SS&C Technologies Holdings Inc (SSNC) 2004 Q2 法說會逐字稿

Good afternoon. My name is Tina, and I will be your conference facilitator. At this time, I would like to welcome everyone to the SS&C Second 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. (Caller instructions.) Thank you. Mr. Stone, you may begin your conference.

Thank you Tina. This is Bill Stone, CEO of SS&C. And I would like to thank all of you for joining us on our Q2 earnings call today. Joining me on the call are Norm Boulanger, our Chief Operating Officer, and Patrick Pedonti, our Chief Financial Officer. Norm will give you a business overview for Q2. And Patrick will discuss the details of our financial results for the second quarter, which ended June 30, 2004.

Before I start, let me remind you that various remarks 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 filings with the Securities and Exchange Commission, including the company’s Registration Statement on Form F3, as amended.

I’d like to begin by saying our management team continues to effectively execute our business strategy. And, as a result, I am once again able to present positive results for SS&C. We had strong results for Q2, and posted new records for revenues, operating income, and net income. In Q2, our operating income increased $3m over last year, or 72% to $7.2m, a 29.3% operating margin.

In addition, our net income for Q2 rose 51% to $4.4m, or $0.21 per share, compared to $2.7m, or $0.14 per share in Q2 of 03. I’m also pleased to report solid revenue growth for Q2. Our revenues increased 54%, to $24.5m from $15.9m in Q2 03. All revenue streams contributed to our results. And revenue growth came from both organic and acquisition business.

This quarter we had a 13% increase in organic growth, which is about 30% above our 10% target. Licensed revenue increased 13% over last year. And the growth was all organic. Professional services revenue increased by 116% over Q2 03, with acquisitions accounting for the bulk of the increase. Maintenance revenue increased 20% over last year, primarily due to the OMR acquisition.

Outsourcing revenue increased by 160% compared to Q2 last year. Organic growth was responsible for 39% of this growth. Our recurring revenues for Q2, which include both maintenance and outsourcing revenue, increased to $17.6m, a 61% increase over Q2 03. And our recurring revenues now represent over 71% of our total revenue number.

As many of you know, we did a secondary in Q2. And with that secondary, our balance sheet is very strong, with $115.9m in cash, cash equivalents, and investments in marketable securities at June 30 of 04. We have generated $12.3m in operating cash flow in the six-month period ended June 30 04. Our cash position improved markedly as a result of raising the $74.4m through our secondary offering. Our financial strength gives us tremendous leverage for executing our long-term growth plan.

We continue to focus on increasing revenue, controlling costs, integrating acquisitions, and improving technology. The results of our focus continue to show up in improving revenues and earnings. We currently expect Q3 04 revenues to be in the range of $24.5m to $25m, and net income to be between $0.19 and $0.20 per diluted share.

We expect Q3 04 total diluted shares to be approximately $24.5m. For 2004, the full year, our expectation is for revenue to be between $92m to $95m, and diluted earnings per share to be between $0.78 and $0.80 per share. With this, I’d like to turn it over to Norm Boulanger, to get a little bit deeper into our operating results.

Thanks Bill. We challenge ourselves every day to improve our performance, and be able to present you with solid numbers at the end of each quarter, to keep our goals on the radar screen at all times. And sometimes these goals lead directly to financial results.

[Inaudible], we need to simultaneously focus on organic growth, acquisition growth, and growth within each of our verticals. Q2 showed encouraging results in all categories. The 13% increase in organic growth that Bill mentioned earlier came primarily from CAMRA™, Total Return™, our outsourcing business, [inaudible], and our [inaudible] finance group.

The OMR fund services, Heatmaps® and IAN acquisitions all made healthy contributions to our revenue numbers. All verticals posted an increase in revenue over Q2 of last year – most notably, our financial institutions business, our hedge and family office business, and our municipal finance business.

Cross-sell opportunities continue to build momentum, as we bring our acquisitions into the fold. We are capitalizing on our ability to sell new solutions to existing clients, as well as to strengthen our position in the marketplace by showing new prospects, using a greater array of products and services.

We are making significant progress integrating our acquisitions. And we are seeing immediate returns on all fronts. Continuing to manage projects carefully, constantly looking for operational efficiencies and economies of scale.

On the product development front, we had a major release in Antares™, and expect to launch version releases of LMS and PTS in Q3, a major upgrade in Q2, within to leverage our multiple products layer, by developing a fully integrated [inaudible] products, services platform and messaging, that can help our clients keep efficiencies for their front office, straight through process and to the back.

