Earnings Call Transcript - SSNC Q3 2024

Operator, Operator

Thank you for standing by. My name is John, and I will be your conference operator for today. At this time, I would like to welcome everyone to the SS&C Technologies Third Quarter 2024 Earnings Call. 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. I would now like to turn the call over to Justine Stone, Head of Investor Relations.

Justine Stone, Head of Investor Relations

Hi, everyone. Welcome and thank you for joining us for our Q3 2024 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 Brian Schell, 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, October 24, 2024. 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 and CEO

Thanks Justine, and welcome everyone. Our third quarter results show record adjusted revenue of $1,466.8 million, a 7.3% increase. Our adjusted diluted earnings per share were $1.29, which is up 10.3%. We also reported record adjusted consolidated EBITDA of $566.2 million with 38.6% EBITDA margins. Our third quarter adjusted organic revenue growth was 6.4%. This growth was driven by strong performances in our Alternatives, GIDS, WIT, and Intralinks businesses. The unexpected upside primarily came from our GIDS and WIT businesses, accelerated license revenue in Wealth and Investment Technologies, and one-time professional services fees in the global investor and distribution solutions business. The Global Investor Distribution services business was a key factor in our outperformance. Our recurring revenue growth rate for financial services was 7.2%, encompassing all software-enabled services and maintenance revenue. Cash from operating activities for the third quarter was $336.6 million, reflecting a 39% increase from Q3 2023. Our cash flow conversion rate for the quarter was 103%. We repurchased 1.2 million shares for $89.4 million at an average price of $72.72 per share. Despite high-quality acquisitions, we still believe that share repurchases represent the best use of capital. In September, we finalized the $670 million acquisition of Battea-Class Action Services. Battea aligns with our financial criteria, reporting about $95 million in annual revenue, experiencing high single-digit growth, and boasting a 45% plus EBITDA margin. This acquisition will be immediately accretive to our earnings. Battea's offerings are complementary to our fund administration business, and we are already making strides in cross-selling. I’ll now hand the call over to Rahul to delve deeper into the quarter’s details.

Rahul Kanwar, President and COO

Thanks, Bill. We had another strong quarter with organic revenue growth of 6.4%. The wealth and investment technology business unit grew 10.9% for the quarter. The reorganization from earlier in 2024 has brought development teams together, and we’re currently integrating the capabilities of our Aloha solution into the new Genesis platform. This will accelerate our ability to deliver the deepest set of cloud native front-to-back technology to the investment management market. The Black Diamond Wealth Platform has reached a major milestone with the rollout of advanced grouping functionality. This initiative enables Black Diamond advisors to further personalize their client reporting and compete effectively in the alternative asset reporting space for RIAs and family offices. Our Global Investor and Distribution Solutions business had another strong quarter, and in addition to new business wins, we have brought in additional revenue through special projects at our largest clients. The healthcare industry is facing higher than expected utilization and rising costs for Medicare and Medicare Advantage. SSNC is poised to support our healthcare clients and prospects through these headwinds. With the integration of our DomaniRx platform, automation opportunities and liftouts, we can reduce the operating costs for health insurers over time. Q4 is off to a strong start for SSNC Health. We signed two large license deals for about $8 million in revenue at the beginning of October that will push from Q3. Our internal automation efforts are progressing as well. Since acquiring Blue Prism in 2022, our total revenue has grown about $600 million and our headcount is down. For 2024 year-to-date, we estimate a benefit of approximately 1,050 full-time equivalents thus far in the year because of rolling out Blue Prism digital workers as well as automating and optimizing existing processes. We’ll now turn it over to Brian to run through the financials.

