Earnings Call Transcript - SSNC Q2 2024

Operator, Operator

Ladies and gentlemen, thank you for joining us for the SS&C Technologies Q2 2024 Earnings Call. All lines have been muted to avoid background noise. After the speakers' presentations, we will have a question-and-answer session. I will now turn the call over to Justine Stone, Head of Investor Relations. Please proceed.

Justine Stone, Head of Investor Relations

Welcome everybody and thank you for joining us for our Q2 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 the 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 Factor 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, July 25th, 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.

William Stone, Chairman and CEO

Thanks, Justine, and welcome everyone. Our second quarter results are record adjusted revenue of $1,452.4 million, up 6.5% and $20 million ahead of our forecast. Our adjusted diluted earnings per share were $1.27, up 17.6%. Adjusted consolidated EBITDA was $558.9 million for the quarter, and our EBITDA margin was up 170 basis points to 38.5%. Our second quarter adjusted organic revenue growth was 6.4%. The revenue acceleration was driven by strength in our alternatives, GIDS, wealth and investment technology, and Intralinks businesses. The surprise upside came largely in our GID business, with outperformance driven by seasonality and some accelerated license revenue. Our recurring revenue growth for financial services was 7.7%, which includes all software-enabled services and maintenance revenue. Second quarter cash from operations was $385 million, up 16.8% from Q2 2023. Our cash flow conversion percentage for the quarter was over 120%. We paid down $25.2 million in debt in Q2 2024, bringing our net leverage ratio to 2.84 times consolidated EBITDA. In Q2 2024, we bought back 3.7 million shares for $227 million at an average price of $62.17 per share, making this the highest share buyback in one quarter in SS&C's history. Last week, the Board Of Directors renewed a one-year, $1 billion common stock repurchase program. We continue to believe stock repurchases are a good use of our capital. On the M&A front, valuations are still elevated, but we are seeing an increase in relevant targets coming to market. We will continue to look, but our returns need to be as attractive or greater than buying back our own stock. I'll now turn it over to Rahul to discuss the quarter in more detail.

Rahul Kanwar, President and COO

Thanks, Bill. Our business had a good quarter with the strongest organic revenue growth since 2021. Our alternative fund administration business had strong growth across the board in private markets, hedge funds, and retail alternatives where we provide both fund administration and transfer agency services and support registered alternative and interval funds. SS&C is uniquely positioned to serve this growing area with the combination of our transfer agency and fund administration services. We have seen early success in the wealth and investment technology business unit collaborating on client relationship management and sales opportunities. Trust Suite continues to gain momentum; the sales pipeline is robust and we're being invited to participate in the largest RFPs in the market. DomaniRx's second release was put in production on July 1st, and the platform can now process claims for all lines of business. We have processed over 100 million claims since going live in January and have migrated our first new client onto the platform. Domani's key strengths include enhanced functionality running on the SS&C private cloud, enabling self-service capabilities and customized reporting. I will now turn the call over to Brian to discuss the financials.

