SS&C Technologies Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless otherwise noted. Amounts below are in millions of dollars unless stated otherwise.
Business context and results
SS&C provides software-enabled services, software licenses, maintenance, and professional services. Q1 revenue growth was driven mainly by the 2014 acquisition of DST Global Solutions (DSTGS) and continued demand for alternative-investment fund administration.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $205.7 | $185.8 | +10.7% |
| Gross profit / margin | $93.4 / 45% | $84.3 / 45% | +10.8% gross profit |
| Operating income / margin | $43.1 / 21% | $47.0 / 25% | -8.3% |
| Net income | $26.2 | $26.4 | -0.8% |
| Diluted EPS | $0.30 | $0.30 | Unchanged |
| Operating cash flow | $31.2 | $38.6 | -19.2% |
Revenue, costs, and material period changes
- Software-enabled services revenue rose 6% to $153.6 million; maintenance rose 40% to $35.7 million; professional services rose 23% to $9.1 million; software licenses declined 2% to $7.3 million.
- DSTGS contributed $13.7 million of revenue, including $10.5 million of maintenance revenue. Reported maintenance revenue included a $0.4 million reduction from acquired deferred-revenue fair-value adjustments.
- Cost of revenue increased 11% to $112.3 million; gross margin remained 45%. The company cited DSTGS costs, $2.0 million of costs related to eliminating redundant positions, and increased service-delivery costs, partly offset by $2.5 million of favorable currency translation.
- Operating expenses increased 35% to $50.3 million, including DSTGS costs, $2.6 million related to redundant-position eliminations, and $2.6 million of professional fees for the pending Advent acquisition. Research and development rose 44% and general and administrative expense rose 47%.
- Interest expense declined to $5.6 million from $7.1 million, reflecting lower average debt and interest rates. The effective tax rate was 27%, versus 33%; the prior-year rate included a $2.5 million charge related to New York tax-law changes.
Cash flow, debt, and liquidity
- Operating cash flow was $31.2 million. Investing activities used $3.2 million, including $2.3 million of capital expenditures and $0.9 million of capitalized software. Financing activities used $47.0 million, including $44.0 million of debt repayments and $10.5 million of dividends. Cash declined $21.2 million to $88.3 million.
- Cash from operations was pressured by working-capital movements, including bonus payments and higher receivables; days sales outstanding increased from 42 to 45 days. Approximate operating cash flow less capital expenditures and capitalized software was $28.0 million.
- At March 31, cash was $88.3 million; current assets were $219.8 million and current liabilities $168.5 million. Debt principal was $601.0 million, with a $595.3 million carrying value after original-issue discount and before current-portion classification. The credit facility’s weighted-average rate was 2.94%.
- The company reported compliance with credit-facility covenants. Its net senior secured leverage ratio was 1.48x versus a 4.75x maximum. A 1 percentage-point rise in interest rates was estimated to increase annual interest expense by approximately $3.8 million.
- Management stated that cash on hand and operating cash flows were expected to cover current obligations, working capital, and capital spending for at least the next 12 months. However, $69.2 million was held at foreign subsidiaries designated as permanently reinvested; $22.8 million held in India would incur estimated distribution taxes of $3.9 million if repatriated to the foreign debt holder.
Outlook, risks, and unusual items
- SS&C agreed to acquire Advent Software for approximately $2.7 billion in cash, equating to $44.25 per share plus assumed debt. Closing was expected in Q2 or Q3 2015, subject to regulatory clearances and customary conditions. Planned funding included $3.0 billion of debt financing, cash on hand, and approximately $400 million of equity. This is a material financing and execution risk.
- Management forecast a 2015 consolidated effective tax rate of 26%–28%. The filing provides no broader revenue or earnings guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- Foreign-currency translation reduced other comprehensive income by $36.2 million in Q1; goodwill also declined, primarily due to a $31.6 million currency-translation effect. Approximately 32% of Q1 revenue came from clients outside the United States. The company reported $3.2 million of unfavorable currency translation against revenue.
- The U.S. Millennium class action was settled and dismissed with prejudice in 2014, with insurers funding GlobeOp’s settlement contribution. A related UK arbitration claim by the Master Fund remained pending; the company said the potential loss could not be reasonably estimated and that it could not predict the outcome.
- Management said disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter. The company was evaluating the impact of the forthcoming revenue-recognition standard and debt-issuance-cost presentation standard.
Important facts for investors to verify
- Whether the Advent acquisition closed on the expected timetable and whether its final financing, equity issuance, and integration costs matched the plan.
- Subsequent developments and any estimated exposure in the pending Millennium UK arbitration.
- Whether revenue growth, particularly DSTGS-related maintenance revenue, translated into improved operating margins and cash generation.
- Debt balances, interest-rate exposure, covenant headroom, and the effect of acquisition financing on leverage and liquidity.
- Foreign cash availability, repatriation taxes, currency effects, and changes in receivable collection and days sales outstanding.