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Executives

William C. Stone - Founder, Chairman and Chief Executive Officer

Normand A. Boulanger - President, Chief Operating Officer and Director

Patrick J. Pedonti - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Mayank Tandon - Needham & Company, LLC, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Matt Diamond - Deutsche Bank AG, Research Division

SS&C Technologies Holdings (SSNC) Q1 2013 Earnings Call May 1, 2013 5:00 PM ET

Operator

Good afternoon, my name is Mimi, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SS&C Technologies 2013 First 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 the conference.

William C. Stone

Thanks, Mimi, and welcome and thanks, everyone, for joining our Q1 2013 earnings call. I'm Bill Stone, Chairman and CEO of SS&C. With me today is Norm Boulanger, our President and COO; and Patrick Pedonti, our Chief Financial Officer.

Before we get started, we need to review the Safe Harbor statements. Various remarks we may make on this conference call about our future expectations, plans and prospects constitute forward-looking statements for the purpose 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. These are included in SS&C's filings with the Securities and Exchange Commission, in particular, the company's annual report on Form 10-K for the year ended December 31, 2012.

I'm going to start with a brief review -- overview and then turn it over to Norm, who will get into more details; and Patrick, who will go through the financials. After that, we'll open it up to questions.

We had a fantastic start to the year, with the first quarter revenues of $173.3 million, up 85% over the same period in 2002 (sic) [2012]. Software-enabled services was up 110% from the first quarter of 2002 -- 2012 to $135.7 million. We achieved adjusted non-GAAP net income of $37.5 million, up almost 63% over the first quarter of '12. SS&C software-enabled services contributed 78.4% of revenue for the quarter compared with 68.9% at the same period last year.

We also saw stronger license demand in the quarter, with revenue up almost 60% from 2012. Our forward-looking visibility, we view it on our annual run rate basis of recurring revenue, which is our maintenance and our software-enabled revenues on an annualized basis, was $647 million, based on the combined of $161.8 million for the first quarter of 2013. This represents an increase of 92.4% from $84.1 million and $336 million run rate in the same period in 2012, and an increase of almost 3% from $157 million in the fourth quarter of 2012 and an annual run rate of $628.7 million. We believe that ARRB of recurring revenue is a good indicator of visibility into future revenues.

In 2013, we're focused on the most important drivers for the global financial services firm. One, minimizing operational risk by improving operational transparency and regulatory compliance. Second, leveraging vast quantities of data from disparate systems to make smarter investment decisions. And third, building cloud and mobility-enabled infrastructure to improve agility and reduce cost.

Our company is built on a number of tremendous strengths with 2 of them, innovation and customer service, being hallmarks of SS&C. We have built on these 2 key strengths to deliver product and service solutions to complex problems facing the financial services industry. We are well into our fourth release of our portal and mobility apps, and we've begun to roll out a new cloud-based analytics solution. The power of this solution is its ability to gather accounting and operational information our clients need to make the best possible decision on their data every time, in real time.

SS&C's independence, transparency and focus are creating larger opportunities and leading to increased revenues and profit margins. I'm energized by the strength of our business model, our talented group of 4,200 people and the enormous opportunities.

Finally, we'll be hosting our Annual Client Summit in Fort Lauderdale, Florida next week. We plan to showcase our latest innovations in the SS&C Investment Intelligence including mobility, risk, voice recognition and reporting portals.

And now I'll turn it over to Norm for a few more detailed comments.

Normand A. Boulanger

Thanks, Bill. In Q1, we saw growth across our businesses, both in software-enabled services and license. We had strong contributions from our institutional, asset management and SS&C GlobeOp businesses. We're seeing increased activity across the business, and specifically in our software-enabled services, through asset management, insurance and alternative markets. In addition, we are participating in larger opportunities than we have previously. We are optimistic about our momentum and focused on growing our sales team. Executing on larger deals, as well as expanding sales, provides an opportunity to accelerate growth.

Our recent acquisitions continue to go well and are on track. We had strong customer and employee retention, synergies and sales. Our SS&C GlobeOp business was recognized by a Hedge Fund Magazine Week Global, a U.S. award as the Best Fund Administrator in North America and Best Managed Account Platform. Global Custody Risk magazine named SS&C as the 2013 Best Valuation Service Provider.

