SS&C Technologies Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in millions of dollars, except per-share data and ratios. Share and per-share figures were retroactively adjusted for the June 2016 two-for-one stock split.
Business context and results
SS&C provides software-enabled services, maintenance and software licenses, and professional services. Recurring revenue accounted for 93% of revenue in both Q2 and the first half of 2016. Comparisons are substantially affected by acquisitions, including Advent, Varden, Primatics and Citigroup AIS; Citigroup AIS was acquired on March 11, 2016.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $373.1 | $212.8 | $697.2 | $418.5 |
| Gross profit | $162.6 | $103.3 | $310.0 | $196.7 |
| Gross margin | 44% | 49% | 44% | 47% |
| Operating income | $66.0 | $58.4 | $116.5 | $101.5 |
| Net income | $28.2 | $39.1 | $35.2 | $65.4 |
| Basic / diluted EPS | $0.14 / $0.14 | $0.23 / $0.22 | $0.18 / $0.17 | $0.39 / $0.37 |
| Net interest expense | $32.8 | $5.4 | $65.9 | $11.0 |
Cash flow, debt and liquidity
- First-half operating cash flow was $139.3, compared with $100.7 in 2015. Investing activities used $335.4, including $317.6 net cash paid for acquisitions. Financing activities used $142.0, including $155.3 of debt repayments and $24.8 of dividends.
- Cash and cash equivalents were $95.2 at June 30, down from $434.2 at year-end 2015. Current assets were $409.4 and current liabilities $413.9.
- Debt principal totaled $2,664.7: $2,064.7 under senior secured credit facilities and $600.0 of 5.875% notes due 2023. The balance-sheet carrying amount, net of unamortized discount and issuance costs, was $2,600.8. The $150.0 revolving facility was undrawn.
- The company reported a 3.35x consolidated net senior secured leverage ratio against a 5.50x maximum covenant and stated it was in compliance with financial and non-financial covenants.
Material changes and management commentary
- Q2 revenue rose 75% year over year; first-half revenue rose 67%. Management attributed the increases primarily to acquisitions and increased demand for fund administration services. Acquisitions contributed $169.2 of Q2 revenue and $285.6 for the first half.
- Despite higher revenue and operating income, net income declined in both periods. Management cited substantially higher interest expense following debt incurred for the 2015 Advent acquisition. First-half depreciation and amortization rose to $113.4 from $52.1, and stock-based compensation to $27.9 from $8.3.
- Gross margin declined to 44% from 49% in Q2 and 47% for the first half. Reported cost pressures included acquisition-related costs and a higher cost ratio for maintenance and term licenses and professional services.
- Citigroup AIS was purchased for approximately $321.0 in cash, plus transaction costs and assumed liabilities. It contributed $65.1 of revenue from acquisition through June 30. Acquisition accounting reduced recognized revenue through fair-value adjustments to acquired deferred revenue.
Outlook, risks and contingencies
- Management expected cash on hand, operating cash flow and revolver availability to meet current obligations and projected working capital and capital spending for at least the next 12 months. The filing provides no specific revenue or earnings guidance; it forecast a 19%–21% consolidated effective tax rate for full-year 2016.
- At June 30, $2,064.7 of debt was variable-rate. Management estimated that a 1 percentage-point increase in interest rates would increase annual interest expense by approximately $15.4. Approximately 26% of first-half revenue came from clients outside the United States; foreign-currency movements affected reported results.
- The company identified covenant breach and potential acceleration of debt as risks, although it was compliant at quarter-end. It also noted that future changes in the mix of domestic and foreign income could affect its tax rate.
- The Millennium litigation was settled or resolved in GlobeOp’s favor and is concluded. Management said it was not aware of other litigation expected to have a material adverse effect. No material off-balance-sheet arrangements were reported.
- Disclosure controls were concluded effective at the reasonable assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of revenue growth and future performance reflects acquired businesses versus underlying organic growth, and how well the acquisitions integrate.
- Whether recurring revenue growth can offset the reported margin compression and higher operating costs.
- Debt reduction, interest-rate exposure, covenant headroom and cash available for debt service, including the location and restrictions on foreign cash.
- The sustainability of cash conversion and the effects of acquisition-related amortization, purchase accounting, stock compensation and tax-rate changes on earnings.