SS&C Technologies Holdings Inc (SSNC) 2008 Q3 法說會逐字稿

Good morning. My name is Sierra, and I will be your conference operator today. At this time I would like to welcome everyone to the third-quarter 2008 earnings conference call. (Operator Instructions).

I would now like to turn the conference over to your host, Mr. William Stone. Sir, you may begin your conference.

Thank you, Sierra. Welcome and thank you for joining us on our Q3 2008 earnings call. I'm Bill Stone. I am the Chairman and CEO of SS&C, and with me today is Patrick Pedonti, our Chief Financial Officer.

Before we get started, we need to review the Safe Harbor statement. 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 provisions 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 filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2007.

I would like to start with some of our highlights for the quarter, and then I will turn it over to Patrick to review the financial highlights as well.

As many of you are aware, this is our first analyst call since Q1 2007 when we registered to go public. During the past 15 months, we have watched the capital markets to determine if there was a window of opportunity to go through with our IPO, and as many of you know, the market has not been very inviting. So last month we went through our registration in order to take the tax deduction, as well as we don't believe over the next several months that the markets look very inviting anyway.

Despite the volatility in the markets, we continue to grow our business and provide quality service to our customers, which has continued to give us additional mandates. Revenue for the quarter was $71 million. That is about 12% above Q3 of '07. Recurring revenue was 84% for the quarter, up from 82% year-to-date. Our software-enabled services continue to be the largest element of growth. It was up 17% for the quarter and over $43 million. We generated adjusted operating income of $27.2 million, and we had strong cash flow. For the nine months ending September 30, we generated $43 million in net cash. Our leverage position is 3.4 times, which has steadily decreased from 6.8 times at the closing of our go private transaction in November of 2005.

We did $5.6 million in license revenues in Q3. The largest deal we did was Thornburg Investment Management out of Santa Fe New Mexico, which licenses several of our products including Camera, TradeDesk and Pages, and Allianz Global Investors who license Sylvan, Recon and Pages.

In addition, our acquisition of Zoologic has proven to be a good acquisition for us. We were able to sell their training products into our client base, as well as extending our licenses in their current client base. We've gone from 45 clients to 84 clients since acquiring Zoologic in September of '06, and this quarter we added Syracuse and Rutgers Universities, Prudential Insurance, Principal Financial, Northern Trust, MetLife and several others. Another strong acquisition for us was Northport, which does private equity administration. That business has grown very strongly for us since we acquired it in September of '08 -- I'm sorry, September of '07, and we believe that it will continue to grow for us.

Our most recent acquisition was Micro Design Services out of Persephone, New York -- out of Parsippany, New Jersey. What Micro Design does is build handheld devices for exchanges in other routing activities for securities and other instruments. It has got a great team of about 30 people in Parsippany, and we believe that will be a great acquisition for us. We spent $17.8 million in buying Northport -- I mean in buying Micro Design, and we expect strong earnings growth from them.

We also have added two new executives. Sean Egan comes to us from KPMG. He had a 35 year career there. He is running our real estate businesses, which includes SKYLINE, SamTrak, LMS and LMS Originator. Sean comes, as I said, with 35 years at KPMG where he ran the real estate practice in the Northeast and in New York.

Also, Doug Benedetto is the Vice President of Strategic Relationships for us. Doug has had 20 years experience at ING Investment Management, [Altos], and [SNA Capital Management] prior to that.

Internationally we had a good quarter. We have over 30 clients now in Australia, and revenue has increased 200% in Australia since we acquired FMC and got the Australian operation with that acquisition.

We also have a strong business in Asia-Pac. We have customers in 10 regions, including Hong Kong, Singapore, Taiwan, and we have 16 customers in Malaysia, including ING, Allianz and Bank Negara.

We also are in the process of moving an outsourcing arrangement that we had with Broadridge, which is subsidiary of ADP that was spun out of ADP that we had in Hyderabad. We are moving that to our own offices in Kuala Lumpur, and we have added about 30 staff in order to do that business in NKL.

We had a good third quarter, but as many of you know, the businesses are softening around the world, and our business is no different than most of the financial services businesses. Although we have much stickier recurring revenue, we have a very strong maintenance base, and our earnings continue to be good.

That being said, we decided in October to reduce our headcount. We reduced it by 9%, and all of that will be done by the end of the year with 70%, 75% already done.

