Earnings Call Transcript - SSNC Q1 2021

Operator, Operator

Good day and thank you for standing by, and welcome to the SS&C Technologies First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please note, that today's call is being recorded. I would now like to turn the conference over to Mrs. Justine Stone. Thank you. Please go ahead.

Justine Stone, Investor Relations

Hi, everyone. Welcome and thank you for joining us for our Q1 2021 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 Patrick Pedonti, our Chief Financial Officer. Before we get started, we need to review the Safe Harbor statement.

Bill Stone, CEO

Thanks everyone for joining. Our results for the first quarter are $1.235 billion in adjusted revenue, up 4.9% and $1.18 in adjusted earnings per share, up 14.6%. Our adjusted consolidated EBITDA was $491.9 million for the quarter, and our adjusted consolidated EBITDA margin was 39.8%. Our first quarter adjusted organic revenue was up 2.9%, strengthening our Alternatives business. Intralinks and our software businesses contributed to this growth, surpassing our own expectations; DST and PST came in at 0.1% growth for both financial services and healthcare. Operating cash flow was $185.7 million for the three months ended March 31, 2021, up 25.7%. We brought back 2.7 million shares of common stock in Q1 2021 at an average price of $67.50 per share, totaling $481.4 million. Our secured net leverage ratio now stands at 2.29 times, and our total net leverage ratio is at 3.35 times. We continued our focus on organic revenue growth and we're beginning to see some positive trends. We are growing our sales force and building new revenue-generating products and services. We continue to make product improvements and new technologies across our business. In SS&C Health, our digital capabilities continue to grow in partnership with our customers. Our expert user experience designed to pilot the SS&C digital experience platform launched in early Q2 2021, with the platform expanding to over 2 million members by early Q4 2020. This represents an exciting opportunity for our customers to unify their digital solutions by the single member experience aligning with member and market expectations.

Rahul Kanwar, President & COO

Thanks, Bill. We had a strong quarter with a broad-based lift in revenue, both year-over-year and sequentially. Intralinks had robust growth as the M&A market is off to a brisk start and economic stimulus continues. Increased carve-outs and restructuring, and overall economic activity driving acquisitions contributed to this. Accounts and win rates remain high. In our Alternatives business, the number of qualified prospects has returned to pre-COVID levels, and there is increased fundraising momentum across strategies. Our existing clients are growing organically through new fund launches and performance, and we continue to win new clients at healthy levels. We ended the quarter with over $2 trillion in assets under administration for the first time, a significant milestone. Our software business performed well; outsourced technology trends across wealth asset management and alternatives remain strong. Customers increasingly demand the ability to select and configure their operating model, including both software applications and outsourced services. Our capabilities are proving to be a valuable differentiator, as one indicator shows that over 90% of SS&C's advanced Q1 new sales included hosting or other operational services. Managed service offerings for our Geneva applications continue to gain traction in the marketplace.

Patrick Pedonti, CFO

Thanks. Results for the first quarter of 2021 were GAAP revenues of $1,233.4 million. GAAP net income was $174.9 million and diluted EPS of $0.65. Adjusted revenues were $1,235.4 million, including the impact of the adoption of the revenue standard 606 and the acquired deferred revenue adjustments for acquisitions. Adjusted revenue was up 4.9%, adjusted operating income increased 7.1%, and adjusted EPS was $1.18, a 14.6% increase over Q1 2020. Adjusted revenue increased by $57.4 million. Our acquisitions contributed $18.6 million in the quarter, foreign exchange had a favorable impact of $16.1 million or 1.4%, and adjusted organic revenue increased on a constant currency basis by 2.9%, driven by strength in the Alternatives Fund Administration, Advent, and Intralinks products. These were offset by weakness in institutional asset management, healthcare, and NS products. Adjusted operating income for the first quarter was $475.8 million, an increase of $31.6 million or 7.1% from the first quarter of 2020. Foreign exchange had a negative impact of $13.2 million on expenses in the quarter. Adjusted operating margins increased from 37.7% in the first quarter of 2020 to 38.5% in the first quarter of 2021, driven by cost controls. Expenses increased 3.5% on a constant currency basis, acquisitions added $6.3 million, and foreign currency increased costs by $13.2 million. Adjusted consolidated EBITDA was $491.9 million or 39.8% of adjusted revenue, an increase of $28.4 million from Q1 2020.