Brian Schell, CFO

Thanks, Rahul, and good day everyone. As noted in our press release, our Q3 2024 GAAP results reflect revenues of $1.466 billion, net income of $164 million, and diluted earnings per share of $0.65. Our adjusted non-GAAP results include revenues of $1.467 billion, an increase of 7.3% over Q3 2023, and adjusted diluted EPS of $1.29, a 10.3% increase over Q3 2023. The adjusted revenue increase of $100 million over Q3 2023 was primarily driven by incremental revenue contributions from the WIT alternatives, GIDS, and Intralink businesses. Acquisitions contributed $8 million with about $4 million attributable to Battea, and foreign exchange had a favorable impact of approximately $5 million. As a result, adjusted organic revenue growth on a constant currency basis was 6.4%. Our core expenses increased 6.8% or $58 million excluding acquisitions and on a constant currency basis. Adjusted consolidated EBITDA was $566 million or 38.6% of adjusted revenue, an increase of $32 million or 6% from Q3 2023. Net interest expense for the third quarter of 2024 was $110 million, a decrease of $11 million from Q3 2023. Adjusted net income was $327 million, up 10%, and adjusted diluted EPS was $1.29, an increase of 10.3%. The effective tax rate used for adjusted net income was 26%. An increase in the average share price drove the diluted share count up to 254.1 million from 252.3 million at Q2 ‘24. SSNC ended the third quarter with $694.7 million in cash and cash equivalents and $7.2 billion in gross debt. The higher-than-normal cash balance reflects opportunistic borrowing that will be deployed during the fourth quarter. SSNC’s net debt, as defined in our credit agreement, which excludes cash and cash equivalents of $159 million held at DomaniRx, was $6.7 billion. Our last 12-month consolidated EBITDA used for covenant compliance was $2,279 billion. Based on net debt of approximately $6.7 billion, our total leverage ratio was 2.9 times. As we look forward to the fourth quarter and the remainder of the year with respect to guidance, note that we will continue to focus on client service and assume that retention rates will remain in the range of our most recent results. We will continue to manage our expenses with a cost-disciplined approach by controlling and aligning variable expenses to ensure efficiency, increasing productivity to improve our operating margins and leverage our scale and create capacity while effectively investing in the business through marketing and sales and R&D to take advantage of future growth opportunities. Specifically, we have assumed foreign currency exchange and interest rates to remain at current levels, a tax rate of approximately 26% on an adjusted basis, which is unchanged from prior guidance, capital expenditures to be 4.1% to 4.5% of revenues, which is also unchanged from prior guidance, and a stronger weighting to share repurchases versus debt reduction, subject to changes in market conditions or financing needs. For the fourth quarter of 2024, we expect revenue to be in the range of $1.46 billion to $1.5 billion and 2.4% organic revenue growth at the midpoint; adjusted net income in the range of $329 million to $345 million; interest expense, excluding amortization of deferred financing costs and original issue discount, in the range of $110 million to $112 million; diluted shares in the range of 254.6 million to 255.6 million; and adjusted diluted EPS in the range of $1.29 to $1.35. For the full year 2024, we expect revenue to be in the range of $5.815 billion to $5.855 billion and 4.9% organic revenue growth at the midpoint; adjusted net income in the range of $1.299 billion to $1.315 billion; diluted shares in the range of 253.6 million to 253.8 million; adjusted diluted EPS in the range of $5.12 to $5.18; and cash from operating activities to be in the range of $1.33 billion to $1.37 billion. And now back to Bill.

Bill Stone, Chairman and CEO

Thanks, Brian. We feel our business is strengthening, and we were able to expand our horizons. The Battea purchase is already showing very positive signs. Our Deliver client conference was a great success, and I would like to thank David Rubenstein for being our keynote speaker. I will now open it up for questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. Your first question comes from the line of Jeff Schmitt from William Blair.

Jeff Schmitt, Analyst

Thank you. Could you discuss the market opportunity for DomaniRx? Just because I think the top three players in that space handle maybe 70% or 80% of prescription claims, I think. And you’ve just mentioned before, you don’t plan on kind of focusing on that group that much. So how big is sort of the remaining market opportunity from a revenue perspective? And then how are kind of those early conversations going?

