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

Us now is Brian Schell, who is the Chief Financial Officer at SS&C Technologies. Welcome.

Thank you.

So I guess, sort of the first question is you recently moved some businesses between your verticals. Can you give us a 30-second sort of overview of the new verticals, what's in each vertical, who would service, et cetera?

Sure. And we did this, just as a little bit of a backdrop, which we can talk about more if you would like, for more of a go-to-market strategy and a little bit of efficiency overall in client service. But I'll start with GIDS, the traditional transfer agency business. We moved retirement into that as they are servicing ultimately the similar, call it, individual account holder at the end of the day behind the large funds, the '40 Act. Then you look at the next business is the alts business. There were no change there as far as the fund administration traditionally as people think about that business. The Wealth and Investment Technology is the third one. And that includes the Advents and Eze, which we have reported individually, as well as I&IM also combined. And again, that was probably the most efficient as far as the go-to-market impact that we provided. So think about it as most of our software sales, and we can get into that further as well. Then we also then have the, I'll call it, more of our horizontal businesses with Intralinks and Blue Prism and then finally, the health care business.

Now can we take each one of those verticals and get kind of the core products and the customers, competitors?

Absolutely. So on the GIDS business, the GIDS and other, which is primarily the retirement as we think about it, right, so its traditional market is the mutual fund firms and focused on providing services for those end account users, the millions of account users behind those large funds and providing those services both primarily in North America, with the U.S. being the largest market, and then also internationally, which where we're seeing quite a bit of growth lately, particularly Australia and then in Europe. And it's a business that is obviously not growing as much from that standpoint. But it's a profitable business, but like I said, it doesn't have a lot of, I'll call it, industry growth behind it today. And then retirement, that actually is growing quite nicely, which is within that business with some new clients that were onboarded over the last several years. So again, overall, as a business, it will have a lower end of the growth but performed to where we expected to. As we look to the next section we talked about with respect to our alts space, the traditional fund administration business, that we see growing very nicely. And where we see why it's doing well as far as those fund services, right, from complete just kind of, call it, the front-, middle- to back-office support. And where we see it's doing well is it really -- the bulk of its revenue is coming from serving the most complex, largest funds out there, whether they'd be the hedge funds business or the private markets, which includes both PE as well as private credit. And we've seen that grow quite nicely as well over time. And that business has been growing kind of in that mid-single-digit range. And we're seeing really nice organic growth in that business, both from new fund launches, fund spin-outs completely to another firm, the private markets business, particularly private credit, we're seeing, like I said, a lot of nice vectors. And then the funds themselves growing, which is also creating some nice momentum with their AUM growing and us servicing those assets. The next is the WIT, I mentioned the Wealth and Investment Technologies. The key products there, I'll mention, is Geneva, which is the kind of the -- I'd say, the gold standard for fund administration, which we actually use internally at the alts business as far as the fund administration business. And the other large products there are Black Diamond, which again is almost as large as the Geneva product itself, given its recent success in serving the RIA community. It also has some trust services built within there. And then Eze, right in the front, and OMS, you'll see, is also then part of that group. That's a little bit more transaction-based. But those all combined together, we've seen some quite nice go-to-market, I would say, synergies as far as the revenues that it's been able to generate. And it's been growing nicely as well. I'll move to now the Intralinks business, which I think most people are familiar with, again more of a horizontal approach but does have a little bit more of a focus within financial services, again providing the data rooms, the virtual data rooms. About 20% of that business is actually subscription-based. So it's not just all M&A transaction business. But what we've seen is even though you haven't seen the M&A prints more publicly of, "Wow, that's a lot of M&A volume," there's still a tremendous amount of work that's being done behind the scenes before things actually print. And the deals are actually larger, are more complex, requiring more data. So it's taking up more time, more capacity and, therefore, generating more fees there. And then Blue Prism, I'll mention as far as -- and I would say back to the competitor, sorry, I didn't get down on all of them, but there aren't a lot of competitors in the -- within Intralinks. There's probably one large competitor and a couple of other smaller. Within the Blue Prism space, this is the robotic process automation that both is -- like I said, serves all types of clients, again also a lot of financial services clients, where, again it's basically taking those manual processes, automating them and use of digital workers implemented across organizations. And it's a pretty robust enterprise solution, many times. And SS&C is probably maybe the second, if not the largest, users internally. And we've used that to help drive our margins as well as far as some of those things we do both in our GIDS business as well as our fund administration business to help continue to drive down costs, increase efficiency and improve accuracy overall as far as the automation effort goes there. And then lastly, health care, which is more of a -- health care is more of a technology platform than anything else. It's not providing medical advice. It's not doing anything along those lines. It's more of a claims adjudication process. Both in the health care plans as well as the pharmacy business are the kind of the primary, I'll call it, services that we provide there.

