SS&C Technologies Holdings Inc (SSNC) 2005 Q1 法說會逐字稿

Good afternoon. My name is Chastity (ph), and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the SS&C First Quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS.]

Thank you. I will now turn the conference over to Mr. Stone, Chief Executive of SS&C. You may begin your conference.

Thank you, Chastity, and welcome, everyone. I'm Bill Stone, and I'm the CEO of SS&C, and thanks for coming to our Q1 earnings call today. With me is Norm Boulanger, our President and Chief Operating Officer, and Patrick Pedonti, our Chief Financial Officer.

Before I start, let me remind you that various remarks that we may make on this conference call about our future expectations, plans, prospects, constitute forward-looking statements for the 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 annual report on form 10K for the fiscal year ended December 31st, 2004.

Q1 2005 was a very good quarter, and our performance continues to be based on executing on fundamentals. First, our business model is very robust, and we continue to focus on our strategic objectives. One of those is recurring revenue, which includes both maintenance and outsourcing revenues, and they are a significant part of our model. And in Q1, we had 20.3 million in recurring revenues, a 54% increase over Q1 2004. Outsourcing grew at a 100% rate.

Second, we are focusing on growing our revenues, and in Q1, once again, we had record revenue, up 43%. Our revenues continue to show balanced contributions from most revenue segments, all business lines, and from both organic and acquisition growth.

The first fundamental is to take care of day-to-day business, to take care of our clients, manage our expenses, implement economies of scale, integrate our acquisitions, and capitalize on new opportunities. For example, in Q1, we signed a significant contract with one of our key insurance companies -- company clients, which is going to add tens of billions of assets to run on CAMRA, for two reasons we were successful in expanding this relationship in a very competitive situation. [Inaudible] and others, basically because we provide quality products and great customer service.

The third reason we are successful is the breadth of our functionality. Our experts in security, mortgages, real estate and derivatives build our products, and our product's ability to automate difficult and voluminous transactions are key to our continued success.

Another important factor is making our acquisitions work. First, we look carefully at every opportunity, and that can be five to six a month. We make careful and very deliberate decisions. Once we complete an acquisition, we integrate them quickly to take advantage of the product, technology, and people synergies, and we also look for immediate financial contribution.

For guidance for Q2, we expect revenues to be in the range of 39.5 to 42.5 million, and net income to be between $0.25 and $0.27 per diluted share. For 2005, our expectation is for revenues to be between 157 and 165 million, and diluted earnings per share to be between $1.07 and $1.15. SS&C prides itself on hitting its numbers, and we, again, believe we have set aggressive but realistic targets, and we're anxious to get after it in Q2, in Q3 and Q4.

Our latest acquisition was Financial Models Company from Mississauga, Ontario, which we closed yesterday. Financial Models is the largest acquisition SS&C has done to date, and we're very excited about its opportunities, its products and its people. We believe we have great synergies, and we have great opportunity, and we look forward to bringing them into what we believe is a very strong meritocracy.

So, we look forward to going forward with you, shareholders, and, with that, I'll turn it over to Norm and Patrick to discuss the details about Q1. Norm?

Thanks, Bill.

In Q1, we had solid performance because we focused on the fundamentals Bill just mentioned. Putting these fundamentals into action every day means strengthening and moving each of our business units forward. Q1 results showed up in our revenues, our increased operating margins, our pipeline, our sales wins, and how quickly we have integrated our acquisitions.

Some of the revenue highlights includes, in Q1, we had revenue growth in each of our vertical markets, outsourcing continues to be a significant factor, we had healthy revenue and particular from our trade-through products, direct and fund services. Our hedge fund business in particular did very well this quarter, with strong results from the Eisnerfast and OMR acquisitions. We now provide fund administration services for approximately 50 billion in hedge fund assets under management, which is up from basically zero roughly three years ago.

In Q1, many of our products showed gains in license revenues over Q1 last year, in particular Antares, LMS, SKYLINE, and the DBC municipal finance product suite. In Q1, CAMRA increased license revenues by 42% over Q4 last year with some key wins. As Bill mentioned, we fund an expansion of one of our top insurance clients, and we look forward to continuing that relationship. The SKYLINE 2005 new product release we mentioned in previous calls continues to get wide acceptance in the marketplace. It's continued its contribution to revenue growth.

