SS&C Technologies Holdings, Inc. (SSNC) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Jamie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SS&C Technologies 2013 Second Quarter 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'd now like to turn the call over to Bill Stone, Chairman and Chief Executive Officer. Mr. Stone, you may begin your conference.

Hi. With me today is Norm Boulanger, our President and Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer. We're going to review the Safe Harbor provisions, and then we'll get started. Please note that various remarks we make today about future expectations, plans and prospects, including financial outlook we may -- we provide, constitute forward-looking statements for the purpose of the Safe Harbor provisions of 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, which was also disclosed at the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the Securities and Exchange Commission and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, August, 1, 2013, and 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'm going to give you a brief overview, and then Norm will take you through some more details, and Patrick will go through the financials. We delivered record revenue of $177.5 million, 46.8% increase. We also delivered adjusted EPS of $0.48, an increase of 45.5%. In addition to generating record revenue, we generated net cash from operating activities for the first 6 months to $70 million. That was compared to $35.7 million in the same period of 2012, and this is a 96% increase in cash generated. Software-enabled services was up 62% for the quarter to $138 million. Revenue from software-enabled services represent almost 78% of our record revenue. Our run rate basis of our maintenance and our software-enabled services was at $653,800,000 for the second quarter, and this represents an increase of 51.5% from $431 million in the same period of 2012. And we think it's a good indicator of visibility. One of the most significant deals for SS&C in recent years happened in Q2. Ares Management LLC, a $65 billion Los Angeles-based asset management firm, signed a strategic partnership agreement with SS&C GlobeOp to provide certain administrative services. Norm will talk a little bit more about this, but we have opened a Los Angeles office to help service this new account. We do continue to grow and strengthen our team. We added Tim Reilly into our institutional outsourcing business, and we're happy that Kevin Kainen [ph] is moving from COO of our Mumbai operation to run our Los Angeles office. We also continue to build out our sales force. We added 6 new sales people in Q2, and we've added 14 year-to-date. We're bringing out a whole series of new products and services in trading, risk, bank custody, collateral management, tax and regulatory services. We were able to our sales force and our product and service capability as we maintained a 34% consulting margin in Q2 and drove overall operating margins to 38.7%, a 90 basis point improvement from Q2 last year. And now I'll turn it over to Norm.

Thanks, Bill. We are very pleased with the progress we made in Q2. We executed on sales opportunities, closing important accounts and moving other deals forward. We're focused on cost synergies, cross-selling, customers and our people. The momentum of business remains positive, particularly in our SS&C GlobeOp and institutional outsourcing business. PORTIA and our asset management business had a strong license quarter in Q2. Overall, our pipeline is strong, and we are pursuing a number of larger opportunities we're optimistic about closing. We hosted our client summit in May, and the event was well received. Customer enthusiasm is high, and in particular, our launch of our SS&C Investment Intelligence platform drew strong interest. In Q2, we hired Tim Riley, former partner of PwC, a leader in institutional outsourcing service division. Tim's mandate is to continue the momentum we've had to date and accelerate growth in our software-enabled service business. Increased regulation continues to drive opportunity for our business. Our Regulatory Solutions Group recently signed its 100th customer since its formation a year ago. These customers use our compliance services to perform PF, FATCA, AIFMD and others. Key deals for the quarter include Ares Management, a $65 billion-plus asset manager, has selected SS&C GlobeOp to perform outsourced fund administration and accountant services. This is a key win for us, and we look forward to our strategic partnership with Ares. In addition, SS&C GlobeOp signed a $1.3 billion private equity firm, a $2.1 billion hedge fund manager, a new $350 million fund launch, 2 U.K.-based start-up hedge fund and a Shanghai-based asset manager. We also saw a number of wins for us in the PORTIA, including Bank of Butterfield, an international institutional and private client bank and an asset manager, a healthcare-focused fund manager in New York, an emerging markets division of a global bank starting operations in Indonesia, a Malaysian-based asset manager. In other parts of the business, a global investment manager selected SS&C for its middle- and back-office derivatives outsourcing services. The asset management arm of a Malaysian bank selected Antares and CAMRA to manage its front- to back-office operations. We cross-sold Pages to an existing SS&C's Sylvan client, a Malaysian central bank that needed a solution for their investment reporting. Our bank selected our managed account platform to provide alternative products to its institutional investors. We sold a Global Wealth Platform -- our Global Wealth Platform to a turnkey asset management provider in Florida, a large U.S. independent broker dealer selected Evare for their data-gathering service, and a Midwest-based registered investment advisor selected Pages for its client reporting. And now I'll turn it over to Patrick to go through the financials.

