SS&C Technologies Holdings Inc (SSNC) 2011 Q2 法說會逐字稿

Good afternoon. My name is [Joron], and I will be your conference operator today. At this time, I'd like to welcome everyone to SS&C Technologies' 2011 second 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 William C. Stone, Chairman and Chief Executive Officer. Mr. Stone, you may begin your conference.

Thanks everybody. And with me is Norm Boulanger, our President, Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer.

The Safe Harbor statement we have to read is 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 this 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'll give you some brief overview and then we will turn it over to Norm, and he will go through some more of the details, and then Patrick will go through the numbers. And after that, we'll open it up for some questions.

Second quarter revenue grew 12.5% to a record $92 million. We're continuing to deliver quarter-after-quarter. Our continued ability to grow at these healthy levels showcases the strong business model we have and the improving health of our global client base.

We were particularly happy with our software-enabled services, which -- whose revenue was up 17% to $62 million. Revenue from software-enabled services is now 67% of total revenue for the second quarter. We achieved GAAP net income of $13 million, up nearly 200%. And adjusted non-GAAP net income of $21.3 million, up 32% over the second quarter of 2010. Operating cash flow was up 75% in the first six months of this year to a record $41 million. With approximately 90% of our revenues recurring in nature, we're well positioned to drive both cash flow and earnings.

The annual run rate basis of our recurring revenue which we define as the addition of our maintenance and software-enabled services was $81 million in Q2, an annual run rate of almost $324 million. This represents an increase of 15% from $70.4 million and $282 million run rate in the same period in 2010 and an increase of 5% over Q1's [$77.2 million] and $309 million run rate. We believe this is a good indicator of visibility and these are all GAAP recognized revenue numbers.

SS&C's license revenues were a little softer than expected but were caused mostly or primarily by execution issues, which we've already taken steps to correct. We're quite optimistic our Q3 license revenues will be solid.

Software enabled services demand remains high. And as financial companies begin driving cost improvements, outsourcing is a very attractive alternative. We are seeing demand for new technology offerings, including cloud computing and mobility, which highlight our technological problems and our innovation skills. We're the only major player in the SaaS BPO space with a technology heritage and this is increasingly apparent to our prospects and clients as well as our competitors, tracking investment portfolios, be they securities, loans, derivatives or other assets or liabilities is primarily accomplished through technology. Access to data, mobility, size and scale are the four pillars of our software enabled services growth. We're focused on expanding earnings and our adjusted diluted earnings per share were up 18% in Q2 from Q2 '10. We are well positioned for a solid second half. We have a number of acquisitions in our queue but as always we are very disciplined in this process.

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

Thanks, Bill. Q2 2011 was a solid quarter. As Bill mentioned, we had good results in our software enabled services with revenue growing 17% of which 11% was organic growth, particularly strong was our growth in our alternative and institutional market verticals. In fund administration we saw wins that span start ups, new fund launches and funds from our competitors. We are confident that the opportunities will continue to grow.

We also continue to see momentum in our LMS Loan Suite and our Global Wealth Platform software as a service solution. As Bill mentioned, our license result for Q2 was lower than we anticipated, we attribute this to the nature of the license business and in general in execution channels for the quarter. The markets and prospects are available and our Q3 pipeline is strong. We're expecting (inaudible) to return to more typical levels.

[We sold] a number of opportunities during the quarter. TimeShareWare Enterprise was selected by Royal Holiday Club, which has eight resorts in key Mexican destinations and owns it or controls inventory in 190 other resorts. They chose it to manage its sales and marketing, club management, accounting and [members'] website.

A Fortune 500 company in the insurance industry and Local Initiatives Support Corporation chose LMS Loan Suite to manage their mortgage loan accounting and servicing needs. Two SS&C registered investment advisors from California, New Jersey chose our Global Wealth Platform. Software as a service solution to support the separately manage account business.

In Europe, we signed several new deals including the Private Equity division of (inaudible) and Partners Asset Management Group and the large private bank that selected MarginMan to support its margin trading in Singapore and Hong Kong.

A large asset manager also selected Evare to collect data from external facilities to pass through to the internal accounting systems for reconciliation and trade.

In June we officially launched sscfundservices.com in New York City, we had over 400 attendees and received very positive feedback on the portal we designed for fund managers and investors. In addition to the portal, the key differentiator are our new sales, and it allows us an opportunity to upsell our current customer base with add-on services such as risk, performance measurement, and performance attribution.