Last quarter, I talked about our innovative cloud-based services and branded these integrated capabilities as SS&C Investment Intelligence. Next week, at our Annual Client Summit, we'll be showcasing our SS&C Investment Intelligence cloud-based services. We expect many customers across market verticals, which include insurance companies, asset managers, credit unions, mortgage loan services and other firms. We now have more than 65,000 subscribers to our cloud-based services. We believe technology will be the key differentiator in providing services, and this will continue to be a key area of investment.

In Q1, we signed a number of deals across the business, including a $9 billion property, casualty and life insurance group selected SS&C as its investment accounting provider and statutory reporting partner. The insurer is scheduled to go live in May and is one of the first insurance clients to leverage our SS&C Investment Intelligence platform. A specialist multi-manager group, a global alternative asset manager, a European global investment firm and multibillion-dollar credit manager and an existing client all selected us for our Form PF services.

In Singapore, a Singapore-based quantitative global macro hedge fund selected SS&C GlobeOp to ensure compliance with FATCA, foreign tax compliance act. A fixed income specialist with a range of UCITS offerings added 3 new funds to its platform. We signed a number of fund service deals including an established $600 million New York-based manager, a rapidly growing New York City fund manager and a multibillion-dollar private equity firm. We also signed just this quarter in our front-office offer in Antares and signed a Portland-based insurance company, a European private investment management company and a large investment management company to utilize that software. A larger asset service purchased Sylvan for its comprehensive performance contribution capabilities. A large U.S. asset manager extended their relation with PORTIA and added Pages, Sylvan and Recon. It was a joint sale of our acquired acquisition of PORTIA in our original asset management team. We signed PNC Bank to our municipal finance software, DBC Finance. SS&C now has 30 of the top 30 largest underwriters by volume in the marketplace as DBC clients, as ranked by the Bond Buyer magazine. In Q1, we also signed the investment arm of a European insurance company who outsourced their performance and attribution to SS&C.

And with that, I'll turn it over to Patrick.

Patrick J. Pedonti

Thanks, Norm. GAAP results for the first quarter were revenue of $173.2 million, net income of $21.4 million and diluted EPS of $0.26. Adjusted revenue was $173.3 million, an increase of $79.7 million or 85% over Q1 2012. Strong revenue from acquisitions and improved demand for our software-enabled services for alternative asset managers drove revenue growth in the quarter. Adjusted operating income was $64.8 million, an increase of $28.8 million or 80% from the first quarter of 2012. Operating margins decreased to 37.4% from 38.5% in Q1 2012, as the GlobeOp acquisition impacted the margins unfavorably. But we have made significant progress on implementing cost synergies and expect to generate $13 million of savings for the full year 2013. This will result in improved margins as we progress through the year. We have assumed these savings in our guidance we provided for 2013.

Adjusted EBITDA, as defined in Note 3 of our financial statements, was $68.7 million or 39.6% of adjusted revenue. This is an improvement of 84% compared to Q1 2012. Net interest expense for the first quarter was $12.5 million and includes $1.4 million of noncash amortized financing costs and OID. Interest expense increased over the last year due to the $1 billion credit facility we put in place to finance the GlobeOp and the PORTIA acquisitions. We recorded a tax provision in the quarter of $8.2 million or 28% of pretax income. The decrease in 2013 over 2012 was due to the corporate tax reorganization we implemented in the fourth quarter of 2012, in conjunction with the GlobeOp acquisition. We expect the GAAP effective tax rate to be between 28% and 30% for 2013.

Adjusted net income was $37.6 million and adjusted diluted EPS was $0.45. The adjusted net income excludes $21 million of amortization of intangible assets, $2.1 million of stock-based compensation, $1.4 million of noncash debt issuance costs and a gain of $500,000 for unusual items and purchase accounting adjustments. And the effective tax rate we used for adjusted income was 30%.

