Earnings Call Transcript - SSNC Q4 2021

Operator, Operator

Thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the SS&C Technologies’ Fourth Quarter and Full Year 2021 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. It is now my pleasure to turn today’s call over to Justine Stone, Head of Investor Relations. Please go ahead, ma’am.

Justine Stone, Head of Investor Relations

Hi, everyone. Welcome and thank you for joining us for our fourth quarter and full year 2021 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, February 10, 2021. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today’s call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today’s earnings release, which is located in the Investor Relations section of our website. In the third quarter of 2021, we entered into a joint venture named DomaniRx LLC, in 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. I will now turn the call over to Bill.

Bill Stone, CEO

Thanks, Justine, and thanks, everyone, for joining. Our results for the fourth quarter are $1.296 billion in adjusted revenue, up 7.5%; and $1.28 in adjusted diluted earnings per share, up 13.3%. For the year, adjusted revenue was $5 billion and $589 million, up 8.1% and adjusted diluted EPS was $5.02, up 16.7%. Adjusted consolidated EBITDA was $522.9 million for the quarter and our EBITDA margin was 40.3%. Our fourth quarter adjusted organic revenue was up 6.9%, ahead of our expectations; our alternatives and Intralinks businesses continue to drive our top line growth, growing at 12.9% and 23%, respectively. As I mentioned in our earnings press release, the pandemic and its impact on the labor force have put pressure on our costs. Much of our R&D efforts are diverted towards automation and efficiency in our services business, and these productivity gains just counteract the pressure from higher labor costs. At the same time, the great resignation is drawing attention at the highest levels of fund companies, causing many to consider third-party administrators. This creates opportunity. We continue to see shifts in talent across the industry. Firms with in-house operations cannot hire talent fast enough. And our competitors are not able to replace talent or meet the needs of scaling their businesses. We see this phenomenon worldwide, and we expect it to be a catalyst for outsourcing services as well as clients being willing to invest in technology. 2021 was a record-breaking year for M&A, propelling our Intralinks business to new heights while our execution generated market share gains. Global M&A volumes topped $5 trillion for the first time ever, comfortably eclipsing the previous record of $4.55 trillion. Based on publicly announced deals, we gained 5% market share in the M&A market. Our current forecasts, based on the survey of over 300 dealmakers, show the majority expects the level of M&A activity to increase in 2022. SS&C generated net cash from operating activities of $1.429 billion for the 12 months ended December 31, 2021, up 20.6% or $244 million from 2020. We paid down $519.9 million of debt in 2021, and our leverage ratio stands at 1.72 secured and 2.69 total. Our shareholder-friendly capital allocation strategy remains a top priority. In 2021, we bought back 6.8 million shares at an average price of $71.74 per share, for a total of $487.9 million. We were restricted from buying back in Q4 2021, due to material nonpublic information related to the Blue Prism acquisition. In November, the Board approved a 25% increase in our quarterly dividend payout, now at $0.20 per share. We are still limited in what we can say regarding the Blue Prism acquisition. We’ve made good progress with regulatory approvals and expect to close in Q1 or Q2. For more background on this acquisition and information on our strategic rationale, please refer to our steam document. I will now turn the call over to Rahul to discuss the quarter in more detail.

Rahul Kanwar, President and COO

Thanks, Bill. Sales execution, market strength, and collaboration across our business units have been key drivers to this year’s performance. Our business performed extremely well and we made great progress on new technology, which will set us up for further success. We continue to focus on innovation and Algorithmics; our clients' front-office operations can now achieve nanosecond response times for pre-trade deal checks. Algorithmics integration with Singularity has led to new wins and increased pipeline. Chorus, our automated workflow solution, has released a new workforce optimization tool focused on in-office remote and hybrid management to improve productivity and provide insights. Newly created SS&C Trust Suite, combining Black Diamond and Advent under a single contract and commercial model, was sold to the first client. On the healthcare front, DomaniRx has been making great strides in building our cloud-native API-driven claims adjudication platform. Now I will mention some key deals for Q4. A top health insurance company chose Singularity outsourcing services for their investment accounting operations. An $8 billion AUM hedge fund chose a suite of global middle and back office services, citing our ownership of technology as a key component to the win. A premier financial services firm chose our mutual fund serve accounting and all serve solution to efficiently scale and grow their new business. A $4.5 billion AUM asset manager based in Kuwait chose a suite of Advent Geneva products. A $7.5 billion AUM trust company chose a suite of Advent cloud delivery products due to our overall solution for equity and fixed income. A New York-based hedge fund, with a firm-wide objective to move to the cloud, upgraded their trading operations to Eze Eclipse. The pension and investment arm of one of the Canadian provinces chose to upgrade to our newest investment accounting solution, Aloha. A large Malaysian insurer also chose Aloha and our vision reporting solution. I will now turn it over to Patrick to run through the financials.

