SS&C Technologies Holdings Inc (SSNC) 2012 Q4 法說會逐字稿

Good afternoon. My name is Sayid and I will be your conference operator today. At this time, I would like to welcome everyone to the SS&C Technologies 2012 fourth quarter and full year conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and 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 and welcome everybody and I appreciate you joining our earnings call.

I'm Bill Stone. I'm the Chairman and CEO of SS&C, and I have Normand Boulanger, our President and Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer. Before we get started, we have to go through the Safe Harbor statement. Various remarks we may make on this conference call about our future expectations, plans, prospects, constitute forward-looking statements for purposes of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Actual results may result differ -- may differ materially from those indicated by these forward-looking statements and as a result of various important factors. These are included in the 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'm going to give you a brief overview of the quarter and the year and then I'll turn it to Norm, who will go through some more of the details and then Patrick will go through the numbers. At the end, I'll take some questions.

The fourth quarter caps off another good year for SS&C, setting performance records, both in revenue and operating cash flow as well as a number of other metrics. Software-enabled services were up 107% in the fourth quarter to a historical high of $131.4 million. Revenue from software-enabled services was over three quarters at 76.5% of total fourth-quarter revenue.

Now from a visibility standpoint, we look at Annual Run Rate Basis, which we add our maintenance and software services together, and for that for fourth quarter, it was $628.7 million based on $157.2 million for Q4. This represents an increase of 88.7% from the $83.3 million and $333 million run rate in the same period of 2011. It also increased 4% from Q3 and the $151.1 million from Q3. Again, that annual run rate for Q3 was $604 million. We believe this is a good indicator of where our revenues are going. Once again in 2012, we delivered record adjusted revenue, up 49% to $552.9 million, and we did that with a 38% operating margin.

We focus on market needs. For instance, we spent the year designing and implementing a Regulatory Services Group to keep our clients free of the number crunching required by the regulators. This frees up our clients to concentrate on what they view their number one objective is -- investment performance. In 2012, we also continued our approach of adding to our capabilities through acquisitions. We did this with GlobeOp, PORTIA, Gravity Financial and Hedgemetrix. Gravity and Hedgemetrix are based in Boston and Dallas respectively, and that gives us more regional capability for our global fund administration business.

We are pleased that the level of integration we have accomplished in our GlobeOp and PORTIA acquisitions. We are now bundling -- selling bundles of functionality often tied to services. Our technological capabilities, combined with our global operations and accounting expertise are proving to be winners. SS&C's independence, transparency and focus are driving larger opportunities and leading to increased revenues and margins.

We are a trusted partner in global operations and global accounting in the most complex asset types and structures. We are the only administrator that owns our own technology, licenses it and uses it. Further, we reduced our leverage from 4.2 times at the close of the GlobeOp acquisition to where we are at 3.7 times at the end of December. With $70 million in adjusted consolidated EBITDA for the quarter, SS&C has the financial flexibility to pursue an active acquisitions strategy. Now I'll turn it over to Norm.

Thanks, Bill.

Overall, 2012 was a good year. We delivered solid results, acquired four companies, and made investments in our product offerings that will support future revenue and margin growth. In Q4, we have solid contributions in our License business, in particular, in PORTIA and in our Institutional Retail businesses. Outsourcing growth was led by SS&C GlobeOp. As Bill mentioned, the inspiration of our acquisitions have been going well, and in part is driving the improvement in margins. But we will continue to drive revenue growth. Our sales pipeline is strong and we are optimistic about our momentum.

Our innovation -- our innovative cloud-based services continued to be a strategic focus. SS&C strategy is to continue to grow some development and implementation of its cloud-based products and services. We are in a unique position of having market-leading expertise with the proven ability to integrate intelligence with the optimized process of trading, trade capture, middle and office accounting services, and portfolio management and analytics, while affording our clients extremely comprehensive reporting capabilities.

We are pleased to state that these abilities are now available on a highly functional, secure, mobile platform, enabling unprecedented management and operational flexibility. We are branding these integrated capabilities SS&C Investment Intelligence. SS&C Investment Intelligence brings forth a clear competitive advantage. SS&C Investment Intelligence runs our deep knowledge and experience to provide investment operations and accounting and administration services with the utilization of progressive technologies, resulting in unparalleled offering.

