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

All right. Well, thanks, everyone, for joining us today, and welcome back. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. And I am delighted to be joined by SS&C. And from SS&C, we have Rahul Kanwar, who's been a great friend to RBC for a number of years. So thank you for that. Rahul is the President and Chief Operating Officer at SS&C and we're delighted to have you here.

Dan, thank you. Thanks for having us. We really appreciate it.

Yes. Always a pleasure.

I wanted to just jump right off in kind of the demand environment overall. Specifically, you sounded pretty optimistic coming off of last quarter. When we look at kind of the deal pipeline that you got to have with new clients, I'm interested to know where you sit kind of today? And how that feels versus maybe a year ago or even kind of leading up into kind of the exit strategy of '25?

Sure. Sure. I think that the -- in context, right, and I give you both an internal and external perspective, the internal perspective is we have been working hard on our business for the last, not that we don't always work hard for on our business, but for the last couple of years, we've really been focused on making sure we have the right executive ruling business units that we've got a -- we're getting some benefit and synergy from our scale when it comes to things like R&D spend and the pace of technology development, paying attention to customer, we're now in a place where we have 20,000 customers, many of whom use -- 20,000-plus customers, many of whom use multiple of our products and services, making sure they're being covered holistically and that we have an opportunity to expand. So all of those things that we have been working on, not that any of those things are ever complete, are in a better place than they have been, right? And so coming back to your question, how do we feel about it internally, you're looking outwards, let's say, a year later, we feel better because we've done more of the work. And that's not to say that there isn't -- hopefully, over the next year, there'll be more work done and it will get even better. So that's kind of one part of it. I think from an outside-in perspective, really, what I would say in most of the markets that we're in, we are likely the only people that a prospect will talk to that is somewhat agnostic to we can buy a system from us. You can have us hosted for you, you can run it in the cloud, you could have us provide the services. So there's a wealth of choices, right? So we've got both -- a lot of breadth when it comes to -- we could do your fund administration, we could be an order management system, we would set your back office accounting system, we could do regulatory reporting for you. So there's a lot of different product capability. There's also a lot of different operating model capability. And as folks look more and more at their own operating models and how do they get scale and how they get leveraged, those things are pretty attractive. So that also is the -- overall, the demand environment is pretty positive. And I think those are some of the reasons.

Yes. It feels like the market underappreciates or maybe you misunderstood how much a preparatory change was actually taking place in the organization to kind of land you guys at this point in time. Because listening to you talk about it is like there's structural differences clearly in the [ organization ] than would have been the case maybe I don't know, maybe 2 years ago or something like that.

That's right.

Yes, yes. And we talk about like 3 areas of interest for a lot of investors, GIDS, obviously, wealth and investment tech and alternatives as they think about those growth areas, both or all 3 of them doing really well. So if we start with GIDS, just as an example, kind of what are you seeing some of the dynamics near-term?

So part of that change, that internal change, we have refocused GIDS on R&D and innovation driving the way, paying a lot of attention to customers and delivering. It sounds very simple, and it is simple to say. It's not always easy to do, but just following through and making sure things go live and the service levels are good and things like that. It is also, GIDS is truly a global business, right, and so we might be selling a large deal in Australia. We might have one in Singapore and then we might be doing a major outsource for a big customer in the U.S., and it's obviously got a huge European and neutral presence. So it's all over the world. It's continuous, but we're getting better at having more outward-facing sales and marketing, better product delivery and then just being really, really focused on that customer experience. We think that translates to sustainable growth, right, and part of that is, the mix is changing too, there's more wealth in there now. We're in Australia. There's in the U.S. and in the U.K., there's much more wealth. We're benefiting from some of the trend towards retail alternatives, things like that. So there's some secular things that are happening that are changing the mix for us a little bit.

Okay. And then again, like as we think about -- you say wealth, like that seems to be an area that that's been quite strong for you guys as an alternative. So I'm just wondering what are the key secular dynamics maybe that are going to allow you to underwrite kind of a longer-term duration in that business -- both of those businesses, quite frankly.

