Earnings Call Transcript - SSNC Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SS&C Technologies Fourth Quarter 2022 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. It is now my pleasure to turn today’s call over to Justine Stone, Head of Investor Relations. Please go ahead.

Justine Stone, Head of Investor Relations

Hi, everyone. Welcome and thank you for joining us for our fourth quarter 2020 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 the various remarks we make today about future expectations, plans and prospects, including the financial outlook we provide, constitute forward-looking statements 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 most 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, February 7, 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.

Bill Stone, Chairman and CEO

Thanks, Justine, and thanks everyone for joining. Our results for the fourth quarter included $1.339 million in adjusted revenue, which is up 3.3%, and our adjusted diluted earnings per share were $1.16, down 9.4%. Adjusted consolidated EBITDA was $518.6 million, the third highest in our history, and our EBITDA margin was 38.7%. Our fourth quarter adjusted organic revenue was flat, in line with our expectations. For the year, total organic growth was 2%, while our Financial Services organic growth, which accounts for 94% of our revenue, was3.7%. 2022 was a challenging operating environment for SS&C, but we are pleased with the revenue performance from our software businesses, including Advent, Investment Management, and Institutional Management, as well as the resiliency of our Alternative Fund Administration and Intralinks business. In 2022, SS&C generated net cash from operating activities of $1.134 billion, which included $67 million in deal-related expenses. We paid down $166 million in debt in Q4, bringing our consolidated net leverage ratio to 3.4 times, and our net secured leverage ratio to 2.4 times consolidated EBITDA. This past January, during our quarterly blackout of stock buybacks, we paid down an additional $101 million in debt and in Q4, we bought back 1.8 million shares for $90.7 million at an average price of $50.14. For the year, we had stock buybacks totaling $476 million, which involved purchases of 7.8 million shares at an average price of $61.01. We will continue to allocate about 50% of our cash flow to stock buybacks and about 50% to debt pay down. In December, we acquired Complete Financial Ops, a specialized Colorado-based fund administrator that focuses on private equity and family offices. CFO Fund Services will augment SS&C’s capabilities in servicing venture capital and family office funds. Clients will continue to receive outstanding service backed by SS&C's size, scale, and comprehensive solutions. We remain methodically opportunistic in our acquisition strategy as valuations have come down more in line with our disciplined approach, and we are evaluating several opportunities. We remain very optimistic about our Blue Prism acquisition, and we are rolling out our digital workers throughout our business. I will now turn it over to Rahul to discuss the quarter in more detail.

Rahul Kanwar, President and COO

Thanks, Bill. Q4 results demonstrate the strength of our business amidst a challenging operating environment and highlight our ability to drive margins despite inflationary pressures. We exited 2022 with a 38.7% EBITDA margin, up 330 basis points from the low point in Q2. Cost controls, facilities reduction, and productivity improvements enabled this quick turnaround. While labor markets remain volatile, we believe Blue Prism’s intelligent automation technology will be an important means to harnessing the productivity of our workforce in 2023 and beyond. As a business unit, Blue Prism continues to grow nicely, exiting 2022 with 20% EBITDA margins. We continue to see opportunity in the private credit market, where we are investing in a highly scalable offering combining the strengths of Advent Software products and GlobeOp Services capabilities. A key component will be the build-out of a robust data platform that integrates multiple SS&C technologies, including Geneva, TNR, Precision LM, and others. Private credit represents the latest example of SS&C developing technology and expertise to address the needs of specialized and complex fund managers. This is a strategy we have employed effectively as we have built the world’s largest alternatives administration business. I will also mention some key deals from Q4. Three existing SS&C clients upgraded to our newest platform, Aloha. We currently have over 30 clients live on Aloha. A $13 billion asset manager partnered with SS&C for fund accounting and reporting functions on their real assets portfolio, which included lifting out 60 employees in Texas. One of DST’s largest clients expanded their relationship to include more transfer agency operations. A Canadian alternative asset manager chose SS&C for a suite of private equity administration services, including regulatory reporting, treasury services, and investor vision, citing their need for Canadian and international expertise, as well as scale for future growth. A $75 billion hedge fund chose Geneva for its superior functionality around loan processing and accounting, while a Hong Kong-based asset manager chose EMS/OMS for greater asset class coverage, flexibility, third-party integration, and compliance functionality. Mine Super, managing $12 billion in assets on behalf of 55,000 members, became SS&C’s first Australian superannuation client. The partnership will deliver superior digital experiences for members, driving greater engagement and stronger retirement outcomes. I will now turn it over to Patrick to run through the financials.

