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spk00: Good day and thank you for standing by. Welcome to SS&C Technologies' second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. And if you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your first speaker. Mr. Justine Stone, Head of Investor Relations. Please go ahead, ma'am.
spk01: Hi, everyone. Welcome and thank you for joining us for our second quarter 2021 earnings call. I'm Justine Stone, Investor Relations for S&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer, Rahul Kanwar, President and Chief Operating Officer, and Patrick Pedanti, 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 provision under the Private Securities Allegation 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 factor 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, July 28, 2021. 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. The 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 will now turn the call over to Bill.
spk04: Thanks, Justine, and thanks, everyone, for joining. Our results for the first quarter are $1.261 billion in adjusted revenue, up 10.5%. and $1.24 in adjusted diluted earnings per share, up 19.2 percent. We surpassed $500 million in adjusted EBITDA in the quarter for the first time, coming in at $511 million. For the six months, our adjusted consolidated EBITDA was over $1 billion. Our adjusted consolidated EBITDA margin grew to 40.5 percent for the quarter. Our second quarter adjusted organic revenue was up 7.2%, the highest organic revenue growth quarter in several years. All of our businesses outperformed our expectations, and our alternatives, Interlink, SS&C Health, and DSP Financial Businesses drove the strong top-line growth. SS&T generated net cash from operating activities of $562 million for the six months ended June 30, 2021, even though we paid $144 million in cash taxes versus $35 million in 2020. We repurchased 2 million shares of common stock in Q2 2021 at an average price of $73.44 per share for $143.6 million. We paid down 183.1 million in debt for the first six months of 2021, and our leverage ratio continues to come down. As of Q2, at the end of Q2, our secured net leverage ratio was 2.09 times, and our total net leverage ratio had 3.1 times consolidated EBITDA. We remain fully committed to a shareholder-friendly capital allocation strategy. We're excited about last week's announcement that SS&C Health, along with our minority partners, Humana and Anthem, will form a joint venture to build the industry's most modern, sophisticated pharmacy benefit management platform. The newly formed entity, DomaniRx, will shape the future of PBM through a cloud-based, API-driven adjudication platform. This venture is the latest step in accelerating growth at SS&C Health. As we convene other participating members, we will have the ability to offer flexible tools, advanced analytics, and customizable programs to increase transparency. We expect the Domani Rx members to have an unrivaled pharmacy experience. Domani Rx will generate interest in our healthcare and pharmacy claims processing and analytics services now. The new technology will benefit both DemaniRx and our existing SS&C Health Business. We believe the healthcare industry's transaction processing, data analytics, and information delivery to be significantly hampered by outdated technology. The customer experience as well as the payer-provider experiences can be greatly enhanced with powerful, flexible technologies. The growth in life-saving pharmaceuticals and other prescription-based medicines There are over 4.5 billion prescriptions filled in the U.S. per year, as well as an aging population, makes this an ideal time to invest and deliver. Assistancee Health has years of experience running large-scale systems with the ability and expertise to handle volume and large customers. I'll now turn the call over to Rahul to discuss the quarter in more detail.
