SS&C Technologies Holdings, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014, filed February 26, 2015. SS&C provides financial-services software and software-enabled outsourcing and hosted services to more than 7,000 clients. Its business is primarily contractually recurring: software-enabled services and maintenance accounted for 90.9% of 2014 revenue. The filing also reports unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $767.9 million | $712.7 million | +7.7% |
| Operating income | $200.4 million | $183.0 million | +9.5% |
| Net income | $131.1 million | $117.9 million | +11.2% |
| Diluted EPS | $1.50 | $1.38 | +8.7% |
| Operating cash flow | $252.5 million | $208.3 million | +21.2% |
| Gross margin | Approximately 46.5% | Approximately 45.4% | Improved |
- Fourth-quarter 2014 revenue was $200.7 million, operating income $53.6 million, net income $36.6 million and diluted EPS $0.42. In Q4 2013, the comparable figures were $182.5 million, $47.8 million, $26.9 million and $0.31.
- Revenue mix in 2014: software-enabled services $592.5 million (77%), maintenance $105.6 million (14%), software licenses $36.3 million (5%) and professional services $33.4 million (4%).
- Cash and cash equivalents were $109.6 million at year-end, versus $84.5 million in 2013. Current assets were $235.2 million and current liabilities $191.6 million.
- Debt principal was $645.0 million at year-end, down from $782.0 million; the balance-sheet carrying amount, net of discount, was $638.9 million. The company reported a 1.62x secured net leverage ratio against a 4.75x maximum covenant and was in compliance with covenants.
- Interest expense was $27.2 million, down from $42.4 million. A 1% interest-rate change was estimated to affect annual interest expense by approximately $4.0 million.
Material changes versus prior comparable periods
- Annual revenue growth reflected continued demand for alternative-investment fund administration and contributions from acquired businesses, including DST Global Solutions (DSTGS) and Prime. DSTGS contributed $7.2 million of revenue after its November 2014 acquisition.
- Software-enabled services revenue increased 7% to $592.5 million; license revenue rose 27% to $36.3 million, partly due to a significant perpetual license; professional services revenue rose 19%. Maintenance revenue increased 2%.
- Gross margin improved versus 2013, which management attributed primarily to cost-reduction synergies from acquisitions. Selling and marketing, R&D, and general and administrative expenses increased; 2014 general and administrative costs included legal expenses and acquired-business and office-consolidation costs.
- The effective tax rate rose to 26% from 19% in 2013, mainly reflecting a higher share of domestic earnings and fewer favorable tax items. The 2013 rate benefited from discrete tax benefits.
- Foreign currency translation reduced reported comprehensive income: the 2014 translation adjustment was a loss of $45.5 million. International clients generated about 33% of revenue, and the company did not hedge currency exposure.
Outlook, risks, contingencies and unusual items
- The filing provides no formal numeric 2015 financial guidance. Management expressed the view that financial-services firms would continue increasing IT investment in 2015 amid operational complexity and regulatory demands.
- In February 2015, SS&C agreed to acquire Advent Software for an enterprise value of approximately $2.7 billion, or $44.25 per share plus assumed debt. Closing was expected in Q2 2015, subject to approvals and customary conditions. The stated funding plan included $3.0 billion of debt financing, cash on hand and approximately $400 million of equity. Integration, financing, approval and synergy realization are material uncertainties.
- A U.K. arbitration involving GlobeOp and the Millennium funds remained unresolved. A related U.S. class action was settled and dismissed in 2014, with insurers funding the settlement contribution contemplated from GlobeOp. The remaining arbitration includes a claim alleged to exceed $160 million; SS&C said the possible loss could not be reasonably estimated and that it was vigorously contesting the matter.
- Principal disclosed risks include economic and financial-market weakness, client and hedge-fund exposure, competition, cybersecurity or service interruptions, regulatory and tax changes, foreign-exchange movements, acquisition integration, and substantial variable-rate debt. The company also noted that debt covenants restrict certain activities, including dividends and additional borrowing.
- Other notable capital-allocation items: SS&C paid its first quarterly dividend of $0.125 per share in December 2014 and repurchased $11.2 million of shares during the year. A subsequent $0.125 dividend was declared in February 2015.
Important facts for investors to verify
- Whether the Advent transaction closed as expected, its final financing mix and resulting debt, dilution, integration costs and realized synergies.
- Progress and potential financial exposure from the remaining Millennium U.K. arbitration, including the limits and continuing availability of insurance coverage.
- Revenue growth and retention in recurring services, margin trends, and the contribution of acquisitions versus organic growth.
- Ability to service variable-rate debt and remain within covenant limits after the planned large acquisition.
- Currency impacts, tax-audit outcomes and the effect of deferred tax positions on future earnings and cash flow.