SS&C Technologies Holdings, Inc. — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with Q1 2022 unless otherwise stated. SS&C provides software-enabled services and software licenses, maintenance and related services, primarily to financial services and healthcare clients.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,362.7 million | $1,295.0 million | +5.2% |
| Gross profit / margin | $637.0 million / 46.7% | $619.8 million / 47.9% | Margin down 1.2 percentage points |
| Operating income | $280.1 million | $291.8 million | Down 4.0% |
| Net income | $126.2 million | $171.3 million | Down 26.3% |
| Net income attributable to SS&C common stockholders | $126.0 million | $172.1 million | Down 26.8% |
| Diluted EPS | $0.49 | $0.64 | Down 23.4% |
| Cash from operating activities | $254.8 million | $183.5 million | Up $71.3 million |
| Capitalized software and property additions | $53.1 million | $35.6 million | — |
Revenue growth reflected $63.2 million from 2022 acquisitions and $24.2 million of organic growth, partly offset by $19.7 million of unfavorable foreign currency translation. Software-enabled services revenue rose 2.7%; license, maintenance and related revenue rose 18.4%, mainly due to acquisitions. Management cited strength in SS&C GlobeOp fund administration and Global Investor and Distribution Solutions. Cost of revenue increased 7.5%, faster than revenue, with personnel costs, wage inflation and costs supporting growth contributing to organic cost increases.
Operating expenses increased 8.8%, primarily reflecting acquired businesses; organic operating expenses declined, partly because professional fees were elevated in Q1 2022 around the Blue Prism acquisition. Net interest expense rose to $111.9 million from $49.3 million as average debt balances and borrowing rates increased; average interest rates were 6.21% versus 3.11%. The effective tax rate was 29.4%, up from 27.0%.
Balance sheet, debt and liquidity
- At March 31, 2023, cash and cash equivalents were $433.3 million; total debt was $7.039 billion, versus $7.080 billion at year-end 2022. Debt included $5.010 billion of term loans, $75 million drawn on the revolving facility and $2.000 billion of 5.5% senior notes due 2027.
- Current debt maturities were $129.4 million. Significant term-loan maturities include tranches due April 2025; other term-loan tranches mature in March 2029. The revolver matures in December 2027.
- Cash, cash equivalents and restricted cash totaled $788.2 million, including $352.4 million of restricted client-related cash. Client funds receivable and corresponding client funds obligations were each $429.2 million. These balances affect reported current assets, liabilities and cash flows but are associated with client obligations.
- Operating cash flow was $254.8 million. Investing activities used $49.8 million, including $42.6 million of capitalized software development and $10.5 million of property and equipment additions. Financing activities used $755.3 million, including a $541.9 million net decrease in client fund obligations, $133.3 million of treasury-stock purchases, $50.7 million of dividends and $44.6 million of net debt repayments. The resulting decrease in cash, cash equivalents and restricted cash was $549.4 million.
- The company said cash on hand, operating cash flow and available credit should fund current obligations, working capital and capital spending for at least the next 12 months. It reported compliance with debt covenants; the actual maximum consolidated net secured leverage ratio was 2.39x against a 6.25x limit.
Material developments, outlook and risks
- SS&C repurchased 2.3 million shares for approximately $134.7 million and paid a quarterly dividend of $0.20 per share, totaling $50.7 million. A July 2022 authorization permits up to $1 billion of repurchases.
- The filing provides no specific revenue, earnings or cash-flow guidance. Management cautioned that results for the quarter are not necessarily indicative of future quarters or the full year.
- Management identified uncertainty from macroeconomic conditions, including higher interest rates, inflation, foreign-exchange movements and continuing effects of the COVID-19 pandemic. At quarter-end, approximately $5.085 billion of debt bore variable interest rates; the company estimated that a 100-basis-point rate increase would raise annual interest expense by about $50.8 million. It estimated the client cash interest-earnings offset at approximately $10.5 million of annual net income per 100-basis-point change.
- Approximately 30% of Q1 revenue came from clients outside the United States. Unfavorable currency translation reduced year-over-year revenue by $19.7 million. SS&C continues to monitor the transition from USD-LIBOR for variable-rate debt and related arrangements.
- Legal proceedings connected to DST ERISA matters remain a significant contingency. SS&C had accrued $51.5 million for related proceedings and arbitration awards. In March 2023, a court confirmed 55 arbitration awards and entered judgments against DST; appeals and related injunction proceedings were pending as described in the filing. The ultimate resolution and any additional exposure were uncertain. Management said it was vigorously defending the matters.
- Other unusual or notable items included $12.0 million of severance expense and $6.1 million of losses from fair-value adjustments on assets held for sale, partly offset in other income by $10.2 million of dividend income. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- How revenue growth and acquisition contributions compare with organic growth, particularly as currency effects and acquired businesses change.
- Whether margin pressure, wage inflation and the increased cost of variable-rate debt persist, and the resulting effect on earnings and cash generation.
- Debt maturities, available revolver capacity, covenant compliance and the company’s ability to maintain liquidity while funding dividends and repurchases.
- Developments in DST ERISA litigation, arbitration awards, appeals, settlements and potential exposure beyond the $51.5 million accrued liability.
- How much reported cash is unrestricted and available to the parent, given client-related and subsidiary cash restrictions.