SS&C Technologies Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The statements are unaudited.
Business context and financial performance
SS&C provides software-enabled services, software licenses, maintenance and related services, principally to financial-services and healthcare clients. Results include acquired businesses from their respective acquisition dates, notably Blue Prism, acquired in March 2022.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,321.0 | $1,264.4 | $3,944.7 | $3,756.8 |
| Gross profit | $623.8 | $624.0 | $1,867.9 | $1,778.1 |
| Gross margin | 47.2% | 49.4% | 47.4% | 47.3% |
| Operating income | $304.2 | $340.1 | $841.6 | $922.1 |
| Net income attributable to SS&C common stockholders | $160.0 | $184.4 | $442.7 | $549.1 |
| Diluted EPS | $0.61 | $0.69 | $1.68 | $2.05 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $764.6 | $944.9 |
Q3 revenue increased 4.5% year over year; nine-month revenue increased 5.0%. License, maintenance and related revenue rose 39.4% in Q3 and 26.0% for the nine-month period. Software-enabled services revenue declined 1.9% in Q3 but rose 1.1% for nine months.
Material changes and management commentary
- Management attributed revenue gains to acquisitions and organic growth in selected fund administration, software and virtual data room businesses, partly offset by unfavorable foreign-currency translation: $32.5 million in Q3 and $65.0 million for nine months.
- Q3 operating income fell $35.9 million year over year despite higher revenue. Total operating expenses rose 12.6% in Q3 and 19.9% for nine months, reflecting acquisition-related costs and, for the nine-month period, higher personnel costs, wage inflation, travel and IT expenses.
- Q3 cost of revenue rose 8.9%, faster than revenue, and gross margin declined 2.2 percentage points. The filing cites personnel costs, wage inflation and costs supporting growth among the drivers.
- Net interest expense increased to $86.0 million in Q3 and $203.0 million for nine months, from $50.2 million and $152.6 million, respectively, reflecting higher average debt balances and rates. Q3 average interest rate was 4.55%, versus 3.12% a year earlier.
- Other income was $1.1 million in Q3 2022 versus expense of $44.9 million in Q3 2021; the prior-year quarter included a $43.4 million legal accrual related to DST ERISA matters. Nine-month 2022 other expense was $28.3 million.
- Q3 stock-based compensation expense included a $25.7 million reduction from a true-up to performance awards expected to vest. This reduced previously recorded expense and contributed to lower organic operating expenses for the quarter.
Cash, debt and liquidity
- At September 30, 2022, cash and cash equivalents were $401.9 million, versus $564.0 million at year-end 2021. Total debt carrying value was $7,241.1 million, versus $5,948.9 million. Long-term debt, net of current portion, was $7,183.7 million.
- Cash, cash equivalents and restricted cash totaled $1,443.6 million, including $1,038.7 million of restricted cash held within client funds. Client funds receivable and obligations were each $1,115.1 million on the balance sheet; these balances are not equivalent to unrestricted corporate liquidity.
- Nine-month operating cash flow was $764.6 million, down from $944.9 million. Investing used $1,707.8 million, principally due to $1,629.5 million of net cash paid for acquisitions. Financing used $751.7 million, including a $1,564.5 million decrease in client funds obligations, $385.4 million of repurchases and $153.4 million of dividends; net debt borrowings partly offset uses.
- The company reported $247.5 million available under its $250 million revolving credit facility and compliance with all financial and non-financial debt covenants at quarter-end. The actual consolidated net secured leverage ratio was 2.52x against a 6.25x maximum.
- Management stated that cash on hand, operating cash flow and credit availability should be sufficient for obligations, working capital and capital spending for at least the next 12 months.
Acquisitions, outlook and risks
- Major 2022 acquisitions included Blue Prism for approximately $1.6 billion, Hubwise for approximately $75 million and Tier1 for approximately $32.5 million; the company also acquired MineralWare and O’Shares assets. Blue Prism contributed $62.5 million of Q3 revenue and $136.0 million for the nine months. Acquisition purchase-price allocations remained preliminary.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management cautioned that results to date are not necessarily indicative of future periods.
- Management identified uncertain potential effects from COVID-19 and macroeconomic conditions, including higher interest rates, inflation and foreign-exchange movements. Foreign-currency translation reduced reported revenue and contributed substantially to other comprehensive loss.
- Variable-rate debt creates rate exposure: the filing estimates that a 100-basis-point rate increase would add approximately $53.0 million of annual interest expense. A substantial portion of debt was described as variable-rate; the company was monitoring LIBOR transition effects.
- DST ERISA litigation and related proceedings remained ongoing, including appeals concerning arbitration awards and class proceedings. The company stated it was vigorously defending the matters; ultimate resolution and additional potential exposure were uncertain. Management did not believe other legal claims were probable to result in material losses.
- Foreign-currency translation adjustments were a $512.0 million loss for the first nine months of 2022, contributing to a $66.9 million comprehensive loss despite positive net income.
- Management concluded disclosure controls were effective. It was still reviewing and evaluating internal financial-reporting controls for Blue Prism, whose systems and processes were separate.
Key facts for investors to verify
- How much of revenue growth is sustainable and organic, particularly given acquisition contributions and currency effects.
- Whether operating margins and cash conversion recover as acquisition integration, wage inflation and other costs evolve.
- Debt levels, variable-rate exposure, refinancing needs and covenant headroom; distinguish corporate cash from client-held or restricted funds.
- Final acquisition purchase accounting, Blue Prism integration and the acquired businesses’ ongoing contribution to earnings and cash flow.
- Developments and potential financial exposure in the DST ERISA litigation and related arbitration proceedings.
- Effects of foreign-exchange movements, interest rates and the unusually large translation loss on reported equity and future results.