Earnings Call Transcript - SSNC Q4 2023

Operator, Operator

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the SS&C Q4 and Full Year 2023 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, Investor Relations with SS&C. And with that, Justine, you have the floor.

Justine Stone, Investor Relations

Welcome, and thank you for joining us for our Q4 2023 Earnings Call. I'm Justine Stone, Investor Relations for SS&C. 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, February 13, 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.

William C. Stone, CEO

Thanks, Justine, and welcome everyone to our fourth quarter results, which are record adjusted revenue of $1.412 billion, up 5.5%, and our adjusted diluted earnings per share were $1.26, up 8.6%. Adjusted consolidated EBITDA was $563 million for the quarter, the highest in our history, and our EBITDA margin was up to 39.8%. This is a 300 basis point increase from the second quarter of 2023. Our fourth quarter adjusted organic revenue growth was 4.5%. The fourth quarter revenue acceleration was driven by strength in our alternatives, retirement, and Intralinks businesses. We also saw acceleration in GIDS, Advent, and Eze businesses. Our recurring revenue growth rate for financial services was 6.9%, which includes all software-enabled services and maintenance revenue. This is a sequential increase from 5.9% in Q3. For the year, total organic growth was 2.8%, and financial services recurring revenue growth was 4.9%. Our financial services revenue retention remains over 97% on the last 12-month basis. In 2023, SS&C generated net cash from operating activities of $1.215 billion. We paid down $150 million in debt in Q4 2023, bringing our net leverage ratio to 3.05 times and our net secured leverage ratio to 2.1 times. We bought back 2.4 million shares for $131 million at an average price of $54.74 per share. For the year, we have allocated $375 million towards debt pay down and $472 million towards stock buybacks. We anticipate a similar higher focus on share repurchase in 2024. On January 1, DomaniRx, our brand new pharmacy benefits platform, went live with our Phase I drug discount clients. We have processed 15 million claims in January, over 10% more than we had originally anticipated for the month of January, and our response time of under one second is quite better than industry standard. We project we will process 45 million claims by the end of the first quarter. Customers who have migrated have touted the cutover to Domani as frictionless. Our second release of DomaniRx is scheduled for June 1, 2024, and will include full commercial Medicare and Medicaid functionality. We are pleased with the successful launch of DomaniRx, and we look forward to adding new clients in the second half of 2024. We also completed a major retirement system implementation with one of the world's largest insurance companies. Regulatory change has driven a lot of activity around our retirement income solution and rollovers. We look forward to capitalizing on this opportunity. I'll now turn the call over to Rahul, to discuss the quarter in more detail.

Rahul Kanwar, President and COO

Thanks, Bill. In Q4, we saw acceleration in revenue and healthy margin expansion. Notably, alternatives grew 7.8%, Intralinks grew 18.6%, and Retirement grew 12.8%. Our EBITDA margin exit rate was 39.8%, a result of higher revenue growth, cost controls, and our digital worker initiative. For the year, we obtained approximately 2,000 full-time equivalents in digital worker productivity, which we expect to yield $100 million savings annually. We are optimistic about our ability to continue to drive additional benefit from digital workers and other automation strategies. We're seeing a lot of opportunities across the financial services industry as large firms look for ways to drive down costs within their back-office operations while improving their front-end technology. These market dynamics can be beneficial for our GIDS, Retirement, and Alternative Fund Services businesses. Across the company, we have focused on offering comprehensive solutions to our customers comprised of multiple products and services in an integrated and holistic way. As one example, in 2023, we signed 12 Trust Suite clients, a new platform for banks and trust companies combining back office and regulatory reporting from Innovest, the front office experience of Black Diamond, and our CRM capabilities through Salentica. Similarly, the integration of Eze, Eze Eclipse, and Advent Geneva has been positively received. We've also signed over 70 new Eclipse clients in 2023, bringing the total number of clients on Eze Eclipse to over 250. We are gaining momentum and have an opportunity to increase market share from here. I will now turn it over to Brian, to run through the financials.

