SS&C Technologies Holdings Inc (SSNC) 2013 Q4 法說會逐字稿

Good afternoon. My name is Sahid, and I will be your conference operator today. I would like to welcome, everyone, to the SS&C Technologies fourth-quarter and 2013 conference call.

(Operator Instructions)

Please note that this conference is being recorded and will be made available on SS&C's website, www.ssctech.com.

I would now like to turn the call over to Justine Stone, Investor Relations Coordinator. Ms. Stone, you may begin your conference.

Welcome and thank you for joining us for our Q4 and 2013 earnings call.

I'm Justine Stone, Investor Relations Coordinator for SS&C. With me today is Bill Stone, Chairman and Chief Executive Officer; Normand Boulanger, President and Chief Operating Officer; Rahul Kanwar, Senior Vice President and Managing Director of Alternative Assets; and Patrick Pedonti, Chief Financial Officer.

Before we get started we need to review the Safe Harbor statement. Please note that various remarks we make today about future expectations, plans and prospects, including the financial outlook we provide, constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Security Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as result of various important factors, including those discussed in the risk factors section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, February 11, 2014. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so.

During today's call we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located on the Investor Relations section of our website at www.ssctech.com.

Thank you, and I will now turn the call over to Bill.

Thanks, Justin. I'll start with a brief overview, and then I'll turn it over to Norm to cover some operational highlights, Rahul will give us an SS&C GlobeOp update, and Patrick will take us through the financials.

As you can see, 2013 was another strong year for SS&C with record revenue, record EBITDA, record operating cash flow and record earnings per share. In Q4 our revenue grew to $182.5 million, an increase of 6.3% over the same period a year ago. In Q4 revenue from software enabled services was 77.1% of total revenue.

Once again in 2013, we delivered record adjusted revenues, up 28.9% to $712.8 million, while increasing our adjusted operating margins to 38.8%. We were able to pay down $239 million in debt and end the year at 2.4 times leverage. This leverage ratio is almost two full turns of leverage improvement since the GlobeOp acquisition in June of 2012.

In 2013 we also continued our approach of adding to our capabilities to the target acquisitions of Prime Management Limited, a service provider for the insurance-linked securities market, and we completed the integration of SS&C PORTIA and GlobeOp. We added offices in Los Angeles and Luxembourg and expanded our presence in the Midwest in Evansville. We were also recognized for numerous awards, including being named to the FinTech 100 and Forbes' America's Best Small Companies list for 2013.

We announced a collaboration with the University of Southern Indiana to build a curriculum and a concentration in investment accounting. USI has an award winning accounting program and SS&C is actively growing our business there. We have reached a headcount of 110. We hope to double this in 2014.

Now, I will turn it over to Norm.

Thanks, Bill.

We closed out 2013 with a solid quarter. As I look back this past year, I'm proud of SS&C's many accomplishments. We executed at a high level in 2013, growing revenue and maintained industry-leading margins. Acquisition synergies remained on track, as our integration activities for SS&C PORTIA and GlobeOp acquisitions are essentially complete, and to date we achieved approximate $17 million in synergies.

In overview, we have only begun to scratch the service on the exceptional cross-training opportunities presented by these businesses. We expect these opportunities, coupled with solution enhancements we have in the pipeline, to increase the value we deliver to our customers. Our SS&C PORTIA, SS&C GlobeOp institutional asset management business capped a strong 2013 performance with solid Q4 results.

We've rounded out our strong executive management team by adding Christy Bremmer through the PORTIA acquisition, promoting Bob Schwartz to SS&C's Chief Technology Officer from GlobeOp, and hiring Tim Reilly from PWC to manage our Institutional organization. We invested in our technology, enabling us to rollout new products and services.

We continue to evolve our mobility strategy, delivering innovative cloud-based services including wireless, mobile apps and web-based portals. Our mobility strategy remains a focus in 2014 and will continue to be a differentiator. We rolled out major releases of our platforms, including our private equity platform, TNR Solution, SS&C PORTIA, and our loan service and origination solution, LMS.