Patrick Pedonti, CFO

Thank you. Results for the fourth quarter of 2021 were GAAP revenues of $1 billion and $294.2 million; GAAP net income of $250.9 million and diluted EPS of $0.94. Adjusted revenues were $1 billion $296.2 million, including the impact of the adoption of the revenue standard 606 for acquired deferred revenue adjustments or acquisitions. Adjusted revenue was up 7.5%. Adjusted operating income increased 10.6%, and adjusted EPS was $1.28, a 13.3% increase over Q4 2020. Revenue shows strong growth with strength across several product lines, including the alternative asset business, Advent apps, brokerage, and the Intralinks businesses. Adjusted revenue increased $90.1 million or 7.5% over Q4 2020. Our acquisitions contributed $10.5 million in the quarter. Foreign exchange had a favorable impact of $0.8 million or 0.1% in the quarter. Adjusted organic revenue increased on a constant currency basis by 6.9% in the quarter. Adjusted operating income for the fourth quarter was $507.5 million, an increase of 48.7% or 10.6% in the fourth quarter of 2020. Adjusted operating margins increased from 38% in the fourth quarter of 2020 to 39.2% in the fourth quarter of 2021, driven by revenue growth and cost controls. Expenses increased 4.2% on a constant currency basis. Acquisitions added $8.6 million in expenses, and foreign currency increased costs by $0.7 million. Adjusted consolidated EBITDA, defined in note three of our earnings release, was $522.9 million or 40.3% of adjusted revenue, an increase of $47.1 million or 9.9% from Q4 2020. Net interest expense for the quarter was $49 million and included $3.2 million of non-cash, amortized financing costs and OID. The average interest rate in the quarter for our credit facility, including on senior notes, was 3.09% compared to 2.99% in the fourth quarter of 2020. A reduction in the debt balance resulted in interest expense decreasing by $4.1 million or 8%. Adjusted net income, defined in note four of our earnings release, was $341.3 million and adjusted EPS of $1.23. The effective tax rate used for adjusted net income was 26%. Diluted shares increased to 267 million from 266.5 million in Q3 as a result of an increase in the average share price and option exercises. On our balance sheet and cash flow, we ended the fourth quarter with $564 million of cash and cash equivalents and $6 billion of gross debt. SS&C’s net debt, as defined in our credit agreement, which includes cash and cash equivalents of $139.5 million held by DomaniRx LLC, was $5.6 billion as of the end of the year. Operating cash flow for the 12 months was $1.429 million, a $244 million or 20.6% increase compared to 2020. For the full year, we allocated proportionally our free cash flow to both stock buybacks and debt payments. Treasury stock buybacks were $487.9 million for purchases of 6.8 million shares at an average price of $71.74 per share; and that compares to $227.7 million of treasury buybacks in 2020. In July 2021, the Board authorized a new stock repurchase program for up to a billion dollars in stock buybacks. We have approximately $837 million remaining on that authorization. Net debt payments were $519.9 million, compared to $738.2 million in 2020. We declared and paid $174 million of common stock dividends compared to $136.1 million last year, an increase of 27.8%. For the full year, we paid income taxes of $310.4 million, which compares to $244.4 million in 2020. Our accounts receivable DSO was down to 49.5 days compared to 50.8 days as of September 2021, and 48.4 days as of December 2020. Capital expenditures and capitalized software were $136.6 million, just about 2.7% of adjusted revenue compared to $106.4 million in 2020. Spending was predominantly for capitalized software and IT infrastructure. Option exercise proceeds for the year were $197.7 million for 5 million shares compared to $189.7 million for 6.3 million shares last year. Our consolidated EBITDA, which we used for our covenant compliance, was $2.66 billion and included $1.3 million of acquired EBITDA and cost savings related to acquisitions. Based on that data, our total leverage ratio was 2.69 times and our secured ratio was 1.72 times. On our outlook for the year, I will first cover some high-level assumptions. As we’re focusing on client services, we expect retention rates to continue to be in the range of the most recent results. Pending acquisitions are not included in our current 2022 guidance. We have assumed foreign currency exchange will be at the current levels. As a result, adjusted organic growth for the year will be in the range of 2% to 6%, and adjusted organic growth for Q1 will be in the range of 1.9% to 5.1%. On interest rates, we have assumed for the near term it will be 30-Day LIBOR plus the spread of 175 bps. In mid-year and the latter part of the year, we’ve assumed that three-month to six-month LIBOR plus the spread. We expect staff costs to increase due to continued wage inflation. We will manage our expenses during this period by controlling variable expenses to maintain our operating margins, and we will continue to invest in our business for capital expenditures of approximately 2.8% of revenue. As for free cash flow, we will continue to allocate both to debt pay down and stock buybacks, and we expect the adjusted tax rate to continue to be approximately 26%. For the first quarter of 2022, we expect revenue to be in the range of $1.258 billion to $1.298 billion. Adjusted net income will be in the range of $326 million to $343.5 million, and diluted shares will be in the range of $268.3 million to $267.8 million. For the full year of 2022, we expect revenue in the range of $5.130 billion to $5.330 billion, adjusted net income in the range of $1.375 billion to $1.445 billion, and diluted shares in the range of $269.5 million to $267.5 million. In our operating cash flow, we expect the full year to be in the range of $1.440 billion to $1.510 billion. And I’ll turn it back over to Bill for final comments.

