SS&C Technologies Holdings Inc (SSNC) Q1 2023 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the SS&C Technologies Q1 2023 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. It is now my pleasure to turn today’s call over to Justine Stone, Head of Investor Relations. Please go ahead.

Hi everyone. Thank you for joining us for our Q1 2023 earnings call. I am Justine Stone, Head of Investor Relations for SS&C. On the call 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 the 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 27th, 2023. 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 to comparable GAAP financial measures is included in today’s earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. I will now turn the call over to Bill.

Thanks Justine and thanks everyone for joining. We started 2023 with pretty strong revenues growing $1.363 billion and adjusted revenue up 5.2%, and our adjusted diluted earnings per share, while a little soft to $1.11 was within our range and was down 11.2% from last year. Rising interest rates obviously impacted our earnings, but we're in very good shape from a financial standpoint. We had a lot of inflation, too, especially in wages, and that also put some pressure on our bottom line. Adjusted consolidated EBITDA was over $500 million again at $509 million, and our EBITDA margin was 37.3%. First quarter with all the payroll taxes and health care expenses is normally the highest expense quarter we have. But we do expect to begin to see a lot of cost savings from our Blue Prism digital worker deployment. We believe the digital workers will drive margins and serve as a hedge against inflation. We currently have over 40 processes live and are on track to achieve our 2023 productivity goal. Our first quarter adjusted organic revenue was up 1.9. We saw good performance in alternatives in our global investor and distribution services business, retirement and our Institutional and Investment Manager segment. We generated net cash from operating activities of $254.8 million for the three months ended March 31, up 38.9% over the same period last year. We paid down $44.6 million in debt in Q1, bringing our consolidated net leverage ratio to 3.38 times and our net secured leverage ratio to 2.39 times of consolidated EBITDA. In Q1, SS&C bought back 2.3 million shares for $134.7 million at an average price of $59.9 and program to date treasury stock buybacks of $439.9 million for purchases of 7.8 million shares at an average price of $56.34. We'll continue to target 50% of our cash flow to stock buybacks and 50% to pay down. We still look at lots of M&A while it remains disciplined, and we have yet to see any movement on large-scale assets, although we did see the German force putting in a bid for SimCorp today. We do think we'll have opportunities for some tuck-in acquisitions before the end of the year. This April marks the fifth anniversary of the DST acquisition, which brought SS&C over $2 billion in revenue and a long list of large sophisticated clients. While we have doubled the profitability, accelerating their revenue growth took investments in the product, the service, and the leadership teams. We feel these investments are paying off, and our biggest prospects are currently in our GIDS and retirement businesses. We have all watched volatility in the financial services sector, particularly US banking over the past few months. SS&C is a strongly diversified company. We have seen limited impact to date. As always, we will support our customers monitor the situation closely and react as necessary. I'll now turn it over to Rahul to discuss the quarter in more detail.

Thanks Bill. Our business remains strong despite a volatile macroeconomic backdrop with several of our business units improving their competitive positioning. Our alternatives fund administration business posted 6.6% growth in Q1 and now has assets under administration of $2.24 trillion. GIDS, which serves the world's largest asset managers, grew 3.6% this quarter. We've invested heavily in the leadership, technology, and service organization of this business over the last five years and continue to do so. We won large customers over the past few years and entered into long-term contract renewals with others. These marquee names, including St. James Place, Capital Group, Brooks McDonald, JPMorgan, Van land, and most recently, Mind Super provide a solid foundation from which to continue to grow. We have prioritized innovation and are working on dozens of new products and services across the company, whether it be SS&C BrightLine for tax, SS&C Everywhere for data connectivity and Insights, or SS&C Private Cloud for a purpose-built compute solution. These products solve important issues for our customers, give our employees creative ways in which to add value, and strengthen our business. I'll mention some of the key deals for Q1. A large UK wealth client embarked on a strategic project to move their international accounts to SS&C's Bluedoor platform, an alternative asset manager chose SOMS and fixed link services after a comprehensive RFP process, a $30 billion in AUM private equity and real estate firm chose us for fund services, a current brokerage client chose SS&C's All Serve solution to help scale and expand the clients offering in the alternatives market, and an $80 billion real estate manager with a non-traded REIT chose the suite of SS&C's fund services and retail all transfer agency services. We'll now turn it over to Patrick to run through the financials.

