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

Ladies and gentlemen, thank you for standing by, and welcome to the SS&C Technologies Q2 2024 Earnings Call. [Operator Instructions] I will now hand today's call over to Justine Stone, Head of Investor Relations. Please go ahead.

Welcome, everybody, and thank you for joining us for our Q2 2024 earnings call. I'm Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Rahul Kanwar, President and Chief Operating Officer; and Brian Schell, our Chief Financial Officer. Before we get started, we need to review the safe harbor statement. Please note that various remarks we make today about future expectations, plans and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, July 25, 2024. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today's call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. I will now turn the call over to Bill.

Thanks, Justine, and welcome, everyone. Our second quarter results are record adjusted revenue of $1.4524 billion, up 6.5% and $20 million ahead of our forecast. Our adjusted diluted earnings per share were $1.27, up 17.6%. Adjusted consolidated EBITDA was $558.9 million quarter, and our EBITDA margin was up 170 basis points to 38.5%. Our second quarter adjusted organic revenue growth was 6.4%. The revenue acceleration was driven by strength in our alternatives, GIDS, Wealth and Investment Technologies and Intralinks businesses. The surprise upside came largely in our GIDS business, the outperformance driven by seasonality and some accelerated license revenue. Our recurring revenue growth for Financial Services was 7.7%, which includes all software-enabled services and maintenance revenue. Second quarter cash from operating -- from operations were $385 million, up 16.8% from Q2 '23. Our cash flow conversion percentage for the quarter was over 120%. We paid down $25.2 million in debt in Q2 '24, bringing our net leverage ratio to 2.84x consolidated EBITDA. In Q2 '24, we bought back 3.7 million shares for $227 million at an average price of $62.17 per share, and this is the highest share buyback in one quarter in SS&C's history. Last week, the Board of Directors renewed a 1-year $1 billion common stock repurchase program. We continue to believe stock repurchases are a good use of our capital. On the M&A front, valuations are still elevated, but we are seeing an increase in relevant targets coming to market. We will continue to look, but our returns need to be as attractive or greater than buying back our own stock. I'll now turn it over to Rahul to discuss the quarter in more detail.

Thanks, Bill. Our business had a good quarter, with the strongest organic revenue growth since 2021. Our alternative fund administration business had strong growth across the board in private markets, hedge funds and retail alternatives where we provide both fund administration and transfer agency services and support registered alternative and interval funds. SS&C is uniquely positioned to serve this growing area with the combination of our transfer agency and fund administration services. We have seen early success in the wealth and investment technology business unit, collaborating on client relationship management and sales opportunities. Trust Suite momentum continues. The sales pipeline is robust, and we're being invited to participate in the largest RFPs in the market. DomaniRx's second release was put in production on July 1 and the platform can now process claims for all lines of business. We have processed over 100 million claims since going live in January and have migrated our first new client onto the platform. Domani's key strength includes enhanced functionality running on the SS&C private cloud with self-service capabilities and customized reporting. I will now turn the call over to Brian to discuss the financials.

Thanks, Rahul, and good day, everyone. Our Q2 '24 GAAP results reflect revenues of $1.452 billion, net income of $190 million and diluted earnings per share of $0.75. Our adjusted revenues were also $1.452 billion, an increase of 6.5% over Q2 '23. The increase of $89 million over prior year was primarily driven by incremental revenue contribution from the alternatives with GIDS and Intralinks businesses. Acquisitions contributed $4 million and foreign exchange had an unfavorable impact of $2 million. As a result, adjusted organic revenue growth on a constant currency basis was 6.4%. Our core expenses increased 3.3% or $29.2 million excluding acquisitions and on a constant currency basis. Adjusted consolidated EBITDA attributable to SS&C was $559 million or 38.5% of adjusted revenue, an increase of $57 million or 11.2% from Q2 '23. The 38.5% EBITDA margin reflects a year-over-year improvement of 170 basis points, driven by the positive impact of both revenue growth and disciplined expense management. Net interest expense this quarter was $113 million, a decrease of $5 million from Q2 '23. Adjusted net income was $320 million, up 15.7% and adjusted diluted EPS was $1.27, an increase of 17.6%. The effective tax rate used for adjusted net income was 26%. Increased share repurchases drove the diluted share count down to 252.3 million from 253.3 million in Q1 '24. SS&C ended the second quarter with $462.7 million in cash and cash equivalents and $6.7 billion in gross debt. SS&C's net debt, as defined in our credit agreement, which excludes cash and cash equivalents of $88.5 million held at DomaniRx, was $6.3 billion. Our last 12-month consolidated EBITDA used for covenant compliance was $2.2 billion. Based on net debt of approximately $6.3 billion, our total leverage ratio was 2.84x and our secured leverage ratio was 1.6x. In May, we refinanced our Term B loans consisting of 5 tranches with a new single $3.9 billion Term B loan tranche as well as a $750 million senior note. The refinancing resulted in a $28 million noncash loss on distinguishment of debt and the capitalization of $35 million of new deferred financing fees. The refinancing activity resulted in extending our debt maturity by approximately 3.7 years and diversifying our funding sources, but still positioned to benefit from any reduction in short-term rates. As we look forward to the third quarter and the remainder of the year with respect to guidance, note that we will maintain our focus on client service and assume that retention rates will continue to be in the range of our most recent results. We will manage our expenses with a cost discipline approach by controlling and aligning variable expenses to ensure efficiency; increasing productivity to improve our operating margins to leverage our scale; and effectively investing in the business through marketing, sales and R&D to take advantage of future growth opportunities. Specifically, we have assumed foreign currency exchange rates will be at current levels; short-term interest rates to remain at current levels; a tax rate of approximately 26% on an adjusted basis; capital expenditures to be 4.1% to 4.5% of revenues, which is a slight reduction from prior guidance; and a stronger weighting to share repurchase versus debt reduction, subject to changes in market conditions. For the third quarter of 2024, we expect revenue to be in the range of $1.42 billion to $1.46 billion and 5.3% organic revenue growth at the midpoint; adjusted net income in the range of $304.6 million to $320.6 million; interest expense, excluding amortization of deferred financing costs and original issue discount, in the range of $107 million to $109 million; diluted shares in the range of 251.6 million to 252.6 million shares; and adjusted diluted EPS in the range of $1.21 to $1.27. For the full year of 2024, we are raising revenue guidance by $12 million and expect revenue to be in the range of $5.706 billion to $5.866 billion and 4.9% organic revenue growth at the midpoint; adjusted net income in the range of $1.246 billion to $1.326 billion; diluted shares in the range of 250.9 million to 253.9 million shares; adjusted diluted EPS in the range of $4.98 to $5.22; and cash from operating activities to be in the range of $1.305 billion to $1.385 billion. Our updated 2024 guidance reflects our strong results in the first half of the year with a continued positive outlook for the remainder of the year. And now back to Bill.

