SS&C Technologies Holdings Inc (SSNC) 2004 Q4 法說會逐字稿

Good afternoon. My name is Meredith and I will be your conference facilitator. At this time I would like to welcome everyone to the SS&C Fourth Quarter 2004 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 “*” then the number “1” on your telephone keypad. If you would like to withdraw your question, press “*” then the number “2” on your telephone keypad. Thank you. At this time, I would like to turn the conference over to Bill Stone, CEO. Please go ahead, Sir.

Thanks, Meredith, and welcome everybody. I’m Bill Stone and I’d like to thank all of you for joining us for our Q4 earnings call today. With me on the call is Norm Boulanger, our President and CEO, and Patrick Pedonti, our CFO. Norm will discuss our Q4 operational activities and Patrick will discuss the details of our financial results for the fourth quarter and the full year which ended December 31, 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 quarterly report on Form 10Q for the quarter ended September 30th, 2004.

Five years ago on this year end conference call in 1999, I summed up the year by saying the best thing about 1999 is it’s over. Since that time, our earnings per share have been 9 cents, 18 cents, 36 cents, 59 cents and in 2004, 84 cents. Let me tell you I like where I’m sitting today much better than I did in 1999. The one thing that I know is SS&C is performing and we have the platforms and the products and services to continue to perform. Everybody benefits when we perform. How I like to call it is the virtuous cycle. We can deliver products and services to our customers where they view that what we are delivering is of value and they pay us an appropriate amount and we have enough amount to pay our employees good salaries and good bonuses and we still have a lot of money left for our shareholders for good return. We believe that’s the virtuous cycle and that’s what we work very hard to make sure it starts with the customers and that they have very positive feelings about SS&C and our products and services.

We’re proud of our financial achievements in 2004. Patrick will give you more details in a few minutes, but I’d like to mention some of the overall company accomplishments we’re equally proud of. We were able to win high profile global clients like Mann Investments and New York Life International, but we’ve been focusing on top flight customer service and we’ve been able to really have a very high level of customer service and we continue to work hard to continue to deliver that customer service. We’re bringing out new solutions and new products all the time, like Skyline 2005, and Norm will talk a little bit about its success. We have successfully completed 3 acquisitions in 2004 from our investment advisory network to NeoVision Hypersystems to OMR and we are very proud of that integration.

We completed a $74.4m secondary in June of this year that was led by Goldman Sachs and J.P. Morgan and we had great companies like Jeffries and America’s Growth Capital and SunTrust Robinson Humphrey as well. We also launched the financial accelerator, the SS&C Financial Accelerator, at the University of Connecticut School of Business in downtown Hartford, Connecticut. We believe this is a real world laboratory with all kinds of great stuff that we’re going to be able to do there like testing out new products and services by working with clients and people of expertise in our various market segments that we’re in to be able to test what we’re doing and be able to bring out really exciting things.

So 2004 was an outstanding year and when we take a focus on 2005, it’s how do we continue doing what we’re doing so far? I think the best news is we’re excited, we’re ready and we have a great foundation to build on. We had record revenue growth in 2004. Our revenue showed balanced contributions from all revenue segments and from both organic and acquisition. We have a solid revenue stream from our outsourcing business which has grown 134% this year to over $30m and we also had 21% growth in license revenues which is a good indicator that we have the right products in our markets. We also, as you know, ended the year with $130.8m in cash, cash equivalents and marketable securities on our balance sheet. Again with $28.5m worth of cash flow generated, we’re pretty proud of that statistic. We do believe that staying extremely financially strong is very important to our customers, and we think it’s very important to our acquisition targets, and we also think it’s a very strong strength for our employees and our shareholders.

We have a great management team and a great workforce. We really focus on getting results and we focus on everyone on the team contributing. We think that we’ve done a great job at motivating those people and driving quality products and services. Our guidance for 2005 is revenue between $110 and $116m and earnings per share between 96 cents and $1.00. For Q1, revenue guidance is between 26 and 27.5m and earnings per share between 21 cents and 24 cents. Now I’d like to turn the floor over to Norm to discuss the details of our Q4 results.

