SS&C Technologies Holdings Inc (SSNC) 2003 Q3 法說會逐字稿

Good afternoon. My name is Derrick, and I will be your conference facilitator. At this time, I would like to welcome everyone to the SS&C Third Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. Mr. Stone, you may begin your conference.

Good afternoon. This is Bill Stone. I'm the CEO of SS&C, and I'd like to thank you for joining us today.

With me are Norm Boulanger, our Chief Operating Officer, and Patrick Pedonti, our Chief Financial Officer. Norm will give you a business overview, and Patrick will discuss the details of our financial results for the third quarter ended September 30, 2003, and they'll both speak after I've given you a few of the highlights.

Before I begin, I'd like to remind everyone that various remarks that we may make on this conference call about our future expectations, plans, and prospects constitute forward-looking statements for 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 SS&C's quarterly report on Form 10-Q for the quarter ended June 30, 2003, which is on file with the Securities and Exchange Commission.

We are pleased to be able to say our strong operating results for Q3 makes it 10 straight quarters we have had strong operating results. Our management team has done an excellent job at transitioning the business to a recurring revenue model and in controlling our expenses.

I'd like to point out some of the highlights for the quarter.

Our operating income was $4.6m, up from $3.3m last year, and our recurring revenue stream continues to improve and is over 70 percent of our revenue.

Our outsourcing revenue also has been strong and now represents approximately 20 percent of our revenue. We continue to generate significant cash flow from our operation, and this quarter we put it to work.

First, we declared our first-ever cash dividend of 10 cents semiannually. Based on the amount of cash we generate and the tax law changes, it made sense to pay some of the profits to shareholders directly. This is in addition to the $4.7 million we spent on share repurchases this quarter.

Secondly, on Tuesday, we announced we entered into a nonbonding agreement to acquire the fund administration business of Amicorp Fund Services. We expect to finalize this transaction and complete the regulatory applications in November. This business is located in Curacao, the Netherlands Antilles and will be renamed SS&C Fund Services. Amicorp is a good fit, and we see this as an opportunity to expand our global reach in the hedge fund industry.

In the EMEA market, several brokers of asset managers, pension funds, and custodians have selected and implemented Altair, our new Netherlands investment management system. Some companies, like [AEK][ph] and [Wasa][ph], are celebrating their first anniversary on the system, while others went live this quarter. We believe the success will help [future] our sales efforts.

Domestically, we continued developing expanding relationships that deliver value-added services to our clients. In Q3, we expanded our relationship with Reuters to integrate their DataScope and Fixed Income services with our PortPro application. This will give our clients access to Reuters' enterprise information, including fixed income and equity reference and pricing data.

Currently, we are forecasting Q4 revenues to be in the range of $16-18m and net income to be between 23 and 26 cents per diluted share.

And with that, I'm going to turn it over to Norm Boulanger, our Chief Operating Officer.

Thanks, Bill.

In Q3, our outsourcing revenue continued to trend upward, while we closed outsourcing business across our hedge funds, insurance, and financial institutions verticals, as well as we renewed long-term commitments with some existing customers.

Of particular interest this quarter is we saw our consultant revenue increase by 36 percent over Q2. Some of the notable highlights for the quarter in terms of sales included in our Financial Institutions Group, we signed a seven-year agreement with U.S. Central Credit Union as an alliance partner marketing our PortPro product to its member corporate credit unions.

Our CAMRA Portfolio Management and Accounting System was instrumental in closing a major outsourcing deal this quarter in the insurance space.

The DBC Product Group had a solid quarter. It signed a total of 18 new deals in Q3.

We've also had some success marketing our solutions to prospects that used competitor products. We had several takeaway deals that we won this quarter against competitors.

As Bill mentioned, we have an active pipeline and expect to see our present momentum extend into the fourth quarter.

On the product development front, during the quarter, we rolled out major releases for the entire DBC product suite, new releases for CAMRA and AdvisorWare; SKYLINE II, our residential system, scheduled to be released into the market into the market in the next few weeks; and we've planned a release for our Antares and LMS product by the end of the fourth quarter.