spk05: Rahul Naira- Thanks, Bill. We had a strong quarter driven by Broadway's performance across our business. We continue to benefit from an increasing recognition by customers and prospects of the breadth and depth of our solutions and expertise. The changes we've made to our organization structure, business leadership, and sales management, and our continued focus on innovation and delivery are having a positive impact. Our fund administration business is seeing increased fundraising momentum across strategies and a robust pipeline of existing and new clients. The expertise, customer focus, and dedication of our professional teams combined with market-leading technology and solutions are unique assets that helped us outperform in the context of a healthy fundraising and new launch environment. During the quarter, we combined our real assets and private equity groups. The newly launched SS&C Global Private Markets Group, under the leadership of Bagesh Malde, is well-positioned to help our fast-growing private equity and real assets customers with their operational, accounting, and technology needs. In June, we announced the restructure of the former DSD Financial Services products and services offerings. The new organizational structure will accelerate technology innovation and strategic product development, in rapidly evolving markets and enhance the overall customer experience. Simplifying our management structure, increasing focus on product areas and end markets, and the high confidence we have in executive leadership in each of these areas are all important factors that led to this change. I will mention some key deals for Q2. The wealth management arm of a large UK customer chose SS&C GIDS to undergo a transformation program. Advent technology, including Advent Genesis, was a major component as the client looks to develop their future model strategy. A $15 billion AUM asset manager chose a suite of Advent products to be delivered via the cloud. A $30 billion AUM alternative investment firm chose SS&C Global Fund Administration Services after a comprehensive due diligence process. Her Northeast Medicare provider chose SS&C Health PPO Services. An impact investing firm launched in 2020 chose SS&C Global Funds Administration and Loan Services. I will now turn it over to Patrick to run through the financials. Thank you. Results for the second quarter of 2021 were GAAP revenues of $1,259,000,000, GAAP net income of $189.8 million, and diluted EPS of 71 cents. Adjusted revenues were $1,261,000,000. Adjusted revenue was up 10.5 percent. Adjusted operating income increased 15.3 percent. And adjusted diluted EPS was $1.24 and 19.2 percent increase over Q2 2020. Overall, adjusted revenue increased 120.2 million. Our acquisitions contributed $17.8 million. Foreign exchange had a favorable impact of $26.4 million, or 2.3 percent of the quarter. Adjusted organic revenue increase on a constant currency basis was 7.2 percent. We had strength across several product lines, including alternative assets, advent, retirement services, global, investor distribution, or ALPS asset management business, healthcare, and intralinks business. This was offset by weakness in the as-business through the lower trading volumes. Adjusted operating income for the second quarter was $495.8 million, an increase of $65.7 million, or 15.3 percent, from the second quarter of 2020. Adjusted operating margins increased from 37.7 percent in the second quarter of 2020 to 39.3 percent in the second quarter of 2021. This is driven by cost controls and expense controls. Expenses increased 2.5 percent on a constant currency basis. Acquisitions added 14.9 million in expenses and foreign currency increased costs by $21.7 million. Adjusted EBITDA was $511.1 million or 40.5% of adjusted revenue and increased $62.7 million or 14% from Q2 2020. Net interest expense for the quarter was $51 million and includes $3.3 million of non-cash amortized financing costs and OIDs. The average interest rate in the quarter for our amended credit facility, including the senior notes, was 3.02% compared to 3.19% in the second quarter of 2020 and resulted in interest expense decrease of 9.5 million. We recorded a gap tax provision of 76.7 million or 28.8% of pre-tax income. We expect the GAAP tax provision to be approximately 26% for the full year. Adjusted net income defined in Note 4 of the earnings release was $331 million, and adjusted EPS was $1.24. And the effective tax rate for adjusted net income was 26%. Diluted shares decreased $267.6 million from $285.5 million in Q1. The impact of share repurchases was partially offset by an increase in the average share price and option exercises. On the balance sheet and cash flow, as of June 30th, we had approximately $247 million of cash and approximately $6.3 million of gross debt for a net debt position of approximately $6.1 billion. Operating cash flow for the six-month end of June 2021 was $562.3 million, a $6.6 million increase compared to the same period of 2020. Year-over-year operating cash flow was impacted by tax payments, which were deferred into the back half of the year in 2020. Highlights for the six months on cash flow. Treasury buybacks of $325 million for purchases of 4.7 million shares at an average price of $69.79. In addition, the Board renewed its stock buyback program for another year for a total of $1 billion. Net debt payments were $183.1 million compared to payments of $257.3 million at the same period in 2020. We declared and paid $82.1 million of common stock dividends as compared to $64 million last year, an increase of 28.3%. This year, we paid interest of $97.8 million compared to $133.1 million in 2020. Year-to-date, we paid income taxes of $144.2 million compared to $34.7 million in 2020. Our accounts receivable DSO was 50.8 days compared to 53.3 days at June 2020. Capital expenditures and capitalized software was $59.6 million or 2.4 percent. of adjusted revenue compared to 51.9 million or 2.2% of adjusted revenue in 2020. Spending was predominantly for capitalized software and IT infrastructure. Option exercise proceeds were 88.8 million for 2.1 million shares compared to 82.8 million for 2.8 million shares last year. Our LPM consolidated debt that we used for covenant compliance was $1,948,000,000 as of June 2021. Based on that debt of approximately $6.1 billion, our total leverage ratio was 3.12 times, and our secured leverage ratio was 2.09 times as of June 30th. For outlook for the year, I'll go over a few assumptions first. We'll continue to focus on client service. We expect our retention rates to continue in the range of our most recent results. We expect foreign currency exchange to be approximately at current levels for Q3 and for the remainder of the year. We expect the impact of DSD Health Unit pre-acquisition client services to impact revenue by approximately $10 million. for the back half of the year. Adjusted organic growth for the year, we expect in the range of 3.3 percent to 5.0 percent. And adjusted organic growth for Q3 in the range of 2.9 percent to 6.4 percent. Interest rates on a long-term credit facility would approximately be one month LIBOR plus the spread, which is currently 175 bps. We will continue to manage expenses during this period, controlling our variable expenses. But we expect staff costs to increase due to continued wage inflation. We'll continue investing in our business for long-term, and capital expenditures will be approximately 2.8 percent of revenue. We'll continue to allocate free cash flow to both debt, pay down, and stock buyback. And we expect the gap tax rate to be about 26% on both an adjusted basis on the gap basis. For the third quarter, we expect revenues to be in the range of $1,205,000,000 to $1,245,000,000. Adjusted net income in the range of $309,000,000 to $325,000,000. And diluted shares in the range of $268.1 million to $268.6 million. For the full year of 2021, we expect revenue in the range of $4,921,000,000 to $5,001,000,000. Adjusted net income in the range of $1,258,000,000 to $1,295,000,000. And diluted shares in the range of $267.9 million to $268.4 million. And for the full year, we expect cash from operating activities to be in the range of $1,305,000,000 to $1,345,000,000. And I'll turn it back over to Bill for final comments.
spk04: Thanks, Patrick. And I'd like to thank all of our employees for the dedication and hard work they put in each and every day. We're working with various parts of our organization to ensure a productive return to the office policy. We expect to begin our transition this fall. We appreciate you, our shareholders, and we remain steadfast in our mission to be the finest technology and service provider in the global financial services industry and the United States healthcare industry. We grew organically 7.2 percent. We've added $400 billion to our alternatives platform in 18 months. We generated over a billion in adjusted consolidated EBITDA in six months. And we announced Damani Rx, our new platform joint venture. I'll now open it up for questions.
spk00: Thank you. Ladies and gentlemen, if you would like to ask a question, you may press star then the number one on your telephone. Once again, you may press star one to ask a question. And as a reminder, please limit your question to one and one follow-up question. If you need to ask additional questions, you may press star one again to go back into the queue. Thank you. Please stand by while we compile the Q&A roster. Your first question comes from the line of Alex Cram from UBS. Your line is open.
spk02: Yeah, hey, good evening, everyone. Just maybe on the healthcare side, I guess this may be a chance to flesh out the new JV in a little bit more detail. So maybe, first of all, can you just tell us how the healthcare business did this quarter, and then maybe describe the path of how this JV is going to you know, impact your existing healthcare business in terms of the growth outlook, how it should accelerate over the next few years. So a little bit more color so we can kind of complete the picture a little bit more. Thanks.
spk04: Sure. So, you know, our healthcare business grew approximately about 10%, right, Patrick?
spk05: Yeah, 12%. And then if you... adjust for the pre acquisition termination, it was 18%.
spk04: So, you know, Alex, we think this is a very transaction processing information delivery business. And we think we're world class. So we're excited about the opportunity. We think we have really top flight minority partners with us to venture partners. And As we said in our remarks today or in the press releases, there's 4.5 billion prescriptions spilled in the United States annually, and we process approximately, you know, 400 to 500 million of those. So we think it's a big opportunity to get a larger and larger market share. We think new technology is going to change the experience for the individual customer and then also for the payer provider. And I think getting that information back to those places with some sense of, you know, real-time processing, I think will allow them to make better decisions and then create, you know, a more enlightened kind of healthcare industry and then also provide us with great growth opportunities. And I think that's what we're looking forward to is to be able to, you know, really go from, you know, $400 million to $500 million in the number of claims that we process to, you know, well in excess of a billion.