I will now highlight some notable wins in Q4. SS&C GlobeOp signed a $400 million asset manager base in Miami, Florida; a new hedge fund launch in London; a Dallas-based private equity fund; a $500 million base Boston fund; a [coin] shop trading futures and options for (inaudible) for middle-office capability technology and our TPOS online service offering; and other parts of the business and independent trust companies selected Pages and ePages to improve report and delivery to advisory and shareholder clients. A wealth management provider purchased Evare for data aggregation services; and an online [vault] for selected SVC market data. We also did very well internationally. An insurance company in Asia selected PORTIA; a large global asset manager will use our Direct services and CAMRA as part of its insurance outsourcing services for its European clients.

The largest bank in Malaysia will use CAMRA support as custody solution; a European hedge fund manager will use Fund Administration Services to administer (inaudible) high income platform; a large global bank added MarginMan with Singapore and Hong Kong branches; a newly established private wealth manager based in London selected SS&C Global Worth Platform for trade-in and portfolio management; and finally, a European hedge fund will use our middle- and back-office services to launch its managed account services.

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

Thanks Norm.

Results for the fourth quarter of 2012 were GAAP revenues of $171.8 million, GAAP net income of $16.1 million, and EPS of $0.19. Adjusted revenue was $172 million, adjusted for purchase accounting adjustments, an increase of $76.3 million or 80% over Q4 2011. Strong revenues from acquisitions and improved demand for our software-enabled services for alternative asset managers drove revenue growth in the quarter.

Adjusted operating income in the fourth quarter was $66.1 million, an increase of $27.8 million, or 72% from the fourth quarter of 2011. Operating margins decreased to 38.4% from 40.1% of revenue in Q4 of 2011. As the GlobeOp acquisition impacted margins unfavorably, but overall operating margins increased from 37.2% in Q3 2012, as productivity and initiated cost reductions improved margins. Consolidated EBITDA was $70.1 million, or 40.7% of adjusted revenue. This improvement of $30.5 million, or 77%, compared to Q4 2011.

Net interest expense for the quarter was $13.7 million, and includes $1.4 million of non-cash amortized financing costs and OID. Interest expense increased due to the $1.1 million credit facility we put in place to finance the GlobeOp and PORTIA acquisitions. We recorded a tax provision for the year of $24.7 million, or 35% of pre-tax income. The increase in 2012 over 2011 was due to non-deductible acquisition transaction costs and valuation allowances put in place in certain jurisdictions.

We expect the GAAP effective tax rate to be approximately 30% in 2013. Adjusted net income was $35 million and adjusted diluted EPS was $0.42. Adjusted net income excludes $21.4 million of amortization of intangible assets, $1.8 million of stock-based compensation, $1.4 million of non-cash debt issuance costs, and $154,000 net gain of unusual and purchase accounting items. The effective tax rate used for adjusted income in 2012 was 35%.

On the balance sheet and cash flow, we ended December 31, with $86.2 million in cash, and a little over $1 billion of debt for a net debt position of $934.8 million. We generated $134.4 million of operating cash flow for the year, after a very strong fourth quarter, when we generated $73.8 million. The fourth quarter cash flow showed the cash generation strength of the combined SS&C and GlobeOp businesses. Operating cash flow for the year increased $24 million, or 22% from 2011, even after the impact of one-time items including $4.3 million FX loss and $14.3 million in acquisition transition -- transaction costs.

The following are the cash highlights for the year. We paid approximately $967 million to acquire PORTIA, GlobeOp, and two smaller acquisitions. Our debt increased $912 million since December of '11 and we used it to fund the acquisition. Excess cash flow after acquisitions and investments in the Business were used to pay down debt. In the fourth quarter we paid down $59 million of debt at a total of $136 million since we acquired GlobeOp on June 1, 2012. We used $18.3 million for capital expenditures and capitalized software, about 3.3% of revenue. It was mainly used to improve and expand our IT and cloud infrastructure.

We paid $28.8 million of cash taxes compared to $25.2 million in 2011. Our accounts receivable DSO ended at 48 days on December 2012, an increase of 40 -- four days from December 11, and down from 50 days as of September 2012. In financing activities, we recorded the proceeds from option exercises of $14.4 million and a tax benefit related to those options of $3.5 million.

Our LTM EBITDA used in covenant compliance includes acquisitions, as if owned, for the full period was $256 million for the last 12 months as of December 2012. Based on the debt of approximately $934 million, our leverage ratio was 3.4 as of December '12 -- 3.7 as of December 2012.

