SS&C Technologies Holdings Inc (SSNC) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the third-quarter 2006 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 session. (OPERATOR INSTRUCTIONS).

Mr. Stone, you may begin your conference.

Thank you. Welcome, everybody, to our third-quarter earnings call. I am Bill Stone, and I'm here with Patrick Pedonti, our CFO.

Before I start, let me remind you that various remarks we may make on this conference call about our future expectations, plans, prospects constitute forward-looking statements for purposes of the Safe Harbor provision 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 10-Q for the period ended September 30, 2006.

SS&C had an excellent quarter, with revenues of $52.9 million and adjusted operating earnings of $18.4 million. This compares with $46.1 million in revenue and $15.3 million in adjusted operating earnings for 2005, respectively. The percentage increases are 15% and 20%, also respectively.

We continued to grow our outsourcing business at a fast clip, with outsourcing revenues up 26%. Outsourcing revenues combined with our maintenance revenues, which we define as our recurring revenues, are up 19% to $41.4 million. We have also invested heavily in our outsourcing business, adding new people and processes and building out our London and Toronto outsourcing centers. These are both going well.

We continue to add marquee clients, including UBS, Morgan Stanley and MCAP. MCAP is the largest independent mortgage and equipment finance company in Canada. They are going to roll out our LMS product in seven locations across Canada. UBS is implementing our Pages reporting tool around world, and Morgan Stanley has relicensed our Zoologic training and education tool, as well as our FundRunner product.

We had excellent sales in our outsourcing business, and expect to see a significant rise in Q4 outsourcing revenues. We continue to be the fund administrator for the most complex hedge fund and fund of funds. [Hedge fault swaps], multistrategy and fund of funds find our sophisticated software, along with our world-class staff, to be particularly appealing.

We're also excited about our Zoologic acquisition, which we closed in the third quarter. The 540 hours of training courses, targeted completely at the financial services industry, gives us a wealth of knowledge at our fingertips. The 60 Zoologic customers are a Who's Who of financial services, and we believe we have tremendous cross-sell opportunities.

The last point I would like to highlight is the discipline SS&C has exhibited since our go-private transaction. We went private on November 23rd of 2005. At the time of our go-private transaction, our leverage ratio was 6.8. At September 30, 2006, our leverage ratio was 5.7. We have used our strong cash flow generation to pay down debt and buy two companies, Cogent Management and Zoologic. Cogent has been an excellent addition, and we believe Zoologic will be the same.

With that, I will turn it over to Patrick.

Thanks, Bill. Our results for Q3 2006 are revenues of $52.4 million on a GAAP presentation basis. Included in the GAAP reported revenue is a $500,000 reduction in revenue due to purchase accounting at fair value deferred revenues as of the November 2005 merger. Excluding this adjustment, revenue was $52.9 million, an increase of 15%.

Reported net income for the period was $400,000 and included acquisition amortization of $5.7 million and stock-based compensation of $1.7 million.

In the financial statements, we have included note 1 and 2 to present operating income and EBITDA on a comparable basis. Adjusted operating income for the third quarter was $18.4 million, an increase of $3.1 million or 20% from the third quarter of 2005.

Consolidated EBITDA in note 2 of the financial statements are defined in our credit agreement and are used in calculating our covenant compliance. Consolidated EBITDA is EBITDA and is further adjusted to eliminate purchase accounting adjustments, any unusual nonrecurring items, and adjusted to reflect acquisitions and cost reductions implementing those acquisitions as if owned for the full quarter. Consolidated EBITDA for the third quarter was $20.8 million, an 11% increase over the third quarter of 2005.

In Q3, we recorded a non-cash stock-based compensation of $1.7 million, to reflect the cost of the employee options issued in August 2006.

Net interest expense for the quarter was $12.2 million, and includes $959,000 of amortized financing costs.

We recorded a tax benefit for the nine months ended September 30, 2006. This was due to a benefit from our foreign operations tax structure and the reduction in the Canadian tax rates, for which we recorded a benefit of $1.2 million on our deferred tax liabilities in the second quarter.

Our balance sheet and cash flow -- so we ended the quarter with $10.6 million in cash and $476.4 million of debt, for a net debt position of $465.8 million. For the nine months, we generated $25.8 million of operating cash flow. We have used that cash flow in mainly three areas -- $14 million in cash to acquire Cogent, a hedge fund outsourcing business, in the first quarter, and Zoologic in the third quarter. We have also invested $2.9 million in capital, in our IT infrastructure, to support our growing outsourcing business. Then we paid down $12.2 million in debt.

Our LTM consolidated EBITDA as of September 30, 2006, including acquired EBITDA and cost savings, was $82.4 million. Accounts receivable DSO was 59 days as of September, an improvement from 62 days on December 31, 2005.

With that, I will turn it over to Bill for final comments.

Thanks, Patrick. As you can tell, we believe that our business is strong, and we believe in the fourth quarter we will have another good quarter as well. We continue to focus on delivering quality services and products to the financial services industry, and we are now about 900 people strong. We believe that we have a tremendous opportunity going forward.

With that, we'll take any questions.

(OPERATOR INSTRUCTIONS). Andy Green, Wachovia.

Patrick, I think you said it, and I was writing and I missed it. But what was the organic growth year over year?

For the quarter, it's 8.5%. Year to date, it's 11.6%.