Okay. Leaving health care aside for a second, what does demand look like? And are you competing against other vendors, other suppliers? Or are you competing against financial institutions sort of in-house-developed?

Yes. So that's a great question. And that obviously varies with each of those. So if we again talk -- start at the top, I would say the transfer agency business tends to be -- that's going to be kind of external. So that will be other services. Again, that demand is certainly slowing as far as there aren't a lot of new people saying, "Hey, I want to start offering more mutual fund." That industry, in and of itself, is just shrinking. And so we're seeing our growth again more internationally there from that competitors. We are the -- we have a dominant market share there. But that's more about where do we provide the incremental services to capture incremental share of wallet or services that make sense as well as some of the geographic expansion? As far as the alts business, that actually has been a lot of organic growth, right? So we've seen that's been a really nice organically driven business, where we've seen organic growth of AUA of existing clients. So their funds are just getting larger, even if they're not starting anything new. We see them starting new funds even within their business, which is where we've generated probably of our clients a lot of the revenue because the complexity of being able to administer to the larger hedge funds, there aren't a lot of people who can do that. As they start looking at different hybrid type of funds or different types of asset classes or different geographies, we're able to handle that and fewer firms are able to do that. We're seeing managers separate from their firms and just completely go out on their own. So we're having success there with some, call it, completely new logos. I touched on the private markets because of the PE firms and the private credit. We saw a really nice growth in private credit last year with some big wins. We're seeing that growth still double digit this year. And we don't see as much of the outsourcing services so much as the administration services. And we do see some of the outsourcing services and some of the hedge funds as far as wanting to outsource that to us or to someone else. In that space, there is financial services, call it, banking, some competition. But like I said, we think that we win much more than we lose as far as when they come up for bid on those. With respect to the Wealth and Investment Technologies, we're continuing to see strong demand. And the biggest demand there is probably still is the Black Diamond, as I mentioned. Its revenue growth heading into -- from exiting Q1 into Q2 for Black Diamond, it actually may surpass the sales of Geneva, which is kind of that core product which we use. And so we're seeing those really combining those services around Black Diamond for that RIA community, which continues to do very well and being part of that ecosystem. So we're seeing really good demand there. The growth rate you may see within that group is a bit muted because of some prior year comps of some licensing revenue that was received last year that rolled off, and this year being -- this quarter being the last one of that. Intralinks, I think we've mentioned we saw that 20% growth rate with the behind-the-scenes demand really strong, even though the prints haven't occurred. And then I guess -- and then for the robotic process automation, there are multiple competitors there. I think we are definitely holding our own there. Again, it's a profitable growth for us versus growth at all costs. And we've continued to expand those margins from acquisition from essentially negative, call it, to low 30% range on EBITDA, so again seeing some nice growth as we continue to win clients there as well.

Okay. One of the questions we get asked a lot is your revenue exposure to asset valuation levels, market goes down, market goes up. How does that run through the business model?