Our outlook for the first quarter and the full year of 2012 -- 2013, we expect an effective tax rate of 30% as a result of the corporate reorganization we completed in the fourth quarter in conjunction with the GlobeOp acquisition and our credit facility structure. Our 2013 adjusted net income guidance will assume a 30% effective tax rate. Our current expectation for the first quarter of '13 is revenue in the range of $171 million to $175 million, adjusted net income of $35.5 million to $36.8 million, and outstanding diluted shares of 83.8 million to 84.2 million.

Our current expectation for the full-year is revenue in the range of $710 million to $720 million, adjusted net income of $152 million to $156 million, and outstanding diluted shares between 84.8 million and 85.3 million. For the full-year of 2013, we expect cash from operating activities to be in the range of $168 million to $175 million and capital expenditures to range between 2.4% and 2.8% of revenues.

Now I will turn it back over to Bill.

Thanks, Patrick.

One important management note is Stephen Whitman, our long-time General Counsel has retired and we wish him well. Since the beginning of the year up, Paul Igoe has joined our senior management team as Senior Vice President and General Counsel and we are already impressed with his capabilities. Looking towards 2013 and beyond, we feel optimistic about our future. For the full-year 2013, as Patrick said, we are expecting revenue between $710 million to $720 million and we are cautiously optimistic about the technology recovery. We continue to see requests from financial services organizations across the world.

We are also seeing clients becoming increasingly comfortable of using our software-enabled services model to execute on their complex accounting and reporting requirements. Not only are we well-positioned to understand the technical aspects of the software-enabled services model, but we also offer our clients a deep knowledge of the accounting requirements, consulting necessary and of their Financial Services business.

We'll now open up the lines for questions.

Thank you.

(Operator Instructions)

Maya Tandon, Needham & Company.

Bill, could you first just talk about the overall spending climates at your clients'? How does that compare to the same time last year? As you're looking to 2013, do you see better opportunities than you did maybe 12 months ago?

Well, I think, Mayank, with the opportunities that we have are in much larger organizations and we're seeing much bigger opportunities for us to deliver into those bigger organizations. So that's primarily in the services business, where we do fund administration and accounting for asset management and insurance companies. But we are also seeing an increased interest in licenses across the board. It's not anything like a boom, but it is also at least is not trending negative.

Okay, that ties into my next question. I wanted to get a little bit of color on organic growth in the quarter and also what is embedded in your expectations for 2013?

As we said on the last couple of calls, Mayank, we are selling bundles of services that we couldn't really tell you what part was a GlobeOp product, a PORTIA product, a SS&C product, or anyone else, right? So I think what we are saying is that our revenue grew from $166 million in Q3 to $172 million in Q4, right? So that's $6 million. I think that, as Patrick said, we are expecting $171 million to $175 million in Q1 and somewhere between $710 million and $720 million, so say, $715 million, so that will be up from $552 million. I think that's how we run the business, and I think as long as we can continue to drive margin out of the business, were optimistic about being able to hit some pretty large earnings targets in 2013.

Okay, fair enough. Would you say that GlobeOp and PORTIA have been tracking pretty much in line with what you had thought in the last quarter, in terms of the overall impact for 2012? So, that way we can back into some of the numbers.

I think they are tracking about as we expected. I think that in some regards, we've gotten a little more synergy, and in other regards things that are taking a little bit longer to get everything to gel. So, I think that in general, the tracking, I would use that as tracking. I don't think, again, that someone could really tell me which was represented by, if it's a SS&C salesperson, SS&C sales team, and a Globe product from GlobeOp. I don't really know is that organic, or is that acquisition growth, and I think that's what we're seeing.

Okay and then I wanted to move over to margins and just get a sense from you in terms of how much of the synergies have you captured? I think you had mentioned $25 million when you first did the deal. Where are you in terms of capturing those synergies, and what is the potential for any upside which could continue to drive margin expansion over time?

Well, I think we said $25 million over three years, and so we are in since June 1, which as of the end of December, what, seven months? So seven months out of 36 is about, what, 20%? So I would guess we're moving a little faster than the 20%; we're probably at 25% to 30%. I think that we would -- we -- I couldn't calculate it for you, but I believe we will ultimately have more than $25 million in synergy.

Okay, and then just finally, how should we be thinking about margin trends over the course of 2013? Will it be more backend loaded? Or will it be a fairly smooth improvement as you capture these synergies over the course of 2013?

Well, I think there will be some seasonality. The seasonality is not particularly pronounced in our Business, but some of the employee costs and taxes are much more heavily weighted in the first quarter and the second quarter, so there will be more expense load in those quarters than maybe in the third quarter and the fourth quarter. So, that might trend a 0.2%, several tenths of 1% of margin. And then other than that, I think it will be pretty smooth.

