SS&C Technologies Holdings Inc (SSNC) 2003 Q4 法說會逐字稿

Good afternoon. My name is Brian, and I will be your conference facilitator today. At this time I would like to welcome everyone to the SS&C fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press *1 on your telephone keypad. If you would like to withdraw your question, press *2 on your telephone keypad. Thank you. At this time I would like to turn the call over to Mr. Bill Stone, CEO.

Thanks, Brian. Welcome everyone. I’m Bill Stone, CEO of SS&C, and I'd like to thank you for joining us on our earnings call today. With me are Norm Boulanger, our COO and Patrick Pedonti, our CFO. Norm will discuss our Q4 in 03 results from an operating perspective, and Patrick will discuss the details of our fourth quarter and full year financial results.

Before I start, let me remind you 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.

I am pleased once again to be able to present positive results for SS&C. We had a strong fourth quarter which rounded out a strong year. Norm and Patrick will discuss the details, but I would like to mention a few highlights. Our operating income hit a record high for the second consecutive quarter. In Q4 our operating income was $6m, an increase of 31 percent over Q3 and up 50 percent from Q402.

In Q4, outsourcing revenues increased 21 percent to $3.6m, up from $3m in Q4 last year and up 10 percent from Q3 this year. Throughout 2003 we successfully focused on both revenue growth and expense control. As a result, GAAP net income for 2003 rose 61 percent to $11.8m, or 89 cents per share compared with $7.3m or 53 cents per share in 2002.

These strong results showed up on our balance sheet, and we ended 2003 with $52.4m in cash and marketable securities and no debt. We put some of this money to work as well. We continued our stock buyback program for a total of $17.7m in 2003. We paid our first ever dividend payment to shareholders totaling $1.2m, and we paid $1.8m for the acquisition of SS&C fund services, which is headquartered in [Curassow, Netherlands and Tilly].

As you know, acquisitions are a key part of our overall business plan. We look for opportunities to broaden our reach into new markets, or gain depth by adding features and functionality to an existing market. Recently we completed two acquisitions. In December, as previously released, we acquired AME Corp’s fund administration business. Rebranded SS&C’s fund services to the business unit that is headquartered in Curassow and provides both on and offshore services. We believe our combined strength in fund administration and technology will set us apart and early results show the market is responding.

Last week we announced we acquired Investment Advisory Network LLC, IAN for short. IAN provides web-based wealth management services to financial institutions, broker/dealers and financial advisors who offer managed accounts to the private wealth market. This acquisition allows us to tap into the rapidly growing private wealth market with an ASP BPO offering and advances our recurring revenue model.

As many of you know, with what’s going on in the regulatory environment, more and more people are setting up separate accounts than their own private accounts. These separate accounts and private accounts are going to have to be managed by individual investment advisors and we believe that IAN will be a great platform for us to sell into this marketplace.

What we’ve done in 2003 has really given us a platform for what we expect in 2004. We currently expect Q1 2004 revenues to be in the range of $17.5m to $18.5m, and that income to be between 25 cents and 27 cents per share. For 2004, our expectation is for revenue to be between $74m and $75m, and diluted EPS between $1.07 and $1.12. With that, I would like to turn it over to Norm Boulanger.

Thanks, Bill. As Bill outlined, we have a solid Q4 and a full year. We accomplished this by staying focused and executing on our goals. One of our primary goals is keeping our operating costs in line, and Q4 expenses were down $0.3m from Q4 2002, and down 6 percent for the year.

In 2003, we were able to reduce our facilities expense by completing two site consolidations. We also continue to focus on the use of the Internet to expand our client service offerings. By doing so we can deliver services over the web and serve clients more profitably.

Our total revenues increased by 10 percent to $17.9m in Q4 from $16.2m in Q4 2002. As Bill discussed, we had a 20 percent increase in outsourcing revenues for Q4, and we expect an increase in revenue next year.

[With] outsourcing across our hedge funds, insurance and financial institution verticals, and we have long-term commitments with existing clients. We are excited about the potential of our recent acquisitions. SS&C Financial Services and IAN’s business models match our recurrent revenue model, and we expect both will make an important contribution to our outsourcing revenue in 2004.

Q4 professional services were $2.1m, a 76 percent increase over the $1.2m in Q4 2002. This increase is due to a number of sales of both license and outsourcing, and also reflect the large outsourcing deal signed in the previous quarter that we provided implementation services on in the fourth quarter.

Overall the 2004 revenue outlook is positive. We have an active pipeline, good visibility for our core business, and our new acquisitions will allow us to penetrate new markets and add to our existing outsource momentum.