Thanks. Results for the first quarter were GAAP revenues of $1.327 million; GAAP net income of $126 million, and GAAP diluted earnings per share of $0.49. Adjusted revenues were $1.634 billion. Adjusted revenues were up 5.2%. Adjusted operating income decreased 1.1% and adjusted diluted EPS was $1.11, 11.2% decrease over Q1 2022 due to the impact of higher interest rates on our debt. Adjusted revenue increased $67.2 million or 5.2%. Our acquisitions contributed $64 million. Foreign exchange had an unfavorable impact of $19.9 million or 1.5%. Adjusted organic revenue increased on a constant currency basis by 1.9%. We had strength in several product lines, including alternatives against transfer agency services business and institutional investment management business. Adjusted operating income for the quarter was $493 million, a decrease of $5.7 million or 1.1% from the first quarter of 2022. Adjusted operating margins were 36.2% in the first quarter compared to 38.5% in the first quarter of 2022. Excluding acquisitions, expenses increased 5% on a constant currency basis. Acquisitions added $52 million in expenses and foreign currency decreased costs by $19.6 million. Our cost structure has been impacted by general inflation, wage inflation, and increase in business travel compared to 2022. Adjusted EBITDA was $509 million or 37.3% of adjusted revenue, a decrease of $5.9 million from Q2 2022. Net interest expense for the quarter was $111.9 million, an increase of $62.6 million or 127% from Q1 2022. In Q1 2023, net interest expense includes $3.5 million of noncash amortized financing costs and OID. The average interest rate in the quarter for the amended credit facility, including our senior notes, was 6.21% compared to 3.11% in the first quarter of 2022. We recorded a GAAP tax provision of $52.5 million or 29% of pre-tax income. Adjusted net income was $284.4 million and adjusted EPS was $1.11, and the effective tax rate used for adjusted net income was 26%. Diluted shares increased to 257 million from 256.4 million in Q4. The higher average stock price was partially offset by share repurchases during the quarter. On cash flow and balance sheet, we ended the first quarter with $433.3 million of cash and cash equivalents and $7.1 billion of gross debt. SS&C's net debt, which excludes cash and cash equivalents of $130.2 million that are held at DomaniRx, was $6.8 billion as of March 31st. Operating cash flow for the three months was $254.8 million, a $1.3 million increase from the same period in 2022. We bought back treasury stock for $134.7 million and repurchased 2.3 million shares at an average price of $59.19. In July 2022, the Board authorized the new stock repurchase program of up to $1 billion in stock buybacks. Program to date, treasury stock buybacks are $439.9 million for purchases of 7.8 million shares at an average price of $56.34. Net debt payments in the quarter were $44.6 million. We paid a total of interest of $138 million in the quarter compared to $74.2 million in 2022. On income taxes, in the quarter, we paid $20.9 million compared to $42 million in the first quarter of 2022. Our accounts receivable DSO was 53.5 days as of March 31st compared to 52.3 days as of December 2022 and 52.7 days as of March 2022. Capital expenditures and capitalized software was $53.1 million or 3.9% of adjusted revenue for the quarter. Spending was predominantly for capitalized software to invest in research and development and IT infrastructure. Based on our net debt of approximately $6.8 billion, our total leverage was 3.38 times and our secured leverage was 2.39 times as of March 31st. On outlook for the year, first, I'll cover a few assumptions. We'll continue to focus on client service, and we expect retention rates to continue in the range of most recent results. We've assumed foreign currency exchange will be at current levels for the remainder of the year. As a result, organic growth for the year will be in the range of 2% to 6%, and adjusted organic growth for Q2 will be in the range of 0.5% to 3.5%. We've assumed interest rates will increase in the range of 35 to 50 basis points through the remainder of the year compared to the average rate in the first quarter. We'll continue to manage our expenses during the period by controlling variable expenses and increasing productivity to improve our operating margins. We'll continue to allocate free cash flow to both debt pay down and stock buybacks, and we continue to expect the adjusted tax rate to be about 26%. So, for the second quarter of 2023, we expect revenue in the range of $1.3345 billion to $1.3745 billion. Adjusted net income in the range of $276.5 million to $293 million, and diluted shares in the range of $256.5 million to $257.5 million. For the full year, we expect revenue in the range of $5.455 billion to $5.655 billion, adjusted net income in the range of $1.190 billion to $1.285 billion and diluted shares in the range of 255 million to 258.5 million. On cash from operating activities, we expect that to be in the range of $1.275 billion to $1.375 billion. And I'll turn it back over to Bill for final comments.