Patrick Pedonti, CFO

Thanks. The results for the fourth quarter of 2022 were GAAP revenues of $1.338 billion, GAAP net income of $207.5 million, and diluted EPS of $0.81. Adjusted revenues were $1.391 billion, which is up 3.3%, and adjusted operating income decreased 1.1% while adjusted diluted EPS was $1.16, a decrease of 9.4% from Q4 2021. Overall, adjusted revenue increased $42.9 million or 3.3% from Q4 2021. Our acquisitions contributed $72.5 million, while foreign exchange had an unfavorable impact of $28.7 million or 2.2% in the quarter. Adjusted organic revenue was flat on a constant currency basis. We saw strength in several product lines, including Alternatives, Institutional and Investment Management, and the Intralinks business; however, this strength was impacted by weakness in our GIDS transfer agency business and Healthcare sectors. Adjusted operating income in the fourth quarter was $502.1 million, a decrease of $5.4 million or 1.1% from Q4 2021. Adjusted operating margins were 37.5% in the fourth quarter of 2022, compared to 39.2% in the fourth quarter of 2021. Excluding acquisitions, expenses increased 2.6% on a constant currency basis. Acquisitions added $56.7 million in expenses, whereas foreign currency decreased costs by $27.9 million. Our cost structure has been impacted by wage inflation and increased staffing to support our business. Adjusted consolidated EBITDA, as defined in our earnings release, was $518.6 million or 38.7% of adjusted revenue, a decrease of $4.3 million or 0.8% from Q4 2021. Net interest expense for the quarter was $104.9 million and includes $3.7 million in non-cash amortized financing costs and OID. The average interest rate during the quarter for our credit facility, including the senior notes, was 5.64%, compared to 3.09% in the fourth quarter of 2021. Adjusted net income was $296.6 million with adjusted EPS at $1.16, with an effective tax rate of 26% used for adjusted net income calculations. Diluted shares decreased to $256.4 million from $260.9 million in Q3. Share repurchases and a lower average stock price during the quarter led to this decrease. In the fourth quarter of 2022, we reported GAAP fair value unrealized gains totaling $68.8 million for investments made in 2020 and 2021, which are excluded from our adjusted financial results. On the balance sheet, we ended the quarter with $440 million in cash and cash equivalents, and $7.1 billion in gross debt. SS&C net debt, which excludes the cash of $134 million at DomaniRx, was $6.8 billion as of December 31st. Operating cash flow for the 12 months ended December 2022 was $1.134 billion, which includes the impact of $67 million in Blue Prism post-acquisition transaction costs. Adjusted for these transaction costs, cash flow was $1.21 billion, a decrease of $227 million or 15.9% compared to 2021. Cash flow was impacted by higher interest rates, lower EBITDA, and an increase in receivables, DSO. During the three months ended December 31st, we paid down $166 million in debt and purchased $90.7 million in stock buybacks. Highlights for the 12 months of cash flow indicate that we spent $1.36 billion on acquisitions, including those of Blue Prism, Hubwise, MineralWare, O’Shares, Tier1, and Complete Financial Ops, net of cash acquired. Treasury stock buybacks totaled $476 million, with purchases of 7.8 million shares at an average price of $61.01, compared to $487.9 million in treasury stock buybacks in 2021. In July, the Board authorized a new stock purchase program of up to $1 billion, and to-date, stock buybacks totaled $305 million for purchases of 5.5 million shares at an average price of $55.78. For the year, we declared and paid dividends of $203 million, compared to $174 million last year, an increase of 16.7%. In 2022, we paid interest of $298 million, compared to $192.5 million in 2021. Income taxes paid totaled $281 million this year, down from $310 million in 2021. Our accounts receivable DSO was 52.3 days as of December 2022, compared to $51.8 days as of September 2022 and 49.5 days as of December 2021. Capital expenditures and capitalized software totaled $208 million or 3.9% of adjusted revenue, compared to approximately $137 million in 2021, with the spending primarily for capitalized software and IT infrastructure. Our LTM consolidated EBITDA, which we use for covenant compliance, stood at $2.010 billion as of December 2022. Based on the net debt of $6.8 billion, our total leverage was 3.4 times, and our secured leverage was 2.4 times as of December 31st. Regarding our outlook for 2023, we will continue to focus on client services, and we expect our retention rates to stay within the range of our most recent results. We have assumed foreign currency exchange rates will remain at the year-end 2022 levels. As a result, we project adjusted organic growth for the year to be between 2% and 6%, with adjusted organic growth for Q1 expected to range from negative 0.5% to positive 2.5%. We have modeled interest rates to average approximately 6.35% this year for our credit facility and senior notes. We anticipate improvements in staff productivity by approximately 5% and we will manage expenses by controlling variable costs, aiming to improve our operating margins by 50 to 150 basis points compared to 2022. We will continue investing in our business in areas of capital expenditures, product development, and sales and marketing, and we will allocate free cash flow to both debt pay down and stock buybacks, assuming a tax rate of approximately 26%. For Q1 2023, we expect revenue to range between $1.332 billion and $1.372 billion, adjusted net income to be between $282 million and $299 million, and diluted shares to be in the range of $156 million to $157 million. For the full year 2023, we expect revenue to be between $5.45 billion and $5.655 billion, adjusted net income between $1.190 billion and $1.285 billion, and diluted shares to be in the range of $455 million to $458.5 million. For the year, we expect cash from operating activities to be in the range of $1.275 billion to $1.375 billion. I will now turn it over to Bill for final comments.