Thanks, Mark. Results for the second quarter were GAAP revenue of $177.5 million, reported GAAP net income of $26.1 million and dilutive EPS of $0.31. Adjusted revenue was $177.5 million, an increase of 56.3% or 46% over Q2 2012. Strong revenue from acquisitions and improved demand for our software-enabled services for alternative asset managers and Pacer products drove revenue growth in the quarter. Adjusted operating income for the second quarter was $68.8 million, an increase of $22.9 million or 50% from the second quarter of 2012. Operating margins increased to 38.7% from 37.8% in Q2 2012. We have made significant progress on implementing GlobeOp and PORTIA acquisition cost synergies and expect to generate $15 million of savings for the full year 2003 (sic) [2013]. And we have assumed these savings in our guidance for the full year. Adjusted EBITDA was $72.6 million or 40.9% of revenue. This is an improvement of 51% or $24.7 million from Q2 2012. Net interest expense for the second quarter was $11.8 million and includes $1.6 million of noncash amortized financing costs and OID. Interest expense increased due to the new $1.1 billion credit facility we put in place to finance the GlobeOp and PORTIA acquisitions in June 2012. On June 10, we repriced a Term B credit facility, reducing the interest rate from LIBOR plus 4% with a 1% floor to LIBOR plus 2.5% with a 75 bp floor. This will result in approximately a $10 million annualized savings in our interest expense. We recorded tax provision of $9.8 million or 27% pretax income. The decrease in 2013 over '12 was through the corporate tax reorg we implemented in the fourth quarter of 2012 in conjunction with the GlobeOp acquisition. We expect the GAAP effective rate for the full year to be between 27% and 30%. Adjusted net income was $41 million, and adjusted EPS was $0.48. The adjusted net income excludes $21.1 million of amortization of intangible assets, $1.9 million of stock-based compensation, $1.6 million of noncash debt issuance cost and $2 million of unusual gains, mostly related to foreign exchange. On our balance sheet and cash flow, as of June, we had $60.6 million of cash and $919 million of gross debt for a net debt position of approximately $858 million. We generated $70 million operating cash flow for the 6 months ended June 30, a 96% increase over 2012. The combined SS&C and GlobeOp businesses are showing strong cash flow characteristics, and year-to-date, we've paid down $102 million of debt. That brings the total debt paydown since the GlobeOp acquisition in June 2012 to $238 million. We used $8.2 million for capital expenditures and capitalized software, approximately 2.3% of revenue. And we expect capital expenditures for the full year to be somewhere in the range of 2.4% to 2.8% of revenue. We paid $15.1 million in cash taxes in 6 months compared to $20.8 million in 2012. Our cash receivable DSO was 49 days as of June 2013 compared to 48 days as of December '12 and up from 47 days as of June 2012. In financing activities, we recorded the proceeds from option exercises of $14.1 million and a tax benefit related to these option exercises of $4.9 million. And our LTM EBITDA, which we use for covenant compliance and includes acquisitions as if owned for the full year, was $277.1 million. And based on net debt of $858 million, our leverage ratio as of June '13 was 3.1x. For our outlook for Q3 and the full year, our current expectation for the third quarter for 2013 is revenue in the range of $179 million to $183 million, adjusted net income of $42.5 million to $44 million and outstanding diluted shares of 86.9 million to 87.2 million. For the full year, we expect revenue in the range of $714 million to $722 million, adjusted net income of $165 million to $167.5 million and diluted shares of 85.5 million to 85.9 million. For the full year '13, we expect cash from operating activities to be in the range of $181 million to $187 million and capital expenditures to be 2.4% to 2.8% of revenues. And we'll use all excess cash flow to fund any potential acquisition and pay down debt. And now I'll turn it over to Bill for final comments.

Thanks, Patrick. We have continued to grow out our sales capacity, and we're getting to see some positive momentum from the sales team. Now last week as well, we received from the Luxembourg Ministry of Finance a fund administration license, and we have opened a new office in Luxembourg, adding to the multiple domiciles and jurisdictions we already have. Our 4,100-plus employees have executed well across the complex set of products and service initiatives, and we feel very strongly that we have some momentum going into the second half of this year. And with that, we'll take questions.

[Operator Instructions] Your first question comes from Bryan Keane from Deutsche Bank.

It's Bryan from Deutsche Bank. I heard about the comments on improving demand and alternative investments. I'm just curious, is there a way to quantify the pickup you're seeing there?

Well, I think that we're tightening the range for the full year and raising the lower end of the range. And we think that obviously, we're just bringing on Ares, so that will pick up some revenue in the fourth quarter. But we believe that we will have a lot of momentum going into '14.

The Ares deal and the opening of the L.A. office, are you taking on any of their employees? And was there any payment you had to make to Ares to win that piece of business?

We are not paying anything to Ares, and we are taking about 40 of their employees.

40 of their employees, okay. And it seems kind of like a BPO kind of operation? Or will it be similar to the things you guys have done? I guess the question would be how is it different, the Ares deal compared to what you normally have done in the past? Or is it similar, it just happens to be in Los Angeles?

