SS&C Technologies Holdings Inc (SSNC) Q1 2022 Earnings Call Transcript

Good day, everyone, and welcome to the SS&C Technologies First Quarter 2022 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. And I would now like to turn the call over to Justine Stone, Head of Investor Relations. Please go ahead.

Hi, everyone. Welcome and thank you for joining us for our first quarter 2022 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 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 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, April 28, 2022. 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. Also in the third quarter of 2021, we entered into a joint venture named DomaniRx, LLC, of which we are the majority interest holder and primary beneficiary. All earnings figures discussed today, including operating income, EBITDA, net income, and EPS are attributable to SS&C based on the ownership interest retained by SS&C.

Thanks everyone for joining. Our results for the first quarter were $1,296 million and adjusted revenue, up 4.9% and $1.25 and adjusted diluted earnings per share up 5.9%. Adjusted consolidated EBITDA was $514.9 million for the quarter, the highest first quarter in our 35-year history. Our EBITDA margin was 39.8%. Our first quarter adjusted organic revenue was up 4.3%, our alternatives Intralinks and Advent businesses were the growth leaders for the quarter. Excluding the impact of our healthcare business, our Q1 2022 organic growth in financial services, which is over 90% of our revenue, was 5.9%. SS&C generated net cash from operating activities of $183.5 million for the three months ended March 31, 2022. In the quarter, we bought back 2.3 million shares at an average price of $75.22 per share for a total of $170.9 million. We also used cash on hand to help fund the acquisition of Blue Prism and Hubwise, which both closed in March. Our consolidated net leverage ratio now stands at 3.48 and our net secured leverage ratio is 2.51. We expect to reduce our gross leverage to 3.0 by the end of the year while remaining active with our share repurchase program. These are exceptional numbers given the global uncertainty and resultant hesitancy of our customers. We're excited to add the Blue Prism team and their automation capabilities to SS&C. Blue Prism will continue growing revenues at 15% to 20%, with the potential to accelerate with its successful cross-sale initiatives. We estimate the enterprise-grade intelligent automation market to be in excess of $150 billion, based on McKinsey's estimate that 30% of all roles can be automated. Companies worldwide can struggle with the labor market, and we are in a great position to capitalize on this disruption. Currently, Blue Prism, like most fast-growing new technology companies, is operating at a loss. Through revenue growth and cost controls, we expect a 15% to 20% EBITDA margin exiting 2023 and a 30% to 40% EBITDA margin exiting 2024. I'll now turn the call over to Rahul to discuss the quarter in more detail.

Thanks, Bill. We had a good quarter across the board, led by strong performance from Advent, Intralinks, and alternatives fund administration. The Alternatives business continues to strengthen from market-driven gains and internal development efforts. Investor allocations to hedge funds are at all-time highs, and assets under administration continue to grow despite market volatility. We remain focused on extending the depth and breadth of our technological capabilities. GoCentral and Treasury Management Solutions, both launched this quarter, have generated significant interest already. GoCentral, utilizing AI and RPA technology throughout, will contribute to our win rates going forward, as well as advance the automation journey across all client operations. Our private markets and Advent teams have been closely partnering to enhance a holistic operating and technology model in support of hybrid credit funds. This new offering marries Geneva’s core technology capabilities with private market administration services in a manner that offers clients flexible delivery models. In Q2, we expect to close our first combined deal and have several large prospects in the pipeline targeted for later this year. Intralinks remains strong in both M&A and alternatives, coming off of 2022's record-breaking M&A environment. We continue to take market share and anticipate steady continuation of deal volume for the remainder of the year. As expected, healthcare revenue declined 15.5% in the quarter. We're investing heavily in DomaniRx and we continue to move towards the development of a cloud-native, API-driven claims adjudication platform based on the best experiences from ourselves and the other two founding partners. With the upcoming launch of DomaniRx and the interest this new technology has generated, we expect a strong recovery in 2023. Now, I will mention some key deals for Q1. A $5 billion broker-dealer chose Black Diamond due to our superior service and support model over competitors, as well as our trading and rebalancing functionality. An existing client, a top U.S. mutual fund, expanded their relationship with our event center solution. One of our largest mutual fund clients expanded their transfer agency BPO services. A $14 billion hedge fund, an existing Geneva client, chose our Fixed Link solutions, perceiving Geneva as Tier 1 platforms and found the two together to be an extremely powerful solution. A $1 billion AUA real assets fund chose our suite of SS&C private market services, including investor tax and fund services, due to our expertise across various asset types and fund structures. I will now turn it over to Patrick to run through the financials.

