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

So we're thrilled to close out the day today with SS&C. We've got CEO, Bill Stone. Really appreciate you taking some time out. Brian Schell, their new CFO and Justine Stone does a terrific job with IR. I'm Kevin McVeigh, the UBS -- one of the UBS software analysts. I recently came over from Credit Suisse and really thrilled to be covering SS&C as part of our application software effort here. I'd like to keep this as collaborative as possible. I'm going to start with a couple of questions, but you can pass around a microphone. But anyone has any questions, you can come through the iPad or just e-mail me, [email protected]. That's M-C-V-E-I-G-H, we'll try to keep it as collaborative as possible. Again, we really appreciate you folks taking some time out, and Bill especially.

I feel like -- I started the same question last year, and I think it's really important because you've been one of the most effective CEOs in the sector for a long time. And I think from starting the company, you've seen a lot of different tech cycles. And I think one of the things that always impressed me is your ability to identify trends early and really attack those trends, but also the opportunities around the people you hire or retain and create, I think it's a real strategic rationale. So I wanted to start maybe talking about specific points of time from SS&C from maybe the founding up until maybe the first buyout and then the second buyout and kind of where we are today with maybe a little bit of an emphasis on DST, Intralinks because I think there were just specific events that really helped position you for where you are today and it will go into kind of more of the current environment. But I think one of the things I don't think the market fully appreciates is the optionality and the embedded IP you've created over 3 decades. And there's a real skill of that, that manifests itself in my mind, at least through the cash flow, the mortgage profile of the business and what I think and feel very confident about is accelerating organic growth.