And now I will turn it over to Patrick for some of the financial results.

Thanks, Bill. The results for the third-quarter '08 were revenues of $71 million and net income of $4.8 million. It includes acquisition amortization of $7.5 million, stock-based compensation of $2.1 million, and in addition, we wrote off $2.1 million of IPO costs as a result of withdrawing our S1 registration statement. And that $2.1 million is included in G&A costs on our P&L.

Revenue increased $7.5 million or 12% in Q3. All the growth was organic with $6.3 million of the growth coming from our software-enabled services that grew 17%. Foreign exchange negatively impacted us about 2/10 of a 1% in the quarter as the US dollar started to strengthen during that period.

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 $27.2 million, an increase of 3.9 or 17% from the third quarter of '07.

Consolidated EBITDA in Note 2 of the financial statement is defined in our credit agreement, and it is used in calculating our covenant of compliance. Consolidated EBITDA excludes interest expense, income taxes, depreciation and amortization and any unusual and non-recurring items. Consolidated EBITDA for the quarter was $28.8 million, a 13% increase from third quarter of '07 and 40.6% of revenues.

Net interest expense for the quarter was $10.3 million and includes $584,000 of amortized financing costs. We recorded a tax expense in the third quarter of $1.5 million, and based on our current estimation, we estimate that our effective tax rate for the full year will be about 31%.

On our balance sheet and cash flows, we had strong cash flow for the nine months ended September 30, and we continue to delever our business. We ended the quarter with $30.3 million of cash and $414.6 million of debt for a net debt position of $384.3 million.

And, as Bill had mentioned, we closed the MDS acquisition on October 1, and we used $17.7 million of the $30.3 million to pay for that acquisition.

We generated $43.1 million of operating cash flow in the nine months, and we used that to invest in our business and pay down debt. So we have invested $6.2 million in capital equipment and our IT infrastructure and facilities for our growth. In addition, we have paid $25.1 million of debt down in the nine months.

In 2008 we became a taxpayer as our NOLs and carrybacks were used up in 2007. With the nine months ending September 30, we paid $10.7 million in taxes compared to a net refund of $1.6 million in the comparable period in 2007. This excludes the effects of taxes. Our cash flow went from $38.5 million in '07 to $53.8 million in '08, a $15.3 million increase.

Our LTM consolidated EBITDA as of September 30 was $113.8 million. Our EBITDA growth and lower debt position has reduced our leverage to 3.4 as of September 30. Accounts Receivable DSO was 59 days at September 30, an increase from 52 on December 31, 2007 as we are experiencing some delays -- as we experience some delays in payments from customers. But we have seen some improvement in collections in the fourth quarter.

Now I will turn it over to Bill for final comment.

Thanks, Patrick. As we navigate through these volatile times, I believe our job as a management team is to keep the Company strong. We do this at SS&C by aggressively pursuing all sales, passionately serving our customers and relentlessly controlling our expenses. If you take out the $2.1 million in operating expenses that we had for IPO, you will see that our expenses in Q3 '08 are almost exactly the same as Q3 '07, and that is with an $8 million increase in revenue.

So I think that is what we try to do as a business, that is what we will continue to do, and now I will take any questions, and Patrick as well, from anyone. Thank you. Sierra?

(Operator Instructions). Andy Green, Wachovia.

Just a couple of questions, Bill. Can you talk about your customer base and what you are seeing? Patrick mentioned that DSOs went up a little bit because of slower payments, and I was wondering from your standpoint have you lost any major customers? What does that look like in terms of customers going under and any sort of consolidation effects?

And then also along those lines, typically in the past you have been pretty successful putting through annual price increases. I was wondering if you have started to get any pushback for '09 price increases?

First, obviously we're not getting much revenue from Lehman Brothers anymore, as well as anyone else that is in Chapter 11. But they were not that big of a customer to us. The other ones that are so prominent in the news -- Fannie, Freddie, AIG, Lehman and Bear -- are not particularly large clients of ours. So there has really been very little financial impact.

As far as losing customers, much more than losing customers we are seeing redemptions in our fund administration business. So even though we are winning a tremendous amount of business, we have to offset all of the redemptions in order to get growth. So that has been a challenge.