Brian Schell, CFO

Thanks, Rahul. As noted in our press release, our Q4 2023 GAAP results reflect revenues of $1.412 billion, net income of $194 million, and diluted earnings per share of $0.77. And as Bill noted earlier in the call, our adjusted revenues hit a record level at $1.412 billion, up 5.5%. Adjusted EBITDA also hit a record at $563 million, an increase of 8.5%, or $44 million, and adjusted diluted EPS was $1.26, an 8.6% increase over Q4 2022. The adjusted revenue increase of $73 million over Q4 2022 was primarily driven by the incremental revenue contributions from Alternative, Intralinks, and GIDS. Our acquisitions contributed $4.1 million, or approximately 30 basis points. Foreign exchange had a favorable impact of $11 million, or 80 basis points. As a result, adjusted organic revenue growth on a constant currency basis was 4.5%. Our cost structure has been impacted by general inflation, higher personnel costs, and increased professional fees compared to 2022. However, by maintaining a cost-disciplined approach and the use of digital workers, our core expenses only increased 2%, or $17 million, excluding acquisitions and on a constant currency basis. Acquisitions added $5 million, and foreign currency added an additional $8 million of expenses. With the combination of our revenue growth outpacing our expense growth, adjusted EBITDA margin of 39.8% reflects both a sequential and year-over-year expansion of 70 basis points and 110 basis points, respectively. Net interest expense for the fourth quarter of 2023 was $119 million, an increase of $14 million from Q4 2022. The average interest rate in the quarter for the amended credit facility, including the senior notes, was 6.93% compared to 5.64% in the fourth quarter of last year. Adjusted net income was $317 million and adjusted diluted EPS was $1.26. The effective tax rate used for adjusted net income was 26%. Share repurchases of 2.4 million helped to drive the diluted share count down to 252.1 million from 253.9 million in Q3. While Q4 reflects strong results, our 2023 annual earnings per share reflects a slight decline of $0.04 per share compared to last year. The single biggest contributor to this decline was the impact of the rise in short-term interest rates, which increased the interest expense on our debt by approximately $164 million, or nearly $0.47 per share on an after-tax basis, assuming a 26% tax rate. SS&C ended the fourth quarter with $432 million in cash and cash equivalents and $6.8 billion in gross debt. SS&C's net debt, as defined in our credit agreement, which excludes cash and cash equivalents of $100 million held at DomaniRx, was $6.4 billion as of December 31. Our year-end total leverage ratio was 3.05 times, and our secured leverage ratio was 2.1 times. As our term loans B-3, B-4, and B-5, totaling approximately $3.5 billion, approach maturity in April of 2025, we anticipate refinancing them in the near term. Also, as previously noted, SS&C generated net cash from operating activity of $1.215 billion, an increase of 7.1%. The increase reflects the incremental earnings as well as improved working capital management. As we move into 2024 and establish our guidance, note that we will continue to focus on product innovation and enhancements as well as client service. We assume that retention rates will continue to be in the range of our most recent results. We will also continue to manage our expenses with a cost-disciplined approach by controlling and aligning variable expenses to ensure efficiency, rationalizing our real estate footprint, increasing productivity to improve our operating margins to leverage our scale, and effectively investing in the business through marketing, sales, and R&D to take advantage of future growth opportunities. For the full year 2024, we have assumed adjusted organic revenue growth in the range of 2.7% to 6.3%, with foreign currency exchange rates consistent with 2023 levels. Short-term interest rates are expected to remain flat through the first half of the year, with small declines in the second half. We assume the GAAP tax rate of approximately 26% on an adjusted basis, which is unchanged from the prior year. Capital expenditure is expected to be consistent with 2023 at 4.3% to 4.7% of revenues, with a continued slight emphasis on share repurchases similar to how we allocated capital in 2023. As a result, for the full year 2024, we expect revenue to be in the range of $5.668 billion to $5.868 billion. Adjusted net income is expected to be in the range of $1.221 billion to $1.321 billion, with interest expense, excluding amortization of deferred financing costs and original issue discount, in the range of $438 million to $448 million. Diluted shares are expected to be in the range of 252.7 million to 255.7 million, with adjusted diluted EPS in the range of $4.85 to $5.15, and cash from operating activities to be in the range of $1.292 billion to $1.392 billion. For the first quarter of 2024, we expect revenue to be in the range of $1.397 billion to $1.437 billion, adjusted net income in the range of $300 million to $316 million, interest expense excluding amortization of deferred financing costs original issue discount in the range of $113 million to $115 million, diluted shares in the range of 253.2 million to 254.2 million shares and adjusted diluted EPS in the range of $1.19 to $1.25. Now, I'd like to turn it back over to Bill for final comments.

