SS&C Technologies Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by.

Operator

My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the SS and C Technologies First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.

Operator

I would now like to turn the conference over to Justine Stone, Head of Investor Relations. Justine, you may begin your conference.

Speaker 1

Welcome, and thank you for joining us for our Q1 2024 earnings call. I'm Justine Stone, Investor Relations for SS and C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer Rahul Kanwar, President and Chief Operating Officer and Brian Schell, 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.

Speaker 1

Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in our Risk Factors section of our most recent annual report on Form 10 ks, 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, April 25, 2024. 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.ssbtech.com.

Speaker 1

I will now turn the call over to Bill.

Speaker 2

Thanks, Justine, and thanks, everyone. Our first quarter results are record adjusted revenue of $1,435,800,000 up 5.3 percent and our adjusted diluted earnings per share were 1.28 dollars 12.3 percent increase. Adjusted consolidated EBITDA was $556,800,000 for the quarter, a record high for Q1 and our EBITDA margin came in at 38.8. Our Q1 adjusted organic revenue growth was 4.7%. The Q1 revenue acceleration was driven by strength in our alternatives, retirement, Intralinks and Ops Advisor businesses.

Speaker 2

Our recurring revenue growth rate for financial services was 6.5 percent, which includes all software enabled services and maintenance revenue. For the 3 months ended March 31, 2024 cash from operating expenses from operating revenue was $180,500,000 We paid down $79,900,000 in debt in Q1, 2024, bringing our net leverage ratio to 2.95 times and our net secured leverage ratio to 2.02 times. We bought back 800,000 shares for $52,900,000 at an average price of 63.24 dollars The internal deployment of Blue Prism Digital Workforce across SS and C continues to go well. 150 basis point year over year increase in our EBITDA margin can be attributable in large part to this initiative. A recent Forrester study found an average SS and C Blue Prism client saw a return on investment figure of 3 30% over 3 years.

Speaker 2

The key benefits include business growth, improved productivity, compliance cost avoidance and improved employee experience and retention. As one of the largest users of Blue Prism technology, we are experiencing these results firsthand. Earlier this month, we held our 1st delivery conference, which was held at the Fairmont in

Speaker 3

Windsor in the UK, hosting over 250 clients. The enthusiasm and energy over the 2 day event was evident and we've received universal positive feedback. I'll now turn the call over to Rahul to discuss the quarter in more detail. Thanks, Bill. Our business had a strong quarter with notable strength in Intralinks, Retirement and Wealth and Investment Technologies.

Speaker 3

We saw improvement in software purchasing and long term renewal decisions in Q1, which positively impacts our software businesses. This past quarter, we combined our institutional investment management or INIM business with Wealth and Investment Technologies led by Karen Geiger and Steve Lieben. This change allows us to align several of our software products and services geared toward banks, insurance companies and wealth and asset managers. Our objectives are to enable accelerated innovation, take advantage of scale to deliver enterprise solutions and benefit from a consistent sales and marketing process. We also combined our retirement business with Global Investor and Distribution Solutions in order to deliver a seamless customer experience to our shared clients and once again take advantage of greater scale and resources.

Speaker 3

Initial feedback from our customers on these changes has been very positive. We continue to progress on optimizing our cost base and strengthening our offering through use of Blue Prism and other AI and automation technologies. In our fund services business, notable capabilities include intelligent automation that processes over 2,000,000 loan notices each year, enabling customer interaction and support requests through our internally developed large language models and a variety of other advanced protocols. I will now turn it over to Brian to run through the financials.

Speaker 4

Thanks, Rahul, and good day, everyone. As noted in our press release, our Q1 'twenty four GAAP results reflect revenues of $1,350,000,000 net income of $158,000,000 and diluted earnings per share of $0.62 And as Bill noted earlier in the call, our adjusted revenues were quarterly record $1,436,000,000 up 5.3 percent and adjusted diluted EPS was $1.28 up 12.3 percent versus Q1 2023. Adjusted diluted EPS includes $0.03 in dividend income received on investments previously excluded from adjusted earnings. Going forward, reported adjusted diluted EPS and guidance will include dividend income. The adjusted revenue quarterly increase of $72,000,000 was primarily driven by incremental revenue contributions from alternatives and Intralinks, acquisitions contributed $3,000,000 and foreign exchange had a favorable impact of $6,000,000 As a result, adjusted organic revenue growth on a constant currency basis was 4.7%.