Moving onto our balance sheet and cash flow, as of March 31, we had $68.8 million of cash and $976 million of gross debt, for a net debt position of $907 million. We generated $20.6 million of operating cash flow for the quarter, a 57% increase over the first quarter of 2012. The combined SS&C and GlobeOp businesses are showing strong cash flow characteristics. And as a result, we were able to pay down $45 million of debt in the quarter. That brings the total to $180.6 million of debt paydown in the 10 months since the GlobeOp acquisition in June 2012. We used $2.2 million for capital expenditures and capitalized software, or 1.3% of revenue. We expect capital expenditures to increase in the coming quarters as we invest in IT and facilities to support our growth. We paid $9.8 million for cash taxes compared to $10.8 million in the first quarter of 2012. Our accounts receivable DSO was 48 days as of March 2013 compared to 48 days as of December 2012 and down from 51 days as of March 2012.

In financing activities, we recorded the proceeds from option exercises of $8.9 million and a tax benefit related to the option exercise of $2.7 million. Our LTM EBITDA, which we use in our covenant compliance, includes acquisitions as if owned for the full period was $265.3 million as of March 2013. And based on a net debt of $907 million, our leverage ratio was 3.4x at March 2013.

Moving onto guidance for Q2 and the full year, our current expectation for the second quarter of 2013 is revenue in the range of $175 million to $179 million, adjusted net income of $38.3 million to $39.3 million and outstanding diluted shares of 85.4 million to 85.6 million. And our current expectation for the full year 2013 is revenue in the range of $712 million to $722 million, adjusted net income of $157 million to $160 million and outstanding diluted share of 85.4 million to 85.8 million. For the full year 2012 (sic) [2013], we expect cash from operating activities to be in the range of $171 million to $177 million and capital expenditures to range between 2.4% of revenue to 2.8% of revenue. And we'll use our access cash flow to either fund potential acquisitions during the year or to pay down debt.

And now, I'll turn it over to Bill for final comments.

William C. Stone

Thanks, Patrick. It's obvious from those numbers that we've done some pretty impressive things like pay down over $180 million of debt in the 10-month period. For those of you that aren't good at math, that's $18 million a month. As we look forward to the rest of 2013 and beyond, we feel awfully optimistic. We are guiding the revenue to $712 million to $722 million. We're a recurring revenue business and we're still raising revenues. We continue to win large mandates, and we are seeing opportunities throughout the hedge, private equity, managed accounts, pension and insurance markets. The best technology combined with the best people and processes are clear and convincing winners. I'll now open it up for questions. Mimi, if you would go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mayank Tandon of Needham.

Mayank Tandon - Needham & Company, LLC, Research Division

Bill, could you just elaborate a little bit on the environment overall versus say, 3, 6 months ago specifically in terms of how the pipeline looks and also the sales cycles from your customers?

William C. Stone

Sure. As far as the pipeline is concerned, we've been raising our sales force. We've hired probably, since the last call, we've probably hired 10 or 12 new salespeople. And I would say that it looks like they're already building pipe and building in a pretty consistent way, and we're optimistic about that. I believe that we have more opportunity today than we had 3 or 6 months ago, and I think that we're executing better. So I think all those things should portend for a robust rest of the year.

Mayank Tandon - Needham & Company, LLC, Research Division

I think specifically you had called out 5 or 6 large deals versus about 1 year ago, given the scale that you have with the GlobeOp deal. Could you give us a sense in terms of what that pipeline looks specifically in terms of those large deals and when those deals might convert into revenue?

William C. Stone

Yes. We are planting deep hooks in a few of those, and they're close to the boat. Maybe one of them is even flopping around in the boat, right? But our ability to generate revenue off of them is partly in the cooking and cleaning of those big fish, and we're in that process. So we're excited about where we are. We believe, over the next few months, we'll be able to give you more color about where we are and where we stand and, hopefully, be able to provide more clarity. But we are excited about where we are, and we are excited about where we're going to be.

Mayank Tandon - Needham & Company, LLC, Research Division

Two more quick questions. First, in terms of cost synergies, I think you identified $25 million when you first did the deals, GlobeOp and PORTIA. Could you give us a sense of where you are in terms of generating those cost synergies, and is there a potential for upside to that number? And then also in terms of guidance, I think you raised EPS guidance by about 3% -- or net income guidance, rather, by 3% versus a smaller increase on revenue. I'm assuming that's building in some more margin expansion versus what you had initially? Is that correct?

