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

All right. Good afternoon, everybody. We'll go ahead and get started with the next session. I'm Patrick O'Shaughnessy, capital markets technology analyst here at Raymond James. Up next, we have SS&C Technologies. And on their behalf, we have Founder and CEO, Bill Stone. Bill, thanks for joining us.

Of course, Patrick. Thanks for having me.

So maybe for the benefit of folks in the room who aren't as familiar with SS&C, can you maybe just go through the company's business model? What do you guys do? And how has that changed over the last few years?

Yes. SS&C is a worldwide provider of software services, financial services and health care. And we've been around for coming on 40 years, and we have a broad range of products and services. So from analytics, front to back, and sophisticated trading service, many of the largest asset managers, banks, insurance companies, hedge funds, private equity funds, private capital, so forth and so on. And we have done 72 acquisitions, and we generally price on assets under management our transactions.

So Bill, you started the company. If you were to want to start the company today, what would make it impossible to replicate what SS&C does?

Well, I don't think that necessarily, that starting a fintech company is particularly difficult. There's a lot of people that can start fintech companies. But to get the size and scale and scope and expertise together that SS&C has done, I think it would be difficult. We have about 27,000 people. We have 140 offices in 40 countries. And we probably have more CPAs than almost -- anyone than a CPA firm. And then we have CFAs and mathematicians and then 5,000 or so technology people.

Client retention at SS&C is essentially at an all-time high, up 150 basis points from 2 years ago. And that's despite the company leaning a bit more into pricing in recent years. Do you feel like you're in a better position competitively today than you have been in the past?

I think we are -- we have made tremendous investments. I do think that we've always been pretty competitive. And I think we've concentrated -- so I think we've always been pretty competitive. I think it's we focus more. We get brought in relationship managers and stuff, where people have the one throat to choke on the SS&C side versus having multiple people and getting kind of confused. Is this person from SS&C? Or is it from some acquisition we did 5 years ago, 10 years ago, 20 years ago? So I think we focused on that, and that has improved our relationships with a lot of our clients. And again, got them better service and more ears listening to them.

What are some of the secular tailwinds that you see benefiting SS&C over the medium term? And how can those offset the secular headwind of a consolidating and under-pressure traditional asset management industry?

Well, complexity generally helps us. And I don't think the world is getting less complex. I think it's getting more complex. Regulation generally helps us because people don't want to do regulation themselves. They want to outsource it to somebody, and we're particularly expert in that. So we get that, and then you have taxation and various in sundry regulatory authorities around the world. And that also adds to the opportunities to do 10, 12 years ago, it was Form PF. And then it's -- now if you buy back your stock, you got a 1% tax. There's always something, right? I mean, I'm from the government, I'm here to help you. Run. So it's a little bit that kind of an environment. And Wall Street and the Citi and other financial centers around the world are -- there's a lot of bright people, and they create a lot of very interesting products, often structured, often difficult to understand. It's often difficult to get the cash flows and get the cash flows correct. And so getting yields right in different kinds of fixed-income securities is also -- can be a challenge.

And so like the traditional asset management industry obviously is under pressure. But are there some end markets of yours, where you actually do see kind of growing clients? New firms emerging? Kind of a growing market opportunity because of that?

Sure. I think there's a number of well-known private equity firms that are huge, $100 billion and upwards to $1 trillion. And they've created all kinds of new assets in private -- primarily in private capital, private debt stressed. And you can talk to some of them, and those are pretty bright people. And they basically say, they can get 200, 300 more basis points for their customers in the private markets than you get in the public markets. And obviously, all of you understand that if you can compound at 200 or 300 basis points more than you are now, that can really grow quite a bit more rapidly.

In terms of near-term growth, SS&C is a diverse company with related but still different businesses with unique demand drivers. In the past couple of years, it's always kind of been one or 2 problem children. Most of the companies doing pretty well, but then this business was struggling or in the next year, some other business was struggling. As you kind of look to 2024, what's your confidence level that kind of everything is going to be growing in the same direction?