Speaker 4

Our core expenses increased 1.9% or $16,000,000 excluding acquisitions and on a constant currency basis. Adjusted consolidated EBITDA attributable to SS and C defined in Note 3 in the earnings release, was $557,000,000 or 38.8 percent of adjusted revenue, an increase of $48,000,000 or 9.4 percent from Q1 2023. The 38.8 percent EBITDA margin reflects a year over year improvement of 150 basis points. The 150 basis point margin expansion reflects the positive impact of both revenue growth and disciplined expense management. Net interest expense for the Q1 of 2024 was $116,000,000 an increase of $4,000,000 from Q1 2023.

Speaker 4

The average interest rate in the quarter for the amended credit facility including the senior notes was 6.86% compared to 6.21% in the Q1 of 2023. Adjusted net income as defined in Note 4 in the earnings release was $324,000,000 and the adjusted diluted EPS was 1.28 dollars The effective tax rate used for adjusted net income was 26%. Despite the quarterly share repurchase activity, a higher average stock price drove the diluted share count up to 253,300,000 from 252,100,000 for Q4 2023. SS and C ended the Q1 with $413,000,000 in cash and cash equivalents and $6,700,000,000 in gross debt. SS and C's net debt as defined in our credit agreement, which excludes cash and cash equivalents of $95,000,000 held at Demani Rx was $6,400,000,000 as of March 31.

Speaker 4

Our last 12 month consolidated EBITDA used for covenant compliance was $2,156,000,000 as of March 2024. Based on net debt of approximately $6,400,000,000 our total leverage ratio was 2.95 times, down from 3.05 times at year end. Our secured leverage ratio was 2.02 times as of March 31. Dollars 3,500,000,000 of our term loan B matures in April 2025 and we are currently evaluating our debt financing options looking to go to market in the near future. As we look forward to the Q2 and the remainder of the year with respect to guidance, Note that we will remain focused on client service and assume that retention rates will be in the range of our most recent results.

Speaker 4

We will continue to manage our expenses with a cost disciplined approach by controlling and aligning variable expenses to ensure efficiency, increasing productivity to improve our operating margins, to leverage our scale and effectively investing in the business through marketing, sales and R and D to take advantage of the future growth opportunities ahead of us. Specifically, we have assumed foreign currency exchange will be at current levels, interest rates to remain at current levels with potential of a couple of short term rate declines in late 2024. Our refinancing will not materially impact our interest rate expense, but is obviously subject to varying market conditions. GAAP tax rate of approximately 26% on an adjusted basis, which is unchanged from prior guidance. Capital expenditures to remain at the 4.3% to 4.7% of revenues, which is unchanged from prior guidance and a similar historical weighting share repurchases and net reduction.

Speaker 4

For the Q2 of 2024, we expect revenue to be in the range of $1,412,000,000 to 1 $452,000,000 adjusted net income in the range of 2.95 $1,000,000 to $311,000,000 interest expense excluding amortization of deferred financing costs and original issue discount the range of $112,000,000 to $114,000,000 diluted shares in the range of $253,000,000 to 254,000,000 dollars and adjusted diluted EPS in the range of $1.16 to $1.22 For the full year 2024, we are raising revenue guidance by $7,000,000 and we expect revenue to be in the range of $5,695,000,000 to $5,855,000,000 adjusted net income in the range of $1,242,000,000 to $1,322,000,000 diluted shares in the range of $252,000,000 to $255,000,000 adjusted diluted EPS in the range of $4.93 to $5.17 and cash from operating activities to be in the range of $1,302,000,000 to $1,382,000,000 Our updated 2024 guidance reflects our strong results in the Q1 with a continued positive outlook for the remainder of the year. It also reflects our cost disciplined approach and expected margin expansion over the course of the year. Now I'd like to turn it back over to Bill for final comments.

Speaker 2

Thanks, Brian. I'd like to take this opportunity to thank a long term Director, Mike Daniels, for his dedication and support. Mike has been on our Board for over 10 years and will not stand for reelection. He's been an important advisor during this time seeing SS and C grow from $700,000,000 in revenue to over $5,500,000,000 We wish him well in his future endeavors. We've had a strong start to 2024 and we're working hard to maintain this momentum.