Bill Stone, CEO

Thanks, Patrick. With almost $500 million in adjusted consolidated EBITDA for the quarter exceeding $2 trillion in assets under administration in our Alternatives business, adjusted revenue growth of almost 3%, and reducing our secured and total leverage ratios to 2.2 million and 3.35 times, we have built a powerful franchise. The franchise continues to add talent and opportunities as we embark on a new post-COVID world. I will now open for questions.

Operator, Operator

We will now take questions. And our first question comes from Dan Perlin with RBC.

Dan Perlin, Analyst

Good evening, everyone and great start to the year. So, Bill, I just wanted to drill down a little bit; it sounds like maybe client budgets are starting to come back in the growth mode, you have called out Alternatives, maybe the impact of pre-COVID levels and new fundraising and Intralinks. I'm just wondering, as you're having those conversations today with clients, where do we stand in terms of the real demand environment? What does the current pipeline look like for you guys? I mean, obviously, we see your guidance which seems pretty reasonable but I'm just also wondering kind of the tonal difference that you're having with clients today versus maybe a quarter or two ago?

Bill Stone, CEO

Well, Dan, I think what you're seeing across the world is that the world is opening up and knock on wood, that we can continue to do that. The different governments, whether it's the EU or United States or other North American and Asian countries are pumping money into their economies. And that's giving investment managers confidence as their fund flows start to fill their coffers, which makes them either launch new funds, get into new investment types or new strategies. And that reflects in the increased demand we're seeing; we have increased the size of our sales force, and we continue to train, which is proving to be pretty effective. And so we're cautiously optimistic; no one can really predict what the pandemic is going to do next; hopefully, it's going to fade off into the sunset, but we don't have a perfect crystal ball on that. But I would say those are the primary drivers of our demand increase.

Dan Perlin, Analyst

Yes, that's good. And the follow-up is on this new kind of division that you guys launched, this Intelligent Automation Solutions, where it sounds like you're trying to help clients with their digital transformations. That— I guess I'm wondering that sounds like, not so much a deviation from your historical product forward business but it does sound like it might be broader in terms of consulting and maybe some other IT functions. So I'm wondering two things; one, do you think that that's opening up the funnel for new opportunities that you guys are going to be able to bring in? And then secondly, is there a product roadmap that needs to go along with that in order to be successful there? Thanks.

Bill Stone, CEO

Well, we're pretty excited about adding Gautam and his experience and expertise. Being able to make our bundles increasingly more user-friendly and powerful is also exciting. So we think we have lots of exciting technology, and we think that we're increasingly becoming more adept at binding our different products together, which gives our clients more comfort as they grow and expand and want to have fewer suppliers while relying heavily on that. Rahul, would you agree with that comment?

Rahul Kanwar, President & COO

Bill, I would. And I would just add to the second part of the question that there already is a fair amount of IP within SS&C that relates to intelligent automation, whether it's our AWD product or various initiatives we have across the company on natural language processing and artificial intelligence. Gautam and his team are tasked with pulling those together, as Bill said, to make sure that they are knitted together in the right way for a specific use case or a particular application in a given industry, as well as build new product; but we have a pretty good foundation.

Dan Perlin, Analyst

Great. Thank you guys.

Operator, Operator

And our next question comes from Surinder Thind with Jeffries.

Surinder Thind, Analyst

Good afternoon, and congratulations on the quarter. My first question is regarding the guidance; can you break down the outlook for organic growth amongst the various segments for the full year? Meaning as Intralinks, DST, and then SS&C core.

Bill Stone, CEO

Yes, I think in general, we expect our Alternatives business to grow in the 4% to 7% range. We expect Intralinks to be a little bit better than that, and our software businesses to be in the 1% to 2% range. We're striving hard to keep DST in positive territory; so 0% to 1%. We think we have the pipelines and capabilities to hit those numbers, and that's what we're striving for. Our business does better when there is more volatility in the market, and recently, volatility has picked up, which will help the DST business. Rahul, do you have other points you'd like to make?

