SS&C Technologies Holdings Inc (SSNC) 2004 Q3 法說會逐字稿

Good afternoon. My name is Paige and I will be your conference facilitator. At this time I would like welcome everyone to the SS&C third-quarter earnings conference call. (OPERATOR INSTRUCTIONS) Mr. Stone, you may begin your conference.

This is Bill Stone and I am the CEO of assess the SS&C, and thank you for joining us for our Q3 earnings call today. With me is Norm Boulanger, our President, and Patrick Pedonti, our Chief Financial Officer. Norm will have a few remarks for all of you at the end of my remarks, and then we will turn it over to Patrick for some of the numbers.

Before I start let me remind you that various remarks we make on this conference call about our future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision of 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 filing with the Securities and Exchange Commission, including the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

I'd like to start today by saying how pleased I am to announce the appointment of Norm Boulanger as our President. Norm has been with SS&C since 1994 when we were 9 a million in revenue private company. He has been instrumental in many of our successful product and service launches, and he has the respect and confidence of our clients, employees and shareholders. Not only that, but I believe that this appointment cements our strategy of consistent recurring revenues, conservative management of our balance sheet, a strong commitment to our customers, and constant recruiting of the best analysts. When we think about this best talent, I think Norm and I believe that we've built a great team around us -- (indiscernible) our hedge fund business, Colleen Nelsen in our financial institutions, Janet Good (ph) in outsourcing, John Sharp (ph) in IT, Kevin Milne in international, Tee Arasoo in Malaysia, just name a few of the people that we've been able to surround ourselves with. Of course Patrick gets to talk, so I don't have to name him. And Steve Whitman, our General Counsel. Again, we believe we've built a really great team and that that's something that -- this is our 19th quarter of positive results in a row. And we believe that we've got the team to deliver many more quarters in the future.

Focusing on our -- executing our business strategy remains a priority for us. As a result, I'm able to repeatedly present positive results for SS&C. We had strong results for Q3 and once again hit new records in revenue, operating income, and net income.

In Q3 our operating income increased 2.9 million over last year or 63 percent to 7.5 million. In addition, our net income for Q3 rose 59 percent to 4.8 million or 20 cents per share compared to 3 million or 15 cents per share in Q3. Revenues as well grew 57 percent to 25.2 million, up from 16 million in Q3 '03.

Patrick will go through all of the numbers with you in a few minutes, but I think these numbers are pretty impressive and things that we've been able to do over the last several quarters and over the last several years has really set the stage for us to continue to deliver.

One of the things the Board approved of for today was a stock repurchase program of up to $50 million of our shares. This number represents about 10 percent of our market cap and about 40 percent of our current assets. It's very similar to the $20 million repurchase program that we've had in the past. And again, it reflects our belief that our stock is of value and also that we want to be able to negate any effects for employee equity programs.

On the international front we've seen increased interest for our products and services in Asia and Europe. Kevin Milne is building a strong sales team in Europe, and we've got a great team over and Malaysia and in Tokyo as well. In addition, our hedge fund and our global treasury solutions are attracting more and more Attention. I know Ward MacGraw is hiring very aggressively in our hedge fund outsourcing business both here and our operations in Connecticut, our operations in New Jersey, our operations in Curisow (ph), and really across the world. We're really looking for additional personnel to help us with our opportunities.

Not only does it help us to operate on these opportunities; it also requires a strong sales force, and we've been hiring strong salespeople across the United States and across the world for the last several months. And we are pretty excited about our opportunity as they start to deliver on new sales. We have high expectations for our group out in Denver and our IAN Group. We have high expectations for our financial institutions. And I have said before, we have high expectations for our hedge fund group.

The results of our focus as well have shown up in what we're delivering. And for next quarter we currently are expecting 25 to 26 million in revenue and net income between 20 and 23 cents per diluted share.

Now I'd like to turn it over to Norm for a few comments.

Since I started with SS&C 10 years ago, we've gone through a lot of changes (inaudible) changes has made us a stronger and (inaudible) company.