In 2004, we are focusing on the smooth transitions of our acquisitions, and making our presence felt in the new markets. Finally, we’ve run our operations to grow revenues, control expenses and produce earnings. Now I would like to turn it over to Patrick, our CFO.

Thanks, Norm. I’ll go over the fourth quarter results first. The results for Q4 2003 are revenues of $17.9m, net income of $6.7m and earnings per diluted share of 28 cents. Strong performance in Q4 was the result of strong revenue and continued margin improvement. Our operating income for Q4, as Bill mentioned, was $6m, 34 percent of revenue and a new record for the company. This compares to 29 percent of revenue for Q3 2003 and 25 percent of revenue for Q4 2002.

The operating income increase of $2m from Q4 2002 was a result of strong revenue increases and continued margin expansion. Licensed revenue for the fourth quarter was $4.1m, a reduction from $4.6m in the prior year. The quarter had lower hedged product licensed revenue that was offset by strong [inaudible] product sales.

Maintenance revenue was $8m for the fourth quarter, a 9 percent increase from prior year. The increase was mainly attributable to our municipal finance products we acquired in late 2002 and strong renewal rates across the majority of our products.

Professional services revenue for the fourth quarter was $2.1m, a 76 percent increase from prior years. The increase was driven by a major professional services project related to an outsourcing contract. Outsourcing revenues were $3.6m in the fourth quarter, an increase of $600,000 or 21 percent from the prior year, and a 10 percent sequential increase. The increase from prior year was mostly due to increased demand in our assets and fee direct outsourcing services.

In the fourth quarter, our outsourcing gross margins continued to improve and reached 44 percent. A sequential improvement of 300 basis points from 41 percent in Q3 of 03 and a 1,400 basis point improvement from 30 percent in Q4 of 02.

Recurring revenues, which consist of maintenance and outsourcing revenues are up $1.3m, or 12 percent to $11.7m in Q403 compared to Q402. The total expenses for the fourth quarter were $1.8m, which is down $400,000 from Q402 but up $400,000 sequentially from the third quarter of 2003. This sequential cost increase was mostly in cost of revenues, and was directly related to the increase in revenue.

For the year of 2003 our revenues are at $65.5m and net income was $11.8. Diluted EPS of 89 cents. This compares with $62.4m in revenues in 02 and diluted EPS of 53 cents. Please note that in 02 we had an IT R&D charge of $1.7m related to the real time application.

Operating income for the year was $18.4m, or 28 percent of revenue and a record for the company. This compares to $11.1m or 18 percent of revenue in 2002. This increase of 65 percent was the result of an increase in revenues, specifically recurring revenues, improved gross margin and a reduction in operating expenses.

Our licensed revenues for 03 was $14.2m, a reduction from $15.6m in the prior year. The year had strong municipal finance product sales, offset by reductions in property management and loan management products compared to the prior year.

Maintenance revenues were $31.3m, 12 percent increase from prior year. The increase was mainly due to the municipal finance product, and strong renewal rates in all the institutional asset management products.

Professional services of $6.8m, a 7 percent increase from prior year. The increase was driven by again, the major professional services product of projects related to outsourcing contracts which will start in the future.

Outsourcing revenues were $13.2m, an increase of $600,000 or 5 percent over the prior year. The increase from prior year is mostly due again to increase demand to SS&C Direct Outsourcing Services. In the outsourcing, gross margins were 39.5 percent for the year compared to 31.7 percent in 2002. This improvement was mainly due to improved operational efficiency.

For the year, recurring revenues is the key indicator that we follow, was up $4m or 10 percent to $44.5m in 03, and represented 68 percent of total revenues for the year. Our total expenses for the year were $47.2m, down $4.1m or 8 percent compared to 2002. Major costs were [inaudible] and productivity improvements contributed to the expense reduction. Cost reduction areas included facilities, consolidation, market data cost reductions and various other operating cost reductions.

Growth in the productivity area, revenue per employee went from $192,000 of revenue per employee in 2002 to $213,000 in 2003, an 11 percent improvement.

On our balance sheet and cash flow, as Bill said, we ended the year with $52.4m in cash and marketable securities, an increase of $10.7m for the year, even after spending the $17.7m in stock buy backs of which we purchased approximately $1.1m shares. In addition, as Bill mentioned, we paid $1.8m for the acquisition of the fund services business in Q4.

