SS&C Technologies Holdings, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results. Amounts below are in millions of U.S. dollars unless stated otherwise. SS&C reports one operating segment.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $93.7 | $89.0 | +5% |
| Gross profit / margin | $46.8 / 50% | $44.5 / 50% | Margin unchanged |
| Operating income / margin | $22.1 / 23.6% | $23.1 / 26.0% | Income down 4% |
| Net income / margin | $17.9 / 19.1% | $9.8 / 11.0% | Income up 82% |
| Diluted EPS | $0.22 | $0.12 | Up $0.10 |
| Operating cash flow | $13.1 | $12.1 | Up $1.0 |
- Software-enabled services rose 12% to $64.6 million and represented 69% of revenue. Professional services grew 10% to $5.8 million; maintenance was essentially flat at $19.5 million.
- Software license revenue fell 42% to $3.8 million, attributed to lower organic license revenue, fewer and smaller perpetual-license transactions, and timing variability.
- Operating expenses increased 16% to $24.8 million, including $4.2 million of transaction costs associated with GlobeOp, PORTIA and other acquisition activity. Operating income declined despite higher revenue; gross margin remained 50%.
- Net income benefited from interest expense falling to $0.5 million from $5.1 million and other income of $4.1 million, versus other expense of $0.3 million a year earlier. The 2012 other income primarily included a $4.4 million fair-value gain on currency contracts related to the proposed GlobeOp acquisition. Q1 2011 included a $2.9 million debt-extinguishment loss.
Cash, debt and liquidity
- Cash and cash equivalents were $41.9 million at March 31, up $1.6 million from year-end. Operating activities provided $13.1 million; investing activities used $1.2 million; financing activities used $10.6 million, including $15.0 million of net debt repayments.
- Long-term debt was $85.0 million, down from $100.0 million at December 31. The senior credit facility had a 1.99% weighted-average interest rate. A 1 percentage-point rate change was estimated to affect annual interest expense by approximately $0.9 million.
- Management said cash, operating cash flow and revolving-credit availability were expected to cover obligations, working capital and capital spending for at least the next 12 months. At March 31, the company reported covenant compliance: actual total leverage was 0.55x against a 3.25x maximum; fixed-charge coverage was 13.17x against a 1.50x minimum.
- Current assets were $107.3 million and current liabilities $82.2 million. Goodwill was $937.4 million, a substantial portion of total assets of $1.217 billion.
Material developments, outlook and risks
- Revenue growth included $3.1 million of organic growth and $1.8 million from acquisitions; unfavorable foreign-currency translation reduced revenue by $0.2 million. Management cited client retention, new clients and activity/assets in client portfolios as drivers of software-enabled services growth.
- Management forecast a 33%–34% consolidated effective tax rate for 2012; Q1’s effective rate was 30.3%, partly due to reversal of uncertain tax positions. The filing provides no broader revenue or earnings guidance.
- SS&C had made a recommended cash offer for GlobeOp at 485 pence per share. As of May 9, valid acceptances represented about 62% of GlobeOp’s issued share capital; the offer remained open and the company said completion was not certain. Currency forwards and options were entered into to limit exchange-rate exposure; their fair value depended partly on management’s estimated 70% likelihood of acceptance and was classified as Level 3.
- On May 9, SS&C acquired the PORTIA Business for approximately $170 million in cash plus transaction costs and assumed liabilities, funded with a new $175 million senior secured term loan. Results were to be consolidated from May 10.
- A March 2012 credit agreement provided for substantial term-loan and bridge facilities and a $100 million revolving commitment, subject to conditions, to fund the GlobeOp offer, refinance existing debt and potentially fund PORTIA. It is secured by substantially all tangible and intangible assets and includes restrictive covenants and a leverage covenant. A covenant breach could trigger default and acceleration.
- Other identified exposures include variable-rate debt, foreign-currency revenues and transactions, acquisition integration and financing risks, and the possibility of goodwill impairment. Management reported no material litigation expected to adversely affect the company and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the GlobeOp offer closed, its final consideration and financing, and the resulting debt and integration effects.
- PORTIA’s finalized purchase accounting, operating contribution and impact of its $175 million financing on leverage and interest expense.
- Whether organic software-enabled services growth and client retention continued, and whether license revenue recovered from its Q1 decline.
- How much of Q1 earnings growth depended on lower interest expense and the non-cash currency-contract gain, versus recurring operating performance.
- Future cash conversion, receivables and working-capital trends, covenant headroom, and the valuation assumptions underlying Level 3 derivatives and contingent consideration.