SS&C Technologies Holdings, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited consolidated results. Dollar amounts below are in millions, except per-share data. SS&C provides financial software, maintenance, professional services, and software-enabled services; it reports one segment.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $91.8 | $81.6 | $180.8 | $159.8 |
| Gross profit / margin | $46.2 / 50.3% | $40.7 / 49.8% | $90.7 / 50.2% | $79.7 / 49.9% |
| Operating income / margin | $22.9 / 24.9% | $19.8 / 24.2% | $46.0 / 25.4% | $39.2 / 24.5% |
| Net income | $13.0 | $4.4 | $22.9 | $13.4 |
| Diluted EPS | $0.16 | $0.06 | $0.29 | $0.19 |
| Operating cash flow | Not presented quarterly | $41.1 | $23.4 |
Revenue rose 12% in Q2 and 13% for the six-month period. Growth was led by software-enabled services, up 17% in both comparisons; maintenance and professional services also increased. Software-license revenue declined 18% in Q2 and was roughly flat for the half. Management attributed overall growth to organic expansion, acquisitions, and favorable currency translation.
Cash and cash equivalents were $82.6 at June 30, 2011, versus $84.8 at year-end 2010. Current assets were $143.8 and current liabilities $76.3. Total debt was $203.8, down from $290.8 at year-end; cash less total debt was approximately $121.1 net debt. The debt balance included $137.1 under the senior credit facility and $66.6 of 11.75% notes due 2013.
Material changes and notable items
- Q2 revenue increased $10.2, including $5.4 from acquisitions, $3.4 organic growth, and $1.4 favorable foreign-exchange impact. For the first half, the $21.0 increase included $9.7 from acquisitions, $8.8 organic growth, and $2.5 from currency.
- Net interest expense fell to $3.5 in Q2 from $8.1, and to $8.6 for the first half from $17.1, primarily reflecting lower average debt. Q2 2010 included a $5.5 debt-extinguishment loss; the first half of 2011 included a $2.9 loss related to redeeming $66.6 of notes.
- In February 2011, the company received approximately $52.0 in net proceeds from a follow-on offering. The company issued shares; selling stockholders also sold shares but did not receive proceeds attributable to those sales.
- SS&C acquired BenefitsXML (BXML) in March for approximately $15.1 in cash, plus transaction costs and assumed liabilities. BXML contributed $1.9 revenue and $1.1 pretax earnings from acquisition through June 30. A contingent consideration liability of $1.8 was recorded; potential undiscounted payments range from zero to $3.0.
Cash flow, outlook, and risks
First-half operating cash flow of $41.1 was offset by $19.0 of investing outflows, principally the BXML acquisition, capital expenditures, and capitalized software, and $24.8 of financing outflows, including $87.8 of debt repayments partly offset by offering proceeds and option exercises. Cash declined $2.2 overall.
Management said cash on hand and operating cash flows should be sufficient for current obligations, working capital, and capital spending for at least the next 12 months. It forecast a 2011 effective tax rate of 33%–34%; the filing provides no specific revenue or earnings guidance. Management reported compliance with debt covenants at June 30. The actual total leverage ratio was 1.20x against a 5.50x maximum, and interest coverage was 7.24x against a 2.25x minimum. The 2011 capital-expenditure covenant limit was $23.7; spending through June was $3.1.
- Key exposures include variable-rate debt ($137.1 at June 30), foreign-currency movements, and the ability to satisfy leverage and interest-coverage covenants. The company had no outstanding interest-rate swaps at quarter-end.
- About 31% of first-half revenue came from clients outside the United States. Management said foreign-currency transaction gains or losses were not expected to be material in 2011, while noting exposure could change.
- Management reported no litigation believed likely to have a material adverse effect, no material off-balance-sheet arrangements, and no material change in previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Check the quality and sustainability of organic growth, particularly the contribution and margins of software-enabled services.
- Separate acquisition-driven and currency-driven growth from comparable organic performance; review acquisition integration and BXML contingent-payment assumptions.
- Reconcile the debt reduction, offering proceeds, redemption premium, and remaining 2013 notes; assess interest-rate exposure and covenant headroom.
- Review working-capital movements and cash conversion, including bonus payments, tax receivables, and deferred maintenance revenue.
- Assess share-count dilution from the offering and stock-based compensation, and monitor the stated full-year tax-rate expectation.