Speaker 2

I'd like now to open it up to questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Dan Perlin from RBC Capital Markets. Please go ahead.

Speaker 5

Thanks. Good evening, guys. Just a quick question on the organic growth trends. They look like they continue to improve here. And I'm just wondering if you can maybe help parse us out given the current environment we're in and maybe some of these incremental kind of go to market strategy changes or maybe fine tuning points.

Speaker 5

So how much of the kind of improvement and maybe expected improvement going forward is in kind of just overall demand picking up, Bill, versus kind of sales execution or product realignment and maybe some of this go to market motion that's changing for some

Speaker 4

of these other business segments? Thanks.

Speaker 2

Well, I think, Dan, and nice to hear from you, we have had an awful lot of development work done in our businesses. We've created a number of new solutions for our different clients and that's getting traction. Particularly our trust product, Omni Trust that we married to our Black Diamond. So now wealth advisors can also handle trust, which is important as their clients start to move money to their children and others. And I think that's been a big opportunity for us.

Speaker 2

And we've also done a number of other things where our delivery to our clients has been improved and our execution on the implementations has also improved. And so I think a combination of those things, some more discipline on the pricing and we're still winning. We're still winning big deals and as they go live, I think our financial picture will look brighter as we go through the year.

Speaker 5

Yes, that's great. Just a quick follow-up. The $0.03 in the quarter that's related to dividend income, just I guess a couple of things. One is, was that originally contemplated in kind of the original guidance that you gave for 2024 and the $0.03 obviously going forward, these are going to be adjusted. So what's in if it wasn't, what's included now?

Speaker 5

And maybe can you just walk me through what the mechanics of that are? I might

Speaker 4

have just missed it. Sorry. Thank you. Yes. No, there was this is Brian.

Speaker 4

Thanks. The $0.03 was not part of the original guidance. As we look through the appropriate components of adjusted earnings, we felt like these investments were appropriate to be included. The last year, if you look at it for presentation purposes, you'll see we actually included it in last year's EPS numbers as well. So you can see it on an apples to apples basis.

Speaker 4

So on a go forward basis, it's there. We think it's appropriate and try to bring any visibility or clarity we can to the numbers.

Speaker 5

So should we be using $0.03 a quarter as kind of the run rate? I did see the year over year comparison was adjusted, but I just want to make sure I'm not getting over my skis or over adjusting or under adjusting? Thanks.

Speaker 4

The big, I'd say contribution to the year is actually just the Q1, I would say for the remainder of the year. It probably rounds to probably another penny overall for the next three quarters. So it's not a huge adjustment, but we just thought it was relevant given how we reflected the rest of our investments in various interest income items to be included in our overall adjusted results.

Speaker 5

Got it. And just to be clear, it's $0.01 for the remaining 3 quarters, not a $0.01 per quarter?

Speaker 4

Correct.

Speaker 5

Okay. That's great. Thank you so much.

Speaker 6

No problem.

Operator

Your next question comes from the line of Andrew Schmidt from Citi. Please go ahead.

Speaker 7

Hey, Bill, Raul, Brian. Thanks for taking my questions here. So quick question on the revenue outlook. It looks like the upper end came down. Just curious what drove that and how that may tie into the organic growth expectations for the remainder

Speaker 4

of the year?

Speaker 3

Yes. Andrew, I think the only thing that happened, we're actually at least as optimistic about the remainder of the year as we were at the start. I think the only thing that happens is as we get closer, the ranges get tighter, we get a little more precise, right. So that's really all that's happening. I think the midpoint is actually higher than it was the last time we gave guidance.

Speaker 7

Got it. Perfect. Thank you for that role. And then maybe we could talk about just the visibility on the organic growth. Obviously, we narrow where we get a lot of questions.

Speaker 7

If you could characterize kind of how you build that up and whether what you have sort of in the Q, if you will, for organic growth is sort of high versus moderate versus low, how you would rank the opportunities there? Thanks a lot guys.

Speaker 2

Yes, I would say right now as of April 25, that we're probably stronger than cautiously optimistic. We tend to be accountants, cautiously optimistic is kind of for most people, wildly optimistic for us. So I think the natural conservatism sometimes gets the best of us, But we have a lot of business that we sold in the Q1 that we have not recognized yet. But it's already sold. We've already got some of the cash.

Speaker 2

It's coming in and we think we have lots of opportunities.

