SS&C Technologies Holdings Inc (SSNC) 2008 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome everyone to the 2008 fourth quarter 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) Thank you.

Mr. Stone, you may begin your conference.

Thank you. Welcome and thank you for joining us for the Q4 and 2008 earnings call. I'm Bill Stone, Chairman and CEO of SS&C. 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 may make on this conference call about our future expectations, plans and prospects constitute forward-looking statements for the 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&Cs 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 financial and business highlights, then I'll turn it over to Patrick to take us through the financials in a more deep manner. 2008 proved to be the best year in SS&Cs history. Driven by 13% revenue growth, our consolidated EBITDA grew 17%. The fourth quarter, while still delivering 41.4% EBITDA margins, saw revenue flat with 2007. Q4 saw the first layoffs in six years as we prepared for the financial services industry slowdown. Recurring revenues for the year was 82% of our revenue and hit $231 million. For us, these are big numbers. We did experience a slowdown in Q4, as I mentioned. Revenue in the fourth quarter was essentially flat at $68.3 million compared to $68.4 million in 2007. Revenues for the year were $280 million, an increase of almost $32 million over 2007.

Q4 new license revenue was $6.5 million, a reduction of 27% from Q4 '07. This is a reflection of lengthening sales cycles in the asset management and institutional sectors. We are encouraged, however, to see deal flow continue to come our way, and we are aggressively pursuing these opportunities. Throughout 2008, as is our practice, we managed our expenses closely. We recognized a slowdown in late Q3, and we moved quickly to reduce head count on November 1, 2008, we eliminated approximately 100 positions worldwide or 9% of our workforce.

On the international front we are actively growing our business in several regions. We now have over 30 clients in Australia, and revenue has increased 200% since the acquisition of the Australian business in 2005. In Asia [ac we have customers in 10 regions, including Hong Kong, Singapore, Taiwan, and a large concentration in Malaysia with over 16 clients, including IAG, (inaudible) and Bank Nagara, and the Central Bank of Malaysia. This year we lost the fund administration business in Kuala Lumpur beginning with the transfer of over 90 funds from an out source provider in India. Kuala Lumpur provides us with the ability to increase service levels and reduce costs. We have also been in Kuala Lumpur since 1995. I'll now turn it over to Patrick to review the 2008 and Q4 financials.

Thanks, Bill. Results for the fourth quarter of 2008 is revenue of $68.3 million and net income for the period of $6.5 million. Included in net income is acquisition amortization of $7.5 million and stock-based compensation of $1.9 million. In addition, we had a gain of $0.5 million as a result of our final negotiation of the IPO costs as a result of withdrawing our S-1 in the third quarter.

Revenue decreased $200,000 or 0.2% over Q4 2007. Excluding acquisition revenue and the negative impact of foreign currency, revenue increased $2.5 million -- 2.5% in the fourth quarter. Acquisitions contributed $2 million in the quarter, and foreign exchange negatively impacted revenue by $3.9 million or 5.6% of the quarter as the U.S. dollar strengthened.

In the financial statements we've included note 1 and note 2 to present operating income and EBITDA on a comparable basis. Adjusted operating income in the fourth quarter was $25.3 million, a decrease of $900,000 or 3% over the fourth quarter of '07. As our revenue mix shifted from higher-margin license revenue to software-enabled services revenue.

Consolidated EBITDA in '02 in our financial statement is defined in our credit agreement and excludes interest expense, income taxes, depreciation, amortization, any unusual nonrecurring items, and is adjusted to reflect acquisitions for the full period. Consolidated EBITDA in Q4 was $28.3 million a 2% decrease over the fourth quarter of '07. Net interest expense for the quarter was $10 million and includes $572,000 of non-cash amortized financing costs.

For the year -- results for the year are a revenue of $280 million and a reported income of $18.8 million, and the net income includes amortization expense of $30.2 million, stock based compensation of $7.3 million and other excluded nonrecurring costs of $1.3 million. Revenue increased $31.8 million, up 13% from '07. Excluding acquisitions and the negative impact of foreign currency, organic revenue growth in 2008 was 12%. Acquisitions contributed $3.1 million and foreign exchange negatively impacted revenue by $700,000 for the year compared to '07. Adjusted operating income for '08 was $14.6 million or 16% over '07, and our operating margins improved by 110 basis point, from 36% in '07, to 37.1 in 2008. We had strong cash flow for the year ended December 31, '08, and continue to delever our business. We entered the quarter with $29.3 million in cash and $409 million in debt or net debt position of about $379 million. We generated $61.7 in operating cash flow for the year, and we invested that operating cash flow in our business and to pay down debt. We spent $6.7 million in capital expenditures, $17.9 million to acquire the MDS business in the fourth quarter, and we paid down $25.6 million in debt for the full year.