William C. Stone, CEO

Thanks, Brian. I'd also like to welcome Debra Walton-Ruskin as the newest Director on our Board. Ms. Walton-Ruskin has had an impressive career at the London Stock Exchange Group, Refinitiv, Thomson Reuters, and Thomson Financial. Her expertise in fintech, global market, executive sales leadership, and financial data fits well with SS&C's strengths and focus. We look forward to collaborating with Debra. We have recently recruited a Senior Executive, Ezra Baylin, who will head up Mergers and Acquisitions. Ezra has the experience and expertise to guide us in our M&A pursuits. Q4 was a good quarter and we look forward to reporting throughout 2024. I now will open it up for questions.

Operator, Operator

Thanks, Bill. Okay. It looks like our first question today comes from the line of Dan Perlin with RBC Capital Markets. Dan, please go ahead.

Dan Perlin, Analyst

Thanks. Good evening. Bill, I wanted to ask you a question about what's embedded in guidance as you think about the jumping-off point for organic growth, at 3.5% in the first quarter, but then for the full year, clearly ramping to 4.5%. So, I'm just wondering what kind of connects the dots to that acceleration as you think about your line-of-sight going into the back half of the year?

William C. Stone, CEO

Hi, Dan. Hey, we got a lot of stuff accomplished in the fourth quarter of 2023 and that gives us a lot of confidence going into 2024. We kind of said in the remarks about a large insurance company going live on our track system, and that's going to drive a lot of revenue. We also completed another large retirement system in 2023, and we've been winning an awful lot of the major hedge fund launches and conversions. So, we have a lot of stuff that we think are in our pipeline, and we think as that rolls through that we will accelerate throughout the year to increase organic revenue growth.

Dan Perlin, Analyst

That's great. Just a quick follow-up on Alternatives. Again, another strong quarter, and you called out private markets continuing to be a key contributor to that. I guess a couple of things. Is there a way to kind of contextualize how big that has become embedded in Alternatives, and then in that same vein, as private equity continues to move down private credit, are you having, or have you seen more success potentially as we think about this year in terms of signing up more within the PE side of the equation? Thank you.

Brian Schell, CFO

Dan, I think the whole fund business, hedge funds, private equity funds, fund-to-funds is about close to $1 billion in revenue. And the private market side, private equity and private credit at OWL is probably pushing $350 million. So, you're getting close to 35% to 40% of our revenue in the funds business coming from private. And as you've seen, as well as everyone else has seen, this tremendous amount of money going into private debt, private credit, everything private, and they get better returns. I don't think that's going to change, and we think we're very well-positioned.

Operator, Operator

All right. Thanks, Dan. And our next question comes from the line of Surinder Thind.

Surinder Thind, Analyst

Thank you. For the first question, just in terms of as you think about DomaniRx and as you look ahead through the rest of the year, is there anything within guidance that you've included there? And how should we think about the progression or the uptake of the business as you think about it this year versus next year?

William C. Stone, CEO

Well, I think the rollout was as close to flawless as any of the rollouts we've had, which bodes well for word-of-mouth going across the health industry is pretty vibrant, and an awful lot of people talk. We have great relationships across all kinds of healthcare organizations. As we said in my earlier remarks, the 15 million claims that we processed in January were 10% more than we anticipated, which would be 1.5 million claims. So, we think there's some embedded growth in there, and then we think we're going to add clients throughout the year. As we roll out commercial and then Medicaid and then Medicare, it is increasingly going to be imperative for all kinds of claims processors and other healthcare companies to get into new technology. You can't run this on spreadsheets, and you really can't run this on technologies that are not flexible enough. There's a lot of stuff coming out in 2025 on HIPAA and other regulations, and I don't think that 40-year-old, 50-year-old, 60-year-old technology is going to save the day. The brightest minds that are running these big places are going to come to us and recognize that we can streamline their operations, save them a lot of money, and we can make a lot of money in the process.

Surinder Thind, Analyst

Got it. It sounds like it obviously has a positive outlook, but was any of that included within the guidance, or is that all upside at this point?

William C. Stone, CEO

I think as far as healthcare is concerned, we were measured. We think that, if anything, we have upside to that. We're so young as a management team; we have a lot of time to really execute on our strategy so that we can reap the benefit.

Surinder Thind, Analyst

Got it. And then just as a follow-up here, just on the margin part of the story, obviously great execution. Have you thought about the target for digital workers as the year progresses, and ultimately where you might be able to get to? Obviously, there's always going to be some level that you can do in any given year, but is there another ramp coming at some point, or is it more of a smooth curve in terms of the adoption of the number of digital workers from here on out?