Rahul Kanwar, President & COO

No, Bill, I think you've covered it. I would just say, and we saw this in Q1; we are seeing a pretty good lift across our business. So it is pretty broad-based, so we're pretty optimistic about what happens in Q2 to Q4.

Surinder Thind, Analyst

That's helpful. As a quick follow-up, can you provide any details on the Schwab transaction and their transition from DST to BNY Mellon for their business transfers? What kind of impact might that have on you?

Bill Stone, CEO

We don't expect that to have much of an impact on our overall business; the revenue side of that was not particularly large. Some of these big custodians are under tremendous pressure, and we're holding our own and bringing out new technology and moving a lot faster. We're not going anywhere; Schwab is still a great customer of ours, and we have a lot of respect for them. We remain optimistic about what we're building and how we're delivering it.

Surinder Thind, Analyst

Thank you, Bill.

Operator, Operator

And our next question comes from Alex Kramm with UBS.

Alex Kramm, Analyst

Good evening, everyone. Can you maybe just talk about pricing in the quarter, maybe across the board? But then also on the hedge fund administration sides, you've been talking about this for a couple of years now that you're trying to get a little bit more; so anything you can share on the quarter will be helpful?

Bill Stone, CEO

Rahul, you want to take that?

Rahul Kanwar, President & COO

Sure. Alex, you know, as we've said previously, we have developed a pretty good process now where once a year we go back to these customers and we talk to them about the contracts, particularly those that are coming up for renewal. We seek generally a modest increase that aligns with what happens to our costs. So we're in that process and have been for three or four months now. There really hasn't been much to report other than nobody's happy to get approached about a price increase. However, we had good constructive dialogue, and there has not been any fallout from that process. We believe we're delivering sufficient value to make that worthwhile. So it's gone well; it's pretty modest overall. We expect to keep doing it annually over the long term.

Alex Kramm, Analyst

Okay, fair enough. And then maybe just turning back to the quarter; I think you mentioned DST, but can you break out some of the other businesses? Like the Alternative business growth for the quarter, along with Intralinks and Eze, I don't think you mentioned it. So anything you can share regarding how the growth came together for the quarter? Sorry if I missed it.

Bill Stone, CEO

The Alternatives business grew 6.7% in the quarter, while Intralinks saw 10% growth. The DST business, however, had significantly lower volumes and was down 3% for the quarter. The DST business, combined with health and financial services, was essentially flat on an adjusted basis.

Alex Kramm, Analyst

All right, thank you.

Operator, Operator

And our next question comes from Andrew Schmidt with Citi.

Andrew Schmidt, Analyst

Hey Bill, Rahul, Patrick; hope you're doing well. Thanks for taking my questions. So a question on DST; I think you mentioned last quarter that financial services for the year on an organic basis were expected to be low-single, and healthcare maybe slightly down. Any update to the growth trajectory of DST this year? And then, any commentary on how the pipeline is specifically shifting for DST versus the other parts of the business will be helpful. Thank you.

Bill Stone, CEO

Well, again, we've made a lot of changes in DST and we're pretty focused on it. We have some good pipeline business there; the challenge is execution. We've won several large mandates in our retirement services business, and that revenue should build throughout 2021 for a significant lift in DST. We feel we're bringing out exciting new digital technologies and capabilities, and ultimately, you need superior products and services. When you have that, training your sales force and winning deals becomes increasingly positive. Is that your take, Rahul?

Rahul Kanwar, President & COO

It is Bill. For DST financial, we're targeting low-single digits, probably around 2.5% organic growth, while for health it’s around 1.3%. So combining those two gives us a little over 2%, which is what we're aiming for this year.

Andrew Schmidt, Analyst

Got it. That's super helpful. I appreciate the technology commentary, that's great to hear. I guess just as a follow-up, switching gears to the institutional asset management market. Obviously, we saw the announcement of a large asset manager switching to a front-to-back investment servicing platform. Are you experiencing more demand or conversations among the larger traditional asset managers aimed at overhauling their tech infrastructure? We've been discussing this for a number of years, but it seems like some things are starting to break loose; can you share your thoughts on that market?