I wish it was more formulaic than it is. There are formulas there, but they're not as straight as -- like I said, for modeling purposes, right? So the good news is that if asset values go down, and they never go down, right, is it tends to be a bit muted. But when they go up, you get the same temporal effect. Because the pricing within that business is there are some core flat fee fixed services that we will do around, call it, tax reporting, compliance reporting that really aren't really as much tied to asset levels. Then we also then have services that we provide that's tiered, right? So you may say, "At x billion dollars, it's a 10 basis point fee. At the next $5 billion, it's maybe a 0.5 basis point lower," right? So it doesn't necessarily grow as a straight line as we would -- one would like or be able to model it. So there's definitely some variability. And it's definitely a tailwind with, I think, the performance we're seeing in the market today. Now it can -- you can't just use equity values overall, right, because you have a diversity of when things are marked, the overall -- where you have credit, so you have the fixed income, you have public equities, you have private equity. So you don't have as much volatility over time. But generally, that kind of overall broadly growth rate will be supportive. But it's not a one-for-one relationship.

Okay. Switching gears a little bit, getting away from financial services for a little bit, Blue Prism, you mentioned that it's about, what, half the business you're sort of using in-house?

Yes. I would say that those are the two big operators, GIDS and the alts business.

Okay. And this is an unfair question or a tough question. When you bought it, there was a debate as to whether it made more sense to continue to sell it to clients outside, or it actually having a bigger impact on SS&C itself. We're now, what, 2.5 years, 3 years, I think, since the acquisition, '22. Where do we come out?

I would say how about both? So here's what I see, right? So I'm relatively new as you've said. So we've seen this business expand margins and continue to grow. But it's expanded margins from essentially 0 contribution to, call it, low 30%, which in and of itself is tremendous, right? That's just purely taking a look at the business and what operationally does or does not make sense from an expense standpoint to allow this business to continue to grow. So the enterprise, in and of itself, has been a nice growth trajectory. So we've created value of just on a stand-alone basis. I think that consistent with the approach of SS&C is we see tremendous strategic value in owning the software. And you can control, the owner controls the development cycle, the enhancements, the releases, staying up with it, feedback from all the other users outside of us coming into us and then to continue to enhance it and then prioritize that and sell that and make that a world-class software. So we love owning that software. It's possible, obviously, to use it without owning it, but we have shown a preference to using that, and that's usually worked out well. We have -- like I said, I think we've obviously, in our previous calls, have cited $100 million of savings number by implementing digital workers across the business. And I still think there's more to be had, although I think we've captured the low-hanging fruit early on. But as we continue to implement into the rest of the organization, we'll continue to build capacity so that the incremental revenue doesn't require the incremental maybe new hire that I was looking for before. Or I think that over time, it will reduce other expenses. So for example, our own corporate finance group is beginning implementing digital workers this year. And over time, we're implementing processes where I'll have to have fewer processes that will be -- because they will be the same that won't be audited by my internal audit group. They won't need to be audited by our external audit group. And so you have different elements that just costs will continue to decline over time, or it's going to take a 3-day process down to 2 hours. It doesn't mean that person goes away, but that means that person just created a whole bunch of capacity every month. And as you build those processes on top of each other, you create tremendous more amount of capacity.

And then again, if I'm remembering correctly, when you bought it, it had a fairly significant percentage of nonfinancial services clients. Have they stuck with the company or...

Yes, I haven't necessarily seen any changes in that. I think that we tend to -- we'll have a little bit more financial services clients because I think what we're doing a better job of is basically making sure we're introducing the digital working capability to our existing client base. And so I think you're going to continue to see that. So the more successful our cross-selling and leveraging an overall client relationship management framework and using that discipline and making sure that if we look at our clients and look at our services, if we see a white box around the Blue Prism for digital worker, we better make sure that, that client understands and knows that. So that's the most immediate, easiest cross-sell we can have with the financial services clients.

Makes sense. Health care, how does it fit in?

