SS&C Technologies Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Comparisons are with the corresponding 2021 periods unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and reporting period
SS&C provides software-enabled services, software licenses, maintenance and related services. Results include Blue Prism and Hubwise from March 2022, MineralWare from May 2022, and O’Shares assets from June 2022. The Blue Prism acquisition, completed in March for approximately $1.6 billion, was the principal transaction during the period.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,328.7 | $1,259.0 | $2,623.7 | $2,492.4 |
| Gross profit | $624.3 | $595.0 | $1,244.1 | $1,154.1 |
| Gross margin | 47.0% | 47.3% | 47.4% | 46.3% |
| Operating income | $245.6 | $312.9 | $537.4 | $582.0 |
| Net income | $110.3 | $189.8 | $281.6 | $364.7 |
| Net income attributable to SS&C common stockholders | $110.6 | $189.8 | $282.7 | $364.7 |
| Diluted EPS | $0.42 | $0.71 | $1.06 | $1.36 |
Cash flow: For the first six months, operating cash flow was $447.5, versus $562.3 in 2021. Investing activities used $1,673.6, principally including $1,597.1 of net cash paid for acquisitions and $63.3 of capitalized software development. Financing activities provided $69.2, including net borrowings, partly offset by lower client-funds obligations, share repurchases and dividends.
Liquidity and debt: June 30 cash and cash equivalents were $438.3, compared with $564.0 at year-end 2021. Funds receivable and held on behalf of clients of $1,620.3 were matched by client-funds obligations of the same amount and should not be treated as unrestricted corporate cash. Debt carrying value was $7,292.3, including $2,000.0 of 5.5% senior notes due 2027; the senior secured facilities had a weighted-average interest rate of 3.54%. The company reported $247.5 available under its revolving facility and compliance with debt covenants. Its actual consolidated net secured leverage ratio was 2.48x against a 6.25x maximum covenant.
Material changes versus the prior comparable period
- Q2 revenue increased 5.5%; acquisitions contributed $65.6, organic growth contributed $27.9, and unfavorable foreign-currency translation reduced revenue by $23.8. Software-enabled services rose 1.3%, while license, maintenance and related revenue rose 27.8%.
- For the first half, revenue increased 5.3%, reflecting $83.0 from acquisitions, $80.7 of organic growth and a $32.4 adverse currency impact.
- Despite revenue growth, Q2 operating income fell to $245.6 from $312.9. Operating expenses rose 34.2%, driven by acquisitions and higher personnel-related costs, including wage inflation, stock-based compensation and recruiting, as well as travel, IT and professional fees. Q2 net interest expense increased to $67.7 from $51.0, and other expense was $20.4 versus $6.5 of other income in 2021.
- First-half operating cash flow declined by $114.8. The company cited working-capital movements and approximately $68.0 of Blue Prism transaction costs as drags on cash flow.
- Debt increased from $5,948.9 at December 31, 2021 to $7,292.3, primarily reflecting acquisition financing. The company recorded $263.0 of other comprehensive loss in the first half, largely from foreign-currency translation.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management stated that cash on hand, operating cash flow and credit availability are expected to fund obligations, working capital and capital spending for at least the next twelve months.
- Management reported some client delays related to COVID-19 but no direct material negative effects to date, while warning that future effects remain uncertain and could become material.
- Variable-rate debt totaled approximately $5,350.5. The company estimated that a 100-basis-point rate increase would raise annual interest expense by approximately $53.5. A substantial portion of variable-rate borrowing referenced USD-LIBOR; transition impacts were still under assessment.
- Foreign-currency translation was a significant headwind to revenue and equity. Approximately 29% of first-half revenue came from clients outside the United States; the company also cited foreign-currency transaction and equity-investment valuation losses in other expense.
- Blue Prism and Hubwise purchase-price allocations remained preliminary. Acquired goodwill increased by $1,002.0 in the first half, before a $181.0 adverse currency translation effect. Acquired intangible assets and purchase accounting may affect future amortization and reported earnings.
- Legal matters include extensive DST-related ERISA litigation, arbitration awards and appeals. A proposed $27 million class settlement was not preliminarily approved; the company said the ultimate resolution and potential additional exposure were uncertain. Management stated it did not believe the proceedings, in aggregate, would materially adversely affect the company, but continued to defend them.
- The company repurchased 2.3 million shares for $170.9 during the first half, with no repurchases in Q2. In July 2022, the board authorized a new $1 billion repurchase program. First-half dividends paid were $102.4, or $0.40 per share declared.
- Management concluded disclosure controls were effective as of June 30, 2022, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth, particularly in software-enabled services, continues after separating acquisition contributions and foreign-exchange effects.
- Whether operating expense growth, wage inflation, stock-based compensation and acquisition-related costs continue to pressure operating income and cash generation.
- Debt levels, variable-rate exposure, interest costs, covenant headroom and the availability and terms of refinancing or revolving credit.
- Blue Prism and Hubwise final purchase accounting, acquired-business performance, goodwill and intangible-asset amortization.
- Developments and potential financial exposure in the DST ERISA cases, arbitration appeals and related proceedings.
- Use of cash for dividends, repurchases and acquisitions, including the effect of the July 2022 repurchase authorization on liquidity and leverage.