SS&C Technologies Holdings Inc

NASDAQ:SSNC

Earnings Call Transcript 2021-Q2

[Operator]

Good day and thank you for standing by and welcome to the SS&C Technologies second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference will be recorded. [Operator Instructions]. Thank you.

I would now like to turn the conference over to your speaker today, Ms. Justine Stone, Head of Investor Relations. Please go ahead, ma'am.

[Justine Stone, Head of Investor Relations]

Hi everyone. Welcome and thank you for joining us for our second quarter 2021 earnings call. I am 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 Patrick Pedonti, 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 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 28, 2021. 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.

[Bill Stone, Chairman, Chief Executive Officer]

Thanks Justine and thanks everyone for joining. Our results for the first [sic - see press release] quarter are $1.261 billion in adjusted revenue, up 10.5% and $1.24 in adjusted diluted earnings per share, up 19.2%. We surpassed $500 million in adjusted EBITDA in the quarter for the first time coming in at $511 million. For the six months, our adjusted consolidated EBITDA was over $1 billion. Our adjusted consolidated EBITDA margin grew to 40.5% for the quarter. Our second quarter adjusted organic revenue was up 7.2%. This is the highest organic revenue growth quarter in several years.

All of our businesses outperformed their expectations. In our alternatives, Intralinks SS&C health and DST Financial businesses drove strong topline growth. SS&C generated net cash from operating activities of $562 million for the six months ended June 30, 2021 even though we paid $144 million in cash taxes versus $35 million in 2020. We repurchased two million shares of common stock in Q2 2021 at an average price of $73.44 per share for $143.6 million.

We paid down $183.1 million in debt for the first six months in 2021 and our leverage ratio continues to come down. At the end of Q2, our secured net leverage ratio was 2.09 times and our total net leverage ratio was at 3.1 times consolidated EBTIDA. We remain fully committed to a shareholder friendly capital allocation strategy.

We are excited about last week's announcement that SS&C Health along with our minority partners, Humana and Anthem, will form a joint venture to build the industry's most modern sophisticated pharmacy benefit management platform. The newest formed entity, DomaniRx, will shape the future of PBM through a cloud-based API driven adjudication platform. This venture is the latest step in accelerating growth at SS&C Health.

As we can team other participating members, we will have the ability to offer flexible tools, advanced analytics and customizable programs to increase transparency. We expect the DomaniRx members to have an unrivalled pharmacy experience. DomaniRx will generate interest in our healthcare and pharmacy claims processing and analytic services. Now, the new technology will benefit both DomaniRx and our existing SS&C Health business.

We believe the healthcare industry' transaction processing, data analytics and information delivery to be significantly hampered by outdated technology. The customer experience as well as the payer and provider experiences can be greatly enhanced with powerful, flexible technology. The growth in life-saving pharmaceutical and other prescription based medicines, there are over 4.5 billion prescriptions filled in the U.S. per year as well as an aging population makes it an ideal time to invest and deliver. SS&C Health has years of experience running large-scale systems with the ability and expertise to handle volume and large customers.

I will now turn the call over to Rahul to discuss the quarter in more detail.

[Rahul Kanwar, President, Chief Operating Officer]

Thanks Bill. We had a strong quarter, driven by broad based performance across our business. We continue to benefit from an increasing recognition by customers and prospects of the breadth and depth of our solutions and expertise. The changes we have made to our organization structure, business leadership and sales management and our continued focus on innovation and delivery are having a positive impact.

Our fund administration business is seeing increased fundraising momentum across strategies and a robust pipeline of existing and new clients. The expertise, customer focus and dedication of our professional teams combined with market-leading technology and solutions are unique assets that help us outperform in the context of a healthy fundraising and new launch environment.

During the quarter, we combined our real assets and private equity groups to the newly launched SS&C GlobeOp Private Markets Group under the leadership of the Bhagesh Malde. He is well-positioned to help our fast growing private equity and real assets customers with their operational accounting and technology needs.