Bryan Keane, Deutsche Bank.

Just want to ask about that $6 million increase between the third and the fourth quarter? Is there -- is the fourth quarter usually seasonally strong on revenue side? Or is it pretty evenly split throughout the year?

I think Bryan, if you go back historically, fourth quarter was always the best quarter because we were primary a license business and as most software companies, the fourth quarter is the -- is when everybody's budget runs out, so they spend money then. Today, with almost 77% or so of our Business coming from software-enabled services, it's much smoother. I would say that the revenue really tracks over time rather than seasonality-wise.

Okay, and then in the quarter, professional services was a little lighter than we modeled. Was there anything in particular that drove that?

There's not; it's just really a matter of the -- other project we were working on and the percent we ought to complete them, where projects finished up and other projects started. So actually it was a very good quarter for us, professional service-wise. It was lighter than last quarter.

Okay and then, just Bill, when you talk about being able to pitch and win some larger deals, is that just with all the new assets that you have compiled together? Maybe you could just give us some color on why you've had success in being able to pitch larger clients now that you have the combined Company?

Well I think, Bryan, if you go back prior to owning GlobeOp, SS&C had a great Fund Services business; it was growing fast, had pretty good margins. But we were the eighth largest hedge fund administrator in the world. GlobeOp was seventh and they had some great clients and some great products and had a good business.

But combined, we were either number three or number four, depending on which one of the lists you look at. I think what GlobeOp was bringing to the table was really a world-class middle office. And what SS&C was bringing to the table was a really world-class back office. And so, the middle office is primarily collateral management, derivative evaluation, settlements, that type of stuff; and back office is NAV calculations, financial statements, tax returns, that type of stuff. So, each of us did the other, right? We did some middle office and they did some back office, but the strength in each of our businesses was middle office for GlobeOp and back office for SS&C.

Today, we have world-class middle office and world-class back office. I think larger and larger fund groups are seeing that when they see what we can offer from this SS&C Investment Intelligence, like Norm describes, where from the moment you make a trade, we're tracking that trade all the way through to the time you dispose of it. We are doing the evaluation. We are sending the information to the investors. We are putting it into the types of reporting that you want, the types of alerts, the types of compliance. All the regulatory reporting, we're preparing tax estimates and tax returns off of all that. And it is all in a real-time or near real-time basis, and there is no one in the world that has what we have.

Okay, that's helpful. Last question for me, just the pricing environment. Just updated thoughts on that? Thanks so much.

Well no one is asking us to raise prices, so that is always a challenge. But I think we're still able to sell on value. I think that we are getting fair prices out of our technology suite and the talent base that we have. I think our clients are viewing it as a really, a fair relationship with us. We are trying to -- we're moving for longer contract so that we run up against renegotiations in a less often basis. So, sometimes in order to get a three- or four-year renewal, we might give up a little. But we think that we will more than make that up on volume.

(Operator Instructions)

Terry Tillman, Raymond James.

Bill, one question for you is, I'm not going to ask about organic growth or something of that nature, but you talk about like this is really about bundled services or solutions. As you think about -- or I'm curious, what you think about revenue synergies? And if we look at the $710 million to $720 million, if revenue synergies is a concept that you're driving towards, what do you have baked in on revenue synergies? Or is that more of a potential upside driver?

Well, either again, as I said, we have several what we view as elephants in our pipeline, and an elephant for SS&C now is right at $10 million a year and up. So we don't win usually have too many recurring revenue $10 million opportunities. We have a number of those today. So we are really not baking in winning those deals and we think we're going to win some of those deals. So I think there is upside to our revenue. I think there is upside to our earnings, but we're trying to give you the best estimate we have right now, with a little bit of conservatism baked in, because if we're going to surprise you, we want to surprise you positively.

Got it. I like that. In terms of -- if we look at the software-enabled services, it is such a big line item, and there's a lot of different things in it. But could you maybe isolate the Hedge Fund Administration business? Did you see it accelerate in the quarter in terms of either new business signed or just the revenue generation? How do we think about that portion of the business going forward? What you think is a sustainable growth rate for Hedge Fund Administration?