Thanks, Bill. Bill summarized the tremendous amount of activity we had in 2004. Each quarter we met some challenges head on. We did this with a disciplined approach to our core values and our philosophies. We expect everyone at SS&C to carry their own water. That means strengthening and moving each business forward, taking action that produces results, and that includes new acquisitions. And some times that’s improving a business that’s struggling and a lot of times it’s growing and improving results. In 2004 we stayed true to the business strategy, stayed focused and then delivered. It’s a winning plan that we will carry into 2005. Outsourcing continues to be a sweet spot for us. We have capitalized on some value block centers in 2004 and need to continue to do so in 2005. In Q4, funds services assigned Mann Investments, part of the Mann Group, a global leader in alternative investments. We won the deal because we were able to quickly adapt Advisorware to provide German transparence and tax accounting and reporting and we had the ability to provide independent valuation services for all asset classes including derivatives. Because of our excellent performance and service, our role has been expanded and we will now service several additional Mann funds.

Besides the advantage we have in winning outsourcing business is our proprietary technology and our expertise. We use the best products, we’ve built a scalable infrastructure and we have experienced people. Our license revenue has also grown and is up for both the quarter and the year. CAMRA, Total Return, Skyline, Altair and Debt Derivatives have all been major contributors throughout the year. Skyline results for the quarter were outstanding and were a direct result of the Skyline 2005 release. Skyline team listened to what the market wanted, incorporated many enhancements and efficiencies in the new release and they systematically rolled it out and it paid off. In Q4, a significant number of our existing clients updated to Skyline 2005 and Q4 Skyline licenses increased by 326% over Q3. We’re very proud of that team and we think that’s an example of the types of things we can achieve when we work together.

On the R&D front, we had year end releases for CAMRA, Total Return and OMS. In addition, we completed the German Tax Accounting and Reporting enhancement to Advisorware that I mentioned. In Q1 we expect to roll out releases for PTS and Advisorware. BSN3 Backpack acquisition in 2004 was a major priority for us. We have made significant progress in the strength of our acquisitions, both processes and people. The talented pool of people with key expertise we now have is a tremendous asset and all of our acquisitions are supported and expanding our new business opportunities. Looking ahead, we expect our growth drivers to be outsourcing services within several of our key markets, especially the hedge outsourcing sector. And our challenges for 2005 will be to attract new talent, manage our costs, improve technology and provide the best service to our customers. Our plan is always to execute. We ended 2004 with a great starting point for 2005. I expect this year to be every bit as exciting. I’d like to turn it over to Patrick to go through the financial numbers.

Thanks, Norm. Our results for the fourth quarter 2004 are revenues of $27.1m, net income of $6m, and earnings per diluted share of 25 cents. The strong performance in Q4 was from solid organic revenue growth and strong contributions from our recent acquisitions. Revenue in the fourth quarter increased $9.2m or 51% compared to the prior year. This increase came from both increased demand for our core products and services and from recent acquisitions. Internal revenue growth was 11% and acquisitions contributed $7.3m. Strong growth came from several product areas. Hedge funds, hedge fund products and services, our SS&C direct outsourcing services, Skyline Property Management product that Norm mentioned, and a trade through product acquired in the OMR acquisition.

Outsourcing revenues were $8.8m for the fourth quarter, an increase of $5.2m or 142% from the prior year. In the fourth quarter, our outsourcing gross margins were 46%, a 228 basis point improvement from Q4 of 2003. Total gross margins were 65% for the fourth quarter, decreased from 70% in the fourth quarter the prior year. The reduction was due to lower gross margin contributions from the recent acquisition and also product mix changes. Margins in our internal business remain strong and we continue to work to reduce costs and improve efficiencies in our acquired businesses.