For example, we have successfully designed custom solutions for our hedge funds, by integrating our Antares™, Heatmaps®, Total Return™, AdvisorWare®, Debt & Derivatives™ and our messaging technology, as well as integrating that with our customers’ external systems. For the insurance market, we’ve integrated our CAMRA™, Debt & Derivatives™ and our performance module, as well as a communication structure underneath that is our messaging Xe™ technology.

For some of our asset management clients, we’ve integrated CAMRA™, Antares™, Heatmaps® and Xe™. We’re excited about the potential of our integrated products offering. The unique advantages that we have include the depth and breadth of our products and services, as well as our ability to customize each solution to meet the specific needs of our clients.

Overall in Q3 we will concentrate on increasing our market presence, both domestically and globally, and get the message out of all of the advantages our products and services offer the marketplace. Now I’d like to let our CFO, Pat Pedonti, give you the financial details for Q2. Patrick?

Thanks Norm. I guess to summarize our results for Q2 04, our revenues were $24.5m, net income of $4.4m, and EPS of $0.21 diluted. This strong performance in Q3 was really driven by three areas – solid organic revenue growth, while controlling costs; strong contributions from our recent acquisitions; and continued outsourcing gross margin improvements.

Revenue for the second quarter increased $8.6m or 54%, compared to last year. The increases came from both increased demand for our core products and services, and from recent acquisitions. Internal growth represented 24% of the growth, and mostly came from demand for CAMRA™ products and services, our Total Return™ product, and all our outsourcing services.

We also had higher revenues from OMR acquisition than we had originally expected. The recent acquisitions of OMR, IAN, NeoVision, and [Sun] [ph] Services, contributed $6.5m to the revenue growth when compared to the second quarter of 2003.

Our outsourcing revenues were $8.3 in the second quarter, an increase of $5.1m, or 160% from prior year, and a 60% sequential improvement from Q1 04. And, importantly, our gross margins in the second quarter improved and reached 48%, a 1200 basis point improvement from 36% in Q2 03.

Total expenses for the quarter were $17.3m. This is up $5.6m from Q2 03, and up $4.2m sequentially from the first quarter of 04. The sequential cost increase was mostly due to the expenses added from the recent acquisition of OMR.

As revenues increased 54%, our total expenses increased only 47% when compared to second quarter last year. This is a result of us maintaining our strong operating income returns, and improving operating income margins by 310 basis points over the second quarter of 03.

Our balance sheet, as Bill mentioned, continues to be strong, near $160m in cash and marketable securities as of June 30, 04. Cash and marketable securities have increased by $63,5m over the last six months. Major sources of cash obviously include our secondary offering, where we raised a net $74.4m after costs, and major use of the cash during this period includes $23.4m for the acquisitions of OMR, Ian and NeoVision.

Operating cash flow for the six months ended June was $12.3m, a 26% improvement over last year. Contributions to the strong cash flow were increased earnings, and a tax benefit from the option exercises during that period.

The accounts receivable days outstanding is 61 days at the end of the quarter, up from 43 days as of December 31, 2003. The increase is mostly due to the OMR acquisition, which took place in the quarter, and was caused by some transitional issues around collecting those receivables during that quarter. We expect to resolve those shortly, and move our DSO back into our expected range of 45 to 55 days.

Concerning our guidance for the year, the following are a couple details. As Bill mentioned, we expect diluted shares to be about 24.5 million in Q3 04, where we’re getting the full impact of the shares issued in our secondary offering.

Interest expense – interest income in Q3 we expect to be approximately $350,000 to $380,000, as we move our cash position into short-term tax-free investments. Expenses should increase slightly, below 1-2% in Q3, as we have a full quarter impact of the OMR expenses. In – as you recall, in Q2, we acquired OMR in April 12. So we had about 2-1/2 – a little over 2-1/2 months of expenses for OMR in Q2.

Full year guidance is $93m to $95m in revenue, and $0.78 to $0.80 EPS. At the end of the first quarter ’04, before our secondary offering, we provided guidance of $0.76 to $0.80. With the additional shares issued at the secondary in June 04, the new EPS guidance is at the high end of the previous range.

But, more importantly, our net income guidance has improved by approximately $1.5m from our view at the end of the first quarter. I’ll turn it back over to Bill. Thank you.

Thanks Patrick. Thanks Norm. As you can tell, we really feel strongly about both what we’ve done in the second quarter, and how we feel about the rest of the year. We do believe that our business is performing in each one of its segments. We think we have a great management team. And we have over 400 very talented employees.

And we really believe that we have an opportunity, if we continue to execute – and we plan on continuing to execute – to be able to meet with you at the end of the third quarter and at the end of the fourth quarter with strong results.

