SS&C Technologies Holdings Inc (SSNC) 2011 Q1 法說會逐字稿

Good afternoon. My name is Huey, and I will be your conference operator today. At this time, I'd like to welcome everyone to SS&C Technologies' 2011 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. We will be taking questions in the order we receive them. Please note that this conference is being recorded and will be made available on SS&C's website, www.ssctech.com.

I'd now like to turn the call over to Mr. William C. Stone, Chairman and Chief Executive Officer. Mr. Stone, you may begin your conference.

Thanks, Huey. Welcome and thank you all for joining us for our Q1 2011 earnings call. I'm Bill Stone, the Chairman and CEO of SS&C, and I have Norm Boulanger, our President and Chief Operating Officer, with me, as well as Patrick Pedonti, our Chief Financial Officer.

Before we get started, we have 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 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. These are included in SS&C's filings with the Securities and Exchange Commission, in particular the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

I'm going to start with a brief overview of the quarter and then I'm going to turn it over to Norm to get into more of the operational details, and then I'm going to have Patrick go through the financials. And after that, we'll summarize with some highlights and open it up for everybody's questions.

Let's begin with the results. I'm pleased to report our first quarter revenue grew 13.9% to a record $89 million. To give you some perspective on this, in 2004, our last year as a public company prior to going private, we did $95.9 million for the whole year. The first quarter of 2005, we did $27.4 million. Consistent growth over the long term is our mantra.

Now, to get back to this quarter, software-enabled services revenue was up 17% in the first quarter, to $57.7 million. Revenue from software-enabled services was almost 65% of total first quarter revenue. We achieved GAAP net income of $9.8 million, which is up 9%, and adjusted non-GAAP net income of $19.2 million, which was up 36% over the first quarter of 2010.

We look at our annual run rate basis of recurring revenue, which we define as our maintenance and software-enabled services revenue, which was $77.2 million in Q1, an annual run rate of over $308 million. This represents an increase of 14.8% from $67.2 million and $268.8 million run rate in the same period in 2010 and an increase of 3.3% from Q4 2010's $74.7 million and $298.9 million run rate. Now, we believe is AARB is a good indicator of visibility, and these are all GAAP-recognized revenue numbers.

In 2011, we continue our approach of adding to our capabilities through targeted acquisitions. And in the first quarter, we acquired BenefitsXML, a provider of employee benefits enterprise software solutions. We have a track record of delivering customizable, scalable, extensible front, middle, and back office platforms and services to financial institutions that run their investment operations. In that vein, BenefitsXML is very similar. They target the employee benefits service providers, the life and health insurance companies, and BenefitsXML and SS&C share many blue-chip clients. In addition, BenefitsXML's overall technology, which is based on cloud-based solutions, add to our technical staff with key technical capabilities.

2011 also represents our 25th year in business. We marked our 25th anniversary with the launch of our Global Wealth Platform, or GWP, at the Private Banking Conference in Singapore. GWP provides a secure, Web-based, multi-currency wealth management platform to support all aspects of investment management, among them portfolio construction, modeling and trading, performance analytics, P-calculations and billing, advisor and client portals, reporting and even more. Established private wealth management firms such as Deutsche Bank's private wealth business in Australia use our GWP to manage both their high-net-worth and ultra-high-net-worth client portfolios.

We are going to continue to have 25th anniversary celebrations and rollouts over the rest of the year. And our next one is at NASDAQ on June the 9th.

Now I'll turn it over to Norm for some operational highlights.

Thanks, Bill. We started 2011 with another solid quarter. We continue to see opportunity across each of our markets for our software products and software-enabled services. As I mentioned last quarter, we've seen increased demand in a number of areas, and in particular for our loan management offering, LMS Loan Suite.

In Q1 we closed several opportunities, including an international insurance and financial services organization with operations in approximately 130 countries selected LMS to manage its $14 billion loan portfolio. The asset management arm of a boutique investment bank selected LMS Loan Suite to service a complex portfolio of mortgages, including non-performing loans. A mortgage loan servicer selected LMS to sit on it's Web-based borrowers portal to service the multibillion-dollar commercial loan portfolio. A Midwest-based large institutional asset manager expanded their relationship with SS&C, selecting our Debt and Derivative software solution.

A global provider of outsourcing services expanded their license of SS&C Recon. Recon on this operation is a critical component of their platform and is utilized to service all of their hedge fund clients. An asset manager selected Sylvan to manage their composites for both traditional and institutional clients as well as their alternative investment managers.