Well, thanks for having me, Kevin. I appreciate all of you taking some time and it is -- I appreciate you said I was one of the most effective rather than one of the oldest, both of which have been -- what may have been more -- I'm not sure which one would have been more accurate. But I started this business in 1986, right? And I wasn't 21, I was 30 -- 30 years old, and I've been an operations executive at a broker-dealer, I've been a TPA at KPMG. I'd worked in St. Louis, I got transferred to Hartford. I got to run the Aetna audit as a kid. So I got to learn a lot of things. And when I started in '86, it was kind of the golden age of entrepreneurs getting into technology, Gates, Jobs, Joy, a few others that were all about the same age. And the reason that it was so effective is that the technology was changing. For those of you who were too young, the Charlie Chaplin and the IBM PC was 1981. By 1986, they were up to say the 386, then the 486, and then the Pentium chip came out and the Novell networks. And Novell networks really since the late '80s until now has been the primary way in which people get data and access all the data out in server farms. Smart clients, server farms, client goes out, grabs the data that you want, you can ask questions, and you get things like what Google did and others, and they make it easier and more broad and all those kinds of things. But fundamentally, it was client server technology from the late '80s to really until about now. And now this ChatGPT or generative AI and intelligent automation and natural language processing and so forth and so on, machine learning, pick one. But what that's doing is changing the world. So I'm pretty proud that I was kind of a driving force of us buying Blue Prism. And if you go way back in SS&C's history, General Atlantic partners came into SS&C in 1994. Bill Ford, who now runs General Atlantic partners, we were his first investment. So Bill and I go back for almost 30 years, I guess. And I thought those guys do everything organized, like do this, do this, go hire these people who will use this, the best lawyer in the country, is John Burgess, if you don't use [indiscernible]. Burgess is at [indiscernible] is at Wilson Sonsini. I didn't know who these people are. But smart enough that he seems to know. So let's do what he said. And so we did that. We started growing pretty fast. We bought something called Chalk, which was one of the biggest actuarial firms in the country in 1995. Jane Chalk was the founder, and we were doing about $14 million in revenue, and they were doing about $10 million. And so when we went public that year, we did $26 million in 1996. And managing 62 actuaries was not something that I've always had my heart set on and that didn't last that particularly long. But it was a very good acquisition for us. We made a lot of money. And then in '96 we went public, and we were -- our red herring was 9 to 11, and we priced at 19. [indiscernible] strong management in Milwaukee and the guy holds up our red herring [indiscernible] this is gold, pure gold. I'm going, "Oh my God, he's buying this hook, line and sinker. This is a bad thing." It was like, how do you dampen the enthusiasm and we didn't. And so we went public May 31 in '96 at $19, stock went up to $25. August, we reported, we missed by $0.01, stock went to $3. I don't know if any of you know, but when you're the CEO, you get 5% of the shares for friends and family. So we sold $3.75 million. So I got about 175,000 shares I got to hand out to friends and family. And by September, I still had family. But we recovered and we went back up to $27, and we were really kind of booming. We opened an office in London. We went from 3 to 100 people in London. And then Y2K stopped. As soon as they figured out that all the computers were going to stop at -- when it turned 2000, all the consulting projects stopped. So Y2K stopped and there were euro conversions, like the Swiss Franc and Deutsche Mark and all the stuff like [indiscernible] all was converting to the euro and that all stopped. So I mean, like half of our business stopped. So we were at $27, we went to $5. Not fun. But by that time, I had friends again, and I didn't give them any stock, so I wasn't in any trouble. But -- so then you go back, you go through this and in 2005, we were going private with Carlyle, and there was a company called Financial Models Corp based in Toronto, a really good company and what we felt, they were going to merge with Linedata, which is a French company and what I learned about Canadian takeover rules is that if you can make a superior bid, then you're going to win. So we started analyzing it. I thought that the price that they were going to pay was way too cheap, and they were at about $12.20, and we ended up paying $17.70. So we paid $165 million, and they were making about $11 million in EBITDA. And this was like April 19 of 2005. By the end of 2005, they were making $34 million. By April of 2006, they were making $44 million. And by the end of 2006, they were making $48 million. We took something that was making $11 million, turned into $48 million in about 18 months. But what it taught me was there's a lot of people who spend a lot of money on a lot of things that make no sense. So when I first went up and looked at their space, which is in Mississauga, very nice, nice building. They named all of their conference rooms after cities. So you'd see London and New York and Toronto and Paris and Montreal and -- I saw Nairobi. I mean, how many conference rooms do you have to have to have Nairobi as one of your conference room names. I figured too many. So we cut their space way back. And we saved like $700,000 per floor in this space. And it's like, wow, so that was a great deal in 2005. And we went back public in 2010. And then in 2012, we saw it again. So now it's GlobeOp. GlobeOp traded on the stock exchange, they're going to go private with TPG. So we look at this -- we were like the #9 fund administrator and GlobeOp was #8 or vice-versa, they were 9, we were 8. But if we merged, we're going to be 3. We were really interested. And so we went to give an investment bank. So all of the investment banks that I'd used, JPMorgan, TROW, Morgan Stanley, Goldman Sachs, Bank of America, one more, Credit Suisse, and finally, Deutsche Bank would be our banker. And so we go in there and the guys at GlobeOp says, "I did a survey of our clients, nobody wants you." Guy's name was Hans Hufschmid. I said, "You know Hans, you were an FX trader at the Long Term Capital, right? Salomon Brothers before that. So what you're saying is all your clients want this FX trader to be their accountant and not just CPA to be their accountant. That might be so. But I bet you, if I bid more than you and TPG bid, I bet everybody comes to me." He says, "Nobody wants you." I said, "It's a story of my d**n life." So of course, we bid more and we won, right? And so that vaulted us to #3 in fund administration and in 2012 and literally, right, we've made a fortune. TPG was based in San Francisco, and we made our final bid. San Francisco 49ers were playing, I think the Dallas Cowboys in the Super Bowl. I send it at kickoff time. I sent that to TPG, kickoff time. Now we put our final bid in. So we won that. That really vaulted us to #3 as a fund administration. And shortly thereafter, we became #2, took over from CITCO, then it was State Street and us, and we finally passed up State Street. State Street ultimately bought all of our technology and jettisoned all their technology. That was a little bit like Pepsi going to the Coke formula. So we did that one and that was in 2012. And then in 2015, we bought Advent. And we were the biggest user of Geneva, and I kept telling Rahul that we either got to go buy Geneva or we got to get off. And he was a grown man, I hate to see him cry. So we ended up buying Geneva. Morgan Stanley's trading were something [indiscernible]. We were at $44.25. They wanted $44.75. Morgan Stanley says, "Don't offer them another nickel. Don't give them another nickel. Are you guys are out of your mind?" I have $44.25. I offered them another $0.25. This could now make no difference even if this is going to work or it's not going to work, and that $0.25 isn't going to amount to a hill of beans. So we bought that. It was a great acquisition in 2015. And [indiscernible] in the Blue Prism, which we bought it. We also did DST and Intralinks in 2018, and we probably have $3 billion in revenue and almost $1 billion in EBITDA out of those 3 acquisitions, and we paid $8.3 billion, which in today's dollars would be a bargain of all bargains, right? But since I did it in 2018, it's -- since that time, I had [indiscernible], but it's not really true. So we did Blue Prism about maybe 20 months ago. When we bought them, they had about a 4% negative EBITDA margin that come out of the fourth quarter, probably close to 35%. So we've changed that almost 40% in margin expansion in about 20 months. So we still know what we're doing and the acquisitions aren't as attractive as they used to be because of the price. And we don't like to do things where we have to be perfect. So we don't. But we still -- last quarter, we made $533.9 million of consolidated EBITDA. We had the most revenue in our history. We'll probably do $2 billion to $2.1 billion in EBITDA for the year. We'll generate pretty well in excess of $1 billion in cash flow, and we're going to buy back $500 million or so in cash -- I mean, in stock, and we bought $500 million last year, we've bought $500 million a year before. As long as that's cheap, we'll just keep buying our stock. So we feel like it's a good store for our shareholders. And we're pretty confident -- my financial adviser thinks I'm a little light on SS&C, [indiscernible] stock up.

