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

Thanks, everyone, for joining us today. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. And I'm delighted to have back to the stage, Bill Stone, who is the Founder and CEO of SS&C and has been a friend of this firm for a very long time. So thank you so much. It's great to see you.

Thanks, Dan.

Yes. So what we've been doing, Bill, is for most of the companies, we're starting kind of at a high level, just talking about the demand environment, and then we're going to kind of work our way down to some of the more interesting parts of the story right now. But as you sit here today, maybe you sounded pretty optimistic, I would say, on the last earnings call. So maybe just talk a little bit about what you're seeing and maybe the deal pipeline relative to, I don't know, in the past 6, 9, 12 months, whatever time line you want to talk about?

Yes. I think it's pretty strange world out there that all we realize, too, right? So besides a couple of awards, we have some inflation, we have a macro environment that in capital procurement, large-scale licenses is pretty tough game. Services is easier. And I also think the cost pressures on financial institutions of all sizes and shapes are pretty high. So our ability to offer outsourcing services that gives them some operating leverage has been pretty strong, and we think it will continue to be pretty strong in. And that's true in U.S., in Europe, and Asia.

Yes. So in the past, we've talked a little bit about sales cycles and conversion cycles, remaining pretty elongated, still a little more challenging. Are you seeing any of that kind of thought at this point? Are some of the conversations at least that you're having with clients, making it such that you feel more confident, like there's a little more visibility potentially coming down the pipe?

Well, we have a whole bunch of stuff we've sold over the last couple of years that we're now implementing. And as you implement, it's amazing what happens to your revenue. So we get a few hundred thousand a month when we're in implementation phase with this 1 client. So that's still a nice contract. It's $3.5 million or may you get $400,000, or may be $5 million. But once they go live, so $3.5 million a month. So $3.5 million a month, if you multiply it by 12, you get to $42 million, which kind of makes $3.5 million look small. And so we have a few of those in our pipeline, but these are enormous institutions with millions of accounts and we're moving off an old system, and they can't believe it, but they have some bad data. So it's always your fault. We weren't here in 1947 when you did this, but it doesn't matter. So we have to get through that and we are getting through that, and we have a bunch of brand new clients that we've signed but also need to be implemented.

Yes. Okay. So that sounds pretty encouraging. It's pretty encouraging which is why I think you sound a little more optimistic on the call. So let's do a one liner on a couple of the bigger lines of business. I think on one liners, if you can go a little bit longer on everyone. But like -- so alternatives, pretty good quarter?

Pretty strong business has been a pretty strong business. There are certain parts of the alternatives that are really booming like private credit, private equity distressed. It looks like there might be a lot more distressed in the U.S. in the next couple of quarters. But that's a strong business for us, and we're kind of #1 in -- and we think that we're ahead and we're running faster, which means that they didn't catch us.

Private credit, can you just elaborate that on a little bit. I mean, it seems like that's proving out to be a much, much bigger opportunity for a lot of players in the space. And as you point out, you're kind of one of few, if not kind of on 1 hand probably would be able to do that kind of work. So is that a fair set of assumptions or.....

It is. Private credit is kind of what it says, right? So when you go out in the public markets and everything is kind of in black and white, and everybody can see private credit, it's the deals that are structured and there's lots of different nuance that you can put in the deals, which creates a challenge for rural systems and being able to accommodate the wrinkles that they put in their private credit agreements is something that we spend a lot of time and a lot of money. And I wouldn't tell you we're perfect by any stretch of the imagination, but we're the best at it. So that gives us a leg up.

Alright. What about Advent, a little bit of a tougher quarter, but it still seems like the trajectory?

Yes. Advent, we bought in 2015, and that year, we did about $1 billion in revenue and Advent did about almost $400 million in revenue. This year, they'll do about $600 million in revenue. And we bought them in 2015, they weren't growing at all.

Yes. Okay. What you're calling GIDS, I guess, is the Global Investor and Distribution Solutions business. That seems to be holding pretty steady. Is that fair?

