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

Good morning. My name is Jeff Schmitt. I cover wealthtech stocks here at William Blair. I'd like to introduce today SS&C Technologies. They're a leading provider of enterprise software and outsourcing solutions for the financial services industry. We have with us today Brian Schell, the CFO, to discuss the business. But before we begin, just for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. And with that, I will turn it over to Brian...

Thank you, everyone, and I appreciate everyone coming here this morning. And so what I would like to do is, again, provide a general overview of who we are, some of those more familiar with the stock I find a little bit, like I said, more high level, but that's okay. That's kind of what I'm trying to do here. And again, I encourage you to read the safe harbor statement, which I've already passed up. But what I'd like to do is just kind of -- as we talk about who SS&C is at the highest level regarding what we do for financial services. We do have a group that does provide support and services for the healthcare industry as well. But again, it's a small part of our business. But again, mission-critical cloud-based software is what we do. We think it's very sticky revenues, and we'll show you kind of our growth prospects, what we do, what we see and what we think makes us -- gives us a competitive advantage. The slide is -- I'm going to talk a little bit more about the specific services and what we do here. What we provide our market position, our approach, our competitive advantage. And the first thing to point out here is if you don't know about us is our #1 ranking in alternative fund administration and mutual fund transfer agency. Again, that's kind of our dominant position. If you look at how we kind of group our revenues and when we talk about this, those 2, I'll call it, kind of categories is about 50% of the business right there. So that kind of gives you a sense of the dominance of our position and the overall composition of the firm and the revenues. The chart is while there's a lot on here, it's a wonderful overview because if you look at the 10 kind of boxes below, it kind of gives a little segment of the things that we do in providers for the financial services and healthcare administration in the pharma, right? So the investment in loan fund accounting, we do a lot of outsourcing for the middle and the back office. We provide a lot of data and data analytics that loops back through to the clients themselves. I mentioned the transfer agency business, which is large. We support the front-office trading, the virtual data rooms, both for the -- for transactions, whether it be debt capital markets, M&A, equity capital markets, it's a lot of reporting solutions that we provide from a compliance and tax standpoint, regulatory I mentioned the healthcare, and there's a lot more around what we do around processing claims. This is not us being a healthcare provider per se, but more supporting as a technology provider to the healthcare and pharmacy industry. And then the last one there is the intelligent automated solutions. Right now, this is more around robotic process automation with the Blue Prism transaction that we completed a couple of years ago. And what we've been able to do there is to help people gain efficiencies and capacity within their organization. And actually, this is something that SS&C has done internally pretty significantly to help us grow our margins. So there's a complete suite of offerings that we have here. A couple of other points before I leave here is that you're going to hear recurring, as I mentioned, this is the -- we are a technology company, right? This is the heart of what we do as far as part of our competitive advantage in helping us drive our margins in what we do. And the fact that we are independent also frees us from potential channel conflicts of providing services that other, I'll call it, competitors that may be in a peer banking industry that might be trying to provide these services. We don't have that same conflict, and we'll mention and we think that's actually relatively important. Very brief. Again, we're listed on NASDAQ, operate 114 offices in 90 cities globally, over 26,000 employees, something a little bit more unusual, but our founder and CEO believes very strongly in equity compensation and driving that in very deep into the organization. We were recently doing some recruiting and he made the statement is that this is not a good place to work unless you want to get rich. His idea is driving that equity deep into the organization to create alignment with a very, I'll call it, pretty junior levels in the organization relative to a lot of the organizations. The other thing a little bit on the middle section there, just again, we do own and operate a private cloud. We do actually operate a couple of data centers to help support that. And we have a pretty diversified revenue stream across a number of clients and the -- roughly the top 200 recently did pulled this number, the recently in the last -- a couple that -- our top 200 clients is about 50% of our revenue base. So it's relatively diversified, but we do obviously have a large section of the