In '08, we became a taxpayer as our NOL and carry-backs were used up in '07. For the year, we paid $12.5 million in taxes compared to a net refund of $1.6 million in '07. So if you exclude the big-swing effect of the taxes in '08, our operating cash flow increased $18.7 million over '07. LTM EBITDA, as of December, was $115.5 million. Our EBITDA growth and lower debt position reduced our leverage to 3.3 times from approximately 6.8 times when we closed in November of 2005. Accounts receivable DSO was 51 days on December 31, down from 52 at the end of '07, as we experienced strong cash collection from the fourth quarter. And I'll turn it over to Bill for final comments.

Thanks, Patrick. While all of you know that our primary -- while all of you know that the primary markets we serve have been hobbled, we still see great acquisition opportunities in various pockets of product and service revenue opportunity. We continue to pursue these opportunities of all sizes, and throughout the global markets; and as I said, we see some good market demand. We also believe our salesforce is improving as we acquire and build more talent and capacity. And with that, we turn it over to any questions.

(Operator Instructions) Your first question comes from the line of [Mike Storms] with Mountain Capital Advisors.

Do you have any outlook for your 2009 retention rate? I know you have a lot of contracts that rollover to customers, and I think that usually comes out at the end of the year, beginning of the year. Any guidance in that regard?

Yes. We -- our maintenance retention rates are the same they've been historically. The low to mid 90%.

Okay.

We didn't see any big change on January 1.

Okay. So no real change here then. All right. That's good. All right. So far, you guys look like you're holding up pretty well considering how battered the financial services industry is getting here. I guess keep up those acquisitions.

Well, we think that there's a lot of things that we can opportunistic about, and we also have -- we're an independent funded administrator. Independence is pretty well prized right now, and old boring things like separation of duties and strong internal controls and accurate reporting on a timely basis, those are becoming pretty attractive again.

Any update on the IPO?

Not really.

So I guess you're waiting until the markets look better, right?

I think so. Obviously, the last five days in the market have been pretty strong, but you're starting from a pretty low base, and it's not something that we would -- we would pursue very aggressively right now.

Okay. Thank you very much.

Your next question comes from the line of Mike Lanier with AIG.

Bill, how do things look on the acquisition front? Are people getting realistic about prices?

We think so. We have seen some real softening in demands. We have seen some real intensity as far as doing it more quickly. I think that an awful lot of entrepreneurs that have built up an equity stake view it as being something that they've worked awful hard for; and, when you've seen the Dow go from 14,000 to 6,900, I think they're afraid. In that environment, it gives us a lot of opportunity.

And if the right thing comes along, how do you suppose you'd most likely finance it?

Well, there's one guy's number that has a 713 area code. I'd have to call him. That's Mike.

Well, you better get us before these bonuses get paid out. That might be a little late.

There is a tremendous amount of dry powder. We can finance things ourselves. Most of our bankers tell us -- they say we might not like the price, and we also have some capacity left under our accordion, and we haven't touched our revolver, so, we probably have a couple hundred million dollars in dry powder, and in today's environment, a couple hundred million dollars is a lot of acquisition opportunity.

Sure, sure. How do you characterize -- what percentage of your revenue and income do you think would be classified as hedge fund?

It's probably a $90 million business, out of $280 million. What is it? About a third? Below a third?

And what are your expectations for that group right now/

Well, it's gotten beaten up a little bit, but we're seeing an awful lot of people that were in house administered, starting to -- their investors are demanding that they have outside controls, and so we're seeing some real opportunity. We've got a whole bunch of things, knock on wood that are in the hopper that if we can get a little luck and close a few of them, I think that we'll start seeing an upturn in that business in Q2.

Oh, good. Good, good, good. Which of your -- which of the spokes in the wheel looks to be the most challenging for you?

Well, I think that hedge funds have been -- they were very challenging in Q4 and still challenging in Q1. It's just that the pipeline is getting bigger, and there are bigger names with bigger monthly revenues for us. So that's what's really driving that. Obviously the big life insurance industry has been battered pretty well as you know, with the Hartford and Genworth and others. So that market has become more slower, I would say. At the same time, what we've seen is people start to concentrate on things that they can control, and in most institutions, be they banks, insurance companies, or asset managers, the largest discretionary spend that they have is IT. And so that's now getting plenty of scrutiny. And we get a lot of opportunity when people decide, not invented here is a very expensive -- very expensive attitude.

And I guess, going forward, one of the themes that should play into your game plan is more regulation, but that doesn't look like an '09 type of -- that will take them too long to write some new rules for you to monitor for people?

Right. But, I do think that that has some -- that has some opportunity to it, because, again, that's a leading indicator. People want to get in front of those kinds of things, not get behind them and when you're in in any kind of a consumer market, like a lot of our customers are, they want to stay out of the limelight when it comes to regulatory filing issues.

