SS&C Technologies Holdings Inc (SSNC) 2018 Q2 法說會逐字稿

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SS&C Second Quarter 2018 Earnings Call. (Operator Instructions) Justine Stone, you may begin the conference.

Hi, everyone. Welcome, and thank you for joining us for our second quarter 2018 earnings call. I'm Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Norm Boulanger, Vice Chairman; Rahul Kanwar, President and Chief Operating Officer; and Patrick Pedonti, our 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 the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, 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, August 2, 2018. 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 in the Investor Relations section of our website at www.ssctech.com.

I'll now turn the call over to Bill.

Thanks, Justine, and thanks, everyone, for being on the call. As we reported, we did $908.5 million in adjusted revenue for the quarter, and we earned $0.62 a share in adjusted diluted earnings per share, a good quarter indeed. We've now owned DST for 3.5 months, and we've made significant progress that Rahul will go through in a few minutes.

Central to this acquisition's success is focus on the clients and make sure they have satisfaction with our services. Since the acquisition closed on April 16, we have met with over 200 clients. The clients are demanding innovation and quicker delivery. We've eliminated overly process-oriented functions and now focus on delivering top initiatives faster.

There's also been broad interest to leverage SS&C's leading products and services, including our web services and our mobility. While much of the focus this quarter has been on DST, our core fund administration and software businesses have also maintained their momentum, delivering 3.7% in organic growth this quarter.

SS&C continues to expand the breadth of our service offering. On Tuesday, we announced a definitive agreement to acquire Eze Software from TPG for $1.45 billion. We're expecting about $30 million in expense synergies, which brings the purchase price multiples to 10.7x. We are very familiar with Eze, having been on Eze Castle back in 2013. Eze Software is a premier provider of trading software to the asset management industry and is very prominent in hedge fund space. We expect this transaction to be immediately accretive and plan to use a mix of cash on hand and incremental term loan debt as our funding sources. As always, we will pay down debt quickly, and we expect to reduce our leverage profile by about 0.7 or 0.8 a turn every year.

Finally, I'm pleased to announce Rahul Kanwar's promotion to President and Chief Operating Officer. Rahul joined SS&C in 2005 through our acquisition of EisnerFast fund administration and has grown our Fund Services business to the billion-dollar business it is today with over 5,000 employees.

Norm Boulanger, who's been with us for 24 years, will become Vice Chairman and will continue to have some executive responsibilities around revenue and also technology innovation. In Norm's 24 years, he started off as a manager in our professional services business and has been instrumental in the drive to $4 billion in revenue and $1 billion in EBITDA. All 3 of us have worked closely together, and we look forward to continuing on as these talented executives assume new roles. I'll now turn it over to Norm.

Thanks, Bill. I've been with SS&C since 1994, and I've witnessed the transformation of SS&C Technologies into the company it is today. In June, we had a soft release of our brand-new product, SS&C SINGULARITY, our next-generation intelligent financial services platform. SS&C SINGULARITY is highly scalable cloud-based system that supports all major asset classes and inter segments on a single platform. Embedded machine learning and intelligent process automation enable the system to learn from user behavior and become smarter over time.

I believe this product has tremendous potential. SINGULARITY will streamline our customers' operations, also provide us an upgraded path for many of our current products and systems. And I think it has a strong competitive advantage against our competitors. And important within our outsourcing business, SS&C will reap the benefits of the systems artificial intelligence to increase efficiency and reduce our costs. The system represents a major milestone in the digital transformation of investment and accounting operations, and I'm really excited about it.

Now I'd like to review some of the key deals for Q2. A $2.5 billion AUM asset manager in the United Arab Emirates chose SS&C Advents and Koba, a wealth manager in Saudi Arabia chose a suite of SS&C Advent products, including APX, Moxie, Tradex, Rules Manager and Investrack. A $2 billion asset manager and current APX client chose SS&C's performance measurement and reporting solutions.