Now, the world's largest asset managers decided to expand their license of our client reporting system, Pages. It's their a main tool in generating fund fact sheets that they use in their sales and marketing efforts. And finally, a commercial life insurance company based in Thailand selected CAMRA.

We continue to focus and execute on our opportunities, adding talent, driving operational efficiencies, and delivering new and enhanced services to the market. Our new offerings include Debt and Derivatives SQL. The new release takes advantage of the latest version of Microsoft SQL, 2008 for Windows 7, and enhances our swaps capability for mortgage-backed, indexed, interest-only, and principal-only swaps.

Global World Platform integrated with Tradeware Services. This combined offering allows our customers to manage their front office to accounting, including release of trades, brokers, with a single solution. This offering is being well received, in particular by large registered investment advisors.

Our private equity services are now offered with ASP access to our TNR software. This model allows internal fund managers to access our front office capabilities, allowing them to raise capital, monitor their investments, manage their client relationships, all on the same database that's managed by our fund services team. We believe we're the only provider in the private equity space to offer an integrated outsource and software solution.

On past calls I've mentioned our fundservices.com offering. We continue to enhance our offering, and on June 9, SS&C will showcase SS&Cfundservices.com for alternative investment managers at an event in New York City. SS&Cfundservices.com is an integrated, Web-based solution that allows customers secure access to critical fund information with the simplicity of cloud delivery, enabling mobile access, including for iPad application.

And now I'll turn it over to Patrick to go through the financials.

Thank you, Norm. The results for Q1 2011 were GAAP revenue of $89 million and reported GAAP net income of $9.8 million and diluted EPS of $0.12. Revenue was $89 million, an increase of $10.8 million, or 14%, from Q1 2010. Excluding acquisition revenue and the positive impact of foreign currency, organic revenue increased 6.8% in the quarter.

Acquisitions, including Geller GIPS, thinklink, TimeShareWare, and BenefitsXML, contributed $4.4 million revenue in the quarter, and foreign exchange positively impacted us by about $1 million, or 1.3%, as foreign currency strengthened.

The business had strong organic growth in the fund services business provided to hedge funds and fund-to funds, LMS license sales to institutional asset managers, and Pacer products and services sold to asset managers.

Adjusted operating income for the first quarter was $34.1 million, an increase of $4 million, or 13%, from the first quarter of 2010. Margins fell to 38.2% from 38.5% in Q1 2010, as recent acquisitions impacted margins. We expect the operating margins of these acquisitions to improve over the course of 2011.

Adjusted EBITDA was $35.6 million or 39.9% of revenue in the quarter, an improvement of $4 million compared to Q1 '10, or 13%.

Net interest expense for the first quarter was $5.1 million and includes $470,000 of non-cash amortized financing costs. Interest expense was down $3.9 million from Q1 2010 as we've paid down $172 million of debt since the end of Q1 2010. In the first quarter, we only received 15 days of benefit from the senior subdebt redemption we completed in March 2011.

We recorded a tax provision in the quarter of $5 million, or 34% of pretax income. We expect the GAAP effective rate for the full year to be in the range of 33% to 35% of GAAP pretax income.

Adjusted net income was $19.2 million, and adjusted diluted EPS was $0.24. The adjusted net income excludes $9 million of amortization of intangible assets, $2.9 million associated with the subnote redemption, $1.8 million of stock-based comp, $152,000 of capital-based taxes, and approximately $400,000 of unusual and nonrecurring expenses, mostly foreign currency impact, debt waiver fees associated with the redemption, and acquisition-related expenses.

For the balance sheet for the quarter, we ended up with $70.8 million in cash and $224.5 million of debt, for a net debt position of $153.7 million. We generated $12.1 million of operating cash flow for the first quarter compared to $15.5 million in Q1 2010.

Cash uses in the quarter -- we used $14.8 million for the acquisition of BenefitsXML. We used $2.1 million for capital expenditures and capitalized software, which represented 2.4% of revenue. We paid down $67.1 million of debt, including the senior subnote redemption of $66.6 million. And we paid $5.5 million in taxes compared to $5.9 million in 2010.

Our accounts receivable DSO was 56 days as of March 2011, an increase of eight days from 48 days as of December 2010 and compared to 51 days in March 2010. The increase in DSO was due to late client billings in one of our business units as they negotiated price increases for the 2011 contract year. Business delay impacted cash flow by about $3 million to $4 million in the quarter. We expect DSO to return to normal levels at the end of Q2.

And financing activities recorded net proceeds from the February secondary offering of $52 million.