In June, we announced a restructure of the former DSP financial services product and service offerings. The new organizational structure will accelerate technology innovation and strategic product development in rapidly evolving markets and enhance the overall customer experience. Simplifying our management structure, increasing focus on product areas and end-markets and the high confidence we have in executive leadership in each of these areas are all important factors that led to this change.

Now I will mention some key deals for Q2. THE wealth management arm of a large U.K. customer chose SS&C GIDS to undergo a transformation program. Advent Technology including Advent Genesis was a major component as our client looks to develop their future model strategy. A $15 billion AUM asset manager chose a suite of Advent products to be delivered via the cloud. A $30 billion AUM alternative investment firm chose SS&C GlobeOp fund administration services after a comprehensive due diligence process. A Northeast Medicare provider chose SS&C Health BPO services and an impact investing firm launched in 2020 chose SS&C GlobeOp' fund administration and loan services.

I will now turn over to Patrick to run through the financials.

[Patrick Pedonti, Chief Financial Officer]

Thank you. Results for the second quarter of 2021 were GAAP revenues of $1.259 billon, GAAP net income of $189.8 million and diluted EPS of $0.71. Adjusted revenues were $1.261 billion. Adjusted revenue was up 10.5%, adjusted operating income increased 15.3% and adjusted diluted EPS were $1.24, a 19.2% increase over Q2 2020. Overall, adjusted revenue increased $120.2 million. Our acquisitions contributed $17.8 million. Foreign exchange had a favorable impact of $26.4 million or 2.3% in the quarter. Adjusted organic revenue increased on a constant currency basis was 7.2%.

We had strength across several product lines including alternative assets, Advent, our retirement services, global investor distribution, our ALPS asset management business, healthcare and insurance business. This was offset by weakness in the ALS business due to lower trading volumes. Adjusted operating income for the second quarter was $495.8 million, an increase of $65.7 million or 15.3% from the second quarter of 2020. Adjusted operating margins increased from 37.7% in the second quarter of 2020 to 39.3% in the second quarter of 2021. This was driven by cost controls and expense controls.

Expenses increased 2.5% on a constant currency basis. Acquisitions added $14.9 million in expenses and foreign currency increased costs by $21.7 million. Adjusted EBITDA was $511.1 million or 40.5% of adjusted revenue and increased $62.7 million or 14% from Q2 to 2020. Net interest expense for the quarter was $51 million and includes $3.3 million of non-cash amortized financing costs and OID. The interest rate in the quarter for our amended credit facility including the senior notes was 3.02% compared to 3.19% in the second quarter of 2020 and resulted in interest expense decrease of $9.5 million.

We recorded a GAAP tax provision of $76.7 million or 28.8% of pre-tax income. We expect the GAAP tax provision to be approximately 26% for the full year. Adjusted net income, defined in Note 4 of our earnings release, was $331 million and adjusted EPS was $1 24. And the effective tax rate for adjusted net income was 26%.

Diluted shares decreased 267.6 million from 285.5 million in Q1. The impact of share repurchases was partially offset by an increase in the average share price and option exercises.

On the balance sheet and cash flow, as of June 30, we had approximately $247 million of cash and approximately $6.3 million [sic -- see press release] of gross debt for a net debt position of approximately $6.1 billion. Operating cash flow for the six months ended June 2021 was $562.3 million, a $6.6 million increase compared to the same period of 2020. Year-over-year operating cash flow was impacted by tax payments which were deferred into the back half of the year in 2020.

Highlights for the six months on cash flow, we had treasury buybacks of $325 million for purchases of 4.7 million shares at an average price of $69.79. In addition, the Board renewed stock buyback program for another year for a total of $1 billion.

Net debt payments were $183.1 million compared to payments of $257.3 million in the same period in 2020. We declared and paid $82.1 million of common stock dividends as compared to $64 million last year, an increase of 28.3%. This year, we paid interest of $97.8 million compared to $1 33.1 million in 2020. Year-to-date, we paid income tax of $144.2 million compared to $34.7 million in 2020. Our accounts sealable DSO was 50.8 days compared to 53.3 days at June 2020.