A $100 million hedge fund expanded usage in Geneva. 3 new banks range from $6 billion to $8 billion in assets selected SS&C Primatics EVOLV product as their CECL solution. They will go live by the Q1 2020 mandatory adoption date. A $10 billion AUM advisory firm chose SS&C Black Diamond reporting platform due to our pricing, integration to different CRMs and planning solutions.

A $100 million family office based in Russia with operations in Russia, Cyprus and Luxembourg chose to operate from an access to APX in the Advent data solutions. And finally, Canadian public investment management company acquired the current SS&C net client and realized the efficiencies of using SSCNet for all broker communication, replacement, trade or e-mail allocations. I'll now turn the call over to Rahul.

Thanks, Norm. We had a strong quarter in winning new mandates, providing upgrades for current customers and identifying new opportunities. Deal sizes and complexity continue to increase, which play well to our strength.

As Bill said, DST integration is progressing smoothly. We have taken steps to simplify the organization, increase pace of decision-making and rationalize expenses. We expect these changes will focus the organization more directly on the overall customer experience. We have empowered a strong leadership team under Mike Sleightholme and refocused them on customer satisfaction and revenue growth. We've already identified a number of opportunities to further enhance DST's strong relationships with their customers.

I would also like to announce the hiring of a new Chief Technology Officer, [Anthony Caiafa]. Prior to this role, Anthony was a senior technology executive at Bloomberg LP where he led efforts in infrastructure, automation, monitoring and security. We're excited to welcome Anthony to SS&C as we continue to evaluate and incorporate the latest technologies into our products and processes.

Now I will mention some key deals for Q2 2018. A Middle East-based wealth manager serving high-net worth individuals and families chose SS&C GlobeOp for our ability to support their complex structure. A $10 billion hedge fund chose SS&C GlobeOp, our team's expertise and ability to handle the daily net asset value calculations were key factors in the win.

One of the nation's largest record keepers selected DST retirement solutions to leverage our retirement planner engine, which allows participants to optimize their portfolios. A large interval fund manager selected DST for outsourcing of their transfer agency solution, including technologies and business process outsourcing. 2 private equity firms entering in the '40 Act space through acquisitions selected our fund administration services provided by ALPS.

I will now turn it over to Patrick to run through the financials.

Thanks, Rahul. We reported results for Q2 2008 (sic) [2018] and our GAAP results, our revenue of $895.8 million, a GAAP net loss of $63.7 million and a diluted loss per share of $0.27. On an adjusted basis, revenue for the quarter was $908.5 million, which is excluding the adjustments for implementing the new revenue recognition standard and for the acquired deferred revenue from the Advent and DST acquisitions. We had a strong quarter. Adjusted revenue was up 119%, adjusted operating income was up 73% and adjusted EPS was $0.62, up 35% over Q2 2017.

Our adjusted revenue increased $494.5 million or 119%. The acquisitions of DST, Eze, Modestspark and CommonWealth contributed $477.3 million of revenue in the quarter. Foreign exchange had a favorable impact of $1.9 million or 0.5% in the quarter, mostly due to the strength of the British pound, euro and Canadian dollar compared to Q2 2017. And as a result, organic growth on a constant currency basis in the quarter was 3.7%.

Adjusted operating income for the second quarter was $271.8 million, an increase of $114 million or 73% from Q2 2017. Adjusted operating margins increased -- decreased to 30% from 38% in Q2 '17. Foreign exchange had a negative impact of $2 million on expenses in the quarter. The margin decline was mostly driven by the DST acquisition where operating margins were 21.8% for the quarter.

An update on synergies. As of June 30, we've taken cost reduction actions that will generate approximately $130 million of annual cost savings in the future. Consolidated EBITDA was $291.8 million or 32.1% of adjusted revenue and increased 78% over Q2 2017. Net interest expense for the quarter was $70.2 million and includes $3.4 million of noncash amortized financing costs and OID. The average rate in the new quarter for the note -- for the new term facility was 4.6% compared to 4% in Q2 2017.