Bill Stone, CEO

I’m proud to announce that we have completed our SS&C’s private cloud SOC-1. We are very close to our SOC-2 on our private cloud, which we expect to have within a week. These types of audits require an enormous amount of coordination and commitment. Not only have we delivered on our contractual commitments to customers, but our sales staff is busy showing prospects. We are one of the first companies with a SOC-1 and SOC-2 certified private cloud offering. Stay tuned as we roll out products and services which utilize this hyper-secure, robust, and lightning-fast technology. I’ll now open it up for questions.

Operator, Operator

Your first question comes from a line of Michael Young with Truist Securities. Your line is open.

Michael Young, Analyst

Sorry about that. I was having a bit of an issue with my view button as well. Thanks for taking the question. Just maybe wanted to start with the commentary about the staff cost increases and trying to offset those with some other cost savings. Just as we kind of look forward to next year with the revenue guidance in line with current expectations, should we think of the EBITDA margin as normal, kind of slight expansion year-over-year? Or do you think there will be some pressure on that given some of the dynamics with inflation?

Bill Stone, CEO

Well, I mean, we’re not immune. We are in businesses where our employees are highly sought after, and they’re a great team. The raises and bonuses are going to be larger and more frequent. But we also are going to have a lot of productivity gains, and we think that we will be able to maintain our margins in the 50 to 75 basis points range. If we get a little tailwind, maybe we’ll do a little better.

Michael Young, Analyst

That’s helpful. And maybe just as a follow-up, as we kind of think about maybe the business as a whole or specific business lines, how much does inflation play into contract pricing, and how much of a tailwind should we be expecting as a part of that next year?

Bill Stone, CEO

Our customers are sophisticated users of technology and financial accounting, and they’re aware that our costs increase, and they want to keep the same staff as we have on our clients. So, people understand when costs go up, prices have to go up. I think that is something that we are very cognizant of and have focused on for the last two or three years. Nobody likes price increases, but people certainly understand.

Operator, Operator

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

Surinder Thind, Analyst

Thank you. Bill, I’d like to start with a question about the revenue guidance for next year. It sounds like the adjusted organic growth is going to be in the 2% to 6% range for the full year. Can you put that in the context of Investor Day, where you talked about 4% to 7% longer term? Is it near-term headwinds that you’re seeing or clients thinking about delaying projects? How should we think about what we heard at Investor Day a few months ago versus what the guide is currently?

Bill Stone, CEO

We’re trying to be a little conservative but certainly be realistic. It’s a pretty uncertain time right now with speculation on interest rates and the regulatory environment constantly changing. We have full pipelines, and we’ve got great products coming out. We have some optimism, but we also want to temper that with realism.

Surinder Thind, Analyst

That’s helpful. And then, as a follow-up to the earlier question about the expected margin expansion this year, is there a bridge that you can provide us with there regarding the wage inflation? Are you able to pass most of that, or some of those costs on to clients? How should we think about that versus the productivity initiatives?