We also have plans to roll out variations of this cloud-based [portal] technology for our other market verticals including private equity, benefits administration, institutional and asset management customers. Our customers continue to face market uncertainty in some recently announced layoffs. Even with uncertainty along with cost pressures can create sales challenges. But it also serves as a catalyst to engage SS&C. This can create significant opportunity for us.

A value proposition is our technology and services [showcase] customer growth. Customer growth enables margin expansion for our prospects. And now I will turn it over to Patrick for financials.

Thanks, Norm. Results for the second quarter 2011 were GAAP revenues of $91.8 million and GAAP net income of $13 million and diluted EPS of $0.16. Revenue was $91.8 million, an increase of $10.2 million or 12.5% over Q2 2010. Excluding acquisition revenue and a positive impact of foreign currency, organic revenue increased 4.2% in the quarter. Acquisitions including thinklink, TimeShareWare and BenefitsXML contributed $5.3 million in the quarter and foreign exchange positively impacted revenue by $1.5 million or 1.8% as foreign currency strengthened.

The Company has strong growth particularly in our fund services business for hedge funds and fund to funds and institutional asset managers.

We continue to see positive trends in our SaaS business. Software-enabled services revenue was $61.5 million, an increase of $8.9 million or 17%. Excluding acquisition and a positive impact of foreign currency, organic revenue growth for software-enabled services was 11%. Adjusted operating income in the second quarter was $35.8 million, an increase of $3.5 million, or 11%, from the second quarter 2010. Operating margins fell to 39% from 39.6% in Q2 2010, as increased investment in R&D and lower professional services margin impacted overall operating margins. But sequentially operating margins improved from 38.3% in Q1 '11 as software enabled services margins and operating margins at recent acquisitions improved.

Adjusted consolidated EBITDA was $37.4 million or 40.7% of revenue, this is an improvement of $3.6 million or 11% compared to Q2 '10.

Net interest expense for the quarter was $3.5 million and includes $416,000 of non-cash amortized financing costs. Interest expense was down $4.6 million from Q2 '10 as we've paid down a little over $114 million of debt since June 30, 2010.

We recorded a tax provision in the quarter of $6.5 million, or 33% of pretax income. We expect our GAAP effective tax rate for the full year to be in the range of 33% to 34% of pretax income.

Adjusted net income was $31.3 million, and adjusted diluted EPS was $0.26 -- $21.3 million and adjusted diluted EPS was $0.23. The adjusted net income excludes $9.2 million of amortized intangible assets, $3.6 million of stock-based comp, and $23,000 of unusual and non-recurring expenses, mostly related to stock option that exercises and fees related to our secondary stock offering.

At June 30, we had $82.6 million in cash and a little over $203 million of debt for a net debt position of $121 million. We generated $41.1 million in operating cash flow for the six months compared to $23.4 million in 2010. The increased earnings and improvements in managing working capital contributed to the increased operating cash flow. And we continue to use our strong cash flow to acquire business to pay down debt.

Highlights of cash uses for the year are -- we spent $14.8 million to acquire BenefitsXML. We've used $4.2 million for capital expenditures and capitalized software, which represents about 2.3% of total revenues. We paid down $87.8 million of debt, including the subnote redemption of $66.9 million that we completed in the first quarter.

For the six months, we paid $15.6 million in taxes compared to $10.9 million in 2010. The increase is due to our higher pretax income this year.

Accounts receivable DSO was 44 days as of June 2011, a decrease of four days from 48 days as of December '10 and 49 days as of June 2010. Cash flow from financing activity includes the net proceeds from our February secondary offering of $52 million.

As far as our covenants are concerned for the quarter, our LTM consolidated EBITDA that we used for covenant compliance, it was $145.3 million as of June 11. And our EBITDA and lower debt position has reduced our leverage from approximately [1.8] on December 31, 2010 to [1.2] as of June 30, 2011.

As far as outlook for the next quarter and the full year, our current expectation for the third quarter is revenue in the range of $93.5 million to $95 million. Adjusted net income of $21.6 million to $22.1 million and outstanding diluted shares in the range of 81.2 million to 81.5 million.

Our current expectation for the full year is revenue in the range of $369 million to $373 million and adjusted net income in the range of $84 million to $85.2 million. And outstanding diluted shares for the full year will be in the range of 80.6 million to 80.7 million.

For the full year '11, we expect cash from operating activities to be in the range of $84 million to $87 million and capital expenditures to be in the range of 2.1% to 2.3% of revenues for the year. And now I'll turn it over to Bill for final comments.