Key deals for the quarter include a large institutional asset manager selected our client reporting and performance attribution solution, a Canadian insurance manager, a global investment manager and a US hedge fund expanded its relationship with SS&C for our reconciliation technology. An international bank selected SS&C for its margin trading capabilities. A Canadian asset manager contacted us for our ASP and business continuity services. The largest bank in Australia selected our client reporting solution. We closed a couple of PORTIA deals, a Middle Eastern family office, a Hong Kong based asset manager, a US asset manager and a US independent broker dealer.

I'll turn it over to Rahul.

Thanks, Norm.

2013 has been a very strong year for SS&C's Alternatives business. Revenue increased 48.6% over the same period in 2012. We ended the year with $566 billion in assets under administration, an increase of 30.7% over $433 billion at the end of 2012.

In Q4, we continued our efforts to offer additional products to our customers. We added EMIR Trade Repository solutions to our services. EMIR, which stands for European market infrastructure regulation, places trade reporting and reconciliation requirements on derivatives users in Europe. Initial reaction to our offering has been positive. We now have 20 customers subscribed to the service.

Similarly, we continue to build technology and interfaces to support the OTC central clearing requirements and have enhanced this offering in Q4. We launched Annex IV reporting and depository light services to help customers comply with the requirements of the Alternative Investment Fund Managers Directive, or AIFMD, in Europe. We have a number of customers already and are continuing to build our pipeline for these new services.

We continued to invest in our sales organization in 2013, adding a number of new salespeople and a new sales management and training program, which is starting to yield results. Sales performance was strong in Q4 with a number of large organizations selecting SS&C.

Some highlights include: the asset management division of a large bank selected SS&C to provide fund administration services for several fixed income funds; a New York based, multi-billion dollar, healthcare-focused private equity firm selected SS&C for fund administration services; a large global macro manager in Europe selected SS&C for middle office fund administration and regulatory services; and a $1 billion plus manager based in New York selected SS&C to take over fund administration for its event driven strategies.

I'll now turn it over to Patrick.

Thanks, Rahul.

Results for the fourth quarter of 2013 were revenue of $182.5 million, GAAP net income of $26.9 million and diluted EPS of $0.31. Revenue in Q4 increased by $10.8 million or 6% over Q4 2012. We had strong license revenue from our PORTIA Pages and Sylvan products and year over year 7% growth in our software enabled services business.

Foreign exchange did have a negative impact on our revenue in Q4 by approximately $800,000. Adjusted operating income in the fourth quarter was $72.2 million an increase of $6.1 million or 9% from the fourth quarter of 2012.

Operating margins increased to 39.6% from 38.4% in Q4 2012. We made significant progress in implementing GlobeOp and PORTIA acquisition cost synergies. As norm mentioned, we generated approximately $17 million of savings in the year 2013. In addition, margins significantly improved in our fund administration and our PORTIA businesses. Consolidated EBITDA was $76 million or 41.6% of revenue. This was an improvement of 8% or $5.9 million over Q4 2012.

Net interest expense for the quarter was $8 million and includes $1.4 million of non-cash amortized financing costs and OID. Interest expense increased due to the $239 million debt pay down since the fourth quarter of 2012 and the June 2013 repricing of the term credit facility that reduced the interest spread by 1.75%.

We recorded a tax provision of $14.1 million, or 34%, in the quarter. For the full year the effective tax rate was 19%. The full-year tax provision was impacted by several one-time, extraordinary benefits including prior-year R&D credits, reduction in the UK rates that reduced our deferred tax liabilities, and additional releases of reserves. We expect a GAAP effective tax rate, excluding one-time items, to be between 26% and 28% for the full-year 2014.

Adjusted net income was $46 million and adjusted diluted EPS was $0.53. The adjusted net income excludes $21.6 million of amortization of intangible assets, $2.4 million of stock-based compensation, $1.4 million of non-cash debt issuance costs, and $800,000 of unusual gains. The effective tax rate used for adjusted income in 2013 was 30%.

For the year, we ended with revenue of $712.8 million, a 28.9% increase. Adjusted operating margins increased 32% and adjusted EPS increased 38.7%, as we grew the business, integrated the 2012 acquisitions of GlobeOp and PORTIA and paid down $239 million of debt.