It is, and I usually see a pair of my business, but it has worked out this past year, and we have some optimism. We've put some new technology in and we put in a ton of customer relationship management, and that looks like it's paying off. And as I tell our development teams look given some new stuff. You can keep selling the old stuff, you got to give them some new stuff. When if he wants a new dress.

Alright. So that one's got an investment backdrop to it relative to maybe some of the other ones?

Yes, it does. But almost all of them, if you want to be a large-scale player in what we do, you have to have technology.

Yes.

You can't do it with green eye shades and arm band. It doesn't work that way anymore. Even if you have to have stuff that people can get access to who can slice and dice the data they want to be able to drill down the way they would drill down. And that's -- we're good at it. And I think you have to constantly, get better at it.

Alright. Healthcare, there, we say flat. It was the first time we said that a long time?

Yes. But most of the attrition really happened in '18, '19 and '20. So it's not really that we're losing -- we lose any this year, right? So that will run off. And I think in the third quarter of this year, we did 68.5%. In the third quarter last year, we did 70.1%, and I think those are pretty close. But the margin third quarter '23 was 35%, and third quarter of '22 was 24%. So we did almost the same amount of revenue as we did into '22, but we did it with 1,100 people instead of 1,700.

Alright. With this last one just on Intralinks. How are you thinking about that?

Great acquisition, that grew about 11% in the third quarter. This year at will be about a $500 million in revenue business. It ought to make something in excess of $250 million. We paid, I think, $1.5 billion.

All right. So we talked a little bit about the demand environment. You briefly touched about the macro. I was thinking around U.K., Europe, and APAC in particular. Anything to call out distinguishing, kind of nuances about those businesses, where they are in certain cycles? Or is it just very consistent across countries?

Well, I think. We have a very large presence in the U.K., and that drives a pretty nice presence in South Africa, for instance. Because there's a lot of connection between those countries and the financial institutions. So that's helped us a lot. We've gotten a lot of business. We also do pretty well in Ireland and Scotland and those places. On the continent, or doing more on the continent, a little tougher, and we're a little more recent about getting too much employment in places like France and Germany where we feel like we might not have much let's say, in being able to manage our resources. So we're a little reticent. But we have opportunities and people want us to come. And so if we can get the right opportunities, right kind of contracts than we'd like to move towards [indiscernible].

What about APAC?

APAC has been kind of a bright star for us, particularly Hong Kong, Singapore, Australia have been pretty strong. We found some acquisitions in Australia, and we're pretty bullish. They have the superannuation funds, which is basically our social security, but it's in your name, you don't have the government helping you invest your money so that you get invested in Australia and they call it the wall of money, it just keeps coming. So that's pretty attractive to us. We have made bids on any number of places in Australia. We almost bought Link, bullet dodged. But we just bought something called Iris, it's big business has $900 billion in assets, but it's not really priced right. We can do a lot of things with that, that we think will drive some release.

Okay. All right. I wanted to spend a minute on retention rates, which I think I might have asked you on the conference call. But like when we look at the numbers in the quarter, I think it's as high as it's ever been. If not, it's pretty dig on close to the highest levels of retention that I've seen in covering the stock for a long time. So I'm trying to understand what has changed in that because it did -- it wasn't a huge jump, but it was material, when you look at over the past, I don't know, 2, 3 years, even on a quarterly basis. So what are you doing different?

I think we made a pretty strong commitment to have relationship managers on the different accounts and making sure that they understood that their compensation is going to be tied to retention of our clients. And so that's worked out pretty well with us for us, and we're also driving more revenue opportunities through that. And I think you do better when you go see your clients. So that's worked out well for us.

Yes. Do you feel like in the past, past couple of years in terms of your how you spend more of your time within the organization. Has it changed dramatically? Or are you still doing the same thing that you would have been doing 2, 3 years ago? Like are you finding that there's maybe more of your fingerprint along some of these things that are happening today?

