SS&C Technologies Holdings, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019, compared with the same 2018 periods. SS&C provides software-enabled services, software licenses, maintenance and related services. Results include contributions from acquisitions, including DST, CACEIS, Eze and Intralinks; Eze and Intralinks were acquired in late 2018.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,144.2M | $992.4M | $3,429.4M | $2,310.1M |
| Gross profit / margin | $501.5M / 43.8% | $412.3M / 41.5% | $1,475.7M / 43.0% | $897.0M / 38.8% |
| Operating income / margin | $227.6M / 19.9% | $180.6M / 18.2% | $653.1M / 19.0% | $216.7M / 9.4% |
| Net income | $95.0M | $57.0M | $296.9M | $44.5M |
| Diluted EPS | $0.36 | $0.23 | $1.12 | $0.19 |
| Operating cash flow | Not presented quarterly in the supplied filing text | $755.0M | $322.4M |
- Q3 revenue grew 15.3%; the company attributed $147.8M of the increase to Eze and Intralinks. Nine-month revenue rose 48.5%, including $1,092.8M from acquisitions. Management also cited growth in institutional and investment management, advisory and wealth management, and fund administration services. DST business declines and unfavorable currency translation partly offset growth.
- Q3 and nine-month gross margins improved year over year. Nine-month operating income benefited from acquisition contributions and the absence of $96.4M in 2018 transaction expenses; acquisition-related costs and higher interest expense remained significant.
- Interest expense was $98.5M in Q3 and $304.4M for the nine months, compared with $78.1M and $173.7M, respectively, primarily reflecting acquisition-related borrowings and, to a lesser extent, higher average rates. The nine-month 2019 tax provision was $73.9M versus a $28.3M benefit in 2018; the comparative period’s effective tax rate was affected by acquisition and low pretax-income effects.
- Operating cash flow increased to $755.0M for nine months, supported by net income and noncash adjustments, partly offset by working-capital changes. Investing used $40.3M; financing used $715.3M, including $629.1M of net debt repayments, $76.0M of dividends and $60.3M of share repurchases. Cash, cash equivalents and restricted cash decreased $2.4M to $1,110.9M, but this total includes client funds; balance-sheet cash and cash equivalents were $157.5M.
- At September 30, 2019, total debt was $7,632.4M, including $2.0B of 5.5% senior notes due 2027. The senior secured credit facilities had a 4.29% weighted-average rate; the company had $245.4M available under its revolving facility. The reported covenant net secured leverage ratio was 2.98x against a maximum of 7.25x.
- Current assets were $2,055.1M and current liabilities $1,899.1M, including matching client funds receivable/held of $1,045.7M and client obligations of $1,045.7M. Management said cash on hand, operating cash flow and credit availability should fund obligations, working capital and capital spending for at least the next 12 months.
Material changes, outlook and risks
- In March 2019, SS&C issued $2.0B of 5.5% senior notes due 2027 and used the proceeds to repay part of its Term B-3 loan. Debt at quarter-end was below December 31, 2018’s $8,256.0M carrying amount.
- A multi-year $250.0M license agreement signed in Q3 generated a $48.0M upfront payment; a further $202.0M was due in Q4. SS&C recognized $15.0M in Q3 and expects to recognize the license revenue over approximately four years. Remaining performance obligations for license, maintenance and related revenue were $601.7M, with $288.4M expected over the next 12 months.
- SS&C adopted lease accounting guidance on January 1, 2019, recording $387.6M of right-of-use assets and $417.8M of lease obligations at adoption. Quarter-end operating lease liabilities were $403.4M; adoption did not materially affect earnings or cash flows.
- The board authorized up to $500M in share repurchases in August; $60.3M was spent on 1.3M shares through September 30. Quarterly dividends were $0.10 per share in 2019.
- No quantitative earnings or revenue guidance is provided in the supplied filing text. Management noted that results to date are not necessarily indicative of full-year or subsequent-period results. A 1% increase in rates was estimated to raise annual interest expense by approximately $56.9M on variable-rate debt; a 10% change in covered equity investments would affect net income by approximately $9.0M.
- Legal exposure includes ERISA-related litigation, individual claims and arbitration demands connected with the DST 401(k) plan, as well as a U.S. Department of Labor action. SS&C said it was defending the matters; potential loss could not be reasonably estimated. Management did not believe other proceedings would materially adversely affect the company.
- SS&C reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It identified no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much revenue and margin growth is organic versus acquired, including ongoing trends in the DST business and the impact of foreign exchange.
- Collection and recognition timing for the $250.0M license agreement, including the expected Q4 receipt of $202.0M and multiyear revenue schedule.
- Debt reduction, interest-rate exposure, revolver availability and covenant headroom, while distinguishing reported cash from client funds.
- The sustainability of operating cash flow and margins after acquisition-related costs, amortization, dividends and repurchases.
- Developments and any potential financial exposure from the ERISA-related proceedings and arbitration demands.