For Q4, our goals are to complete the Amicorp acquisition, [and] continue to focus on executing our business plans. That means growing revenue, controlling expenses, and delivering first-rate customer service. These three objectives, when executed properly, lead to strong gains in shareholder value.

Now, I'd like to turn it over to our CFO, Patrick Pedonti, to give you the financial details for Q3. Patrick?

Thanks, Norm.

The results for Q3 2003 are revenues of $16m and net income of $3m and earnings per diluted share of 23 cents. The strong performance in Q3 was from solid sales results, margin improvement, and continued expense reductions.

Operating income for the quarter was $4.6m, or 29 percent of revenue, and a new record for the Company. This compares to 26 percent of revenue in Q2 2003 and 22 percent of revenue in Q3 2002.

The operating income increase of $1.3m from Q3 2002 came from a 6-percent increase in revenues, improved margin, and continued cost reductions of our operating expenses.

License revenue for the quarter was $3m, a reduction from $3.6m in the prior year, but we had a strong quarter in our hedge business and our municipal finance business as compared to the quarter last year.

Maintenance revenues were $8m for the third quarter, a 16-percent increase from prior year. This increase was mainly attributable to the municipal finance business, which we purchased last year, and an increase in the maintenance for our CAMRA product.

[Professional services during the][ph] quarter was $1.7m, $100,000 higher than the same period last year.

Outsourcing revenues were 3.3 in the quarter, an increase of $200,000, or 8 percent, from the prior year, and up 3 percent sequentially from Q2 2003. The increase from the prior year was mostly due to increased demand for our SS&C direct outsourcing services.

In the third quarter, our outsourcing gross margins continued to improve and reached 42 percent, a sequential improvement of 600 basis points, from 36 percent of the second quarter of this year and a 1,000-basis-point improvement from the 32 percent in Q3 of last year.

Recurring revenues, which consist of maintenance and outsourcing, were up $1.4m, or 14 percent, to $11.3m in Q3 2003, compared to last year. It now represents 70 percent of total revenues, and that's up from 66 percent in the third quarter of last year.

On the expense side, our total expenses for the quarter were $11.4m, and this is down $400,000 from Q3 last year and down $300,000 sequentially from the second quarter of '03. These cost reductions came mainly from two areas -- cost reduction programs that we've been implementing and productivity improvement initiatives.

In the cost area, we continue to carefully review all costs in our business, and in Q3 benefited from cost-reduction programs we initiated in Q2 and in Q3, and our annualized revenue per employee demonstrates the productivity improvements we've made. Annualized revenue per employee increased to $210,000 in Q3 2003, an increase of 8 percent from last year.

The balance sheet and cash flow -- our balance sheet continues to be strong with $48.4m in cash marketable securities, and our cash marketable securities position has increased $6.7m this year even after spending approximately $14.2m to purchase back approximately one million shares of our stock during the past nine months. In addition, in the third quarter, as Bill mentioned, we paid our semiannual dividend for a total of $1.2m.

Operating cash flow for the nine months ended September 30, 2003 was $16.4m, or $1.24 per diluted share. This was an increase of $5m, or 44 percent, over the same period last year. Main contributors to the strong cash flow are our increased earnings and accounts receivable collection. Our accounts receivable days outstanding as of the end of the quarter were 49 days, which is significantly lower than our expected and normal range of 60 to 70 days.

Book value as of September 30 was 57.7m, up $4.37 a share, and our return on equity in the third quarter on an annualized basis was 21 percent. This was almost a two-fold improvement from the 11 percent for the full year last year.

Concerning our stock buyback, the Company currently has authorization for approximately an additional $25m of stock buyback through May of 2004. And over the past three years, we've purchased over 5.3m shares for a total of $49.9m.

And I'll turn it over to Bill.

Thanks, Patrick. Thanks, Norm.

SS&C appreciates your interest in our company. We believe we are well positioned to continue our operating success. This operating success translates into shareholder value. Our GAAP earnings over the past four years have been 14 cents, 27 cents, 53 cents for '00, '01, and '02, and we currently see '03 GAAP earnings of 85 cents at the middle of our estimates. Fourteen cents, 27 cents, 53 cents, and 85 cents is a track record our company's proud of, and it is a record of accomplishment for the 305 people who make up this company.