Bill Stone, Chairman and CEO

Yes. We would say you’re right, it’s probably about 70% to 80% is what the UnitedHealthcare, Aetna, CVS, Cigna, and Express Scripts process. I think there are something like five billion to six billion scripts a year in the United States. So, if you take 20% of six billion, you have 1.2 billion, and if you take 30%, you get 1.8 billion. So, that’s a lot of scripts. We think we have a lot of room for growth. We also think that we can license our technology maybe to one of those three or maybe more. And we also have a large number of others that are like us or like the big three but a lot smaller, so they might do 200 million, 300 million scripts rather than the 1.5 billion scripts. So we think there’s plenty of runway. There are a lot of things in healthcare that need help, and pharmacy claims is one, but there are other areas like medical claims and other needs where we think we’re well-positioned to help the healthcare industry.

Jeff Schmitt, Analyst

Okay. Great. And then just on the Trust Suite business, I think you’ve mentioned it last quarter, but it’s the InnoTrust combination. Could you discuss the size of that business and the type of growth you’re seeing there? How does that stack up versus competitors like SEI’s product?

Bill Stone, Chairman and CEO

Yes. I think the Trust Suite product really combines the InnoTrust product and Black Diamond and creates a very pleasant user interface with a lot of capability using technology that is pretty state-of-the-art. Most of the trust systems in the marketplace today are multi-decade old, and we think that we have a lot of room for growth. We’ve been pleased with the acceptance rate of Trust Suite.

Jeff Schmitt, Analyst

Any sense just on the size of that business today from a revenue perspective or the growth?

Bill Stone, Chairman and CEO

Well, it’s still a little nascent, but we would expect it to do probably in 2024 upwards of $10 million in revenue. And then in 2025, we would expect to see perhaps a multiple of that.

Surinder Thind, Analyst

Thank you. Bill, can you provide maybe any color on the outlook for Q4 in terms of the slowdown in the organic growth rate that’s implied? And then is there some licensing noise or licensing deals and things like that, or how should we think about the Q4 number?

Bill Stone, Chairman and CEO

Yes. I think the major thing with Q4 in 2024 compared to 2023 is Q4 of 2023 was substantially better than any of the other quarters in 2023. So we’re kind of facing a bit of a comp challenge. We have a big pipeline. We have a lot of activity going on. We’re always cautious. We’ve had three or four pretty good quarters in a row, and we expect Q4 to be a good quarter as well.

Surinder Thind, Analyst

Got it. And then in terms of the follow-up, just obviously, a lot of news in the healthcare space with potentially Cigna and Humana back in merger talks, some weak results out of Elevance and some other things. What’s the potential impact, or is there any read-through there? Is there anything we should be aware of related to DomaniRx?

Bill Stone, Chairman and CEO

No. I think, as Rahul spoke earlier, we got a pretty big uplift in revenue for healthcare in October, stuff that had been pushed from September. I still think we have a great opportunity here. DomaniRx is really new technology; there’s nothing like it out in the marketplace that can handle scale. Many people that used our RxNova system considered it the gold standard for Medicare and Medicare Advantage already, and DomaniRx is far exceeding RxNova’s capabilities.

Surinder Thind, Analyst

So Bill, I guess, just to clarify, is the commentary there that there shouldn’t be any strategic impact on the relationship there that you have? Or I guess, that’s what I was trying to get at rather than the actual near-term business.

Bill Stone, Chairman and CEO

You mean Humana and Cigna? So we think there’s plenty of opportunity for us. Whatever happens with Humana and Cigna, we think it will be positive for us. A lot of activity is happening in healthcare, as Rahul had alluded to before, and we just have to see how things play out. But everyone is concerned about their health, and people aren’t going to stop spending money on their health. We believe it’s a very good position for us.

Andrew Schmidt, Analyst

Hey, Bill. Hey, Rahul. Hey, Brian. Thanks for taking my questions this evening. I wanted to ask a question on 2025. I know it’s a little early, but you do have the 4% to 8% medium-term organic growth outlook out there. Wondering if 2025, if you think about it within the context of that, if it’s shaping up similar to the medium-term? And then if you could just talk about maybe the pipeline or the sales cycles accordingly. Because I know there’s a lot of work that’s done in advance to hit those targets. So if you could comment on just your visibility there in terms of what you’re seeing in the pipeline, that would be great. Thanks a lot.