Yes, that's a great question. We would say that we've always gone in with our eyes open. We bought DST. We like to think we knew what we were doing. Okay. So maybe we didn't know exactly what we were doing, but we did pretty well. We bought $2 billion, $2.1 billion of revenue, of $400 million in EBITDA, and we paid $5.4 billion. So now we probably do $2.2 billion, maybe $2.3 billion in revenue in DST, but they make $900 million in EBITDA. So if you do $5.4 billion and divide it by 9, you get $600 million so -- and it's $900 million and $2.2 billion, $2.3 billion in revenue, and 75 of our top 100 clients came from DST. Not that, that part was growing, but it gave us platforms on which to go sell all kinds of more stuff. So there's a lot of revenue that we've generated out of that client base that doesn't go to DST. So we think those things are things that make SS&C unique. I had -- somebody sent me a note today that says, yes, the shorts finally threw in their towel. They lost about 30%. They really didn't -- they thought you overpaid for Blue Prism, and they didn't like your capital allocation. So with Blue Prism, we bought that -- coming in April, it will be 2 years. Or March or April, it will be 2 years. When we bought them, they were 4% negative EBITDA. But I've been a pretty big believer that this AI robotic process automation, natural language processing and machine learning stuff is going to change the world. And I thought that for a long time. So when we got a chance to buy Blue Prism, we pounced and we paid $1.7 billion. And, oh, man, you're dumb as ever. And I said, well, now that minus 4% is at 30%. We think the EBITDA margin will get to 40%. And people say, yes, but it was growing faster when it was on its own. Yes, it was growing faster and losing a lot more. Now it doesn't grow quite as fast and it makes a lot of money. So then people say, what about UiPath? That's why I went and told the whole [ camera with Blue Prism ]. How come UiPath can grow 19% and we only grew, constant currency, 8% or so? I say well, but last quarter, they lost $55 million, and we made $30 million. Which would you rather have? I want to grow at 19% and make $50 million. So you kind of sometimes make choices. And we don't like to piss away money. That's not our bag. And I am not a big gigantic supporter of Blue Prism TV. I just don't think we can compete against Netflix, and so we're not really going to try.

Well, so you did touch on robotic process automation and gen AI. How do you think that is going to impact your business over the next 5 to 10 years? Both in terms of operational efficiencies and taking out costs or being able to scale better, but also being able to monetize it externally?

Well, I think the ability to use digital workers to do more mundane tasks, we can create digital workers. The state of New Mexico took the enrollment in Medicaid from 3 to 30 days to 15 minutes. We use digital workers to analyze client statements for some of our more big hedge fund clients because the LP statements are so important to them. It was taking like 2 or 3 people, 2 or 3 days to go through all 500 LPs statements. Put a digital worker on there. They don't take any breaks. They don't like coffee really. Don't ever have to give them a raise. I never had one bitch at me. It takes about 4 hours. They don't make mistakes. They don't go to sleep. And humans, you start looking at statements for 4 or 5 hours, you get bored. And then they -- Smith without an I. What's that big deal, S-M-I-T-H? No, there's no way, I guess. So just -- right, so you [ stop listening ] and everybody gets all ticked off. So some of those things will make it a little better. And then also, what you're going to find is it's going to keep getting better at speeds that none of us are really aware. It's no different than E-ZPass. I remember when it first came out, it can go through there at about 5 miles an hour. Now you go through there at 100 miles an hour. You still have to pay a toll, but you also get a speeding ticket, right? So it's just -- there aren't toll takers anymore, right? And there's a lot of things like that. You're going to -- I'm not that big of a McDonald's fan, but I've been in them, and they got a kiosk. You press a couple of buttons, and some bag come about and hit you in the head. So there's no humans again. And that's what this is going to do to our businesses. If you don't have a specific skill that is somewhat world-class, then you're going to be redundant. And I think that's what these things -- and I started this in '86. Much of you probably weren't born. But in '86, it was the 386. In '87, the 486, then the Pentium chip. It's all been client server architecture ever since. Today, but this stuff isn't about making it faster or anything like that. It's about reducing the labor cost, and it's going to do it. And we've proven it. We implemented 1,300, 1,400 digital workers in 2023. We think it was a big reason why we have 2,000 less people than we thought we would have had.

What is your ability to deploy digital workers and AI relative to your competitors? Do you feel like your scale plus your investment in Blue Prism gives you a pretty differentiated advantage on that front?

