SS&C Technologies Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone quarterly report; selected unaudited fourth-quarter results are also summarized below. Amounts are U.S. dollars.
Business context
SS&C provides software-enabled services and software to financial-services and healthcare organizations, including fund administration, asset and wealth management, trading, and healthcare claims and benefit administration. It operates as one reportable segment. The business model is weighted toward recurring services: software-enabled services generated 83.5% of FY2019 revenue. Management reported average revenue retention above 90% over the prior five years for specified core contracts.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Revenue | $4,632.9 million | $3,421.1 million | Up 35.4% |
| Gross profit / margin | $2,021.2 million / 43.6% | $1,370.0 million / 40.0% | Margin up 3.6 percentage points |
| Operating income / margin | $914.4 million / 19.7% | $429.1 million / 12.5% | Margin up 7.2 percentage points |
| Net income | $438.5 million | $103.2 million | Net margin 9.5%, versus 3.0% |
| Diluted EPS | $1.66 | $0.42 | Weighted-average diluted shares rose to 264.2 million from 243.7 million |
| Cash from operations | $1,328.3 million | $640.1 million | Up $688.2 million |
| Debt | $7,224.3 million principal | $8,347.3 million principal | Year-end 2019 carrying amount was $7,154.1 million after unamortized discounts and issuance costs |
Revenue growth was primarily acquisition-driven: acquisitions contributed $1,140.5 million of the $1,211.8 million increase, according to management. Software-enabled services revenue rose 38.2% to $3,869.2 million; license, maintenance and related revenue rose 22.7% to $763.7 million. Management attributed improved margins partly to cost reductions and operating leverage; acquired businesses and integration costs affected comparability.
Cash, cash equivalents and restricted cash totaled $1,789.4 million, but included $1,627.6 million of client funds; cash and cash equivalents alone were $152.8 million. Client funds obligations were $1,729.9 million. FY2019 financing included $1.1 billion of net debt repayments, $107.7 million of dividends and $60.3 million of share repurchases. Management expected cash, operating cash flow and available credit to cover obligations and projected working capital and capital spending for at least 12 months.
FY2019 interest expense was $409.6 million. The company reported $5,198.7 million of variable-rate debt and estimated that a 1 percentage-point LIBOR increase would add approximately $52 million to annual interest expense. Its actual secured net leverage ratio was 2.70x, below the 6.75x maximum covenant threshold. The revolving facility had $245.4 million available at year-end.
Selected fourth-quarter results (unaudited): Revenue was $1,203.5 million versus $1,111.0 million in Q4 2018; operating income was $261.3 million versus $212.4 million; and net income was $141.6 million versus $58.7 million. Diluted EPS was $0.54 versus $0.23.
Material changes and unusual items
- FY2018 included major acquisitions of DST, Eze, Intralinks and CACEIS; their fuller-period contribution materially affects year-over-year comparisons. In 2019, SS&C acquired Algorithmics for approximately $89.6 million and Investrack for approximately $7.7 million.
- In March 2019, SS&C issued $2.0 billion of 5.5% senior notes due 2027 and used the proceeds to repay term debt. It recorded a $7.1 million debt-extinguishment loss, versus a $43.3 million loss in 2018.
- FY2019 operating cash flow included a $250 million multi-year license agreement paid upfront; associated revenue is expected to be recognized over approximately four years.
- Income tax expense was $93.2 million, compared with $21.9 million in 2018; the effective tax rate was 17.5% in both years. The FY2019 result included tax benefits from stock awards, foreign loss utilization and releases of uncertain tax positions.
- Adoption of lease accounting in 2019 added $387.6 million of right-of-use assets and $417.8 million of lease liabilities at transition. The filing says the change did not materially affect income or cash flow statements.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management describes continued investment in product development, cloud and software-enabled services, international expansion, margin improvement and selective acquisitions as priorities. In January 2020, the company repriced term-loan margins; principal, scheduled amortization and covenants were unchanged.
Subsequent to year-end, SS&C approved a reduction of approximately 670 employees and expected about $30 million of severance expense in Q1 2020, with most cash payments in Q1 and Q2. The board also declared a $0.125-per-share dividend payable in March 2020. A $40 million preferred-stock investment in SILAC was announced in February 2020; the CEO had an economic interest in SILAC, and the independent directors and audit committee approved the related-party transaction.
Key risks include substantial indebtedness and variable interest rates; reliance on financial markets and hedge-fund clients; acquisition integration and goodwill valuation; cybersecurity, service interruption and privacy regulation; competition; foreign exchange and international operations; and regulatory, tax and litigation exposure. Goodwill was $7,959.9 million, with no impairment recorded. The auditor identified the DST reporting unit goodwill impairment assessment as a critical audit matter because it involved significant assumptions about discount rates and projected margins.
The company disclosed ongoing ERISA-related litigation and numerous arbitration demands involving the DST employee benefit plan, as well as a U.S. Department of Labor action. SS&C said it was vigorously defending these matters and had not determined their effect, if any, on its financial position or results. Management stated that it knew of no litigation expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control; management also concluded controls were effective, while Algorithmics was excluded from the 2019 controls assessment because it was acquired during the year.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth and confirm the recurring-revenue contribution and retention trends.
- Reconcile reported cash with client funds and obligations; do not treat client balances as freely available liquidity.
- Review debt maturities, variable-rate exposure, covenant headroom and the effect of the January 2020 repricing.
- Assess the assumptions supporting the substantial goodwill balance, particularly the DST reporting unit, and monitor integration savings and amortization.
- Track the outcome and potential financial exposure of the ERISA litigation and arbitration matters, tax examinations and uncertain tax positions.
- Confirm the actual costs and timing of the 2020 workforce reduction and the terms, valuation and governance of the SILAC investment.
- Note that the filing’s geographic revenue descriptions use different comparisons: 25% outside North America in the overview and 27% outside the United States in the detailed disclosure.