We do believe that we have a superior service. We are getting responses from our customers that we have a superior service. They particularly appreciated our responsiveness and our creativity with moving their assets away from prime brokers that were in trouble, and they realize that SS&C has proprietary technology that we own and we are able to move very quickly to help our customers.

As far as price increases, that is primarily in our maintenance business, as well as selectively other places. On the maintenance we have not seen pushback in our maintenance increases for '09. Actually we don't accept pushbacks for our maintenance increases and we never have, and that has proven to be very good for us.

As far as price increases on our licensees or on our fund administration services, we are being very selective about that. We're much more interested in winning the business.

Okay. Thanks. Regarding cash flow deployment, I guess what are you guys thinking about in terms of what you're going to do with free cash flow? Obviously you've got potential debt pay down, but you think you will be doing some more tuck-in acquisitions sort of along the size of Micro Design Services?

You know, if we can find things like Micro Design Services, we would snap those up whenever we got the opportunity. We have the ability to get Wachovia or others to loan us money. To do acquisitions is probably less likely. I don't believe that any of the private equity firms, including Carlyle, which owns 70% of us, is as aggressive as they have been in the past.

If we could, we would be buying back our debt aggressively, our bank debt, which is trading 68 to 72 I heard last. But since we only get to buy it back at par, being the financial wizards we are, we just don't think that's a very good idea. So we're looking selectively at acquisitions and also in really making sure we have bulletproof services to our customers.

Okay. And just one last question. I know you don't give guidance. I was just wondering if you could give us directionally any color on your outlook for '09 in terms of organic growth? You have been pretty consistently posting double-digit organic growth. What is your initial look at '09?

Well, to be honest, it is very difficult to predict '09. I think that relative to the industry we will do very well. Relative to our own past records, we will not do as well. There is an awful lot of change going on in the marketplace that could bode very well for us. We have a very efficient backoffice. I'm pretty certain we could do most investment loan accounting, information flow to large scale institutions quite a bit cheaper than what they can do for themselves. We have a number of proposals out for major financial institutions where we can really save them a lot of money, give them a lot more flexibility, allow them to add new business. And I think as companies such as yours and others start looking at their IT infrastructure, they are going to decide that 75% of the discretionary money being spent in financial institutions is in IT, and maybe that's not the wisest thing to do, and we will benefit greatly if that happens.

(Operator Instructions). Mike Lanier, AIG.

What was that last comment, you will benefit greatly if what happens?

You know, the more outsourcing that companies like yours and others might do, that really, really helps us. Right? So we get really large contracts to do the backoffice for large financial institutions. When you go trade additional securities, it is different ones than what you have traded in the past. SS&C probably has large clients that trade those already.

What that does is it means we have an infrastructure both technologically accounting-wise and reporting-wise that an awful lot of companies do not have. And that has been very, very effective for us.

Okay. Just to be clear on the debt, to reduce debt, you do not want to pay par for the bank debt. I understand that, especially -- I don't know paying 40 points over market, it bothers most people. But are you also prohibited from buying bonds?

Yes. We are without a waiver from the senior debt.

Okay.

Which we are sure they would give it to us for nothing, don't you think?

They are in a great mood these days. But on the flip side of things, I can see where things could work out in terms of the outsourcing play is a pretty good argument for companies like ours because it allows them to apparently reduce staff and costs and it looks good, and then that will play into it quite well.

But just on the flip side, kind of the dark side of things, if this economy turns -- starts turning more towards a depression instead of a short recession, what kind of levers do you have if your revenues take a dive? I mean how much -- how quickly can you resize your cost structure if you had to?

Well, I think it is pretty obvious, Mike, that we had a pretty good Q3 and we have had a pretty good nine months, right?

Right.

And we still within a two-week period decided and selected over 100 positions to eliminate, which is 9% of our work force. And so I think we moved very quickly. I think that we're focused on the business. We have a group of people that run the business that understand, and we don't -- and we do not really -- we do not really argue with ourselves through these things. I kind of go through the oh [expletive removed], oh dear process, what are we going to do? We are not Hamlet, right, we move. And again, our whole idea is that our job is to make decisions. Our job is not to dilly-dally. And that is what has worked out pretty well for us, and I believe that is what will continue to work out for us.

The other thing as far as -- we have 5000 customers, so no one represents more than 3%, 4%, 5% of our revenue, and we are diversified across almost all financial services categories you can look at.