spk02: Okay, fair enough. And then maybe just secondarily, just any quick comments on M&A? It's been quiet. You've obviously looked at a lot of assets. Sounds like there's something in the capital market space that may be on the block. So I know you always look, but... I'm curious about your current appetite and how you think the pricing environment is looking right now.
spk04: Well, yeah, we always look, and we bid. And sometimes we get outbid, and when we get outbid, we think people overpay. And so that's kind of our view of it. There's a lot of things for sale right now. Prices are still nosebleed levels. And, you know, when you add $400 billion in assets to our platform in 18 months, you know, that creates a lot of revenue. And it creates a lot of opportunity for additional revenue. And I've said on this call many times that if we do big acquisitions, it's going to take a lot of management time. And in our estimation – that management time when it's focused on organic revenue growth, organic revenue growth goes up. And I think, you know, Q2 is another example of that.
spk02: Fair enough. Thank you.
spk00: Thank you. Your next question comes from the line of Peter Heckman of Davidson. Your line is open.
spk06: Good afternoon, everyone. Thanks for taking my question. I wanted to ask on the fund administration business, very notable year-over-year growth, and as you point out, great asset accumulation in the last 18 months. If I'm calculating that correctly, AUA was about 19% year-over-year. What would you estimate would be the growth of the underlying market in that same time period, trying to figure out how much is share and how much is just higher allocations to alternative assets.
spk04: I think, Rahul, you'd be probably maybe the best at picking a stab at that.
spk05: Yeah, I think what I would say is, you know, we don't really have and there isn't a lot of great data on the underlying market and how fast it's growing. But, you know, what is pretty indicative to us is how we're doing in terms of competitive takeaways. And if you kind of look at our AUA mix and the $400 billion and kind of where it comes from, et cetera, there's a pretty big portion of it that comes from competitors. I mentioned in my remarks a $30 billion fund that we're taking from somebody else in the market. So that would suggest that in addition to the lift we're getting just because the market's getting better, people are recognizing our technology investments and our staff and you know, some of the leadership we put in place and some of the changes we've made, like combining private equity and real assets and things like that, and that's having an impact.
spk06: That's great. That's great. And then I didn't hear you – I heard you mention Interlink as one of the things that contribute to organic growth in the quarter, but I guess my suspicion is with good M&A activity and all of the SPAC IPOs out there that that business could have maybe put a – you know, mid-teens or higher type growth. Is that on the right track?
spk05: Yeah, the analytics business grew about 18% in the quarter.
spk06: Great.
spk05: And they're at about 14 year-to-date.
spk06: Okay. That's helpful. I'll get back to you. Appreciate it.
spk00: Thank you. Your next question is from the line of Andrew Schmidt from . Your line is open.
spk05: Hey, guys. Thanks for taking my questions. Good to see the step up in growth here.
spk01: I wanted to ask you, you know, I think the last couple of questions seems pretty clear that the volume-based revenues are stepping up pretty significantly.
spk05: But on the sort of the deal closing and sales cycle side, can you talk about you know, your observations in the second quarter, it seems like things are improving, but what would be your thoughts on sales cycle in terms of, uh, just appetite for closing deals versus maybe the power quarter?
spk04: Well, I think that, you know, we have pretty full pipelines and, and we're getting an awful lot of, uh, uh, an awful lot of inquiries into, uh, into us from all over the world, uh, particularly as far East has been, has been, uh, quite active. And again, right, I mean, all the central banks are flooding the world with money. And so, you know, now it's time to make hay. And I think, you know, we have increasingly strong sales force and increasingly strong management of that sales force. And so I think we are reaping the benefits of the investments that we have made in order to increase our revenue growth. Got it.
