SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) Q4 2022 Earnings Call Transcript

SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the SS&C Technologies Fourth Quarter 2022 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. It is now my pleasure to turn today’s call over to Justine Stone, Head of Investor Relations. Please go ahead.

Justine Stone: Hi, everyone. Welcome and thank you for joining us for our fourth quarter 2020 earnings call. I am Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Rahul Kanwar, President and Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer. Before we get started, we need to review the safe harbor statement. Please note the various remarks we make today about future expectations, plans and prospects including the financial outlook we provide, constitute forward-looking statements 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 most 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 7, 2023. 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 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: Thanks, Justine, and thanks everyone for joining. Our results for the fourth quarter of $1.339 million in adjusted revenue, up 3.3% and our adjusted diluted earnings per share were $1.16, down 4 — 9.4%. Adjusted consolidated EBITDA was $518.6 million, third highest in our history, and our EBITDA margin was 38.7%. Our fourth quarter adjusted organic revenue was flat in line with our expectations. For the year, total organic growth was 2%, while our Financial Services organic growth, which is 94% of our revenue was 3.7%. 2022 was a challenging operating environment for SS&C, but we are pleased that with the revenue performance from our software businesses, including Advent, Investment and Institutional Management and as — and the resiliency of our Alternative Fund Administration and Intralinks business.

In 2022, SS&C generated net cash from operating activities of $1.134 billion, including $67 million in deal related expenses. We paid down $166 million in debt in Q4, bringing our consolidated net leverage ratio to 3.4 times and our net secured leverage ratio to 2.4 times, sorry, 2.4 times consolidated EBITDA. This past January, as we were in our quarterly blackout three of our stock buybacks, we paid down debt an additional $101 million. In Q4, we bought back 1.8 million shares from $90.7 million at an average price of $50.14. For the year, we had stock buybacks of $476 million, for purchases of 7.8 million shares at an average price of $61.01. We will continue to allocate about 50% of our cash flow to stock buybacks and about 50% to debt pay down.

In December, we acquired Complete Financial Ops, a specialized Colorado-based fund administrator that focuses on private equity and family offices. CFO Fund Services will augment SS&C’s capabilities in servicing venture capital and family office funds and CFO clients will enjoy the same outstanding service backed by SS&C size, scale and comprehensive solutions. We remain methodically opportunistic in our acquisition strategy, valuations have come down more in line with our disciplined strategy and we are evaluating several opportunities. We remain very bullish on our Blue Prism acquisition and we are wrapping our digital workers deployment throughout our business. I will now turn it over to Rahul to discuss the quarter in more detail.

Rahul Kanwar: Thanks, Bill. Q4 results demonstrate the strength of our business amidst a challenging operating environment and highlight our ability to drive margins despite inflationary pressures. We exited 2022 with 38.7% EBITDA margin, up 330 basis points from the low point in Q2. Cost controls, facilities reduction and productivity improvements enabled this quick turnaround. While labor markets remain volatile, we believe Blue Prism’s intelligent automation technology will be an important means to harnessing the productivity of our workforce in 2023 and beyond. As a business unit, Blue Prism continues to grow nicely and exited 2022 with 20% EBITDA margins. We continue to see opportunity in the private credit market, where we are investing in a highly scalable offering combining the strengths of Advent Software products and GlobeOp Services capabilities.

A key component will be the build-out of a robust data platform that integrates multiple SS&C technologies, including Geneva, TNR, Precision LM and others. Private credit represents the latest example of SS&C developing technology, expertise and services to address the needs of a very specialized and complex set of fund managers. This is a strategy we have employed effectively and repeatedly as we have built the world’s largest alternatives administration business. I will mention some key deals for Q4. Three existing SS&C clients upgraded to our newest platform, Aloha. We currently have over 30 clients live on Aloha. A $13 billion asset manager partnered with SS&C for fund accounting and reporting functions on their real assets portfolio, this partnership includes lifting out 60 employees in Texas.

Photo by Scott Graham on Unsplash

One of DST’s largest clients expanded their relationship to include more transfer agency operations. A Canadian alternative asset manager chose SS&C for a suite of private equity administration services, including regulatory reporting, treasury services and investor vision citing their need for Canadian and international expertise, as well as scale for future growth. A $75 billion hedge fund chose Geneva for its superior functionality around loan processing and accounting. A Hong Kong-based asset manager chose EMS/OMS as they needed greater asset class coverage, flexibility, third-party integration and compliance functionality. Mine Super managing $12 billion in assets on behalf of 55,000 members became SS&C’s first Australian superannuation client.