Thank you. The results for the first quarter included revenues of $1,295 million, net income of $172.1 million, and diluted earnings per share of $0.64 on a GAAP basis. On an adjusted basis, revenues were $1,296 million, factoring in the adoption of revenue standard 606 and deferred revenue from past acquisitions. Adjusted revenue saw a 4.9% increase, with operating income attributable to SS&C rising by 4.8% and adjusted earnings per share rising to $1.25, marking a 5.9% growth over Q1 2021. Overall, adjusted revenues increased by $60.8 million, a 4.9% rise in Q1. Our acquisitions added $17.4 million to this figure. However, foreign exchange fluctuations negatively impacted results by $8.7 million or 0.7% during the quarter. Adjusted organic revenue grew by 4.3% on a constant currency basis, driven by strong performance in several product lines, including Alternatives, Intralinks, and Advent businesses. In the first quarter, adjusted operating income reached $498.7 million, up $22.9 million or 4.8% compared to the first quarter of 2021. The adjusted operating margins remained stable at 38.5% compared to last year. Expenses saw a 1.7% increase on a constant currency basis, with acquisitions contributing $17.6 million in expenses, while foreign currency fluctuations reduced costs by $7.8 million. Consolidated EBITDA was reported at $514.9 million, equating to 39.7% of revenue, reflecting a $23 million or 4.7% increase from Q1 2021. Net interest expenses for the quarter totaled $49.3 million, which included $2.6 million of non-cash amortized financing costs. The average interest rate for our credit facility and senior notes was 3.11%, compared to 3.01% in the same period last year. We specified a GAAP tax provision of $63.5 million, representing 27% of pre-tax income. Adjusted net income amounted to $334.4 million, with adjusted earnings per share at $1.25. The effective tax rate for adjusted net income was 26%. Diluted shares increased to 267.6 million from 267 million in Q4 2021, with the impact of option exercises and a rise in average share price offset by share repurchases. On the balance sheet, we concluded the first quarter with $558 million in cash and equivalents and $7.6 billion in gross debt. SS&C's net debt, per our credit agreement, excludes $145 million in cash and equivalents held at the DomaniRx joint venture, resulting in net debt totaling $7.2 billion as of March 31. For the three months ending in March, operating cash flow was $183.5 million, reflecting a $2.2 million drop compared to the same period in 2021. Highlights from the quarter include net borrowings of $1,583 million, in contrast to net borrowings of $70 million in the previous year. We spent $1,553 million on the Blue Prism and Hubwise acquisition net of cash acquired. To finance the Hubwise acquisition, we took on two additional loans amounting to $1,530 million, maturing in March 2029, carrying an interest rate of SOFR plus 2.25% with a 50 bps SOFR floor. Treasury stock buybacks totaled $170.9 million, acquiring 2.3 million shares at an average price of $75.22. In July 2021, the Board approved up to $1 billion in stock buybacks; to date, we have repurchased $333.7 million worth of shares, totaling 4.4 million shares. We declared and paid a $51.1 million common stock dividend in the quarter, a 24% increase from last year. We paid $42 million in income taxes, slightly down from $42.5 million in Q1 2021. Our accounts receivable days sales outstanding increased to 52.7 days from 49.5 days in December 2021. Capital expenditures and capitalized software amounted to $35.6 million, roughly 2.7% of adjusted revenue, primarily for internal use software and IT infrastructure. Our trailing twelve months consolidated EBITDA for covenant compliance was $2,063.5 million as of March 2022. With net debt of $7.2 billion, the total leverage ratio stands at 3.48, and the secured leverage ratio is 2.51. Looking ahead, we have made several assumptions: we will keep focusing on client service and retention rates, which are expected to remain aligned with our recent results. We anticipate the foreign currency exchange will stay at current levels, negatively affecting revenue by about $43 million in Q3 and Q4. We expect our recent acquisitions of Blue Prism and Hubwise to add around $203 million in revenue for the rest of the year. Therefore, we project adjusted organic growth for the year to fall between 2.4% and 5.6%, with adjusted organic growth in Q2 expected to range from 1.7% to 4.8%. We assume near-term LIBOR will be approximately 70 bps, the spread on our credit agreement will be 175 bps, and 225 bps for the new facility for the Blue Prism acquisition. We predict LIBOR rates to rise by around 100 bps for the remainder of the year, impacting our expected interest cost by about $0.06 from earlier guidance. The Blue Prism acquisition is projected to dilute EPS by about $0.09 this year, taking into account the new debt facility. We expect staff costs to rise due to ongoing wage inflation, affecting Q2 operating results. We will manage expenses in the latter half of the year by controlling variable costs and maintaining our operating margins. Our strategy will be to utilize free cash flow to reduce debt and continue stock buybacks, with an assumed tax rate of 26% on an adjusted basis for the year. In summary, for the second quarter of 2022, we anticipate revenue will be between $1,328 million and $1,368 million, diluted shares between 267.2 million and 266.7 million, and adjusted EPS between $1.13 and $1.19. For the full year of 2022, we project revenue in the range of $5,350 million to $5,510 million, diluted shares between 268 million and 266.4 million, and adjusted EPS between $4.99 and $5.21. We now expect cash from operating activities to fall between $1,315 million and $1,375 million.