On the balance sheet and cash flow as of December 31, we had $84 million of cash on the balance sheet, $782 million of gross debt for a net-debt position of approximately $697 million. The business is showing very strong cash flow characteristics with operating cash flow exceeding adjusted net income. We generated $208 million of operating cash flow for the year ended December 31, a 55% increase over 2012.

For the year, we used our cash to pay down $239 million of debt, brings the total that we've paid down since the GlobeOp acquisitions to $375 million. We purchased 23,900 shares in the fourth quarter for $943,000. We used $14.3 million for CapEx and capitalized software, which is approximate 2% of revenue. In 2013 we paid $21.6 million in cash taxes compared to $28.8 million in 2012. Our account receivable DSO was 45 days as of December 2013, compared to 48 days in December 2012, which significantly improved our working capital.

In finance and activities, we recorded proceeds from option exercises of approximately $28 million and a tax benefit related to those option exercises of $24 million. Our LTM EBITDA for covenant purposes at December 31, was $292.8 million. With the net-debt balance, that give us a leverage ratio of 2.4.

On outlook for 2014, our current expectation for the full year is revenue in the range of $755 million to $775 million, which represents a growth of 5.9% to 8.7%; adjusted net income of $195 million to $204 million; and outstanding diluted shares increasing approximately 3% to a range of $88 million to $88.5 million. In addition, in 2014, we will receive the full benefit of the corporate reorganization we did and will be using an effective tax rate of 28% for the full year.

For the year, we expect cash from operating activities to be in the range of $220 million to $230 million, capital expenditures to be approximately 2.3% to 2.8% of revenues. Excluding the effects of one-time items, which we had in 2013, we expect tax payments to increase about $15 million to $20 million in 2014.

We used all excess cash flow to fund potential acquisition, buy back shares in the open market, and pay down debt. Our current expectation for the first quarter is revenue in the range of $183 million to $187 million, adjusted net income of $45.5 million to $47 million and diluted shares of $87.2 million to $87.4 million.

I will turn back over to Bill for final comments.

Thanks, Patrick.

We're pleased with the performance of our Business. We look forward to posting strong numbers for 2014.

With that let's open it up to questions.

(Operator Instructions)

Bryan Keane, Deutsche Bank.

This is Ashish Sabadra calling on behalf of Bryan Keane.

Pretty solid operating margins. On the revenue side, licenses and professional services are pretty solid, but maintenance and professional services came in a bit weaker than our expectations. I was just wondering, (inaudible), on the last call you had mentioned some [activation] in the next year and certain longer duration -- bigger contracts coming online. I was wondering if you could provide some more color on that side?

I will take that first, but I think that we're pretty confident in our professional services line, that we have a number of large projects going on and we've strengthened our consulting group, so we would expect consulting to go up perhaps 10% in 2014. As far as maintenance is concerned, and we've had two pretty strong quarters Q3 and Q4 on license revenue, that's usually what generates maintenance revenue. As you know, we're not getting CPI plus 2 or 3 when CPI is almost 0. We are only getting very little lift in our maintenance from annual increases. I would see that as remaining somewhat muted, but moving up with the addition in license that we've had.

Norm, would you have anything else?

No, I think those are the two drivers, Bill.

The licenses are obviously the key to the growth of the maintenance line. We've done a better job, I think, of hitting stronger license numbers. Over time, that's going to help us. I do think as the rate environment changes, we'll start getting some of the traditional lift we've had in maintenance in the past that we haven't experienced, really, in the last -- over a couple years, really.

Then, timing of the deals are still important, right? So getting these deals signed and getting the run rates, hitting the books is the driver behind the outsourcing number. The bigger deals we have that are still a challenge, but it is good problem to have.

Okay. Thanks for that color. As we look at software enabled services and going through the year, should we see the software enabled services growth improve through the year through 2014?

We do believe that business will improve. I think that we have lots of business that's come on in 2013 and we see a lot of deals in our pipeline that should help us in 2014. As Norm just said, it's getting those deals closed and getting that revenue to begin to hit our financial statement. Rahul, would you have any?

