SS&C Technologies Holdings Inc (SSNC) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I'd like to welcome everyone to the SS&C Technologies 2012 Third Quarter Conference Call. At this time, all participants are in a listen only mode. Later, we will 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 Bill Stone, Chairman and Chief Executive Officer. Mr. Stone, you may begin your conference.

Thanks Karen. Welcome and thanks all of you for joining us on our Q3 2012 earnings call. I'm Bill Stone, I'm the Chairman and CEO of SS&C, and with me today is Norm Boulanger, our President and Chief Operating Officer, and Patrick Pedonti, our Chief Financial Officer.

Before 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 purposes of the Safe Harbor positions 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, 2011.

I'll start with a brief overview of the quarter, and turn it over to Norm who will take you through the some of our operational highlights. Patrick will take us through the financials, and then I'll summarize and open it up for questions. In the third quarter, our revenue grew 76% to a record $166 million. We continued to deliver. Our continued ability to grow at healthy levels and integrate our acquisitions showcases our strong business model, deep management talent, and improving health of our growing client base. Software-enabled services revenue was up 98.6% in the third quarter to $125.6 million, and revenues from software-enabled services represented almost 76% of total third-quarter revenue. We achieved adjusted non-GAAP net income of $32.1 million, up 41.8% over the third quarter of 2011.

Our annual run rate basis of recurring revenue, which we define as maintenance and software enabled-services revenue, was $151.1 million in Q3, an annual run rate of $604.5 million. This represents an increase of 82.4% from the $82.8 million, and $331.4 million run rate in the same period of 2011, and it's an increase of 40.1% from last quarter's $107.9 million, and $431.5 million run rate. We believe that this annual run rate base is a good indicator of visibility. And these are GAAP recognized revenue numbers.

SS&C won notable industry and business awards including being named to the Forbes 100 Best Small Companies, the FinTech 100, Software Magazine's Top 500, and Marcum's Top Tech 40 list. We also won the top Managed Account Platform Service Provider by Hedge Fund Management Week. Regulation and compliance continue to burden our client but provide us opportunity to help. I'm pleased to announce the creation of our Regulatory Solutions Group. This formalizes our efforts to help fund managers and financial services firms meet regulatory requirements necessitating data aggregation, analysis, reporting, and transparency.

Our current offering consists of cloud-based solutions for Form PF, and FATCA, and we are working on CFTS CPO PQR requirements [from AV] and various European regulatory initiatives. Our key strengths are the depth of our functionality, the intuitiveness of our user interfaces and the expertise of our teams. These solutions are designed to be used by fund administration clients or any other firm on a standalone basis. Leading our effort in this area is Mike McGaw, who is being promoted to Managing Director at SS&C GlobeOp, and he works for the overall manager of that business Rahul Kanwar. In Q3, we acquired Gravity Financial, a Canton, Massachusetts fund administrator. And early this quarter Q4, we acquired Hedgemetrix a Dallas-Fort Worth based administrator. We have number of acquisitions that we're looking at currently, but as always we are very disciplined in this process.

We've gotten a lot of favorable feedback from our clients and prospects in what's happening across our Company. It's confirmed by our sales in all of our market segments. Our investments in infrastructure and new cloud-based regulatory service offerings are helping us differentiate ourselves from our competition. And these offerings coupled with our financial strength positions us very well for long-term growth. We are focused on expanding our earnings and our adjusted diluted earnings-per-share were up 39.3% in Q3 from Q3 '11. And we are well-positioned for a solid fourth quarter. I'll now turn it over to Norm for some operational highlights.

Thanks Bill. Our focus in Q3 was to execute on our opportunities, continued investment on our [ofference thrived] pipeline and the integration of the PORTIA and GlobeOp acquisitions. We look forward to the integration of the Gravity Financial and Hedgemetrix acquisitions and introducing their clients to a broad range of products and services. Our third quarter results showed record revenue and we are ahead of plan on synergies. We continue to see strong demand for SS&C GlobeOp services.

In Q3, SS&C launched our new iRisk offering for insurance companies. Using data directly from the camera platform, iRisk seamlessly delivers comprehensive risk calculations that address insurance company enterprise risk management, solvency two for international insurers, as well as the ongoing US solvency modernization initiative. Risk measures include value at risk, sensitivity and stress testing, effective duration and convexity, key rate duration, projected investment income cash flow, and fair market values. Jim Remenda, the Senior Vice President Enterprise Risk, is heading up this area.