Thanks Patrick. We expect revenue to accelerate in Q3, Q4, and we expect the growth to be broad-based across a lot of our different businesses and we will be able to convert a bunch of backlog revenue. We have price increases that have already gone into effect until the revenue will begin to tick up, and we also have a very full pipeline. We have invested heavily in our product and service suite, and we remain excited about our opportunities. It's been a difficult journey to get to here, but I think we're in really good shape going forward. I'll now open it up for questions.

Your first question comes from Kevin McVeigh with Credit Suisse. Your line is open.

Thank you for the kind words and congratulations on the results. I've observed that the organic growth appears to indicate approximately 2% on average for the first half of the year, with a midpoint of 4% projected for the entire year. I'm curious if the growth is driven by the same factors, such as pricing, new business backlog, and new products, or if there are additional drivers we should consider as we look towards the second half of the year.

Kevin, I think that's primarily what it is. We have a number of large-scale deals that we've sold over the past couple of years. It seemed like they were never going to materialize, but they are coming to fruition and going live. This will significantly boost our revenue. As I mentioned, we still have strong pipelines with healthy margins, particularly in our transfer agency business, which grew by 3.6% in the first quarter, marking a significant turnaround. We're making progress in all areas, and the price increases are beginning to take effect as well. Overall, I believe we're in reasonably good shape for the second half of 2023.

That's terrific. And then just one quick follow-up. It seems like the AUA was actually up sequentially, the first time about four quarters, and that's despite some disruption in your quarter across the markets. Any thoughts around that? What's driving that?

Rahul, do you want to take that?

Sure. We had pretty good inflows into both our hedge fund and our private equity businesses during the course of the quarter. So it's a combination of new fund launches, some organic and performance-related growth in these clients as well as new client wins. So, it's the first time we've seen net uptick in a few quarters and we're pretty happy about it. However, we do expect based on the comments Bill just made about the strength of our pipeline, we're certainly seeing some momentum in the market.

And I would say that we believe we remain the strongest competitor by a significant margin. There is a lot of volatility in that market, and a lot of the larger investment managers prefer to have our steady hand. I think that's played out pretty well for us.

Terrific. Thank you.

Your next question comes from the line of Dan Perlin with RBC Capital Markets. Your line is open.

Thanks. Good evening. Bill, I wanted to just take your temperature in terms of discussions that you've had with your clients. This is obviously true for Rahul as well. Kind of pre-SVB and post-SVB, you made it sound like there's not been any kind of fallout from that, and that's good to hear. But I'm just wondering kind of the posturing of what they're saying. I understand you have a backlog, and it's going to get converted to these large clients, which I think is encouraging for organic growth. I'm just wondering where they sit today in kind of their readiness to release capital in order to drive new contracts with you guys?

Yes. As you mentioned, much of what we anticipate for the second half is already signed and we are currently working on bringing these projects to fruition. This reflects a continuation of the progress made over the last 12, 18, to 24 months. However, there is noticeable anxiety in the financial markets, especially within the banking sector. While our client base among mid-level banks isn't extensive, we do have some clients in that category, and we are keeping a close watch on the situation. The recent issues with banks like Silicon Valley, First Republic, and Signature highlight the delicate balance between traditional banking and venture capital and other investments. I don't believe the current challenges are similar to what we experienced during 2008 or 2009, which is why we haven't felt a significant impact thus far. We will continue to monitor the situation closely.

Yes. Just a quick follow-up on the commentary around digital workers you had in the release. It seems like you're reiterating this 1,300 to 2,700. Can you just remind us where that sits in terms of cost savings? I think we had allocated something like $65 million at the low end of that range for annualized cost savings. But I just want to take your temperature on where we sit on that as well. Thank you.

You hit the nail on the head, Dan, $65 million. We're estimating about $1,000 in savings as we deploy digital workers per worker. Knock on wood, that's pretty much what we see. In some cases, the improvement in productivity is drastic. So we're very optimistic that if we keep our nose to the grindstone and build great digital workers, we'll have a great outcome. That's what people are focused on.

Excellent. Thank you, Bill.

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

Hey Bill, Rahul, Patrick. Thanks for taking my questions. I want to ask about the GIDS business. Maybe just talk about the nature of the investments and what you're doing there. That would be helpful. And then the 3.6% growth, the positive flip, much better than we were anticipating. Could you just sort of disaggregate that and maybe talk about the drivers there, whether it's existing client growth, new client launches, things like that. Just curious to understand the drivers a little bit more there.