Total expenses for the fourth quarter were $18.4m. This is up 6.5 from the fourth quarter of ‘03 and up $700,000 sequentially from the third quarter of ‘04. Sequential cost increase is due to investments we made to support the higher level of revenue. We continue to monitor expenses closely but will be investing in sales and marketing, our outsourcing organization, and information technology to support our business. Our operating margins continue to improve and reached 32% in the fourth quarter from 30% in the third quarter of 2004. Interest income was $690,000 for the quarter. It increased significantly from Q3 ‘04 as we received a one-time benefit of approximately $100,000 from interest earned from a long term receivable that was paid in the quarter. In addition, the gain of $120,000 in other income was the result of a settlement from a contract dispute.

We recorded a tax provision of approximately 39% for the full year which is a bit lower than we expected. As a result, our fourth quarter effective tax rate was 37%. We ended the year with 435 employees, up 117 employees from the end of 2003. Our average revenue per employee increased 12% in ‘04 from $213,000 to $239,000 per employee. On the balance sheet, as Bill said, we ended with $130.8m in cash and marketable securities, an increase of $9.6m from the end of the third quarter. So December 31st cash and marketable securities balance represents $5.39 per diluted share. Our cash and marketable securities position increased for the year by $78.5m. Major sources included $74.4m from our secondary offering in 2004. Major uses of cash include $23.5m for the acquisitions of OMR, EM and Neovision, dividends paid of $2.9m and $1.3m in equipment additions.

Operating cash flow for the 12 months ended December, 2004 was $28.5m, a 20% improvement over the same period in 2003. Contributors to the strong cash flow were increased earnings, $4.6m depreciation amortization, a tax benefit on option exercises and effective management of working capital. Our accounts receivable days outstanding is at 45 days at the end of December from 52 days December 31, 2004 and that’s at the lower end of our expected range of 45 to 60 days. Concerning guidance for the first quarter and the full year, the following are a couple of details. For the full year, as Bill said, we expect revenue of $110m to $116m. And our recurring revenue should represent approximately 73 to 75% of total revenue. And we continue to expect the majority of our growth to come from outsourcing services.

Our earnings guidance for the year excludes any impact of FAS123 which will currently require our company to extend stock options in the third quarter of 2005. Our diluted shares should be approximately in the range of 24.3 to 24.8m for the year and interest income is expected to be between $2.2m and $2.4m for the full year. In addition, we’ll continue to invest in sales and marketing and costs to support our outsourcing revenue. Corporate tax rate we expect to be about unchanged in 2005 at approximately 39%. We’ll be investing in our IT infrastructure in ‘05 to support our outsourcing business and we expect capital expenditures to be in the range of $1.6m to $2.5m. On the first quarter, as Bill said, our revenue guidance is 26 to 27.5m and sequentially we continue to expect outsourcing revenues to grow, but we expect lower professional services as we completed some major projects in the fourth quarter of 2004. These revenues will result in EPS of 21 to 24 cents per diluted share. Thank you. Now I’ll turn it over back to Bill.

Thanks, Norm. Thanks, Patrick. Now when I was watching the Patriots and Steelers game on Sunday, I heard one of the announcers say that Bill Belichick says that he doesn’t have any ETWs, or ERWs, I mean. So I figured out - - they finally said that an ERW was someone that eats, rides and watches the game. So there’s no players on the Patriots that are ERWs, and I think at SS&C we kind of view it the same way. We have 435 people and we don’t have any ERWs. All of SS&C’s people show up every day and work very hard and that is what is expected and I think that is what is delivered. And I think that as long as we do that, my role is to be like Belichick, make sure we don’t have any ERWs, and if I see them, I ask people. I think that’s what we’re about. I think that we really do manage our business on a day to day business and we’re passionate about it and I think that we have opportunities in 2005 that really can drive our business and I really think that we had a great 2004 and I appreciate all the shareholders as well as all the employees. And now I’ll turn it over to any questions that anyone might have.