Sure. I mean we spent $1.7 billion. We've got 1,400 experts, right? But they're technology experts. And we marry them with our 27,000 people that are expert in almost any of the accounting and reporting and performance, performance measurement, compliance, risk, all those things. And you marry that with those 1,400 that work for you, right? We get to cherry pick. We get the best ones, right? If you put a dumb person to build a digital worker, you know what you get? You get a dumb digital worker, so you can't do that. You got to get a smart person, right? I mean really, really smart, right? Because every error or every piece of knowledge that, that person doesn't know, there's no way for that digital worker to know. So you have to design it and develop it and test it and recognize that this is going to change how you do things. A digital worker can create an e-mail, send e-mail to the counter-party, get a response back, and clear a break. No humans. And depending on how much, we do millions and millions and millions of transactions a day. So the more you can automate that, the more you can make that seamless, the more you can go in and show your prospects what you can do, compared to what other people can do. A lot of people create financial statements for their auditors that are in these funds. They use spreadsheets to do all this kind of stuff and create them. We hit a button. It says, oh, who are you audited by? EY. Well, here's their format. All the data goes right in. Same thing with any of the other big 4 and probably the next 20 biggest accounting firms. So we build templates. We have processes. It's all automated. Not very many errors, like none.

So Blue Prism was your last meaningful size acquisition. You've done a couple of pretty small tuck-ins since then. Your leverage, I think, is a place -- or at a place where you're pretty comfortable with it. What are you seeing out there right now on the M&A front? And kind of strategically, what is intriguing to you at this point?

Well, I think interest rates with where they are today and the sellers still having a very high regard for the value of their assets, it makes M&A a little more challenging. There's some good companies that we would like to own. But when they want 10x revenue, I always say, I would like to sell to you at 10x revenue. I'm not going to buy from you at 10x revenue. So you have to be disciplined, and you can't get in such a big hurry that you can't wait. So that's kind of my view of how this ought to work is just go to acquisitions when it makes sense. That wasn't me. And don't do it when it doesn't make sense. Don't overpay to the point where you have to be perfect to make any money. If you have to be perfect to make money, you're not going to make any money. Problem of being a human, not many of us are perfect.

So then in the meantime, as you're waiting for those deals to come along that do make financial and strategic sense, just continue a balanced plan of debt reduction as well as share repurchases? Shift a little bit more towards share repurchases now?

That's been our strategy for the last -- most of the second half of last year. And I think too that we have various in sundry assets on our balance sheet that if we can liquefy then, we'll pay off additional -- buy back additional shares or pay back more debt.

So you've obviously been a pretty active acquirer over the years. I don't think I recall you guys divesting any businesses. And maybe, I just don't remember it. To the extent that you feel like you have undervalued assets, why haven't divestitures been a part of the SS&C playbook?

That would mean that I would have to admit that somebody can run that business better than me. I'm not in that business. I don't believe that, right? So I think that we are getting the most productive value out of our assets. I mean, it's not like we haven't ever looked to sell stuff we have. And then we've had some things that were extremely attractive. But we're an IP place. We're a human resource place. That value is those people. They all used to come in the office, but now work from home and very hard. But anyway, that's our value, right? So when we go to do some sort of a divestiture, it's got to pass HSR. And who's ever the buyer has to be able to get to financing and all this other stuff. And when we're selling, obviously, if they're going to merge it with one of their fund companies, right, one of their portfolio companies, they need control. So they got to have over 50% ownership. So we would be, obviously, less than 50% ownership, which would put our management teams at risk, right? They know they're not going to be in charge, and they'll quit especially the best ones. The best ones always quite because they can always get a job, right? And then you know what you're left with? Not the best ones, right? And you might have a really, really good business that you just clustered, right? And so I'm willing to do it, but I want guarantees. And then they won't give you any, so you take all the risk. Hey, they're going to give you a great big number if you can get it done. But I just keep thinking that it's got more risk than I want. And we're -- it's like I don't -- I mean $2.2 billion in revenue -- or in earnings, and $5.7 billion, $5.8 billion in revenue, and I bet I don't miss any meals.

SS&C's free cash flow conversion dipped the past 2 years. Historically, it was around 100% of adjusted net income, but it fell to 76% in 2022 and 82% in 2023. What's a realistic outlook for your free cash flow conversion going forward? And to what extent is the recent higher capital intensity structural as opposed to more cyclical?

I think it will tick back up this year, probably being higher than the 82%. How much higher? I'm not sure. And we had a few things that caused it to dip. We had a settlement with the government on an ERISA issue with the acquisition of DST. We've had some timing of when we paid our bonuses versus first quarter or second quarter that have changed some of those things. And we've had various in sundry, legal settlements and tax issues that changed a little bit. But in general, and I think on CapEx, we capitalized more software this year than we have in the past. But we delivered DomaniRx on 1-1 of this year, and we also delivered a huge system to Nationwide. And then Domani is about 1 million [ hour ], our system build that we did. And Nationwide is about 350,000. And knock on wood, they both work. A lot of times in these things, what they mostly do is get postponed.