William C. Stone

Yes. I think on specifics, Mayank, I'm going to let Patrick give that a shot.

Patrick J. Pedonti

So far, we've implemented about $13 million of cost savings, which will benefit 2013. So we'll get the benefit for about $13 million. We're still -- we're working -- obviously, it's May 1, so we're still working to increase that number for 2013. But for now, we've implemented $13 million for the year. Our goal is a $25 million run rate at the end of 3 years, so I think we feel pretty good that at the end of 10 months, we've already implemented and identified $13 million.

Mayank Tandon - Needham & Company, LLC, Research Division

And in terms of the guidance?

Patrick J. Pedonti

We've built in the $13 million in the guidance. And part of the improvement in the guidance is a little bit of revenue improvement and some cost reductions.

William C. Stone

I also would say, Mayank, to further what Patrick said, is just that, that $13 million in 10 months is over 50% of what we said over 36 months.

Operator

Our next question comes from Sterling Auty of JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

In terms of some of these new large mandates that you've gotten, obviously, they're not start ups. So where are you taking share? In other words, where are you winning these large mandates away from?

William C. Stone

Well, Sterling, I think the primarily place that we're getting these is that people either have current administrators, in general, they tend to be larger financial institutions, or we are taking over their back office. So those are the places where we're seeing the most interest in what we do. And again, the ability for us to bring a technology-based delivery mechanism that has very high-quality people and very well thought out processes has really resonated in these larger and larger opportunities.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

But is there a consistent – there's been other consolidation in the marketplace, probably some other fund administrators that maybe weren't operating as efficiently, are those low-hanging fruit to take further share from?

William C. Stone

Well, when you talk about consolidation, right, the consolidators recently have been SS&C, State Street, Northern Trust and Bank of New York. And those are all formidable competitors that we respect in every regard. We do believe that we might be able to move a little quicker, and we kind of believe that we have more focus and we have more transparency. So we think that's resonating throughout the industry. They're very tough competitors, but we like our competitive position.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

And last question. Different ways that you can obviously drive revenue to those clients and one of which is kind of the volumes that you're seeing. Any comments in terms of volatility and how volumes are impacting your business at this point?

William C. Stone

Yes, it really has not had much of an impact. It's been more on an overall basis, over a full quarter period, it's been relatively flat. So I would say on some of our transaction-based businesses away from fund services, like selling data, running a fixed network, that type of stuff, I would say that it's been flat to very marginally down, right. But not significantly at all.

Operator

Our next question comes from Terrell Tillman of Raymond James.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

The first question is, we are in an environment where it's problematic for some technology and services companies, and seeing even a modest revenue raise is interesting and positive. What again is driving that? Is it just these additional sales reps being more productive out of the gate? Is it just the meat-and-potatoes SES business? Or is it a higher probability on some of these big, mega mandate-type deals closing?

William C. Stone

Well, we like to start off, Terry, with brilliant management. You guys like to drill into that. So we do believe that additional salespeople is creating a sales competitive culture inside of SS&C. We just had a large sales event in Maryland, where we had our top 10 salespeople there and they got to invite one of our people that helped each individual one close their biggest deals. And the salesperson got to select that person, and that went over very well. And the guy that came in 11th, he said, "I'll be sure to be there next year." So you get those kind of feedback and you realize that the kinds of things that you're doing, and we have a very nice esprit de corps right now. It really is not every man or woman for themselves. It is much more of a collaborative, although aggressive, culture. So we think that's helping. These big whales, right, their revenue is going to be back-of-the-year-weighted. And we're hunting in packs. We're well equipped and well provisioned, and we expect to bring more and more of those in.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. And I guess on PORTIA, maybe could you give us a report card, maybe a letter grade in terms of where you are, in terms of what the expectation was at this point in time after closing the deal in terms of starting to materialize some of those revenue synergies? And then what about maybe even expanding the adjustable market there with more of a SaaS product delivery model?

William C. Stone

Norm, why don't you take that?