Brian Schell, CFO

Thanks, Rahul. Good day, everyone. Our Q2 2024 GAAP results reflect revenues of $1.452 billion, net income of $190 million, and diluted earnings per share of $0.75. Our adjusted revenues were also $1.452 billion, an increase of 6.5% over Q2 2023. The increase of $89 million over last year was primarily driven by incremental revenue contributions from the alternatives and GIDS and Intralinks businesses. Acquisitions contributed $4 million and foreign exchange had an unfavorable impact of $2 million. As a result, adjusted organic revenue growth on a constant currency basis was 6.4%. Our core expenses increased 3.3% or $29.2 million excluding acquisitions and on a constant currency basis. Adjusted Consolidated EBITDA attributable to SS&C was $559 million or 38.5% of adjusted revenue, an increase of $57 million or 11.2% from Q2 2023. The 38.5% EBITDA margin reflects a year-over-year improvement of 170 basis points, driven by the positive impact of both revenue growth and disciplined expense management. Net interest expense this quarter was $113 million, a decrease of $5 million from Q2 2023. Adjusted net income was $320 million, up 15.7%, and adjusted diluted EPS $1.27, an increase of 17.6%. The effective tax rate used for adjusted net income was 26%. Increased share repurchases drove the diluted share count down to 252.3 million from 253.3 million in Q1 2024. SS&C ended the second quarter with $462.7 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 the $88.5 million held at DomaniRX, was $6.3 billion. Our last 12 months consolidated EBITDA used for covenant compliance was $2.2 billion. Based on net debt of approximately $6.3 billion, our total leverage ratio was 2.84 times and our secured leverage ratio was 1.6 times. In May, we refinanced our Term B loan consisting of five tranches with a new single $3.9 billion Term B loan tranche as well as a $750 million senior note. The refinancing resulted in a $28 million non-cash loss on the extinguishment of debt and the capitalization of $35 million of new deferred financing fees. The refinancing activity resulted in extending our debt maturity by approximately 3.7 years and diversifying our funding sources, but we are still positioned to benefit from any reduction in short-term rates. As we look forward to the third quarter and the remainder of the year with respect to guidance, note that we will maintain our focus on client service and assume that retention rates will continue to be in the range of our most recent results. We will manage our expenses with a cost-discipline approach by controlling and aligning variable expenses to ensure efficiency, increase productivity, improve our operating margins to leverage our scale, and effectively invest in the business through marketing, sales, and R&D to take advantage of future growth opportunities. Specifically, we have assumed foreign currency exchange rates will be at current levels, short-term interest rates to remain at current levels, a tax rate of approximately 26% on an adjusted basis, capital expenditures to be 4.1% to 4.5% of revenues, which is a slight reduction from prior guidance, and a greater weighting on share repurchase versus debt reduction subject to market conditions. For the third quarter of 2024, we expect revenue to be in the range of $1.42 billion to $1.46 billion and 5.3% organic revenue growth at the midpoint. Adjusted net income is expected to range between $304.6 million to $320.6 million. Interest expense excluding amortization of deferred financing costs and original issue discount in the range of $107 million to $109 million, diluted shares in the range of 251.6 million to 252.6 million shares, and adjusted diluted EPS in the range of $1.21 to $1.27. For the full year of 2024, we are raising revenue guidance by $12 million and expect revenue to be in the range of $5.706 billion to $5.866 billion and 4.9% organic revenue growth at the midpoint. Adjusted net income is expected to be in the range of $1.246 billion to $1.326 billion, with diluted shares in the range of 250.9 million to 253.9 million shares, adjusted diluted EPS in the range of $4.98 to $5.22, and cash from operating activities expected to be in the range of $1.305 billion to $1.385 billion. Our updated 2024 guidance reflects our strong results in the first half of the year with a continued positive outlook for the remainder of the year. And now back to Bill.

William Stone, Chairman and CEO

Thanks, Brian. We obviously had a strong quarter on both the top and bottom line. We continue to be bullish about our business and our updated guidance reflects 4.9% organic growth at the midpoint and $5.10 in adjusted diluted earnings per share. I'd also like to announce that on September 18th of 2024, we'll hold an Analyst Day at NASDAQ market site in New York City. Formal invites will go out in the coming weeks, and please reach out to Justine if you have any questions. We also will be hosting our SS&C deliver client conference in New Orleans, Louisiana on October 6 to 8. This premier event is designed for executives and decision makers across SS&C's solutions set and features hands-on learning, industry insights, and many networking opportunities. I'm pleased to announce this year's keynote speaker is my friend David Rubenstein, co-founder and co-chairman of the Carlyle Group, which SS&C was a portfolio company from 2005 until 2014. We look forward to hosting hundreds of our clients and prospects in October. I'd now like to turn it over to questions.

Operator, Operator

Your first question is from Dan Perlin with RBC Capital Markets.

Daniel Perlin, Analyst

Thanks. Good evening. It's great to see the organic trends continuing to improve here. I have a quick question about the guidance. At the midpoint, it seems to suggest that if we consider the midpoint for the third quarter and then look at the full year number, the fourth quarter's organic growth appears to step down a bit, possibly more significantly. I'm trying to understand whether this is simply due to tougher comparisons as we review the numbers or if there's something structural we should be aware of, or if this is just overall conservatism since we're still a little way off from releasing the fourth quarter numbers. Thanks.

William Stone, Chairman and CEO

Yeah, Dan, I would just say that the Q4 is really a comp issue. Q4 of '23 was particularly strong, and again as you well know we are in the process of meeting and beating our numbers. So we are still focused hard on making sure we have a strong number, but a number that we expect to hit.

Daniel Perlin, Analyst

That's great. Just a quick follow-up. Your leverage stands at 2.8 turns now. You've recently initiated a $1 billion buyback and completed the largest buyback in the company's history for the quarter. Bill mentioned the M&A environment in the pipeline. What do you see out there? How is it shaping overall capital allocation? I understand there's a hurdle rate for your buyback versus M&A, but M&A seems to be gaining momentum. In your recent Intralinks report, it appeared that deal flow in North America was looking quite promising. I would love to hear your thoughts on your current position, especially since your balance sheet is in good shape.