Throughout the year and in Q3 we've invested in addition to [wah] offerings like our web and mobility platforms, eInvestor, Form PF, and our shared platform solution for private equity, and others. We believe our investments will position us for growth as markets become more robust. Key deals for the quarter include a large Mexican real estate and resort developer selected Time ShareWare to manage its time share sales and operations activities. A New York-based $1.5 billion private equity firm converted to SS&C GlobeOp from a bank administrator. A California-based private equity fund with $1.7 billion in AUM converted to us from internal systems selecting us for private equity administration.

An AsiaPac private equity start up fund with 1.5 billion commitments selected us for private equity administration services. An Australian based phone administrator selected us to be his leading platform for hedge fund accounting and reporting AdvisorWare. A large bank extended its use of PORTIA and licensed additional modules. A large Malaysian bank selected Zoologic Learning Solutions to complement their in house learning and training program. A financial advisor in the national wealth management provider selected Global Wealth Platform. We also signed find a number of deals for our enterprise reconciliation to a Recon, including a large Australian mining company, a Malaysian asset manager, two US-based investment managers, a UK-based asset manager, and a UK-based software and research firm, as well as a Canadian investment manager.

In Q2, we completed successful Form PF filing for our funds service clients with over $5 billion of regulatory assets under management. We've been hosting Form PF breakfasts across the United States, and ones coming up in Boston, Dallas, and New York in November. The focus has been on lessons learned from the first wave of filings and these events have been well received. Due to the impact of Hurricane Sandy, we've postponed our event at NASDAQ this week into Q1 of 2013. The event will feature a solutions showcase for our regulatory and reporting solutions. Hurricane Sandy has been a challenging event, and has highlighted the need to have strong business continuity in disaster recovery facilities. We've had no interruption in services, and are providing additional coverage through our global offices.

Through daily contact with our clients and staff, we've been able to deliver uninterrupted service. We are in daily contact with our clients, and expect our all month end deliverables to provided on time. We remain confident in our long-term growth prospects of our business, and continue to execute against our priorities of leveraging the power of our core software and services. Managing our expenses carefully, and delivering value to our customers through innovation. And now I'll turn things over to Patrick to go through the financials.

Thanks Norm. Results for Q3 2012 were GAAP revenue of $165.6 million, and GAAP net income for the period was $17.6 million, which gave us a diluted per share of $0.21. Adjusted revenue was $166 million, an increase of $71.7 million or 76% over Q3 2011. The difference between the adjusted revenue and the GAAP revenue was the fair value adjustment of the deferred revenue in the PORTIA acquisition. Adjusted operating income for the third quarter was $61.8 million, an increase of $24.1 million, or 64% from Q3 '11.

Operating margins decreased to 37.2% of revenue from 39.9% in Q3, 2011 as the GlobeOp acquisition impacted the margins unfavorably. But the GlobeOp margins increased in Q3 2012, compared to the second quarter in 2012. Adjusted consolidated EBITDA was $65.1 million or 39.2% of adjusted revenue. This is an improvement of $26.4 million or 68% from Q3 2011 as recent acquisitions performed better than expected. Net interest expense for the third quarter was $13.7 million, and includes $1.4 million of non-cash amortized financing costs and OID. Interest expense increased to the new 1.1 credit facility that we've put in place to finance the GlobeOp and the PORTIA acquisition and refinance our previous facility.

We recorded a tax provision in the quarter of $4.1 million or 19% of pretax income. We expect the GAAP effective tax rate for the full-year to be approximately 31%. Adjusted net income was $32.1 million, and adjusted diluted EPS was $0.39. The adjusted net income excludes $21.3 million of amortization of intangible assets, $1.4 million of stock -based compensation, and $3.2 million of extraordinary items related to acquisitions. The extraordinary items include $1.9 million of FX loss from balance sheet translations, $800,000 of deal costs, and $500,000 of other one-time costs.

As of September 30, we had $80.3 million in cash, and $1.07 billion of debt for a net debt position of about $990 million. We generated $60.7 million of operating cash flow for the nine months ending September 2012, compared to $71.6 million in 2011. The cash flow in 2012 was impacted by several one-time deal costs, including $14.3 million FX loss related to the Hedge on the GlobeOp acquisition, and $14.3 million of acquisition transaction costs.

For the nine months we paid $965 million for PORTIA, GlobeOp, and the Gravity acquisition which we closed in late September. Debt increased about $971 million since December '11, and was used to fund the acquisitions. We've used our excess cash to pay down debt. In the third quarter, we paid down $76.6 million of debt, and we paid down an additional $20 million at the end of October. We used $9.5 million for capital expenditures and capitalized software by 2.5% of revenue. In 2012, for the nine months we paid $24.6 million in income taxes, compared to $23.6 million in 2011. Our accounts receivable DSO was 49 days as of September 12, an increase of 5 days from 44 days as of December 2011, and 43 days as of September 2011. In financing activity, we recorded the proceeds from option exercises of $12.3 million, and a tax benefit related to those option exercises of $2.9 million. On our debt covenant, our LTM consolidated EBITDA for the last 12 months including acquisitions was $248.6 million. And based on net debt of about $1 billion, our leverage ratio was 4.0 as of September, down from 4.2 as of June 2012.