Our consolidated EBITDA, which is used for covenant compliance and includes acquisitions as if owned for the full period, was $145.4 million as of March 11. Our EBITDA growth and lower debt position has reduced our leverage from approximately 1.8 on December 31, 2010 to 1.3 as of March 31, 2011.

As far as the outlook for Q2 and the remainder of the year, we closed the secondary offering on March 11, 2011, and we issued 3.1 million shares at that offering, including the underwriter's over-allotment of 1.1 million shares, which were issued on March 9, 2011. These shares only impacted us for a partial quarter in Q1. We expect a full impact of these shares will be recorded in the second quarter.

On March 17, we announced the redemption of $66.6 million of the senior subnotes. The interest cost reduction as a result of this redemption will be $7.8 million for the full year. In Q2, we will receive the full benefit of this redemption compared to only 15 days in the first quarter.

Our current expectation for the second quarter 2011 revenue is a range of $90.5 million to $93 million, adjusted net income of $20.7 million to $21.5 million, and outstanding diluted shares of 80.8 million to 81.0 million.

Our current expectation for the full year is revenue in the range of $367.5 million to $373 million and adjusted net income in the range of $83.4 million to $85.2 million. Outstanding diluted shares for the full year will be approximately 80.6 million to 80.7 million. Compared to Q2, we expect increases in share count in Q3 and Q4, about 300,000 to 500,000 shares per quarter.

For the full year '11, we expect cash from operating activities to be in the range $83 million to $87 million and capital expenditures to be in the range of 1.9% to 2.2% of total revenues for the year.

And now I'll turn it over to Bill for final comments.

Thanks, Patrick. As we look at Q1 and then we look at the rest of 2011, we're quite optimistic. For the full year 2011, we're guiding revenues up to $367.5 million to $373 million, and our cash flow from $83 million to $87 million. Now, we continue to be encouraged by the technology recovery, and we continue to see requests from financial services firms as they refresh their technology. We are also seeing clients becoming increasingly comfortable using our cloud-based application and service delivery to execute on their complex accounting and reporting requirements. Not only are we well positioned to understand the technical aspects of the cloud computing model, but we are also able to bring a deep knowledge of consulting and financial services.

I'll now open it up for questions.

(Operator Instructions.) Adam Frisch, Morgan Stanley.

Hi, it's Glenn Fodor for Adam. Thanks for taking my call, and congratulations on 25 years. Good to see the guidance raised, but I was wondering if you can just break this down between how much of the increase is due to organic growth versus acquisitions. I just haven't done the math yet, based on what you gave us.

There's two factors in the increase. One is we ended up at the top end of our guidance range for Q1, so that's impacting it. And then we did the BenefitsXML acquisition. So we still expect organic growth to be in the 6% to a little over 7% range for the full year. So a part of that increase is BenefitsXML.

Okay, and then the second question. Interesting to hear about the traction in loan. I was wondering if you can provide some color on what's the catalyst there? Is it Dodd-Frank or any anticipation there? And who are the main competitors you're going up against? Are they core processors or somebody else?

I'll take that one. We're seeing a couple of things in that space. One is the asset class itself is hot right now, and we're seeing different types of organizations like our software. Traditionally, we were always very strong in the insurance market. We're seeing a nice uptick there. Some very large players have been looking at our software recently and continue to do so. Mortgage loan servicers, particularly ones that are specializing in buying FDIC loans, those types of things. And organizations that are basically, effectively money managers who have basically distressed mortgage portfolio strategies.

So it's a little more broad-based than we have traditionally seen, so the momentum's continuing from last quarter, and we're pretty excited about our prospects in that space. We have an excellent product in that market.

Okay, great. Thank you very much.

Bryan Keane;Credit Suisse;Analyst

This is Ashish Sabadra on behalf of Bryan Keane. I had a quick question regarding the market improvement. You mentioned that we should expect margins to improve, and margins were lower this quarter just because of acquisition. I was wondering if you could give some more color on the margin improvement.

I think we initially gave guidance that we expect EBITDA margins to be between 40% and 41% for the full year. And they were approximately 40% for Q1, and we expect them to increase gradually towards 41% by the end of the year.

Okay. On the demand environment, I was just wondering if you could give some color on the demand for the fixed income side that accounts for roughly 60% of your revenue. So what kind of demand are you seeing, and how does the AUM flow -- just if you could give any color on the demand.

