Earnings Call Transcript - SSNC Q1 2024

Operator, Operator

Thank you for joining us. My name is Christa, and I will be your conference operator today. I would like to welcome everyone to the SS&C Technologies First Quarter 2024 Earnings Conference Call. I will now turn the conference over to Justine Stone, Head of Investor Relations. Justine, you may begin.

Justine Stone, Head of Investor Relations

Welcome, and thank you for joining us for our first quarter 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 our 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 25, 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 thanks, everyone. Our first quarter results are record adjusted revenue of $1,435.8 million, up 5.3%, and our adjusted diluted earnings per share were $1.28, a 12.3% increase. Adjusted consolidated EBITDA was $556.8 million for the quarter, a record high for Q1, and our EBITDA margin came in at 38.8%. Our first quarter adjusted organic revenue growth was 4.7%, driven by strength in our alternatives, retirement, Intralinks and Ops adviser businesses. Our recurring revenue growth rate for Financial Services was 6.5%, which includes all software-enabled services and maintenance revenue. For the three months ended March 31, 2024, cash from operating expenses from operating revenue was $180.5 million. We paid down $79.9 million in debt in Q1 2024, bringing our net leverage ratio to 2.95x and our net secured leverage ratio to 2.02x. We bought back 800,000 shares for $52.9 million at an average price of $63.24. The internal deployment of Blue Prism digital workforce across SS&C continues to go well. The 150 basis point year-over-year increase in our EBITDA margin can be attributed in large part to this initiative. A recent Forrester study found an average SS&C Blue Prism client saw a return on investment figure of 330% over 3 years. The key benefits include business growth, improved productivity, compliance cost avoidance, and improved employee experience and retention. As one of the largest users of Blue Prism technology, we are experiencing these results firsthand. Earlier this month, we held our first Deliver Europe conference, which was held at the Fairmont in Windsor in the U.K., hosting over 250 clients. The enthusiasm and energy over a two-day event was evident, and we've received universal positive feedback.

Rahul Kanwar, President and COO

Thanks, Bill. Our business had a strong quarter with notable strength in Intralinks, retirement, and wealth and investment technologies. We saw improvement in software purchasing and long-term renewal decisions in Q1, which positively impacts our software businesses. This past quarter, we combined our Institutional Investment Management or I&IM business with wealth and investment technologies led by Karen Geiger and Steve Leivent. This change allows us to align several of our software products and services geared toward banks, insurance companies, and wealth and asset managers. Our objectives are to enable accelerated innovation, take advantage of scale to deliver enterprise solutions, and benefit from a consistent sales and marketing process. We also combined our retirement business with global investor and distribution solutions in order to deliver a seamless customer experience to our shared clients and, once again, take advantage of greater scale and resources. Initial feedback from our customers on these changes has been very positive. We continue to progress on optimizing our cost base and strengthening our offering through the use of Blue Prism and other AI and automation technologies. In our Fund Services business, notable capabilities include intelligent automation that processes over 2 million loan notices each year, enabling customer interaction and support requests through our internally developed large language models and a variety of other advanced protocols. I will now turn it over to Brian to run through the financials.