On outlook for the Q4, our current expectation for the fourth quarter 2012 is revenue in the range of $170 million to $174 million, adjusted net income of $32.7 million to $33.7 million, and outstanding diluted shares in the range of 84 million to 84.3 million. And for the full year, we expect cash from operating activities to be in the range of $109 million to $113 million. And full year capital expenditures to be in the range of 2.9% to 3.1% of revenues as we're making investment in IT infrastructure in the fourth quarter. And I'll turn it back over to Bill for final comments.

Thanks Patrick. And as always thank all of you for investing in SS&C. And for those of you who are affected by Hurricane Sandy, we want you to know that you're in our thoughts and prayers. SS&C has built a very strong franchise, and we are seeing increased demand. We believe we will see some large wins in the next few months, and these will translate into growing revenues and earnings. I'll now open it up to questions.

(Operator Instructions)

Ashish Sabadra from Deutsche Bank.

Hello. This is Ashish Sabadra calling on behalf of Bryan Keane. Quick question about the guidance, especially on the revenue side. You took down the guidance a bit for the full year, and I was just wondering if you could give some more color on that?

Sure, I think that what's happened is, as we've gone through the integration of both PORTIA and GlobeOp, we have spent more time on picking up the synergies on the expense side of the ledger, and we're now starting to turn towards the revenue side of the ledger. We've hired some more salespeople. We've got some sales management in place. We've been able to really start to build our pipelines, as we have been able to have our people be fully in charge, and we think we'll start seeing a big uptick in revenue in 2013.

Okay. Thanks for the color. And just, Bill, you mentioned a couple of large wins that you anticipate in the fourth quarter. I was wondering if you could give some color on those wins -- nature of those wins in the sense -- or the nature of those proposals or wins?

Well, we're always hoping it's Deutsche Bank, you know. But really, I think that what we have is a number of very large funds that are looking very seriously at SS&C and SS&C GlobeOp, and we have a number of funds that we have already won the business that are now on-loading a bunch of assets that we think will begin to generate significant revenue for us as they build out their cells. As you know, a lot of these managed account platforms have different cells that they are marketing out into various constituencies. So, we feel very confident in the types of business that we're seeing, the robustness of our pipelines, and really the bullishness of our sales force.

Yes, that helps. The margins definitely, as you highlighted, they came in much better than our expectations. And you highlighted the synergies came in much better than your expectations as well. So, earlier I believe you had said it will take 18 to 24 months to get the Company back to the pre-acquisition margins, and I was wondering if you believe that you will be able to get the Company back to 40%-plus EBITDA margins much faster than that?

Well, again, as I said, we're combing through these businesses. We are seeing some really nice upticks in our ability to manage these businesses without as much capital expenditures, and then also being able to get synergies on some of our purchases. Being able to consolidate a number of our different departments. So, we're very optimistic that we're going to be able to continue to drive margin improvement. Now, we buy about twice as much data now as we used to. We have a number of areas where we have real opportunities to reduce our costs on a per-transaction or per-client basis. And so, I think we're optimistic that we'll be able to drive into the low-40%s over the medium to short term.

Okay. And one final question for Patrick. I'm not sure if I missed it, but if you could provide the organic growth for this quarter, as well as the growth in the fund administration business? That's it for me, thanks.

Yes, I think really as far as the organic growth is, since the acquisition of GlobeOp, we have multiple platforms in which we can put new clients on. If we put them on a GlobeOp or a PORTIA platform, it's called acquisition growth. If we put them on an SS&C platform, it's called organic growth. We're not going to make distinctions on those things anymore, because we don't feel like that's how we run the business. We're going to do what's ever best for our customers, and we're not going to report organic growth numbers anymore. We just don't think that they're realistic, and they're arbitrary. So, I don't think that we're going to report those numbers anymore.

Okay. Thanks.

Mayank Tandon from Needham & Company.

Bill, good evening. I just wanted to get a better sense from you in terms of the organic growth. You're not going to report that, but just the overall growth rate when it accelerates. What are some of the key engines? Given the macro, given the headwinds your clients are facing, what has to happen for growth to accelerate from current levels?