Bill Stone, CEO

We are introducing a number of new products and services focusing on that area. The transition process for large scale asset managers is multi-year. The new technologies like RPA, AI, ML, and natural language processing are increasingly sophisticated and powerful. Managers are looking at their current infrastructures and how they can transition to newer technologies while streamlining their operations and infrastructure costs. We believe that this will lead to increased adoption in the market; COVID posed challenges for ripping out old infrastructures, but it also prompted much review and analysis. Now we expect that shift to begin, and we plan to be at the forefront of those changes.

Andrew Schmidt, Analyst

Makes sense. Let's hope we're getting to that stage. Thanks a lot, Bill. I appreciate the comments.

Operator, Operator

And our next question comes from Rayna Kumar with Evercore ISI.

Rayna Kumar, Analyst

Hi, good evening. Thanks for taking my question. Can you give us your thoughts on the current outlook for large license deals? Now that vaccines are becoming more prevalent in the U.S., do you think you will start to conduct more face-to-face meetings to close some of these larger deals that you spoke about on the fourth quarter earnings call?

Bill Stone, CEO

As Rahul pointed out earlier, we are increasingly bundling infrastructure with large licenses. Large-scale managers often have expertise in utilizing applications but not necessarily in maintaining and upgrading them, which is where our expertise comes in. We believe that bundling capabilities provide us with more opportunities. However, I believe large license sales may not be as robust as they were 10 years ago given the increased options available for clients. They may adopt alternatives that simplify their entire infrastructure management. Do you agree, Rahul?

Rahul Kanwar, President & COO

I do. We've noticed strength in our Advent business, and we are beginning to see more conversations in our institutional investment management business.

Rayna Kumar, Analyst

That's extremely helpful. And just on the DST business, for clarification, did you say DST for the full year could be up 0% to 1% organically or 2%? What gives you confidence that DST will continue to improve in 2021 versus what we saw in 2020? Thank you.

Bill Stone, CEO

Yes, I think I said 0% to 1%, but Rahul can correct me. We're targeting around 2% combined. We have tremendous opportunities, but opportunities only convert into financial results once contracts are signed. We're executing on several significant deals, and as these materialize over the next few quarters, we hope to share positive updates.

Rahul Kanwar, President & COO

I don’t have more to add, other than we’ve got reasonable visibility in the current quarter and that contributes to our confidence.

Rayna Kumar, Analyst

Thank you.

Operator, Operator

And our next question comes from James Faucette with Morgan Stanley.

James Faucette, Analyst

Thanks very much. I wanted to quickly touch on acquisitions during the course of the quarter. Rahul had mentioned that you might be looking to tweak your M&A strategy a little bit, and it seems like Mainstream may fit the criteria you outlined. Should we expect acquisitions similar to this going forward in terms of price you're willing to pay, growth rates, etc.?

Bill Stone, CEO

I think the answer to that is yes. James, if you can tell us about the high end of this; there is not a lot of money chasing these opportunities. We have confidence in our development and sales teams, and we believe we can build almost anything. The question becomes, where do you allocate your capital? We want to invest in what will give our shareholders the best risk-adjusted return. Some assets are selling at 20 times revenue; that’s quite a price. Due diligence is essential, and we must ensure these investments pay off. We will raise our prices to acquire good assets, which are currently priced higher, but we remain disciplined. As Patrick mentioned, we expect around $1.003 billion in free cash flow, which gives us ample flexibility. This is a crucial decision, and there’s no specific answer other than you will pay more now to engage in the M&A game than you did five or ten years ago.

James Faucette, Analyst

Yes, for sure. The tweaks certainly make sense. However, I wish I could tell you how high or how long this trend will continue. But it seems there’s been increasing focus on Australia, given Link Group and Mainstream; is that a coincidence? Or is there something particularly attractive about the Australian market that you're looking to exploit? I'd like to understand if there’s anything specific we should be paying attention to regarding that region.