The partnership will deliver superior digital experiences for members, driving greater member engagement and stronger retirement outcomes. I will now turn it over to Patrick to run through the financials.

Patrick Pedonti: Thanks. The results for the fourth quarter 2022 were GAAP revenues of $1.338 billion, GAAP net income of $207.5 million and diluted EPS of $0.81. Adjusted revenues were $1.391 billion. Adjusted revenue was up 3.3% and adjusted operating income decreased 1.1% and adjusted diluted EPS was $1.16, a 9.4% decrease from Q4 2021. Overall, adjusted revenue increased $42.9 million or 3.3% from Q4 2021. Our acquisitions contributed $72.5 million. Foreign exchange had an unfavorable impact of $28.7 million or 2.2% in the quarter. Adjusted organic revenue was flat on a constant currency basis. We had strength in several product lines, including Alternatives, Institutional and Investment Management and the Intralinks business.

That strength was impacted by weakness in our GIDS transfer agency business and Healthcare businesses. Adjusted operating income in the fourth quarter was $502.1 million, a decrease of $5.4 million or 1.1% from Q4 2021. Adjusted operating margins were 37.5% in the fourth quarter of 2022, compared to $39.2 million in the fourth quarter of 2021. Excluding acquisitions, expenses increased 2.6% on a constant currency basis. Acquisitions added $56.7 million in expenses and foreign currency decreased cost by $27.9 million. Our cost structure has been impacted by wage inflation and higher staffing to support our business. Adjusted consolidated EBITDA defined in note three of our earnings release, was $518.6 million or 38.7% of adjusted revenue, a decrease of $4.3 million or 0.8% from Q4 2021.

Net interest expense for the quarter was $104.9 million and includes $3.7 million of non-cash amortized financing costs and OID. The average interest rate in the quarter for our amended credit facility including the senior notes was 5.64%, compared to 3.09% in the fourth quarter of 2021. Adjusted net income was $296.6 million and adjusted EPS of $1.16, and the effective tax rate used for adjusted net income was 26%. Diluted shares decreased to $256.4 million from $260.9 million in Q3. Share repurchases and the lower average stock price during the quarter led to the decrease. Fourth quarter — in the fourth quarter of 2022, we reported GAAP fair value, unrealized gains totaling $68.8 million for investments we made in 2020 and 2021. These gains are excluded from our adjusted financial results.

On the balance sheet, we ended the quarter with $440 million of cash and cash equivalents, and $7.1 billion of gross debt. SS&C net debt, which excludes the cash of $134 million at DomaniRx was $6.8 billion as of December 31st. Operating cash flow for the 12 months ended December 2022 was $1.134 billion. It includes the impact of $67 million of Blue Prism post-acquisition transaction costs. Adjusted for the transaction costs, cash flow was $1.21 billion or a decrease of $227 million or 15.9% compared to 2021. Cash flow was impacted by higher interest rates, lower EBITDA, and an increase in receivables, DSO. During the three months ended December 31st, we paid down $166 million of debt and purchased $90.7 million of stock buyback. Highlights for 12 months on the cash flow, we paid $1.36 billion for acquisitions, including Blue Prism, Hubwise, MineralWare, O’Shares and Tier1 and Complete Financial Ops net of cash acquired.

Treasury stock buybacks totaled $476 million. We purchase a 7.8 million shares at an average price of $61.01, compared to $487.9 million of treasury stock buyback in 2021. In July, the Board authorized the new stock purchase program up to $1 billion. Program to-date, stock buybacks totaled $305 million for purchases of 5.5 million shares at an average price of $55.78. For the year, we declared and paid dividends of $203 million, compared to $174 million last year, an increase of 16.7%. In 2022, we paid interest of $298 million, compared to $192.5 million in 2021. Income taxes paid this year totaled $281 million, compared to $310 million in 2021. Our accounts receivable DSO was 52.3 days as of December 2022 and that compares to $51.8 million as of September 2022 and 49.5% as of December 2021.

Capital expenditures and capitalized software totaled $208 million or 3.9% of adjusted revenue, compared to approximately $137 million in 2021. The spending is predominantly for capitalized software and IT infrastructure. Our LTM consolidated EBITDA, which we use for covenant compliance was $2.010 billion as of December 2022. And based on the net debt of $6.8 billion, our total leverage was 3.4 times and our secured leverage was 2.4 times as of December 31st. On outlook for 2023, I will cover a few assumptions first. We will continue to focus on client services, and we expect our retention rates to continue a range of most recent results. We have assumed foreign currency exchange at the year end 2022 levels. As a result, adjusted organic growth for the year will be between 2% and 6%, and adjusted organic growth for Q1 will be in the range of negative 0.5% and to positive 2.5%.