In addition, the recent acquisition of SamTrak, which adds an important layer of functionality to SKYLINE, we believe, will continue to strengthen our ability to grow the SKYLINE product line. We're implementing an aggressive sales plan for SKYLINE, and, so far, we're very comfortable with the progress that we're making.

A major part of making sure our day-to-day operations runs efficiently and profitably is managing the integration of our acquisitions. Our goal is to move decisively and quickly. The 2004 OMR acquisition is a great example. We have increased our capacity, broadened our market reach, expanded our sales and marketing efforts, and, most importantly, increased revenues. In Q1, we focused on using the same integration model for Eisnerfast and SamTrak. Both acquisitions have already given us a greater opportunity in the marketplace, and have made immediate contributions to the revenues.

Our solid foundation allows us to absorb acquisitions quickly and successfully. Our excitement about the FMC acquisition is high, as is our confidence level. We are already in high gear, and have had numerous meetings over the last four or five weeks. We have looked at the FMC products, technology, markets. We have made a great deal of progress in developing our strategy, and plan to take advantage of the tremendous amount of synergy that we see. And particularly, we have identified cross-selling opportunities and implementation opportunities across several of our business lines for many of the FMC products.

On the R&D front, we continue to support and move our entire suite of products forward. We had major releases for PTS, tax releases for Total Return and AdvisorWare, and an additional release of CAMRA. Another project that I wanted to mention is we've been working on -- with the MBA students at the SS&C financial accelerator at UConn. One of the projects with significant promise is design of dashboards. These dashboards can be used to view operational risk and financial metrics. We believe there are far-reaching benefits to these dashboards. We will first implement them in our service businesses and, longer-term, we expect to be able to release products such as these to our licensed customers on a [inaudible] customer base.

Looking ahead to Q2, we have a healthy sales pipeline, and expect to continue our growth initiatives across both our outsource and license businesses. We ramped up quickly for the FMC acquisition, and the integration is already underway, with our primary focus being the FMC employees, products and clients.

And now, I'll let Patrick, our CFO, take you through the financial details.

Thanks, Norm. Our results for Q1 2005 were revenues of 27.4 million, net income of 6 million, and earnings per share of $0.25. Our performance in Q1 was a result of solid organic revenue growth and strong contributions from our recent acquisitions.

Revenue for the first quarter increased 8.2 million, or 43% compared to the prior year. This increase came from both increased demand of our core products and services, and from recent acquisitions. Internal growth overall was 6%, but we had strong internal growth in both of our license and outsourcing products, and acquisitions contributed $7.1 million.

Strong growth came from several product areas. Hedge fund products and services, our SS&C direct outsourcing services, SKYLINE products, property management product that Norm mentioned, and our trade-through product that we acquired in the OMR acquisition.

Outsourcing revenues were 10.5 million this first quarter, an increase of 5.2 million, or 100% from the prior year. In the first quarter, our outsourcing gross margins were 48.3%, a 90 basis point improvement from Q1 2004, and a 230 basis point improvement from Q4 of 2004. Total gross margins were 64% in the first quarter, decreased from 68% in the first quarter of the prior year. The reduction is due to a shift in product mix towards outsourcing as a result of the OMR and Eisnerfast acquisitions.

Total expenses were 18.3 million. This is up 5.1 million from Q1 ‘04, and down $100,000 sequentially from the fourth quarter of '04. Year-to-year increase is mostly due to the addition of our acquisitions. We'll continue to monitor expenses closely, and we'll be investing in sales and marketing, our outsourcing organization, and information technology to support our business growth.

Operating income in the first quarter was 33% of revenue, a record for the company and improvement from 31% in Q1 ‘04, and 32% in Q4 ‘04. Interest income was 572, 000, increased significantly from Q1 ‘04 as we invested the proceeds of our June ‘04 secondary in marketable securities of mostly government and corporate tax preferred bonds.