But there's nothing -- there's nothing percolating that's going to be particularly helpful in '09 for right now?

There's not, like an AVR or an IMR or a new risk-based capital calculation. There's none of that yet.

It's coming.

Yes, it's coming. Like a freight train, too.

Thanks, Bill.

(Operator Instructions) Your next question comes from [Tony Introveno], with Federated Investors.

Good afternoon, guys, or actually, afternoon. I just had a couple quick questions. Regarding the global accounts, how much of revenue is that? Is that a meaningful piece?

Right now we get about 40% of our revenue outside of the United States.

40, 4-0?

4-0, with about 20% of that coming from Canada.

Okay.

So we get about 80% in North America.

Are those the Australian and the AP stuff that you talk about, is that, like, the rest of that, the other 20% or?

Well, no, because we have a European business that's bigger than our Asia Pac business.

So that stuff is kind of a small portion?

That's right. But we see a lot of opportunity there. In Australia they really have privatized their retirement system, and it's caused a super annulation process, and it's creating a tremendous amount of money to be invested. It's 9% that the companies have to put aside in individual savings accounts.

And are you -- is this kind of an area where you're focusing to put more money in, are you investing in these areas?

We are. Actually we're investing in a number of areas, particularly our sales organization, and also our product organization, as far as having platforms. So we are doing a number of things where we're -- we are improving the interoperability of our different products and services and providing, a really world-class user experience for our customers. And the other thing is that our distribution capability in Asia Pac is another area that we're spending money on.

Okay. And so were these just kind of companies that you bought up and bundled together? Is that kind of how it worked? So you kind of need to get them all working together?

Well, we have some really what are considered best of breed products that are sold on their own; and when we integrate them with our, like, performance attribution, our reconciliation, and these are our Sylvan and our Recon products, as we more tightly integrate them with our accounting engines, we have a more attractive and more robust platform that is proving to be, in initial showings to some of our prospects, appear to be very, very positive.

And moving along to a couple other -- in the acquisition number, you talked about 2 million for the quarter, and was it 3.1 for the year? Is that -- that's not the recent one, is it, that's a combination of a couple different acquisitions?

Yes, that's a combination of a couple. In the first quarter, I think we had some acquisition revenue as a result of an acquisition in '07, and then we had 2 million in Q4 as a result of the MDS acquisition.

Okay. Then then, in the EBITDA reconciliation, let's see. Where is this, you have acquired EBITDA and cost savings of $2.4 million--?

Yes.

Is that -- could you give a breakdown on that, of which one is which?

That is -- that's all the October acquisition, MDS.

Okay.

So the $2.4 million is effected for a full year.

Okay. And that is -- so those are recognized cost savings in EBITDA?

No. That's nine months EBITDA for the MDS acquisition, January to September.

Oh, okay. I see what you're saying.

Yes. The definition of consolidated EBITDA is to effect all acquisitions for a full year.

Okay. All right. And then just a clarification on the debt pay down. If my numbers are correct, it looks like you just paid down about $500,000 in Q4; is that right?

That's correct. I thought it was $400,000, but somewhere around there.

Okay. So $25 million for the year; but then, when I look at the debt balances, I have 415 for last quarter and 408--.

Yes. Any difference between the cash flow and the actual change on the balance sheet is foreign currency.

Oh, that's currency? Okay.

Right. We've got some debt up in Canada denominated in Canadian dollars. So the cash flow statement is a true paydown.

Okay.

We would pay down more, but our debt is selling at a big discount and--.

Yes.

And our covenant -- our credit agreement has a covenant against paying down other than at par.

Can you buy back and just hold it?

We have to get a waiver, which we will be coming to you shortly.

Okay.

I'm sure you guys will be reasonable.

And then just, I guess, my final question is, you did 12%, 13% this year. Do you think you can do that again next year, or do you foresee 2009 being more difficult?

I think that 2009 is an acquisition opportunity year. I would see it it being very difficult to get those kind of organic growth numbers, but I'm cautiously optimistic on oppositions. Actually, I'm really kind of bullish.

That's good.

We've also got -- at today's foreign exchange rates, foreign currency exchange going against us right now.

Yes.

That's a pretty reasonable number right there, too.

Yes. In the fourth quarter, it was $3.9 million, right? And I don't think, foreign currencies were down to their lowest level in the fourth quarter, so, this year, if currencies stay where they are, it could be 13 million to $15 million for the full year.

Okay. All right.

But obviously all that doesn't drop to the bottom line, since those--.

Yes. If you add some of the costs, too.

The costs are in the local currency, too.

Okay. Thank you very much.

And at this time, sir, there are no further questions.

Well, we appreciate you being on the call, and we look forward talking to you at the end of next quarter. Thank you.

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