SS&C Technologies Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial performance
SS&C provides software-enabled services, software licenses, maintenance and professional services, with fund administration services a key business. Software-enabled services generated 78% of revenue in both the quarter and nine-month period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $192.6 | $179.5 | $567.1 | $530.2 |
| Gross profit / margin | $91.2 / 47% | $83.3 / 46% | $262.0 / 46% | $239.8 / 45% |
| Operating income | $54.4 | $47.9 | $146.8 | $135.2 |
| Net income | $40.8 | $43.5 | $94.5 | $91.0 |
| Diluted EPS | $0.47 | $0.51 | $1.08 | $1.07 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $164.3 | $154.3 |
Q3 revenue grew 7%, led by software-enabled services (+8%), licenses (+12%) and professional services (+21%); maintenance declined 2%. Nine-month revenue also rose 7%. Management attributed growth mainly to greater demand for alternative-investment fund administration, the Prime acquisition (contributing $1.9 million in Q3 and $6.0 million year to date), a significant perpetual license and more implementation projects. Foreign currency translation reduced nine-month revenue by $1.3 million.
Gross margin improved, which management attributed primarily to cost-reduction synergies from acquisitions. Operating expenses rose 4% in Q3 and 10% year to date. Nine-month general and administrative expense included legal costs related to an IP infringement lawsuit settled in Q2 and office-consolidation costs. Q3 net income fell despite higher operating income, principally reflecting the year-earlier income tax benefit; the 2013 quarter had a $4.7 million tax benefit versus $9.0 million tax expense in 2014.
Cash, debt and liquidity
- Cash was $75.1 at September 30, down $9.4 from year-end 2013. Current assets were $198.9 and current liabilities $147.3 (current ratio approximately 1.35).
- Operating cash flow of $164.3 was offset by $13.6 of investing outflows and $158.9 of financing outflows; cash declined by $9.4. Capital expenditures were $11.9 and capitalized software additions $2.7.
- Credit-facility principal was $608.0; reported debt net of original issue discount was $601.6, including $21.6 current and $579.9 long term. The facility’s weighted-average rate was 2.96%. Debt fell from $782.0 principal at December 31, 2013, including $174.0 of repayments during the nine-month period.
- Management said cash on hand and operating cash flows should fund current obligations, projected working capital and capital spending for at least the next 12 months. The company reported compliance with its credit agreement covenants; the maximum leverage covenant was 4.75x and actual net senior secured leverage was 1.71x.
- The company held $52.0 of cash at certain non-U.S. subsidiaries designated as permanently reinvested, $22.0 at foreign debt-holder subsidiaries for debt service, and $23.1 in India that would incur an estimated $3.9 distribution tax if repatriated to the foreign debt holder.
Outlook, risks and notable items
- Management forecast a 2014 full-year effective tax rate of 26%–27%; no revenue or earnings guidance is provided in the filing.
- Variable-rate debt totaled $608.0. A 1 percentage-point increase in rates was estimated to increase annual interest expense by approximately $3.4.
- About 33% of nine-month revenue came from clients outside the United States. Currency movements may affect reported results; the company does not use derivatives for trading or speculative purposes.
- The U.S. Millennium class action was dismissed with prejudice after a settlement consummated in August 2014; insurers funded the entire settlement amount contemplated for GlobeOp. Related claims between GlobeOp and the Millennium Master Fund remain in UK arbitration. The company said it could not predict the outcome or reasonably estimate any potential loss.
- The company repurchased 274,726 shares for approximately $11.2 during the first nine months under its $100 million program. It recorded a $0.4 increase in Prime contingent consideration liability in Q2.
- Management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether recurring fund-administration demand and the contribution from Prime continued after Q3, and how much growth reflects acquisitions versus organic activity.
- Monitor maintenance revenue, margins, operating-expense growth and the effect of license revenue variability.
- Verify debt repayment, floating-rate exposure, covenant headroom and cash availability, including the location and repatriation constraints on foreign cash.
- Track the UK Millennium arbitration, insurance coverage and any change in the ability to estimate potential exposure.
- Assess the sustainability of the 26%–27% tax-rate forecast and the impact of foreign exchange and discrete tax items.