Our balance sheet continues strong, and we ended March 31st with 108.2 million in cash and marketable securities. Our cash and marketable securities position decreased for the three months ended March 31, 2004, by 22.6 million. The main reason is significant uses of cash were our two acquisitions for 25.8 million of Eisnerfast and SamTrak, stock buyback program that we had in place early in the quarter, where we purchased 259,000 shares for $5.6 million, and the semiannual dividend of 1.8 million.

Operating cash flow for the three months was 12.8 million, 46% improvement over the same period last year. Contributions to the strong cash flow were increased earnings, and strong collections at our annual maintenance contracts. Our accounts receivable DSO was 52 days, up from 45 days as of December 31 ’04. The DSO generally increases in the first quarter, as we bill the majority of our maintenance contracts during this period. Our expectation is our DSO will continue in the range of 45 to 60 days.

Concerning our guidance for Q2 ‘05, following is a couple details. The acquisition of financial models will be included in our financial statements as of April 20th, 2005, so it will be approximately 70 days in that quarter. We expect FMC revenues to continue in the range of their most recent results, and earning contribution from FMC to be neutral in Q2, and to be accretive starting in the third quarter.

Our preliminary estimates are that FMC will add approximately 4.5 million on an annual basis in amortization for acquired intangible assets, and that expense of 4.5 million on an annual basis is included in our guidance. To finance the acquisition of FMC, we used 84 million of our cash, and we drew down a $75 million revolving line of credit. The rate on the line will be between LIBOR and 100 basis point and the current prime rate. As a result of this, we'll have very little interest income going forward for the rest of the year. We expect to have approximately 24.1 to 24.2 million diluted shares in Q2.

There are some significant tax issues that we're dealing with around the FMC acquisition, and we’re currently working on those with our advisors. We expect to resolve them shortly, but we still expect our effective tax rate to be between 39 and 40%.

For the full year, at our revenue range, as Bill said, is 155 to 165, and we think our recurring revenues, maintenance and outsourcing will represent somewhere between 76 and 77% of that total revenue. And the majority of our growth will still come from outsourcing revenue. Our [inaudible] for the year will be approximately 24.2 to 24.3 million shares, and we expect our corporate tax rate, again, to stay between 39 and 40%.

In the CapEx area, we expect to invest significantly in IT infrastructure, and we’ll expect to invest 1.6 million plus 2.2 million at SS&C, plus continue the investment that FMC has been making in the past.

I'll turn it back to Bill to discuss FMC acquisition in more detail, and then we'll take your questions.

Thanks, Patrick.

One item I wanted to get a little bit more specific on was our organic growth, which Patrick said was 6% for the year. If we take out a contract that we had with IAN that we acquired in the first quarter of last year that we were well aware of, which was about $400,000 that did not renew in the second quarter of last year, and also we had professional services revenue with a large contract with a major bank that did not -- also was completed in the fourth quarter of last year. Then, if you take those two items out, I think our organic growth was between 10 and 11%, so I think that's one thing that I wanted to clarify.

We do believe we have very solid performance, and we believe it is because we execute on a day-to-day basis. Another reason we continually perform is because we think we are very smart about our acquisitions, which ones to choose, and then move very quickly once we choose them. Yesterday, we did acquire FMC, or closed on FMC, and we paid $159 million in cash. FMC is a major presence in the Canadian investment management market, and a growing presence in the US, European and Australian markets.

FMC also represents our largest acquisition to date, and we're very excited about the potential. We believe it's a market that we know very well, and a business that we know very well. We also believe there is very little overlap in our solutions. The targets for most of FMC's products have been large institutional asset managers, and while SS&C has some large institutional asset managers, we tend to have more insurance and pension fund, so we are excited about the ability to cross-sell our capabilities into the FMC client, and FMC's capabilities into our clients. And obviously now, they're all our clients.

We also believe that we have a portfolio of products and services that's unmatched in the industry, so, if people want to have credit default swaps for dollar rolls or inverse floater's, different kinds of repo (ph), international securities, reporting on fund-to-fund private equity for hedge funds themselves, SS&C had an unmatched service level and product level, and we're very excited about the intellectual capital that we were able to acquire in the FMC acquisition.