Bill Stone, CEO

We had a lot of hiring in the past year, and that’s a lot of training and education and a lot of administration. Costs are going to go up and they’re going to go up more in an inflationary environment. We believe we are going to compete hard and deliver superior service to our clients, and that’s the opportunity which will enable our margins to increase.

Rahul Kanwar, President and COO

In addition to the productivity and labor force dynamics that you covered, we still have opportunities in enterprise contracts that are coming up for renewal, and third-party software and discretionary spend. So in addition to obviously making sure that we’ve got highly motivated employees that are continuously innovating and improving our processes, we also keep looking at other areas to control costs, and all of those things together should result in some margin improvement.

Surinder Thind, Analyst

That’s helpful. Thank you.

Operator, Operator

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

Unidentified Analyst, Analyst

Thank you. Hi, this is John on for Pete. Just a quick one. Within fund administration, have you guys seen any change in the competitive dynamics over the last year?

Bill Stone, CEO

If you look at the league tables, you’ll see that APAC is buying everything in sight. They’ve done a number of acquisitions and my guess is those acquisitions are challenging. Beyond that, I don’t think there has been that much of a difference in our competitive landscape.

Rahul Kanwar, President and COO

I’d also say that with our growth rates accelerating, as we continue to build products and services and get more scale, our ability to compete and enhance that win rate improves each year.

Unidentified Analyst, Analyst

Got it. I know the acquisitions aren’t included in the current 2022 guide. But just wondering how we should look at the potential contribution of the Hubwise deals?

Patrick Pedonti, CFO

It’s Patrick. I think this is fairly small and might be around $8 million in revenue. And no shares might be around $20 million in revenue.

Unidentified Analyst, Analyst

Got it, thank you so much.

Operator, Operator

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

Andrew Schmidt, Analyst

Hi guys, thanks for taking my questions. I like the slide you have in the investor deck that highlights the good growth in the alternatives business in 2021. Can you talk about the expectation within the organic growth guidance for alternatives for 2022? And particularly, how you think market volatility could impact that business?

Patrick Pedonti, CFO

I think at the midpoint of our guidance, we expect the fund administration growth to be in the high single digits for 2022, which continues to be higher than historical levels.

Bill Stone, CEO

There has been volatility at different times, but our capital markets indicator has shown consistent growth since 2011. The talent in the alternatives business, matched with the broad investments and strategies they have, bodes well for the alternatives. We see nothing but increased interest from large-scale fund companies and institutions.

Andrew Schmidt, Analyst

Got it. That’s pretty constructive. I appreciate that. And then, in the fourth quarter and maybe in the first quarter, did Omicron have an impact on the sales pipeline or deal closing? Do you think it might have temporarily slowed things down, which could imply some pent-up demand in the first quarter into the second quarter?

Bill Stone, CEO

Everything is affected by Omicron or other COVID derivatives. However, the 6.9% organic growth in Q4 2020 was solid. Our focus remains on organic revenue growth, and even the acquisitions should be very additive to our offerings across the entire product line.

Operator, Operator

Your next question comes from Jackson Ader with JPMorgan. Your line is open.

Jackson Ader, Analyst

Great. Thanks for taking my questions, guys. The first one is on Blue Prism. Can you provide any initial thoughts on what the integration or strategy after closing might look like relative to some of the different acquisitions that you’ve made in the past?

Bill Stone, CEO

We’re really not in any position to comment on Blue Prism, as the London and UK takeover board frowns on us saying anything. We expect that should close in Q1 or Q2, and we’ll be happy to set up a call with you at that time.

Jackson Ader, Analyst

No big deal, I felt like I had to ask. Regarding retention rates and AUA, both kind of ticking down. How much impact do you think the low retention rates are having on assets versus market factors?

Bill Stone, CEO

We’re going to have some fluctuation with our AUA due to market values, as well as when certain clients launch new funds or shut down funds. I think we have a very strong business and it's getting stronger.

Operator, Operator

Your next question comes from the line of Chris Donat with Piper Sandler. Your line is open.

Chris Donat, Analyst

Good evening. Thanks for taking my question. Bill and Rahul, I just want to follow up on that last one about the AUA. Can you help me understand the sequential decline, particularly considering the significant increase in the S&P 500 in the fourth quarter? I’m looking for clarity on that decline?

