SS&C Technologies Holdings, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. SS&C provides software-enabled services, software licenses, maintenance and related services. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,152.8 | $1,144.2 | $3,464.5 | $3,429.4 |
| Gross profit / gross margin | $523.9 / 45.4% | $501.5 / 43.8% | $1,543.2 / 44.5% | $1,475.7 / 43.0% |
| Operating income | $257.0 | $227.6 | $717.1 | $653.1 |
| Net income | $159.4 | $95.0 | $428.1 | $296.9 |
| Diluted EPS | $0.60 | $0.36 | $1.61 | $1.12 |
| Net interest expense | $54.7 | $98.5 | $192.6 | $304.4 |
- Quarterly revenue increased 0.8%; nine-month revenue increased 1.0%. Software-enabled services revenue was nearly flat in both periods, while license, maintenance and related revenue grew 5.5% in Q3 and 6.9% year to date.
- Management attributed Q3 revenue growth to acquisitions and favorable currency movements, partly offset by a $27.8 million decline in organic revenue. For nine months, acquisitions added $73.1 million, offset in part by a $31.9 million organic decline and unfavorable currency movements.
- Q3 operating income rose 12.9% and net income rose 67.8% year over year. Lower interest expense supported earnings; Q3 other income also included $11.8 million of investment gains. The effective tax rate was 26.9% in Q3 versus 20.0% a year earlier, and 20.9% versus 19.9% for nine months.
Cash flow, debt and liquidity
- Nine-month cash provided by operating activities was $755.1 million, essentially unchanged from $755.0 million. Investing activities used $195.9 million, including $113.5 million for acquisitions, $54.6 million for capitalized software and $25.4 million for property and equipment.
- Financing activities used $1,477.7 million, including a $949.2 million decrease in client funds obligations, $330.3 million of net debt repayments, $219.8 million of share repurchases and $99.9 million of dividends. The decrease in client funds obligations also reduced reported cash.
- At September 30, cash and cash equivalents were $184.5 million; funds receivable and funds held for clients were $781.5 million, matched by $781.5 million of client funds obligations. Total debt carrying value was approximately $6,844.3 million, down from $7,154.1 million at year-end 2019.
- The company reported $246.1 million available under its $250 million revolving facility. Management said cash, operating cash flow and credit availability were expected to cover obligations and projected working capital and capital spending for at least 12 months.
- The term-loan interest margin was reduced in January 2020 from LIBOR plus 2.25% to LIBOR plus 1.75%. The company reported a 2.52x consolidated net secured leverage ratio against a maximum covenant ratio of 6.75x. The $2.0 billion of 5.5% senior notes mature in 2027; term loans are due in 2025.
Material developments, outlook and risks
- SS&C acquired Captricity in March and Innovest Systems in May 2020. Together, the two acquisitions contributed $29.9 million of Q3 revenue. Integration-related severance expense was $32.0 million for the first nine months, versus $11.8 million a year earlier.
- Management said COVID-19 had caused some client delays and weakness in certain products, but had not had a direct material negative effect on the business through September 30. It cautioned that impacts remained uncertain and that results through the period might not indicate effects later in 2020 or 2021. Remote-work technology costs increased, while travel restrictions and other savings reduced organic expenses.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management described limiting discretionary spending and reprioritizing capital projects amid the pandemic.
- A putative ERISA class action involving DST-related retirement-plan investments had a $27 million settlement agreement in principle, subject to court and other conditions. The company stated a loss was not probable as of September 30, 2020; the amount could be offset by insurance if recognized. Related individual actions, arbitrations and a Department of Labor case were also pending. Management said it could not yet determine their effect, if any.
- Other notable items include $219.8 million of year-to-date share repurchases under a renewed $750 million program and $99.9 million of dividends paid. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether organic revenue trends and client delays improve, particularly in products affected by COVID-19, and how much reported growth depends on acquisitions and currency.
- How sustainable earnings growth is after considering lower interest expense, investment gains, tax-rate changes and acquisition-related costs.
- Debt repayment capacity and liquidity, distinguishing company cash from client funds and monitoring covenant headroom and variable-rate exposure.
- Final outcome, timing and insurance coverage of the DST-related litigation and proposed settlement, plus any required loss recognition.
- Acquisition integration, severance costs, and the eventual cash generation and performance of Captricity and Innovest.