spk05: And then, you know, this quarter we've seen a number of product launches and sort of technology revamps, some of it on the legacy, you know, DST side. Has anything changed about the approach to product development, technology development, things like that? I would imagine part of it, you know, is sort of the management restructure on the TST side. But just curious if anything has changed in terms of your approach to organic technology development, things of that nature.
spk04: Well, again, we have hired a number of people. And, you know, obviously, you know, technology in 2021 is a lot different than technology was even when we bought TST, which we closed in April of 18. So, you know, we're adding, you know, like microservices and artificial intelligence and robotic process automation and machine learning. And we're also, you know, we're in a hurry. You know, SSNC is in a hurry. Now, in a hurry doesn't mean you can snap your fingers and you know, in one day or even one quarter and sometimes even in one year that you can change everything without taking so much risk that you're going to, you know, you're going to break the egg. So you've got to be a little bit wise. And, you know, as I said, right, we just passed $500 million in EBITDA in a quarter, first time ever, a billion dollars in the first six months, first time ever. So I think we are increasing the cadence in our software development capabilities. And I think that's why you're seeing a number of new products come out with a lot of, you know, requested features and functions that our clients and prospects have been asking for. Rahul, do you have anything to add to that?
spk05: So I think the only other thing I would add is, you know, just coming back to that restructure point, I think focusing our business very, very, in a very methodical way on kind of the end markets that they serve and making sure our technology teams are lined up against those end markets and are really paying attention to what those customers want means that the pace of development is, you know, faster, right? So it's things we've always done. We'd like to think we're doing it with a little more focus and intensity. Perfect. Exactly what I was getting at. Thanks a lot, Will, Bill. Appreciate the comments.
spk00: Thank you. Once again, if you would like to ask a question, you may press star, the number one on your telephone. And as a reminder, please limit your question to one and one follow-up question. Your next question comes from the line of Jackson Ader from J.P. Morgan. Your line is open.
spk03: Great. Thank you. My first question is actually back on the joint venture, the healthcare joint venture.
spk05: I'm curious about the new platform and maybe with existing customers. Will this be additive to the business that you have with existing customers or will it basically be more of a replacement from existing solutions to a newer platform over the next four or five years as this thing gets ramped up?
spk04: I think that our business philosophy forever has been to have a flexible delivery model. So there's going to be different customers that want this delivered to them through the JV, and there's going to be others that are going to want us to deliver this through SSC Health. We think, in general, this is going to be a pretty nice tailwind to our growth in the healthcare business. And, you know, I don't know if – If current SS&C Health customers will want to go into the JV or want to remain with us, obviously we're talking to all of them and trying to give them the options that they want. But, you know, it's pretty new, and everybody's pretty excited about it, and we're optimistic that revenue growth will increase markedly.
spk05: Okay. Great. Thank you. And then, Rahul, you mentioned, I think, in one of the deals that you ran through that one of the advent signings happened to be in the cloud. And I was just curious, can we get a reset on where your customers' and investors' preferences are at the moment in terms of And really, I guess this relates to the last question as well on the healthcare trend venture. But where are people's heads in terms of their preference for the cloud versus more on-premise deployment? Yeah, and I think just building on what Bill just said, right, what we're trying to do is be flexible on delivery, right, and making sure that whether they want to deploy on-premise and on-premise increasingly, right, is on-premise with a cloud provider that they have themselves or public cloud or whatever the case may be, or they want to buy it through us and have us run it on our private cloud, which we think is purpose-built for our application, so it has several benefits. But I would say that the majority of new deals, one way or another, are going on some kind of cloud type, and that's really what we're doing our development on as well.
spk06: Okay.
spk05: All right. Great. Thank you.
spk00: Thank you. Your next question comes from the line of Surinder Thind of Jefferies. Your line is open.
