Business context and reporting period
SS&C Technologies Holdings, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The period includes Advent Software from its July 8 acquisition and Varden from September 1; DST Global Solutions, acquired in late 2014, also contributed to year-over-year comparisons. Amounts below are in millions of dollars unless otherwise noted.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $280.9 | $192.6 | $699.4 | $567.1 |
| Recurring revenue | $260.8 | $177.0 | $643.5 | $524.1 |
| Gross profit / margin | $129.0 / 45.9% | $91.2 / 47.4% | $325.7 / 46.6% | $262.0 / 46.2% |
| Operating income / margin | $15.0 / 5.3% | $54.4 / 28.2% | $116.4 / 16.6% | $146.8 / 25.9% |
| Net income (loss) | $(34.6) | $40.8 | $30.8 | $94.5 |
| Diluted EPS | $(0.36) | $0.47 | $0.33 | $1.08 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $120.6 | $164.3 |
- Q3 revenue rose 46%; nine-month revenue rose 23%. Recurring revenue was 93% of Q3 revenue. Management attributed growth primarily to Advent, Varden and DSTGS, alongside continued demand for fund administration services; foreign-exchange translation was a partial offset.
- Q3 results included $30.4 million of debt-extinguishment loss and sharply higher interest expense of $32.6 million versus $6.1 million. Operating expenses were $114.1 million versus $36.9 million, including acquisition-related costs, stock compensation, redundancy charges and professional fees.
- Q3 stock-based compensation was $23.1 million, including $18.8 million for Advent awards and $11.1 million for accelerated vesting. Acquisition-related operating expenses included $12.6 million of redundancy charges and $12.2 million of professional fees. These reported amounts should not be treated as wholly recurring.
- Nine-month operating cash flow declined year over year. Management cited $64.9 million of one-time Advent-related payments and $2.6 million for eliminating redundant positions. Days sales outstanding increased to 45 from 42 at year-end 2014.
Financial position, debt and liquidity
- At September 30, cash and cash equivalents were $503.8 million, compared with $109.6 million at December 31, 2014. Current assets were $724.0 million and current liabilities $337.9 million.
- Debt carrying value was $2.829 billion, including $2.300 billion under secured facilities and $600 million of 5.875% senior notes due 2023, net of discounts and issuance costs. Cash-adjusted debt was approximately $2.325 billion. The $150 million revolving facility was undrawn.
- The new July 2015 credit facilities financed the Advent acquisition and refinancing; variable-rate debt was $2.3 billion. The company estimated a 1 percentage-point rate increase would add approximately $11.6 million of annual interest expense. It reported compliance with debt covenants at September 30. The financial ratio covenant begins testing for the quarter ending December 31, 2015; its initial maximum senior secured leverage ratio is 5.50x.
- Cash from operations, cash on hand and revolving-credit availability were expected by management to fund obligations, working capital, announced acquisitions and capital spending for at least 12 months. This is management’s liquidity assessment, not a guarantee.
Outlook, risks and unusual items
- Management forecast a 31%–33% effective tax rate for full-year 2015. The filing gives no specific revenue or earnings guidance.
- Announced pending acquisitions included Primatics Financial for approximately $122 million, expected to close in Q4 2015, and Citigroup’s Alternative Investor Services business for $425 million, subject to approvals and other conditions, expected to close in Q1 2016.
- The Advent purchase accounting was preliminary and included $1.956 billion of goodwill and a $431.2 million deferred tax liability related to acquired intangibles. The company cautioned that pro forma acquisition results are illustrative, not predictive.
- Millennium-related U.S. class-action claims were settled and dismissed; in July 2015, a UK tribunal dismissed the Master Fund liquidators’ claims against GlobeOp. Further proceedings on arbitration costs and GlobeOp’s indemnity claim remained.
- The filing highlights privacy and data-protection regulation as a business risk, including potential compliance costs, liability, reputational harm and reduced adoption. It also discusses foreign-currency exposure and sensitivity to variable interest rates. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and recurring revenue is attributable to acquisitions versus organic demand, and how acquisition integration affects margins.
- The sustainability of operating cash flow after acquisition-related payments and the effect of longer collection cycles and deferred-revenue movements.
- Debt repayment capacity, interest-rate exposure, covenant headroom when testing begins, and the funding and closing terms of pending acquisitions.
- Final purchase accounting, acquired-asset amortization, goodwill and tax consequences, including the nondeductible Advent intangibles.
- Developments in unresolved arbitration matters, privacy and data-protection obligations, and other risks described in the company’s risk-factor disclosures.