Yes. And I think then that also goes pretty nicely with wealth and investment technologies, which I think is one of the -- so that's the technology part of it, right, that's the -- and so having us do it for you. You want to run a system or you want to run a module or you want to have some blend. And both of those are benefiting from fact that there is more independent asset, whether it's a registered investment adviser or something else, there's just a lot more high net worth and folks that are investing in a lot of different asset classes and things like direct indexing, for example, where they take an index and they had a tax harvesting strategy on top of that, so you can buy the [ S&P ] and then get a some kind of a tax overlay and potentially an advantage. Those kinds of things are becoming really popular with retail clients, right? And -- but they come with some processing overhead. And we're the sort of one of the likely suppliers of that processing capability, whether it's through a web portal and self-service like our Black Diamond platform or whether it's through GIDS doing the work for you like it does in the U.K. for some really big clients. And so that's what we're seeing.

Okay. Okay. And then same kind of question in terms of like secular dynamics around alternatives. This has been a space for you that has been very strong for a very long period of time. It's kind of had a couple of ebbs and flows. But it feels like it's kind of starting to have a payday again. Are you seeing that? You can see the numbers, but I mean, are you feeling confident about that?

Yes. No, it feels really good. And I think the biggest change if I was contrasting '24 to '23, is we have strong private market growth in '24. We've had it in '23. We've had it for a long time. We expect that to continue. Some of that is because we think we're in a dominant position. We were talking this morning and we think we have twice as many private market assets in our platform than our next #2 competitor. So we're in a little bit of a good position. We think we earned that because we have ownership of technology and lots and lots of expertise, and we fully intend to sustain that, right? So that's one part of it, I think the private markets. But I think the biggest difference in last year is the hedge fund market, but the hedge fund part of that business is now growing what we would normally expect. I've been -- I came to SS&C in 2005 and most of my career before my current job was in the fund administration business. Then you would expect the hedge fund market almost regardless of what the market did will grow 5%, 10%, right? Some of that will be we take market share. Some of that will be -- we get deeper into customers. We didn't do that in '23, but we're back to doing that in '24, which then makes the overall [indiscernible] .

Yes. Yes. So one of the questions is just as a broad brush that we're asking kind of every company given the time of year where we are now, in this cycle is, we have clarity now in the administration. As you've talked with clients kind of pre and post. Are you feeling like those investment dollars that they might have been willing to unleash or -- are going to be more readily available now that they have clarity? And are you feeling that there's a sense of urgency or difference between what you might have seen just even a few months ago?

Well, look, I think it's still pretty early, right? In some ways, we have businesses that directly benefit from a reduction in regulation, perhaps a little more M&A, right? A little more optimism in kind of -- in the markets and maybe more fund allocated. So we have a lot of businesses that are poised to benefit from some of what you read about, but it hasn't shown up yet.

Yes. Not yet. Okay. All right. And not in the conversations or anything like that? The tone or...

The tone remains -- as I've sort of been describing, in general, the conversations we're having with our customers or prospects have trended better and better and better as we get better, right? And that's been -- would I say it's directly a consequence of the recent presidential election [indiscernible].

Okay. Okay. All right. Well, let's hit the #1 question that we get, which you and I were just talking about, before we went live, which is kind of the organic growth rate deceleration implied in the fourth quarter, right? So you had a really strong third quarter. The midpoint of the range in 4Q kind of implies about a 400 basis point deceleration. And I know there's some puts and takes. So maybe you should flush that out? And then is that the right way to really be looking at this business as we go forward as we maybe normalize some of those things, how do you think about that?

Yes. And so the nice thing about this question is we've had 3 meetings so far. So we've had 3 opportunities [indiscernible] -- So let me see if I could remember some of what I've said or no.

This is a better distribution. just tell it here and hopefully, a lot more people...