We would say, really, that fixed income represents probably 40% to 50% of our revenue, and the other 40% to 50% is split between equities and derivatives. I think that we have a broad-based portfolio of products and services, and even though interest rates are under pressure to rise, I think that an awful lot of companies are looking at ways in which to go after yield to be able to support their crediting rates and other interest payouts that they have. So they're obviously looking to get some yield in order to be able to maintain their spreads. And I think that's one of the reasons, as Norm was speaking about our LMS Suite, it is high powered when it comes to stressed loans. It allows you work them out nine times and carry all of that data so that you can go back and then analyze and look at what's really going on. It also allows you to keep track of various of the collateral underneath that loan or over that loan so that you really understand your protection.

So I think that the demand for our products and services -- and in particular, for sophisticated accounting services for credit funds and different fixed income assets -- has been quite strong for us.

Okay, thanks for the color. And one final question, sir. Do you have any contracts up for renewal, and what kind of pricing pressure, if any, are you seeing for these contracts?

We constantly have contracts up for renewal, but we have always had very strong renewal rates in the 93% to 95% level, and we have contractual increases on maintenance. And in general, we either raise our prices on our fund services contracts or else there's been large rises in assets under management, and that's given us lift on those contracts. So we have not seen much of a real negotiation process on our maintenance contracts, or really, either, on our service contracts, whether that be ASP, BPO, in fund services as well as institutional asset outsourcing. So I think that's been very strong for us.

Okay.

Sterling Auty, JPMorgan.

This is Sterling Auty on behalf of Sterling Auty. How are you doing today? Maybe just, Bill, to follow on that last part, the price increases on the maintenance, et cetera -- when do they go through? Do they go through in the fourth quarter or in the first quarter?

They go through in the first quarter, the majority of them. And we have maintenance contracts that renew throughout the year, but over 50% of the maintenance contracts renew January 1.

Okay. And then you talked about the increase in annual guidance that the acquisition was helping. Is there a sense -- obviously, it's not that large -- but how much is the acquisition contributing to this year?

They'll contribute about, plus or minus, somewhere around $4 million.

Okay. And then there's a lot of talk and hoopla about what's happening in the commodities markets, cost inflation, what's happened with gold and silver, et cetera. As you look across the wide range of products that you have, what solutions may get benefited or looked at from your clients that might be investing in the commodity side?

Well, primarily, that's our services business. We will handle commodity trading advisors, commodity pool operators. And then we also have a metals section of our derivatives product that allows people to invest in gold futures and gold forwards or other precious metals, or any kind of metal, for that matter. So I think those would be the primary upticks of our business.

And are you seeing an uptick because of the recent activities?

I wouldn't say that that is recognizable.

Okay. And then, Patrick, just an administrative one. The assets under management, or the assets under administration in the fund services business, can you give a sense of where you ended the quarter in terms of total, even if it's a rough estimate?

Sterling, we don't have a number. We haven't reported assets under management in the past.

All right. Thanks, guys.

Terry Tillman, Raymond James.

This is actually Eric Lemus in for Terry. I have a three-part question for you as far as your Global Wealth Platform. Can you just, first, talk about the adoption rate, whether it be to the install base or new customer situations? And then second, what are the differentiators of the products as far as ASP versus historically selling the CAMRA product? And then lastly, what end markets are you seeing most demand for the Global Wealth Platform? Thanks.

Good questions there. Let me first just make sure that you understand that the Global Wealth Platform is a relatively new offering we just brought to market. And so most of the opportunities that we have are new clients, and we're actually pretty excited about the number of opportunities we've had and the progress we're making closing business with them.

We also integrated our Tradeware offering, which does the fixed connections for the trading side. That, combined, has given us -- some of the opportunities we have right now, we're offering both those services. And so we're pretty excited about that space. It's mostly with certain investment advisors, managed account platforms, both SMA and UMA types of accounts. And it really doesn't compete with CAMRA. It's a different space. It competes more with, let's say, An Advent Geneva, Advent APX.

Yes, primarily CAMRA would be institutional asset managers that would have between 50 individual pools of assets up to 500. The Global Wealth Platform will handle 10,000 to 100,000 accounts of high-net-worth and ultra-high-net-worth individuals. It really, it allows you to select strategies and then rebalance portfolios based on a variety of different criteria that each individual investment advisor is setting up with their individual clients. It also prepares a financial plan for individual high-net-worth clients and shows them how you're going to accomplish that plan. And I think that's some of the stuff of the integration that has really made that very effective.

And we're seeing traction. We first rolled that product out in Australia, and that's where it's had its most traction for us. But we've started getting traction in Canada and the United States, and we've gotten our first inquiries out of Europe.