Capital expenditures and capitalized software was $59.6 million or 2.4% of adjusted revenue compared to $51.9 million or 2.2% of adjusted revenue in 2020. Spending was predominantly for capitalized software and IT infrastructure.

Option exercise proceeds were $88.8 million for 2.1 million shares compared to $82.8 million for 2.8 million shares last year. Our LTM consolidated EBITDA that we use for covenant compliance was $1.948 billion as of June 2021. Based on a net debt of approximately $6.1 billion, our total leverage ratio was 3.12 times and our secured leverage ratio was 2.09 times as of June 30.

For outlook for the year, I will go over a few assumptions first. We will continue to focus on client service. We expect our retention rates to continue in the range of our most recent results. We expect foreign currency exchange to be approximately at current levels for Q3 and for remainder of the year. We expect the impact of DST Health unit pre-acquisition client services impact revenue by approximately $10 million for the back half of the year.

Adjusted organic growth for the year, we expect in the range of 3.3% to 5.0% and adjusted organic growth for Q3 in the range of 2.9% to 6.4%. Interest rates on our long term credit facility will approximately be one month LIBOR plus the spread which is 175 bips. We will continue to manage expenses during this period controlling our variable expenses. But we expect staff cost to increase due to continued wage inflation. We will continue investing in our business for the long term and capital expenditures will be approximately 2.8% of revenue. We will continue to allocate free cash flow to both debt paydown and stock buyback. And we expect the GAAP tax rate to be about 26%, on both an adjusted basis and GAAP basis.

For the third quarter, we expect revenues to be in the range of $1.205 billion to $1.245 billion, adjusted net income in the range of $309 million to $325 million and diluted shares in a range of 268.1 million to 268.6 million. For the full year of 2021, we expect revenue in the range of $4.921 billion to $5.001 billion, adjusted net income in the range of $1.258 million to $1.295 billion and diluted shares in a range of 267.9 million to 268.4 million. And for the full year, we expect cash from operating activities to be in the range of 1.305 billion to $1.345 billion.

And I will turn it back over to Bill for final comments.

[Bill Stone, Chairman, Chief Executive Officer]

Thanks Patrick. And I would like to thank all of our employees for their dedication and hard work they put in each and every day. We are working with various parts of our organization to ensure a productive return to the office policy. We expect to begin our transition this fall. We appreciate you, our shareholders and we remain steadfast in our mission to be the finest technology and service provider to the global financial services industry and the United States healthcare industry.

We grew organically 7.2%. We have added $400 billion to our alternatives platform in 18 months. We generated over $1 billion in adjusted consolidated EBITDA in six months. And we announced DomaniRx, our new platform joint venture.

I will now open it up for questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Alex Kramm from UBS. Your line is open.

[Alex Kramm, UBS]

Yes. Hi. Good evening everyone. Just maybe on the healthcare side, I guess this maybe a chance to flesh out the new JV in a little bit more detail. So maybe first of all, can you just tell us how the healthcare business did this quarter? And then maybe describe the path of how this JV is going to impact your existing healthcare business in terms of the growth outlook? How it should accelerate over the next few years? So a little bit more color so we can kind of complete the picture a little bit more. Thanks.

[Bill Stone, Chairman, Chief Executive Officer]

Sure. So our healthcare business grew approximately about 10%, right, Patrick?

[Patrick Pedonti, Chief Financial Officer]

12%. And then if you adjust for the pre-acquisition termination, it was 18%.

[Bill Stone, Chairman, Chief Executive Officer]

So you know, Alex, we think this is a very transaction processing and information delivery business and we think we are past that. So we are excited about the opportunity. We think we have really top flight minority partners with us, joint venture partners. And as we said in our remarks today or in the press release, there is 4.5 billion prescriptions filled in United States annually and we process approximately about 400 million to 500 million ourselves. So we think it's a big opportunity to get a larger and larger market share. We think new technology is going to change the experience for the individual customer and then also for the payer provider and I think getting that information back to those places with some sense of real time processing, I think, will allow them to make better decisions and then create a more enlightened kind of healthcare industry and then also provide us with great growth opportunities. And I think that's what we are looking forward to, is to be able to really go from 400 million to 500 million in the number of claims that we process to well in excess of a billion.