So health care, obviously, is not financial services service. I would say it's a strategic view that the technology and services we provide is a lot like the technology and services we provide to financial services firms. And as we -- I mentioned earlier, as we think about what do we do in health care, right, we provide a technology platform that looks a lot like -- and Bill has used this analogy a few times, it looks a lot like a trade ticket, for example, right? So I've got this order of this prescription. I know who's going to be delivered over here. I know that where's the quantity and there's a price. And how do I get that best price? And who's going to supply it? And keeping track of all that data and being able to move that through the system with very low latency, most efficiently with high protection from cyber, independent and the ability to scale, we think, is a strategic play that going into, call it, 2020 -- at the end of this year, we think, can see accelerated growth, right? We knew that over the last few years that we were going to have some challenges within health care. Because we had clients -- no client losses, that revenue has been running off. We think this is going to bottom out this year. We think we're going to see a trajectory increase to be more positive in the back half but then start to see the benefits of the new -- our new DomaniRx platform as it onboards new clients and builds up its network. We've seen a catalyst from Change Healthcare and looking to say, "Hey, maybe I shouldn't be single-threaded on my services. Maybe this is a better service as far as -- because it's a brand-new system that's proven at scale, that I can get better data and I have very low latency on getting my claims processed." Those are all things we're seeing are attracting interest in the health care industry. And so to answer your question, is it as related? Certainly not on the back-end consumer, but the service we're providing looks a lot like what we're doing with the financial services clients.

So margin potential similar, state of the businesses?

It is. Right now, even at not at scale, we're in the, call it, low 30% EBITDA margin. So do we think that can enhance significantly over time with the revenue growth? Yes.

You mentioned DomaniRx. It's a partnership, correct?

Correct.

With Humana?

Humana and Elevance.

Why did you want to partner with them or they partnered with you? I mean, who's bringing what to the relationship?

Right. So I would say that it was very mutual, right? So here, SS&C is a known, trusted provider within financial services around technology and software solutions. And then you have two different partners over here in the health care industry, who aren't small by any means, and you have somebody inside the tent making sure that, call it, the programming or some of the technology decisions you make as far as the services that you have, you have really users there. And it's like what we really need is to make sure it has capabilities of X, Y and Z. So getting that input in the build and design was really important to us. And if you -- nothing brings engagement like putting some money at risk, right? So I think that was also important, right, is having skin in the game. So all of those things, I think, at the end of the day, will prove that it will be successful or not. But so far, it's going as planned. Obviously, I want to -- we want to make more revenue sooner than later. But that was, I think, the importance of bringing in health care expertise inside that development project to make sure that we weren't just building a better mousetrap and we didn't understand what exactly we were doing. So I think bringing them in was very important.

You mentioned the problems that one of your competitors has choice with their cyber attack. Are there other major competitors? Or are the insurance companies mainly doing it themselves?

I think most of the PBM, the networks, is we're competing against the large three that are out there. And we don't expect that, "Oh, my gosh, we're going to replace them," but we do think we can be a very viable, large alternative for those that want to be on an independent network, right? Right now, if you want to have some of that claims adjudication process and you don't -- you're not one of those three, which there are a lot of other providers, you don't really have an independent choice. And so we think we can be that independent choice for a lot of those firms, either as their primary, or again as their secondary. As you build that redundancy, which we've seen over time, with whether it be we've seen that in the banking industry, where you kind of see the contagion effect sometimes, you can see it in health care now with -- if your claims platform is down, it can be an existential risk. If you can't get paid and you can't move things through, you have a problem, right? So I think people, as they're doing some of their risk planning and that overall approach, we think it was unfortunate for them but fortunate for us for a catalyst to maybe elevate their evaluation of us.

I've got plenty more questions, but I want to open it up to the room if there's anything out there. Looks like more crickets, right, some crickets in morning and more crickets now. There's been a question around SS&C in terms of organic growth versus inorganic growth and whether there's trade-offs between the two or something to cause organic growth to come in disappointing in some areas, better than others. You're relatively new. What do you see coming in, in terms of that dynamic and any possible changes that you would think about?