No, I think that's right. As we pointed out last quarter, we have more larger opportunities at this time than I can remember. Our job this year is going to be to close those contracts, get them implemented. As Bill pointed out, get revenue to start hitting our books.

Great, thanks for the color.

Peter Heckmann, Avondale Partners.

Patrick, could you comment on your guidance for shares outstanding? Maybe a little bit higher than I expected. Do you expect some new share, employee share grants? Is that the primary reason for the increase?

I think it's the growth in shares is pretty similar to 2013. We do do an annual option grant to employees in the fourth quarter, so that's obviously having some impact. We've recently have had significant exercises by employees and that impacts it and the stock price rising also impacts diluted shares. Those three factors are contributing, too. We would expect about a 3% rise.

Okay. That's fair. That number would reflect no anticipated share repurchase activity?

That's correct.

Okay. Then, perhaps, Bill --

What we assumed in our guidance, at least is in our net income guidance, is that we would use the cash to pay down debt, so that could be offset by stock purchases, which actually would be more accretive to EPS.

Fair enough. Perhaps you could, either Bill or Rahul, give us an update on the build outs of LA and Luxembourg on Fund Administration side?

Sure. This is Rahul. I'd start there. I was just in Los Angeles last week. That build out is going very, very well. We are making good progress on our largest customers there. We've got number of new customers that we are looking at.

We've got a good sized operation there now, and we feel good about our prospects in LA. Luxembourg, similarly, we are starting to see some pipeline from some current clients, as well as new clients. We hired a couple of salespeople in Luxembourg that are now starting to generate pipe, as well. We are making progress in both fronts.

Are there any major regulatory developments that have occurred in the last, say three to four months, that you would highlight as potential demand drivers for outsourcing or things that generally we should beware of as we survey the landscape?

As Rahul spoke in the comments, there's EMIR that's just popped out, AIFMD, and the way that that is being implemented throughout Europe is causing a lot of consternation in the funds business in Europe, all things that give people uncomfortableness. They just as well have an outside expert do it rather than do it in-house and have to hire the expertise, and then maintain the expertise.

That's something that we've been able to do pretty well. We see a lot of opportunity in our regulatory services group. I think we are trying to figure out ways in which to leverage that further.

Great, thanks for the color. I will get back in the queue.

Mayank Tandon, Needham & Company.

Bill, I wanted to give you a sense of the big deal pipeline? I think in the past you've quantified that, maybe if you could give us a sense of the number of big deals you have in the pipeline and your best guesstimate in terms of what the real picture looks like in terms of winning those opportunities?

I would say that last year we felt like we had maybe up to 10 of those deals, and we would say that won a couple of those. A couple others are still -- we are still circling.

A couple others have not chosen anything else, but they've gone into hibernation, and a few more have come in. I would say that we are probably at the same level as we were a year ago. I don't think we have Aries quite to the point of where they were at this time last year, but we have a number of $7 billion to $20 billion private equity and hedge fund clients.

We're reasonably confident that we're going to win a number of those. What I would like to have is more clarity as to the date we are going to win, because there's a lot of work that goes into showing them exactly how what they do now is going to get transferred to what we do, what responsibilities they are going to keep, what responsibilities we are going to keep, how many people they are going to keep, how many people they want to have us absorb. There's a whole series of things. We have lots of conversations going on with lots of big places.

Let me ask you this, how important is it to win some these of deals to hit the midpoint of your guidance? I look at your guidance range and I think it is about 7% organic at the midpoint. Just want to get a sense of how important is it to win these deals to get to that range?

As you can well imagine, Mayank, we get to that range a lot faster if we win those deals. Traditionally, SS&C is a very good manager of its business. We have had very good strength in hitting our earnings. Right? Even if we have been fractionally soft on our revenue.

We had a little bit of a headwind with the FX, had about $800,000 in revenue in Q4. I think Patrick and confirm this, but several million dollars for the year that was a lot softer in the FX than in 2012. We have a big pipeline. We have an excellent sales force. We are counting on them.