We recorded a GAAP tax benefit in the quarter of $99.9 million or 61% of the pretax loss. Adjusted income was $154.6 million and adjusted diluted EPS was $0.62. The adjusted net income includes $106.8 million -- excludes $106.8 million of amortization of intangible assets; $92.5 million of acquisition deal costs mostly related to the DST acquisition; $55 million of severance related to staff reductions; $45 million of stock-based compensation; we took a charge of $44.4 million of a loss of extinguishment of a debt; $12.7 million of purchase accounting adjustments; $9.7 million of revenue adjustments related to the adoption of ASC 606, the new revenue recognition standard; and $3.6 million of other items.

Diluted shares in the quarter increased 17.5% over Q2 '17, mostly due to the equity offering in the second quarter to fund the DST acquisition. And the effective rate we used for adjusted net income in the quarter was 25%.

On the balance sheet and cash flow, as of June, we had $785.1 million of cash and cash equivalents and $6,992,500,000 of gross debt for a net debt position of $6,207,400,000. Operating cash flow for the 6 months was $119.7 million, a $76.5 million or 38% decrease compared to the same period in 2017. The DST acquisition cost impacted the operating cash flow in the quarter by approximately $135 million. Adjusting for those transaction costs, operating cash flow was up 30% over Q2 -- over the 6 months in 2017.

A couple of highlights from a balance sheet and cash flow. Our gross debt has increased approximately $4.9 million from Q4 '17 due to the DST acquisition. Since the DST acquisition on April 16, we've paid down $408.3 million in debt. We paid $100.3 million of interest compared to $41.9 million in Q2 '17.

In the quarter, we paid $67.9 million of cash taxes compared to $30.1 million in Q2 '17. As of June 30, our accounts receivable DSO was 53.7 days and that compares to 54.7, an improvement from March 2018. We spent $38.9 million of capital expenditures and capitalized software. The CapEx was mostly for facilities expansion and IT. And option proceeds were $55 million compared to approximately $36 million in Q2 2017. And for the year, we paid a $31.4 million dividend common stock.

Our LTM EBITDA -- LTM consolidated EBITDA used for our covenant compliance was $1,413,000,000 as of June 2018, including $572 million of acquired EBITDA and cost savings related to the acquisition. And based on a net debt position of $6.2 billion, our total leverage as of June is 4.4x.

On the outlook for the remainder of the year, first, for the third quarter and our third quarter outlook only includes acquisitions that have closed through today, so it excludes Eze which we expect to close in the fourth quarter. Our current expectation for the third quarter is adjusted revenue in the range of $992 million to $1,012,000,000, adjusted net income of $162 million to $168 million and diluted shares in the range of 255 million to 253 million. And we expect adjusted tax rate to be approximately 25% in the quarter.

Our current expectations for the full year is adjusted revenue of $3,356,000,000 to $3,396,000,000 and adjusted net income in the range of $607 million to $617 million and diluted shares in a range of 243 million to 245 million. Cash from operating activities are estimated to be in the range of $528 million to $550 million, and we expect capital expenditures for the full year to be between 2.8% and 3.2% of revenues -- adjusted revenues. And I'll turn it back over to Bill for final comments.

Thanks, Patrick. SS&C is ramping and transforming very quickly. Mike Sleightholme has a really talented group of people at DST, including Willie Slattery in London and Nick Wright in London as well as our friends in Kansas City like John Geli and Jonathan Boehm, Chris Bremner and a whole number of others, and we're excited about that. We're excited to have Jeffrey Shoreman and his team at Eze coming over to us in the next few months. And I think that we have a lot of momentum.

We'll be holding 2 big events in the fall: our annual client conference, the SS&C Deliver client conference will be September 11 and 12 in Vegas, and we'll have an Analyst Day in November in New York City. We look forward to seeing any number of you at those 2 events, and we'll now open it up for questions.

(Operator Instructions) Our first question comes from Rayna Kumar with Evercore ISI.

This is [Nick Primo] on behalf of Rayna Kumar. Can you please walk through what the drivers of organic revenue were for the quarter and what organic revenue growth was as well as your expectations for the third quarter and for 2018?

