SS&C Technologies Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results are compared with Q1 2019 unless otherwise noted. SS&C provides software-enabled services and software licenses, maintenance, and related services.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $1,173.6 million | $1,137.2 million; up 3.2% |
| Gross profit and margin | $508.0 million; 43.3% | $475.3 million; 41.8% |
| Operating income | $218.8 million | $202.0 million |
| Net income | $99.2 million | $80.8 million |
| Diluted EPS | $0.37 | $0.31 |
| Net cash from operating activities | $147.7 million | $137.4 million |
| Cash, cash equivalents and restricted cash, including client-held amounts | $1,339.0 million at March 31 | Down $450.4 million from December 31, 2019 |
Software-enabled services revenue rose 1.8% to $989.5 million; license, maintenance and related revenue rose 11.4% to $184.1 million. Revenue growth reflected $23.8 million of organic growth and $18.1 million from acquisitions, partially offset by a $5.5 million foreign-currency impact. Gross margin improved despite integration-related severance expense of $31.4 million, compared with $4.9 million a year earlier.
Interest expense declined to $77.4 million from $101.6 million, reflecting lower average debt and interest rates. Other expense was $15.3 million, versus $3.5 million of other income in Q1 2019, and included $10.9 million of investment losses net of dividend income. The effective tax rate increased to 20.0% from 16.5%. Foreign-currency translation losses of $150.7 million contributed to comprehensive loss of $53.9 million, despite positive net income.
Liquidity, debt and capital resources
Total debt carrying value was $7,306.3 million at March 31, 2020, including $2.0 billion of 5.5% senior notes due 2027. The company had $373.7 million of cash and cash equivalents, excluding restricted cash and client funds. The broader cash-flow figure includes client-held funds; client funds obligations were $1,073.1 million at quarter-end.
SS&C borrowed $246.0 million under its $250 million revolving facility as a precaution amid COVID-19 uncertainty; no further revolver availability remained, and $4.0 million of letters of credit was outstanding. The company reported a 2.67x consolidated net secured leverage ratio against a maximum covenant level of 6.75x. It expects cash on hand and operating cash flows to fund obligations, working capital and capital spending for at least the next 12 months, while continuing to preserve liquidity and limit discretionary spending.
Operating cash flow increased by $10.3 million year over year. Investing activities used $73.3 million, including $40.0 million in securities investments, $18.0 million in capitalized software, $16.3 million for acquisitions and $8.5 million in capital expenditures. Financing activities used $517.7 million, largely reflecting a $670.7 million decrease in client funds obligations, dividends of $31.9 million, and net debt borrowings of $150.1 million.
Material changes, outlook and risks
- On January 31, 2020, the company repriced its term loans, reducing the Term Loan B margin from LIBOR plus 2.25% to LIBOR plus 1.75%. The transaction resulted in a $2.8 million debt-extinguishment loss.
- SS&C acquired Captricity on March 24 for approximately $15.3 million net of cash acquired. Its reported Q1 revenue contribution was $0.1 million. The company also agreed on April 30 to acquire Innovest Systems for $120.0 million, subject to adjustments; closing was expected in Q2 2020.
- SS&C said COVID-19 had not caused direct material negative effects on its business through the filing period, although clients had delayed some commitments. Management cautioned that effects could change rapidly and materially, and that Q1 experience might not indicate the impact for the rest of 2020. No quantified full-year guidance is provided in the filing text.
- Risks include COVID-19-related customer demand and operating disruption, substantial debt and interest-rate exposure, foreign-currency movements, and investment-value volatility. The company had approximately $5.3 billion of variable-rate debt; it estimated a 1% rate increase would add about $53.5 million to annual interest expense.
- Legal matters include ERISA-related claims, a Department of Labor action, individual lawsuits and 430 substantially similar arbitration demands reported through March 29. The company said it was defending the matters and had not determined their effect, if any, on its financial position or results.
- The company invested $40.0 million in SILAC, Inc. preferred stock; its CEO has an economic interest in SILAC and sits on its board. The filing identifies this as a related-person transaction approved by independent directors and the audit committee.
Important facts for investors to verify
- Whether COVID-19 materially affected subsequent-quarter revenue, collections, customer commitments, costs or liquidity after March 31.
- Accessible corporate liquidity versus client-held funds, and the implications of having fully drawn the revolving facility.
- Debt repayment, interest-rate exposure and covenant compliance, including any changes in leverage or borrowing availability.
- Whether reported revenue growth and margin improvement persist after acquisition effects, foreign exchange and integration-related severance.
- Developments and potential exposure from the ERISA litigation, DOL action and arbitration demands.
- Final purchase accounting and integration outcomes for Captricity, and closing and financing details for the announced Innovest acquisition.