Business context and reporting period
SS&C Technologies Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. It provides software and software-enabled outsourcing services to financial-services and healthcare clients. The filing reports full-year results, not standalone 2020 fourth-quarter results.
Revenue is largely recurring: software-enabled services represented 83.4% of 2020 revenue. SS&C reported average retention above 90% over the prior five years for specified software-enabled services, maintenance and term-license contracts. Its largest client contributed less than 5% of revenue; the top 10 contributed approximately 15%.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $4,667.9 million | $4,632.9 million | +0.8% |
| Gross profit / gross margin | $2,093.8 million / 44.9% | $2,021.2 million / 43.6% | Margin +1.3 percentage points |
| Operating income / operating margin | $985.8 million / 21.1% | $914.4 million / 19.7% | Income +7.8% |
| Net income / diluted EPS | $625.2 million / $2.35 | $438.5 million / $1.66 | Income +42.6%; EPS +41.6% |
| Cash provided by operating activities | $1,184.7 million | $1,328.3 million | Down $143.6 million |
- Revenue growth was acquisition-driven: acquisitions contributed $100.4 million, offset by a $65.3 million decline in organic revenue. Software-enabled services increased 0.6%; license, maintenance and related revenue rose 1.7%.
- Cost reductions improved gross margin. Operating expenses were nearly flat at $1,108.0 million. Research and development expense was $399.4 million, up 4.1%.
- Interest expense fell to $249.9 million from $409.6 million, primarily from lower average interest rates and debt balances. The effective tax rate rose to 19.4% from 17.5%.
- Cash, cash equivalents and restricted cash totaled $1,337.9 million, including substantial client funds; balance-sheet cash and cash equivalents were $209.3 million. Client funds obligations were $1,227.4 million.
- Year-end debt principal was $6,496.0 million ($6,442.4 million carrying value, net of discount and issuance costs). The company repaid $738.2 million of net debt during 2020; $246.1 million was available on its revolving facility. Covenant net secured leverage was 2.31x against a 6.75x maximum.
- Cash uses included $227.7 million of share repurchases, $136.1 million of dividends, $116.0 million for acquisitions and $34.8 million of capital expenditures. The board declared a $0.16-per-share dividend in February 2021.
Material changes versus the prior comparable period
- Revenue growth slowed markedly from 35.4% in 2019, when major 2018 acquisitions contributed substantially, to 0.8% in 2020. Organic revenue declined in 2020, partly reflecting weakness associated with COVID-19 and the economic environment.
- Gross margin improved from 43.6% to 44.9%, while operating income increased despite flat revenue, reflecting lower costs and reduced interest expense.
- Net income increased from $438.5 million to $625.2 million. The comparison also reflects a materially lower debt-extinguishment loss in 2020 than in 2018, and lower interest expense than in 2019.
- Operating cash flow decreased by $143.6 million. Management cited working-capital movements, including an incentive payment related to a client contract extension and lower deferred revenue.
- 2020 acquisitions included Captricity and Innovest; together with Millennium, acquisitions contributed to revenue growth. Innovest contributed $28.1 million of 2020 revenue and Captricity $4.7 million.
Outlook, risks, contingencies and unusual items
- The filing gives no quantified revenue, earnings or cash-flow guidance. Management stated that cash on hand, operating cash flow and available credit were expected to fund obligations, working capital and capital spending for at least the next 12 months.
- Management reported no direct material negative COVID-19 impact through 2020, but noted client delays, lower organic revenue in some businesses and uncertainty about future effects. Remote-work technology costs increased, while travel and other costs declined.
- Principal risks include economic and securities-market activity, assets under client management, hedge-fund industry exposure, client retention and consolidation, acquisition integration, cybersecurity and service interruptions, competition, privacy and regulatory obligations, foreign exchange, and significant indebtedness. Approximately 27% of revenue came from outside the United States.
- Debt included $4,485.9 million of variable-rate facilities and $2.0 billion of 5.5% notes due 2027; term loans mature in 2025. Management estimated annual interest payments of approximately $196.0 million at year-end and disclosed LIBOR-transition uncertainty.
- A proposed $27 million settlement in a DST-related ERISA matter remained subject to court approval and objections. Hundreds of related individual arbitration demands, other litigation and a Department of Labor case were also disclosed; ultimate exposure was uncertain. Management said no legal proceeding was expected to have a material adverse effect, while noting the uncertainty of these matters.
- Severance expense was $32.1 million in 2020, compared with $15.9 million in 2019, largely associated with acquisition integration. Goodwill was $8,078.7 million; no impairment was recorded, though the auditor identified the health-business goodwill assessment as a critical audit matter.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The auditor’s critical audit matter was goodwill valuation for the health business.
Most important facts for investors to verify
- Whether organic revenue trends recover, particularly in businesses affected by COVID-19 and market activity, and whether acquisition contributions can be sustained.
- Whether cash generation remains adequate as debt service, capital investment, dividends and repurchases compete for funds; distinguish corporate cash from restricted client funds.
- Debt reduction, variable-rate exposure, covenant headroom and the transition away from LIBOR, including the 2025 term-loan maturities.
- Developments in the proposed ERISA settlement, arbitration claims and related litigation, including any recognized charge or insurance recovery.
- Goodwill valuation assumptions and acquisition integration outcomes, given the large goodwill balance and the auditor’s critical audit matter.