William C. Stone, CEO

I would just say that the digital worker initiative at SS&C is a very focused, very managed process, and everybody understands that they need to get on board. They understand that if they don't get on board pretty quickly, then they don't have to worry about it. We're pretty blunt about those kinds of things, and it's been effective for us. As they embrace it, they go, 'Wow, I should have done this sooner.' Those kinds of things lead the horses to water. That's what we've done, and we have a lot of opportunities going forward. The technology keeps getting better; it is capable of more things, and as we integrate large language models into the process, it will only get better. We're optimistic about where we go from here. We've moved from about 36.8% in the second quarter to 39.8% in EBITDA margin in the fourth quarter. We're looking forward to continuing to be able to expand our margins and improve our customer service and satisfy more customers.

Surinder Thind, Analyst

Excellent. Thank you very much, Bill.

Operator, Operator

All right. Thank you for the question, and our next question comes from the line of Andrew Schmidt with Citi. Andrew, please go ahead.

Andrew Schmidt, Analyst

Hey, Bill, Rahul, or Brian, good to speak with you. Thanks for the time. Actually, a good segue from that last question to my question. You mentioned, I think, Bill, the 39.8% EBITDA margin in the fourth quarter, which is a good jumping-off point into 2024. Historically, I think the target margin had been 40%. I guess the question is with the efficiencies that you're seeing digital workers and in other areas, is that long-term target now a higher ceiling? What might that look like over the longer term? Thanks a lot.

William C. Stone, CEO

Yes, Andrew. I think we need to define the longer term. Over the next couple of years, we probably have opportunities to increase our margins through the digital worker process, 100 basis points to 200 basis points. Look, we're going to spend money on a lot of things too. So, the margin is not just driven by the Blue Prism deployment. We're spending money on sales, marketing, and a lot of R&D initiatives, and we are focused on defending our IP. That's not a cheap process, but it's our lifeblood. We want people to understand that we don't take it for granted but with extreme defense, which leads to extreme offense. We're very focused, very protective of our customers, employees, and communities, which means we need to be protective of our IP.

Andrew Schmidt, Analyst

Got it. Thank you for that, Bill. If I could ask just about license revenues for 2024, obviously it's not a huge part of the business, but it can create some volatility as we saw in 2023. What's the expectation for 2024, and I guess there's a broader question about just outlook philosophy and whether that's changed at all in terms of taking a finer point in sales cycles and booking assumptions like that?

Brian Schell, CFO

Sure. I think similar to what Bill said a second ago about healthcare, we're trying to be measured in terms of what's in our guidance on license revenue. There was some softness in 2023, but at the same time, the pipelines that we have and the deals in fairly advanced stages give us a little bit more cheer about 2024. We actually think license ought to do better in 2024 than it did in 2023. On the second comment regarding the forecasting process, not so much a change in philosophy, but I think as we continue this, we just get better information and can make better estimates on what's happening; it's a continuous and ongoing process.

Operator, Operator

All right. Thanks, Andrew. It looks like our next question comes from Alexei Gogolev with JP Morgan. Alexei, go ahead.

Alexei Gogolev, Analyst

Thank you, everyone. Hi, Bill. I was wondering if you could elaborate a little bit more on the comments you made around winning major hedge fund launches and conversions. Any additional feedback there? Also, are you sensing any acceleration in hedge fund end market consolidation that's been going on for some time now, but it sounds like it's been accelerating?

William C. Stone, CEO

Yes, Alexei, I think if you go back through our press releases and our client wins, you'll see that an awful lot of the major macro hedge funds are our clients. For the last several years, many of the new funds and the hedge funds went into these macro funds. We have a concentration on the largest and most complex funds, which ensures that we have the expertise and technology to support them as they grow and expand their geographic and asset selection reach. We had a press release recently on Hudson Bay, a $20 billion hedge fund that we just added to our lineup. We have many of those throughout the world and we are expanding in EMEA and Asia Pacific as well as North America. We invest more money in this than anyone else, and we believe that will continue to increase our win rates.

Alexei Gogolev, Analyst

Perfect. Thank you, Bill. A quick question to Brian: have you been able to assess the potential implications to your free cash flow from the Tax Relief for Families and Workers Act of 2024 bill? Do you have any visibility on where this could take your tax from this bonus depreciation change?