Again, Mayank, I do not think that really -- the kinds of stuff that we're offering to our client base really makes them more efficient, right? And as we go up against a number of organizations that are not nearly as technologically savvy as we are, we're able to bring technology to really enhance how they do things. And I think that allows them to grow, that allows them to have better information for their portfolio managers and their traders. To be able to service their investors better, at a lower cost, and allows us to grow. Allows us to continue to invest in all the things that we're investing.

And so, we're very excited about what our growth prospects are. And as you well know, when times are tough in major financial institutions, they start looking at cost savings, and we think that we're a catalyst for cost savings.

Okay. And then, can you just remind us in terms of -- sorry -- I was going to ask you -- can you remind us what is the impact on growth from trading volume levels and assets under management? How much of that is a drag on growth, and what are your expectations in terms of the impact of that going forward?

Well, again, right, obviously we have a couple of networks that we run that, when the New York Stock Exchange is down and the NASDAQ is down, there's way less transaction volume going through that. That probably is really in the 5%, 6%, 7% of our revenue, so it's not going to impact overall revenue by that much. Asset size, AUM size is a key part of our pricing, but it's a key part of our pricing on about 30% of our revenue, and it probably represents about 30% of the matrix that we use to price. So, you'd probably get about 9% of our revenues really impacted by AUM. So, I think that's basically where we are on those types of things.

Obviously, if AUM is going up and transaction volumes are going up, we get some lift. And if they're going down, we take a little bit of a headwind. But again, I think it's something that we've been able to manage quite well, and I think we will continue.

And just one final question, I think last quarter, if my memory serves me right, you had a little bit of client erosion as you integrated GlobeOp. Could you just talk about any client losses this quarter, and how much of that was an impact on the model? Thank you.

Yes, we've had very little attrition this quarter, if any. And so, we are still overcoming some of the ones that we talked about before, like OpHedge, but that's about over. And we think that beginning in probably the end of Q4 and Q1, where you'll start seeing, again, quarter-over-quarter faster growth rates. Again, we'll have acquisition revenue, as well as organic revenue mixed into those two. It's very difficult if you've got a $10-million-in-revenue client, to put them on some platform because you want to tell you analysts that we have higher organic growth. That makes no sense.

And so, we're not going to be in a position where we're trying to do things from a stock-price basis rather than for our customer basis and our own operational basis. We think it makes a lot more sense to choose what is correct for the customer, and then just report out how our business runs, but not some arbitrary split of the revenue.

Okay. Thank you.

Terry Tillman from Raymond James.

Yes, good afternoon, guys. Can you hear me okay?

We can.

Okay, thank you. I guess the first question is -- you guys were kind enough last quarter to actually give us a viewpoint on updated PORTIA and GlobeOp contribution. Could you tell us -- are you still expecting the same amount, $44 million for PORTIA, and GlobeOp at $240 million to $250 million for the year?

Well, I think those are annual run-rate basis, right? Those aren't --

Yes, those were annual -- those were run-rate basis that you had talked about last quarter on the Q&A.

Yes, they're probably pretty similar. Those are good.

Okay. And I guess, Bill, I'm just curious because there has been some pretty tumultuous in the fund administration business in one of your large competitors, a bank-affiliated competitor was acquired. Have you seen any impact of that on the market? And what's it doing? Have you won business from that, or is it more of a to-be-determined on what kind of benefit or (inaudible) you could get from the Goldman divestiture?

Well, obviously whenever you have a large block of clients turning over, there's a real opportunity for us to chase those prospects. And we have, and we have in a very methodical way. Both Fred Jacobs, who runs that business, and [Amon Graves], who is also in the sales management side of that, has our entire sales force, which is -- that we have in fund services, which is probably about 20-strong now, going after that business. Punit Satsangi out in London as well, and we think we have some opportunities in Asia.

So, there's an awful lot of things that you're going to get as fallout out of Goldman, and there's also going to be probably a change in customer service between Goldman and State Street. And so, we think there will be opportunities for us to be able to differentiate our service, differentiate our technology-based capabilities, and really probably drive some good business for us.

Okay. And I guess, on the deferred revenue side, it looks like the trends sequentially and even year over year were a little bit better this quarter. Is there anything, Bill or Patrick, in the deferred that actually is more than just maintenance, and speaks to some of the confidence you have in terms of the fourth-quarter outlook? Maybe something as it relates to backlog, if you will. Anything related to deferred that we should take away there?

No, it's all basically deferred maintenance revenues. And it tends to be the highest at the end of Q1, and then go down towards the end of the year, since most of them are kind of calendar-based.

