SS&C Technologies Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; amounts below are in millions of dollars unless stated otherwise.
Business context and period
SS&C provides software-enabled services and licenses, maintenance and related services. Results reflect the acquisitions of DST Systems and CACEIS North America in Q2 2018, and Eze Software and Intralinks in Q4 2018; the prior-year quarter did not include these businesses. Management attributed most of the reported year-over-year growth to acquisitions, alongside increased demand for certain services.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1,137.2 | $421.9 |
| Gross profit / gross margin | $475.3 / 41.8% | $192.4 / 45.6% |
| Operating income / operating margin | $202.0 / 17.8% | $86.9 / 20.6% |
| Net income | $80.8 | $51.3 |
| Diluted EPS | $0.31 | $0.24 |
| Net cash from operating activities | $137.4 | $69.9 |
Revenue rose 169.5%; acquisitions contributed $703.4 of the increase, and foreign currency translation reduced revenue by $2.7. Software-enabled services revenue was $972.0, or 85.5% of total revenue. Net interest expense increased to $101.6 from $25.3. Q1 2019 also included a $7.1 loss on extinguishment of debt. The effective tax rate was 16.5%, compared with 17.2%.
Operating cash flow was $137.4, including noncash adjustments and working-capital movements. Investing activities used $16.1, including $16.3 of property and equipment additions and $16.4 of capitalized software costs. Financing activities used $211.9; cash, cash equivalents and restricted cash decreased by $89.9. Cash flow after those two stated investment outlays was approximately $104.7, not a company-defined free-cash-flow measure.
Balance sheet, debt and liquidity
At March 31, 2019, total debt carrying value was $8,116.1, including $2,000.0 of 5.5% senior notes due 2027 and $6,161.1 under senior secured credit facilities. Total debt was $8,256.0 at December 31, 2018. The new notes’ proceeds were used to repay part of the Term B-3 loan; the refinancing generated the $7.1 debt-extinguishment loss. Cash and cash equivalents were $154.6. The reported $1,023.4 of cash, cash equivalents and restricted cash also includes client funds; $954.8 of client funds obligations was matched by funds receivable and funds held for clients and should not be treated as freely available liquidity.
The revolving facility had $243.4 available at quarter-end. The company reported a 3.31x consolidated net secured leverage ratio against a maximum covenant level of 7.25x. Management stated that cash on hand, operating cash flows and available credit were expected to fund obligations, working capital and capital spending for at least the next 12 months. The company paid $25.2 in dividends, or $0.10 per share.
Material changes, outlook and risks
- Revenue growth was acquisition-led: acquired businesses contributed $703.4 in quarterly revenue. Management also cited demand growth in fund administration and services for advisory and wealth managers.
- Gross margin fell 3.8 percentage points to 41.8%; management cited a changed revenue mix and acquisition-related costs. Operating margin declined to 17.8% from 20.6%.
- Interest expense rose substantially following acquisition-related borrowing. Approximately $6.2 billion of debt bore variable interest rates; the filing estimates a 1 percentage-point rate increase would add about $61.8 annually to interest expense.
- Adoption of lease accounting on January 1, 2019 recorded $387.6 of right-of-use assets and $417.8 of lease obligations. The company said adoption did not materially affect its income statement or cash flows.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Legal matters include a DST-related ERISA class action, a separate individual suit and 278 similar arbitration demands reported through April 22, 2019. Management said it could not yet determine the effect of the ongoing Department of Labor matter.
- As a subsequent event, a jury awarded SS&C approximately $44.0 in damages against Clearwater Analytics, including $28.0 punitive damages. The judgment remained subject to post-trial motions and appeal and was not included in Q1 financial statements.
Important facts for investors to verify
- How much of ongoing growth and margin performance is organic versus attributable to acquisitions and purchase-accounting effects.
- Debt repayment plans, refinancing terms, interest-rate exposure and continued compliance with credit-facility covenants.
- Availability and restrictions on reported cash, particularly balances held on behalf of clients and cash held by foreign subsidiaries.
- Outcomes and potential financial effects of the DST-related litigation, arbitration demands and Department of Labor investigation.
- Status, collectability and appeal outcome of the Clearwater damages award, which was not recognized in Q1 results.