Brian Schell, Chief Financial Officer

Thanks, Rahul, and good day, everyone. As noted in our press release, our Q1 24 GAAP results reflect revenues of $1.35 billion, net income of $158 million and diluted earnings per share of $0.62. As Bill noted earlier in the call, our adjusted revenues were a quarterly record of $1.436 billion, up 5.3%, and adjusted diluted EPS was $1.28, up 12.3% versus Q1 '23. Adjusted diluted EPS includes $0.03 in dividend income received on investments previously excluded from adjusted earnings. Going forward, reported adjusted diluted EPS and guidance will include dividend income. The adjusted revenue quarterly increase of $72 million was primarily driven by incremental revenue contributions from alternatives and Intralinks. Acquisitions contributed $3 million, and foreign exchange had a favorable impact of $6 million. As a result, adjusted organic revenue growth on a constant currency basis was 4.7%. Our core expenses increased 1.9% or $16 million excluding acquisitions and on a constant currency basis. Adjusted consolidated EBITDA attributable to SS&C, defined in Note 3 in the earnings release, was $557 million or 38.8% of adjusted revenue, an increase of $48 million or 9.4% from Q1 '23. The 38.8% EBITDA margin reflects a year-over-year improvement of 150 basis points. This margin expansion reflects the positive impact of both revenue growth and disciplined expense management. Net interest expense for the first quarter of '24 was $116 million, an increase of $4 million from Q1 '23. The average interest rate in the quarter for the amended credit facility, including the senior notes, was 6.86% compared to 6.21% in the first quarter of '23. Adjusted net income, as defined in Note 4 in the earnings release, was $324 million, and the adjusted diluted EPS was $1.28. The effective tax rate used for adjusted net income was 26%. Despite the quarterly share repurchase activity, a higher average stock price drove the diluted share count up to 253.3 million from 252.1 million for Q4 '23. SS&C ended the first quarter with $413 million in cash and cash equivalents and $6.7 billion in gross debt. SS&C's net debt, as defined in our credit agreement, which excludes cash and cash equivalents of $95 million held at DomaniRx, was $6.4 billion as of March 31. Our last 12-month consolidated EBITDA used for covenant compliance was $2.156 billion as of March 2024. Based on net debt of approximately $6.4 billion, our total leverage ratio was 2.95x, down from 3.05x at year-end. Our secured leverage ratio was 2.02x as of March 31. The $3.5 billion of our term loan B matures in April 2025, and we are currently evaluating our debt financing options, looking to go to market in the near future. As we look forward to the second quarter and the remainder of the year with respect to guidance, note that we will remain focused on client service and assume that retention rates will be in the range of our most recent results. We will continue to manage our expenses with a disciplined approach by controlling and aligning variable expenses to ensure efficiency, increasing productivity to improve our operating margins, leveraging our scale, and effectively investing in the business through marketing, sales, and R&D to take advantage of future growth opportunities. Specifically, we have assumed foreign currency exchange will be at current levels, interest rates will remain at current levels with the potential for a couple of short-term rate declines in late 2024, and our refinancing will not materially impact our interest rate expense but is subject to varying market conditions. The GAAP tax rate of approximately 26% on an adjusted basis is unchanged from prior guidance. Capital expenditures are expected to remain at 4.3% to 4.7% of revenues, which is unchanged from prior guidance and a similar historical weighting of share repurchases and debt reduction. For the second quarter of '24, we expect revenue to be in the range of $1.412 billion to $1.452 billion, adjusted net income in the range of $295 million to $311 million; interest expense, excluding amortization of deferred financing costs and original issue discount, in the range of $112 million to $114 million; diluted shares in the range of $253 million to $254 million; and adjusted diluted EPS in the range of $1.16 to $1.22. For the full year 2024, we are raising revenue guidance by $7 million, expecting revenue to be in the range of $5.695 billion to $5.855 billion, adjusted net income in the range of $1.242 billion to $1.322 billion, diluted shares in the range of $252 million to $255 million, adjusted diluted EPS in the range of $4.93 to $5.17, and cash from operating activities to be in the range of $1.302 billion to $1.382 billion. Our updated 2024 guidance reflects our strong results in the first quarter with a continued positive outlook for the remainder of the year, recognizing our cost discipline and expected margin expansion over the course of the year.

Bill Stone, Chairman and CEO

Thanks, Brian. I'd like to take this opportunity to thank a long-term director Mike Daniels for his dedication and support. Mike has been on our board for over 10 years and will not stand for reelection. He's been an important adviser during this time, seeing SS&C grow from $700 million in revenue to over $5.5 billion. We wish him well in his future endeavors. We've had a strong start to 2024, and we are working hard to maintain this momentum. I'd now like to open it up to questions.

