SS&C Technologies Holdings, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Share and per-share amounts reflect the June 2016 two-for-one stock split.
Business context and reporting period
SS&C provides financial-services software and software-enabled outsourcing services across investment management, alternative investments, wealth management, financial institutions and related markets. It reported more than 11,000 clients and operated as one reportable segment. Contractually recurring software-enabled services, maintenance and term-license revenue represented 93% of FY 2016 revenue; management reported core-product retention above 90%.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $1,481.4 million | $1,000.3 million |
| Gross profit / gross margin | $680.9 million / 46% | $467.9 million / 47% |
| Operating income / operating margin | $288.7 million / 19.5% | $164.7 million / 16.5% |
| Net income | $131.0 million | $42.9 million |
| Diluted EPS | $0.64 | $0.22 |
| Operating cash flow | $418.4 million | $230.6 million |
| Cash and cash equivalents at year-end | $117.6 million | $434.2 million |
| Total debt obligations at year-end | $2,559.6 million | Not clearly stated on a comparable basis in the excerpt |
FY 2016 operating cash flow less capital expenditures and capitalized software was approximately $380.9 million. Reported gross debt obligations exceeded balance-sheet debt of $2,501.1 million, which is presented net of unamortized discounts and issuance costs. Cash interest expense was $129.9 million; annual interest payments were estimated at approximately $111.7 million. The company had $56.0 million of additional revolver availability and was in compliance with debt covenants; its net senior secured leverage ratio was 2.96x against a 5.25x maximum.
Fourth quarter 2016, unaudited: Revenue was $400.9 million, gross profit $195.6 million, operating income $95.3 million, net income $57.0 million, and diluted EPS $0.28. The filing does not provide quarterly cash flow or debt figures.
Material changes versus the prior comparable period
- FY revenue rose 48%. Management attributed $418.9 million of the increase to acquisitions, alongside $71.4 million of organic growth, partly offset by $9.2 million of unfavorable foreign-currency translation. Acquired deferred-revenue fair-value adjustments also affected reported revenue.
- Recurring revenue increased 50% to $1,371.5 million. Software-enabled services grew 43% to $956.8 million, and maintenance and term-license revenue grew 68% to $414.7 million. Perpetual-license revenue declined 24% to $24.0 million.
- Operating income increased 75% and net income roughly tripled from a low 2015 base. The 2015 comparison included a $30.4 million debt-extinguishment loss and a 30% effective tax rate; the 2016 effective tax rate was 20%.
- Gross margin edged down to 46% from 47%. Operating margin improved, while higher interest expense—$129.9 million versus $79.3 million—reflected a full year of acquisition-related financing.
- 2016 acquisitions included Citigroup Alternative Investor Services, Wells Fargo Global Fund Services and Conifer. The company spent approximately $457.5 million net of cash acquired on 2016 acquisitions and repaid $383.4 million of debt. Cash declined by $316.6 million year over year.
Outlook, management commentary, risks and unusual items
- No specific company revenue or earnings guidance was provided. Management expected financial-services firms to continue investing in IT and outsourcing in 2017 and stated that cash, operating cash flow and available credit should fund obligations, working capital and capital spending for at least the next 12 months.
- Management’s strategy emphasizes recurring services, international expansion, operating efficiencies and further complementary acquisitions. Goodwill was $3.65 billion and net intangible assets were $1.53 billion; management reported no goodwill impairment and said reporting-unit fair value significantly exceeded carrying value at year-end.
- Leverage and variable-rate exposure are significant: $1,959.6 million of debt was variable-rate, and a 1% interest-rate change was estimated to affect annual interest expense by approximately $19.6 million. Debt agreements include restrictive covenants and substantially secured obligations.
- Key business risks include acquisition integration and realization of synergies; exposure to hedge-fund industry conditions and assets under management; competition and client retention; cybersecurity, service interruptions and data protection; evolving regulation; foreign-exchange movements (the company did not hedge); and economic and political uncertainty. The filing cited Brexit uncertainty and $105.4 million of 2016 UK revenue.
- Tax authorities were auditing certain U.S. federal and state returns. The filing reports $39.2 million of uncertain-tax-position liabilities plus $3.1 million of related interest and penalties in its contractual-obligations disclosure; the tax note separately reports $62.988 million of unrecognized tax benefits. Timing and settlement remain uncertain.
- Management reported no litigation expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal control. Management excluded the three 2016 acquisitions from its internal-control assessment; those businesses represented 12% of 2016 revenue and 1% of year-end assets.
- Adoption of the new lease standard was expected to materially increase reported balance-sheet assets and liabilities. The new revenue standard, expected to be adopted in 2018, was anticipated to change recognition for perpetual and term software-license arrangements.
Important facts for investors to verify
- Separate organic growth from acquired revenue, and assess the full-year contribution and integration progress of the 2016 acquisitions.
- Reconcile total debt, cash, remaining revolver availability, maturity schedule, interest costs and covenant headroom; assess sensitivity to higher rates.
- Evaluate whether recurring-revenue growth and retention can sustain margins given rising service costs, amortization and acquisition-related expenses.
- Review goodwill and intangible-asset assumptions, future amortization, and the expected balance-sheet effects of lease and revenue-recognition changes.
- Monitor hedge-fund client exposure, assets-under-management-based pricing, UK and other international revenue, currency effects, cybersecurity and tax-audit outcomes.
- Confirm the financial and control reporting integration of acquired businesses, which were excluded from the 2016 internal-control assessment.