Our organic revenue in the second quarter was 3.7%. And for Q3, based on the range we provided, the organic revenue would be between 5.5% on the high end and 3.2% on the low end. And for the full year, based on the range, the organic revenue would be between 5% and 3.8%.

Your next question comes from Surinder Thind with Jefferies.

I'd like to actually start a question with Eze Software. Are you able to provide a little bit more details on the transaction in terms of how we should be thinking about -- or maybe some historical context around the growth rate at Eze on revenues and then maybe even what we should be thinking about? It seems like the accretion should be meaningful. Any guidance that you can provide there and maybe what the target leverage ratio will be at deal close?

Yes, I would say that -- Eze has been affected over the past couple of years with some headwinds in the hedge fund industry and particularly hedge fund startups. But they've performed well and what we'd expect that their revenue growth over the next several years is going to be in the mid-single digits. They have a couple of very exciting platforms that are coming out, and I think that will help drive growth. And then as far as synergies are concerned, we would expect something in the $30 million worth of cost synergies over a 3-year period. And I think that, as we said, it's going to be immediately accretive to our adjusted earnings per share. And we really don't have a range yet of exactly the amplitude of that accretion.

And then a target leverage ratio maybe?

We think -- I mean, it's going to depend on how some of the debt financing goes and what we decide with that. But I think our target would be to be somewhere around 4.9 to 5x net leverage.

Got it. And then one quick question on DST. Given the meaningful announcements around the cost synergies, can you talk about -- maybe a little bit more color on just the fact that you were able to achieve the level of synergies so early in the process and maybe that versus what the initial -- what's changed since maybe a quarter ago and then how that maybe impacts or if there's any impact on the final guide of $175 million.

Yes, Surinder, I mean, we -- 90 days ago, we really owned them for 90 days, right? So there's a lot of things that happen relatively rapidly in those kinds of situations. And like I said, we've got a number of really talented people at DST that are really excited about their opportunities to make more and more decisions. And we're much more distributed type kind of a decision-making process at SS&C than they were at DST. And they've really helped us to accomplish what we've done so far. And I think, if anything, it's just probably moving the bulk of the $175 million into the first year rather than the second year.

Your next question comes from Alex Kramm with UBS.

Just staying on the topic of DST. Can you talk about a little bit what's going on at DST, I guess, from their organic perspective? I mean, you announced a couple of business wins there. But just curious like how fast that business is growing and any more color you can give. If I look at my numbers, I don't know if I'm looking at the right compares, but it actually said something like 6% year-over-year, but I might be looking at the wrong base. So any numbers you can share would be great.

The 6% number is wrong, right? Yes, I think the health care business, we expect to grow somewhere in the 5% to 7% range. So if you just took that one, I think you'd be in the range. But the transfer agency business, both domestically and internationally, has been a minus 2% to plus 2% kind of business for a number of years. And we see opportunity, right? We see a lot of opportunities. And in my town hall with the whole staff, they asked me what's the difference between SS&C and DST. And it's primarily speed. We like to go quickly. We like to make decisions. We like to empower people. And we think that's going to help us drive revenue growth. It's still early and obviously, the financial impact of getting the cost synergies is pretty important, and we put some focus on that. But we're also focused on the sales force and how we go to market and what our opportunities are. And I think when we talk at the -- into the third quarter, I think we should have any number of initiatives that has begun to bring revenue.

All right. And then I guess, just going back to Eze for a second. Can you just talk a little bit more about the strategic rationale? I think you talked about a little bit more. But in terms of, I think you have some EMS, OMS systems already. Is it just having more to show in front of clients? And also related to that, I guess to some degree, I think Eze had a bunch of turnover over the last few years with some of the changes over there. I mean, is this -- does that make it easier for you to kind of integrate it and hit the ground running or how would you view that?