Operator, Operator

Your first question comes from Dan Perlin from RBC Capital Markets.

Daniel Perlin, Analyst

Just a quick question on the organic growth trends. They look like they continue to improve here. And I'm just wondering if you can maybe help parse this out given the current environment we're in and maybe some of these incremental kind of go-to-market strategy changes or maybe fine-tune end points. So how much of the improvement and maybe expected improvement going forward is in kind of just overall demand picking up, Bill, versus kind of sales execution or product realignment and maybe some of this go-to-market motion that's changing for some of these other business segments?

Bill Stone, Chairman and CEO

Well, I think, Dan, and nice to hear from you. We have done an awful lot of development work in our businesses, and we've created a number of new solutions for our different clients, and that's getting traction. Particularly our trust product, OmniTrust that we've married to our Black Diamond. Now wealth advisers can also handle trusts, which is important as their clients start to move money to their children and others. I think that's been a big opportunity for us. And we've also done a number of other things where our delivery to our clients has been improved, and our execution on the implementations has also improved. So I think the combination of those things, some more discipline on the pricing, and we're still winning. We're still winning big deals. And as they go live, I think our financial picture will look brighter as we go through the year.

Daniel Perlin, Analyst

Yes, that's great. I have a quick follow-up regarding the $0.03 in the quarter that relates to dividend income. Was this anticipated in your original guidance for 2024? If it wasn't, what is currently included? Also, could you explain the mechanics behind this? I might have missed it, sorry.

Brian Schell, Chief Financial Officer

Yes, this is Brian. The $0.03 was not part of the original guidance. As we reviewed the relevant components of adjusted earnings, we determined that these investments were appropriate to include last year. For clarity, we incorporated this into last year's EPS numbers as well, allowing for an apples-to-apples comparison. Moving forward, we believe it's important to provide any visibility or clarity we can to the numbers.

Daniel Perlin, Analyst

So should we be using $0.03 a quarter as kind of the run rate? I think the year-over-year comparison was adjusted, but I just want to make sure I'm not getting over my skis or over-adjusting or under-adjusting.

Brian Schell, Chief Financial Officer

The big I'd say, contribution to the year is actually just the first quarter. I would say for the remainder of the year, it probably rounds to probably another $0.01 overall for the next three quarters. So it's not a huge adjustment, but we just thought it was relevant given how we reflected the rest of our investments and various interest income items to be included in our overall adjusted results.

Daniel Perlin, Analyst

Got it. And just to be clear, it's $0.01 for the remaining 3 quarters, not $0.01 per quarter.

Brian Schell, Chief Financial Officer

Correct.

Operator, Operator

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

Andrew Schmidt, Analyst

Bill, Rahul, Brian. So a quick question on the revenue outlook. It looks like the upper end came down. Just curious what drove that and how that might tie into the organic growth expectations for the remainder of the year?

Rahul Kanwar, President and COO

Andrew, I think we're still as optimistic about the remainder of the year as we were at the beginning. The only change is that as we get closer, the ranges become tighter and we are able to provide a bit more precision. So that's really all that's going on. The midpoint is actually higher than when we last provided guidance.

Andrew Schmidt, Analyst

Got it. Perfect. Perhaps we could discuss the visibility on organic growth, as it's an area that raises many questions. Could you describe how you develop that and what is currently lined up for organic growth? How would you rate those opportunities: high, moderate, or low?

Bill Stone, Chairman and CEO

Yes. I would say right now, as of April 25, that we're probably stronger than cautiously optimistic. We tend to be accountants cautiously optimistic, which is kind of wildly optimistic for us. So I think the natural conservatism sometimes gets the best of us. But we have a lot of business that we sold in the first quarter that we have not recognized yet. But it's already sold, and we've already got some of the cash coming in. We think we have lots of opportunities.

Operator, Operator

Your next question comes from Alexei Gogolev from JPMorgan.