[Operator Instructions]. Your first question is from Craig Peckham, Jeffries.

Good afternoon everybody. And I just wanted to ask two questions here. Number one, the guidance for 2005, Patrick, I wondered if you could give us a little bit of clarity in terms of what sort of underlying organic growth is imbedded in that.

We expect pretty much what we’ve said in the past that organic growth will be between 10 and 15%.

Okay. So that would obviously be consistent with what we saw in 2004. Can you give us maybe a little more visibility on relative growth rates within organically in terms of the segments?

We don’t really provide information on segments. But I think we continue to think that a lot of our growth will come in our outsourcing, both institutional asset managers and hedge funds.

Okay. And also, speaking of hedge funds, I’m wondering, Bill, if you could tell us what you’ve been seeing here in the last few weeks and months in the hedge fund vertical. I’m thinking in particular how the new regulatory environment might be impacting your business, what you’re hearing from customers there, how that’s impacting pipelines or prospects.

Well, you know, what we’re seeing really is that the hedge fund market, as you well know Craig, is really getting a windfall of assets to manage and major institutions are now allocating a portion of their cash flow to alternative investments and that’s both in all the various types of hedge fund strategies such as global macro or long chart, are also now paired -- what you have is fund to fund. So there’s a tremendous amount of money being allocated to the alternative investment space. With that comes increased transparency, more scrutiny by regulators and taxing authorities, and what it really does is play to SS&C’s strengths which has always been double entry bookkeeping, inventory control, accurate performance measurement, strong compliance, and really an understanding that these types of transactions and these types of funds need to have net asset values, need to be able to calculate and reconcile on a daily basis, and I really believe that’s been a very strong reason why that business is really, really growing. And we have pretty good visibility on when we talk about outsourcing because obviously we sign, in general, 3 to 5 year contracts and we’re really excited about our opportunities in this space.

Just wondered if maybe you could hazard a guess in terms of the fourth quarter how much of that license revenue may have been kind of linked up with the hedge fund verticals. It sounds like it’s mostly Skyline driven, but I just wanted to clarify.

I think really that it crossed all the different product areas. We had pretty good growth. Again, it’s only $4.8m, it’s not like it’s a huge license revenue number. If you look at the growth in the outsourcing revenues, if you thought about turning recurring revenues, which is really - - what we get on our license, really, is 20% recurring with our maintenance fees. But our outsourcing revenues are 100% recurring and in general have transaction and accelerators. So we’re excited about what we’re doing in outsourcing and we’re excited about our opportunities both in the institutional asset management space, but the hedge fund and fund to fund space as well as the financial institution space. So I think really for ‘04, we’ve got contributions from everywhere and in ‘05 I think that we’re looking for more of the same.

Okay. Thanks, Bill.

Your next question is from Phil Mickelson, J.P. Morgan.

First off, congratulations on an excellent 2004. My question is - - I know this deal is somewhat now in the rearview mirror, but I was wondering if you could comment on the OMR acquisition. Is that integration fully complete and can you talk about kind of the sequential growth in revenues and the margins along with OMR?

Yeah, we have always said that our target was to get OMR up to our margins which obviously in Q4 was about 32%. We’re comfortable that OMR is in that range right now. As far as revenue is concerned, we’ve done better on revenue with OMR as we’ve got a little up tick in transactions and revenue has run probably 10% higher than what we expected on the acquisition and I think on the acquisition we expected somewhere around $20 to $22m in revenue.

And then can you comment on going, looking forward into 2005? I know acquisitions are always on the horizon. Any kind of potential deals on that in terms of deals getting a little hotter right now as you look into the first couple of quarters of ‘05?