Thanks, Brian. We obviously had a strong quarter on both the top and bottom line. We continue to be bullish about our business and our updated guidance has us at 4.9%, organic growth at the midpoint and $5.10 in adjusted diluted earnings per share. I'd also like to announce that on September 18, 2024, we will hold an Analyst Day at Nasdaq Marketsite in New York City. Formal invites will go out in the coming weeks, and please reach out to Justine if you have any questions. We will also be hosting our SS&C Deliver Client Conference in New Orleans, Louisiana, on October 6 to 8. This premier event is designed for executives and decision-makers across SS&C's solutions set and features hands-on learning, industry insights and many networking opportunities. I'm pleased to announce this year's keynote speaker is my friend, David Rubenstein, Co-Founder and Co-Chairman of the Carlyle Group, which SS&C was a portfolio company from 2005 until 2014. We look forward to hosting hundreds of our clients and prospects in October. I'd now like to turn it over to questions.

[Operator Instructions] Your first question is from the line of Dan Perlin with RBC Capital Markets.

Great to see the organic trends just continuing to improve here. I just had a quick question on the guidance. It looks like at the midpoint, it seems to suggest if we use kind of the midpoint for the third quarter and then take the full year number that the fourth quarter's organic growth kind of steps down a little bit maybe more meaningfully. I'm just trying to understand like is this just tougher comps as we kind of look at the numbers? Or is there something structural that we need to be mindful of? Or is it just kind of overall conservatism since we're not -- we're a little bit away from maybe putting up the numbers on the fourth quarter?

Yes, Dan. I would just say that the Q4 is really a comp issue. Q4 of '23 was particularly strong and again, as you well know, we're in the process of meeting and beating our numbers. So we're still focused hard on making sure we have a strong number, but a number that we expect to hit.

Yes. Okay. No, that's great. And then just a quick follow-up. Your leverage is at 2.8 turns now. Obviously, you just re-upped $1 billion buyback and you just did the biggest buyback in the company's history for the quarter. And you kind of mentioned a little bit, Bill, about the M&A kind of environment in the pipeline. I'm just wondering what do you see out there? How is it stacking up in terms of overall capital allocation? I understand you got a hurdle rate for your buyback versus M&A. But it does sound like M&A is picking back up and even in kind of your -- I guess with your Intralinks report that you recently put out, it sounded like within North America, the deal flow was looking pretty good. So I would just love to get your thoughts on where you sit today given your balance sheet is pretty healthy.

Yes. As you well know, we've really built the company around organic revenue growth and acquisitions. We see a lot of stuff out there. We see things that are on the low end of ridiculously priced. So we are willing to look hard. We would like to deploy capital in acquisitions. We would like to further build out our portfolio of products and services. And in each of our business units are kind of beating the bushes for opportunities. So I wouldn't be surprised if we were able to close a couple of tuck-ins and maybe something a little more substantial. I don't see any $5 billion or $10 billion acquisitions on the near-term horizon, although SS&C will be in the running if any of those things come on the market.

Your next question is from the line of Andrew Schmidt with Citi.