Well, I think Jeff Shoreman has been at Eze for almost 15 years and has been the CEO for the last couple of years and has done a really nice job. And his senior management team that we've been with a number of times seems to be very stable. So I don't know about where the high turnover is. Of course, when a big portion of your new sales is startup hedge funds and it's slowed down pretty good in 2016, but it's starting to rebound and so is their business. So we're really optimistic. And they got 2,500 clients and they're very strong in the trading space, both from a derivatives and an equity, then a fixed income. We have some good complementary stuff for them. And obviously, Moxy is very popular on the loan-only side. So we think there's just a lot of stuff that we're going to be able to deliver to our clients in a way that it's going to delight them.

Your next question comes from Andrew Schmidt with Citi.

Norm and Rahul, congratulations on the new roles. So first is strategic question on Eze Software. We've seen recently a lot more consolidation in front office tools and also in front to back office sort of integrated platforms. I guess, where do you see -- you clearly picked up good OMES products with Eze. You also have a front to back office platform as well that you're picking up. How do you see the role of just -- an integrate a front to back office platform within the product suite? I know you do some of that now, but just curious how that fits into just the overall strategy and then just what the overall product suites.

Well, maybe Rahul could comment on this, too, but what I would say is that we have now for the Eze business a natural upgrade path through to Geneva to be able to handle increasingly complex and difficult-to-handle multi-strats funds and private equity funds and whole series of other structures that has not been Eze's particular strength on the middle and back-office stuff, and still very, very strong on the front office. So I think that's the idea is that the clients are going to have opportunities to upgrade throughout our suite. And I think that's something that will increase our retention, and then also give us opportunities to cross-sell in each other’s client base.

The thing that I would add to that are as we met with the Eze team and went through their products, there are a number of things on their road map for what they like to do with the system that we feel we have solution for, right? So that's a big part of the opportunity here. The other thing is we're also a pretty big outsourcer of middle office activities. And we think, therefore, Eze to be able to provide that capability to customers will enhance their win rate and ultimately, result in larger ticket. So those are some of the up target.

Makes sense. And then maybe a question for Patrick. Nice uptick in the adjusted net income outlook. It looks like it's well in excess of the second quarter beat here. Is it the DST cost synergies that's driving that? Are there other factors considered in the outlook? Just a little bit more color on that, just the implied outlook for the back half of 2018.

There are several of our businesses that are performing well, including we've implemented more synergies than we expected in the back half of the year for DST. So we've got some business performing well. Revenue is growing. The cost structure is fairly flat. And then also, we're getting higher synergies falling into the second half of the year than we initially expected.

Your next question comes from Peter Heckmann with D.A. Davidson.

Rahul, could you give us an update on end-of-quarter AUA and whether you included any of the ALPS number in there?

Yes. So Pete, we're at 1.66 trillion at the end of the quarter. We have included the ALPS hedge and private equity numbers in there. We have not included their '40 Act and mutual fund numbers.

Okay, okay. And then do you anticipate any issues or challenges? I think with the change of control of ALPS, you have to have a shareholder vote. Has that occurred yet?

We've been through most of those processes, if not all.

Okay, okay. Great. And then just lastly on Eze, can you comment or basically on the revenue composition and their sensitivity to equity trading volumes, is it fixed minimums with volume bands or is it completely sensitive to volumes?

Peter, it's a combination of things, with both trading volumes and number of seats and number of entities. So it's similar to how SS&C price, and it's more of a matrix than any one particular point.

Your next question comes from Chris Shutler with William Blair.

Can you just be more specific on the cost savings that you achieved from DST in the second quarter? I'm guessing not that much. And then what's in the Q3 and Q4 implied guide?

There's approximately $20 million in each quarter, Q3 and Q4. In addition, the DST's re-billable expenses kind of fluctuate quarterly depending on the services they provide in each quarter. So that kind of affects our cost -- their costs, and they expect it to be a little bit higher in the second half of the year. But we're probably expecting about $20 million a quarter.

Just to confirm, Patrick, there weren't any cost saves really in the second quarter?

No, there were cost saves in the second quarter. I mean, there were some -- like public company costs and executives that left, but the vast majority of the staffing reductions that we announced were done at the end of the quarter.