With that, we'll take questions.

[Caller instructions.]

Your first question comes from [Chris Rowan][ph] with SunTrust Robinson.

On the license revenue, came in a little light. What's going on there? Are you selling the CAMRA and the AdvisorWare product, or has there been a lull in that market?

Chris, this is Bill. I think that, you know, the license revenue was weaker than we expected, but I think primarily we had some fallout at the end of the quarter, but we believe that we have a pretty good pipeline. We think the AdvisorWare and CAMRA products, as well as some of our other products, look like they're pretty well positioned in this period. If we see a little bit of an uptick in capital spending in the financial services area, we do think we will win our share.

Okay, what was the product group that had 18 new deals?

[Indiscernible].

That's the municipal finance business.

Okay. And then what's driving -- I realize that the municipal finance acquisition might be driving year-on-year improvements in maintenance, but it seems like that line is awful strong given the license revenue being kind of flat. What's driving that maintenance revenue line?

I think we've had very good renewal rates, and we've also had, with those renewal rates, some upticks in each one of the various license -- our license maintenance stuff that we have. So if we have CPI plus two or three, I think that that's been a pretty good -- we've had awfully good renewal rates, and we've been able to get the increases, and they've pretty well stuck.

Okay. And the outsourcing revenue seems to, you know, be kind of stuck where it is. Is there -- you know, is there less of an appetite for outsourcing, or what do you see there, and what's your prognosis for that?

I think that if you go back three quarters, Chris, I think we were at $3,056,000 three quarters ago, and I think this quarter we ended up at $3.3m. So I think we have an opportunity to see that continue to grow. We had a little bit of a lull when we acquired a financial institution's business in Minneapolis, [DVI][ph]. We moved pretty quickly to try to [indiscernible] some of the losses that they were having by raising prices, and by raising prices, we lost some of our revenue in that business. We do feel like we have a good handle on that now, and they're starting to see some improvement in that business, and so we think that the entire outsourcing business will continue to move north.

Okay. And I didn't see a significant sequential drop in the share count despite the buyback. Did you do it all at the end of the quarter?

I'll take that. Chris, this is Patrick. The buyback was pretty much offset by option exercises for the quarter.

Okay. Okay, that's all my questions. Thanks.

Sure.

Your next question comes from [Rob Colworth][ph] with Financial DNA.

Yeah, hi, this is [Gary Craft][ph]. Just a couple of questions on accounting definitions here. I just want to make sure I understand how you define recurring revenue. I know I heard you before, but if you could just go over that again, that'd be great.

Okay, recurring revenue for SS&C is annual maintenance agreements and outsourcing contracts. What doesn't go into recurring revenue is new license sales, and also, it doesn't go into recurring revenue as professional services.

And you don't record a -- report a backlog number then?

We do not.

Are you giving any type of outlook here for 2004?

We have not given any outlook for 2004.

Okay. Can you comment on what you -- where you see demand really perking up, if at all, in that year? Will it in other product areas, perhaps the new one that you're moving into, the credit union area, or is it indeterminate at this stage?

I think that, you know, as far as guidance for 2004, I think we're still kind of going through our finishing touches on our 2004 plan, but I think we are reasonably optimistic about our past success continuing in 2004. We think that the outsourcing business will be strong in 2004. We have pretty good visibility for professional services through 2004, and we also think that given that the economy continues to pick up, that license revenue will be a little bit stronger in 2004 than it was in the first three years of the new century.

And are you managing to any type of longer-term goal here for the outsourcing as a percentage of total revenues, Bill?

We would like to see outsourcing revenues become 50 percent over the next three or four years.

Could you help us to understand with the new foray into the credit unions for the portfolio management accounting what your -- how you elected to move into that market? If I understand correctly, that is -- this is the first product venue for the small- and mid-size community banks. And just how you went about entering into this market, what led to it, and what you think you can do there beyond just the portfolio management accounting, if anything?