The product suite that we're getting from FMC, in particular Pages, is a client communications system for generating client statements. It's been very well-received, and we would call it a world-class product. We believe we can sell that into our LMS, or AdvisorWare, in our CAMRA clients. We also believe it is immediately applicable to our outsourcing clients.

Sylvan (ph)is the standard for performance attribution around the world, and we believe again, AdvisorWare and Total Return, as well as our other products, our prime places to sell Sylvan as a model -- as a module, I mean. And then, also, we believe Sylvan is also very attractive on an outsourcing basis.

Recon’s a top reconciliation tool that we’ll start integrating into our products and integrating into our outsourcing service, and we believe that, again, Recon has proven to be very well-accepted around the world. FMC Net is a direct competitor of Ongeo (ph). We're very excited about it. It has a tremendous share of the Canadian market, 75 to 80%, I believe. We've just recently announced a relationship with Swift, and we think that we have a lot of growth potential with FMC Net. And then, finally, the SBC (ph) division of FMC is a data division that we believe we can use to satisfy our voracious needs for data, as well as start selling it into our client base.

Now again, the solid recurring revenue base of FMC -- I believe it's 81% for last year -- was recurring revenue. We get powerful products and services. They have great clients, great technology and some great people, and we certainly welcome all into the SS&C family, and we look forward to really driving our opportunity in the global marketplace, and really becoming a -- continue to be a consolidator and bring value to our shareholders, our clients and our employees.

And with that, Chastity, we'll take any questions that people may have.

Thank you.

(OPERATOR INSTRUCTIONS.)

Phil Mickelson with J.P. Morgan.

Quick question. What was the Eisnerfast contribution in the quarter? Was it meaningful, or what kind of extent was it for the results?

Patrick might give you more detail on that, Phil, but Eisnerfast really was just 1 to 2%, I believe, of our revenue in that range, [inaudible], 2-1/2%

Yes, somewhere around 2-1/2% of our revenue.

And what’s kind of the revenue profile of that company, and the profitability profile, since we haven’t gotten any detail with that? Is that -- what kind of run rate approximately, what kind of profitability on that business?

This is at Eisnerfast you’re talking about?

That’s correct.

Yes. We had them for one month in the first quarter, right, and they were about 2-1/2%, so somewhere around 650,000, and that’s their current run rate. They’ve also got very good margins. They’re in the 30% range.

And I just wanted to know, with kind of your 2005 guidance on the top line revenue, have you made any differences? I know the first quarter of 6%, but have you made any -- are you still assuming, like, a 10% top line growth with that revenue estimate?

Ten percent organic growth, is that what you’re talking about, Phil?

Yes, through Granacor (ph).

Yes. We would believe that we’d be a little higher than that.

Shane Diamont (ph) with Stephens.

Wanted to check on your stock buyback. You guys executed some for, I guess, the first time in a while, and wanted to see what your thoughts were as far as continuing that buyback, and maybe -- I couldn’t remember exactly how much you had remaining on your authorization.

We have about 43 million remaining on our authorization. We’ve spent 5.6. It might be about 44 million left on our authorization. Again, I think we believe that our stock is of value and, when we get opportunity, we will buy it. At the same time, we also have a lot of acquisition opportunities, and we’re trying to keep a war chest available for that. And so, there’s a balancing act going here, and I think that, given what happens with our stock price might indicate how active we are with our stock buyback program.

OK. And then, one question for Patrick. There was a long-term investment that I saw. I think it was on the cash flow statement, cash paid for long-term investment. Can you tell me what that was?

We made an equity investment in a strategic company that we’re looking to help us out with our LMS product.

OK, was that the Mezzanine (ph) Financing?

Yes. It’s called MedCap, Shane, and MedCap is a CMBS expert that sell -- help package loans for primary lenders, so it gives us an access into their primary lender network, which includes places like Bank of America and Wachovia, and we believe we get very good relationships going upstream into those primary lenders, and we also get an opportunity to show them how our LMS product works to package and sell CMBS.

Can you give us I guess some insights into kind of the sales environment as you saw it in the first quarter, and whether or not there have been any changes there, and maybe kind of the outlook of activity and what you’re seeing in the marketplace?

