SS&C Technologies Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; dollar amounts below are in millions unless otherwise noted. SS&C provides software-enabled services, maintenance and software licenses, with fund administration a key source of demand. Recurring revenue represented 94% of Q3 revenue.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $418.3 | $383.3 | $1,236.9 | $1,080.5 |
| Gross profit | $198.4 | $175.3 | $576.0 | $485.3 |
| Operating income | $103.9 | $76.9 | $283.6 | $193.4 |
| Net income | $64.2 | $38.7 | $163.5 | $74.0 |
| Diluted EPS | $0.30 | $0.19 | $0.77 | $0.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $307.1 | $237.0 |
Q3 revenue grew 9%; nine-month revenue grew 14%. Gross margin was approximately 47.4% in Q3 versus 45.7% a year earlier, and approximately 46.6% for nine months versus 44.9%. Operating margin was approximately 24.8% in Q3 versus 20.1%, and 22.9% for nine months versus 17.9%.
Growth was led by recurring revenue: up 11% in Q3 and 16% for nine months. Non-recurring revenue declined 16% and 9%, respectively, reflecting lower professional-services and perpetual-license revenue. Management attributed revenue growth to acquired businesses and continuing demand for fund administration services. Acquisitions and purchase-accounting adjustments contributed materially; the filing identifies $20.9 million of Q3 revenue from acquisitions, net of lost sales, and $99.1 million for nine months, net of lost sales. Organic growth figures also include acquired deferred-revenue fair-value adjustments.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $103.9 million at September 30, down $15.8 million from year-end 2016. Nine-month operating cash flow was $307.1 million; investing activities used $36.1 million and financing activities used $290.5 million.
- Investing cash use primarily included $29.8 million of capital expenditures and $8.2 million of capitalized software costs. Financing use primarily reflected $337.8 million of debt repayments and $39.9 million of dividends, partially offset by $46.3 million from option exercises.
- Debt principal was approximately $2.267 billion, including $1.667 billion of variable-rate debt and $600 million of 5.875% senior notes due 2023. The balance-sheet debt carrying amount, net of discounts and issuance costs, was $2.217 billion. Debt principal was lower than at December 31, 2016, when the company also had $94 million drawn on its revolving facility.
- The $150 million revolving facility had no borrowings at September 30; $0.9 million of letters of credit was outstanding. The company reported covenant compliance and a 2.31x net senior secured leverage ratio versus a 5.25x maximum. Management said available cash, operating cash flow and credit availability should meet obligations and projected working-capital and capital-spending needs for at least 12 months.
- Current assets were $389.1 million versus current liabilities of $406.1 million. Approximately $80.4 million of cash was held at non-U.S. subsidiaries under permanent-reinvestment determinations; $74.6 million was available to foreign borrowers for debt service.
Changes, outlook and risks
- Interest expense declined to $26.3 million in Q3 and $81.6 million for nine months, primarily due to lower average debt and lower borrowing rates following the March 2017 credit-agreement repricing. That amendment reduced the highest applicable margins on Term Loans A and B by one percentage point; it generated a $2.3 million debt-extinguishment loss in Q1.
- The nine-month effective tax rate was 16.5%, versus 23.4% in 2016, reflecting stock-award windfall tax benefits and other comparison effects. Management forecast a 2017 full-year effective tax rate of 18%–19%. Discrete stock-compensation tax benefits were $2.7 million in Q3 and $12.8 million for nine months.
- Management identified no material changes to critical accounting estimates. The company planned to adopt the new revenue standard in Q1 2018 using the modified retrospective method. It expected term-license revenue to be recognized upfront while related maintenance revenue remains recognized over the contract period; some existing deferred revenue would instead be reflected in retained earnings. The impact was still under evaluation.
- A 1% rise in interest rates was estimated to increase annual interest expense by approximately $16.7 million. About 27% of nine-month revenue came from clients outside the U.S.; foreign-exchange movements affect reported results. The filing reports no off-balance-sheet arrangements material to investors and no litigation expected by management to have a material adverse effect.
- After quarter-end, on October 13, 2017, SS&C acquired CommonWealth Fund Services for approximately $16.4 million, subject to adjustments. No earnings guidance beyond the tax-rate forecast is provided in the filing.
Important facts for investors to verify
- How much reported revenue growth reflects underlying organic demand versus acquisitions and deferred-revenue purchase-accounting adjustments.
- Whether the expected 2018 revenue-recognition changes materially affect revenue timing, deferred revenue, retained earnings or contract-acquisition costs.
- Debt repayment capacity and sensitivity to interest rates, including compliance with the secured leverage covenant and availability of the revolver.
- Durability of margin and earnings growth, considering the contribution of tax benefits, acquisition synergies and lower interest expense.
- Integration and financial contribution of CommonWealth, and the accessibility of cash held by foreign subsidiaries.