Maybe it's a higher-level question for me. Obviously in the last 3 quarters, we've seen you maintain at least mid-single-digit organic growth. Maybe talk about the sustainability and visibility of consistently delivering that. And if anything, what's changed? I realize that we're at a more stable level in terms of the GIDS performance. Health care is stable versus 1 to 2 years ago, but if there's anything else deeper in the business that drives that stabilization, that would be helpful. And I realize I might be jumping on the Analyst Day, but anything there would be helpful.

Andrew, I would just say in general that we have a strong focus on organic revenue growth. We have looked at a bunch of acquisitions, but the ones that we really like are pricing at 10x revenue. So we don't like them that much at that price. So when you start focusing on organic revenue, you start looking on how you're pricing. We've done a pretty good job of getting a little more discipline there. And you also make sure that the pitches that we go out in order to cross-sell and upsell as well as new names are crisp and impact. So I think we've done a good job there. And I think Rahul probably has a couple of anecdotes or additions that would also give you some clarity.

Yes. I think the thing that I would add to that is product development. We've spent a lot of energy over the last really several quarters, making sure that what we're selling into a particular type of customer will bring in all of SS&C to bear. And so that's starting to show up in larger deals and better win rates, and we expect that to continue.

Got it. Yes, certainly shining through in the product updates that you're putting through to the market. So we see that. I appreciate those comments. And then maybe just a question on the outlook. Just the raise and the EPS outlook relative to the second quarter result and that in conjunction with higher level of share repurchase. I'm wondering if there was some reinvestment that was baked in or if there's some that you're kind of saving for some potential outperformance in the back half. It just looks like the raise was a little bit lighter than the outperformance, so anything there would be helpful.

Well, again, as we said, our GIDS business was particularly strong, and we don't expect a repeat of the strength of that business in Q3 or Q4. We have some opportunities, but often they're multi-quarter sales cycles. We have a good pipeline, but that certainly could be a little bit of a headwind to us. And then we also are -- we're very excited about our trust suite that we're bringing out into the marketplace. It's getting a lot of positive reaction and I think we are executing and, hopefully, it will surprise you positively.

Got it. Sorry, just one more housekeeping because you mentioned at the GIDS business the accelerated license revenue. Like could you shed some light on that? Was that timing, just any details on that? And then I'll jump back in the queue.

Yes, it is mostly timing. There were some deals that we had forecast that's coming in, in Q3 and Q4, and we were able to pull them into Q2.

Your next question is from the line of Peter Heckmann with D.A. Davidson.

I guess how would you characterize the overall spending environment? And we hear you in terms of where certain areas are producing a little bit better organic growth. But I guess what do you view in terms of like the next couple of years catalysts that could potentially cause you to look at switching vendors, upgrading? And what do you think are the demand drivers there? Is it regulatory? Is it technology? Or is it price?

Well, I think it's all of those. I think price is probably the least important of the 3. I also think as you see of these cyberattacks and the outages for large-scale businesses, they start looking hard at who their vendors are in and how much money are there vendors putting into their security walls and their expertise and the number of layers they have in order to kind of stop the bad guys and similar to things like Madoff and others that caused a real fee change in how people did their books, whether they did them in-house or they did them with an outside administrator. I think technology is going to be one of those things that, yes, you saved a few hundred thousand and maybe even a few million over 3 or 4-year deal, and then you got burned for about 15 or 20. And they're going to start deciding that playing technology on the cheap is a risky business. So I think that's going to be a real driver. I also think how you deploy the newest technologies, whether that's deep learning, machine learning, RPA, AI, ML, all of those things, right? I think the key there is it has to work, and it has to work better than what you had before. You can't go show them something that's really pretty and it's slow or it doesn't -- isn't as accurate. So there's a lot of things that go into deploying new technologies. It's not just, well, we use large language models and we're really steeped in AI. And maybe -- so I think those kinds of things are real opportunities for us. And I think as long as we focus and deliver applications that show that, hey, we're here for the long term, we're going to give you improvements every quarter, every 6 months, every year, and you're going to see that your business improves because you chose the right partner.

Yes, that's helpful. And then just any comments just on wealth specifically, you mentioned it as one driver of organic growth. But I guess how would you characterize there? Is that more on the adviser tech side or more on the long-only side?

I think it's in both. You're going to have, obviously, the Wealth and Investment Technology is a very strong area. And just as you've seen on Envestnet getting sold or at least in the process of being sold. And all the number of mergers and private equity buying into different wealth technology companies, I don't see that stopping. There's a however many trillions being transferred from generation to generation and the younger people getting this money are not going to wait for a monthly statement or a quarterly statement or along those lines, they're going to want instantaneous access to their money. And I think things like you see on the T+1 and other things where the regulators are understanding when you have things like Venmo and other instantaneous money movers, people don't want to wait 24 hours for a trade to settle or the money to be available or anything else. So you're going to have to be nimble enough to handle the people that are recipients the current generations really large-scale wealth accumulation.

Your next question is from the line of Alexei Gogolev with JPMorgan.