big clients that are obviously very important to us. And then the last are just kind of the fun facts of as far as what we do as far as the number of clients, $3.4 trillion in assets under administration, the 45 million accounts on our transfer agency platform and the millions of healthcare claims processing using our pharmacy solutions. If you look at our go-to-market strategy, and again, you'll continue to hear this as a theme is what our primary focus is in working with our sales and technology group is really more about solving problems and primarily in the most complex of organizations. It's not just creating something and then hoping to sell a better mousetrap. It's focusing on what their needs are, what their complexities are and how do we help them do this because we're at scale. A lot of times, they are not -- and so that's our focus as we go into helping them solve their problems so that they can focus and do what they do best. The -- I would say that the other thing is that we try to do that through technology. We do have scale. We do have a lot of "operations and processes," but obviously, the best solution long term, both from an efficiency and from accuracy and everything else is continuing to try to leverage our technology to do that, whether it be through the software licensing process, the overall servicing or the overall just complete outsourcing completely. If you look at -- and this is probably my favorite slide coming up here is we call it our value proposition, but really, it's our competitive position and why it matters. And I mentioned early on about being a technology company. And why is that important? We serve a lot. We have a primary software particularly, as an example here is Geneva, that is probably the gold standard for fund administration, that other firms, our competitors use sometimes in-house, sometimes to sell their services as well. And we get that feedback from all of those clients about how do we continue to enhance. We own that software. So we know we can make those changes. We can prioritize those changes. We don't have to wait on somebody else to make enhancements, to make changes. We control it. We can do that. And we're getting feedback from, like I said, a lot of our client base to be able to continue to enhance that, that can benefit all. So that when we actually make a $1 of investment in that technology, then that leverages across our entire client base, not just one single client or not just for their own internal operations. So we think that gives us a real competitive advantage is owning that technology. And I think part of that mindset also is we've been able to deliver some other very strong software solutions, including Black Diamond, which is really scales primarily servicing RA market. And we think also, I mentioned earlier about our private cloud having an infrastructure there that helps support that also gives us quite a bit of control that we don't have to rely on some of the other larger players to be able to make the changes or put in some of the security that we want to be able to put in overall. The other thing I want to be able to mention then is -- again, I mentioned this a couple of times as far as a recurring theme here is the proven ability to execute. And what I mean by that is we are able to handle a tremendous amount of complexity, whether that be the largest firms having some type of hybrid approach, multiple asset classes, multiple geographies, incremental funds. We know that kind of the life cycle of, say, for example, a hedge fund is they start out small. They have a group of leaders, they maybe they want to create a different fund, different focus. As they continue to increase those number of funds, for example, they realize that our off-the-shelf solution, maybe Excel spreadsheets, does not work once you get to a certain level of complexity and their success, and they realize there's a lot of effort here. There's a lot of complexity. We might need to look elsewhere. The larger players already realize this and they're using us. And as we look at where a lot of our growth come from, it's come from some of our -- mostly our largest clients. As they continue to expand as they continue to increase our complexity, this is where we do really well. And this is where you see us continuing to thrive. The other thing is the independence here. Again, making this important point, right? There is no channel conflict. If there's a bank competing also trying to provide some services a lot of times maybe to another large bank, there is no worry or concern. It's like, well, they're going to have my data, they're going to have this. It's we're independent, right? So we think that's very important also overall. As we look at this, again, very briefly, I would call this as just more of our brag page as far as all the things that we do. There's a lot of acquisitions that have occurred over time that you might recognize with respect to Intralinks and how dominant share. It has the global debt manager as far as the commercial paper automation and transfer agency processes for supporting commercial paper, DBC with managing debt structures on the municipal bonds. You can see there's a lot of names here, a lot of things that we do that's