The scale is one of the things I've modeled at in terms of -- to your point, you're almost $6 billion of revenue, $2 billion EBITDA, $1 billion free cash flow. And I think you were up around 6.5x at the time you did DST, Intralinks. And now you're back down to 3. I mean, the cash flow gives you a lot of opportunity to continue to perpetually reinvest in the business, which you do both organically and inorganically. I want to spend a minute on Blue Prism because I think not only operationally how much have improved it, but what it can do for your clients as well as internally. So you scale their margins, there's a huge opportunity across SS&C in and of itself. So maybe take us through that a little bit and what that can mean from a reinvestment perspective?

Blue Prism is kind of -- its 2 biggest competitors have been UiPath and Automation Anywhere, and we bought Blue Prism that Vista went after. So we've followed those private equity firms. And when they go after somebody, they do a proctology exam on due diligence. So -- and then we looked at what they're selling for versus what UiPath was selling for and what Automation Anywhere was selling for and we viewed it as cheap. So we went after it and won. And we think that we have $100 million in run rate savings by the deployment of digital workers, which is what we call the robots. And we've managed to keep it growing at 10% to 15% in the outside world. So we're still selling and it's very vertical. Some of the productivity enhancements are unbelievable. For State of New Mexico, we took enrollment in Medicaid from 3 to 30 days to get one person on to Medicaid in New Mexico to 15 minutes. So when you can do those kinds of productivity enhancements, you really have something that's valuable to people and I think that's what we keep getting smarter. We make smarter digital workers. They do things that humans don't like to do or humans get bored. When humans get bored, they get lazy, when they get lazy, they make mistakes. So the digital workers are very good. They don't get tired, they work 24/7, never one of them have ever asked me for a raise and I've never heard them bitch. So they're really good workers.

And one thing I think, Bill, maybe it's helpful to frame a little bit is, I keep coming back to the concept of the IP you've created over time. And the digital work is only as good as the IP you're layering it on top of, right? So -- and that is to me, at least a huge competitive advantage to some of the other LLM models out there. And you're in the business of regulation recurring and you perfected that art. Maybe help just -- I think that [indiscernible] from the audience a little bit, some of that IP that is 30 years in the making continues?

I mean, you all are in financial services, and you know how many regulators there are, right, whether it's the SEC or the Federal Reserve or the Ministry of Finance in Tokyo or the Office of Supervisor of Financial Institutions in Ottawa or hundred others. There's always something coming at you whether it was Form PF or some other kind of regulation and form that all of you had to fill out. I mean, we went to Australia, probably 15 years ago, and everybody was talking about can you do short sale reporting for the Australian Stock Exchange? I get it to report. I guess we can do it, right? But knowing about these things and being able to naturally know who all these regulators are and what they're going to ask for and getting ahead of it and understanding that, it can't be wrong. You file those reports, they have to be right. So you have to hire people and train people and stay on top of them. And that's what that IP does is that it creates a moat, right, where people can't really come in. You can start a fintech company relatively easy, but building it to where you have 27,000 people in 100 offices in 40 countries and a couple of hundred products and services, that's not so easy.

And you see that in the scale of the clients. I mean, it's been amazing kind of the average client size that's evolved over time?