We had strong operating cash flow in 03 at $23.7m, or $1.79 per diluted share. This increase of $8.2m from the prior year, or 53 percent, came from increased earnings, tax benefit on option exercises and a strong accounts receivable collection. Our accounts receivable DSO at the end of the year was 43 days, which is significantly lower than our expected range of 60 to 70.

A return on equity for 2003 was 19 percent for the full year. This is a 46 percent improvement from 13 percent in 2002. A couple of details on our stock buy back. The company currently has authorization for approximately an additional $8m of stock buy back through May, 2004, and over the past year we purchased $5.4m shares for a total of $53.4m.

That’s the past four years.

Past four years. Now I’ll turn it over to Bill.

Thanks, Patrick. I think that’s enough numbers for all of us for awhile, but they are good numbers and I think what they really reflect is what our business is doing, and I think we are operating on a pretty high level. As we look through 2004, I think what we are trying to do is to really focus on the top line growth and at the same time make sure that we understand what we’re doing and that we control our expenses so we get the kinds of returns that we have come to expect.

Some of the things that are really something that I think are important as a takeaway is, the margin expansion in the outsourcing business went up 800 basis points this year from 02 to 03, and I think that’s a big number and we think we can continue to move our outsourcing margins up. We also believe that our revenue per employee is a key statistic for us. We are at $213,000 in 03 and we would like to improve that in 2004 as well.

And then the last thing that we have is that with the cash hoard that we have in the market and also with a strong stock price, we have a lot of fire power to go after acquisitions and get them done quickly and efficiently, both for the seller and also for us as we start to bring them into our fold.

One of the reasons that you keep seeing us expanding our margins is that we own our software and when we see bottlenecks in our software we have talented developers and talented business analysts and talented managers that then go through and figure out how to automate any bottlenecks. What that does is allows us to do more trades per person, more portfolios per person, or more corporate actions per person, and that’s what drives productivity increases, it drives a controlled expense environment and also drives revenue enhancement and margin expansion. And with that I will turn it over to questions. Brian.

(Operator instructions) Your first question comes from the line of Chris Rowan.

Yes, congratulations on the quarter.

Thanks, Chris.

Is the outsourcing project, the large one, how is that going? Is it on schedule?

Ahead of schedule.

Ahead of schedule?

It’s almost complete.

Almost complete. So should we expect to see a sequential drop in professional services in Q1?

We’ll see some adjustment because of that completion, but we have other accounts we will prospect and try to work, that will start to force revenue the other way. So yes, but it’s not on a one-for-one.

All right. How about outsourcing revenue? What is your outlook for that for 2004?

I think we have an expectation that it is going to be probably our fastest growing area, and probably ought to be growing at a rate of 40 percent or 50 percent.

Wow, that’s great. And most of that is pretty visible, I would imagine?

It is.

And then how about licensed, what is your outlook on licensed? Do you think that’s a growth area or just model it to be flat?

Again, Chris as you know, the licensed business has always been lumpy and it remains lumpy. I think we have very good software that an awful lot of people would buy and if we really get a turnaround in capital spending in the financial services industry, we’ll probably get an up tick in licensed revenue.

You know, the large license sales are six to 18 month timeframes, and I think that what we’ve been doing well over the last several years is manage flat, manage to a flat licensed revenue quarter over quarter, but at the same time to go in after our best opportunities to see if we can’t occasionally have some spikes. We have some nice accounts in the pipeline and we think that we will win our share.

Have clients given you any kind of indication that 04 will be a better capex year?

I think in general we have got some feelings of it being a better capex year. You know, none of them are coming out and being real bullish about it, but they are asking for more RFPs and RFIs, they are asking us to rebid or re-estimate stuff that we had given them two quarters ago, and I think a number them, as you’ve seen some of these large mergers, that generally shakes a few things out as well and it gives us some opportunities.

I think Patrick said that Curassow was strong and the hedge fund products were maybe not as strong this quarter. Is that the beginning of a switch in the market in terms of who is buying versus who is not, or do you think that is just a one quarter blip?

I think in the hedge fund spaces that it is probably a one quarter blip. A lot depends on what happens in the regulatory environment. As you well know, I don’t think that all of the examinations are over with, and there has already been some rumblings that Spitzer is going to look at the hedge fund industry now. So I think the number of new startups and that type of stuff that had slowed down a little bit last quarter. But again, it is a pretty dynamic industry and I think that it tends to have an awful lot of bright people and they bounce back pretty quickly.

Okay. All right. Thanks a lot.

Sure. Brian?

Your next question comes from the line of Robert Coolbirth.