supporting some of the biggest players. Very briefly, again, Q1 almost feels stale in today's world as far as where we are, given that we are last month of the second quarter. And just again, a brief overview of Q1. Again, strong first quarter with 5.3% revenue growth, 4.7% of that was organic, if you adjust out any acquisition activity or FX. A metric that is not on here that we want people to start paying closer attention to is our financial services recurring revenue growth rate, right? If you look at our software-enabled services and the maintenance revenues. We've seen a nice continued growth rate over the last several quarters, Q3, almost 6%, Q4, 6.9%. This last quarter, 6.5%, right? And that's about 85% of our revenue base is in that category. So we're seeing a nice continuing growth rate there. The reason we look at that is that we still have quite a bit of licensing revenue that can be lumpy, right, because of rev rec and 606, there are certain accounting treatment that you may have to make an accelerated revenue recognition over a longer-term contract that may not be as repeatable quarter-over-quarter. So we tend to look at what's the most stable base there that we can try to measure and provide that metric to investors. And the other thing that, obviously, that we also like to see is growth on the bottom line, right? We love to see that margin efficiency and seeing that margin on the incremental revenue really accelerating. And that's when you see the higher growth rate and the earnings overall. As we briefly look at capital allocation, you can see that the company has been pretty consistent in its approach and what it says it wants to do. We talked a lot about how we -- because we have a tendency to -- we've used debt to lever up to try to generate incremental shareholder value primarily in our M&A transactions. And paying off some of that debt has been part of the strategy. So you see that in this first quarter, heavier than what we normally might do. You'll see it was dedicated to debt reduction. And -- but I think what you'll see for the rest of the year and what we've indicated is it tends to be it's going to be little bit more skewed towards share repurchase activity. And the other thing that we do is as you look at our dividend right now sitting at $0.24 quarterly. We don't have a huge payout ratio. We do think it's important to provide a dividend, but it's not a primary focus of our capital allocation approach, but it is there. And it is something we'll look at on an annual basis. On the debt paydown, given where sometimes where people say, "Hey, your stock is undervalued, where aren't you buying back more stock? And -- but what we do think is important is to actually not ignore the debt given that we want to be in a position from a leverage ratio standpoint that should an acquisition opportunity present itself. We want to make sure that we have the appropriate amount of capacity to be able to go and get it as far as continuing to try and build shareholder value. So a certain threshold, maybe not as make as much sense, so it's a math that we look at all the time as far as evaluating the impact of debt reduction and the impact of share repurchase. So just know that it's something that we look at, but the leverage ratio now being under 3 is a very, very comfortable position that we look at. Not on the slide, but I will mention we recently refinanced our debt stack. We had a maturity coming due in April of '25. So inside of that 12-month window. So we went to the market and refinanced a little over $4.5 billion as a result of an upsizing of the strength of the response that we had when we were in market. So what we're able to do is extend maturity by about almost 4 years. We diversified our secured, nonsecured mix as well as our floating versus fixed rate. So it turned out to be a fairly strong reception and execution and slightly reducing our annual interest expense. But the primary focus of doing that was actually doing it to extend the maturity overall. And so it was a very successful transaction with zero OID, and that's great from a cash flow perspective. Again, strong history of M&A. It's something that's always top of mind for us. You look at the track record of growing margins and cash as a result of the acquisitions as we look at and we bring them into the SS&C umbrella and then looking to leverage and integrate those across our operations. You'll see that because overall, we like to look at expanding our overall capabilities to our clients. The most recently one being Blue Prism there in 2022. We utilized that that's a robotic process automation that I mentioned earlier and the intelligent automation. And we are probably the, if not the largest, the second largest client of Blue Prism and using that in our own internal operations. And that's enabling us to actually continue to gain efficiencies as we've looked at those processes that we have that can be enhanced with efficiency, with accuracy, with using intelligent automation with using those processes. So that's something that we then offer that then we can go and be even that much more competitive to our clients by utilizing those tools. If we -- I mentioned this earlier about paying down debt, and this was probably