If you -- when I started as a CPA [indiscernible] believe it would be this thing. Of course not. But I started as a C Corp and started S Corp when I was a CPA. And I knew if it was a C Corp, I'd have to pay taxes twice, right, rather than paying out of my salary whatever I take and I update on whatever earnings the corporation has. And if you're an S Corp, you only got to pay once. But no S Corp goes public. So I wasn't going to try to convert an S Corp to a C Corp and I wanted to go public, and I wanted to go public. And the reason I wanted to go public is I thought that's how you got rich. It's true, too. And if you take them public twice, you get richer. Yes. So those things are pretty effective things to do. And it's -- I think Jack [Welch] said, this isn't philosophy or religion. This is a business. There's one or 2 answers. We have 50. When people said, why do you keep working? I don't know. I like it. And I keep score. And I like to win. And I'm lucky enough to work with a lot of really smart people and it's a privilege. So as long as I'm healthy, I'll probably do it for a while.

Any questions in the audience?

[Technical Difficulty]

I would say that we have better margins than we do today. Our organic growth rate is now climbing towards double digits. We have a high customer satisfaction percentage, and we run our retention rates above where they were last quarter, which was the highest in our history or close to the highest in our history at 97.3%. So we'd like to run it at 98%, 99%. So that being a very highly profitable company that grow board and our shareholders and our employees, our suppliers and our debt holders, people that own us money. We appreciate that, too.

[Technical Difficulty]

I think there's several things that the market is not particularly thrilled about us. One is that we're more of a conglomerate than we are a pure play. So we're one of the biggest wealth providers, one of the biggest hedge fund -- or the biggest hedge fund administrator, the biggest private equity administrator, the biggest mutual fund transfer agent. We're also a reasonably good-sized player in virtual data rooms back from the biggest, we have about $500 million business there. And we also have a big private markets business that grew 20% last quarter. Geneva is the #1 player in large-scale investment accounting systems. And so there's a lot of things that SS&C is in. And most analysts, not Kevin, but most analysts don't want to really dive in and understand, "Oh, I haven't had time to look at your health care business." But we think that's going to be a pretty good grower in 2024. So -- and the second thing is that the market really doesn't like hedge funds. If you look at hedge funds and you think about how. I think the market likes community banks and credit unions that Jack Henry serves better than they like hedge funds that we serve. I think on balance, we get a lot more money out of the hedge funds that we serve and they get out of the credit unions and community banks that they serve, but there are multiples of triple what ours is.

So I want to pivot to the organic growth because I think a certain amount of it is mechanical. I think there's been a target out there of 4% to 7%. It seems like you're somewhere in the 2.5% reported today, recurring probably closer to 5.5%. But when you think about the success on the retention, the pricing but also I think it's fair to say, inflection in the health care business as well as the GIDS business, I mean, those are 2 bigger percentages of the revenue. They've been headwinds for a while. It feels like we're on a more sustainable path, particularly as the retention continues to improve. So maybe any thoughts around that because I think my view of the world has been, that's always been one of the debates in the stock to -- is kind of the sustainability, that reaccelerating growth. And I think part of that is just the narrative that's been in the market relative to some of your competitors that are newer entrants?

Yes. We view them as [indiscernible] but we grow more than they're big, right? So I think a little bit of that. We bought DST, they were 14,400 people, 1,600 contractors. People said, boy, that's a pretty sleepy business. I said, well, it proved to be asleep, right? So you got to wake it up, you got to get it to be competitive again, you got to get it to understand that we got to bring some new technology. We got to have a marketing program. We got to have a sales force and you got to teach people how to win, right? You don't get into the ring and they hit you with the 2x4, you don't go, boy, that's not very sporting of you. No, you hit them in the head with the 2x4 yourself, right? You got to compete. And so we've taught them again to compete. They've gotten a mutual fund business in 1968, good business to get in, in 1968 until about 2012. And then ETFs and passive versus active and all kinds of stuff started coming out of, and they were a little prepared to compete. So yes, we've got Nick Wright in charge of the global investor and distribution services, GIDS business, transfer agency, and he's done a great job. We're up to 3%. He's pretty confident going into '24. Same thing with health care, we buy it and Cigna is our biggest client, but Cigna has just bought Express Scripts. Express Scripts, they paid $59 billion. Something tells me they're not going to keep using us, right? So that was probably $100 million client. So health care is a $100 million client. But we did sign a 4-year contract on the way out. So it just ran out. So that looks like headwinds, but we have lose that this year, that got lost when we bought DST in 2018. I've gone through 5 heads of health care, but I'm pretty confident that that's an enormous business, an enormous market, and there's no new entrants, haven't been any new entrants in a long time, and we have a chance to really have a big business in health care, and it might take 3 to 5 years, but it will be on that kind of trajectory, I think.