We have assumed interest rates will average approximately 6.35% for the year for our credit facility and senior notes. We expect staff productivity to improve by approximately 5% and we will manage expenses during this period by controlling variable costs to improve our operating margins in the rate of 50 basis points to 150 basis points compared to 2022. We will continue investing in our business long-term in the areas of capital expenditures, product development and sales and marketing. And we will continue allocating free cash flow to both to pay down debt and buy back stock and we have assumed that the tax rate will be approximately 26%. So for the first quarter of 2023, we expect revenue in the range of $1.332 billion to $1.372 billion, adjusted net income in the range of $282 million to $299 million and diluted shares in the range of $156 million to $157 million.

For the full year 2023, we expect revenue in the range of $5.45 billion $5.655 billion, adjusted net income in the range of $1.190 billion to $1.285 billion and diluted shares in the range of $455 million to $258.5 million. And for the full year, we expect cash from operating activities to be in the range of $1.275 billion to $1.375 billion. Now I will turn it over to Bill for final comments.

Bill Stone: Thanks, Patrick. 2023’s improved operating environment will present more of our growth opportunities for SS&C. We look forward to capitalizing on these opportunities and delivering superior results to our shareholders. I will now open it up to questions.

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Q&A Session

Operator: Your first question comes from the line of Surinder Thind with Jefferies. Your line is open.

Surinder Thind: Thank you. I’d like to start with a question or two around productivity. Can you maybe talk a little bit about just the digital workers and kind of the efficiencies that you are seeing there? So when you give metrics such as there’s 180 digital workers, does that replace a certain amount of employee hours or how should we think about that and maybe just the kind of the targets that you have for the full year that you laid out relative to last quarter?

Bill Stone: Yeah. We expect on average conservatively that a digital worker will probably save us $50,000 per digital worker deployed. We are not replacing personnel on a one-for-one basis with digital workers. What we are doing is allowing ourselves to hire less and get more productivity through the deployment of digital workers and then also perhaps not to have — to hire for some of the attrition. So we look at this as a win-win for our employees, the digital worker tends to take over repetitive tasks, which gives our employees a more interesting job. And then it also is obviously a cost savings and efficiency process for us and we would hope to deploy, I believe, somewhere around 1,500 to — I think, 1,350 to 2,700 digital workers in 2023.

Surinder Thind: Got it. And then in terms of just what that means for the expense line item, the comment around a 5% improvement in productivity. Also — so in terms of when we think about the revenue guide, does that mean expenses should be relatively flat year-over-year, just in absolute terms?

Bill Stone: I think I guess what it implies, and I think, obviously, we have to manage and we are subject to every other just as every other company depending on what inflation is and what’s happening in the labor markets. But other than that, the productivity we expect out of the deployment of digital workers should offset some of the expenses that we would paid for higher salaries and other expenses.

Surinder Thind: Got it. And then just one quick follow-up, in terms of the commentary around the M&A, any additional color that you can provide there in terms of the types of opportunities you are looking at or the scale of opportunities, any color there would be helpful?

Bill Stone: Yeah. We see a number of dislocations in the fintech space. So there’s going to be opportunities both large and small. And as always, SS&C is a disciplined acquirer, we are also somewhat of a reasonably voracious acquirer when prices are in our disciplined strategy and that’s not 10 times revenue. So we think that the market is moving to where we are, we think that we have lots of productivity opportunities and we think we will be a good home for different types of ops companies we could acquire.

Surinder Thind: Thank you, Bill.

Operator: Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Alex Kramm: Okay. Good evening. Yeah. Hey. Good evening, everyone. Just to follow up on the, I guess, cost and margin question. I think Patrick specifically said 50-basis-point to 150-basis-point margin expansion. Maybe I didn’t hear that right, but if that’s the case.

Patrick Pedonti: That’s correct.

Alex Kramm: I guess –yeah. So I think it gets you in EBITDA terms to around 39% at the midpoint. Is the cadence of that and I guess we came back into the first quarter, but can you maybe just lay out any sort of seasonality or also if you are taking measures still this year? Is that a glide higher with revenue growth or how should we be thinking about the cadence of margins if you think about the four quarters?