spk03: Hi, Bill. Hi, Raul. A high-level question from my perspective in terms of just kind of strategy and where the firm is. When I kind of look back over the past year, year and a half, we think about kind of the management changes that have kind of occurred we kind of look at kind of the recent reorganization kind of around DST or at least in terms of the strategy there. Can you talk about how you feel about positioning right now and kind of the evolution of how you've kind of gotten to here to decide that this is the right approach at this point? And is this kind of, should we expect more changes that you guys are thinking about or are you guys pretty comfortable about where we are at this point and the ability to kind of hit ultimately those milestones and targets that you guys are reaching for?
spk04: Well, Surinder, that's a great question, and that's also pretty much a crystal ball question, right? I mean, I think that, you know, SS&C is constantly changing, and it's constantly changing because our customers are constantly changing. If you look at what Jefferies did five or ten years ago compared to what Jefferies does today, it's a way different firm. And a lot of the hedge funds that we deal with now are in all kinds of different strategies and all kinds of different asset classes. Some are looking for permanent capital. Some are having long-only strategies. Same thing with our large insurance companies that are now, I'm sure you saw the the deal between Blackstone and AIG, you know, $50 billion is going to be $100 billion. And so, you know, you have to have people that are nimble enough to take advantage of what's in the marketplace. And you have to have people that have enough of a risk appetite to take some chances. You know, and when you're going through executive managers, you know, that's what we're looking for. We're looking for people that have you know, deep subject matter expertise, you know, a personality that is inclusive and is open. And then also that, you know, we take prudent risks. And if you don't take any risks, it's very difficult to grow. So I think we're very comfortable with where we are today. But I don't know where the world's going to be in three months or six months or nine months. I read things that other people apparently really know. I just don't think those people are the brightest people on earth.
spk03: Very good, Bill. And then I'm going to ask you one more crystal ball question here. Can you talk a little bit about kind of geography and how you guys are thinking about Europe, obviously there's more of a global approach by the firm at this point, but just it seems like Europe is generally consistently lagged. The U.S., it's always been a bit more of a headwind the past couple of years. How are you thinking about the evolution there, the marketplace versus North America?
spk04: Well, we think there's a lot of opportunity in Europe, and there's a lot of assets, and there's a much slower adoption for large-scale outsourcing than there has been here in the U.S. But, you know, we've won some nice mandates. We think we're going to win some more mandates. And, you know, there's large geographies inside. in europe where we don't have a particularly uh large presence that we think that we think we can you know and again you know we want to do it in a in a prudent way and and be able to uh to make sure that that we have the knowledge skills and abilities to to really capitalize uh and and i think you know we have a number of initiatives going on and you know, in countries like Germany and France and Italy and Spain, and we have a pretty big presence in the U.K. So I think we're reasonably comfortable with our footprint there, and I think we're in execution mode.
spk03: Great. That's it for me, Bill. Thank you.
spk00: Thank you. Once again, if you would like to ask a question, you may press star 1 on your telephone. We have a follow-up question from the line of Alex Cram with UBS. Your line is open.
spk02: Yes, hello again. Just wanted to follow up with a couple of numbers questions. I don't think you mentioned the Alternatives Organic Growth number. It would be great to have that. And then I guess secondarily also DST Financial, if you could disclose that and maybe expand a little bit on that. the selling environment for that business. And any other business lines you want to give us an update on in terms of growth rates for the quarter? Thanks.
spk05: Yeah, Alex, I'll give you the numbers. So on the alternatives business, it grew 12% in the quarter. And now we're at 9.3% year-to-date. On DST, the financial services part of that business grew 4.5% in the quarter, and it's at 2.2% year-to-date.
spk02: Okay. Any other ones, like advent or software businesses? Sorry.
spk05: Yeah, sure. The overall software business, both institutional and advent, some of our other smaller software business grew 3.8% per quarter.
spk02: All right. That should be it for me. Thanks again.
spk00: Once again, if you would like to ask a question, you may press R1 on your telephone. Speakers, I am not seeing any questions in the queue. I would like to turn the conference back to Mr. Bilstone for closing remarks.
spk04: Again, thanks, everybody, for being on the call, and we look forward to talking to you and probably towards the end of October. Thanks again. Stay safe. Stay healthy. Bye.
spk00: Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.
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