Probably, most people don't particularly appreciate but it's thinking a relative dose intensity when recognizing that we're not here to lose this or to win and getting people to understand what that takes. So I think we've improved that process with us. We put in some corporate sales. So the head of sales or global co-heads of sales are now across all the business units, not just now. Business units don't always embrace it with love and kisses, but they're learning. And that allows us to sell bundles, right? So we can sell a trading system and then include fund administration and hosting and a whole number of other things, so a contract it might have been $175,000 is now worth $1.2 million to SS&C as an entity. But people have to recognize that, and they have to understand it. We're not afraid to pay more commission and they think, oh, but you were going to screw it up, I am not going to get my $175,000 deal. I'd tell you what, I'm going to help you sell that $1.2 million deal. And I don't think you or much you want. We'll sell more of those than we would have $175,000s, but they've got to believe it. And this kind of happens. So sometimes I'm going to buy the dance, I've never bought a chicken, but it is about executing and making sure people understand that the whole organization is behind you. And that's sometimes pretty difficult for these places that are a lot smaller, aren't used to growth. It's like looking at acquisitions, something show me an acquisition and how great it is. It's $12 million in revenue. They've been around for 14 years. How quick can this be? And why do you think we're going to be able to -- the bankers, right? And then we buy it. How does that happen I want the bankers to sell it. You got the founder. I'm not going to know as much as the founder, just like someone bought us, they wouldn't know as much as me. So it's understanding that how long they've been around and how big are they? Why aren't they bigger. I mean It's pretty clear, but people are afraid that, oh, I don't want it.

Yes. This bundled concept is a little bit new. That sounds a little new to the story. And so I'm wondering when did that start to kind of evolve into being? And it sounds like we're very early in maybe the uptake of that, but it's starting to resonate a little bit?

Yes. Probably the global co-heads of sales happened about 2 years ago. And this was one of the initiatives that really started to catch on maybe 14, 15, 16 months ago. So we won this bank in Muncie, Indiana which now you've ever heard of, but that's where Ball State is. I mean any assay you wanted to know. But so we won this deal in Muncie, Indiana that is our Black Diamond Wealth Platform attached to Intertrust, which came to us with Innovest. So it's the small bank in Muncie, Indiana and we're getting $1 million a year for 5 years. I'm sitting and recalling. How many small banks are there in the United States? I mean because it's like the first wealth trust system that's relatively new most of these trust systems, whether it's OmniTrust or all these other ones, FIS or Fiserv or others are 40, 50 years old. So this is newer technology, easier to use, our Black Diamond got 2,200, 2,300 registered investment advisers, over $2 trillion in assets on it. So we have a real opportunity to go garner. But you got to figure out who's ready to jump on the gas pedal. I always say, look, I'm not in charge of the break. I'm in charge of the gas pedal, Brian is in-charge of a break or somebody else, not me.

You can raise your hand by the way, the new CFO, who is in charge of the break, though. Got it. I did want to go back to healthcare because it has kind of been your Achilles' heel for just enabling you to have growth. There's been kind of like the growth of SS&C with it and then been breaking it out without it. But those 2 numbers now have pretty much collided on top of each other, maybe 20 basis points different or something like that. But do you feel like there is enough investment and focus on that asset today such that we should start to maybe put in the growth model a little bit as opposed to the model where it's just been, again, these are things that have rolled off. You haven't lost clients as of late, but it does seem to now have to pass this comp period where it could grow again, I think?

Well, I think we expect it to grow in 2024. And maybe upwards 10%, and I don't think I'm sticking my neck out, probably 4 of our top 15 opportunities are in healthcare, and they're big. You got to win and you got to implement all that kind of stuff, but when we started Domani, that's with Humana and Anthem, and we pledged to spend up to $800 million. And they pledged to spend up to about $100 million each. So that was a $1 billion commitment. We haven't spent anywhere near that. But it looks like Domani is on track to go live 1/1, and we'll probably put on our drug discount card business first, which is about 35 million lines in January 1 and probably 80 million lines into the first quarter. So that will be a lot of credibility with the marketplace, and then we'll start converting Humana. And then hopefully, later in 2024, we start converting Anthem. And then hopefully, which we think is happening, it's just that it's new technology. It's the first new one in 34 years and there are some other nascent that I've looked at every one of them, and they're more pipe dream, I think, than they are a real player. Healthcare is a little bit different, but primarily, it's a third-party payer, which means it's not their money, which means it's a great place to go sell software and services as they pay you with other people's money. They hold it tight, but not nearly as tight as some of the people that hold George [indiscernible] cry. So we think we have a real opportunity and we intend on taking advantage of it.