Well, obviously that's going to be tied to the strength of the hedge fund industry, and how much new launches, and how much money keeps flowing into those funds. But I don't see any slow down in that, right? We just published our indices and both of them advanced pretty smartly. In February; we expect that to continue. We have a number of the largest funds in the industry. They tend to be attracting more than their fair share of the money going into the funds. So, I would guess that the Hedge Fund Administration business, in that we include private equity and funded funds in that space. But we would expect that to grow between 10% to 20% a year.

Got it. Just the last question for Patrick is, just to calibrate our models, you have different businesses here. So, how do we think about into '13, anything you could help us with the mix of business between license, or pro-services, or maintenance, and the SES? Just anything at all to be guideposts for us? Thanks again and nice job.

Sure, well, as you know, what's driving our Business is software-enabled services, and the majority of the growth is going to be in the products and the services we provide there. And then license, maintenance, and professional service will probably be in low single digits.

And then Terry, to give you an idea of what we're doing and why the business is really the same business is, is that we keep taking our products, and we turn them into software-enabled services businesses. So right now, we have about, say, a 300,000 per month opportunity at a almost $30 billion asset manager. We're going to use the global wealth platform; we're going to use PORTIA; we're going to use our derivatives product, and our network and our data.

We're going to use the middle office of GlobeOp and deliver that as a bundled solution that we host and deliver, right? So, we're going to be the back office, we're going to host it, and we're going to use all those applications in a seamless way, so that there will only be one user interface. They're only going to see the information they want when they want; it will be available in mobile devices. It's really what SS&C Investment Intelligence is all about.

Saket Kalia, JPMorgan.

It's Saket here for Sterling. Patrick, you continue to delever the balance sheet. How much are you assuming in terms of debt paydown in 2013? How should we model interest expense?

So I think our assumptions today are that we will use all free cash flow, operating cash flow less CapEx to pay down debt. We don't assume any acquisitions in our model. Obviously, we will most likely do some acquisitions in 2013 and we will use cash for that but pay down less debt. So, right now, we just -- that is our goal. Any free cash flow after investing in the business and acquisitions, we will pay down debt with.

Right now, that would be about $150 million, right?

Right, about $150 million.

That is helpful.

On modeling the debt, right now as of December, we've got about $290 million of term A, and that is running 3% to 3.2% cash interest rates. And then, we've got about $730 million of term B, and that's at 5% right now.

Okay.

When we pay it down during the year, we have to pay it down ratably, okay? In proportion. So, that's how you should model the pay down, the term A and the term B proportionally.

Got it. That's helpful. And then Patrick, I think you also mentioned that during the fourth quarter, it sounded like there was some reorganization that's impacting the tax rate, but it also sounded like there was a little bit of cost cutting. Can you give a little bit more color on the cost cutting in terms of headcount?

We really haven't cut headcount. Our goal in 2012 was to improve productivity. So, we are just hiring at a slower rate to support growth. So, that's really our growth. And granted, we've lost four executives at GlobeOp. That gave us some savings, but the rest of it is, we are focusing on integrating the operations and generating cost savings from that, integrating facilities and generating cost savings out of integrating facilities, and productivity improvements; just better output.

Got it. And then on the Software-enabled Services business, all on an apples-an-apples basis in the fourth quarter, can you talk about what growth you saw in that business? On a combined basis, on a pro forma basis, just to give us an idea of how that business is growing?

Q4 '11 or that sequentially?

Actually (multiple speakers) --

We can only look at it sequentially right now. Sequentially, the driver in that business was alternative asset managers, and that business grew from Q3 to Q4 and growth to growth from $168 million to $172 million.

Got it. (multiple speakers)

$172 million; it was really software-enabled services for alternative asset managers that was growing sequentially.

Okay and then lastly for Bill. Bill, from a regulatory perspective, what do you think is the biggest opportunity in 2013? Is there still a lot more growth to go for things like form PF or are there other things on the horizon that you think could be opportunities for the Regulatory Solutions Group?

Well, there is going to be another wave of form PF. I also think that there is going to be a slighter quality after the SEC gets through reviewing the forms PFs have been filed, and people find out that people look at this stuff and they like it to be done correctly. We feel like we did it and we don't believe that there is anyone that has had the application intelligence or programming talent that we have that they put into theirs.

So, when we -- we think that is going to rebound to us. Secondly, you are going to have an awful lot of scrambling around FATCA, right? So there's going to be a tremendous amount of scrambling to get the information ready and the delivery mechanisms prepared for FATCA. We think that we are well-positioned for that, too.

Got it. That's it for me. Thanks.

(Operator Instructions)

Thanks, everybody.

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