Okay, great. Thanks.

Patrick [Dobrinski], William Blair.

It's actually Bhavan Suri. Hope you're doing well. Just a couple of quick questions here, Bill. An update on the hedge business administration business. Obviously, software-enabled services grew nicely. How did that business do?

It was very strong. In the software-enabled services, the hedge fund administration business is probably half of that number, and I would say that it probably has a growth rate of probably in excess of the 17%.

Yes. Again, it's been a couple of quarters now that it's had a growth rate in excess. Do you think at some point that you'll trend towards 60% to 70% there, or is there a chance the other services also will see some kind of inflection, start growing a little more rapidly?

I think that it all really depends on where people are sending their money. So what's happened in the hedge fund space is that they really, over the last six or seven years, have gone from $500 billion to a couple of trillion, whereas most of the other asset managers have seen flat asset growth. And I think that's where you have the challenge. Most of the asset growth in the asset management industry has gone to BlackRock. So if you're not growing with BlackRock, you're not growing in the asset management space. I think they're up to almost $3 trillion. And they, unfortunately, build their own systems.

So I think that the net new asset growth in the life insurance industry is also very muted. So I think that if we see an uptick in the asset flows into those vehicles, I think you'll see an uptick in our revenue. I also think that competitively we are very strong in each of those areas, and so there's an opportunity for us to take market share. But it's a lot easier to get new greenfield than it is to slug it out with an entrenched competitor.

Great. And then on the Global Wealth Platform, just a quick question to follow up on the previous one. Who do you run into in terms of competition? Is it typically internally built solutions, or are they providers like the IFLECs of the world that might have wealth management platforms out there, too?

I think it's primarily the APX platform at Advent, and it's SimCorp, which has their dimension product. And it's probably still some older products like Portia and High Portfolios. But we are seeing traction, and we think we're going to be able to replace those older technologies. And we think we have, really, a lot of competitive advantages against each of the competitors.

Great. And then one quick one for Patrick. The licensed line increase -- was that primarily the LMS business there, Patrick?

It was. The bump-up in the quarter was primarily LMS licenses.

Great. Thanks, guys.

Thank you, sir. (Operator Instructions.) Tim Willi, Wells Fargo.

Two questions, if I could. Bill, can you just talk a bit about giving us an update on the M&A environment and pipeline? I don't remember hearing that in your prepared comments, and just how that looks and how, obviously, you guys are building a lot more financial flexibility if the debt comes down and the EBITDA goes up. And then I have a follow-up question after that.

We'd like to continue to have the debt go down and the EBITDA go up unless we find something awfully attractive for us. There is an awful lot of things for sale, and I think that -- you know, you see the stock market trading at almost 12,000 for the Dow, and I think you're going to see more and more people try to really liquefy assets. I think that there's public knowledge that there's books out on Portia now. I think there's a book out on Condor. There's books out on a number of other pretty substantial pieces of business, and I think it is something where I think SS&C is going to participate, and we're going to be aggressive.

Okay, thank you. And then the follow-up I had -- and again, I'm probably getting a bit over my head with this question -- but you had mentioned the acquisition you did brings some cloud capabilities. I'm just curious. From your perspective, is the cloud something that could be a competitive differentiator for you that you intend to build out more aggressively? Are you actually doing it and just not that aware of it? How do we think about that whole buzz and your customer base and what they're looking for and what you have to do?

As you know, Tim, these things tend to be incremental more than they are revolutionary, so that the cloud is something that we have done for a number of years with our various SaaS platforms. And I think that we're over $1 trillion in assets on our SaaS platforms. And I think that that's something that gives us a tremendous opportunity to go forward. I think that as we roll out, particularly our June 9 event at NASDAQ will show how we've leveraged these assets to really take advantage of the cloud. And I think as we get more mobility and really building out the security around that mobility, I think it's something that will really drive larger and larger organizations, such as yours at Wells Fargo, to be more comfortable with that allowing a very functionally rich application to be delivered on a mobile platform with appropriate security.

Okay. Thank you very much.

Thank you. (Operator Instructions.) At this time I'm showing no additional questioners in the queue. I'd like to turn the program back over to Mr. Stone for any closing remarks.

Thanks, Huey, and thanks, everybody for being on our call today. For those of you that would be interested in coming to our June 9 presentation at NASDAQ, please let our marketing department know, and we'd be glad to accommodate you. And that's Kristen Schwecke in our marketing department. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day.