Yes. Okay. So that's good on an update on Domani. So do you think that's where most of the opportunities are going to be coming from? When we think about that JV versus maybe just the health care business gap today, separate and distinct or they're going to blur a little bit?

They're going to blur a little bit. And we have another product called AMISYS that does entire medical claims. So like we think Humana is a great big opportunity because we do -- we do want to do all their pharmacy claims. And that's about an $80 million business, but their medical claims are twice as big as their pharmacy claims. So we have great relationships. We have some commitments from them if we can execute, and AMISYS would be like a direct competitor to Epic, and Epic is kind of 800-pound gorilla. But like any 880-pound gorilla, a lot of the market can't stand up. Just like in the big 3, which whether it's Optum, UnitedHealthcare, Aetna, CVS, or Cigna, ESI, they own about 80% of the market, but a lot of the market can't stand up. So that's an opportunity and 20% is huge. So we're not going to run out headroom for a long time.

Okay. Cool. Let's pivot the Blue Prism for a second. You've owned it for several quarters now. And I guess, I have, I guess, a couple of questions. One is, when you sit here today and you think about the opportunities having owned it for a little bit. Are you thinking there's more consumer-facing opportunities outside just direct Blue Prism or what you've been able to achieve in terms of turning it on internally, so to speak, and cost savings? Like maybe there's an interplay actually between those 2?

But when we bought Blue Prism in April of 2022, they had about a 3% to 5% negative EBITDA margin. we think fourth quarter, they'll be 35% positive. So that's about a 40% improvement in margin in say 20 months. So we think that's a great accomplishment. We had a great team that did that. And we're still growing at, I think, the last quarter grew between 10% and 11% and we think it will continue to grow in that space, maybe a little faster. It's still in Gartner's Magic Quadrant, right, upper right. And we get great feedback. And some of the things we did like for the New York, New Mexico state, we took Medicaid enrollments from between 3 and 30 days for them to get someone into Medicaid and now take 15 minutes, right? So it's a big improvement. We do some really large platform hedge funds, couple of the general partners are really maniacal that there's no mistakes in any limited partner statement. And so we put -- we used to take 2 or 3 people, 2 days to go through every statement, proofreading them. In your humans, you get bored, you make mistakes. But a couple of digital workers on it, they didn't get bored, they didn't make any mistakes and taking time off. They got through a whole letter about 3 hours. So the quality is better, the speed is better. The productivity is obviously way better. And so we make a lot more money. And we don't have to pay contractors or somebody to do some of this stuff. We've done a number of those kind of case studies, and we're getting smarter and better and faster with Blue Prism.

What about turning it on inside of the organization, I think a big part of your $1 billion run rate. I think you've talked about that number as being a key part to it, 2,000 or something like that, I didn't get the numbers.

So we have deployed about 1,000 digital workers so far, we expect to deploy another 1,000 by the end of this year. We're going to deploy between 1,500 and 3,000 next year. And we think over the next 3 to 5 years, we're going to deploy 10,000 to 15,000. So we're not going to get the incremental benefit that we got with the first 1,000 we put in. We're going to get $100 million in run rate. But we might get that next year, and then it'll probably tail that maybe get $80 million, then maybe you get $60 million, and then hopefully, you're figuring out ways to make it more and more sophisticated. So they do things like you can have a break like we did a trade, you put it in a 1,000. I put in a 10,000. So there's 9,000 share break, Blue Prism can spot it, Blue Prism can create an e-mail, send it to you, ask for you to check a box, if you agree, if you agree, it will fix the break and post it to both of our accounts. Now we have humans that review all of this, but digital workers do it, and now we're figuring out how digital workers could review digital workers. So it just becomes increasingly sophisticated and increasingly, in my opinion, this is the most exciting stuff that's happened in technology since like the Novell network. The Novell network is what started smart client going out to servers, pool of data going out. And that's all we did for the last 15 and 20 or about 40 years. But now there is AI, there is this RPA, this machine learning, this natural language process, change in everything. So all this hype you read about it, and they know hype, and we haven't had anything like this before. I don't know how it plays out at the end and all the ethical things about AI not telling you the truth and everything what the hell, we are not politicians. Why active so nerves.