Bill Stone, Chairman and CEO

Yes. I think that our salesforce is the strongest it’s been, so we have a lot of people out there seeking opportunities and we have a lot of capable people. We have a tremendous number of opportunities all over the world. We need to win, right? Then we need to get them live so the revenue streams in. But I would say that we’re pretty bullish on 2025. We have the resources, we have the cash. We have access to markets. We’re really excited about the cross-sell opportunities with Battea. I believe we have an opportunity to surprise you positively.

Andrew Schmidt, Analyst

Got it. That’s great to hear, Bill. Very constructive. And then if I could just ask about R&D. I think one of the highlights at the Analyst Day was just the breadth of the product pipeline. It’s bigger than I’ve seen in some time. Has there been a shift towards more spend on organic R&D? Obviously, with the step-down in M&A and more focus on organic growth, it would make sense. But I’m just curious about just the philosophy in terms of new product R&D spend. Thank you very much.

Bill Stone, Chairman and CEO

Yes. I’ll give you a little answer, and I’ll let Rahul kind of go a bit deeper. But if you notice our percentage of CapEx, we’re at 4.1% to 4.5%. Historically, we’ve been at 3% to 3.5%. So we have poured a lot more money into R&D, and our CTO, Anthony Caiafa, he’s become better at spending effectively. We think that this trend will probably continue.

Rahul Kanwar, President and COO

The thing I would add to that is as we have organized our business increasingly effectively, right, and had more products and services pointed at specific segments of the market or specific types of customers, what we need to build has become increasingly clearer. We get a lot of good feedback from our sales force. We obtain valuable insights from the folks covering those accounts. A lot of times, we can get anchor clients and individuals who want to partner with us on funded development, resulting in quicker revenue generation. This is part of the positive dynamics we're experiencing.

Dan Perlin, Analyst

Thanks. Good evening. I just want to revisit the fourth quarter organic number again. Sorry, maybe to beat a dead horse here. But like the 2.4% versus the 6.4% you did this quarter, and I went back and just was looking at your comps, so it’s definitely easier across some of them but by no means all of them. So that 400 basis point deceleration, is there any way you can just help kind of contextualize maybe the areas where we should be focused on as we think about modeling across those segments? And then in that same kind of question, Bill, I thought I heard you say there was maybe some bigger license fees that you pulled into this quarter around Wealth and Investment. Did that influence maybe this kind of fourth quarter, I guess, guidance around the organic number as well? Thanks.

Bill Stone, Chairman and CEO

Yes. Again, I’ll provide a brief overview, and I’ll have Rahul add more detail. We did have a really good Q3 for Wealth and Investment Technology and the Global Investor and Distribution Services business. So we’re not quite ready to determine if they can repeat that in Q4, but we’re optimistic they’ll have good quarters as well. So I think that contributes to the overall deceleration, while the comparison to Q4 2023 adds additional complexity.

Rahul Kanwar, President and COO

Yes. Bill, I would just add on that last point regarding comparison; if you look at 2023 by quarter, the first three quarters, we did approximately $1.360 billion in each quarter. In Q4, we did $1.411 billion. So Q4 was $45 million to $50 million higher than the other three quarters, and that’s really what you’re seeing. If you review our Q4 guidance in absolute numbers, we’re ahead of any other quarter this year. Our low point is $40 million ahead of our low point from the prior quarter. We feel good about where we are; most of this is related to the comparative issue.

Dan Perlin, Analyst

Got it. Okay. No, that’s really helpful. That’s really helpful. Thank you. Just on Blue Prism for the moment in terms of cost opportunities, I think you said you’re over 1,050 maybe kind of automated employees. Like where – how much further can we go with that? Are you expecting that to continue to be a meaningful contributor to the ability to have a more efficient cost structure as you go into next year, or are we kind of topping out that count a little bit for the organization? Thank you.