Okay. And just my last question, I guess related to the always-volatile license revenue and how you think about that. In the fourth quarter and even into next year, is the environment -- what are you assuming? Are you assuming some budget flush? How do we actually build our own license revenue models? Because it's challenging to me, and I'm sure it's challenging to you. So, I'd love to get some perspective on near term what to think, and then how do we think about it going forward or does it start to become minimalized because of just a more broad shift to cloud? Thank you.

Well, Terry, again, it's that what we do is that we start with our commitments of our sales force, and we try to scrub them as best as we can. As you might imagine, they're a little more optimistic than they are -- ultimately what is delivered. So, we scrub those, and we look at individual deals and try to come up with what makes sense for our license revenue numbers. Now, we do have some businesses that generally generate somewhere between $500,000 and $1 million worth of license revenue, so we're not starting at zero. We're generally starting at $2 million in license revenue every quarter from term licenses, and things like our property management system and some of our training licenses that we sell. So, I would say that we try to be conservative about licenses, but as you know, if it's big ones, it can get lumpy.

But for modeling, should we just assume something similar in the fourth quarter, or is there some seasonality we should appreciate for PORTIA? Just anything to think about in 4Q. Thank you.

Well, we wouldn't say that there's anything in particular that we should say that the fourth quarter -- we do think that we're going to have a pretty good license quarter in Q4. But I wouldn't say that it's going to be $15 million or anything like that. We would guess it would tick up $1 million or so from Q3.

All right. Thank you, Bill.

Sterling Auty from JPMorgan.

-- [Backett] here for Sterling. Thanks for taking my questions. First, Bill, on the new regulatory group, can you just talk about what sort of deal sizes you see there with an average-form PF deal for example, and how you are winning against the competition? And then I have a couple of modeling follow-ups.

Yes, I think on our form PF, I think the biggest deal that we did was probably in the $0.5 million range -- annual fees. And that we probably average somewhere around $150,000 to $200,000. We would say that we have, by far, the most automated process of anyone in the marketplace. We also think that the experience our clients had in the form-PF arena was, at least what we have gotten back from market intelligence, that our clients had a much easier time with it. We spent a lot of time and a lot of money studying that form, and coming up with technology that would help our clients deal with that. So, we're pretty proud of that.

We're also all over FATCA, so we think that's going to be another big opportunity for us, and we think it's going to come up on people quickly and they're going to need to have help. And we're going to be available for them. So, I think those are the kinds of things that we've gotten on a regulatory basis. And Mike Megaw is a very talented guy. Been with us since the acquisition of Eisnerfast in 2005. And so, we have a lot of high hopes for Mike's capability.

Thanks. That's very helpful. Hey, Patrick, I think I missed it. I heard the tax rate is going to 31%. Is that GAAP or non-GAAP?

That's GAAP.

That's GAAP. Okay, so, for non-GAAP purposes, we should continue to model that 35% range?

I think so, yes, for now. We might re-look at it for 2013 when we've got the GlobeOp worldwide business all reorganized, but for now I would use that.

Okay. Thanks. And then lastly, this was the first full quarter of both acquisitions under your belt, and you said that the synergies are sort of running ahead of what you had planned. As you look at this, the combined business a year out, and once those synergies are fully realized, how do you view the combined EBITDA margin of the Company going forward?

Well, again, we think that we're going to be able to drive margins back to our historical margins, which have been 40% to 42%, and then be able to drive from there based on being able to pick up 50 basis points or so every year through being able to get efficiencies and be able to add technology. Be able to understand that when we have 500 people doing a reconciliation, it takes an hour. If we could turn that into a half an hour, we pick up 250 hours a day. So, there's a lot of things like that, that we get is, if you understand accounting and you understand how people are spending their time, whether they're preparing the data, whether they're running various reports.

Things get down to minutia, right? You run reports with pennies and without pennies. So, things have to reconcile when you have 2,000 or 3,000 items. So, there's a lot of stuff like that, that we think we're very well-positioned. We literally have hundreds and hundreds of CPAs and chartered accountants, and we have 600, 700 programmers, so we think that we can make this business increasingly automated, that we'll increasingly drive margins.

Great. That's it for me, thanks.

And the other thing, Sterling, so in the third quarter, we've -- like it says, the first quarter we've got these two big acquisitions integrated, and we're already at 39.3% EBITDA margins. So, compared to 40.8% I think we had full year last year. So, I think that's pretty significant that we're already there while integrating two big acquisitions. These acquisitions are paying off pretty well.

That's helpful. Thanks.

Thank you. And I show no further questions at this time.

Again, we really appreciate everybody coming on to our call, and we look forward to talking to you next year, and thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.