I appreciate it. I appreciate it. So look, I know that the 90-day is important, right? But if we just zoom out for a second, if you indulge me, where we thought we were at the start of the year, we've done better, right? So we laid out the quarter at the start of the year and we laid out Q1 through Q4. For each of Q1, Q3, we've done a little bit better than we thought we would. And right now, our guidance for Q4 is a little better than we thought, we had it, right? Because we're just looking at it as, we've got a base of recurring revenue. We expect to sell some more. We expect to get some price increases. Hopefully, we can manage the attrition rate, which we've done. And so it ought to do this, right, in a perfect world and it has done that, right? So the challenge, I think a lot of -- at least what we're hearing is that when you compare those quarters, which in of themselves are pretty good quarters in absolute numbers, when you compare them to what happened last year, right? Q4 looks like it's decelerating relative to what we've been able to do. And the biggest part of that, and I've said that before, is Q1 to Q3 last year in 2023 was $1.360 billion, give or take. $1.353 billion, $1.356 billion, Q4 was $1.4 billion, right? So we had $50 million extra revenue in Q4 than we did in any of the other quarters. And that $50 million included some specials that we don't -- we think they happen every year. We don't always predict which quarter they happen, right? So I think that there's a fair amount of comfort to be gained from the fact that year-over-year, the numbers are in line with what we expect to have happened, right? We think that there's a lot of positive we've done on the fundamentals, which means we have a reasonable chance of sustaining that over the long term. I think if the real concern is -- do we think that the Q4 growth rate is really what we would expect going forward, I don't believe that.

Yes. I mean it's hard to digest, when you gave a midterm -- or I guess medium-term guidance 4% to 8%. So maybe you can dovetail into some of the things that allow you to kind of feel confident in that range. I know that the high end of the range, it might have some inorganic spirits to it. But if you wouldn't mind elaborating on that, give some color.

Sure, right. And I think the -- Dan, the second -- the sort of the added part to that is just what's the historical context here more than anything else. And I think that the -- if you kind of look at our business over the last 5 years, let's say right, where a lot of people would say, hey, we haven't really done that in the last 5 years. I would say, you kind of look at it by business or 2/3 of our business, we have done, right? And -- what we've had is some overhang and some suppression of the overall growth rate from primarily the DST businesses that we acquired in 2018, which we're turning around, right? We've worked hard to turn them around. If you're already seeing in GIDS, we're fairly confident you're going to see it in health care. We really just need the rest of our businesses to perform as they have over the last 5 years. And that automatically puts you in the range. Some of the other things are, our retention rates are a little bit better. So maybe that's 100 basis points, something like that. So obviously, that's a part of that. Our ability to get price is a little more disciplined. We're not saying that we -- I think we probably get 150 basis points, 200 basis points more in price now than we did over the last 3, 4, 5 years. So that alone, once again, gets you squarely in that range. And we're not saying we're done yet, right? We think we have an ability to get a lot more focused on price and get even more. And then the business itself for all the reasons that I described, whether it's the sales capability, the R&D capability, the business is better, right, so I think that all those things mean that -- while there's execution left which is always the most important part, we feel pretty good.

Yes. You've mentioned bundling, not so much on stage right now, but in the past, in the context of this kind of 4% to 8% organic growth rate. So -- what about bundling that is going to allow you to be like, again, more growth enabled, you're pulling all these products together. Is that a function of the structure that you talked about early on about, how you changed the business over the past couple of years?

No, it is, it's really important to us. If you look at our top 100 or so customers, the biggest customers use 6 or 7 of our products and services. But there's many customers in there that use 2 or 3 which means that -- and they're all within a particular market or a particular kind of firm, they're all the same, right? So if they don't buy it from us, they're buying it from somebody else or they're doing it themselves. So increasingly, we're finding that when we step back and we say, okay, how are we really covering this customer? And we're recovering them and how good is our internal intelligence about their strategy and their objectives and what they're trying to do, we find opportunity, right? And that's one of those continued processes, and I wouldn't say that we think we're really good at it. But we're better than we have been in a long time, and that is starting to yield some [indiscernible]

Okay. Okay. I did want to kind of cover off the cadence from 4Q to 1Q. Because there's -- we get a lot of questions on this as well. So historically, on an absolute dollar basis, that number is building on itself. So I think there had been some questions about the slowdown in 4Q, is that going to continue to be the case. Is there any reason why like seasonality or anything that's in the pipeline that, that number wouldn't continue to build or...