Speaker 4

Perfect. Very constructive. Thank you very much, Bill.

Operator

Your next question comes from Aleksey Gogolev from JPMorgan. Please go ahead.

Speaker 8

Hello, everyone. Bill, could you elaborate on the combination of divisions that was discussed? What does that mean in terms of cross sell opportunity, R and D investments into products to make sure that they speak better to each other? And perhaps is there any room for margin upside from the combination of those divisions?

Speaker 2

Yes. That's a great question. We feel that we're up 27,000 people. We have 140 offices in 40 countries. We deliver over 100 products and 100 services.

Speaker 2

So it is operating a large business. And the more we can concentrate like products in the business units that are most apt to create new product, create new service, create ways in which to deliver those products and services and then also be able to leverage all the corporate services that we have, whether it's marketing and sales, different implementation teams, all of that type of stuff we think is really much more effective when you take asset management and product for large scale asset managers and put all those products under Karen Geiger and Steve Levent for instance. And then also then have go to market strategies for each one of those large segments. And I think the same thing is true when we took retirement and put it in with the global distribution or the global investor and distribution business, I think we get leverage, we get as Rahul said in his remarks, we get some leverage, we get some scale, we get some better chances to cross sell. And we're again pretty optimistic about the result of that.

Speaker 8

Thank you, Bill. And Brian, could I also ask you a quick question about the components within alternatives division? What was the growth of private markets in the quarter?

Speaker 4

The private market side, 10% -ish was the number of private.

Speaker 8

Thank you.

Operator

Your next question comes from the line of Peter Heckmann from D. A. Davidson. Please go ahead.

Speaker 6

Hey, good afternoon. Thanks for taking my question. I have several kind of related questions on the Healthcare segment. Could you give us an update on the progress of Domane Rx and any initial conversions that have occurred year to date. I was curious, I don't really see something we see in the numbers based on your explanation, but Change Healthcare, which is one of the prescription processing hubs had a malware attack and curious if that affected the Healthcare business at all in the quarter.

Speaker 6

And then lastly, would you expect that healthcare segment to be up or down revenue wise for the year?

Speaker 2

Yes, that's pretty insightful, Pete, good to talk to you. Yes, Change Healthcare has been a nice supplier of revenue to us that we'll start seeing in the second quarter, somewhat in large chunks. So we're we've already sold it. We're already delivering. We have a number of pretty big scale clients, including some of the large scale drug manufacturers.

Speaker 2

So we're optimistic about where we can go with this. The MoneyRx has held up great throughout the 4 months. It's been in production. We get almost no defects. We get great client feedback and we have lots of new business that's going to go on at Domayne Rx over the next 8 or 9 months and we're optimistic about our pipeline.

Speaker 6

Great, great. And so just in terms of like the revenue growth for the year, do you think that we can get back to positive revenue growth this year or we're thinking maybe more 2025?

Speaker 2

I think we'll be positive this year and whether we do 295 or 300 probably somewhere in that vicinity. And the one great thing about healthcare is that there's lots of revenue to be had. So you just need to go execute. And if you do that, you're in pretty good shape.

Speaker 6

Fair enough. All right. Thank you.

Operator

Your next question comes from the line of Jeff Schmitt from William Blair. Please go

Speaker 9

ahead. Hi, good afternoon. Are you still getting price increases kind of above normal in any of your businesses? And how much the pricing impact organic growth in this quarter than the last?

Speaker 3

Yes. I think as we're getting more disciplined as Bill pointed out and more methodical about this process, what we've also been able to do is put the price increases in the contracts on an automatic basis. So it's not as much of an effort and everybody expects them. So in 2023, we think we got about $150,000,000 in price. Our expectation for 2024 is probably a similar number.

Speaker 3

There's a little bit of art as much as science with the renewals and what constitutes price versus upsell and those kinds of things, but that's about what we would expect for the year.

Speaker 9

Okay. And then just back on alternatives organic growth, I think it was 5% or 6% in the quarter. You'd mentioned the private market slowed. I think it'd been growing over 20%. It dropped down to 10%.

Speaker 9

What sort of drove that slowdown? I mean, I think you were getting I thought you were getting 5% or 6% price increases there last year, but what sort of drove that slowdown?