Maybe talk about because I think you framed it pretty eloquently the opportunities in kind of the health care prescriptions relative to trade ticket, and I think it's a pretty powerful analogy that maybe helps drive to anyone listening or participating because it's the optionality there on the prescription side and both sides really seems pretty, pretty powerful.

Yes. I mean we -- one of the reasons we're so successful on the fund administration side is we can handle volume. So Millennium is a great client of ours, and they only might do 1 million to 5 million trades in a day. Very few fund administrators could handle that. You could it every day. So when we look at a trade ticket, number of shares, CUSIP, price and maybe trader. And if you look at the prescription, it's a number of pills, Rx number, some sort of symbol and maybe doctor, and 5,6 pieces of information. We did $400 million of them last year. So you have to be able to process them. You have to be able to kind of collate all that information and then slice it and dice it and give it back to whoever is a user. It could be a regulator. It could be a physician practice, it could be an insurer, there's a lot of constituents in that, and it's highly regulated. It is a pain in the neck, but those are the kinds of businesses that people don't like to get into that you have a lot of margin opportunity because you're doing stuff they don't want to do. And so we think that's a really great analogy to what we did in fund administration. In 2002, we had no assets under administration. Now we have about $3 trillion, and we constantly grow faster than our competitors and the one competitor that has outbid on a number of acquisitions is something called Apex. I just read a Fitch report that said they're 9.6x levered. That seems to me to be a lot of leverage and a lot of leverage with interest rates up 500 basis points, ouch!

I imagine they don't have the same free cash flow you do?

Not according to this report.

Anyone else in the audience?

Obviously, you should have requested a meeting. Bill, can you just -- I don't want to hammer the same issue again, but like organic growth. You mentioned the high single digits. You mentioned 4% to 7%, like what is the path to the higher organic growth that we look back and see this is a growing business that's generating cash flow, et cetera?

Yes. I think some of it is pricing increases, right? Then obviously, it's a cross-sell and upsell which is meant trying to -- as much as we can merge our sales forces. You do 72 acquisitions and people think they know everything. And then I think they don't. So then we have to change how people operate. And that's not simple, right? Because you can stop everything that was good that was going on, not just what was bad. So we think our cross-sell and upsell opportunity is probably worth a couple of points to us as is pricing 2 or 3 points maybe. And then I think the new logos. We still win big deals. We won Dell family office, we won Elliott just recently, and we won Nationwide and JPMorgan and a whole bunch of other ones. And so we're executing better. We put an overlay of sales executives on top of all the sales forces. And so that's different. We just had our user group in Austin, Texas. We had 1,000 people there. And one of our big clients going down [indiscernible], he goes, you have 1,000 people hearing you guys ran this flawlessly. And we had -- first time we didn't have any -- you didn't see any Eze, you didn't see any Advent, you didn't see any Intralinks, you didn't see any of our acquisitions. All you saw was SS&C all over the place. And it was a real -- it was our best one we ever had. And I think that's given us a lot of momentum coming out of it and I think that we will continue to have momentum going forward. And you've got to execute, right? You got to win. You got to win, and you got to get them installed and they got to be happy and you got to go back and see them and sell them some more and the whole cycle.

One thing, correct me if I'm wrong, pricing wasn't something relative to some of your peers, '21, '22, wasn't nearly the level of the industry. So that's -- I don't think there's any fatigue there, so where -- some may see some decelerating benefit. You're really not going to be impacted by that. It's -- you probably still on a...

Yes. We're on a growth incline because we've got focus. When we've done training and we teach people, you don't have to say, stick them out. You can be nice to them and to show them some new value that we've given them and things that we're doing. And people get reasonable with -- you want to keep your same team, they've really done a great job. Now they have another year of experience, you got to pay them more. And you guys have to help me. So those are those kinds of processes that we've been going through, and it's been pretty effective.

Then you have all the leverages. Blue Prism comes in even from an absolute hiring level, it seems like there's a lot of benefit from that as that continues to scale with a new organization?

There's 1,200 techies that marry all these functional experts. It works really well about building really strong digital workers. And that's the key. The key is the functional expertise and the knowledge that creates in that digital worker. You can't be kind and good. You got to be the best. Because they're going to do exactly what you program.

Anything else?

Okay. Thanks, Kevin.

Thank you, Bill. Terrific. Appreciate it.