Yes. So Dan, I kind of point you to just a couple of things, right, maybe put a finer point on a couple of things. There's 2 parts to any given quarter, right, there's the recurring revenue that repeats and we expect that base to absolutely continue to grow. It has all year, we think it can grow in Q4. We think it will continue to grow. That's what we expect, like not having been through a formal budgeting process. Then there's the special, right, there's the additional license we sell or something else like that. So I'd be pleased to answer your question in the affirmative, other than if we sell a $50 million license in Q4 then Q1 is not going through. That's a little bit, I kind of -- I would just try to bring -- and I know it's really hard to do. But I would just try to bring you back to -- If you look at it a year at a time, right, we expect that 2025 once we're done with this process, we'll be reasonably positive compared to -- and within the range of what we have said in the past, but it's early. We haven't done that.

Yes. Okay. Let's spend a minute on health care because -- this has been an area that has been kind of like the Achilles heel for SS&C for a while. It was starting to really move in the right direction in terms of its organic trends. And then third quarter, it looked like it kind of hit a little bit of a wall. So maybe let's talk about why that occurred? And then why you think it can actually continue to grow in 2025, like you still committed to pretty reasonable growth in '25?

Yes. Yes. So we've said this previously. But in Q3 in particular, we had 1 large license deal that we worked on until midnight and didn't get done because our customer decided they needed a couple more steps in their procurement process. And look, we do our best to manage that, but truly out of our control, right? But they did -- they completed the steps, they signed it in October. We think that was worth $8 million. The health care business is only, I think $64 million in Q3, something like that, $65 million, $66 million, so $8 million changes that, right? So that's one part of it. That's the kind of the micro look at a particular quarter. And those are the kinds of -- kind of things that sometimes change the conversation. The more important man, I think the real opportunity in health care is, we've worked hard on DomaniRx for 3, 4 years on, right? We've invested hundreds of thousands of hours. Tori Dargati, every time I say that's about 1 million out [indiscernible]. So most people that spend that kind of money on systems. They take a lot of risk, doesn't always finish, maybe when it finishes, it's not what you expected. We went live in January, we proceed 160 million claims on it so far this year. And the feedback from our customers has been out, right? So we kind of think we have the newest system in the pharmacy benefits market that is also capable of doing things at scale, which we have demonstrated, that's bearing out in some of the conversations we're having with prospects, some of whom can transform the size of our health care business. But we got to do it, right? And so I think that the -- the market for some transformational change in that business is probably the outlook is better than it has been. In the meantime, the things that were big negatives, the clients rolling off and the attrition and so on and so forth. We do think that's behind us. And so once again, I feel a little better about health care.

Okay. So you're still feeling like that's going to be a growth business like an organic growth business because I think there was at one point there was even stock, maybe in double digits at some point. And I think this last quarter, maybe through in the question.

Yes. No, I understand that. It definitely has -- we would expect it to grow. And there are some things out there that -- it might grow really fast.

Yes. Okay. Humana, is that still coming online, like that's still on track would be kind of a January conversion, how meaningful is that?

And I think parts of Humana already. But yes, it's meaningful. A lot of what sells the Domani is the scale. So the more scale we can get on it, that helps. And as part of coming online, they do take some module from us and some additional modules. So we'll get some revenue out there

Okay. Okay. I want to spend a minute on Blue Prism. This has been kind of a 2-sided opportunity for you. You bought the asset, you actually turned it on yourself a little bit. You gained a lot of efficiencies to scale out of it. The question we get all the time is just how much more room do you have? I think the original goal was to get like $100 million out of the digital workers that you had said you had like 1,100 in the third quarter, something like that. So where are we in that process of kind of hitting a wall on that? Or is this going to be like the continual process that just go through SS&C for multiple years?