Understood. Understood. So layering on the margin expansion with Blue Prism, there's other things it seems like that are happening kind of under the hood in terms of optimization and this way you're managing cost structure. So maybe you could talk about some of those other attributes that are not maybe necessarily directly driven by Blue Prism, but other aspects of the business?

Well, as you pointed out, putting up Brian, Brian Schell come to work for us. He was at Cboe, CFO at Cboe, part of that at H&R Block. Brian brings a lot of energy and some new ideas and Patrick was my long-term CFO, 20 years and well, Patrick, but we get new ideas. We get new energy. We got new ways to look at things. And he's in a hurry like the rest of us. So I think that's something that will drive better metrics with better metrics and faster data, you get an opportunity to get a little more synthesized, you're not getting 4 pounds of steak, you are getting a bite size than you can kind of really process what you may have and make better decisions because the information you have is better. . And then also on capital allocation process, our cash flow forecasting process. We're far full in place. We have 100 offices in 40 countries and we have 200 products or services, and we generate $5.5 billion to $5.6 billion in revenue. We're probably going to do about $2.1 billion in EBITDA in 2023. So there's a lot going on. And the more control we have of it without stapling all innovation, without stapling all decision-making, the better off we are.

I want to talk about leverage just for a moment and then what that could ultimately free up in terms of the way you're thinking about future M&A. So you're just over 3.1%, I think, turns as over the last quarter, somewhere thereabouts. What's the kind of comfort zone for you? Is it in the 3s or is it a little bit lower than that? And then if it is close to 3%, does that mean that you're more comfortable in terms of looking at potential M&A opportunities from these levels? Or are you more interested in other areas for capital redeployment?

Yes. I would say that our acquisition strategy hasn't changed. We're methodically opportunistic, right? What has changed is the interest rate environment. and then sellers are still have illusions of [indiscernible], of what their assets are worth. So you're careful about not overpaying for an asset, you are using leverage. We have any number of our competitors. One I just read is 9.6x levered. And I have investment bankers that tell me, I might be able to go private put on 10x leverage. I said how about without my equity under date. And so it's a little bit of what's prudent and then also what's the optimum. And it's all rather than a science. And everyone will tell you what interest rates are going to do. And so you really know what interest rates are going to show you how to make a lot of money. Just don't be wrong. And so it is a little bit about who do you believe every investment bank on Wall Street has a forward curve. I think it's tilted in favor of the investment bank, but I'm not sure. So you do have to be cognizant of what's going on in the debt markets and interest rate markets, whether it's Terminal A, Terminal B, some fixed debt, it's a mix and trying to -- again, you're trying to be wise. And when you're not expensive.

Yes. No, completely understood. You have been a little more, I think, open to buy back stock, and you did some recently. So is that still kind of I guess, a big part of the target capital allocation, again, like not terming out debt at these levels, right? Like we're probably moving in a better direction for you this year than last year.

We're buying as much stock as we can. So we're allocating probably 2/3 of our cash flow to stock buybacks and 1/3 to debt pay down. And with the stock buybacks, we also pay $0.96 dividend. So we probably have close to 75% going back to the shareholders. But that's how we operate, and we're not -- we would allocate to acquisition if we found one, but right now, we're much more about driving stock buybacks and paying down debt.

Well, we're out of time, but it does feel like next year's setup looks and feels better than how it kind of transpired this year as we look through the rearview mirror. As opposed to maybe how we set it up in the beginning of the year. So we're looking forward to seeing how that plays out both.

Me too.

Awesome. Well, thank you so much. It's a pleasure.

Thanks, everybody.

Thank you.