William Stone, Chairman and CEO

Yes. As you well know we've really built the company around organic revenue growth and acquisitions. We see a lot of opportunities out there. We see things that are priced ridiculously on the low end, so we are willing to look hard. We would like to deploy capital in acquisitions. We aim to further build out our portfolio of products and services. Each of our business units are kind of beating the bushes for opportunities. So I wouldn't be surprised if we were able to close a couple of tuck-ins and maybe something a little more substantial. I don't see any $5 billion or $10 billion acquisitions on the near-term horizon, although SS&C will be in the running if any of those larger deals come on the market.

Operator, Operator

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

Andrew Schmidt, Analyst

Hi, Will, Rahul, Brian, thanks for taking my questions. Maybe it's a higher-level question for me. Obviously, the last three quarters, we've seen you maintain at least mid-single-digit organic growth. Maybe talk about the sustainability and visibility of consistently delivering that. And if anything, what's changed? I realize that we are at a more stable level in terms of the GIDS performance. Healthcare is stable versus one year to two years ago, but if there is anything else deeper in the business that drives that stabilization, that would be helpful. And I realize I might be jumping on the Analyst Day, but anything there would be helpful. Thanks a lot guys.

William Stone, Chairman and CEO

Andrew, I’d just say in general that we have a strong focus on organic revenue growth. We have looked at several acquisitions, but the ones that we really like are pricing at around 10 times revenue. So we don't like them very much at that price. So when you start focusing on organic revenue, you also start looking at how you're pricing. We've done a pretty good job of getting a little more discipline there. And you also make sure that the pitches that we go out in order to cross-sell and up-sell, as well as new names, are crisp and impactful. So I think we've done a good job there. And I think Rahul probably has some anecdotes or additions that would also give you some clarity.

Rahul Kanwar, President and COO

Yes. I think the thing that I would add to that is product development. We've spent a lot of energy over the last few quarters ensuring that what we are selling into a particular type of customer will bring in all of SS&C to bear. That is starting to show up in larger deals and better win rates, and we expect that to continue.

Andrew Schmidt, Analyst

Got it. Thank you Will and Rahul. Yes, certainly shining through in the product updates that you are putting through to the market. So we see that. I appreciate those comments. And then maybe just a question on the outlook. Just the raise and the EPS outlook relative to the second quarter result and that in conjunction with higher level of share repurchase. I'm wondering if there was some reinvestment that was baked in or if there's some that you're kind of saving for some potential outperformance in the back half. It just looks like the raise was a little bit lighter than the outperformance. So anything there would be helpful. Thank you.

William Stone, Chairman and CEO

Well again as we said, our GIDS business was particularly strong, and we don't expect a repeat of the strength of that business in Q3 or Q4. We have some opportunities, but often they have multi-quarter sales cycles. We have a good pipeline, but that certainly could be a little bit of a headwind to us. And then we are also very excited about our Trust Suite that we're bringing out into the marketplace. It is getting a lot of positive reaction. Hopefully, it will surprise you positively.

Daniel Perlin, Analyst

Got it. Thank you Bill. And sorry, just one more housekeeping since you mentioned the GIDS business, the accelerated license revenue? Could you shed some light on that? Was that just timing? Any details on that? And then I'll jump back in the queue. Thanks a lot for your responses here.

Rahul Kanwar, President and COO

It is mostly timing. There were some deals that we had forecasted coming in Q3 and Q4, and we were able to pull them into Q2.

Operator, Operator

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

Peter Heckmann, Analyst

Hi, good afternoon. Thanks for taking my question. I guess how would you characterize the overall spending environment? And we hear you in terms of where certain areas are producing a little bit better organic growth. But I guess, what do you view in terms of the next couple of years catalysts that could potentially cause you to look at switching vendors, upgrading? And what do you think are the demand drivers there? Is it regulatory? Is it technology? Or is it price?

