SS&C Technologies Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; amounts below are in millions except per-share data. Comparisons are with the corresponding 2014 periods.
Business context and results
SS&C provides software-enabled services, software, maintenance and professional services, primarily to financial-services clients. Results included contributions from DST Global Solutions (DSTGS), acquired in Q4 2014.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $212.8 | $188.7 | $418.5 | $374.5 |
| Gross profit / margin | $103.3 / 48.5% | $86.5 / 45.8% | $196.7 / 47.0% | $170.8 / 45.6% |
| Operating income / margin | $58.4 / 27.4% | $45.4 / 24.0% | $101.5 / 24.3% | $92.4 / 24.7% |
| Net income / margin | $39.1 / 18.4% | $27.2 / 14.4% | $65.4 / 15.6% | $53.7 / 14.3% |
| Diluted EPS | $0.44 | $0.31 | $0.73 | $0.62 |
| Operating cash flow | Not separately reported | Not separately reported | $100.7 | $92.8 |
Financial position, liquidity and cash flow
- Cash and equivalents were $729.8 at June 30, up from $109.6 at year-end 2014. The first-half increase of $620.2 primarily reflected $717.9 net proceeds from a June common-stock offering and operating cash flow, partly offset by debt repayments, dividends and capital spending.
- Debt principal outstanding was $471.0 at June 30 (carrying value $465.6 after unamortized discount), down from $645.0 principal at year-end. The company repaid $174.0 of debt in the first half, including repayment of a $75.0 revolving-facility balance. Cash exceeded debt principal at quarter-end.
- First-half investing cash outflow was $15.4, including $7.9 for a DSTGS working-capital purchase-price adjustment, $5.7 of capital expenditures and $1.8 of capitalized software. Financing cash inflow was $536.6, including stock proceeds; dividends paid were $21.1.
- Management said cash on hand and operating cash flows were expected to cover current obligations, working-capital needs and capital spending for at least 12 months. This assessment preceded the July Advent acquisition.
Material changes versus prior comparable periods
- Revenue grew 13% in Q2 and 12% in the first half. Management attributed growth to DSTGS and continued demand for fund-administration services from alternative investment managers. Foreign-currency translation reduced revenue by $3.4 in Q2 and $6.6 in the first half.
- Maintenance revenue rose 39% in Q2 and 40% in the first half; software-license revenue increased 63% and 35%, respectively. DSTGS contributed $18.0 of Q2 revenue and $31.7 in the first half.
- Gross margin improved year over year, which management primarily attributed to higher software-license revenue. Operating income increased 29% in Q2 and 10% in the first half; first-half operating expenses grew 21%, including DSTGS-related costs and higher research and development expense.
- Net interest expense declined to $5.4 in Q2 and $11.0 in the first half, from $6.6 and $13.7, respectively, reflecting lower average debt and interest rates. Effective tax rates were 26% in both 2015 periods, versus 30% for Q2 2014 and 31% for first-half 2014.
Outlook, risks and unusual items
- The company forecast a 2015 consolidated effective tax rate of 26%–28%; it gave no specific revenue or earnings guidance in the provided filing text.
- Advent acquisition: On July 8, 2015, SS&C acquired Advent Software for approximately $2.6 billion in cash. The company entered into $2.63 billion of new senior secured credit facilities, including an undrawn $150 million revolver, and issued $600 million of 5.875% senior notes due 2023. A portion of financing proceeds repaid the existing credit facility. Advent results are included from the acquisition date. The filing identifies approximately $45 million of anticipated annual pre-tax cost synergies within three years, while warning that realization is not assured and integration may disrupt operations or increase costs.
- The June stock offering raised approximately $717.9 net. The MD&A separately refers to approximately $400 million of common-stock proceeds used in financing the Advent acquisition; the filing text does not clearly reconcile these amounts.
- Millennium-related UK arbitration remained pending. The company said it could not predict the outcome or reasonably estimate any potential loss. The related U.S. class action was settled and dismissed, with insurers funding GlobeOp’s settlement contribution.
- At June 30, variable-rate debt was $471.0; management estimated a 1% rate increase would raise annual interest expense by approximately $2.6. About 32% of first-half revenue came from clients outside the U.S.; currency movements were a reported headwind.
- The company reported compliance with debt covenants at June 30. Its stated maximum net senior-secured-leverage covenant was 4.50x and reported actual ratio was 0x. A covenant breach could permit acceleration of debt and termination of further lending commitments.
Key facts for investors to verify
- Reconcile the $717.9 June equity-offering proceeds with the MD&A’s approximately $400 million equity-proceeds figure for Advent financing.
- Review Advent’s final purchase accounting, acquisition-related debt and actual progress toward the stated $45 million synergy target.
- Monitor post-acquisition leverage, liquidity, covenant headroom and interest-rate exposure; June 30 cash and debt balances predate Advent financing.
- Track the UK Millennium arbitration, for which potential loss was not estimable, and any change in related insurance coverage.
- Assess the extent to which reported growth reflects DSTGS and currency effects versus continuing underlying demand.