Bill Stone, Chairman and CEO

Thanks, Patrick. 2023’s improved operating environment will present more growth opportunities for SS&C. We look forward to capitalizing on these opportunities and delivering superior results to our shareholders. I will now open it up to questions.

Operator, Operator

Your first question comes from the line of Surinder Thind with Jefferies. Your line is open.

Surinder Thind, Analyst

Thank you. I’d like to start with a question or two around productivity. Can you maybe talk a little bit about just the digital workers and kind of the efficiencies that you are seeing there? When you give metrics such as there are 180 digital workers, does that replace a certain amount of employee hours or how should we think about that and maybe just the kind of the targets you have for the full year that you laid out relative to last quarter?

Bill Stone, Chairman and CEO

Yeah. We expect that on average conservatively, a digital worker will probably save us $50,000 per digital worker deployed. We are not replacing personnel on a one-for-one basis with digital workers. What we are doing is allowing ourselves to hire less and achieve more productivity through the deployment of digital workers while simultaneously managing attrition. We see this as a win-win for our employees; the digital worker tends to take over repetitive tasks, which gives our employees a more interesting job. Moreover, this results in cost savings and efficiency for us. We would hope to deploy somewhere around 1,350 to 2,700 digital workers in 2023.

Surinder Thind, Analyst

Got it. And then in terms of just what that means for the expense line item, the comment around a 5% improvement in productivity. Also, when we think about the revenue guide, does that mean expenses should be relatively flat year-over-year, just in absolute terms?

Bill Stone, Chairman and CEO

What that implies is that we have to manage and we are subject to every other company depending on inflation and labor market conditions. However, the productivity we expect from the deployment of digital workers should offset some of the expenses that we would otherwise incur from higher salaries and other costs.

Surinder Thind, Analyst

Got it. And then just one quick follow-up, in terms of the commentary around M&A, any additional color you can provide regarding the types of opportunities you are looking at or the scale of those opportunities?

Bill Stone, Chairman and CEO

We see several dislocations in the fintech space. Therefore, there will be opportunities for both large and small acquisitions. SS&C maintains a disciplined acquirer approach. We are also known for being aggressive when prices align with our strategy, which does not run 10 times revenue. We expect the market is moving closer to our expectations. We also see many productivity opportunities and will likely be a suitable home for different types of operational companies we could acquire.

Surinder Thind, Analyst

Thank you, Bill.

Operator, Operator

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Alex Kramm, Analyst

Okay. Good evening. Yeah. Hey. Good evening, everyone. Just to follow up on the cost and margin question. I think Patrick specifically said 50-basis-point to 150-basis-point margin expansion. Maybe I didn’t hear that right, could you confirm that?

Patrick Pedonti, CFO

That’s correct.

Alex Kramm, Analyst

I guess that's it. So I think it gets you in EBITDA terms to around 39% at the midpoint. Can you lay out any sort of seasonality or if you are taking measures still this year? Is that a glide higher with revenue growth or how should we be thinking about the cadence of margins throughout the year?

Bill Stone, Chairman and CEO

We will have had Blue Prism for a year in March, and we are quickly deploying digital workers. The ramp-up will occur as each quarter progresses, with the savings associated with those digital workers being concentrated more heavily in Q3 and Q4, as they will be fully utilized in those quarters.

Alex Kramm, Analyst

Okay. Fair enough. And then flipping to the revenue side, 2% to 6% organic, that’s an acceleration from where we were in 2022. Is there anything to highlight on the revenue side, especially regarding the Healthcare business that was a significant detractor in 2022? Should we expect that business to stabilize and potentially begin to grow again?