Well, we -- again, we think that the community bank and credit union market, of which there's over 20,000 of them in the United States, represents one of those opportunities to get in on the ground floor and be able to deliver through the Internet a very valuable service to these organizations that are buying increasingly sophisticated securities through major dealer banks and other financial institutions, broker dealers, that the ability for companies like the small credit union or the small community bank to have access to the kinds of software that we can offer is a very valuable service to them.

Also, by having it on a recurring revenue, delivered through the Internet, centralized delivery mechanism, we can offer it at a very attractive price to them and also offer it through an alliance partner network that allows that alliance partner to market for us, that we have an opportunity to have pretty good profit margins in there, and as the ones become larger, we have opportunities either to expand our outsourcing relationship with them or license them additional products.

Are there other products that you're considering for that market at this point?

We think there's big opportunities with our loan management products and potentially with our property management products.

Okay. And who else would be in those markets, Bill? Do you have any idea at this time? Who's the competition that you see looking [inaudible] for a better value proposition [inaudible] with the small banks?

Yeah, the biggest competitors are SunGard and then a couple of the dealer banks, like First Tennessee. So we see them mostly in the marketplace. There's a small software company in Texas called PPG that's a competitor to us, and there's a small outsourcer called [Bank Metrics][ph] that is also a competitor to us.

And what, if anything, are you doing today in the compliance and with management area [indiscernible] financial institutions? That seems to be such a hot topic in the financial technology circles that we run in. Could you explain that as it relates to SS&C?

Yeah, our delivery mechanism in that area is through our BANC Mall product that allows financial institutions to get an Internet delivery of a variety of different services. One of them is [OFAC][ph] reporting, so there's a way to be able to go in and check on any new accounts and get credit reports and other things on identity identification, as well as complying with the various federal regulations that's coming --

Is that for money transfer or Fed wire-type of transactions, or is it new account openings, or a combination?

It's both, yeah.

Okay. Is there anything beyond that that you have or that you are looking at entering into for particular risk management applications?

Well, again, we have a platform through our BANC Mall that allows us to add additional products and services as we find them in the marketplace, either as a wholesaler for other OEMs or as a delivery mechanism for our own products. So we have a whole platform of products and services out on our BANC Mall, and we're looking very closely at a number of additional products that we could put out there in this space.

And then, finally, on the M&A front, is there anything that you're looking at? I know that you've not been aggressive in that regard, certainly not like some of the traditional outsourcers that we, at least, have seen, but -- and you've actually been quite careful, it seems, in what you've acquired. But are you -- is it likely that we'll see a deal activity here in the next six to twelve months?

Well, again, I think that, you know, your word's careful; our word would be disciplined. You know, we're pretty intent on accretive acquisitions. We're also pretty intent on understanding what it is that we're acquiring and making sure that it can integrate into our business with the least amount of disruption possible. We did just announce on Tuesday that we're acquiring the assets of Amicorp Fund Services down in Curacao. We think that's a very complementary business for us. We have a number of proposals out in the marketplace now with Amicorp as a strategic partner, and now they'll be even closer to us than a strategic partner. So we think that's a great opportunity for us.

We probably look at five or six deals a month, so we are actively in the marketplace. We have a recently strong currency in our stock, we have that $50m or so in cash on our balance sheet, and I think Patrick would say we're going to generate $20m or so in operating cash this year. So we have a lot of financial resources. We're trying to buy wisely and make sure that whatever we buy enhances shareholder value.

Okay, thank you.

[Caller instructions.]

We have a follow-up from Chris Rowan.

Hi. How much did you pay for the recent acquisition you made?

Yeah, we didn't disclose that, Chris, but it was not -- it wasn't material to our financial statement.

Great. Thanks.

At this time, there are no further questions.

Well, once again, we'd like to thank everybody for being on our third quarter call, and we look forward to seeing you at the end of the year. And certainly I know there are people from Boston as well as New York on the phone, and so good luck to both of you. We'll see you in January. Thanks, Derrick.

Thank you. This concludes today's SS&C teleconference. You may now disconnect.