SS&C Technologies Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. SS&C provides software-enabled services, software licenses, maintenance and related services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
Revenue is primarily from software-enabled services, with pricing often linked to clients’ assets under management, transaction volumes and service needs. Software-enabled services represented 84.6% of Q1 revenue. Management attributed growth to organic strength in SS&C GlobeOp fund administration, virtual data room services and portfolio investment products, as well as acquisitions and favorable currency translation.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1,233.4 | $1,173.6 | +5.1% |
| Gross profit / margin | $559.1 / 45.3% | $508.0 / 43.3% | +10.1%; margin +2.0 points |
| Operating income | $269.1 | $218.8 | +23.0% |
| Net income | $174.9 | $99.2 | +76.3% |
| Diluted EPS | $0.65 | $0.37 | +$0.28 |
| Operating cash flow | $185.7 | $147.7 | +$38.0 |
Operating margin was approximately 21.8%, compared with 18.7%; net margin was approximately 14.2%, compared with 8.5%. Net interest expense declined to $51.4 from $77.4, principally due to lower average interest rates and debt balances. The effective tax rate rose to 25.8% from 20.0%, mainly reflecting fewer stock-award windfall tax benefits and a different mix of domestic and foreign income.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $253.7, versus $209.3 at year-end 2020. Separately, funds receivable and held on behalf of clients were $2,030.0, matched by $2,030.0 of client-funds obligations. These client balances should not be treated as freely available corporate cash.
- Total debt carrying value was $6,516.3, compared with $6,442.4 at December 31, 2020; this included $2,000.0 of 5.5% senior notes due 2027 and $126.0 drawn on the revolving facility. The term loans mature April 2025. The company reported $120.1 of revolver availability, with $3.9 of the letter-of-credit sub-facility used.
- Current assets were $3,199.2 and current liabilities $3,133.3; both include the matching client-funds balances. Management said cash on hand, operating cash flow and credit availability should cover obligations, working capital and capital spending for at least the next 12 months.
- Operating cash flow included $141.9 of working-capital outflows, excluding acquisition effects, including annual employee bonus payments. Investing activities used $17.9, including $22.3 of capitalized software development and $9.1 of capital expenditures.
- Financing activities provided $653.7, largely reflecting a $777.0 increase in client-funds obligations. The company also repurchased $181.4 of stock and paid $41.2 in dividends. These movements explain why the reported increase in cash, cash equivalents and restricted cash—$819.8—does not represent a comparable increase in unrestricted corporate liquidity.
- At March 31, the actual consolidated net secured leverage ratio was 2.29x against a 6.25x maximum covenant threshold. A substantial portion of debt carries variable rates, primarily based on USD-LIBOR.
Material changes and unusual items
- Revenue grew $59.8: management attributed $25.1 to organic growth, $18.6 to acquisitions and $16.1 to favorable foreign currency translation. Software-enabled services revenue rose 5.4%; license, maintenance and related revenue rose 3.2%.
- Gross margin improved as total cost of revenue grew 1.3%, slower than revenue. Organic costs declined, partly reflecting less travel and lower depreciation and amortization, while acquisition-related and currency costs increased.
- Operating expenses were nearly flat, up 0.3%; excluding acquisition and currency effects, management reported a $10.4 decrease, primarily from lower travel, entertainment and amortization, partly offset by integration-related severance.
- Q1 included $22.0 of severance expense related to integration of acquired businesses, down from $31.4 a year earlier. Investment gains contributed to other income of $18.0, versus other expense of $15.3 in Q1 2020. The Capita acquisition generated a $2.9 bargain-purchase gain and contributed $3.7 of revenue after its March 1 acquisition.
- Capita, an international life and pensions services business, was acquired in March 2021. Its purchase-price allocation remained preliminary.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management cautioned that Q1 results are not necessarily indicative of future quarters or the full year.
- Management reported client delays in committing to services and products amid COVID-19, but no direct material negative effect on the business to date. It warned that the situation remained uncertain; remote-work technology costs increased, while travel restrictions and related savings reduced organic expenses.
- The company is assessing the potential effect of LIBOR discontinuation on contracts, hedges and other transactions. It also disclosed interest-rate sensitivity: a 1% increase in rates was estimated to increase annual interest expense by about $45.6, partly offset by interest earnings on client cash balances.
- DST-related ERISA litigation remains unresolved. A proposed $27 settlement with plaintiffs is subject to court approval and objections, and its outcome and potential exposure are uncertain. The filing also describes 546 individual arbitration demands through April 15, 2021, related lawsuits and a Department of Labor action. Management said it had not determined the impact on financial position or results; if a settlement becomes concluded or probable, it expects to recognize a charge, potentially offset by insurance.
- Management said there were no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and disclosure controls were effective as of quarter-end.
Key facts for investors to verify
- Whether organic growth and margin improvements persist after separating acquisition, currency and temporary expense effects.
- How much cash is available for corporate use after excluding client funds and restricted cash, and whether the reported liquidity plan remains adequate.
- Debt reduction, variable-rate exposure, LIBOR transition plans and continued compliance with credit-facility covenants.
- Developments in the ERISA settlement, arbitration demands and related proceedings, including insurance coverage and any eventual accrual.
- The final Capita purchase accounting and the contribution of acquired businesses to future results.