Yes, it's similar. I mean, obviously, it's $65.9 billion. That's a rather significant asset manager in the alternative space. So we're pretty proud of the work that our combined team did on the 18-month sale process.

And is there -- would you phrase it as a BPO-type contract? Or is that like a real kind of an IT BPO type contract? Or would it -- does it more look like the software-enabled services that you guys currently have in the revenue stream?

Yes, it's very similar. It's fund administration with the heavy technology footprint that SS&C brings to the table. And we would expect it to be very similar to our -- to the $400 million or so that we have in the current business.

The next question comes from Rohit Soni [ph] from Harbor Spring.

Great job. Two really quick questions. One is I know you read off a lot of the customer wins, but I wasn't able to capture them all. But if you were to summarize the 10 or so or 15 wins that you had mentioned for the quarter, is there a way to summarize where most of the wins came from? Was it in any particular areas or products? And was it more skewed towards hedge funds or private equity or a mix? And then secondly, it's obviously nice that the margins have creeped up even further, up to 41%. Any view on margins for the rest of the year? This is EBITDA margins.

This is Norm. I'll take that question. I think the best way to look at the wins is to look at them in 4 categories. One is the GlobeOp SS&C's fund services business, which is the alternative space. That's been our strongest for a while and was again this quarter. If you go past that, I think you're looking at -- PORTIA had a very good quarter in terms of significant PORTIA sales to customers like Butterfield. Our asset management business, which includes products like Pages and Sylvan, was also strong. And then I think the fourth category I would look at is -- and it cuts across all these businesses, but international had a strong quarter, particularly in Asia. So those are probably the 4 areas that I would look at this quarter that showed some pretty strong growth. From the pipeline perspective, we're seeing significant opportunities in the SS&C GlobeOp services and our institutional outsourcing, which cuts across insurance companies, pension funds, asset managers and global wealth managers. That's how -- when I look forward, those are the areas that I'm looking at. From a margin perspective, we are constantly focused on using technology to expand our margins. There's been lots of synergies across the different acquisitions. Some of that is just starting to come together. So you'll see synergies from a cost perspective as well from a revenue perspective over the next couple of quarters as this is what I'd expect.

And I would guess that, that synergy would be in 100 to 200 basis points over the next 6 months.

[Operator Instructions] The next question comes from Eric Lemus from Raymond James.

I wanted to talk a little bit more about the PORTIA business, and you said it was good in the quarter, but is it -- can we interpret that as PORTIA ahead of plan and the way you guys expected beginning of this year?

I think I'll let Norm take this after I do. But what we would say is that we acquired PORTIA a little over a year ago. They were really on the block for maybe as much as 18 months. We have a lot of faith in Christy Bremner and her team. She's brought in some new people like Mark Bramley and others that are executing very well, and I think they're getting some momentum. I think that the ability to take some of the things that SS&C has and integrate them into the PORTIA product makes PORTIA a stronger product than it was, and it was a strong product before. So I think with the added attention to customer service, the new technology that we're adding and a -- really a strong support from Norm and me and Patrick and the rest of our management team for the PORTIA team, I think we're very excited about this opportunity.

Yes, I guess the only thing I would add to that is it's still traditionally a license business today, and it's doing very well in that front relative to plan. But the real progress, I think, we're making as we're beginning the rollout of our product sets into the PORTIA customer base, including the SS&C Investment Intelligence portal. And we're circling some opportunities on the full outsourcing side that I think will give us some momentum going forward. So we're really excited about expanding that business from a pure license business or largely a license business to something that's more along the lines of our outsourcing business.

Got it. And I guess just building on that as well, is there any sort of roadmap to converting in the PORTIA business into a SaaS model?

It's not a roadmap. The capability exists today, and the customer demand is really what we're trying to tap into. We're out there selling people, offering solutions. Some of those solutions make sense as an outsourced model for them. So it's really driven by the demand of our customers and the prospects. But the capability is there, and the wait is that -- look, we're starting to sell more visually with our Investment Intelligence portal, which I think is going to be very well received in that space..

It's also very difficult to -- these are very successful organizations, and they're not about ready to upset the applecart unless they get pressure. If they had -- start having pressure on costs or if they start having turnover or if they recognize that their whole IT and back office is really centered around 1, 2 or 3 people and they have any turnover of those 1, 2 or 3 people, then you start having some reconsideration of what it is that you're doing. SS&C has 600, 700 people in our technical group. We have now over 1,000 chartered accounts and CPAs, a couple of 100 CFAs, right? So you could get it all for a lot of scale and capability. And people sleep better at night. They got rich. They want to stay rich. And I think that's something that we've helped them do.