Bill Stone, CEO

Australia has a strong economy with its superannuation fund concepts and distribution among its population, which they refer to as a 'wall of money'. They have upwards of 30 million people who are largely in the top decile of the world's wealth. Hence, it is an attractive market. Furthermore, Australia is an English-speaking country with common law practices similar to the UK, US, and Canada, making what we do more transparent to them. That's why we see potential in Australia, along with other assets for sale we want to leverage, no matter where they are in the world.

Operator, Operator

And our next question comes from Chris Donat with Piper Sandler.

Christopher Donat, Analyst

Hi, good afternoon, everyone. It's Chris Donat. In terms of your second-quarter guidance, it looks like there's about a 2% decrease from the first quarter regarding adjusted revenue. How should we understand that? Was that due to a strong quarter from Intralinks? Or were revenues pulled forward from other sources? Or can you help us with the quarter-on-quarter revenue changes?

Bill Stone, CEO

Rahul, do you want to address that?

Rahul Kanwar, President & COO

Sure. The main issue here is that we do have some seasonality in our business in certain areas. For example, in our Alternatives business, we handle a lot of year-end financial statements and tax work. In our transfer and investment businesses, we do some regulatory filings and reporting to investors that tend to occur around the year-end process. Therefore, there are areas where work is concentrated in Q1 rather than Q2, and this is where the difference primarily arises.

Christopher Donat, Analyst

Okay, got it. That makes sense. And then, you've touched on this, but I want to ensure I'm clear. Regarding the new Intelligent Automation Solutions Group, is it separate from Singularity, or is there some overlap? Where do we stand with Singularity? There seem to be many themes here involving machine learning and robotic process automation, which appear to overlap across the two.

Bill Stone, CEO

I believe there is overlap. Singularity is an investment analytics, accounting, and reporting solution. Our Intelligent Automation workflow product, AWD, would be integrated with that to utilize all of Singularity's capabilities in a sophisticated workflow process. It’s all related, but the bundling gives us powerful advantages in the market.

Christopher Donat, Analyst

Okay, thanks, Bill.

Operator, Operator

And our next question comes from Jackson Ader with JPMorgan.

Jackson Ader, Analyst

Great, thanks for taking my questions. First one is on win rates; I'm curious if in either the Eze business or fund administration, you've observed any differences in win rates for new fund launches versus your win rates with existing funds that are just putting out current RFPs?

Bill Stone, CEO

I think our historical win rates and our current win rates are relatively stable; we might have a little momentum now. We have remained a formidable force, and that’s evidenced by our $74 billion in our funds business. We've consistently been strong in new fund launches, and that trend should continue. Do you have anything to add, Rahul?

Rahul Kanwar, President & COO

Bill, I agree. The win rates today are consistent with what we've seen historically. As our business grows and we enhance our products and services, these rates strengthen. The new fund launch market remains attractive, and many of our long-term clients started out in that process.

Jackson Ader, Analyst

Okay. And my follow-up question is about the Mainstream acquisition. First, is there anything structural about that business that would inhibit it from achieving SS&C's operating margin targets? Additionally, when Advent was acquired, about 20% of its business came from international markets; do you foresee any retail or RIA potential cross-sell with Advent as it enters a new market? Thanks.

Bill Stone, CEO

We don’t foresee anything structural at Mainstream preventing it from reaching our operating margins. We believe it’s a sound business and we can enhance its sales and marketing efforts. We will also save on overhead costs, which should help us improve margins. Concerning Advent, we’re focusing on our Black Diamond RIA solution, which continues to grow. We are expanding into that area, which we find appealing. Finding tuck-in acquisitions is expensive, and we need to be conservative with our expenses and mindful of time to market if we decide to build instead of buy.

Jackson Ader, Analyst

Okay, thank you.

Operator, Operator

And there are no further questions at this time. I'll turn the conference back over to Bill Stone for final remarks.

Bill Stone, CEO

Well, again, we appreciate all of you, and hopefully, we're off to the races over here. The Kentucky Derby is coming up in a week or two, and I look forward to talking to you at the end of the second quarter. Thanks.