We've got some really talented sales managers like Punit Satsangi in London, Fred Jacobs here in New York, Amin Graves in New York. We've got Mark Bramley in Boston, John Simon in Boston. We've got a lot of talented people that we have a lot of confidence in and we have high expectations. I'm confident they are going to deliver for us.

Great, that's helpful color. Just two quick questions for Patrick. I believe you said $17 million in synergies in 2013. I think you also achieved some back in 2012. Where are you in terms of hitting that $25 million target? Is there upside to that, given that you already achieved most of it 18 months into the acquisitions?

Right now, so there was $17 million benefit we got in the P&L in 2013. That includes action we took in 2013 and in 2012. Right now, we've got locked in about somewhere around $20 million in savings that is the minimum we would expect for 2014.

We are working hard to get the rest of the $4 million to hit $25 million target. Obviously, the last $4 million is the hardest, but we think there's a lot of opportunity to hit that number, and over time exceed it.

Patrick, what is embedded in the margin guidance for 2014, in terms of both gross margins and operating margins or EBITDA margins?

For the synergies?

In total, what is your expectation in terms of margins? You haven't given specific guidance, but just to get a sense?

I think our targets at the midpoint are to improve operating income by about $50 BPs.

Great. Finally, on the interest cost, can you remind us with the blended cost on the debt is?

Yes, it obviously depends on where LIBOR is. But at current LIBOR rates it is about 3.2% blended.

Okay. In terms of the interest costs, we should take that $697 million that you mentioned and 3.2% would be the cost of that debt?

You should take the gross number. I think the $697 million is the net of cash.

Got it.

I think the gross number is --

$697 million plus $84 million: $782 million.

$783 million, good job, Bill.

Appreciate that, thank you.

Sterling Auty, JPMorgan.

This is Jack's Nater in for Sterling. Just one question on our side. The acquisitions of GlobeOp and PORTIA both really improved your international footprint over the last year to 18 months. Are you guys looking at 2014 to make any further investments to expand the international footprint? If so, what are they?

We're always looking to grow our footprint, whether it's domestically or internationally. We are very methodically opportunistic on acquisitions.

Prime is out of Bermuda. We are looking at any number of opportunities across Europe and also in Asia, as well as here in North America.

Interest rates are awful low, private equity has tremendous cash, prices have firmed, SS&C is very disciplined. Would we do an acquisition? Of course we would. Would we do a big one? Yes, we would do a very big one.

Do we have one in our sites? I wouldn't tell you that I would expect anything imminent. I think we are happy with what we did with GlobeOp. We are happy with what we did with PORTIA.

We are really happy with what our product suite looks like and what we have by way of opportunity to go on a march across international markets, as well as domestic markets. It is all about execution. If we execute, we will do fine.

Okay. Thank you. Actually, just one quick follow up from, you mentioned the 50 basis points in operating margin expansion. Just what do you think -- where is that going to come from? Is that only going to come from the synergies from GlobeOp and PORTIA, or is there something more specific that's going to help you get to the expansion?

I think there are more things. We are focused on a couple areas other than the cost synergies. We look at costs across the Company all the time, so there's cost reduction efforts that are going on across the board.

We also focus on employee productivity and using our technology more so that our cost for employees as a percentage of revenue goes down. Then, we are also looking at lower-cost areas to have operation centers in stead of New York City or Connecticut or Toronto, which should help us.

This is Rahul. In 2014, you'll see us concentrate more effort on driving our resources to both our Mumbai office in India and Evansville. We think that's going to help us. We're automating operations all the time. Bob Schwartz is taking a look at the It infrastructure across the Company. I think there's lots of areas for us to get margin expansion.

Lastly, I think that we've already found new space in Boston that we are going to consolidate some of our offices in Boston. That's several hundred thousand dollars in rent expense cheaper for us.

We've already had a study that's gone on for over nine months looking at all of our data costs. We're going to roll that out. It looks like that's going to have a significant reduction in our data costs. There's a lot of things in this business that are very attractive from a cost standpoint that you have a chance to tweak, and we are constantly tweaking.

Great, that's very helpful. Thank you.

Ross MacMillan, Jefferies.