[Alex Kramm, UBS]

Okay. Fair enough. And then maybe just secondarily, just any quick comments on M&A? It's been quiet. You have obviously looked at a lot of assets. It sounds like there's something in the capital market space that may be on the block. So I know you always look. But curious about your current appetite and how you think the pricing environment is looking right now.?

[Bill Stone, Chairman, Chief Executive Officer]

Well, we always look and we bid. And sometimes we get outbid. And when we get outbid, we think people overpay. And so that's kind of our view of it. There's a lot of things for sale right now. Prices are still nose-bleed levels. And when you add $400 billion in assets to our platform in 18 months, that creates a lot of revenue. And it creates a lot of opportunity for additional revenue. And I have said on this call many times that if we do big acquisitions, it's going to take a lot of management time and in our estimation, that management time when it's focused on organic revenue growth, organic revenue growth builds up. And I think Q2 is another example of that.

[Alex Kramm, UBS]

Fair enough Thank you.

[Operator]

Thank you. Your next question comes from the line of Pete Heckmann of Davidson. Your line is open.

[Pete Heckmann, Davidson]

Good afternoon everyone. Thanks for taking my question. I wanted to ask on the fund administration business. Very notable year-over-year growth and as you point out great asset accumulation in the last 18 months. If I am tracking that correctly, AUA was up about 19% year-over-year. What would you estimate would be the growth of the market, the underlying market, in that same time period? I am trying to figure out how much you share and how much is just a higher allocations to alternative assets?

[Bill Stone, Chairman, Chief Executive Officer]

I think, Rahul, you would be the probably maybe the best taking a shot at that.

[Rahul Kanwar, President, Chief Operating Officer]

I think what I would say is, we don't really have and there isn't a lot of great data on the underlying market and how fast it's growing. But what is pretty indicative to us is how we are doing in terms of competitive takeaways, right. And if you kind of look at our AUA mix and the $400 billion and kind of where it comes from, et cetera, there's a pretty big portion of it that comes from competitors. I mentioned in my remarks $30 billion fund that were taken from somebody else in the market. So that would suggest that in addition to the lift we are getting just because the market is getting better, people are recognizing our technology investment and our staff and some of the leadership we put in place and some of the changes we made like combining private equity and real assets and things like that and that's having an impact.

[Pete Heckmann, Davidson]

Yes. That's great. And then I heard you mention Intralinks as one of the things that contributed organic growth in the quarter. But I guess my suspicion is do good M&A activity and all the stack IPOs out there that that business could put maybe midteens or higher type growth. Is that on the right track?

[Bill Stone, Chairman, Chief Executive Officer]

Yes. The analytics business grew about 18% in the quarter.

[Pete Heckmann, Davidson]

Great.

[Bill Stone, Chairman, Chief Executive Officer]

And they are at about 14% year-to-date.

[Pete Heckmann, Davidson]

Got it. Okay. That's helpful. I will get back with in the queue. I appreciate it.

[Operator]

Thank you. Your next question is from the line of Andrew Schmidt from Citi. Your line is open.

[Andrew Schmidt, Citi]

Hi guys. Thanks for taking my questions. I can see the step-up in growth here. I wanted to ask, I think last couple of questions, it's pretty clear that the volume-based revenues are stepping up pretty significantly. But on the deal closing and sales cycle side, could you talk about your observations in the second quarter? It seems like things are improving. But would love to hear your thoughts on sales cycle in terms of just appetite for closing deals versus maybe the prior quarter?

[Bill Stone, Chairman, Chief Executive Officer]

Well, I think that we have a pretty full pipelines and we are getting an awful lot of enquiries into us from all over the world. Particularly, the Far East has been quite active. And then again, right, all the central bank are flooding the world with money. And so now it's time to make hay. and I think we have increasingly strong sales force and increasingly strong management of that sales force. And so I think we are reaping the benefits of the investments that we have made in order to increase our revenue growth.