Bill Stone, Chairman and CEO

Yes, Dan, I think that’s a great question, and I think we are pretty enthusiastic about where we can go with our Blue Prism digital workers. Brian can elaborate more. But we’ve done a lot of acquisitions, so we have many systems. We prefer to have fewer systems and more digital workers. We indeed have plans to expand throughout accounting and finance. Nick Wright in the Global Investor and Distribution Services business has done a great job of deploying digital workers, as has Bhagesh Malde in our fund administration businesses and many others. We are quite optimistic about Blue Prism’s capabilities.

Brian Schell, CFO

I would just add that across, I’ll call it, more infrastructure to Bill’s point. We don’t want to create a digital worker for 10 different systems and then need to rebuild. We’re leveraging the broader consolidated system. To echo Bill’s point, we’re quite optimistic about what we’ll be able to leverage. Another point that we’ve made on prior calls is that the level of sophistication continues to increase over time as well regarding the impact that some digital workers can have as we mature as an organization and our learnings continue to improve regarding the utilization of these digital workers.

Bill Stone, Chairman and CEO

We are also integrating AI into this as well, including large language models, and other advancements that are enhancing Blue Prism’s capabilities.

Kevin McVeigh, Analyst

Great, thank you. Brian, I think you mentioned that you were carrying a higher-than-expected cash balance that you expect to deploy in Q4. Would that be for capital return, M&A? Just any thoughts around that?

Brian Schell, CFO

Yes. I wouldn’t necessarily assume M&A on a meaningful scale for Q4 within my outlook. However, we took an opportunistic stance on funding given the low rates and what we were able to raise relative to our current cost structure. We’re looking to effectively deploy that share repurchase alongside our operating cash flow and further debt reduction, utilizing that lower cost of funds. We plan to execute that in Q4.

Kevin McVeigh, Analyst

Got it. And then just obviously, the organic growth was really strong, but it sounds like there were – was it $8 million in total healthcare licenses that were pushed? So is the way to think about it that it would have been that much stronger if that was in there and now that could shift to Q4? Is that right?

Brian Schell, CFO

That’s correct.

Peter Heckmann, Analyst

Hi, good afternoon. Thanks for taking the questions. As regards Battea, I understand or at least I inferred from a comment you made at the Investor Day that, that revenue can be somewhat project-oriented. How should we think about modeling that? Is there something to consider in terms of seasonality, or should we just look to you guys in terms of one quarter out for guidance on how you expect that business to contribute?

Bill Stone, Chairman and CEO

Yes. First, it’s interesting that you call class action lawsuits projects. We would tend to classify them as lawsuits. So, you have the vagaries of the court system. But additionally, there is some seasonality in Battea, and Q4 tends to be the largest quarter of the four quarters. Some court cases have already been adjudicated. The courts must release payments on the class actions, and that’s when we receive our compensations. We’ll attempt to provide you all with as much insight into Battea as we can. They have 900 clients; we have 22,000. We believe there’s a chance for considerable extension of Battea’s business.

Peter Heckmann, Analyst

Okay. That’s fair, that’s fair. And then just in terms of thinking about the fund shareholder recordkeeping business and some of the acceleration, I guess I had speculated just looking at money market flows that the industry may have obtained a number of several million accounts just from flows back into money market accounts. Do you think that affected the GIDS’ organic revenue? And if so, is there a way to quantify it?

Rahul Kanwar, President and COO

I think most of our strength in the GIDS organic revenue really comes from building technology, which is attracting more and more customers, perhaps customers from slightly different segments. So we have many more wealth management firms; our biggest clients are wealth management firms, but we’ve got a number of new prospects. As we continue improving our call center capabilities and BPO capabilities, more and more of these customers are willing to outsource internal functions to us, which is a part of our growth. While macro trends in the market may have had some impact, most of it is really us expanding our product suite.

Bill Stone, Chairman and CEO

Also, I think it’s important for people to understand that many of the large-scale financial firms in the United States and, even more so, around the world have a very challenging time deploying large-scale new systems. Their options are to try to build a large system or hire a body shop like Tata or Infosys, which is fraught with challenges. Increasingly, an attractive solution for them is to outsource to us. We have world-class data centers, world-class developers, and world-class processes. As they see our offerings, they become increasingly intrigued.