Yes. Obviously, during my last 10 months, the focus has been organic growth as many of you have seen, with the lack of an M&A announcement, which I would arguably say is should be done no matter what, regardless of the M&A opportunity out there, that we should be making sure that what we do own, we should be making sure we're executing on the best extent possible. And that's providing with the right CapEx, the right OpEx and pursuing the right opportunities. And we're excited about what that has to offer going into this year. I think you saw the optimism probably beginning late last year and then into this year and our success so far through Q1. So again, that hasn't changed. I think on the M&A perspective, I think it becomes more about -- a little bit about your -- the comment there about the capital allocation. But the reason I think people are excited about the M&A is this company has been very successful in, I'll call it, operationalizing those opportunities that have come in, that the price wasn't outrageous, let's enhance the margins, let's get it to grow even more. And that produces a very nice EBITDA contribution over time. And that's what this company has been able to do. And that's why people, I think, are excited about the M&A opportunity and, "Why aren't you doing more of it?" I think it hasn't been an either-or, I think it's been a lack of an opportunity around the M&A because valuations escalated. I think the overall uncertainty, we saw M&A kind of really kind of fell off with whether it be rates, the uncertainty, macro environment, whatever it was, we didn't see anything kind of coming through to fruition, obviously, with what we've seen. So I guess, price is a big part of the overall value for us to be able to create for our shareholders. So we'll continue to evaluate the pipeline that we see. We see it there. We've seen valuations come in a little bit, but not where everybody is doubling down and having to go get it. And the only upside to having a share price that is not as high as it should be is that when we look at the cash return on buying back our own stock, we're going to do that. That is an easy benchmark for us to say, "We know we can get X, Y and Z cash flow return on buying back our own stock even if the M&A opportunity isn't there."

Speaking of M&A, as you look at the portfolio, are there pieces that don't make sense anymore? And are there holes that you're looking to fill?

Yes. I would say the portfolio optimization is something that a management team should always be asked about, "Are you sure you've got the right parts? Do you want to sell anything? What would you want to buy more of?" And it is a review we go through. And I know that your look is like, "Well, you've never sold anything." You're right, we haven't. There hasn't been, I'll call it, a transaction that says, "Am I better off by selling it versus keeping it," right? So you look at what's the price coming in? Do I have any tax leakage? Do I get a change in multiple as a result of that cash flow being part of the business or excluded from the business? What does it change? What do I have when it's left? So we try to look at all those dynamics. People have proposed some complex transactions, where there was more risk to us and our shareholders than it was to the person proposing the transaction as far as length of time, risks of financing, a lot of different elements that one must consider. So just know that, that's something that we'll always evaluate. And I think that's our obligation from a shareholder duty perspective. As far as what are we missing, I think looking at the M&A, and we talked a little bit about this on our last call, but looking to enhance where we are strategically around our alts business, right? I think that would be tremendous as we continue to either grow some capability or some service or some incremental geography, obviously, within, I think, the next likely is probably within our Wealth and Investment Technologies. Are there incremental services or software that really can help strengthen our offering to the existing customers? And then obviously, within, obviously, the GIDS business, I think it's something else you kind of look at, is there incremental services that we can provide to that existing customer base to really enhance that service?

Okay. We're pushing up on time. So my last question, SS&C has a great track record of boosting margins. We talked earlier about how Blue Prism is helping you continue to do that. Before Blue Prism, what was the secret sauce? And where can the margins go?

Yes. I would say that the secret sauce is the team is very focused on, like I said, disciplined cost formulas around the revenue growth and being disciplined around pricing, too, right? So if you're selling the incremental service, let's not give it away. I mean, for our premium service, let's make sure we're pricing it appropriately and having a very disciplined formula that, hey, for every -- I'll make it up, right, because it will be different in every business. For every $10 million that you're adding there, you should only be adding x cost to that $10 million. And if you're not, then something is broken or you're not executing the right way or we need to fix it. And then the challenge that Bill has always laid out is then how can you make it a little bit lower than what it was before? So it's continuously challenged that leadership team is that how are making sure you're benefiting from scale going forward and net revenue growth? So it's really just paying attention to the customer service. And there's some cost metrics that have basically been tested that has proven to that successful formula of that margin expansion.

It sounds a lot like just blocking and tackling.

It is a lot of execution of blocking and tackling.

Okay. Well, thank you. Appreciate it.

Thanks.