William Stone, Chairman and CEO

Well, I think it's all of those. I think price is probably the least important of the three. I also think as you see these cyberattacks and the outages for large-scale businesses, they start looking hard at who their vendors are and how much money their vendors are investing into their security walls and their expertise and the number of layers they have in order to kind of stop the bad actors. Similar instances, like with Madoff, caused a real fee change in how people did their bookkeeping, whether they did them in-house or used an outside administrator. I think technology is going to be one of those things that, yes, you saved a few hundred thousand and maybe even a few million over a three-year or four-year deal, and then you ended up getting burned for about 15 or 20. And they are going to start deciding that playing technology on the cheap is a risky business. So that's going to be a real driver. I also think how you deploy the newest technologies, whether that is deep learning, machine learning, RPA, or AI, those are all factors. The key is it has to work, and it has to work better than what you had before. You can't just show them something that's really pretty but slow or inaccurate. So there are a lot of components to deploying new technologies. It's not just about saying we use large language models and we are deeply involved in AI. I think those themes are real opportunities for us. And as long as we focus and deliver applications to clients that demonstrate that, we're here for the long term. We will give them improvements every quarter, every six months, every year, and they'll see business improvements because they chose the right partner.

Peter Heckmann, Analyst

Yes, that's helpful. And then just any comments on wealth specifically mentioned it as one driver of organic growth. But I guess, how would you characterize that? Is that more on the adviser tech side or more on the long-only side?

William Stone, Chairman and CEO

I think it's in both. The wealth and investment technology area is very strong. Just as you've seen with Envestnet getting sold or at least in the process of being sold, the numerous mergers and private equity buying into different wealth technology companies, I don't see that stopping. There's however many trillions being transferred from generation to generation, and the younger people receiving this wealth are not going to wait for a monthly statement or a quarterly statement. They're going to want instantaneous access to their money. And I think regulations like T+1 and other developments show that when you have services like Venmo and other instantaneous money movers, people don't want to wait 24 hours for a trade to settle or money to be available. So you're going to have to be nimble enough to handle the incoming generations that are accumulating vast amounts of wealth.

Operator, Operator

Your next question is from the line of Alexei Gogolev with JPMorgan.

Alexei Gogolev, Analyst

Hi, Bill, Gogolev here. Great to hear from you. Last time we met, you expressed growing confidence that SS&C will be able to achieve high single-digit organic revenue growth in the mid-term. Following up on some of the questions from my colleagues, are you noticing any opportunities that could lead to further growth acceleration?

William Stone, Chairman and CEO

I think we see that, Alex. The question is that you have to not just see these opportunities but act on them and get ink on paper. I think the large-scale things that we think are happening, include many companies opting to outsource various functions to us, which can yield tremendous expense savings, better technology, and a happier client base, allowing us to earn substantially on processing that business. We believe there are several such opportunities in the marketplace. We think we are well positioned. As for the execution of our new products and services, once they kick in, you will see increasing organic revenue growth. The reduction in year-over-year revenue in healthcare went from 8.5% to 4.5%. I anticipate that Q3 will be better than that, potentially breakeven or above on a growth basis. Q4 should also show acceleration through '25 and '26. So I think there are multiple catalysts that can drive mid- to high-single-digit growth, but execution is key. We have great strategies.

Alexei Gogolev, Analyst

Understood, Bill. To build on the answer that you just provided. You've always positioned having your own data centers and infrastructure as a strong competitive advantage. Could you discuss how your customers reacted to outages last week? And if you've seen any incremental demand as a result?

William Stone, Chairman and CEO

Well, I think we've had many follow-up calls with our customers who, in their tech stacks, had some of the companies that experienced significant issues while we have very little of these affected companies in our tech stack. So knock on wood here, we are well-served by our technology team that's very disciplined and has numerous layers of security around our data processing centers. We run our own private cloud. It doesn't mean we don't face attacks; of course, we do. However, the scale of attacks we face is a fraction of that faced by larger organizations such as Amazon or Azure. We are confident in what we are doing, invest heavily, and believe we are getting value.

Operator, Operator

Your next question is from Surinder Thind with Jefferies.

Surinder Thind, Analyst

Thank you. Bill, can you maybe talk about the pipeline that DomaniRx has given that you've now had a few successful clients on the platform? What you're seeing, maybe what the conversations are like and just the time frame for any new announcements?

William Stone, Chairman and CEO

We have a good pipeline, particularly with large healthcare insurance claims payers. We believe we have a robust offering. If we can execute effectively, these large organizations will see that we can handle their needs efficiently. Additionally, DomaniRx has very little latency, processing up to the second. In contrast, many competitors take several seconds, and when handling millions of claims, that is a significant competitive disadvantage. We are optimistic about our opportunities. There are fluctuations in every market, including this one, so we must execute, but we've put considerable effort into Domani. As I share with our prospects and clients, it performs, which is a substantial statement.

Surinder Thind, Analyst

That's helpful. And just to clarify, is it larger deals and a longer sales cycle in the rest of your business? Or how should we consider that?