Great. That's very helpful. And as far as on the software-enabled services or the outsourcing side, you guys have been successful in the core markets. But is there any other pieces of the market, like on a traditional institutional side, are you seeing some demand for the outsourcing business like the -- like insurers?

We are. We're seeing activity even in -- from insurance companies, from asset managers and from global wealth managers.

Yes. As you could well imagine, right, it's -- interest rates have now consistently been 2% on a tenured treasury. So the amount of investment income being driven by insurers and pension funds has been really, really under pressure. And so they need to get into different kinds of asset classes, and that requires an expertise in things like some of the things Norm talked about before, about being able to handle FATCA, being able to handle AIFMD and other things that support an alternative strategy for 10% or 20% of their assets. It -- before, it was -- the 2 major competitors when I first got into this business was one company called Stock and Bond and the other company called Bond and Stock. They're great marketers, but they only had those 2 asset classes to worry about. Today, it runs the gamut from real property to mortgages to all kinds of equity and equity-linked securities and then all kinds of fixed income, whether it's securitized or not.

The next question comes from Sterling Auty from JPMorgan. Saket Kalia - JP Morgan Chase & Co, Research Division: It's Saket here for Sterling. A few questions if I may. Is Ares one of the elephant deals that you were talking about in some of the prior quarterly calls?

We try to keep things between ocean and land, so I was calling them whales before. That would be a blue one. Saket Kalia - JP Morgan Chase & Co, Research Division: And does that deal cover the entire $65 billion in assets? Or is this just a subset of portfolios?

It cuts across the entire $65 billion. I don't think that the asset number would quite get to the $65 billion number. But it cross -- it cuts across all kinds of different portfolios and all kinds of different things that we're doing for them. And I think that over time, it gets bigger and bigger and becomes a larger and larger percentage of that number. Saket Kalia - JP Morgan Chase & Co, Research Division: Sure, sure. And then relatedly, can you just remind us how pricing works on fund admin deals in terms of basis points on AUM, generally speaking?

Well, the bigger you are, the likelihood that you've already hit the steps, right? So generally, in an alternatives manager, that $10 billion is quite large. So obviously, Ares is extremely large. And in general, we start at basis points. It can be as high as 25 or 30, and it can go down as low as 4 or 5. So it's a stepped process throughout that, and that's how that works. And it also depends on what services they want, whether or not they want daily accounting or monthly accounting, what kind of reports they want and then also whether or not they're taking our regulatory services or they're taking some other services we offer like tax and financial statement processing. Saket Kalia - JP Morgan Chase & Co, Research Division: Sure, sure. And then from a higher level, what do you think is driving the growth in the fund admin business? Is it market share gains? And if so, why do you think you're winning versus some of the larger bank fund admins?

Well, there's really historically no reason bankers are the accountants to the fund industry business, right? You're not getting a loan. You're not getting a credit card. You're not going to an ATM, right? You're really going to an accounting provider. And once the government stepped in and decided that public accounting firms can't offer a fund administration services and do audits of publicly traded companies, that opened the doors for an awful lot of independent administrators to gain market share. Once we were able to start getting into larger organizations and they would see the technological capability that we had and then compare it to the technological capabilities that they see in some of the large financial institutions and some of the less capable fund administrators, I think that's when our capability really started to shine. And SS&C is a pretty focused, pretty technologically savvy and pretty determined to drive the best experience for our customers. And that's resonated quite well across all the different geographies and all the different types of funds, whether that's global macro or long, short equity or any of the different convertible strategies that people might use. Saket Kalia - JP Morgan Chase & Co, Research Division: Got it, got it. And then just last line of questioning, quick question on guidance. Revenue, I think for the year, is going up by about $2 million on the low end, but net income is going up by about $8 million. So do you expect to get more synergies from GlobeOp and PORTIA than you did perhaps last quarter? And then can you just maybe remind us what the margins on those 2 businesses look like now?

I think if you look at the guidance on the net income, a good portion of that is -- part of it is the beat in Q2, part of it is the interest expense reduction for the rest of the year, which is above $5 million pretax, and then the rest of it is additional cost savings that we've generated in the synergies. There's really 3 pieces. Saket Kalia - JP Morgan Chase & Co, Research Division: Got it, got it. And then just any idea of the margins kind of in GlobeOp and PORTIA?

Well, GlobeOp was -- had operating margin somewhere around 30% or a little under when we acquired them. And that business right now is running about 37%, 36%, 37%.

And then PORTIA's always been a pretty high margin, it's a license business, so they're running over 45%.

[Operator Instructions]

I think if anybody doesn't have any other questions, I think that's it, moderator.

At this time, I would now like to turn the call back over to Bill Stone for closing remarks.

Again, as always, we appreciate people taking time out of their busy schedules to be on these calls. We always like to surprise you positively, and we do view that our shareholders are a primary reason why we're in business. So thanks again.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.