Bill Stone, Chairman and CEO

We have provided guidance on this. Patrick?

Patrick Pedonti, CFO

On the Healthcare side, we expect some reduction in revenue, reflecting new client losses, with last year's decrease being around 20% and a projected decrease of about 10% this year, particularly in the first half when compared to prior results.

Alex Kramm, Analyst

Okay. So are we to understand that business will not begin to grow organically until the DomaniRx implementation gets going, or is the current situation a kind of holding pattern?

Bill Stone, Chairman and CEO

We have a lot of ongoing initiatives in Healthcare, and we believe there is substantial opportunity there. The key is hitting those healthcare systems at their renewal dates. We are cautiously optimistic that Domani is progressing well and our talented teams are focused on that, so 2023 may not yield giant optimism, but we believe we can reach a strong ramp-up by 2024.

Alex Kramm, Analyst

Excellent. Thank you very much, guys.

Operator, Operator

Your next question comes from the line of Jeff Schmitt with William Blair.

Jeff Schmitt, Analyst

Hi. Thank you. Alternative organic growth is holding up fairly well, 4.5% in the quarter. But it looks like private markets are growing in the high-teens. Is hedge fund business in negative growth, and can you provide insight into the disparity in these two business areas?

Bill Stone, Chairman and CEO

Rahul, could you take that?

Rahul Kanwar, President and COO

Sure. I believe the hedge fund business is slightly positive. It isn't growing anywhere near the private markets. In 2023, we are planning for 2% to 3% growth in hedge funds and mid-teens or higher growth in private markets, which will influence the overall growth. The sales performance has been strong, and we continue to see demand for middle office services, including new modules like GoCentral. Although we haven't benefited significantly from hedge fund inflows recently, we think we will be well-positioned as the market turns around, as we are gaining share. Meanwhile, private markets and credit businesses are becoming more significant to our overall growth.

Jeff Schmitt, Analyst

Okay. And then a question on the Healthcare business; it seems like you are downsizing the medical side, which is lower margin in relation to the pharmacy business. But is this enough to have a positive impact on overall margins? Would you characterize the margin disparity?

Bill Stone, Chairman and CEO

Healthcare generally runs in the high 20s, while the rest of the business is in the high 30s. That is about right, isn't it, Rahul?

Rahul Kanwar, President and COO

That’s about right, Bill.

Bill Stone, Chairman and CEO

The Healthcare business is still substantial, with significant opportunities ahead. We are focused on execution and addressing this space effectively.

Jeff Schmitt, Analyst

Thank you.

Operator, Operator

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

Peter Heckmann, Analyst

Hey. Good evening. I had just a couple of follow-ups. Can you discuss when you expect a couple of larger customers to go live this year and mention when we should see some of the bigger customers in the conversion backlog hit and start contributing to organic growth?

Bill Stone, Chairman and CEO

Several of these clients are expected to go live in the first quarter, primarily at the end of March. We have numerous others expected in the second quarter, and we anticipate they will all be live by the end of the third quarter. We still have a significant amount of sold revenue that we have yet to recognize. Rahul, do you have any further insights?

Rahul Kanwar, President and COO

No, I think that’s exactly right. It will happen throughout the course of the year, with some clients coming on in Q1 and Q2, and we will achieve close to full deployment towards the latter half of the year.

Peter Heckmann, Analyst

Understood. Lastly, how would you characterize the environment for new business in the fourth quarter? Did it meet your expectations, and how do you feel customers' decision-making will be impacted given the uncertainties in the first half of 2023?

Bill Stone, Chairman and CEO

I believe we are seeing a strong need for efficiency among our customers. As Rahul mentioned, there are significant opportunities in the middle office, and pressure on our clients to find that efficiency. Many are recognizing that maintaining extensive software systems and large operational teams is not their core expertise, which opens up opportunities for us. We are confident in our capabilities and believe our strong salesforce will execute well.

Peter Heckmann, Analyst

Thank you.

Operator, Operator

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

Andrew Schmidt, Analyst

Hey, guys. Good evening and thanks for taking my questions. Can you drill down on organic growth? There have been several inquiries on the topic. Could you discuss visibility regarding acceleration in growth as we approach quarter-end? We know that part of it is due to Blue Prism coming into the mix and implementing, but are there other drivers contributing to your confidence in achieving the organic growth outlook this year?