Another thing I’d like to talk about is SS&C’s commitment to the University of Connecticut in the financial accelerator program. Rich [Dino] [ph] and I – Rich is the Associate Dean at the School of Business – came up with an idea to do a financial accelerator for the MBA students at the University of Connecticut. And SS&C is making a five-year commitment.

And the name of the financial accelerator will be the SS&C Technologies Financial Accelerator in downtown Hartford. And what we plan on doing is to get real world problems and work the professors and the students at the University of Connecticut, and with different partners, and to be able to solve things like performance measurement with constraints, and stuff like commodity based pricing, and other items that are coming up – stuff like Sarbanes-Oxley and new compliance rules.

So we’re very excited about that. We think that U Conn is a university very much on the move. And we’re proud to be associated with them. And we look forward to having that help both our customers, our prospects, and the University of Connecticut. And with that, I’ll turn it over to questions. And Tina, if you would take the questions please.

(Caller instructions.) Your first question comes from the line of [Phil Nicholson] with J.P. Morgan.

Good afternoon. First just some questions regarding ONR. Obviously it looks like the unit performed on a revenue basis was much stronger. First of all, could you provide a little color on A) the revenue side, and also margins at that business? And then the second question is what assumptions are you making for the contribution of OMR into your following – the next quarter’s guidance, and also for the year? Thanks.

Phil, as we talked about when we went out on the road show, we felt that OMR was about – we bought it at about one times revenue. It’s about $20m in revenue. And we paid about $20m for the business. The revenue was a little stronger than we expected - probably in the 10% range or so.

We also felt like the contribution margin – we were able to control costs a little bit better than we expected. And we do feel like, as we said before, that we have an opportunity to move OMR margins up to 20% by the end of the year. And we’re still comfortable with that kind of a guidance, that we have an opportunity with OMR. We have great customers. And we have an ability to manage the cost. And as markets get more active, we see an up-tick in revenue.

And just any color on how – or how you achieved those cost efficiencies so quickly?

Well, again, we didn’t take all the employees, as we also said in the press release, when we acquired OMR. I believe we really took, I believe, about 100 of the employees, and that prior to us acquiring them they had about 110. Some of the senior management that was with OMR stayed with ADP. And we’ve had some turnover that we had expected, and had in some ways encouraged.

So we do believe that we have been able to manage the expense side of OMR a little quicker than we had initially anticipated. And we believe that going forward we have an opportunity to really execute on OMR, and get some revenue increases, and continue to manage the costs as we do in the rest of our business.

Thank you.

Your next question comes from the line of [Craig Beckham] with Jeffries & Company.

Hi. This is actually [Courtney Cleenan]. Just had a couple of questions. First, given your strong cash position, could you talk about the acquisition pipeline?

Yeah [Courtney], we constantly are looking at acquisitions. Again, we have talked often about that we look at five or six a month. So far we – the last one we did was April the 12, with the closing of OMR. We would hope to do at least one more acquisition this year. And we have a number of them that we’re actively discussing, although we don’t have any commitments with any particular acquisition candidates.

And could you give us a sense of how large these acquisitions are, kind of the price range?

Yeah, they would range from $10-15m, up to $50m.

Okay thanks. And another question, we’re hearing a lot about kind of a slower sell side trading volumes. How is that impacting you at this point?

You know, in our business, we primarily – in the license business and probably over half of our outsourcing business is on the buy side. So it – the sell side trading volume has not been much of an impact on us. We do very little with the brokerage community. What sell side exposure we have is primarily in fixed income. And through today, the fixed income markets have really been pretty active.

Okay great. Thanks so much.

Your next question comes from the line of Chris Rowen with SunTrust.

Hi guys. Nice quarter.

Thanks. Hi Chris.

Norm, can you go over those product releases again that are forthcoming that you talked about?

We have the LMS part, which is our mortgage loan and origination system, and PTS, which is our asset liability management system for insurance companies.

And those are - ?

Those are Q3. We have a Total Return™ release and a SKYLINE release, which Total Return™ is our family office offering. And SKYLINE is our real estate management system. Those are releasing in Q4.

Great. Thanks a lot.

(Caller instructions.) At this time, there are no further questions. Are there any closing remarks?

No. Again, we appreciate everyone coming on to the call today. And I think we had some almost 50 people on the call. And that’s very encouraging for us. We – the management team – are very focused on shareholder return. And I think that we appreciate the interest in SS&C, and we look forward to talking to you at the end of Q3. Thank you.

Thank you. This concludes the SS&C Second Quarter Earnings Conference Call. You may now disconnect.