Thanks, Patrick. Looking towards the rest of 2011 and beyond, we feel optimistic. As Patrick stated our yearly revenues we expect between $369 million and $373 million and cash flow between $84 million and $87 million. We believe that focus and determination, as well as paying attention to the detail will serve us going well -- will serve us well going forward.

We will be presenting at investor conference this fall and we hope to see many of you there. And I'd now like to open it up to questions.

(Operator Instructions). Glenn Fodor, Morgan Stanley.

Hi, everybody. Thanks for taking my call. One of your competitors has filed through capitalized with an offering. I was wondering what implications you think that could have for pricing, general competition and competition for acquisitions as they perhaps transition their business model to something more commercially run?

And are we talking about BNY ConvergEx or who are we talking about?

Correct, yes.

We don't really compete with BNY ConvergEx very often with hardly anything. There tend to be much more of a broker dealer and a clearing firm than they are a technology firm or a accounting outsourcing firm like we are. So, we don't really view that they will be very much in our space. Certainly, I think it's a good firm, it's run well, but we really are in very different parts of the market.

Okay. Just turning to IT forecasts, it seems every week there is a different forecast put forth by -- for IT spending by financial institutions. I'm just wondering how conversations are tracking with your customers and what are they focusing on, where are they putting dollars? And is there any sense of caution you're or is there any caution you're sensing that might be behind your tightening up guidance a bit rather than in absolute race?

Well, I mean, I believe that we're -- we are quite confident in our ability to execute over the next several quarters. There's a big push to really merge generally accepted accounting principles with international accepted accounting principles and you're going to have a big push for companies to be able to meld those two systems together and I think that's going to bode well for SSNC as our clients need to track additional information. So, I don't see anything in the spaces we're in where the spend is being constricted. In general, they have to comply with the regulations, obviously we have a pretty active Washington DC, which is [spurting] out regulations somewhat by the hour. So, we feel pretty well positioned for that.

Okay. Great. Thank you very much.

Sterling Auty, JPMorgan.

Bill, can you give us a little bit more color, you mentioned that you've already made some changes and you expect the product license piece to improve from here. Can you talk more specifically about the changes that you've instituted?

Well, we've added several sales people and we've moved some people into our pre-sales group that are very strong, so that we think that that's going to give us a crisper presentation style and an ability to close quicker. A number of the deals really we haven't lost, but they got slipped and sometimes those things can slip forever. So, I think the idea about being able to go after when the griddle is hot, you really have to -- you have to make it happen then. And I think that's something we're -- in Q2, we weren't as -- weren't nearly as crisp as we could have been.

And then just maybe the follow-on to that, if we look at Advent's results as well, they've gone through second and third quarter where their contract value is coming a bit lighter, has slowed. How much of what you think might be going on is just macro given the uncertainty in the market that we've got. And I think you mentioned even in your prepared remarks, I think you mentioned why it might help demand? I wasn't quite sure I understood that but how much does the impact on the business and product license in particular might just [come for] the macro side right now?

First I'd differentiate right. Remember our software-enabled services business grew 17%, it grew 11% organically, it's two-thirds of our revenue. And in our major markets both alternatives and institutional asset managers it grew faster than the 17%. So, we would say that in general the demand has held up very well. It's on the license side that the demand wasn't quite as high as we would have liked. But as I said it really wasn't so much that it was the demand that it was our execution on the opportunities that we had. Now we still believe there are plenty of opportunities out there and it's our job to go get those. So, I don't -- I do see, you saw where Merck is laying off 13,000 people and you're going to start seeing that happening in financial services as well.

I think HSBC announced some layoffs. I just saw Northern Trust announced 270 people out of their Irish fund administration business. So there's going to be some of that, but in general when that happens Sterling the work doesn't go away, right. Just because you're laying those workers off doesn't mean that you can quit filing a 10-Q or a 10-K or you don't have to calculate in any of the -- or you don't have to send out an investor statement. All those things have to happen. And so a lot of times what happens is that organizations either hire independent contractors or hire consultants or hire independent fund administrators and accounting outsourcers like us and that's what we mean about driving some of our sales demand.

All right. So very valid points. Last question will be can you give us an update and some color internationally both Europe and Asia are kind of the progress that you're making in those arenas as well as just the demand environment in those theaters?

I think we're making progress and it's kind of a -- it's a kind of [the second]. We're in the middle of the second, but we think we're going to get through. We have had Dave Reid out in London now for about three or four months and we've had Phil Banas in Australia for about seven or eight months and they are both doing a good job. I think that again it's somewhat long sales cycles in what we do, so you can't expect things to pop immediately. But we would hope to see some increased improvement in Q3 and then more so in Q4 and Q1 of '12.