William Stone, Chairman and CEO

I wouldn't necessarily say longer sales cycles. However, most healthcare plans start planning for contract opportunities on January 1, '24. Given that it's already July '24, we are looking at a major opportunity on January 1, '25. For the largest organizations, the planning must begin now to potentially onboard by January 1, '26. That said, these companies can pay upwards of $100 million a year for claims processing services, so we need to be prepared. The system needs to continually improve, and we must continue to delight our customers.

Rahul Kanwar, President and COO

Yes, we are continuing to roll out Blue Prism within SS&C. In some ways, we are building momentum because as more people receive training, we have more capacity for additional processes to be subject to robotic process automation and AI enhancements. We've also just released the next generation of Blue Prism, which features GenAI capabilities, allowing natural language-type interfaces for designing your workflows. This makes it easier for us to implement it internally and enhances our product differentiation from others in the marketplace. We feel very positive about Blue Prism and its impact, and we certainly expect to see acceleration.

William Stone, Chairman and CEO

I would just like to add that we find when people start to embrace it, their jobs get better. Many employees here have strong analytical skills, and we often have to encourage them repeatedly about its benefits. However, once they perceive its value, it transforms their jobs, making tasks less tedious as digital workers take over those functions. We continuously monitor the number of digital workers by business unit, and I know they are very pleased with all the calls that Rahul and I make to them.

Operator, Operator

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

James Faucette, Analyst

Thanks a lot. A couple of broad questions. I want to follow up on the Blue Prism question, and I appreciate your comments there. Just wondering what you see as the competitive landscape right now? I would love to hear how you're thinking about that opportunity having evolved, specifically whether or not you think you might be able to benefit from some of the hiccups we've seen from some of the public RPA vendors?

William Stone, Chairman and CEO

Yes. We believe that if we maintain minimal disruptions, we will be a major beneficiary of the ongoing transitions as our business is profitable and geared toward sustainability. This means we can invest effectively. I know that many of the companies followed by you and your colleagues are reliant on substantial financial backing from private equity without a clear route to profitability. I think the timeline for that approach has somewhat expired, prompting a need to build sustainable businesses. We've achieved that. However, we also need to accelerate our revenue growth, and our new Chief Revenue Officer carries high expectations. However, as always, execution will ultimately determine success, and we are cautiously optimistic. We should see double-digit revenue growth in Blue Prism for the foreseeable future.

Rahul Kanwar, President and COO

When we combined Advent and subsequently institutional and investment management, that combined operation now generates a little over $1.5 billion in annual revenue and includes many products geared towards wealth asset managers and financial institutions, particularly on the software side. It has only been a few months, but we are starting to successfully coordinate product roadmaps for products like Genesis and Aloha while ensuring that we allocate enough resources toward worthwhile developments. Early results are promising.

Operator, Operator

Your next question is from the line of Kevin McVeigh of UBS.

Kevin McVeigh, Analyst

Great. Thank you so much. And congratulations on really terrific results. Maybe just for Bill. Given the technology efficiencies that Blue Prism are bringing to bear, is it changing your go-to-market strategy with your clients? I know you've spoken a lot about larger lift and shift opportunities? Has it accelerated that process? And does the efficiencies that Blue Prism introduce allow for a wider perspective in terms of go-to-market strategy? It seems like there's a step-function change in the business from a revenue growth perspective that goes beyond some of the segmentation. I just wanted to frame that a little.

William Stone, Chairman and CEO

I think, Kevin, that was the intent when we acquired Blue Prism. We aimed to acquire a horizontal solution that would serve as the foundation for all our applications and services. This would enable us to provide technology differentiation that we could train all employees on across the enterprise. The enterprise is extensive, and given we've completed 75 acquisitions, there is significant teaching and training required for implementing Blue Prism both internally and externally. Clients gain confidence because we are actively using it ourselves. This is the Holy Grail. We believe the opportunity is now unfolding; however, there is some initial effort required for proper implementation. We must educate the IT departments of our clients. Previously, we were scheduled to provide insights on accounting rules or valuation of complex securities. Now, we must discuss deploying machine learning and large language models, which requires an educational approach. I believe we are succeeding admirably, aided by our highly skilled technology team.

Operator, Operator

At this time, there are no further questions. I will now hand today's call over to Bill Stone for any closing remarks.

William Stone, Chairman and CEO

Thank you, Tamica, and thanks, everybody, for being on the call. We really appreciate it. We are working hard for you as we always have. We like to work hard for you and deliver great results. So until next time, we'll be out there working on great results. Thanks again.

Operator, Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.