a slide I put in for the -- most recently for the lenders presentation when we did do the refinancing. But again, it just shows the history that it's important to maintain a strong relationship and credibility with the debt capital markets is that, hey, we're going to ramp up. We're going to use it to finance a transaction, we think is going to create shareholder value, but we will then focus and pay down to make sure we get into back to a more comfortable zone. So these are a couple of, I'll call it, leverage points and data points of completing a transaction and then delevering before the next transaction occurred. So you can see that -- you'll see that spike up to 4.5x to 5x and then delevering back down to roughly under 3x. Again, creating kind of that nice capacity to be able to go in, given the level of cash flow that we're able to generate across the organization. And so that's, I think, is important for everybody to see and understand as far as our approach overall. Dig into a few more financials as we kind of wrap up here in the next 10 minutes or so is, it's a very high-margin business at the end of the day. And as you look at our history over time is that over -- as we've been able to expand our revenue base, we'll be able to expand margins. Now like, well, that's interesting, Brian, but what happened in '22. And you'll see this also on the earnings. The '22 was a transaction was where we bought Blue Prism. And at the time, Blue Prism was essentially slightly negative on an EBITDA basis, but it had a really nice revenue base. And Billstone had a vision of what this could do for us and it turns out it was right, which obviously you get to this level, and you make more bets that are right than not. And that actually hit an impact on our margins overall in '22. This is also when you start seeing a little bit of the inflation impact on a lot of wages and a lot of healthcare and things that actually hit the margins a little bit harder than expected in '22, but very explainable, not trying to create excuses. This is just kind of what happened within the business. And as we grew through that in '23, we started to try to accelerate those margins to where we have an expectation around '24 to "restoring" trying to get back up to that 40% level as what the midpoint of the guidance and the analyst estimates are as far as achieving that more positive trajectory on EBITDA growth. It's important for us to -- as we grow that revenue base is to continue to be increasingly efficient across the board with Blue Prism, with our scale and -- but not ignoring the OpEx and CapEx investments that we need to continue to make to make sure that we're also looking at revenue growth in '25, '26 and '27. So that's important for us to look at it for the long term as well. So you're seeing that implementation of the digital workers and increasing that margin is still important to us. As we look at revenue retention, you'll see that it's consistently above 95%. There will be some adjustments quarterly. It was a little bit of a dip in Q1, but I think that was -- we can explain that as a little bit more noise. But overall, we're just continuing to see that nice trajectory of increasing revenue retention rate. And it's, again, it's based on a rolling 12 months overall. And we don't include acquisitions in that until tenure is over a year. Overall, from our adjusted EPS, again, I mentioned the slowdown in '22 as you look at that, this is more of an impact of the interest rates, honestly, when you start selling shorter-term interest rates floating up, presenting impact on overall EPS. Most of the debt at this time was floating rate. And so it really hit the bottom line pretty hard from an EPS standpoint. We calculated it was over $0.40 a share actually. And so you look at that, you'd see a little bit more of a normalization from where you were to 2021. And -- but you're seeing that kind of that growth trajectory coming back up similar to what I talked about on the EBITDA margin side, right? So we're seeing a nice -- looking at positive trajectory in revenue growth rate. You're seeing that in '24, we also expect some fewer headwinds. We think a stabilization of the interest rate. So I think that's only positive at some point during the future. You see the healthcare, which we haven't spent a lot of time on during this presentation, which again is more about providing that technology kind of behind the scenes for healthcare claims and pharma claims. And we've had a couple of known client losses that occurred a few years ago that are rolling off and will have less of a negative impact on a go-forward basis. So again, positive expectations running around going forward for 2024. And the last slide that we have in the presentation overall is more around where we ended with guidance as far as both Q2 and for the full year. You'll see which is easier to see in the earlier slides about the trajectory of being a more positive growth rate overall and continue to have positive organic revenue growth, margin expansion and an increase in overall cash flow more broadly. I know that the Q&A is more reserved kind of for, I think, another venue, but it's kind of all I had today.

[indiscernible] Thank you.

Okay. Yes, appreciate it.