Sounds good. Thank you.

Terry Tillman, Raymond James.

Hi. Good afternoon guys. Thanks for taking my questions. I guess for Bill or Norm that is a strong number in terms of the 11% software-enabled services growth organically, do you see that kind of at least low double-digit growth as sustainable in the back half of the year and then the next year? And then is there any way you could tell us a little bit more about the mix of that strength from new funds where you're being mandated, the replacement business and then just add-on services in the installed base. I'd love to learn a little bit more about what of those three seems to be the hottest area?

No, I think what we're comfortable with is that we're really seeing consistent opportunity particularly in the fund administration business really across all three segments. And if anything we probably have strengthening in terms of takeaway from some of our competitors, some of the larger funds, so we're really very comfortable with that. The growth in that space is going to continue. I think the outsourcing growth that you're talking about 11% we're expecting that to continue as well. And I think we have an opportunity to improve these numbers if we can execute on the opportunities. We have some really great momentum in that space right now.

Our name in the marketplace is very strong, our reputation is very strong, our technology solution is being well received in the marketplace and we're very optimistic. And so I think that's going to continue to be our focus. If you look at the annual run rate basis that's we're trying to drive, if we drive that number that's going to take over the -- take care of the quarter-over-quarter comparisons each year. And as Bill mentioned on the license business, there is really plenty of opportunity, it's not any different this quarter than other quarters. But you got to manage the number of opportunities relative to our commitment, you got to get as much coverage as we can.

You got to get people to sign a contract on time and as you know insurance companies and banks don't always do what we tell them to do. And it's a matter of staying focused and executing on those opportunities. So, there are headwinds in the marketplace with these layoffs, but I do think some of these things are going to help us as well. Some people will stand and pat thinking they have kind of survived the downturn. And I think some of them are going to bounce back in and say we got to do something more aggressive than we had planned. So, it's not a single part of the market segment, which is what I think is the strongest confidence builder in terms of the demand that we are seeing.

Also, thanks, Terry. Just to give you a little color on Q3 is that it's only August 3, and we have already signed several million dollar deals in our fund services business. So we are seeing demand, we are seeing it across private equity, across fund to funds and across hedge funds. We believe that will continue, we are also seeing [interest] in the institutional asset management business as well as the insurance business.

I think as we raise our eyes, and really start shooting for targets higher than we have in the past, I think our people will execute more, right. So, whereas before they might have had targets of 2%, 4%, 6% growth. They are being told now that that is very unacceptable and that we think we have the products and services to drive a lot more growth and we need to have a lot of talented people around here to really get on that horse and start riding that horse.

Okay. Thanks, Bill. And I guess just my follow-up would be, in terms of the second half on the license side, you talked enough for me to be comfortable of what you said, but how should we think about our models though just so we don't get ahead of ourselves? I mean, could you see it snap back to where it's above the 1Q levels? How should we think about that?

And then secondly, are you accounting well enough for maybe some of the shift to -- some of your licenses to LMS and the GWP maybe is a cloud offering and how do you try to manage that in your planning parameters? Thanks.

I think, Terry that we kind of anticipated that question which Norm and I discussed quite a bit. We really think that a normal quarter for us should be between, $5.5 million, $7 million in license revenue. If we have a strong quarter, we ought to go above that. So we would guess that it will be back in that range. I'd be pretty disappointed if it was just at the $5.5 million, so I would guess it would be $6 million to $7 for Q3. And I think going forward it should be somewhere in that range.

And there is not enough -- again from a market perspective people will decide what kind of services they want from SS&C. It's been a big advantage for us to be able to provide outsourcing as well as license opportunities. So, I don't view as one cannibalizing the other.

Thank you.

Ross MacMillan, Jefferies.

Thanks a lot for taking my questions. Patrick, can you just talk about the big uptick in R&D expense this quarter? Thanks.

Sure. I think there is a couple of things. One is there are some acquisitions that came in for the [full] quarter, in Q2 compared to Q1, BenefitsXML is now in their first quarter. And that business is focusing on developing more products. And then we're also -- we've also generally beefed up R&D in some other areas too. A good chunk of it is acquisitions coming in for the [full] quarter.

But should we think of it as up, the current number is more of a reasonable run rate that gives a slight increase from this run rate?

Yes, this number is a reasonable run rate, a little bit above for the rest of the year.