[Andrew Schmidt, Citi]

Got it. And then, this quarter we have seen a number of product launches and sort of technology revamps, some of it on the legacy DST side. Has anything changed about the approach to product development, technology development, things like that? I would imagine part of it is sort of the management restructure on the DST side. But just curious if anything has changed in terms of your approach to organic technology development, things of that nature?

[Bill Stone, Chairman, Chief Executive Officer]

Well, again, we have hired a number of people and obviously technology in 2021 is a lot different than technology was even when we bought DST which would closed in April 2018. So we are adding like microservices and artificial intelligence and robotic process automation and machine learning. And we are also, we are in a hurry. SS&C is in a hurry. In a hurry, it doesn't mean you can snap your fingers and in one day or even one quarter and sometimes even in one year that you can change everything without taking so much risk that you are going to break the egg. So you have got to be a little bit wise. And as I said, right, we just passed $500 million in EBITDA in a quarter first time ever and $1 billion in the first six months, first time ever. So I think we are increasing the cadence in our software development capabilities and I think that's why you are seeing a number of new products come out with a lot of requested features and functions that our clients and prospects have been asking for.

Rahul, do you have anything to add to that?

[Rahul Kanwar, President, Chief Operating Officer]

So I think the only other thing I would add is, just coming back to that restructure point, I think focusing our business in a very methodical way on kind of the end-markets that they serve and making sure our technology teams are lined up against those end-markets and are really paying attention to what those customers want means that the pace of development is faster, right. So it's things we have always done. We would like to think we are doing it with a little more focus and intensity.

[Andrew Schmidt, Citi]

Perfect. Exactly what I was getting at. Thanks Rahul, Bill. I appreciate the comments.

[Operator]

[Operator Instructions]. Your next question comes from the line of Jackson Ader from JPMorgan. Your line is open.

[Jackson Ader, JPMorgan]

Great. Thank you. My first question is actually back on the joint venture, the healthcare joint venture. I am curious about the new platform and maybe with existing customers. Will this be additive to the business that you have with existing customers? Or will it basically be more of a replacement from existing solutions to a newer platform over the next four or five years as this thing gets ramped up?

[Bill Stone, Chairman, Chief Executive Officer]

I think that our business philosophy forever has been to have a flexible delivery model. So there's going to be different customers that want this delivered to them through the JV and there going to be others that are going to want us to deliver this through SS&C Health. We think, in general, this is going to be a pretty nice tailwind to our growth in the healthcare business. And I don't know if current SS&C Health customers will want to going to the JV or want to remain with us. So obviously, we are talking to all of them and trying to give them the option that they want. But it's pretty new and everybody's pretty excited about it and we are optimistic that revenue growth will increase markedly.

[Jackson Ader, JPMorgan]

Okay. Great. Thank you. And then Rahul, you mentioned I think in one of the deals that you ran through that one of the Advent signings happen to be in the cloud. And I was just curious, one, can we get a reset on where your customers and investors' preferences are at the moment in terms of and really I guess this relates to the last question as well on the healthcare joint venture. But where are people's heads in terms of their preference for the cloud versus more on-premise deployment?

[Rahul Kanwar, President, Chief Operating Officer]

Yes. And I think this is just building on what Bill just said, right. What we are trying to do is, is be flexible on delivery, right and making sure that whether they want to deploy on-premise and on-premise increasingly is on-premise with a cloud provider that they have themselves or a public cloud or whatever the case may be or they want to buy it through us and have us run it on our private cloud which we think is purpose-built for our application. So it has several benefits. But I would say that the majority of new deals, one way or another, are going on some kind of cloud type and that's really what we are doing our development on as well.

[Jackson Ader, JPMorgan]

Okay. All right. Thank you.

[Operator]

Thank you. Your next question comes from the line of Surinder Thind with Jefferies. Your line is open.

