and so forth, we've had to reinvigorate as we've started. So we're pretty happy with how we've been able to replenish the various stages of the pipeline.

Yes. There still is an EBITDA margin expansion story even beyond that. So what are some of the other attributes that you're going after?

Well, just to kind of give you a sense of opportunity more than anything else, we bought DST in April 2018, had $2 billion of revenue, 19% margins. 1.5 years later, they had $2 billion of revenue, 39% margins, right? So we think our ability to pay attention to expenses and be somewhat smart about what we cut and what we don't cut, it's something we certainly spend some time and attention on. Broad strokes, this kind of worker productivity, in general, is a pretty big area for us. We've got opportunities around real estate as we're still somewhat hybrid, with lots of available real estate for anybody that would like some. And there's contract consolidation across our acquisitions. There is kind of continuous analysis of third-party spend on vendors and other software products and things like that we use. We're pretty comfortable that we can deliver steady margin improvement every year, likely 50 to 100 basis points every year, sometimes more, even in inflationary environments. But we're very much focused on making sure that the level of investment in our businesses is the right level that the innovation process that I talked about continues to happen and we'll get some cost savings along the way.

Yes. Okay. And when we talk about leverage on the business, I think the goal is to get down to -- well, I think you're just around three four, something like that, in the last quarter?

Three four, yes.

Yes. And your target is to get to, what, closer to 3? I forget the...

Yes. I think we think that being under 3 will be viewed positively in the market. So I think right now, our capital allocation -- or our guide implies 50% of free cash flow towards debt pay down, 50% towards stock buyback. Once we hit that kind of two nine number, that magical number, we might shift some of that more towards the stock buyback. It might be more like 60-40 or 70-30 dependent on where our stock is trading at. We think we've ridden out kind of the interest rate cycle. We'd like to be flexible.

Yes. And that would lend itself to potentially getting back into the market and a little more M&A. So is there -- in the last minute or so, when we think about the types of deals that you would look at size, scope, you've done very large ones and you've done small ones. So you're kind of leaving the book open for us. What should we be thinking [ about ]?

Well, we like wide lens, right, because you look at everything and it's always good to look. And then you try to find the ones that are most compelling, and that's what we've always done. I think that's what you'll expect us -- yes, that's what you can expect from us. You'll see tuck-ins all over the place. And then occasionally, there will be a big, even transformational deal that we're still very open to do.

Cool. All right. We're out of time, but thank you very much for being here, and best of luck on the transition to higher growth -- organic growth.

Thank you.