Alexei Gogolev, Analyst

Bill, could you elaborate on the combination of divisions that was discussed? What does that mean in terms of cross-sell opportunity, R&D investments into products to ensure that they speak better to each other? And perhaps, is there any room for margin upside from the combination of those divisions?

Bill Stone, Chairman and CEO

Yes. That's a great question. We feel that we're up 27,000 people. We have 140 offices in 40 countries; we deliver over 100 products and services. So it is operating a large business. The more we can concentrate on similar products in the business units that are most apt to create new products, create new service, create ways in which to deliver those products and services and then also be able to leverage all the corporate services that we have – whether it's marketing and sales, different implementation teams, all of that type of stuff – is much more effective when you take asset management and products for large-scale asset managers and put all those products under Karen Geiger and Steve Leivent, for instance, then also have go-to-market strategies for each one of those large segments. I think the same thing is true when we took retirement and put it in with the global distribution or the global investor and distribution business. I think we get leverage. As Rahul said in his remarks, we get some leverage, some scale, and some better chances to cross-sell, and we're, again, pretty optimistic about the results of that.

Alexei Gogolev, Analyst

And Brian, could I also ask you a quick question about the components within the Alternatives division? What was the growth of private markets in the quarter?

Brian Schell, Chief Financial Officer

The private market side grew around 10%.

Operator, Operator

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

Peter Heckmann, Analyst

I have several related questions regarding the Healthcare segment. Can you provide an update on the progress of DomaniRx and any initial conversions that have taken place this year? I'm also interested in whether the malware attack on Change Healthcare, which is one of the prescription processing hubs, had any impact on the healthcare business during the quarter. Lastly, do you anticipate the healthcare segment's revenue will be higher or lower for the year?

Bill Stone, Chairman and CEO

Yes, that's pretty insightful, Pete. I could talk to you. Yes, Change Healthcare has been a nice supplier of revenue to us that you'll start seeing in the second quarter, somewhat in large chunks. We've already sold it. We're already delivering; we have a number of pretty large-scale clients, including some of the large-scale drug manufacturers. So we're optimistic about where we can go with this. DomaniRx has had an upgrade throughout the four months it's been in production. We get almost no defects, great client feedback, and we have lots of new business that's going to go on at DomaniRx over the next eight or nine months, and we're optimistic about our pipeline.

Peter Heckmann, Analyst

Great. Great. And so just in terms of like the revenue growth for the year, do you think we can get back to positive revenue growth this year? Or should we be thinking maybe more 2025?

Bill Stone, Chairman and CEO

I think we'll be positive this year. And whether we do $295 million or $300 million, probably somewhere in that vicinity. The one great thing about healthcare is that there's lots of revenue to be had. So you just need to go execute, and if you do that, you're in pretty good shape.

Operator, Operator

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

Jeffrey Schmitt, Analyst

Are you still getting price increases kind of above normal in any of your businesses? And how much did pricing impact organic growth in this quarter and the last?

Rahul Kanwar, President and COO

Yes. I think as we're getting more disciplined, as Bill pointed out, and more methodical about this process, what we've also been able to do is put the price increases in the contracts on an automatic basis. So it's not as much of an effort, and everybody expects them. In 2023, we think we got about $150 million in price increases. Our expectation for 2024 is probably a similar number. There's a little bit of art as much as science with the renewals and what constitutes price versus upsell and those kinds of things, but that's about what we would expect for the year.

Jeffrey Schmitt, Analyst

Okay. Regarding the alternatives organic growth, I believe it was 5% or 6% for the quarter. You noted that private markets experienced a slowdown, which had previously been growing over 20%, but fell down to 10%. What led to that decrease? I recall you were receiving 5% or 6% price increases there last year, so what caused that slowdown?

Bill Stone, Chairman and CEO

Yes. I would make sure that we all understand the jargon we're using. When you talk to private markets, that's a number of different flavors of private. So, private credit in the first quarter grew significantly more than 10%. But when you aggregate it with private equity and maybe our real estate business, then it all averages out to about 10%. But private credit has been quite strong.