Our success is really primarily based on our people. We have some of the best and brightest people, some of which Bill had mentioned in his previous remarks. They make up the character of SS&C. The leadership of these channels (ph) is in both up and down markets. For those of you who have followed us over the last 10 years, success obviously wasn't a straight line. We have had lots of challenges. And I think comes down to people who are willing to make commitments, make the right decision, make the tough decisions, and focus on what we believe to be the right course of action. It's been great to be part of this talented group working together, adding product and services to develop new technology and to bring acquisitions into the fold.

We believe our greatest opportunities are ahead of us. Some of the things I'd like to accomplish as President include clearly establish the Company as a global leader; to bring our development, sales and marketing units together to create and deliver exciting world-class products and services; to focus intently on customer need and create an organizational structures to meet those needs, particularly as we grow; to make SS&C a worldwide place to work for talented people with an interest in financial and investment administration and technology.

The accomplishment over the past 10 years, which I think got me the President's job, besides putting up with Bill, is dealing with a very nimble organization that allows us to move resources where the opportunities present themselves. And I look forward to continuing to move the Company forward with a great bunch of people.

Those are my thoughts on where I think we're going, and I want to spend a few minutes talking about Q3.

As Bill said, we had an excellent quarter with (indiscernible) results. In many of our markets we saw a growing appetite for outsourcing, which is very encouraging. And obviously that is key to our recurring revenue model. The outsourcing revenues were up 159 percent from Q3 last year. We saw contributions in most of our market verticals, in particular the hedge fund market space, insurance and global treasury. We continue to be encouraged with our OMR acquisition and saw contributions in revenue and growth from both of the TradeThru and Xacct service lines.

Our license revenue in Q3 was up 36 percent over Q3 2003. The biggest contributors were CAMRA, Debt & Derivatives and Total Return. (indiscernible) with these products reflects our strength in fixed income, derivatives and other complex securities.

The sales force continues to capitalize on our ability to provide value-added solutions that others cannot. The depth and breadth of our products and services continues to be a differentiator in the marketplace. As Bill mentioned, internationally interest in our fund services and global treasury business is growing. Moving forward we expect to accelerate those opportunities by driving initiatives to take advantage of increased interest.

On the R&D front we have a major release of LMS and SKYLINE. In Q4 we expect to launch a version release of PTS, our asset liability management tool, as well as the (indiscernible) regulatory releases for CAMRA, Total Return and Advisorware.

A major focus in Q3 is hedge fund development for German tax law compliance. Something you may know, it is a new transparency capability to perform tax processing based on the new German tax laws for hedge funds for those funds doing business in Germany. Before the end of the year we will be able to support existing clients. But more importantly, having this ability elevates us to a small select group of fund administrators. The German hedge fund market is a hot new area, and understanding the new tax laws and having a solution that offers this service gives us tremendous advantage.

We've also seen a lot of optimism in the family office market in response to our recent upgrades of our Total Return product.

Overall we continue to focus on increasing revenue, controlling costs, integrating acquisitions, improving technology and focusing on execution. Historically we have seen ebbs and flows in many of our markets and have adapted. With the phenomenal growth of hedge funds and alternative investments still in full swing, we expect this market to remain a high priority for us both domestically and internationally.

I'd like to turn it over to Patrick Pedonti our CFO. Thank you.

The results for our Q3 2004 revenues of 25.2 million, net income of 4.8 million, and earnings per diluted share of 20 cents. The strong performance in Q3 was from solid organic revenue growth and strong contributions from our recent acquisitions. As you know, we've completed a 4.7 million share offering in early June, and these additional shares have been included in this quarter's EPS calculation.

Revenue for the second quarter increased 9.2 million or 57 percent compared to the prior year. This increase came from both increased demand for our core products and services and from recent acquisitions. Internal growth was 12 percent and acquisitions contributed 7.3 million in revenue. Strong growth came from several product areas -- hedge fund products and services, SS&C direct outsourcing services, our CAMRA and derivatives product, and its TradeThru product which we acquired in the OMR acquisition.