Thanks, Patrick, and as Patrick just mentioned, we're guiding organic revenue growth of 4% for the year and reducing our EPS guidance due to the dilution from Blue Prism and the interest rate increases. The start of 2022 has been a challenging environment for our clients. Uncertainty and instability in the world and the labor force have made our clients and prospects more hesitant to sign deals. This uncertainty can also be a catalyst for change and the need for operational stability from a reliable trusted provider. We are aggressively investing in our sales force and R&D efforts to capture this opportunity. GoCentral, digital treasury management, and others are rolling out now. Costs will be controlled through reduced incremental hiring, utilizing AI and automation, including Blue Prism digital workers, to accomplish this, and a reduction in our global real estate footprint. And I'll now open it up for questions.

Thank you. We'll take our first question from Alex Kramm with UBS.

Yes, hey good evening everyone. Maybe just starting on the DST side here, growth of 0.9% in the quarter decelerated quarter-over-quarter. I heard you on the selling environment and obviously there's a lot of uncertainty in the world. But I would also say that coming into this year, we still had traditional asset managers, I think, do very well on the back of multi-year highs in equity markets, etc. So I think your customer base is actually doing fairly well. So just wondering what in particular you're seeing at DST and in this environment if we can see that growth rate kind of tick up again in that business? Thanks.

I'll give it a shot, Alex, and then I have Rahul comment that we continue to roll out additional capabilities in our DST businesses, and we have lots of large opportunities. It comes down to not only closing those opportunities, but also then getting those clients live. So there is a bunch of pent-up revenue, and hopefully we will start to roll into those financial statements in the second half of 2022. But there are large-scale organizations, and while we have teams working on it, we also rely on the clients to help us in that process, and these uncertainties are not helping them move more quickly. And then, Rahul, do you have any other color?

Well, the one thing I'd add is these are some of our biggest customers across the company. So the DST relationships are strategic for us, and they frequently buy from us in other areas, including Alternatives, Advent, and others. And obviously, that's not reflected in the DST Financial Services line, but it does speak to the value of the relationship.

Fair point. Thank you for that. And then maybe just on the margin real quick, clearly margins flat year-over-year. I think last quarter you already talked about some inflationary pressure, and I think you brought this up again today. So just wondering, are things a little bit tougher than you expected, given the big resignation that everybody talks about? How do you think it's going to continue to impact or how are you going to navigate that environment?

