SS&C Technologies Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated financial statements. SS&C generates most revenue from recurring software-enabled services, maintenance and term licenses, including fund-administration services.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $411.0M | $373.1M | $818.7M | $697.2M |
| Recurring revenue | $386.1M | $348.1M | $773.1M | $648.8M |
| Operating income | $90.0M | $66.0M | $179.7M | $116.5M |
| Net income | $51.2M | $28.2M | $99.3M | $35.2M |
| Diluted EPS | $0.24 | $0.14 | $0.47 | $0.17 |
| Gross margin | 46% | 44% | 46% | 44% |
- Q2 revenue grew 10%; first-half revenue grew 17%. Recurring revenue was 94% of total revenue in both 2017 periods.
- Operating margin was approximately 21.9% in Q2 and 22.0% for the first half, compared with 17.7% and 16.7%, respectively, in 2016.
- Operating cash flow was $193.8M for the first half, versus $139.3M. Investing used $23.2M, compared with $335.4M in 2016, which included substantial acquisition spending. Financing used $201.1M, primarily reflecting debt repayments and dividends.
- Cash and cash equivalents were $90.4M at June 30; restricted cash was $1.9M. Current assets of $379.0M were below current liabilities of $424.0M.
- Debt carrying value was $2.299B, including $37.2M current debt; principal outstanding was approximately $2.351B. The $600M senior notes bear 5.875% interest and mature in 2023. The $150M revolver had no borrowings; $0.6M of letters of credit was outstanding.
- The company generated $655.1M of covenant-defined Consolidated EBITDA for the twelve months ended June 30. Net senior secured leverage was 2.54x against a maximum of 5.25x; the company reported compliance with covenants.
Material changes versus prior periods
- Q2 revenue growth included $20.1M from the GFS and Conifer acquisitions, net of lost sales, and $19.7M of organic growth. First-half growth included $78.2M from acquisitions, net of lost sales, and $46.1M of organic growth.
- Management attributed organic growth mainly to continuing demand for fund-administration services. Acquired deferred-revenue fair-value adjustments contributed $8.2M to Q2 and $25.4M to first-half revenue growth, so reported growth includes a purchase-accounting effect.
- Perpetual-license revenue declined 24% in Q2 and 35% in the first half; total non-recurring revenue declined 1% and 6%, respectively. Foreign exchange reduced revenue by $2.0M in Q2 and $2.9M in the first half.
- Net interest expense fell to $26.3M in Q2 and $55.3M in the first half, primarily due to lower average debt and a lower interest rate after the March credit-agreement amendment. Debt principal declined through net repayments.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and available credit were expected to fund obligations, working capital and capital spending for at least the next 12 months. No revenue or earnings guidance was provided. The company forecast a 2017 effective tax rate of 20%–22%.
- The March 2017 credit amendment reduced the highest stated margins on Term Loans A and B by 1 percentage point each. It generated a $2.3M first-quarter debt-extinguishment loss; financial covenants and scheduled amortization were unchanged.
- Adoption of stock-compensation accounting rules produced discrete tax benefits of $5.0M in Q2 and $10.1M in the first half, affecting reported earnings and effective tax rates. The first-half effective tax rate was 18%, versus 28% in 2016.
- Revenue standard adoption is planned for January 1, 2018 using the modified retrospective approach. SS&C expects the standard to change recognition of term software-license arrangements: the license component is not expected to be recognized ratably over the contractual term. The full impact was still under assessment.
- About 27% of first-half revenue came from clients outside the United States. A 1% rise in interest rates was estimated to increase annual interest expense by approximately $17.5M. The company cited potential foreign-exchange exposure and warned covenant breaches could permit acceleration of debt. It reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of revenue and earnings growth reflects organic performance versus acquisitions and acquired deferred-revenue purchase-accounting adjustments.
- The sustainability of recurring-revenue growth, margin improvement and operating cash flow, including the impact of working-capital movements.
- Debt reduction, interest-rate exposure, covenant headroom and the availability of the revolver; distinguish principal debt from its GAAP carrying value.
- The earnings effect of stock-award tax benefits and the expected impact of the 2018 revenue-recognition change.
- Exposure to goodwill and intangible assets, which were $3.677B and $1.460B, respectively, at June 30, 2017.