Outsourcing revenues were 8.6 million for the third quarter, an increase of 5.3 million or 159 percent from the prior year. In the third quarter our outsourcing gross margins were 46.1 percent, a 460 basis point improvement over 41.5 in Q3 '03.

The total gross margin was 64 percent in the third quarter, a decrease from 69 percent in the third quarter prior year. The reduction was due to lower gross margin contributions from the recent acquisitions. But margins of our internal business have improved over the prior year and we continue to work to reduce costs and improve efficiencies in our acquired businesses.

Our total expenses for third quarter were 17.6 million. This is up 6.3 million from Q3 '03 and up $300,000 sequentially from the second quarter of '04. The sequential cost increase was mostly due to having a full quarter of expenses for the OMR acquisition compared to Q2 '04. We continue to monitor expenses closely and will be investing in sales and marketing, our outsourcing organization and information technology to support our businesses.

Operating income in the third quarter was just under 30 percent of revenue, a 110 basis point improvement over Q3 '03.

Interest income was 472,000. It increased significantly in Q3 '04 as we invested the proceeds of our June '04 secondary and marketable securities, mostly government-owned and corporate tax preferred bonds.

On our balance sheet, our balance sheet continues to be strong with 121.3 million of cash and marketable securities as of September 30, 2004. This equates to $5.02 per diluted share.

The cash and marketable securities position increased over the last 6 months by 68.9 million. Major sources of cash include 74.4 million raised in our secondary offering. And major uses of this cash includes 23.6 billion for the acquisitions of OMR, IAN and Utilization (ph).

Operating cash flow for the 6 months ended September 30th was 19.4 million, a 19 percent improvement over the same period in '03. Contributors to strong cash flow were increased earnings, 3.3 million of depreciation and amortization, and a tax benefit on option exercises.

The accounts receivable days outstanding is 52 days as of September 30th, down from 61 days on June 30, 2004. And this is pretty much in the middle of our expected range of 45 to 60 days.

On our guidance, a couple of details on our fourth quarter guidance. We expect to have 24.2 to 25.3 million diluted shares in Q4. Our interest income should be approximately the same as the third quarter. And then on an overall Company expenses, we expect them to be slightly lower than Q3 '04 as we improve our cost structure at recent acquisitions. But that will be offset by some investment in other areas, specifically sales and marketing. On corporate tax rate, we expect our effective rate to be about 39 to 39.5 percent for the fourth quarter and the year.

I will turn it over back to Bill. Thank you.

When we look out at SS&C, I know everyone sees the $121 million in cash and marketable securities on our balance sheet, and are we going to put that to work. And I can assure you that we're looking at many opportunities to put that money to work, but we're very disciplined in the process. We have a number of opportunities we have pursued very hard. And again, if we can't meet our criteria we're not going to let that money burn a hole in our pocket. And we're not going to do something that is not in the best interest of our shareholders.

What we try to do is a company is to get the best people, and we like to do the toughest things. And that means understanding German transparency laws as far as German taxes are concern. That's (indiscernible) allow our hedge fund customers be able to market their hedge funds around the world, whether that's in Germany, whether that's in Spain, whether that's in South America or whether that's in the Caribbean. And we want to do both on and offshore, and we need to understand what's going on. And we need to be able to be there for our customers.

We think by doing the toughest things that it creates a virtuous (ph) cycle. That virtual cycle is that SS&C gets good prices. Good prices has everything to do with good margins, which have everything to do with good earnings. Our customers get good value. They understand it; they understand that they're paying a premium price, and they get good value for that premium price. And we have talented people to deliver excellent service to them. Our employees get good salaries and good bonuses. We become a good place to work; they get to do interesting things, sometimes challenging things. But we have talented people and they have always met the challenge. The last thing is that our shareholders get good returns.

So if you think about going back to why we get good prices, it's because we employ talented people and we have high expectations. I think that that is something that as a Company that we manage ourselves to. We give people lots of opportunities and we're very empathetic in the opportunities. We also have high expectations on the delivery. And we're not nearly so empathetic on not delivering. So again, as a Company I think that that's why we have a virtuous cycle. I think that with the senior management team and the talent we have around us that we have an opportunity to continue to grow and continue to deliver excellent results.