So for something like DomaniRx, for example, how are you guys thinking about the required return on investment for something like that, which is a big upfront expenditure? What are your expectations when you do underwrite a project like that?

Well, my view is that -- so we do a lot of pharmacy claim adjudication and payment. So last year, we did 437 million or some number like that. But people -- we're not getting into health care business, right? We're not hiring a bunch of doctors. We're not hiring a bunch of nurses. We're going to do accounting. And we're going to do those millions and millions of scripts, and we're going to process them and then slice them and dice them and deliver them back in different reporting formats. And we're going to do it better than anybody on Earth. And when we do it better than anybody on Earth, we're going to make tons of money. And I think it's an enormous market, enormous. I was with the CEO of one of the biggest health care companies in the country, and he told me he does 2 billion scripts a year. So if we can get that client, it's a really big deal. And we have new technology. He's running on 40-year-old technology, and that's being charitable, right? So we have huge opportunity. We just have to keep executing. And again, the great thing about health care, other people's money. And obviously, we're not really going at some hedge fund general partner and asking for his money or her money. You're -- I'm from the government. I got bags of money. We just want our fair share.

In your meetings with your long-term shareholders, so the ones who really understand the company well, they followed you for a long time, what are they asking for from the company? And what are they asking you guys to not do?

They're asking us to get the stock price higher, and they're telling us not to make it lower. So then the problem with that is it's pretty clear, but they're not really giving me any strategies on which to make that happen, right? So -- but I think reality, a lot of people didn't like that we bought Blue Prism, and that's one of the biggest strengths that SS&C has. We're pretty nimble. If it's something we like, we pounce. When we let other people whine and bitch, we're going to just go right down that road. And it's already proven, right? We think we have $100 million in run rate savings internally at SS&C. We're the fastest deployment of Blue Prism in its history, right? And we're going to deploy that many more this year, so it's a huge opportunity. And there's not many things you could do where you can keep selling it. It's about a $300 million business, about 30% in margins. So it throws off $90 million, plus we've saved them maybe -- like I said, $100 million we will have saved by the time -- I think, 12 months is in April. But you take that and you take the $100 million and you take the $90 million, you get $190 million on a $1.7 billion acquisition. And you become one of the leaders in all of this new technology, and we're in the Magic Quadrant of Gartner. So not that Gartner is always right in all of that, and not that we don't have to keep managing the business. But it's not like we went out and paid 20x revenue and all that stuff. We think we did it smartly, and so those are the types of things that SS&C does. And again, we -- look, we -- fund administration, when we got in, in 2002, we had 0 in assets under administration. Now we have $3.4 trillion. How come? They said, you can't do that. Goldman Sachs and Credit Suisse and JPMorgan, State Street, Bank of New York, Northern Trust, they dominate. It ain't banking. It ain't banking. It's accounting. It's accounting and reporting. What's this pharmacy adjudication advanced accounting? And it's reporting, it's systems processing. We have huge data centers. tons of MIPS. And I don't -- and that's all it is, speed. How fast can you do it? How quickly can you get it back to the people that are running the place? And how confident are they in the data you delivered? If you can deliver those things, you can get pretty big. And then when you compete against who we compete against, they don't have a chance. Not a chance. We're going faster than them, and we're ahead of them. But that means over the long term, they can't ever catch us, right? And I know this because I own a couple of [ race artists ], and when she gets ahead, no one ever catches her. But she's got to get ahead. So it's similar.

So if you're ahead and you're getting further ahead, does that imply that your business should have more pricing power going forward?

Yes. But we're accountants and systems people. Asking for more money seems to be genetically a problem. We're getting better though. We're getting better. We're doing training classes. No, you cannot pull a gun on them. You can't do that. It's against the rules. You have to have a sheet that tells them what we've done. Hey, we did these 2 releases. We've got these 400 improvements. We've done this, this and this. You've got your same team. You know how much more we have to pay that team than we did 2 years ago? Sometimes, you have to have an argument. And are they going to like price increases? Of course not. But everybody raises prices. We get [ 2.2% ]. So I think we're getting better at it. I think last year, we -- I think we averaged maybe a little better than [ 3% ], and we hope to do better than that.

Terrific. Well, I think we are up against the clock here, so that seems like a good point to end it. But thank you, everybody, for joining us this afternoon. And thank you very much, Bill.

Thanks a lot.