Bill Stone, Chairman and CEO

We have been implementing price increases over the past couple of years, which are beginning to bear fruit. Overall, we expect these price increases to approach 2% across the entire business. Continued introductions of new systems and services like Aloha, Singularity, and GoCentral are also positive factors driving business growth, especially when sold as packages, such as our trust system in combination with our wealth management product, Diamond.

Andrew Schmidt, Analyst

That’s helpful. Last year we faced labor pressures impacting implementation timelines. Do you see any stabilization in client implementation timelines and the retention of your implementation workforce?

Bill Stone, Chairman and CEO

We have a strong workforce focused on improving implementation effectiveness. We have made significant hires to bolster that team, which is now executing at a higher level. However, these are complex implementations, and challenges with collaboration and remote work may still stretch timelines. Overall, we are optimistic that improvements will begin to show in our quarterly financials.

Andrew Schmidt, Analyst

Thank you very much, Bill.

Operator, Operator

Your next question comes from the line of Kevin McVeigh with Credit Suisse.

Kevin McVeigh, Analyst

Great. Thanks so much. Hey. There is nice acceleration on the organic growth in 2023. Beyond Blue Prism, can you help disaggregate the elements contributing to the 2% to 6% target into buckets like pricing, retention, and new business sold?

Bill Stone, Chairman and CEO

When breaking this down, I would suggest you allocate 1% to 2% for each of the four buckets we discussed: price increases, new business sold, clearing backlog, and new products and services that we are launching. While we want to guide you cautiously on this, we are optimistic but can't fully predict given global circumstances, including inflation and labor issues.

Kevin McVeigh, Analyst

That’s helpful, Bill. Also, you mentioned Blue Prism ended 2022 with a 20% EBITDA margin. Do you have expectations for how that should scale throughout 2023?

Bill Stone, Chairman and CEO

We expect Blue Prism to increase their margins by 500 to 1,000 basis points in 2023. I’ll let Rahul add to that.

Rahul Kanwar, President and COO

I agree with that, Bill. Our goal for the end of 2023 is to achieve approximately a 30% margin.

Kevin McVeigh, Analyst

Thank you.

Operator, Operator

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

Terry Tillman, Analyst

Thanks for taking the question. I had a question for Patrick regarding the 3.7% organic growth for Financial Services. Was that for Q4 or the full year?

Patrick Pedonti, CFO

That was for the full year.

Terry Tillman, Analyst

Could you let me know how it performed in Q4?

Patrick Pedonti, CFO

Let me check for you.

Terry Tillman, Analyst

I do have another question. Bill, it’s nice to talk to you again. I am curious about the private credit opportunity you've highlighted. Could you share any important technology milestones for 2023 and the potential for this to become a revenue stream?

Bill Stone, Chairman and CEO

Welcome back, Terry, it’s been a while. The private credit market is growing rapidly; for instance, companies like Apollo have $550 billion under management. We have successfully integrated several technological components, which puts us in a strong position to capitalize on this market growth. Private markets are increasingly becoming prominent, rivaling public markets.

Terry Tillman, Analyst

That makes sense. One last quick question for Patrick, what was the Q4 organic growth for Financial Services?

Patrick Pedonti, CFO

Q4 showed an organic growth of 1.3% in Financial Services, excluding Healthcare.

Terry Tillman, Analyst

Thank you very much.

Operator, Operator

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

James Faucette, Analyst

Great. Thank you for taking my questions. Bill, you mentioned you are seeing opportunities in the fintech space for acquisitions. Can you discuss how the rising cost of capital impacts your approach to these deals?

Bill Stone, Chairman and CEO

I believe there are still attractive acquisition opportunities available without needing to overhaul capital structures. We have historically operated under much higher interest rates than we see today. We don't envision building complex deal structures, but we may work with partners, large private funds, or pension funds to provide us with credit or equity when the pricing is right.

James Faucette, Analyst

Understood. You mentioned taking market share in hedge funds. Has the management transition of some of your primary competitors created opportunities for your firm?

Bill Stone, Chairman and CEO

We maintain a strong sales pipeline. However, closing deals is subject to market conditions. Given the fluctuations we've faced in recent quarters, the number of fund launches has decreased significantly. We are optimistic about ramping up our Eclipse product and integrating our fund administration capabilities thoughtfully.

James Faucette, Analyst

Thank you for the clarity.

Operator, Operator

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

Bill Stone, Chairman and CEO

We appreciate everyone’s participation today. Notably, the $518 million in adjusted EBITDA was the third highest in our 36-year history. We are proud of our efforts, focused on execution, and we look forward to sharing positive news next time we speak. Thank you.

Operator, Operator

This concludes today's call. You may now disconnect.