Normand A. Boulanger

Sure. I think we're actually on track, maybe a little ahead of plan. From a margin perspective, we're definitely ahead of plan. We continue to work with them to drive sales, and we have initiatives going on to really expand their software-enabled service business. One of the things SS&C brought to the table was a very established outsourcing capability with large clients and sophisticated data centers. So we think that's going to be a big help getting the PORTIA customers comfortable when they choose to engage us on a software-enabled service basis. So we're pretty -- we have high expectations that, that's going to be a good growth area for us over time.

William C. Stone

I would add to that, Terry, that we have a big money manager that's looking to outsource to us with PORTIA and GlobeOp platform end of May. So that's a $300,000, $400,000 a month software-as-a-service opportunity for us. That's, what, $3.6 million to $4.8 million in revenue a year. In PORTIA, our GWP has never seen a deal of that size or magnitude.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

And I guess, the last question, Patrick, to keep you busy or have you participate here. In terms of the gross margin for the rest of the year on software-enabled services, how should we think about that as the year progresses in terms of progression on gross margin specific to that line item?

Patrick J. Pedonti

Sure. I think if you look at it as EBITDA margins, we were at 39.6% in Q1. So we think that gradually over the year, we'll get over 40% in EBITDA margins. And the vast majority of that margin improvement will come from software-enabled services margins. Does that answer your question, Terry?

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Yes.

Operator

[Operator Instructions] Our next question comes from Bryan Keane of Deutsche Bank.

Matt Diamond - Deutsche Bank AG, Research Division

This is actually Matt Diamond on for Brian. Real quick on GlobeOp, I know it's difficult to break out organic growth, just given how well it's integrated now. But it was mentioned at the call last year, in the GlobeOp conference call, that you would expect it to grow about 15% organically. Anecdotally, do you think that's still the case? Or is there any reason to think that's changed somewhat?

William C. Stone

Well, again, as we've said before is, is that our view of what we're selling now is a homogenized product that includes front, middle and back office services. Be very difficult to carve out SS&C tax versus GlobeOp middle-office versus order execution, executive -- and execution management systems, fixed network, who's the sales guy and who are you using as the sales support people. So I really don't think that, that's a meaningful calculation. I think if you're looking for something along those lines, it would be viewing the AUM under various of the publications that rank those things. And similar to league tables where, I think right now, State Street's first, CITCO's second and then Bank of New York and us are about tied for third. And I think that's -- I think we're at $508 billion or something like that. And that's up from $398 billion that we did when we closed the deal.

Matt Diamond - Deutsche Bank AG, Research Division

Okay. And the pricing environment, is there -- how does it look relative to the fourth quarter's? Any reason to think there's any change there?

William C. Stone

Well, I think as we get bigger deals, right, I think that the average yield per dollar on an AUM is less. But the dollars are so much larger that the revenue stream into SS&C is quite healthy. So I think we're going after bigger fish. We recognize that we're not going to catch as many of them. But the amount of poundage and the ability for us to turn that into earnings for our shareholders is a really good trade-off.

Matt Diamond - Deutsche Bank AG, Research Division

Okay. And lastly, I know we talked about there weren't any acquisitions baked into the 2013 guidance. But I'm curious if you've seen anything on the acquisition front that maybe looks appetizing at this point.

William C. Stone

Well, I think in the acquisition area, we're kind of barbelled. There's a number of small ones that probably over the next several months, you'll see press releases on those. And those are just small tuck-ins. And then there's some whales. And again, will we do a whale? We'll do a whale when we can make sure that our shareholders can make a whole lot of money, right. Because that's how we're incented and that's what we're in business for, and if we're going to do a whale, we're going to have to do on an awful lot of work. And so we're going to mitigate the risk as much as possible. And our opportunity will be immense.

Operator

Thank you. I'm showing no further questions in the queue at this time. I'll hand the call back to Bill Stone for closing remarks.

William C. Stone

Well, again, we appreciate everybody being on the call. As you can tell from our standpoint is, is that we believe we're executing, we're going to continue to execute. And we look forward to talking to you in about 90 days. Thanks again. Bye.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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