That's a great question, Alex, and we are instituting all kinds of things to improve our retention and create an environment where we are an employer of choice. But there is wage inflation, and the overall power has really moved from capital to labor. While I don't think that's necessarily a bad thing, I think for the short term, adjusting your sights on pursuing price increases and being able to move inflationary costs through to the revenue side is what we're working on while being sensitive to our employees and making sure that we remain an employer of choice.

All right, great. I'll jump back in the queue. Thank you.

And we'll take our next question from Andrew Schmidt with Citi.

Hey guys, thanks for taking my questions. Good to see the resiliency here. First, I just had a question on Blue Prism, just back to the envelope, it looks like there should be approaching 100% or a 1% accretive on a pro forma basis when we think about total growth. I just want to make sure I have that correct? And then if you could talk a little bit about just the opportunity to plug Blue Prism into the SS&C direct sales force, because it seems like that's one of the big river in opportunities, just timeframe and process there, that would be helpful. Thanks a lot.

Rahul, do you want to take that?

Yes, maybe Patrick can address the first question about the accretive aspect, Bill.

I think your question was around revenue, right? How much does that add to revenue growth?

Yes, right. On a pro forma basis, yes.

Yes, so I think what we have in our financials for this year and our forecast is the first quarter had about $10.8 million, and that just represents half a month. For the remainder of the year, I think we're estimating somewhere around $196 million of revenue for the second, third, and fourth quarters.

Right, I guess —

And then I think to the second, yes sorry.

Yes, I was going to say, I guess the question is more around just combined company growth rate. It seems like it should obviously be accretive, but it seems like it should be approaching that kind of 100 basis point accretion when we obviously have this in the base for 2023. Just want to make sure that's the right ballpark?

You know, if you think about it right, it's roughly we're getting $200 million in 10 months, right. So let's call it $230 million or something like that and add the 20% growth rate, that's $46 million, which would be pretty close to 1%. So that's how we will think about it as well.

Great. Perfect, thank you for that.

And then I think to the second part of the question, we’re actually pretty excited about the opportunity, and we obviously have 18,000 clients, most of whom I’d say, virtually all of them are candidates to have greater automation with their digital workers. So that cross-sell component is pretty important to us. We also have a wealth of direct applications ourselves. Whether in our outsourcing business, we have many of the tasks that folks would look to have digital workers do. So we're working hard, and our teams are working diligently on coming up with applications for, if you're a hedge fund or an insurance company; here is something we might be able to do for you using this technology. And rolling that out, we think will be pretty powerful.

Perfect. Appreciate that. And then when we think about just the core business Intralinks from a growth perspective, it was a real surprise from my perspective given the M&A volumes out there. It seems like a lot of that is due to share gain. Maybe you could talk a little about just the drivers there and how you see that playing out for the full year from a growth perspective. Thanks.

We have a great business in Intralinks, and they continue to find pockets of growth throughout their client base and new clients. They've done a lot of things that help them in the alternatives industry with portals and other things along those lines. Information delivery and obviously, they continue to be very strong in the VVR market and M&A in general. So we expect similar growth for the rest of the year.

Perfect. Thanks Bill, Rahul, Patrick, appreciate the comments.

We'll take our next from Peter Heckmann with Davidson.

Thanks for taking the question. Can you just remind us of some of the dynamics in the health business? The decline in revenue, the timing of any customer losses, and whether that would be fully reflected in the run rate number for the first quarter? And then, just remind us how the JV works. If I remember correctly, you want a majority, so you're consolidating that with revenue and then have a minority interest coming out. But from your comments, it sounds like we're going to start to see that joint venture ramp. Would that be from new customers or increased volumes or both?

The money is 80% owned by us and 10% owned by each of our partners. That's right on how we do the accounting on that. We have a lot of interest in DomaniRx, and the platform that we're building is pretty much on track. We hope to roll that out to one of our partners on the 1st of January 2023, and then the second one on the 1st of January 2024. But we also have tremendous interest from others coming in as customers into as partners. So we expect revenue to ramp nicely in 2023 through the next five or ten years. We're excited about it. We think it's the first really cloud-based claims adjudication process in the PBM world, and we're excited about where we are.