Got it. Okay. And then on the DST revenue and adjusted EBITDA, can you give us a sense where that ended up in the quarter and what you're expecting for the full year?

The quarter was 4 74. That's for 2.5 months. And we're expecting a little over $1.6 billion for the full year, a little over $1.6 billion for full year.

Your next question comes from Jackson Ader with JPMorgan.

First question from my side is the Eze acquisition seems like it's bringing some pretty nice margins already. So where do you think you're going to be able to find the $30 million in synergies over the next 3 years, given they have 35-plus EBITDA margins?

We think Jeffrey Shoreman is really a talented guy, and we have high expectations for our ability to get that $30 million. And we're going to help him in all kinds of ways. But yes, there's a lot of stuff when you become part of an organization the size of SS&C that you don't have to spend at that level, right? So there will be a number of things that are cheaper for him. We won't probably pay many fees to TPG anymore or we probably won't pay much director fees anymore and a whole bunch of other stuff like that.

Okay. And then Bill, I think you mentioned that Eze has over 2,500 clients. Any sense that you can give us on customer overlap of those 2,500 with SS&C?

We haven't done a straight match, but I would bet there's at least 1,000.

Your next question comes from Brad Zelnick with Credit Suisse.

This is Kevin Ma on for Brad Zelnick. Rahul, congrats on the promotion. For my first question, Bill, I think you mentioned last quarter, you want to optimize DST's sales cycle a little bit, for example, getting the time between contract win and actual contract signing to 30 days. Can you talk about the progress there? Any other incremental data points that gives a sense of how you're assimilating DST?

Well, that's been a focus and both Bill, Frank and Jason White have been focused on that, and then the team out at Kansas City, and they realized that in order to get to speed, we've got to have speed in all the support functions as well as have speed in the go-to-market strategies, and then also in our development queues. And so that's moving along at a brisker pace. We think it can get a little more brisk, and we're helping people with that.

Got it. Okay. And my second question is does the acquisition of Eze impact the pace of your normal strategy of just smaller tuck-in acquisitions in all fund admin?

I don't think so.

Your next question comes from Crispin Love with Sandler O'Neill + Partners.

At the end of the second quarter, you had about $785 million of cash on your balance sheet. So how much cash do you need for working capital and regulatory reasons? Or kind of ask it another way, how much of the cash on your balance sheet would we expect for you to use in the Eze acquisition?

We'll use between $600 million and $700 million. And remember, we're going to generate a lot of cash between now and closing, so it may be even a little bit better than that.

And I guess, just one more on Eze. Can you give us some of the color of the negotiating history of the Eze acquisition? And is the timing after State Street's Charles River acquisition just a coincidence?

Yes. We would say it's completely a coincidence. And we had also made some overtures to Fidessa, and we weren't able to quite get that done. And if we had to choose at the start whether we could have Charles River or Fidessa or Eze, we would choose Eze. So we feel pretty fortunate that we were able to come to a conclusion and get it done. And now we have to go through the necessary closing processes, but we're cautiously optimistic.

Your next question comes from Chris Shutler with William Blair.

It looks like the license and maintenance revenue line was up about $25 million sequentially on an adjusted basis. How much of that was due to the core business and how much was due to DST?

All the product systems, the full product line? So it's...?

Yes.

Eze was about $19 million.

$19 million of the $25 million roughly was DST-related?

Yes.

Okay. And then the -- I don't know if you called out the organic growth rate for the alternatives business in the second quarter.

Yes, I've got that. So the whole alternatives business was 6.2%.

I'm sorry, can you say that again?

6.2%.

6.2%. Okay, got it.

That's the total alternatives business, including the license product business. The fund administration was probably a little bit higher.

This concludes the Q&A session for the conference. I'd now like to turn it back to Bill Stone for any closing remarks.

Well, we look forward to seeing you at some of the conferences we have this fall. And I look forward to hosting this call on -- sometime in November. And I congratulate Rahul and Norm, and we look forward to talking to you in a few months. Thanks.

This concludes today's conference call. You may now disconnect.