Mike Infante, Analyst

Hey, it’s Mike Infante on for James. Thanks for taking our questions. I wanted to follow up on some of the comp commentary again. There’s a wealth of variance factors as we think about 2025 organic growth. Given that the comps will become progressively tougher, at least relative to the 4Q 2023 comp as we progress throughout the year, how should we think about some of the drivers that can push you to the midpoint or beyond next year? Thanks.

Rahul Kanwar, President and COO

In general, I would just reiterate that we feel like our business is strengthening, right? We haven’t completed the 2025 revenue planning and budgeting processes yet. But we feel that our recurring revenue in financial services can serve as a leading indicator of strength, indicating that the stable recurring revenue base is continuously growing and that can aid us in 2025.

Bill Stone, Chairman and CEO

To add on what Rahul said, if you observe Q3 of 2024 compared to Q3 of 2023, we increased revenue by $100 million. People look at these fintech companies and discuss them, but they did $200 million in revenue for an entire year. We generated an additional $100 million over just the Q3 period. We’re not claiming our business is strengthening because we anticipate a slowdown. We believe we can continue to accelerate. The deals we are pursuing are larger in scale, encompassing bigger organizations and a larger number of personnel that we'll support. This escalates the level of analysis and negotiations on contracts. Therefore, we remain cautiously optimistic, not retracting from the midterm 4% to 8% growth target.

Mike Infante, Analyst

That’s clear. Maybe just on Blue Prism. We’re seeing a lot of internal expense savings from a reduction in headcount. I would be curious to hear how you’re considering the net new opportunity for Blue Prism, specifically regarding some initiatives you may have in place to return that business to double-digit growth next year? Thanks.

Bill Stone, Chairman and CEO

Yes. We consider this a great question. We are implementing ample internal measures. Management transitions are in place, and we’re increasing the investment into Blue Prism. We’ve designated some of our top technologists to propel our efforts. We’re optimistic about what we can accomplish with Blue Prism and re-accelerating growth. We continue to secure positive assessments, like getting into the Magic Quadrant for our offerings.

Ella Smith, Analyst

Hi, this is Ella Smith from Alexei’s team. Thanks so much for taking our question. First, I was hoping you could speak to the strong growth in alternatives AUM. Can you remind us what’s driving that strong growth year-to-date and how do you think about the forward growth of alternatives?

Bill Stone, Chairman and CEO

We think primarily the strong growth in alternatives is based on effective management. Some might argue that the market is performing fairly well, right? The hedge fund industry typically achieves solid risk-adjusted returns. As you analyze our client base, almost all large-scale platforms are SSNC clients. Over the years, they have captured the majority of new capital flowing into hedge funds, as well as into private equity and now into private credit. Therefore, we think we’re well-positioned to continue benefiting from our clients’ success. We’re very focused on adding value, rolling out new technologies and processes, and supporting our international clients, particularly as they transition toward T+1 settlement. In the U.S., we’re moving to quicker settlement procedures, which will significantly reduce risk in the system, but the systems that facilitate this must be perfectly optimized. That’s a space where we excel.

Ella Smith, Analyst

That makes a lot of sense, Bill. Thank you. And for my follow-up, I’m sorry if I missed this, but I noticed the strong step-up in organic growth for Wealth and Investment Technologies. Could you please remind us what drove that? Was there a big deal or two signed there?

Bill Stone, Chairman and CEO

We had a strong Q3 in Wealth and Investment Technologies, up 10.9%, and we’ve closed a couple of large license deals in Q3 that significantly drove our organic revenue growth.

Operator, Operator

As there are no further questions at the queue at this time, I would now like to turn the call back over to Bill Stone for closing remarks.

Bill Stone, Chairman and CEO

Again, thanks to all of you for being on the call, and thank you to the analysts for asking insightful questions, which we appreciate. I do think that we’re optimistic about where our business is positioned, and we hope to talk to you again in 2025 and surprise you positively.

Operator, Operator

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