With that I'd like to open the floor for questions.

(OPERATOR INSTRUCTIONS) Phil Mickelson, J.P. Morgan.

I was wondering if you could just comment quickly on some of the more specifics regarding OMR in terms of how much of that acquisition revenue came from OMR? Was OMR revenue up sequentially? And finally, kind of how are you able to kind of cut costs? I know the margins surprised everyone in the last quarter. Where were those margins in comparison this quarter?

Sequentially -- we don't give out specific numbers on some of these products, so sequentially OMR revenue did improve, as Norm has mentioned. We have seen growth in both their TradeThru product, and also in their Xacct hedge fund product.

What was your other question?

Margins.

On margins. We continue to make progress on efficiency improvements at OMR, both in -- and looking also at cost reductions in that area. We're going to continue to focus on that.

A couple areas we're looking at is multiple data centers. Also, we've got some of our outsourcing done in India, and we're going to look to see if that's efficient for us too. So there's a lot of areas we're going to look to improve our outsourcing margins there.

But in general, I'd say that we've been very pleased with both the revenue that we've gotten out of OMR. It's been better than our expectations. And also our margins are better-than-expected. We would guess that by the end of the fourth quarter that they would be very consistent with SS&C margins.

Just trying to understand the margins declined sequentially for the outsourcing business. And so is that -- that's a function of OMR? Or I'm not sure exactly (multiple speakers)

That was the function of another acquisition. We lost a piece of business that we were expecting to loose in one of the other acquisitions. And that hurt our margins a little bit.

Thanks.

Philip Rueppel, America's Growth Capital.

First of all, on the hedge fund side, the strength you have seen there, is that really in anticipation of increased regulation? Or is it more due to just the increased assets in that class, as well as your broadened product line, given the Xacct and others that you have added to your portfolio?

I think it's a combination of all of those things. I do think that the large institutions' allocation of money to the hedge fund industry is still expanding. And it's truly a flood of money coming into those vehicles. I think that the hedge fund industry, to have been able to market themselves as an asset class rather than a strategy, has been nothing short of brilliant. And therefore, they're getting an allocation in these large pension funds. And other large institutional investors like insurance companies, where they are allocating 5 to 10 percent of their cash flow into hedge funds, has really made the hedge funds awash in investor money.

That along with they're pretty creative funds. They have come out with a lot of new structures and a lot of new master feeder (ph) structure on the fund-to-funds business, and then a number of other things that allow them to effectively invest that money. And if they can continue to get the returns -- as all of you are well aware, that's a big if -- I think they're going to continue to grow and grow rapidly. And I think that SS&C is extremely well positioned to be able to move quickly to be able to handle anything that they create. And I think that's something that's really been positive to date.

I know it's still early, but Mr. Spitzer appears to be now targeting the insurance industry, and that has traditionally been a stronghold, especially in the back office, for you. Is there any ramifications that might occur either positive or negative as things bear down on that industry?

Obviously, it's still pretty early and we don't really know how that's going to play out. What it does is it heightens executives' concern of risk. We think that our systems are particularly well-suited to control environments; that they have traditionally been designed and developed by industry experts, particularly industry experts in accounting and servicing, which means things like double entry bookkeeping and general ledger reconciliations, and subsystem reconciliations. All of that process, that is now getting documented by the public oversight board that was created with Sarbanes-Oxley and things like the Basel II Accord.

All of those types of things are really beneficial SS&C because we have a strong control systems environment to start with. We think that will ultimately help us. And in the short-term I think obviously it's creating lots of consternation in the insurance industry, and obviously property/casualty insurance industry.

Thanks very much.

Chris Rowen, SunTrust.

Can you give us kind of an indication on the buyback program? You just did an offering, so what's the rationale behind now going out and buying the stock back? And will you buy it back above the offering price of $19.50?

Again, one thing we want to have is a -- I think that's a great question to start with. One thing we want to have is to always have an authorization to buy back. As you well know, the market has been extremely volatile. We don't know wherever the market is going to do. But what we don't want to do is be in a position where we think that the market has unfairly punished our stock and we don't have a chance to take advantage of that opportunity.