Hi there, guys. I just wanted to ask a couple of quick housekeeping questions about your guidance here of $74m to $77m on the top line. I just wanted to ask with respect to that, is there going to be any sort of margin compression due to increased investment, or will the share cap be going up overall? Just to see how the top line fits with the bottom line guidance.

Okay, let me just kind of repeat that for a second Robert. Is it that you are looking on whether or not on our guidance, housekeeping are we looking for margin compression?

Yes, that’s basically the question, yes. Or would share count be coming up a little bit overall, despite some of the continued buy backs?

They all, the mix of revenue, Robert, will have an affect of reducing overall margin a little bit as more of our revenue is from outsourcing, but you know, we should see outsourcing gross margins improve. And then on the share count, you know, what we expect to do is to offset any dilution with buyback purchases.

All right.

For an increased dilution, you know, we expect to offset with the buyback.

All right. Fair enough.

I would say pretty stable.

Okay, now on the two recent acquisitions, is there any more color you might be able to give on whether you all would be taking any one-times, really, into them or if there would be any sort of impact that we will be able to see upon the top, bottom line due to these acquisitions?

Well both the AME Corp Fund Services business and the IAN acquisitions are both small companies. You know, we are getting about a dozen people or so in Curassow and we are getting about 19 or so people in Denver that they are going to generate a few million dollars in revenue, but until we get in there and start cranking the revenue up and managing the expenses, I think the earnings top off will be seen mostly in Q3 and Q4.

All right. Great quarter, guys. Thanks a lot.

Sure.

(Operator instructions) Your next question comes from the line of Phillip Rappel.

Yes, thanks. Hi, guys. A couple of qualitative questions. First of all, you mentioned that you are starting to see some signs of improvement, but not across the board sort of in your end markets. You know, as you look to accelerate revenues in 2004, are you looking to sort of sell more to your existing customers or because of your product set, expand your customer base significantly?

I think that, you know, in the last few years it’s been about a 50/50 split between new customers and additional modules and systems into our current client base. I think that we’ll see a little bit more new customer bent in 04, maybe 60/40 or maybe a little higher than that, maybe 62/38, or something like that.

I think that we have a number of clients that we’ve signed as outsourcing clients in Q3/Q4 that really will ramp up in 04, so you are going to see some revenue improvement from clients that have been signed in the last couple quarters that really don’t go online until Q1.

Okay. And on that outsourcing arena, you know, is it also sort of 50/50 in terms of new customers and conversions of old customers?

Primarily the outsourcing stuff would be almost 100 percent new customers.

Okay, so that is 100 percent new and that –

Just let me clarify that a little bit for you, Phil, is that some of our outsourcing clients, and we’ve talked about them before, are very large financial institutions and they may add new customers, which will give us additional revenue. But also the other large thing will be completely new relationships between us and independent financial entities.

Okay, yes. Okay. And then kind of looking at the outsourcing business, are you seeing more success with the BPO programs or straight ASPs or is that balanced as well?

I think primarily BPO, but we’ve seen an up tick on both sides.

Okay. And then you didn’t mention much about sort of international mix, was there anything different in the quarter and sort of what is your outlook for 2004?

We were profitable in Asia and in Europe in Q4, which we always like to be. We have a stronger pipeline in Asia right now than we have in Europe, although we think there are some opportunities to start expanding our outsourcing into the European market space that might be accelerated compared to Asia, but we have a pretty good pipeline of licensed opportunities in Asia that Europe really has not shown much robustness.

Okay. That’s great. Thanks very much, and nice quarter.

Thanks.

Your next question comes from the line of Andrew Pearl.

Hi, talk about your plans for your sales force head count and quotas, and secondly, could you talk a little more about competition in outsourcing and pricing trends there? Thanks.

Well the head count of the sales force has remained relatively flat and our quotas for them are also relatively flat. We have about 20 people in the U.S. that are quota-carrying sales people and in general they have a quota of anywhere between $500,000 and $1.2m. Internationally we have about five salespeople and their quotas are a little less than that, maybe $400,000 to a million.

In the outsourcing trend, we have been getting very good rates for our services across the spectrum. With the acquisition of SS&C Fund Services we think that our delivery mechanism into the hedge fund and alternative investment markets is going to improve and we might see a strengthening in pricing in that area. In the other outsourcing businesses it’s been strong, but relatively flat as far as pricing is concerned.

Andrew Pearl. Thank you.

There are no further questions in the queue at this time.

Again, we appreciate everybody getting on our call and we look forward to talking to you sometime in April. Thanks.

This concludes today’s SS&C fourth quarter earnings conference call. You may disconnect at this time.