Well, we named as global investor and distribution systems, and it's the largest investment managers in the world that use that service. We always felt that if you could deliver a better interface for better client interaction with the system and really had good process and procedures, there was opportunity all over the place because we didn't think our competitors would do the same thing. And while it might have taken us a little longer than we had hoped, we do think that we have built some purpose-built software that is easier to use and is getting much more client satisfaction. We've had any number of large-scale wins and large-scale renewals that have really helped the revenue side. I don't know if Rahul, do you have anything else to add to that?

Just on the investments. The investments have been in really all aspects of that business. So, we have invested heavily in the technology to the point Bill just made, digital interface, web interface, mobile apps, just workflow and systems. We have also brought in a lot of sales talent, a lot of management talent. The key to all of this is that the large clients that we have won over the last six to nine months, we've kind of worked through that implementation process and they're coming live, and that's helping our numbers.

Thank you for that. I have a question regarding wage inflation that you mentioned, Patrick. I'd like to explore that further. Is this primarily a result of actions taken last year, or are you experiencing more recent factors that are worsening the wage situation? I want to understand your perspective on the current labor cost environment.

Yes, it is mostly actions we took post April 2022 that are impacting us in Q1 when you compare it to prior years. But we're seeing in the current year, wage inflation slow down a little bit.

Perfect. Thanks so much guys. Appreciate the help.

Your next question comes from the line of Alex Kramm with UBS. Your line is open.

Yes, thank you everyone. I just wanted to follow up on the previous question. The margins this quarter definitely fell short of both market expectations and our own estimates. Perhaps we're not modeling it correctly. You mentioned wage inflation earlier, but was there anything unexpected this quarter that caught you off guard? Or is it simply the market not accounting for it accurately, given that you said wage inflation is expected to taper off in April? Additionally, as we look at the rest of the year, what gives you confidence in achieving the margin expansion you previously discussed? Is it primarily due to Blue Prism, or are there other initiatives you are implementing to ensure margins align with your targets?

I believe that the expense increase was mainly due to actions we took throughout 2022, as Patrick mentioned. We weren't surprised by this as it all became apparent in the first quarter. We are confident in our ability to improve margins. While I think there could be a slight decrease of about 100 to 200 basis points in the 37.3% adjusted EBITDA, we firmly believe in our margin improvement capabilities. Our focus is on investing in our people, processes, and abilities to achieve savings of $65 million to $130 million through Blue Prism while continuously reinvesting in our products and services. As Rahul highlighted, we are actively launching new features like BrightLine, GoCentral, and SS&C Everywhere, which we believe set us apart and contribute to our success in securing the majority of platform business opportunities.

All right. Fair enough. And then maybe a little bit bigger picture. There's been a lot more talk about AI, ChatGPT, etc. Just wondering how you view those capabilities in your own business. I think some people are arguing that you may be able to do a lot with that and maybe Blue Prism isn't that same kind of fear. But at the same time, I think there's others who say, hey, this could actually be super disruptive to your business. So, I know it's a big picture question for a call like this, but just wondering how much time you're spending on that and what you're evaluating.

Well, Alex, I don't think that Fintech in general has a very big moat. Almost anyone on this call can start a Fintech company. You need to have an idea and some development talent to deliver a product. Now, doing that and turning it into a $5.5 billion company with 100 offices in 40 countries and a suite of products and services that are world-class—that's a pretty big moat. When companies such as UBS or any of the other great big investment banks, hedge fund platforms, or private equity organizations look at their options, we believe we have the best people and solutions for our customers. We're moving proactively to adopt Blue Prism and believe that intelligent automation, AI, machine learning, and natural language processing will play a major role in the future. Either you get ahead of it, or you're left behind.

Fair enough. Thanks, guys.

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

Thank you. I have a quick one on DomaniRx. Could you give us an update on the platform development there and whether or not you continue to think that you have a good shot at moving your one large processing customer to the new platform in 2023?

Well, I think our target set is $124 million, and I think that we're in reasonable shape. I know that we have had some Domani Board meetings. Rahul has been involved too, and we do pretty much constant updates on that platform. I would say we are cautiously optimistic. Rahul, do you want to comment further?

Bill, I think you got it. We're on target with our development plans so far, and we're keeping a close eye on it.

Okay, that's helpful. And then this is a follow-up. How are you thinking about the private equity, real estate, private asset side? How are you thinking about mark-to-markets there? Maybe just remind us how much of that part of the business relies on fixed minimums versus basis points?

It's primarily basis points. There are some aspects that we do that are piecemeal, but it's primarily a basis point charge.

Okay. Just in terms of how that has historically worked, would you expect there to be a six-month or 12-month lag in terms of when asset values change and when they start to update those values? Or do they do it really more quarterly?

Yes, I'd say quarterly.

