Business context and reporting period
SS&C Technologies Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company provides software-enabled services and software to financial services clients, including fund administration. Results are compared with the three months ended March 31, 2016; the company cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Revenue | $407.7 | $324.1 |
| Recurring revenue | $387.0 | $300.8 |
| Gross profit / margin | $190.2 / 46.7% | $147.4 / 45.5% |
| Operating income / margin | $89.7 / 22.0% | $50.4 / 15.6% |
| Net income | $48.1 | $7.0 |
| Diluted EPS | $0.23 | $0.03 |
| Cash from operating activities | $56.5 | $18.6 |
| Cash, cash equivalents and restricted cash | $110.9 | $119.7 at Dec. 31, 2016 |
| Total assets / stockholders’ equity | $5,659.1 / $2,329.1 | $5,707.0 / $2,258.6 at Dec. 31, 2016 |
Cash used in investing was $7.5 million, including $6.0 million of capital expenditures and $3.3 million of capitalized software costs, partly offset by $1.8 million of acquisition purchase-price adjustments. Cash used in financing was $59.5 million, including $60.2 million of net debt repayments and $12.7 million of dividends, partly offset by $14.0 million from option exercises. Working capital was negative $70.5 million at quarter-end, based on current assets of $407.4 million and current liabilities of $477.9 million.
Debt principal was approximately $2.499 billion, including $1.899 billion of variable-rate debt and $600 million of 5.875% senior notes due 2023. The balance sheet reports debt of $2.445 billion net of unamortized discounts and issuance costs. The revolving facility had $150 million of commitments, with $66 million drawn and $0.5 million of letters of credit outstanding. The senior secured net leverage covenant was 2.80x against a maximum of 5.25x; the company reported compliance. A 1% increase in interest rates was estimated to increase annual interest expense by approximately $19 million.
Material changes versus the prior comparable period
- Revenue increased 26%; recurring revenue rose 29% and represented 95% of revenue, versus 92% a year earlier. Software-enabled services revenue increased 34%; non-recurring revenue fell 11%.
- Management attributed $58.1 million of revenue to acquisitions of Wells Fargo Global Fund Services and Conifer in late 2016 and Citigroup AIS in Q1 2016, net of lost sales to those businesses. Organic revenue increased $26.4 million, including approximately $17.2 million from acquired deferred-revenue fair-value adjustments. Management cited continued demand from alternative investment managers; foreign exchange reduced revenue by $0.9 million.
- Gross margin and operating margin improved, while operating expenses increased 4%, less than revenue growth. Acquisition-related costs were partly offset by lower stock-based compensation.
- Net interest expense declined to $29.0 million from $33.1 million, attributed to lower average debt and interest rates. Q1 2017 included a $2.3 million debt-extinguishment loss related to the credit agreement repricing.
- The effective tax rate declined to 17% from 55%. A $5.1 million discrete tax benefit from stock awards contributed to the lower 2017 rate; the 2016 rate also reflected an unfavorable state-tax apportionment effect.
Outlook, management commentary and risks
- Management forecast a 2017 consolidated effective tax rate of 20%–22%; this is tax-rate guidance, not earnings or revenue guidance. It expects cash on hand, operating cash flow and credit availability to fund obligations, working capital and capital spending for at least the next 12 months.
- The March 2 credit amendment reduced the highest applicable margins on Term Loans A and B by 1 percentage point each and set their LIBOR floors to 0%. Financial covenants, principal amounts and scheduled amortization were unchanged.
- Management reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements. It cautioned that covenant compliance could be affected by events beyond its control; a default could accelerate debt and end future borrowing commitments.
- The company intends to adopt the new revenue standard on January 1, 2018 using the modified retrospective approach. It expects changes to accounting for perpetual and term software licenses, including that the license component of term licenses will not be recognized ratably over the contract term; its assessment was ongoing.
- Other disclosed risks include substantial leverage, variable-rate interest exposure, foreign-exchange movements and dependence on estimates in revenue recognition, acquisition accounting, goodwill and taxes. The company reported effective disclosure controls as of March 31, 2017 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and profit growth reflects acquired businesses and purchase-accounting deferred-revenue adjustments versus underlying organic growth.
- The sustainability of earnings after the $5.1 million stock-award tax benefit and the $2.3 million debt-extinguishment charge; compare the quarterly tax rate with the 20%–22% full-year expectation.
- Debt repayment capacity, variable-rate exposure, revolver availability and ongoing compliance with secured-debt covenants.
- Cash conversion and working-capital trends, particularly bonus payments, receivables and days sales outstanding at acquired businesses, and deferred-revenue collections.
- The eventual financial-statement effects of the 2018 revenue-standard adoption and the timing of license revenue recognition.