Bill, you mentioned that you expected some pretty strong results out of outsourcing in the fourth quarter. I guess, a couple things related to that. First of all, what exactly is driving that?

The other thing is, should we be looking for something -- for the year, we have been talking about EBITDA somewhere in the high 80's. Is that still something that is achievable? Is outsourcing in Q4 going to drive that?

Well, we expect will have a strong Q4, and that our EBITDA will be in the $85 million to $90 million range, probably, for the year. That's adjusted EBITDA, as Patrick explained. We have signed a number of really excellent outsourcing contracts in Q3 that really won't begin to kick in until Q4. So that will be part of the drive, and we also have a pretty nice pipeline for license sales as well.

On a recurring revenue basis, it looks like you're still where you have been, right around -- staying there between 79% -- call it 79%, 80%. Do you see that changing as these outsourcing contracts come on, become a greater percentage of revenue, do you see that pushing past 80% next year or maybe even in Q4?

Again, I think that really is a function of how our license sales go. We are bringing out a number of new products. We're bringing out an origination system on LMS that is getting some pretty nice feedback from the industry. We also have a new release of our FundRunner product, which is a customer relationship management for the fund industry. FundRunner Marathon is going to begin to ship in the fourth quarter. That also should drive some license revenue. We also just released our latest release of CAMRA, CAMRA 5.0, that has also gotten an awful lot of great feedback from our client base.

So a lot of it depends on how license revenue goes, and we're expecting to have a pretty good quarter in license revenue for Q4. So if we have a good quarter in license revenue and a good quarter in outsourcing revenue, it looks like the numbers will be somewhere between 79 and 81, again.

I guess, Patrick, one last one for you, a quick one. I guess there will be just maybe a couple hundred thousand of purchase accounting adjustments in Q4, and then it will pretty much be done?

Yes, it will be done after Q4. So we should have a number that's under that $500,000 in Q3, so somewhere between $100,000 and $500,000 in Q4.

(OPERATOR INSTRUCTIONS). Ken Monaghan, ING.

Could you talk about two things? One is what the pipeline looks like at this stage for acquisitions, both in the fourth quarter as well as in 2007. In addition, would you as well address or talk about to what degree there is any seasonality in the outsourcing solutions business, in the sense that Bill, you might get people making decisions or signing contracts in Q4 with the expectation of starting afresh with a new service provider in the beginning of the year?

As far as acquisitions are concerned, there's an awful lot of things for sale. So that's the positive on the acquisition front. The negative on the acquisition front is things are very expensive. So, again, we tend not to buy when things are very expensive. We think we have a lot of ways to grow internally, and that if we focus on that, we can drive up our organic growth rate. So, even though there's a lot of things for sale and we are looking at a lot of things, as you guys well know, Carlyle is not out of money. So there's plenty of money that we could use to get these deals done. We are disciplined about it, and we have to see where we make money at it, not that we just get bigger. So we are pretty disciplined about the acquisition front.

As far as the seasonality is concerned, a lot of that has more to do with the startup funds, and particularly the large startup funds that we have had a lot of success with. To that end -- and there has been a number of pretty high-profile fund administrator problems in the marketplace. Knock on wood -- we have not been one of those. That also gives us a lot of momentum.

So our ability to take on new clients and add funds from our existing clients and do it on a smooth basis really is what is going to drive that revenue number. Right now, we're hiring people very quickly. We are growing very quickly, and we are focused very much on making sure our processes are very strong to be able to support this new business.

[Michael Storms], Mountain Capital Investments.

If I recall from the second quarter, organic growth, I believe, was around 20%, 21%. You just mentioned to one of the prior callers that organic growth is now, year to date, 11%. What's the slowdown? What area is slowing down?

I think if you look at organic growth and what we said historically is that we think we can do organic growth between 10% and 15%. One of the things -- if we sell a large license of one of our products, a $1 million license fee in any one particular quarter, you're going to see a bump-up in organic growth in particular quarter. So for us to have a 20% organic growth quarter and an 8.5% organic growth quarter, I think, is not unusual. I think our organic growth year to date is 11.9%. We are right at about 12% for the year, which is right between 10% and 15%, which is what we expect. So I don't think there's anything unusual in it at all.

You're saying that was just -- you had more sales in the first and second quarter, I guess?

Again, it depends if sales include sales on acquired companies as well as stuff that we've owned for at least a year. A lot of stuff that we do, like when we bought FMC in April of 2005, we spent a lot of time and effort restructuring that business and working with the management team up there, and we got a nice pickup in revenue and a nice pickup and earnings. But that's included in acquisition revenue, so we don't get any organic growth for that, even though we work very hard on that process.

So the way they define organic and acquisition growth is a little hard to manage the business that way. We manage the business for dollar growth, and again, we're not really particularly concerned. If there's low-hanging fruit on acquisitions, we go after that very fast. If there's low-hanging fruit in organic, then we go after that awful fast. When there's no low-hanging fruit, we go after the next most logical thing, for us to grow revenues and grow earnings.

That's how the process works. Again, it depends on when our acquisitions are and what our pipeline looks like.

At this time, I'm showing no further questions.

Again, we appreciate everybody being on the call. We look forward to talking with you at some time in the first quarter about our full year and our fourth quarter. We continue to work hard, and thanks again.

Thank you. This concludes today's conference call. You may now disconnect.