Bill Stone, CEO

We’re going to have some fluctuation in this. Over time, we have really grown our PLA; for instance, in the first quarter of 2020, we were at $1.750 trillion, and now we’re up almost $500 billion in two years. While there was a drop due to a sovereign wealth fund with a lot of assets but few services, our pipelines are strong and our salesforce is effective.

Rahul Kanwar, President and COO

We had a nearly $50 billion AUA in a single customer that paid us less than a million dollars a year, so that’s one significant reason. The underlying metrics on new funds and performance-driven growth are in line with historical averages.

Chris Donat, Analyst

Okay, thanks.

Bill Stone, CEO

I would comment that we have very strong pipelines, and we have a very strong salesforce executing.

Operator, Operator

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

Kevin McVeigh, Analyst

Great. Thanks so much. I wonder if you could talk about the revenue guidance for 2022. It looks like the range is 2% to 6%. Last year, the range was about 200 basis points from the low to the high end. What accounts for the difference, and how should we think about the seasonality and year-end effects?

Patrick Pedonti, CFO

I think the wider range is due to the increased uncertainty. Last year, it was around $180 million; this year, it’s about $2 million, which shows how much more variability we anticipate.

Kevin McVeigh, Analyst

Can you remind us of the seasonality? How does it fall into the first quarter in terms of filings?

Bill Stone, CEO

There’s a little more tax and financial statement work in the first and second quarters than in third and fourth quarters. That’s the primary seasonality we have.

Rahul Kanwar, President and COO

That’s right, Bill. There tends to be a little bit more license in Q4.

Operator, Operator

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

Unidentified Analyst, Analyst

Hey, this is Jonathan on for James. Can you provide an update on the M&A environment from what you’re seeing? Are there attractive targets in the market?

Bill Stone, CEO

There are a number of companies that have come to market that we will have some interest in. The fintech sector has reset its pricing, allowing us more opportunities to look for attractive acquisitions. While we will push for organic revenue growth, acquisitions must have a higher hurdle to close.

Unidentified Analyst, Analyst

How do you think about the magnitude and timing of price increases through the year regarding wage inflation?

Bill Stone, CEO

We’re trying to figure out different ways to make SS&C a great place to work, in a competitive labor market. When costs go up, if you don’t raise your prices, margins will get hammered. We’re aware that it’s a challenging environment, but we have to execute to have satisfied clients.

Operator, Operator

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

Alex Kramm, Analyst

Hello, everyone. Regarding healthcare, you’ve sounded bullish on that business. Can you provide more details given the recent decline? And do you have updates about potential new partners in the Domani joint venture?

Bill Stone, CEO

We remain very optimistic about healthcare. We have a number of partners who are very interested, and we’ve made great progress on development. We hope to have positive announcements in healthcare over the next quarter or two.

Rahul Kanwar, President and COO

We are making great progress on the new system that we’re building and have lots of great support from our partners.

Alex Kramm, Analyst

And regarding the decline in that business?

Rahul Kanwar, President and COO

There’s some attrition on the medical claim side. So, Domani is very focused on pharmacy. We have some attrition and some we’ve known about, and we’re going to need to overcome that this year.

Bill Stone, CEO

Again, we are optimistic, and we believe we can overcome these hurdles.

Operator, Operator

Your final question comes from the line of Patrick O’Shaughnessy with Raymond James. Your line is open.

Patrick O’Shaughnessy, Analyst

On the M&A front, do you think getting regulatory approval for larger acquisitions is going to be incrementally more challenging going forward given the current stance of global regulators? Or are you likely to steer clear from extended antitrust reviews?

Bill Stone, CEO

We’re not anxious to have antitrust reviews. The more attractive an acquisition is, the more committed we will be to close it. We recognize the growing size of our company, and we need to maintain discipline in our M&A activities.

Patrick O’Shaughnessy, Analyst

Do you have any preliminary thoughts on how the SEC's proposal to increase disclosure requirements on private fund managers might offer either opportunities or threats to SS&C?

Bill Stone, CEO

I think it’s primarily an opportunity to help our clients with additional regulation, and we are optimistic in our ability to do that.

Operator, Operator

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

Bill Stone, CEO

Thanks everybody. We look forward to talking with you at the end of Q1. Stay healthy and stay safe. We’ll talk to you in 90 days or so. Thank you.

Operator, Operator

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