Yes, I think I’ll give you a little high level, and maybe Norm can give you a little more detail. But I do believe that we’re seeing additional activity in the market, and that we are reasonably optimistic about Q2 and the rest of this year. Norm?

Yes. I mean, that’s exactly what we saw, so I think, overall, I would characterize the sales environment as there’s opportunity out there. We feel comfortable that the pipeline that we’re managing will allow us to reasonably go after our goals. You get some variation in which products and which markets in a given quarter, but, overall, we’re seeing a pretty broad base for support for portfolio counting and trading systems on a consistent basis across most of our [inaudible].

I think the key thing for us is to make sure we manage our pipeline. I think we have lots of opportunities, and people are trying to get us to do demos, and fly around the world and do all kinds of things for different prospects. We just need to make sure that we focus on the ones that will close in a particular quarter, and make sure that we don’t get ahead of ourselves.

[OPERATOR INSTRUCTIONS.]

Sylvain Chaput with Sectoral Asset Management.

I’m an FMC user. In fact, I’m also the chair of the FMC International User Group, and I’d like to ask a few questions in relation with that. When and how my current FMC client expect to receive detailed information in a formal manner, which will outline your commitment to FMC clients?

We’ve already begun that process, and I would say shortly. Again, we have already drafted some things for the client base, and we’re very excited about meeting and exceeding its expectations and bringing additional functionality into that client base. So, I would suspect that you’ll be hearing from us on a short basis, and then also periodically after that.

For your client summit next month, will you have any FMC product in stand, or is it too early?

No, no, we plan on demonstrating all of the -- or certainly the ones that we can in the FMC products down in Naples. Our user group is the 22nd to 25th, I believe in Naples, and certainly, you are welcome, and you should have gotten an invitation from us already. But we’re very excited about it. We’ve already got a lot of the information about FMC out on our Web site, and a lot of our information out on FMC’s Web site.

We do, as the user group, have a fall conference with FMC. What do you think about this conference? Will it still be relevant? Do you attend -- FMC to attend that conference?

Well, we -- certainly if our customers invite us, we certainly attend. Certainly you’re the chairman, and I’ll defer to you if you’ll invite us, but we now own them, so we would like an invitation. But certainly, we’re excited about the opportunities throughout Canada, and also throughout the United States and Europe, as well as Australia with the FMC product suite and the great clients that they have.

Stefan Makateas (ph) with Pike Place Capital.

First off, Pat, I’m wondering, you mentioned 4-1/2 million of amortization of intangibles just from FMC. If we include Eisnerfast and SamTrak, and then your existing amortization, what’s the total amortization of intangibles?

I think in the first quarter, we ran about $1 million before FMC.

OK, so one million plus 4.5. And then, does Eisnerfast--?

--A million and a quarter, right? So, four million a year.

OK, right, a million -- I’m sorry. So, four million plus the 4-1/2, and then does Eisnerfast and SamTrak add much to this?

Eisnerfast is included in the million per quarter, or four million original per year.

OK, that was a run rate number then. And then, just for whoever wants to take it, I think the goal over time was to get FMC’s margins up to where SS&C is. Is that correct?

Well, I mean, certainly with the talent that we see at FMC, we’ll probably get higher than our margins.

OK. What -- does the guidance for ’05, what does that imply about the progress of getting the margins in ’05?

I think it begins the process. Again, we want to make sure we take care of the clients and really plan this correctly, and do it -- things very open and clear and decisive way. Again, we have ambitious plans, and we believe that the guidance we’re giving today, where I think our previous guidance was $0.96 to $1.00, and our guidance now is $1.07 to $1.15, again, we prefer to make sure that we understand what we’re walking into, and again, we’ve only owned them for a day, so we’re trying to give you an indication and be aggressive at the same time, try to keep our neck at least only partially on the block -- chopping block.

Thank you. At this time, there are no further questions. Mr. Stone, are there any closing remarks?

Again, we appreciate everybody being on the call. As we can see here from our screen here, over 50 people were on the call today, and that is up from about 35 at the last quarter. So again, we appreciate the interest in SS&C, and we look forward to talking to you next quarter. Thanks.

Thank you for joining today’s First Quarter 2005 Earnings Conference Call. You may now disconnect.