And then you also kindly gave us the detail on the acquisition contribution and also FX on revenue. I know you have got some businesses in other currencies from a cost perspective, was there much impact to operating expenses or the total cost base from FX?

Sure. It's about -- we have about $1.5 million in revenue FX and all those businesses operate in their local currencies also. So, if you assume that all those businesses are running 40% EBITDA margins, then you can pretty much multiply the [1.5 times 0.6] and that's kind of the uplift we got in expenses from FX also.

Got it. Okay, that's helpful.

I want to just say [$900,000].

Bill is quicker on the math than I am.

And then just with regard to some of the more recent offerings like the Global Wealth Platform and LMS, are these becoming material at all in terms of overall product mix or are they still fairly small combined in terms of revenue contribution?

Well, I think that their Global Wealth Platform is really just being rolled out now in the last three or four quarters. It's probably got a run rate push in the couple of million dollars, now maybe a little bit better than that. It is primarily our sales engine in Australia, which probably gives us a few million more. So maybe we have it running in about $5 million. But I think it has some real legs to it.

And then the Loan Management business is really a $5 million or $6 million business and we think it could run upwards $8 million, $10 million in 2011. And we think we have some running room in 2012. So it just depends on how well we can widen the markets for these various products and then how quickly can we get them sold and installed. So I think that's really more of where that -- those two businesses combined are probably somewhere in the 3%, 4% of our business.

And are there any other major product initiatives we should be thinking about as we look into 2012?

I really think that the primary thing that's going to drive our win rate, it's going to be our ability to deliver on iPads, iPhones, Droids, as well as having access to our portals from obviously anywhere in the world. We've spent a lot of money, we've concentrated on it, we think we're the first to the show, we've gotten very well reception. Norm talked about our Nasdaq roll out where we had 400 attendees. It went very well. We're excited about where we're going with this.

As you see in meetings you go to all the time now where people don't have their pads and pencils anymore, they have their iPads, right. And they are constantly typing their notes into their iPads or keeping information on their iPads or hearing something in the Board meeting and doing a Google search on their iPads. It has just become a extension of people and extension of their knowledge base.

And I think that being first and then starting to have not just release one, but having found out what our clients really like, what they want us to change, how we can add capability and then how we can keep it to where it's really usable, really fast and is something that people use all the time for critical pieces of information and that we don't overload it with superfluous information where it starts to slow down.

In addition we are rolling that out to other market segments that we serve. So, you will see additional releases for private equity, benefit administration, institutional and asset management and others as we site what the solution set requirement for those groups are and what the demand will be when we're going to roll this out.

And are these -- just very last one. Are these extensions from -- is this something which an existing customer would get and it's part of it's actually the product or is there actually, can you charge you think for these extensions on to things like iPads?

I think in some markets we might be able to charge directly for it. And in the fund and service administration business, the baseline is going to be included as part of our overall pricing model, but there are going to be opportunities for them to upgrade different components like performance measurement and risk, some liquidity analysis tools and some of those things that we're planning on rolling out for Middle Office. So it will be basically a baseline offering for some of the businesses with value-added services that they have to pay for and for some of the others (inaudible) their current status and the market competition we're able to charge directly for the service including the baseline.

We also think, I think Ross the biggest thing that we get out of this when we go into a new client is our win rate. I mean obviously if for winning 30%, 40% of the time now, we can kick that up to 50% or 60%. I think that's really where we see a tremendous uptick in the effectiveness of our sales and marketing expense, right, we start getting multiple dollars back for every dollar of sales and marketing expense. And it also drives our R&D. So, it really is a very holistic kind of thing for our entire business.

That's great, thank you very much.

(Operator Instructions) [Patrick Sorenskey], William Blair.

Hey guys. Thanks for taking my question. Just was hoping you could go a little bit more in depth, and some color in terms of asset inflows and AUMs, specifically with fixed income, I believe it represents about 40% to 50% of your revenue. You're seeing what clients are doing on that end and the type of color you're seeing there?

Yes, I think that at the end of the last measurement period by hedge fund week, we were at about $202 billion in AUA and I would -- I don't have a number of the top of my head, but I know we've had very strong inflows into our funds and also with few funds. So my guess is that we've probably added $5 billion to $10 billion more in assets and it has primarily been a more fixed income related assets as the markets have gotten pretty choppy here over the last six weeks or so.

Great. Thanks. That's all I have.

And I'm showing no further questions in the queue, I would like to turn it over to our speakers for any closing remarks.

Again we really appreciate everybody on the call. We'll be back again in November to talk to you about our Q3. And appreciate you taking the time out today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.