Got it. Regarding the decline in revenue this quarter, can you remind me if it was due to the loss of one large customer or a combination of several? Also, could you clarify when that deconversion occurred, was it on January 1?

Yes, it happened January 1.

And several, right, so that's a total of about $70 million to $80 million and one of them represents about half.

Got it, okay. And then do you think on the own shares acquisition, do you feel like that should close by the end of the summer?

I think it's scheduled right now to be a little unpredictable because there are some approval requirements. But I think it's scheduled for the end of June.

And we'll take our next question from James Faucette with Morgan Stanley.

Hey, this is Jonathan on for James. Thanks for taking the questions. So you had alluded to driving price increases to offset wage inflation. If I think back to the Analyst Day from last year, you talked about, call it 100 basis points of a pricing uplift to drive growth. How are these price increase conversations going with customers, and is that enough to offset the magnitude of wage inflation that you're seeing?

I think it's a process, and I think the process is well underway. Obviously, inflation has ticked up now most month after month for the last five or six months. We're planning on raising our prices to be able to cover our increased costs, and I think our customers understand what's happening across the board for almost all of the vendors. We're no different, and we have a very talented labor force, and we're going to make sure that we take care of them and continue to be a very strong and trusted partner.

Got it. And a follow-up on the RPA opportunity. How are you thinking about the headcount or the magnitude of investment required to service the broader RPA platform that you have, inclusive of Blue Prism?

We have a large development organization; we have many, many talented RPA developers, as well as AI and NLP and machine learning. We have a big staff and Blue Prism complements great. So we think that in general, we're going to be able to deploy hundreds of digital workers and hopefully over the next two or three years, thousands of them, which will allow us to grow without adding the headcount we likely would have if we didn't have such technologies. I think that's the whole idea behind this acquisition: to bring high-power technology that allows you to switch to digital workers for human workers. I mean, it doesn't replace human workers per se in total, but it certainly augments them in a very, very strong way.

Appreciate the color, Bill. Thank you.

We'll take our next question from Kevin McVeigh with Credit Suisse.

Great, thanks so much. Is there any way to think about what the potential revenue opportunity is across your existing client base for Blue Prism? I think you were muted — obviously 18,000 clients. You know, over time — is there any way to think about what the revenue contribution can be, you know, again across the existing client base?

Rahul, do you want to take that?

Yes, sure, Bill, thanks. It's a huge market. As a multiple of the $200 million Blue Prism does, we anticipate that just in our current client base, we probably have 3, 4, or even 5 times that amount of opportunity. Some consultants out there are representing this as a $150 billion or more market, potentially as much as 30% of — as Bill noted — all the line jobs that are done lend themselves to this kind of technology. So we're just trying, and we're obviously mindful of the size of the market. At the same time, we have to focus on specific things that we can do better than anybody else. Blue Prism already has a number of those in the customers they have deployed, and we're working with them on building out additional use cases and applications.

It's helpful. And then it seems like the revenue retention was up 90 basis points sequentially. Historically, there has been a little seasonality; should it stay around that 96 or how should we think about the revenue retention? I think you said stay around that level. Is that right? I just wanted to confirm that?

Around that.

Okay, great. Thank you.

In the historical range, I assume, over the last couple of years.

Thank you, Patrick.

All right. We'll take our next question from Alex Kramm with UBS.

Oh, that was quick, hello again. And just had a couple of follow-ups here. One on the interest expense. Thanks, Patrick, for the color in terms of the rising interest rate environment, etc. Maybe to make it even easier for some of us, can you actually give us the kind of dollar amounts of interest expense that you expect for the next three quarters as you bake in that rate increase?

Sure. I think — including the new debt on Blue Prism, I think, which is about $36 million or $37 million for the year. We talked about $250 million this year in total.