[Surinder Thind, Jefferies]

Hi Bill. Hi Rahul. A high level question from my perspective in terms of just strategy and where the firm is. When I kind of look back over the past year or year-and-a-half, we think about the management changes that have kind of occurred. We look at the recent reorganization you did around DST in terms of the strategy there. Can you talk about how you feel about positioning right now and could the evolution of how you kind of got into here to decide that this is the right approach at this point? And is it kind of, shall we expect more changes that you guys are thinking about or are you guys pretty comfortable where we are at this point and the ability to kind of hit ultimately those milestones and targets that you guys are reaching for?

[Bill Stone, Chairman, Chief Executive Officer]

Well, Surinder, that's a great question and that's also pretty much a crystal ball question, right. I think that SS&C is constantly changing and it's constantly changing because our customers are constantly changing it. If you look at what Jefferies did five or 10 years ago compared to what Jefferies does today, it's a way different firm. And a lot of the hedge funds that we deal with now are in all kinds of different strategies and all kinds of different asset classes. Some are looking for permanent capital. Some are having long only strategies. Same thing with our large insurance companies that are now, I am sure you saw that the deal between Blackstone and AIG, $50 billion. It's going to be $100 billion. And so you have to have people that are nimble enough to take advantage of what's in the marketplace and you have to have people that have enough of a risk appetite to take some chances. And when you are going through executive managers, that's what we are looking for. We are looking for people that have deep subject matter expertise and personality that is inclusive and is open and then also that we take prudent risks. And if you don't take any risks, it's very difficult to grow. So I think we are very comfortable with where we are today. But I don't know where the world's going to be in three months or six months or nine months. I read things that other people apparently really know. I just don't think those people are the brightest people on earth.

[Surinder Thind, Jefferies]

Very good, Bill. And then I am going to ask you one more crystal ball question here. Can you talk a little bit about geography and how you guys are thinking about Europe? Obviously, there's more of a global approach by the firm at this point. But just it seems like Europe is generally consistently lagged the U. S. It's always been a bit more headwind past couple of years. How are you thinking about the evolution there of the marketplace versus North America?

[Bill Stone, Chairman, Chief Executive Officer]

We think there's a lot of opportunity in Europe. There's a lot of assets and there's a much slower adoption toward large scale outsourcing than there has been here in the U.S. But we have won some nice mandates. We think we are going to win some one mandates. And there's large geographies in Europe where we don't have a particularly large presence that we think we can. And again, we want do it in a prudent way and be able to make sure that we have the knowledge, skills and abilities to really capitalize. And I think we have a number of initiatives going on in countries like Germany and France and Italy and Spain and we have a pretty big presence in the U.K. So I think we are reasonably comfortable with our footprint there. And I think we are in execution mode.

[Surinder Thind, Jefferies]

Great. That's it for me, Bill. Thank you.

[Operator]

[Operator Instructions]. We have a follow-up question from the line of Alex Kramm with UBS. Your line is open.

[Alex Kramm, UBS]

Yes. Hello again. I just wanted to follow up with a couple of numbers questions. I don't think you mentioned the alternatives organic growth number. It would be great to have that. And then I guess secondarily also DST financial, if you could disclose that and maybe expand a little bit on the selling environment for that business? And any other business lines you want to give us an update in terms of growth rates for the quarter? Thanks.

[Patrick Pedonti, Chief Financial Officer]

Yes. Alex, I will give you the numbers. So on the alternatives business, it grew 12% in the quarter and now we are at 9.3% year-to-date. On DST, the financial services part of that business grew 4.5% in the quarter and is at 2.2% year-to-date.

[Alex Kramm, UBS]

Okay. And any other ones like Advent or the software businesses? Sorry.

[Patrick Pedonti, Chief Financial Officer]

Yes. Sure. The overall software business, both institutional and Advent, some of our other smaller software business, grew 3.8% in the quarter.

[Alex Kramm, UBS]

All right. That should be it for me. Thanks again.

[Operator]

[Operator Instructions]. Speakers, I am not seeing any questions in the queue. I would like to turn the conference back to Mr. Bill Stone for closing remarks.

[Bill Stone, Chairman, Chief Executive Officer]

Again, thanks everybody for being on the call and we look forward to talking to you probably towards the end of October. Thanks again. Stay safe. Stay healthy. Bye.

[Operator]

Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.