SS&C Technologies Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. SS&C provides software-enabled services, maintenance and licenses, and professional services. The filing is unaudited. Share and per-share amounts reflect the June 2016 two-for-one stock split.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $383.3m | $280.9m | $1,080.5m | $699.4m |
| Recurring revenue | $355.7m | $260.8m | $1,004.5m | $643.5m |
| Gross profit / margin | $175.3m / 46% | $129.0m / 46% | $485.3m / 45% | $325.7m / 47% |
| Operating income | $76.9m | $15.0m | $193.4m | $116.4m |
| Net income (loss) | $38.7m | ($34.6m) | $74.0m | $30.8m |
| Diluted EPS | $0.19 | ($0.18) | $0.36 | $0.16 |
| Net cash from operations | Not separately stated for quarter | Not separately stated for quarter | $237.0m | $120.6m |
- Revenue rose 36% in Q3 and 54% year to date. Recurring revenue represented 93% of revenue in both 2016 periods.
- Q3 operating income improved substantially while gross margin was unchanged. Nine-month gross margin was 45%, down from 47%.
- Q3 2015 included a $30.4m debt-extinguishment loss; its absence contributed to the year-over-year improvement in reported earnings.
- Management attributed revenue growth mainly to acquired businesses. Acquisitions contributed $67.7m of Q3 revenue and $353.4m for the nine-month period; reported organic growth was also supported by about $22m from acquired deferred-revenue fair-value adjustments in each comparison. Currency translation reduced revenue by $1.8m in Q3 and $6.7m year to date.
Cash, debt and liquidity
- Cash and cash equivalents were $101.8m at September 30, 2016, down from $434.2m at year-end 2015. Current assets were $413.9m and current liabilities $415.8m.
- Gross principal debt was $2,551.5m: $1,951.5m under senior secured credit facilities and $600m of 5.875% senior notes due 2023. The balance-sheet carrying amount, net of unamortized discount and issuance costs, was $2,490.3m. Debt declined from $2,820m gross principal at December 31, 2015.
- Operating cash flow of $237.0m was offset by $334.7m used in investing and $233.8m used in financing; acquisition payments were $309.4m. The company paid $37.5m in dividends and repaid $268.6m of debt during the nine months.
- No revolving-credit borrowings were outstanding. The revolver commitment was $150m. SS&C reported compliance with its debt covenants; the maximum permitted secured leverage ratio was 5.50x, versus an actual 3.08x.
- About 27% of nine-month revenue came from clients outside the United States. Approximately $73.3m of cash was held at non-U.S. subsidiaries subject to permanent-reinvestment treatment; some foreign cash had specified debt-service or repatriation-tax considerations.
Changes, outlook and risks
- SS&C acquired Citigroup Alternative Investor Services on March 11, 2016 for approximately $310.2m, including assumed liabilities and transaction costs. It contributed $118.6m of revenue from acquisition through September 30. The purchase price included $169.2m of acquired customer relationships and technology and $91.5m of goodwill.
- The company announced an agreement to acquire Wells Fargo Global Fund Services, subject to regulatory approvals and customary conditions, and expected closing in Q4 2016.
- Management said cash on hand, operating cash flows and revolver availability should fund current obligations, projected working capital and capital spending for at least the next 12 months. The company forecast a 20%–22% consolidated effective tax rate for full-year 2016. No revenue or earnings guidance is provided in the filing.
- Interest-rate exposure is material: $1,951.5m of debt carried variable rates; a 1 percentage-point rate increase was estimated to add approximately $15.6m of annual interest expense. Foreign exchange movements also affect results.
- Management warned that covenant breaches could permit lenders to accelerate debt and terminate commitments. SS&C stated it was compliant at quarter-end. Management did not believe other legal proceedings would have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- How much reported growth reflects durable organic expansion versus acquisitions and purchase-accounting effects.
- Whether acquired businesses, particularly Citigroup AIS and the pending Wells Fargo GFS transaction, meet expected performance and integration objectives.
- Cash conversion, receivables and days-sales-outstanding trends, given the increase in receivables and lower cash balance.
- Debt repayment capacity, variable-rate exposure, covenant headroom and continued compliance.
- The effect of amortization, acquisition accounting, foreign exchange and the stated 20%–22% tax-rate outlook on future earnings and margins.