Brian Schell, CFO

So, we haven't done a full assessment at this point. It would be premature to give direction on any changes, but we're working through any tax law changes and ensuring we have the right positioning. If there's a strategy we need to implement, we will continue to do that in compliance with appropriate tax laws and jurisdictions. So, at this point, it’s too early to assess any impact to us.

William C. Stone, CEO

Yes. And we're quite focused on our taxes, maintaining a constant 26% tax rate over the last five to ten years. We hope to see this start sloping downward, which may mean changing some of our strategies, potentially moving some personnel to lower-tax states as our clients migrate to places like Florida and North Carolina. We already have a large office in Jacksonville and some personnel in Miami. We're optimistic that with some focus and ideas, we can lower our tax rate.

Alexei Gogolev, Analyst

Thank you, Bill. Thank you, Brian. Congratulations on the great results.

Operator, Operator

Thanks, Alexei. Our next question comes from Kevin McVeigh with UBS. Kevin, please go ahead.

Kevin McVeigh, Analyst

Great. Thanks so much. And I'll add my congratulations as well. If you think about the organic growth guidance for 2024, it looks like the range is 2.7% to 6.3%. Any thoughts as to what would get you to the lower end of the range as opposed to the higher end?

William C. Stone, CEO

Well, that's quite a sizable range, Kevin. We're certainly hoping to beat the low-end and love to beat the high-end as well. We also hope to beat the midpoint. The 2.7% is a high hurdle, but with $5.5 billion in revenue wanting 3% growth, and given 3% attrition, we need 6% on $5.5 billion, which translates to an early estimate of $330 million in sales. It's not a walk in the park, but we have a talented sales team, implementers, developers, and a capable support organization. We're cautiously optimistic for a strong 2024.

Kevin McVeigh, Analyst

Sounds like it. Can you remind us, whoever would be best, the philosophy on the incremental margin you get from Blue Prism and just the deployment of the bots? How much of that goes to margin versus reinvestment as we think about that going forward?

Brian Schell, CFO

We feel good about the investment levels in our business, whether that be on R&D or other initiatives. The productivity enhancements do several things for us: they improve the customer experience, enhance employee roles, and the majority of it goes straight to the bottom line.

Operator, Operator

All right. Thank you, Kevin. Our next question comes from James Faucette with Morgan Stanley. James, please go ahead.

Michael Infante, Analyst

Hi, everyone. It's Michael Infante on for James. Thanks for taking our questions. Bill, I just wanted to ask about M&A. Clearly, there's capacity here from a leverage perspective, and you called out a senior hire to assist with M&A earlier in the call. What does the deal pipeline look like right now, and what types of assets and geographies are you targeting?

William C. Stone, CEO

Right now, we're only targeting Earth. We're going to try to expand wherever we can on the planet. We're very interested in expanding fund administration, potentially acquiring existing businesses that could enhance current client operations through collaboration on a lift-out or other similar methods. We also like technology, as that is a strong component of our business. It's essential to protect our IP, and that's why we’re passionate about it. We recently had seminars in the Far East, including McCall and Hong Kong, pitching clients. We have a robust business in Australia, and we believe there are growth opportunities there as well as in China, where we have many great clients. While the prospects there can vary, we feel confident in the opportunities present in Europe and North America as well.

Michael Infante, Analyst

Got it. That's helpful. And maybe just on pricing, in terms of the incremental revenue contemplated in '24, how much of it do you expect to come from price increases, and how does that compare to what you're able to enact in '23? Thanks.

Brian Schell, CFO

I think we feel confident about a similar amount of price uplift in 2024 as we achieved in 2023. The process for getting those increases is now much more defined, and we expect it to be a continuous uplift for future years as well.

Operator, Operator

Thanks for your patience, everyone. It looks like there are no further questions. So, I'd now like to turn the call back over to Bill Stone for closing remarks. Bill, the floor is yours.

William C. Stone, CEO

Thanks, and thank you, everybody. We appreciate you coming to this call. I know in New York City, it was a little snowy for you, and some of you might have forgotten your galoshes. We really appreciate that you came out, and we look forward to seeing you sometime in April and discussing where we’re going from here. So, thanks again, and we're working hard for you.

Operator, Operator

Thanks, Bill. And ladies and gentlemen, that does conclude today's call. Thank you all for joining, and you may now disconnect. Have a great day, everyone.