Well, as you know, we’re pretty disciplined about that. We have certainly continued our process of looking at between 3 and 5 a month. You know, we actually probably look at 3 to 5 a week, and we probably look deeply at 3 to 5 a month. We’re constantly trolling. We think there are some really interesting opportunities out there. That’s one of the reasons that we have the war chest on our balance sheet. We’re certainly not afraid to use it. At the same time, we want to use it wisely. So we’ll be pretty disappointed if we don’t have an acquisition or two in the first 6 months of ‘05, but we’re also not going to jeopardize our franchise or have it burn a hole in our pocket

Okay, thank you very much.

Your next question is from Chris Rowen, SunTrust Robinson Humphrey.

Hi, guys, this is Kevin Bantum for Chris. Congratulations on the quarter first of all. It looks like recurring revenue took a sequential dip for the third year in a row. But obviously for the year on a whole, it continues to rise and it looked like it ended up at about 70% for the year. Can you kind of lay out a stretch target beyond the 2005 timeframe? I mean, can we look to possibly reaching 80% somewhere down the road?

Again, the recurring revenue number is going to be tied to how much license revenue we do and also how much professional services we do because that’s just going to make that denominator so much bigger on which to calculate the percentage. So we don’t really have a target. We’ll take the license revenues where we can get them, we’ll do the projects on a professional services basis when we can do that. So we’re not trying to not drive those businesses or those revenue lines as well. Although we do believe that as we do more and more work for larger and larger companies, I do believe that they’re finding that our quality and our commitment and our customer service is really world class. And I do believe that with high powered hedge fund managers and fund to fund managers, that they really need to have a strong service provider and we’ve done a great job in that area and I think that that’s going to continue. And so the idea that we could get to 80% I think is possible. I think it depends on what the revenue mix is at any particular quarter and again, when you’re dealing with large scale global institutions, if they want to do a license, we’ll let them do a license. And if they want to do an outsourcing, we’ll let them do an outsourcing. If they want to do an ASP, we’ll let them do an ASP and if they’d like to do term or perpetual licenses, we’ll let them do that as well. We like revenue.

That’s certainly reasonable. Okay, let me maybe rephrase it a little bit. Fourth quarter license was particularly strong at 4.8. There has been somewhat of a trend over the past couple or years to be in about the $4m run range, though it has been growing somewhat. Can we expect a 1Q fall off? And is a 4Q run rate fairly stable absent any upside surprises with large contract adds?

I think that the, I would say $4m run rate is a pretty constant run rate and I would say that probably our license revenue in any quarter throughout ‘05 would be between 4 and 6.

Okay. And then I guess lastly talking to gross margin, I don’t recall if you did mention this, but did you give any guidance relative to outsourcing margin over the next year?

We have not.

Okay, that’s fair. I appreciate it.

I mean, we’ve given long term projections that we’d like to be in the 66 to 68% gross margin rate and then have operating margins in the 31, 32, 33 range.

All righty. All right then, I think that answers my questions. I appreciate it.

Thanks, Kevin.

Your next question is from Phil Rueppel, America‘s Growth Capital.

Hi, this is Philippe Tenau for Phil. Just speaking on that acquisitions question, can you comment on the environment in terms of pricing the opportunities that are coming across your desk? How are they priced relative to last year? And you obviously mentioned that the quality was good, so a couple of statistics would be nice.

Yeah. The acquisition climate is pretty robust right now and I think that prices have firmed, although I think they’re still really across the board, depending on what it is that you’re buying. Obviously the growing businesses with high earnings and a great sales force are extremely expensive and generally not for sale. So generally what you buy are businesses that have challenges as far as either being able to expand their product offering, be able to get into more markets, be able to have a bigger development and consulting group, or be in need of a sales force. And so it really would flow across the range of that and I would say that prices that we have seen have been between .8 times revenue to 5 times revenue.

Okay, thank you very much.

Thank you. At this time there are no further questions.

Okay, well we certainly appreciate everybody being on our Q4 conference call and again, we’ll work hard to earn your investment in 2005. Thank you.

Thank you. This concludes today’s SS&C Fourth Quarter 2004 Earnings conference call. You may now disconnect.