Okay and — yes in terms of the ramp, I guess it’s — I guess I don’t know if you have any assumptions you want to share given that —

No, I would say, I mean — yes. I think right now, you know, the average interest rate on our original facility is probably around 2.45%, and the new facility is 50 basis points higher than that because of the spread. Then I would say it goes up another 50 basis points in Q3 and another 50 basis points in Q4.

Super helpful. Thanks for that. And then just as we think about capital deployment here, are you assuming basically mostly pay off debt given the rising interest rate environment or do you still think there is appetite for buybacks as we step through the year? And then, yes, and that’s it. And then, sorry, just one last quick one, stock-based comp increased quarter-over-quarter. Is that a good — any reasons why the big step up? I think that was the second highest in company history, and is that a good run rate to think about for now?

I think we're going to aggressively buy back our stock; we still see it as financially quite a bit more effective than paying down debt. Although, you know, if interest rates continue to rise, then we'll revisit that. But right now, you know, we're going to generate $5 a share in cash, and our stock is trading around $70 or so — $69 and plus we pay a 1.2% dividend. Economically, it makes a lot more sense to buy back stock, but rising interest rates could change that for sure. We have tried to shift a lot of the cash bonus programs into more equity bonus programs, complementing the cash and reducing cash as a primary driver of the bonus program. So I would think that the equity stock-based compensation is probably pretty close to where it will be going forward. I think it's a tough labor market out there, and we're going to do everything we can to reduce attrition as much as we can, and I think we've done a pretty good job to date.

All right. Helpful. Thanks again.

We'll take our next question from Chris Donat with Piper Sandler.

Hey, good afternoon, thanks for taking my questions. I had one for Rahul on the alternatives business. It shows 10.7% growth in alternatives in the first quarter in your slide deck. And then with the private markets growing over 18%, I'm just curious if you can comment on what's driving that strength in private markets. What do you see for competition, and is this a lot of in-house opportunities shifting to SS&C?

Sure, I think it's a little bit of all of that, but mostly it's a continuation of a trend where folks that had in-house operations, as they start new funds, they use us or somebody like us. We would say that the investment we have made in technology and process over the last decade or so is market differentiating. We have a really strong business; we’re the biggest provider of private markets, that's more private equity and real assets funds in the world. The capability keeps getting better. So we're a natural place for many of these funds to come to, and it is a combination of these are hard asset classes, particularly in the private lending, private credit, and private equity, as well as real assets. Because they are hard asset classes, there are a lot of new launches, and then there are transfers of internal. So all of that leads to, I think, a growth trend that is both positive and sustainable.

Okay, got it. And then Bill, just on the health care business, your optimism for the future. What’s the best way for those of us on the outside to track progress there? Is that something we'll see a flurry of press releases from, or will we need to wait until second-quarter results or third-quarter results? Just how should we try to keep an eye on that one and progress you're making?

I think as we sign new customers and new partners, we would have press releases. But, you know, people are kicking the tires on the technology and want to make sure that we're going to deliver on our milestones. Knock on wood, we've done a pretty good job so far, so I think more to come. These are large-scale healthcare organizations, and there are large chunks of revenue. I think we’ll prove to have been wise to have gone down this path.

Hey guys, thanks for taking my follow-ups here. I wanted to ask about the opportunity to implement the Blue Prism digital workforce across client operations. Is there any way to size or think about that opportunity from a productivity perspective? And then, is that included in the Blue Prism margin ramp or is this a separate opportunity? Thanks.

Yes, we would view it as a separate opportunity. I think Blue Prism has a lot of running room in being able to market its products, I have two of our client base. The productivity increases that we get inside SS&C, I think will really factor into the business units where they deploy Blue Prism. That was one of the strategic reasons for doing it, and I think it's going to be something that really strengthens our business.

That's helpful. Thank you, Bill.

And that concludes the question-and-answer session. I would like to turn the call back over to Bill Stone for any additional or closing remarks.

Well, again, we appreciate you all being on the call today, and we look forward to executing over the next several months and talking to you at the end of the second quarter. Thanks a lot. Bye.

And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.