Yes. So the 1,100 is the number of full-time equivalents we think we have deployed or save this year so far, right? And look, the math is all over the place depending on where -- what kind of job and where they're based and all that stuff. But if you just do a round number, you do [ $60,000 ] a head or in into something like that. We've got 1,100, and you tack on benefits, and you tack on cost of real estate that you save that all. We get the $100 million pretty quick, right? And in a lot of ways, that's additive to at least a similar number, maybe even a bigger number that we did last, right? So it's been -- the internal utilization of Blue Prism has been really positive for us. And it's been positive not just because of Blue Prism itself, but also it forces us to take a look at the processes and see if they lend themselves to digital workers. And if they don't, why not. So a lot of times, we can improve the underlying process and make it 50% better or 30% better or something that's -- But all that said, we still have 27,000 people that work at SS&C. And we would like to be able to -- this year, we're going to go, whatever, 5% plus something like that, right, 4.5%, 5%, something like that. And we're going to do it without really adding headcount. We'd like to see how long we can do that. And that obviously has a pretty dramatic impact on margins and the scale we can get. And that's -- we're still in early stages.

Still early in terms of being able to roll that out.

Yes, that's right. That's right. And so it's both how many of our businesses use that scale? We'd say some. And then how much do they use? We'd also say to, right? So it's a 2-part opportunity.

Yes. So now that you've had it kind of internally for a couple of years, how are you taking those learnings and deploying those out? To selling it to the clients? Like how is that sales motion gone?

The biggest -- so there's a lot of technology ut there, right? And the biggest question people just have is, okay, how does this solve my problem, right? So when we have a customer or prospect come sit with us and we say, look, you're doing an investor statement or you're sending this kind of reporting out. We had this example, and it's a live example where we have 1,148 of these statements, used to take us 3 days to do it, now it takes 30 minutes, right? And it's because the machine does it. And the nice thing about machine does it is, generally speaking, when the machine compares to numbers and tells you they're correct. The numbers are probably correct. It's not because like human being got tired and, "all right, I already checked 50 of these 51 is probably okay," the machine doesn't do that. And so that's really helpful. Taking those news cases, whether it's in investor statement validation or reconciliation or improving the processing time on a phone call in to us or something like that and then turning that back around and going into a prospect and saying, this is how it can help you, has been powerful, but we are very early. So we have the applications built internally in terms of package them up and being able to sell them back up, we're just starting it.

Okay. Okay. That's awesome. I wanted to touch on the acquisition of Battea-Class Action Services. I think from what we've heard from investors, I think they're still a little surprised just by it. Not that you guys would do M&A. That's clearly part of the DNA of the company, but just this one in particular. So if you wouldn't mind maybe refreshing what's the strategic importance of having something like this in your portfolio? And does it create variability that we might need to be aware of?

So a little bit just to make sure we're all thinking about this. I think the way we would think about it a little bit, you have to look at what Battea does. And so it end-to-end customer, right? And so it is -- and who are the end customers, right, and the end customers are for the most part, anybody that runs the portfolio. Everybody that runs the portfolio, trades equities. If they screen their equities to figure out if any of those companies have been in class action suits for which they've been payment, and they can be sophisticated enough in -- so painstaking enough to step through the class action process, they're likely going to get some money. That'e the -- it's really as simple as that, right? So a big part of what makes Battea has had a really good track record of doing it and doing it very, very profitably. And they built some IP. They allow you to go through the nuances of the court system all over the world and extract whatever your fair share is, out of that proceeding or settlement. A lot of times, if you show up and nobody else does your share grows, right? So that's the opportunity. We think that the synergy for us is -- we already have a lot of these customers as customers, right? And when they -- a lot of times, people don't hire somebody like Battea because [indiscernible] the margins, it's important, but it's not that important and they either don't take the time or they don't know how to evaluate. With us, it's, "Hey, we already scanned your portfolio." And by the way, if you know, we just paid $490 million. And if you own this many shares, and this is what is where we've been, and it's [indiscernible] , right? And that's the -- I think the real synergy for us is, it's one more capability that we can sell to our current customers that does not take a lot of -- it's not a tough sell. It is mostly just can you get in there. And that's part of that's what we've seen.

