SS&C Technologies Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. SS&C provides software-enabled services and software licenses, maintenance and related services, principally to financial-services and healthcare clients.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $421.9 million | $407.7 million | +3.5% |
| Gross profit / margin | $192.3 million / 45.6% | $190.2 million / 46.7% | Margin down 1.1 percentage points |
| Operating income / margin | $86.8 million / 20.6% | $89.7 million / 22.0% | Income down 3.2% |
| Net income | $51.3 million | $48.1 million | +6.4% |
| Diluted EPS | $0.24 | $0.23 | +4.3% |
| Cash from operations | $69.9 million | $57.9 million | +$12.1 million |
- Software-enabled services revenue rose 6.6% to $294.8 million; license, maintenance and related revenue fell 3.1% to $127.1 million. Management attributed growth mainly to demand for fund administration, advisory and wealth-manager services; lower professional-services demand and ASC 606 timing effects weighed on the other revenue category.
- Operating costs grew faster than revenue: total cost of revenue increased 5.6% and operating expenses 4.9%. General and administrative expense rose 11%, partly reflecting DST acquisition-related professional fees, legal costs and personnel costs.
- Net interest expense declined to $25.4 million from $29.0 million, primarily due to lower average debt. The effective tax rate was 17.2%, versus 17.4%; management cited the lower U.S. statutory rate, partly offset by GILTI, and quarterly windfall tax benefits from stock awards.
- Operating cash flow was $69.9 million; investing activities used $11.3 million and financing activities used $48.8 million. Cash, cash equivalents and restricted cash ended at $74.6 million. Working-capital movements included higher receivables and payment of annual employee bonuses.
- At March 31, cash and cash equivalents were $74.1 million, current assets $386.2 million and current liabilities $374.9 million. Debt principal was approximately $2.031 billion, including $1.431 billion of variable-rate secured facilities and $600 million of 5.875% notes due 2023; debt carrying value, net of discount and issuance costs, was $1.987 billion. The company reported compliance with credit-facility covenants and $149.1 million of available revolving commitments at quarter-end.
Changes, accounting and significant events
- SS&C adopted ASC 606 on January 1, 2018 using the modified retrospective method. Term-license revenue is generally recognized when the license is delivered, rather than ratably with maintenance over the contract term; certain contract-acquisition costs are capitalized and amortized. Adoption increased opening retained earnings by $65.8 million before tax ($47.9 million net of tax). Management said adoption reduced Q1 revenue by $11.8 million and did not affect total operating cash flows. Prior-year results were not restated, limiting comparability.
- After quarter-end, SS&C completed a public offering of 30.3 million newly issued shares at $47.50 per share, receiving approximately $1.4 billion in net proceeds.
- On April 16, 2018, SS&C acquired DST Systems for approximately $5.0 billion in cash, plus transaction costs and assumed debt. The company entered into new credit facilities with approximately $7.4 billion of borrowings, including about $524.5 million rolled over from existing facilities, and a $250 million undrawn revolver. It used part of the proceeds to repay existing debt, including redeeming the $600 million senior notes. DST results are included from April 16; preliminary acquisition accounting was not yet complete.
- Following the DST transaction, management estimated annual interest payments of approximately $317.8 million. This is a material change from quarter-end leverage and should not be confused with the March 31 balance sheet.
Outlook, risks and contingencies
- Management expected cash on hand, operating cash flows and credit availability to fund obligations, working capital and capital spending for at least 12 months; this statement preceded the DST acquisition and associated financing. The filing provides no specific revenue or earnings guidance. Management forecast a 23%–25% effective tax rate for full-year 2018.
- Key risks include integrating DST and realizing projected synergies; the substantially increased debt burden, variable-rate exposure and covenant compliance; client activity and assets under management; competitive pressure; cybersecurity, service interruptions, privacy and regulatory compliance; and foreign-exchange and international-market exposure. A 1-percentage-point increase in rates at March 31 was estimated to raise annual interest expense by about $14.3 million.
- The company said it was not party to litigation expected to have a material adverse effect. It also reported effective disclosure controls as of March 31 and no material change in internal control over financial reporting during the quarter.
- ASU 2016-02 on leases was expected to materially increase reported assets and liabilities when adopted in Q1 2019. The company was still assessing the impact.
Important facts for investors to verify
- How DST integration, acquisition accounting, cost savings and client retention compare with management’s expectations.
- Post-acquisition debt, interest expense, leverage and covenant headroom, including the effect of variable interest rates.
- Revenue and margin trends on a comparable basis, given the ASC 606 transition and its effect on license timing and contract costs.
- Cash conversion and receivables collection, including the working-capital movements noted in Q1.
- The final tax effects of the Tax Act and the implementation impact of lease accounting.