I guess a question for Bill or Norm just on the demand environment. You'd commented last quarter about how it had taken a little bit longer than you expected to close some of the larger deals. We've had a strong equity market, AUM is up across the board, P firms are exiting investments they made in the 2008, 2009 vintage.

It feels like it should be a pretty healthy environment for selling. I'd just love to do your high-level comments on the environment right now? Thanks?

Just from my perspective, this is norm. We get pretty good demand across the board for our services and our products. The challenge of getting them closed is a little frustrating, but that is part of the game getting these things closed and the contract process and the bureaucracy of these firms. The overall demand for our products and services in alternatives and asset management and these insurance markets, they are actually really pretty good.

To give a little more color to that. We have number of products that are really best-in-class across all the different markets. That's our performance attribution product. It is also our reporting product.

Those are both world-class products that we integrate with all of our systems and services. We also have a number of opportunities in our Global Wealth Platform, which is the first SaaS based RIA or high net worth or global, obviously Global Wealth, that we are very excited about its capability.

Alex Marasco runs that business for us. He ran Security APL prior to coming to us. He understands and he understands the unified managed account business like no one else. We have high expectations of Alex and what he can do with the Global Wealth Platform.

That's great. Maybe just a follow up, you mentioned, I think Patrick mentioned professional services, which was a stronger line item than we expected in Q4. The gross margins on that line were very strong, and it sounds like you plan to grow that above the corporate average in 2014. What's driving that very strong demand for professional services and corresponding very high utilization rates and high gross margins?

I will take a first it first, Norm, and then you can add to my comments. We have proprietary know-how. Depending on how you are managing your investment organization, we have increasingly shown how we can streamline it.

We can allow you to go into additional asset classes. We can build out a derivatives process for you. We can build out a bank loan processing process for you. We can take a look at your mortgage processing and figure out how you can bundle some of your mortgages, securitize them.

There's a lot of expertise that we bring to bear, and I think as we go out and see more of our customers execute better -- in getting in front of them, I think we've been able to really land some large business process reviews and other things where clients are buying entire blocks of time from us: 3,000 hours or 1,500 hours that they get to use on a series of projects that they need. It's something that I think will continue in 2014.

Is that at all a precursor for product sales, do you think? Or is it really a separate exercise, a separate business?

We hope it is a precursor for product sales.

Yes, I think it is. Particularly our a large customers, who are looking for solution-based consultant organization that can really help them solve their operational problems. Since we have our own operations we run, we really have unique expertise to bring to bear. That's going to require, as we determine the solutions on these consulting engagements, it's going to require them to buy certain software products for us to execute those efficiencies in automations.

I do think this is a good driver for the license business. The license business is stronger as we pointed out earlier. That's going to drive more consultant services. Really, what we're seeing is organizations trying to focus on really solving their operational challenges in a broader basis and looking for a partner that can deliver the expertise across the spectrum of tools that they have to use to achieve those goals. That's going to drive additional sales, which will then in turn drive more consultant revenue.

That's great, thank you very much.

(Operator Instructions)

Eric Lemus, Raymond James.

Most of my questions have actually been answered, but just real quickly as far as your sales headcount as we [entrance] to the year. Do you guys see yourselves adding to capacity there> If so, is that more going to be front-end loaded, back-end loaded it or just spread throughout the year? Thanks.

Yes, we would hope to add 20%, 30% to our sales force, which is running at about 110 right now, between 100 and 110. We'd hope to be at 130 or 140 by the end of the year and probably -- we've hired a few in Q1. We'll probably hire a few more in Q2. Probably, in the 8 to 10 in Q3, and maybe 8 to 10 in Q4. It'd probably be a little more back- weighted than -- we are still absorbing what we hired in the last two quarters of 2013.

Great thanks, guys.

Thank you. I'm showing no further questions at this time. I would like to hand the conference back over to Mr. Stone for closing remarks.

Again, we really appreciate everybody's on the call. We are working hard for our shareholders, as we always do. Hopefully, we will be able to talk to you about positive results at the end of Q1, sometime in late April or early May. Thanks, again.

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.