Okay. So we should be seeing it in the numbers already?

Yes, I think so.

Your next question comes from the line of Terry Tillman with Truist. Your line is open.

Hey guys, this is Joe Meares on for Terry. Thanks for taking the questions. The first one that I had is just I wanted to confirm that I heard correctly that organic growth in the quarter for revenue is 1.9%. And just curious what financial services organic growth was in the first quarter. I think it was 1.3% last quarter? So, just curious if there is any inflection there?

You're right that the total organic growth was 1.9%. When you refer to financial services, I assume you're referring to ex-health care, right? And that was 2.5% in the quarter.

Okay, perfect. And then just as a follow-up there, I think last quarter you had mentioned that your expectation for the health care market was for it to be down 10% in 2022. Just curious if there's any change in expectations there?

No, that's approximately what we expect for 2023.

Perfect. Thanks so much guys, appreciate it.

Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

Great. Thank you very much. I want to touch quickly on M&A. In your prepared remarks, you made reference to an acquisition in Europe, SimCorp today. Just wondering how you're thinking about valuations, what you're seeing in valuations. It sounds like you're trying to get some things done between now and the end of the year and just basically— you've obviously built a lot of value over the years via acquisitions, just how you're thinking about that as an opportunity right now?

Yes, James. I would say it's pretty similar. Everyone talks about prices maybe pausing, but it looks like at least the headline numbers on SimCorp are about 30 times EBITDA. It seems they're not pausing very quickly. I think that there are assets that are going to be sold, but the owners of those assets are generally going to have to take some haircuts, and I don't know that they're ready to do that yet. I think SimCorp has been on the market for a while. I think maybe the Borse has some other assets that they want to put together, and that may have serendipitously worked out for them. I don't exactly know where we are with FIS, or some of the other assets that are out there, but some stuff ought to shake loose. The more that people care about their customers, the better opportunity we have.

Got it. And then going back to looking at the second half ramp, it sounds like between some of the new contracts and pricing and some of the other things, you actually have pretty good line of sight into that acceleration. It doesn't sound like you're really dependent too much on macro, at least improving. Just want to make sure that is a correct understanding and where there could be sensitivity if macro were to deteriorate a little between now and then?

Yes, I think that's a pretty accurate characterization of where we are. The macro would have to deteriorate to the point where people are not going to allocate capital to new systems or processes. As large-scale financial institutions get under pressure, often their way to control costs is to outsource, which is a pretty significant strength of ours. We have any number of large-scale conversations going on with very large clients. So, we'll have our opportunities. It's always about execution.

Got it. Thanks a lot for those comments, Bill.

Your next question comes from the line of Alex Kramm with UBS. Your line is open.

That was quick. Hello again. I just wanted to squeeze in a couple of follow-ups. One, you mentioned that pricing has been solid. Can you be a little bit more specific about what kind of pricing you've been realizing? And maybe you could state what businesses you’re realizing more or less than the company average?

I think we're looking at between $100 million and $150 million in price increases realized in 2023, and probably the biggest ones are in the alternatives space and the GIDS business.

Okay, fantastic. Thanks for that. And just a very quick one here. Just to understand better, you noted that you have done 40 process automations now, and you also discussed the 1,300 to 2,700 people. Can you give us a bit of a flavor? When you talk about these 40 processes, how many people were actually reallocated or maybe positions eliminated? And going forward, when you refer to the 1,300 to 2,700, how many processes does that represent? I'm trying to get a sense for how many tasks you're automating and how many people that may affect per use case.

Yes, it's a pretty broad rate. If we can build the digital worker to do sophisticated reconciliations, then we'll have opportunities to deploy hundreds. Whereas in some of the other areas, even things that are well-defined, there may not be as many things to automate. For instance, validating 1065s and K1 tax returns or investment statements, as one digital worker can handle a lot of work. It's more about the one-to-many and many-to-many, and not very often do you have to do many-to-one. The capabilities of individual digital workers and the sophistication of processes are what determine how many and how fast.

Okay, fair enough. Maybe I'll follow up on that. Just very quickly, regarding Blue Prism, there's been deceleration over the last few quarters, with the growth at 10.9%. Initially, when you bought the company, it was in the 15-plus or maybe even 20% range. Is that a sales cycle thing? Or what's going on externally with Blue Prism?

No, we're optimistic that that accelerates for the rest of the year, too.

There are no further questions at this time. I will now turn the call back to Bill Stone for closing remarks.

Again, we really appreciate all of you coming on our call and we look forward to talking to you after the second quarter. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.