SS&C Technologies Holdings, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited; amounts below are in millions of U.S. dollars unless stated otherwise. SS&C provides financial software, maintenance, professional services and software-enabled services, and reports one operating segment.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $94.3 | $83.0 | $275.1 | $242.8 |
| Gross profit / margin | $47.8 / 51% | $40.7 / 49% | $138.5 / 50% | $120.4 / 50% |
| Operating income | $24.1 | $19.6 | $70.1 | $58.8 |
| Net income | $14.9 | $9.9 | $37.8 | $23.2 |
| Diluted EPS | $0.18 | $0.13 | $0.47 | $0.32 |
| Operating cash flow | Not separately presented | Not separately presented | $71.6 | $47.6 |
Q3 revenue increased 14%; nine-month revenue increased 13%. Software-enabled services, the largest revenue category, rose 17% in both comparisons. For Q3, management attributed the revenue increase to $5.2 million from acquisitions, $5.0 million in organic growth and $1.1 million from favorable foreign exchange. For the nine-month period, it cited $14.9 million from acquisitions, $13.8 million in organic growth and $3.6 million from foreign exchange.
Interest expense declined to $3.2 million for Q3 from $6.7 million and to $11.8 million for the nine months from $23.8 million, reflecting lower average debt. The effective tax rate was 30% for Q3 and 32% year to date, versus 27% and 23% in 2010, respectively.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $76.2 million at September 30, 2011, down from $84.8 million at December 31, 2010. Current assets were $135.6 million and current liabilities were $77.7 million.
- Total debt was $172.7 million, down from $290.8 million at year-end 2010. It comprised $106.1 million under the senior credit facility and $66.6 million of 11.75% senior subordinated notes due 2013; $1.2 million was current. The credit facility term-loan weighted-average rate was 2.33%.
- For the first nine months, operating activities provided $71.6 million; investing activities used $25.6 million, including $19.9 million for acquisitions; and financing activities used $54.3 million, including $118.2 million of debt repayments.
- The February 2011 follow-on offering generated approximately $52.0 million in net proceeds for the Company. The filing says proceeds from shares sold by existing stockholders did not go to the Company.
- Management expected cash on hand and operating cash flows to fund current obligations, working capital and capital spending for at least the next 12 months. The Company reported compliance with all debt covenants at September 30, 2011.
Material changes and notable items
- Q3 growth included stronger software-enabled services and professional services; software license revenue declined 3%. Organic software-enabled services revenue rose $6.2 million in Q3 and $17.4 million year to date.
- Q3 gross margin improved to 51% from 49%; nine-month gross margin was unchanged at 50%. Operating expenses rose 13% in Q3 and 11% year to date, while remaining 25% of revenue in both comparisons.
- In March, SS&C redeemed $66.6 million of its 11.75% notes at 102.9375% of principal and recorded a $2.9 million debt-extinguishment loss. The nine-month 2010 comparison included a $5.5 million debt-extinguishment loss.
- Acquisitions included BenefitsXML in March and Ireland Fund Admin in September. Together, the two required approximately $21.0 million in cash consideration net of cash acquired; the filing reports $19.9 million in total acquisition cash outflow for the period. BenefitsXML also carries contingent consideration initially measured at $1.8 million, with possible undiscounted payments of zero to $3.0 million.
- Foreign currency translation reduced Q3 comprehensive income by $24.7 million; total comprehensive loss was $9.8 million, despite $14.9 million net income. Year-to-date translation loss was $14.5 million.
Outlook, risks and controls
- No revenue or earnings guidance was provided. Management forecast a 2011 effective tax rate of 32%–33%.
- Management identified retention and addition of clients, transaction volumes, assets under management, license deal timing, and maintenance-fee growth as factors affecting revenues. It noted that actual results may differ from estimates and that quarterly results are not necessarily indicative of full-year results.
- Debt covenants restrict certain activities and require a maximum leverage ratio and minimum interest coverage ratio. At September 30, actual ratios were 0.96x leverage versus a 5.50x maximum and 8.98x interest coverage versus a 2.25x minimum. A covenant breach could trigger acceleration of debt; the filing cautions that future compliance can be affected by events outside the Company’s control.
- About 30% of nine-month revenue came from clients outside the United States. The Company cited exposure to foreign exchange movements and $106.1 million of variable-rate debt; it had no interest-rate swaps outstanding at quarter-end.
- Management reported no litigation it believed would have a material adverse effect, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective at a reasonable-assurance level; no materially affecting change in internal control was reported.
Important facts for investors to verify
- How much of reported revenue and earnings growth is sustainable organic growth versus acquisitions and favorable currency effects.
- Whether software-enabled services growth, client retention and margins continue, and whether softer license and professional-services trends persist.
- Debt repayment capacity, covenant headroom, interest-rate exposure and refinancing needs for the remaining notes due 2013.
- Acquisition performance, purchase-accounting amortization and potential BenefitsXML contingent payments.
- The impact of foreign currency movements, including the large translation loss in Q3, and the assumptions underlying the 32%–33% tax-rate forecast.