Okay. Yes, it's interesting because most of the acquisitions we've done historically, not every one, but many of them are, either the businesses that were suboptimal or EBITDA margins way lower. Just generally not run very efficiently, but this one has better growth, better EBITDA margins than your business. So it begs the question of, is it changing like the way you're thinking about M&A. The way you described it makes a lot of sense, but it's also had some characteristics that run contrary to [indiscernible] .

Yes. Dan, I would say that the -- the way we think about M&A is probably pretty consistent, which is we try to look at everything, and we try to look at everything individually for the merits of that and then make the best decision we can. So no, it's not -- I don't think the fact that Battea grows nicely or very profitable. It's us. I mean we would like to have those things in everything we buy, but it's not always the case, right? And price point on valuation matters. But for us with Battea, it is mostly the cross-sell capability from them into our client base and the fact that they have 900 customers of their own. And if we can sell some efficiency products and services in some of those customers, then it's a win.

Cool. Staying on M&A for the moment. Here again, kind of releasing kind of animal spirits as they say. Your leverage is still kind of under 3, I think, on a pro forma basis with this deal flows. You raised some capital. You have some excess capital as a result of that, I think so. So -- and you've got variable rate debt. So presumably, there might be some interest benefits coming at some point this year.

So we're due.

You are due, big time. So what are you thinking about M&A outside of what we just talked about Battea, like do you guys still feeling like there's room for that in '25?

We do. We do. We're interested. We're -- there's a lot of looks right now, and there is some optimism we think. And we're -- we continue to be focused on. We know even though I appreciate Dan, we're waiting for question #4 to ask, but we know organic growth is important. So we're focused on that. But we've always done M&A. It's been a good way for us to add to our capability. We think we will do that again.

Okay. Okay. On the excess cash that came with this transaction, are you thinking about that more in the context of buyback right now?

Well, I think our capital allocation process is probably pretty similar for the foreseeable future as it has been in the most recent past, which means it's skewed a little bit more to -- we probably will still pay down some debt, but it skewed a little bit more to buybacks just at these valuation levels, we still think that that's a good use of our capital.

Okay. Great. And then we have maybe another minute left. But just lastly on kind of the EBITDA margin trajectory. You're kind of getting yourself back to more historical levels. And it sounds like you're in a much more efficient organization and you've got Blue Prism that's helping that along with other things. But is it safe to assume like that, that trajectory can continue as we go into 2025? Or are there certain investments that are out there that we need to be mindful of so that we're not putting ourselves too far but when it comes to margin [indiscernible]

I don't think there's any investments that are out there that we think impact margin. In general, you -- we generate a lot of cash. We're fairly profitable. We understand our investment needs and they're sort of baked into our ongoing processes. So I don't think there's anything that's out there that we ought to be worried about. But I do think that our opportunity to improve is as strong as it's ever been. So it's not like we used it up. We like to think we can get 50 to 100 basis points of margin improvement in steady-state. That's what we would expect. We could probably go faster and get more, but it doesn't -- we're much more focused on driving the top line, and we'll get more efficient while we do.

That's great. Well, it sounds like you got a lot of good things heading into '25. You got some organic momentum, hopefully, we'll carry through margin expansion and we get some leverage on the balance sheet and interest expense is going be down. So hopefully, all those things will come to fruition. Thanks so much for being here. Really appreciate it.

Yes. I really appreciate it. Thank you.

Thank you.