Speaker 2

Yes, I would make sure that we all understand the jargon we're using. When you talk to private markets, that's a number of different flavors of private. So private credit in the Q1 growth probably grew significantly more than 10. But when you put it with private equity and maybe our real estate business, then it all averages out maybe to 10. But private credit has been quite strong.

Speaker 3

Yes. And maybe another way to look at it is if you look at the AUA change, you'll see we're at $2,400,000,000,000 So there's really nothing in the underlying growth of any one of those areas where it's not growing at least as well as it was before. And as a matter of fact, we think our hedge fund business is growing better than it did last year.

Speaker 9

Okay. That's very helpful. Thank you.

Operator

Your next question comes from the line of James Faucette from Morgan Stanley. Please go ahead.

Speaker 10

Thank you very much. Just wanted to quickly check on from a capital allocation perspective and M and A pipeline. Bill, there's clearly capacity here for some leverage and you called out a senior hire to assist with M and A last quarter. What does the deal pipeline look like right now? And what kind of assets should we think about you targeting?

Speaker 2

Well, I don't think we're looking anywhere differently than where we are today. And so I think you guys at Morgan Stanley and a number of others UBS advised AssetMark and GTCR. AssetMark would have been a target for us as well. And I would say those types of companies could be targets. I think that things that are in fund administration, we'd still buy and buy pretty quickly.

Speaker 2

And I think there's opportunities. Again, we've probably done 5 or 6 lift outs, and I think we would continue to do those.

Speaker 10

Got it. Appreciate that commentary. And then I wanted to ask kind of a technology related question, especially tied to the transfer agency business. Some of the asset managers we talk to or look at their transcripts and other public commentary are speaking to the impacts of tokenization and their ability to drive down transfer agency costs. Do you think that's more anecdotal in nature?

Speaker 10

Or how should we be thinking about medium to long term growth algo of your transfer agency business more broadly?

Speaker 3

So we're seeing a little bit of that. Most of what we're seeing is clients piloting certain things that they want to do in a tokenized format and we have a couple of clients that we're collaborating with. But right now it's not it does not have a significant impact on our business and honestly it's probably too early to even view it as any kind of a significant trend.

Speaker 2

And the other thing I think James is that, what we have done is take our transfer agency and our capabilities in alternatives administration. So now retail alt, we combine those two things and we're not selling you one or the other. We're selling them as a bundle. So if you just want our transfer agency and want to give your administration somebody else, we're not taking that business. So that discipline and that ability to have a product that is superior and then making sure that we're the beneficiaries of that superior technology when we sell it.

Speaker 2

So that's been a pretty good market steam for us as well.

Operator

Your next question comes from the line of Kevin McVeigh from UBS. Please go ahead.

Speaker 7

Great. Thanks so much and congratulations on the results. Hey, anything to call out? I mean, the interline growth was really, really terrific. I think it was 23%, actually a big, big increase.

Speaker 7

Anything to call out that drove that?

Speaker 2

I really think that they continue to innovate on their primary virtual data room business. I mean, they add AI into that. They do really smart searches. They brought out a redacting agent to be able to help. You get so much data and so much paper in those data rooms, it's important to have ways to be able to collate it and search it quickly.

Speaker 2

So that's been pretty effective and it's been very resilient. So I think we're optimistic for all of 2024 and we don't see things slowing down even after that.

Speaker 7

That's super helpful, Bill. And then just the AUA, my math looks like it increased 3% sequentially versus flat sequentially last year and almost double percentage increase sequentially over the last couple of quarters. Anything to call out there? Because believe it hasn't been a great market and seems like there's been some real nice incremental growth there.

Speaker 3

There's been pretty broad based growth across all of our alternatives, right. So in the hedge funds, we did see some market benefit, but we also saw the benefit of winning a number of new deals. Private markets, as Bill just said, continues to be really strong for us and we've added a number of clients there. So the AUA doesn't correlate always exactly with revenue because the yields are different depending on the guidance of funds and assets we win. But overall, the trend is pretty positive.

Speaker 7

Great. Thank you.

Operator

That concludes our question and answer session. I'd now like to turn the call back over to Bill for closing remarks.

Speaker 2

Again, we appreciate all of you being on the call today. Again, we feel good about the Q1 and recognize that's 25% of the year. So we still got work to do and we're hard at it. So we appreciate the support and see you in 90 days.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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SS&C Technologies Q1 2024
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