We have also various revenue streams from outsourcing revenue, license revenue, maintenance revenue and professional services revenue. And lastly, we do most of everyone's regulatory reports.

You know, Uncle Sam or IRS or inland revenue, the Ministry of Finance in Tokyo, all the Basel II requirements of the different banks around the world, you know we supply information on all that stuff. So there's really not a way to quit doing that without quit existing.

Right, right. Now if -- I guess given the circumstances, it would not be surprising if some acquisition opportunities -- some people were ready to cash out. Do you think -- how big of a bite would you take of the Apple if it looked attractive to you? I mean you think Carlyle would step up with some equity if that was the right deal?

Well, maybe if I get you to call them. I mean right now there is -- there are a number of properties that are extremely attractive. But the financing capability is extremely unattractive.

At our board meeting last week, we discussed what it would be like to try to float some more high-yield bonds. I was told a coupon of 15%. That is not very attractive. And layering on a whole bunch of 15% coupon debt is not very likely. That's just not SS&C's -- it is not in our DNA. We are not going to do that.

No, no, Bill, in the good old days when the coupons got to be stupid, you just did unit deals with warrants. We would look at that.

Well, I mean again one of the reasons that we're having these calls and one of the reasons that we will try to talk to you and other investors is that there are tremendous opportunities out there. There's a lot of companies that are not performing at our levels, and we also think that we could manage some of these companies quite a bit better than they are being managed now.

I have no doubt about that. All right. Well, then so basically the carnage that we're seeing at least on the -- under the broad umbrella of technology and obviously what a difference between software and hardware, you are really not -- it is like of all the companies that I follow, it is like you and SunGard are the ones that seem to be wearing the Superman suit right now. You just not feeling it hardly at all.

Well, you know, why don't we make them Spider-Man?

Okay. All right. Well, congrats on the good numbers. If there is an acquisition that is too good to be true, you know, there is a way to finance it. We will -- you know, give us a call.

I have got your phone number.

Yes.

I'm not bashful.

All right. Thanks, Bill.

(Operator Instructions). Tony Venturino, Federated Investors.

I just wanted to follow-up with what Andy was asking earlier about how sales are going. Are you seeing of other companies that I follow, they were saying that people, clients are postponing decisions, they are pushing decisions out. Are you seeing that at all, or would that even affect you? Because most of the stuff is maintenance and outsourcing. It seems like you have won a lot of deals in Q3. Are you winning the same amount of deals going into Q4? Are you seeing the same amount of interest?

I would say that right now we believe that we have the same amount of deals probably in our pipeline. We think Q4 has traditionally been a strong license quarter for us. You know, knock on wood, we think it could be another one this quarter.

The ability to grow the outsourcing revenue like we have in the past is more problematic because of redemptions. But other than that, I would say that our win rate has been very high. We're adding salespeople. We're not pulling in our horns in any way shape or form on a sales and marketing basis, and we feel strong about our opportunities.

Okay. And you kind of touched on it there. Is there -- do you anticipate kind of a budget flush in Q4 in your client base? Is that something that normally happens? I would imagine that with most companies they have an IT budget, they get rid of it before the end of the year. I do not know if that is going to be the case this year or not.

Yes, those that have not already had their budget taken away from them.

Yes, exactly.

So -- but yes, in general, fourth quarter is our best license quarter, right? I think that is because they are afraid they are going to lose it.

We also have a tremendous number of productivity enhancers for our clients. We just released a syndicated bank loan module that is very slick and very powerful and ties into a number of our great big customers and handles all the different changes that happened and all that to the various faxes that go on to change the bank debt. And then it also ties into the regulatory reporting for our insurance clients, which handles the Schedule D and Schedule B processes for them, and it has been very, well received.

We have other products that have come out. We have a reconciliation product called Recon that is very attractive. We have a performance attribution product, Sylvan, that has got major, major clients, and we believe we have world-class products and world-class services, and yes, there is a rough patch going on in the financial services industry, but there is an awful lot of dry powder on the sidelines. And when that comes back in, SS&C will be very well-positioned.

Okay. Fair enough. That is it for me.

And there are no further questions at this time.

Well, again, we really appreciate everyone coming on the call, and SS&C will continue to work hard for you. Thanks.

Thank you for participating in the third-quarter 2008 earnings conference call. You may now disconnect.