SS&C Technologies Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statements are unaudited. SS&C provides software-enabled services and software licenses, maintenance and related services. Comparisons are with the corresponding 2018 periods, which reflect a different acquisition base.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,148.0 million | $895.8 million | $2,285.2 million | $1,317.7 million |
| Gross profit / margin | $498.9 million / 43.5% | $292.3 million / 32.6% | $974.2 million / 42.6% | $484.7 million / 36.8% |
| Operating income (loss) | $223.5 million | ($50.7) million | $425.5 million | $36.1 million |
| Net income (loss) | $121.1 million | ($63.7) million | $201.9 million | ($12.5) million |
| Diluted EPS | $0.45 | ($0.27) | $0.76 | ($0.06) |
| Net interest expense | $104.3 million | $70.2 million | $205.9 million | $95.6 million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $416.6 million | $119.7 million |
- Q2 revenue rose 28.2%; first-half revenue rose 73.4%. Acquisitions contributed $241.6 million and $945.0 million, respectively. Management also cited higher term-license revenue and demand for fund administration and advisory/wealth-manager services, partly offset by weaker software-enabled services revenue in the DST business and unfavorable foreign exchange.
- Q2 gross margin improved to 43.5% from 32.6%; first-half margin rose to 42.6% from 36.8%. Management attributed cost trends in part to acquisition-related additions and cost reductions, including elimination of redundant positions and other savings at DST.
- Operating expenses fell 19.7% in Q2, largely because the prior-year quarter included $91.1 million in transaction expenses. First-half operating expenses increased 22.3%, primarily reflecting acquisitions, partly offset by lower transaction expenses and reduced DST costs.
- Q2 and first-half 2019 other income included investment gains of $29.5 million and $36.9 million, respectively. These gains contributed to reported earnings. First-half results also included a $7.1 million loss on debt extinguishment; 2018 included a $44.4 million loss.
Cash, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $131.3 million. Cash, cash equivalents and restricted cash totaled $137.4 million; the separately reported $936.4 million of client funds brings the cash-flow-statement total to $1,073.8 million. Client funds are associated with corresponding client obligations and should not be treated as freely available cash.
- First-half operating cash flow was $416.6 million, up from $119.7 million. The filing cites net income and non-cash adjustments, partly offset by working-capital changes, including bonus payments and increased contract assets. Investing activities used $26.7 million; financing activities used $429.8 million, including $414.9 million of net debt repayments and $50.6 million of dividends.
- Debt carrying value was $7,843.1 million, including $5,906.0 million under secured credit facilities and $2,000.0 million of 5.5% senior notes due 2027, net of discounts and issuance costs. The notes were issued in March 2019 and proceeds repaid part of the Term B-3 loan. The revolving facility had no borrowings and $245.4 million available, with $4.6 million of letters of credit drawn.
- The company reported a 3.13x consolidated net secured leverage ratio against a 7.25x maximum covenant requirement. Management said cash, operating cash flow and credit availability were expected to fund obligations, working capital and capital spending for at least the next 12 months.
Outlook, risks and other notable items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management cautions that interim results are not necessarily indicative of future quarters or the full year.
- Interest-rate exposure is significant: approximately $5.9 billion of variable-rate debt was outstanding, and a 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $59.1 million. The company also noted equity-price exposure; a 10% change in the fair value of exposed investments was estimated to affect net income by approximately $10.3 million.
- Legal matters include an ongoing DST 401(k) fiduciary-duty case and Department of Labor investigation, plus 377 substantially similar individual arbitration demands as of July 26, 2019. Management said the financial effect had not been determined; it did not believe the matters or other claims were likely to have a material adverse effect.
- Adoption of lease accounting standards on January 1, 2019 added $387.6 million of right-of-use assets and $417.8 million of lease obligations at adoption. Management said the change did not materially affect income or cash flows.
- Disclosure controls were assessed as effective at the reasonable-assurance level. The filing reports no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of growth and margin improvement is sustainable organically, apart from acquisitions, integration savings and other cost actions.
- The recurring earnings impact of investment gains and the elevated interest expense associated with the acquisition-funded capital structure.
- Debt repayment capacity, covenant headroom, variable-rate sensitivity and availability under the revolving facility.
- Whether DST-related litigation, arbitration demands or the Department of Labor investigation lead to material costs or liabilities.
- The composition and availability of reported cash, given the substantial client-fund balances and obligations.