Rahul Kanwar, President and COO

Yes. And maybe another way to look at it is if you look at the AUA change, you'll see we're at $2.4 trillion. So there's really nothing in the underlying growth of any one of those areas where it's not growing at least as well as it was before. As a matter of fact, we think our hedge fund business is growing better than it did last year.

Operator, Operator

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

James Faucette, Analyst

Just wanted to quickly check on from a capital allocation perspective and M&A pipeline. Bill, there's clearly capacity here for some leverage. And you called out a senior hire to assist with M&A last quarter. What does the deal pipeline look like right now? And what kind of assets should we think about you targeting?

Bill Stone, Chairman and CEO

Well, I don't think we're looking anywhere differently than where we are today. You guys at Morgan Stanley and a number of others, UBS advised AssetMark would have been a target for us as well. I think companies involved in fund administration, we still buy, and buy pretty quickly. I think there are opportunities, again, we've probably done 5 or 6 lift-outs, and I think we would continue to do those.

James Faucette, Analyst

Got it. Appreciate that commentary. And then I wanted to ask a technology-related question, especially tied to the transfer agency business. Some of the asset managers we talked to or looked at their transcripts and other public commentary are speaking to the impacts of tokenization and their ability to drive down transfer agency costs. Do you think that's more anecdotal in nature? Or how should we be thinking about the medium to long-term growth outlook for your transfer agency business more broadly?

Rahul Kanwar, President and COO

So we're seeing a little bit of that. Most of what we're seeing is clients piloting certain things that they want to do in a tokenized format, and we have a couple of clients that we're collaborating with. But right now, it does not have a significant impact on our business. Honestly, it's probably too early to even view it as any kind of a significant trend.

Bill Stone, Chairman and CEO

And the other thing I think, James, is that what we have done is take our transfer agency and our capabilities and alternatives administration. Now retail, we combined those two things, and we're not selling you one or the other. We're selling them as a bundle. So if you just want our transfer agency, and you want to give your administration to somebody else, we're not taking that business. That discipline and that ability to have a product that is superior and then making sure that we are the beneficiaries of that superior technology when we sell it has been a pretty good marketing strategy for us as well.

Operator, Operator

Your next question comes from the line of Kevin McVay from UBS.

Kevin McVay, Analyst

Great, and congratulations on the results. Anything to call out? I mean the Intralinks growth was really, really terrific; I think it was 23%, obviously a big, big increase. Anything to call out that drove that?

Bill Stone, Chairman and CEO

I really think that they continue to innovate in their primary virtual data room business. They add AI into that. They do really smart searches, and they brought out a redacting agent to help you get through so much data and so much paper in those data rooms. It's important to have ways to collate it and search it quickly. So that's been pretty effective, and it's been very resilient. We're optimistic for all of 2024, and we don't see things slowing down even after that.

Kevin McVay, Analyst

That's super helpful, Bill. And then just the AUA; if my math is right, it looks like it increased 3% sequentially versus flat sequentially last year and almost double percentage increase sequentially over the last couple of quarters. Anything to call out there? Because obviously, it hasn't been a great market, and it seems like there's been some real nice incremental growth there.

Rahul Kanwar, President and COO

There's been pretty broad-based growth across all of our alternatives, right? So in the hedge funds, we did see some market benefit, but we also saw the benefit of winning a number of new deals. Private markets, as Bill just said, continues to be really strong for us, and we've added a number of clients there. The AUA doesn't correlate always exactly with revenue because yields are different depending on the guidance of funds and assets we win. But overall, the trend is pretty positive.

Operator, Operator

That concludes our question-and-answer session. I turn the call back over to Bill for closing remarks.

Bill Stone, Chairman and CEO

Again, we appreciate all of you being on the call today. Again, we feel good about the first quarter and recognize that's 25% a year. So we've still got work to do, and we're hard at it. We appreciate the support and see you in 90 days.

Operator, Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.