We certainly don't plan on buying back shares above the offering price. But at the same time, we think our business has performed extremely well over the last two quarters. As we have just given guidance for the current quarter, we also believe it's going to perform well in this quarter. And again, we continue to execute. As that offering gets behind us further and further, that offering price gets behind us further and further. And it's something where again we want to be ready, as I said about those liquid assets being on our balance sheet, in order to deploy for acquisitions in other ways.

Again, SS&C looks like it's well positioned to earn 87 to share this year. If you take 80 cents a share and you look at what that return is on our current market value compared to that, what we're getting in short-term investments, we want to put that money to work and we want to put that money to work in things that meet our criteria. If acquisitions meet our criteria, we will move and move very quickly. But if they don't meet our criteria, we haven't just decided to put on rose colored glasses and go buy anyway. So again, we're very disciplined about that process. And if we can't find acquisitions that are better value than our stock, then we will buy our stock.

It make sense. And you give us a feel for what the organic growth is in the outsourcing business? It's gotten a little tough to determine with the acquisitions. And just looking at modeling next year, it's a little tough to see. I don't think you want us to put out a 159 percent growth or whatever you did this quarter. Are we looking low-teens, high-teens, sub-10? What's a good number?

The last 2 quarters -- last quarter we had 160 percent growth and this quarter we had 159 percent growth in total. Last quarter we had 40 percent was organic and 120 percent was acquisition, and this quarter about 38 percent was organic. And that would mean that 121 percent was through acquisitions. I think you're right. I don't think I'd model it at 159 percent either, although I do think we have a lot of momentum in the business. We haven't given out next year's guidance yet. I think, again, that as we continue to formulate our plans for next year, I think we will be coming out with some guidance over the next several weeks.

That's fair and very helpful. Do you see drivers that would slow down growth or drivers that would speed up growth? Or does everything kind of look pretty much at equilibrium here?

I think obviously we don't have something like -- if I could announce to you that we had another OMR acquisition that we're closing on in the next 30 days I would. But we don't. Obviously that was a tremendous amount of our outsourcing improvement this year, as well as our IAN acquisition and our Amicorp Fund Services (ph) acquisition as well. They have all contributed.

But I think that organically we have lots of opportunity. Occasionally someone is going to get consolidated. We're going to lose a piece of business here and there. But I think on general we're going to have very high growth in that business. And I would say organically we're looking at 10 to 15 percent growth for the whole business. I would say that our outsourcing business will in general grow quite a bit faster than that, be it very high of those bands.

That's very helpful. Thanks.

(OPERATOR INSTRUCTIONS) Courtney Kleeman (ph), Jefferies.

Couple of questions. One is could you breakout organic growth for professional services and outsourcing for the third quarter?

Organic growth in outsourcing was 38 percent. And I think that in our professional services, I think all of the increase was primarily acquisitions.

Okay. I believe you mentioned in the last call that you were very confident that you will announce a deal by the end of this year. Are you still expecting that?

As I said, I don't believe I ever try to give either confidence or no confidence. What I try to say all the time is that we are actively looking at deals, and if they meet our criteria we will move very, very quickly. Whether or not that happens by the end of the year, I wouldn't have any -- I don't have any more confidence or no confidence today than I did 3 months ago.

So we're actively in the market. We have a lot of resources. But we have a lot of opportunities organically. And we're going to concentrate on our business, and if we can get acquisitions we're going to get them when we can. We're going to try not to apologize for bad a acquisition.

Okay, fair enough. Also, I think I missed it. What was the shares outstanding that you expect for the fourth quarter?

I think I stumbled on that number a little bit. 24.2 to 24.3 million.

Thank you so much.

At this time there are no questions.

Again, we would certainly like to tell all of you that we appreciate your interest in SS&C. We continue to work very hard. And again, I, as well as I am sure all of you, congratulate Norm on his being named President. And again, we look forward to seeing you in late January or early February and talk with you again about our results. Thanks.

This concludes today's SS&C third-quarter earnings conference call. You may now disconnect.