SS&C Technologies IPO: Strong Profit Margin, Valued at a Discount

Mar.31.10 | About: SS&C Technologies (SSNC)

LBO'd by private equity giant Carlyle Group and the CEO in 2005, SS&C Technologies (NASDAQ:SSNC) provides subscription-based back-office software and outsourced services to customers in the financial industry, such as institutional asset managers, alternative investment managers, banks and insurers. Aided by 29 tuck-in acquisitions since 1995, the company has amassed a broad product portfolio that allows its clients to manage complex processes, including fund accounting and reporting, performance measurement, trade processing, and compliance, across various asset classes. The company plans to raise $150 million by offering 10.7 million shares at a proposed range of $13-$15. J.P. Morgan, Credit Suisse, Morgan Stanley and Deutsche Bank are acting as joint bookrunners on the deal, which priced on Tuesday, March 30 and will list today on the NASDAQ under the ticker "SSNC."

Impressive Fundamentals

SS&C Technologies has a track record of profitable organic growth and has shown success recognizing synergies from acquisitions. This has helped the company drive 23% top-line CAGR since 2004, reaching $271 million in sales and $110 million in EBITDA (41% margin). The model is highly scalable, which combined with the firm's solid base of recurring revenue (85% of sales) and impressive 90%+ renewal rates, allows for high visibility and strong free cash flow. The company expects demand for its products to increase given the need for greater transparency and potential regulatory changes in the financial industry, and aims to capitalize on this trend by continuing to expand its customer base both organically and through M&A as well as cross-selling to its large installed base of more than 4,500 clients.

Key Issues

The financial services industry is still recovering and revenues are in part tied to transaction volumes and AUM of clients. These factors caused organic revenue growth to decline 7% in 2009. SS&C also faces direct competition from much larger firms, such as State Street, SunGard, PNC Bank and BNY Mellon. Finally, international sales, which represent a key long-term growth driver, declined as a percent of sales each of the last two years (fell 11% in FY09).

Valuation at a discount

Despite the SS&C's strong margin profile, the stock is being valued at a discount to its peers across virtually every metric (i.e. 21x trailing P/E vs. 26x for the group). This combined with the recent strong performance of the group, which has outperformed the S&P 500 over the past month, should help to drive strong investor interest in the deal at the proposed $14 midpoint. We also highlight MSCI's pending acquisition of RiskMetrics for $1.6 billion (13.6x 2010 EBITDA), and believe there is potential for further consolidation in the space as these firms attempt to increase market share, which would likely provide an additional tailwind for the sector.