SS&C Technologies Holdings, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. SS&C provides financial-services software and software-enabled outsourcing to more than 5,000 clients. Its revenue model is largely recurring, with maintenance and software-enabled services accounting for 87.4% of FY 2011 revenue.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $370.8 million | $328.9 million | +12.7% |
| Operating income | $93.8 million | $79.8 million | +17.5% |
| Net income | $51.0 million | $32.4 million | +57.4% |
| Diluted EPS | $0.63 | $0.44 | +$0.19 |
| Operating cash flow | $110.4 million | $75.6 million | +$34.8 million |
| Cash and cash equivalents, year-end | $40.3 million | $84.8 million | −$44.5 million |
| Total debt, year-end | $100.0 million | $290.8 million | −$190.8 million |
Gross margin was 50.3%, versus 49.6% in 2010; operating margin was 25.3%, versus 24.3%. Net margin was approximately 13.8%, versus 9.9%. Covenant-defined Consolidated EBITDA, a non-GAAP measure, was $152.4 million, up from $141.3 million.
Software-enabled services revenue rose 16.2% to $246.0 million; maintenance revenue increased 7.7% to $78.3 million. Software license revenue was nearly flat at $23.5 million, while professional services grew 11.2% to $23.0 million. Organic revenue growth was $19.7 million; acquired businesses contributed $18.7 million and favorable currency translation $3.5 million.
Fourth-quarter 2011 revenue was $95.7 million, operating income $23.7 million and net income $13.3 million. Diluted EPS was $0.16. Fourth-quarter results included a $1.9 million loss on extinguishment of debt.
Cash flow, debt and liquidity
Operating cash flow of $110.4 million exceeded net income, supported in part by non-cash charges and working-capital movements, including advance maintenance collections. Capital expenditures were $6.2 million and capitalized software additions were $1.4 million; operating cash flow less these outlays was approximately $102.8 million. Investing activities used $29.4 million, including $20.6 million for acquisitions. Financing activities used $125.4 million, including $291.1 million of gross debt repayments, partly offset by new borrowing and $52.0 million of net proceeds from a follow-on equity offering.
In December 2011, the company entered a $125 million revolving senior credit facility, drew $100 million and repaid the prior facility; $25 million remained available. The facility matures in December 2016, is secured by substantially all relevant assets, and includes restrictive covenants. SS&C redeemed all remaining 11.75% notes due 2013 during 2011. At year-end it reported covenant compliance, a 0.66x total leverage ratio against a 3.25x maximum, and 9.32x fixed-charge coverage against a 1.50x minimum. Management expected cash and operating cash flow to cover current obligations, working capital and capital spending for at least 12 months.
Changes, outlook and material items
- Revenue growth decelerated to 12.7% in 2011 from 21.4% in 2010; organic growth was 6.0%. Recurring revenue share continued to rise, from 86.5% to 87.4%.
- Interest expense declined to $14.7 million from $30.6 million, reflecting lower debt balances. Debt redemptions generated $4.8 million of extinguishment losses in 2011; the effective tax rate rose to 31.0% from 27.1%.
- 2011 acquisitions included BenefitsXML and Ireland Fund Admin, plus Teledata software assets. In February 2012, SS&C agreed to acquire Thomson Reuters’ PORTIA business for $170 million, subject to approval and customary closing conditions; a committed $175 million term loan was intended to fund it.
- SS&C was also considering a proposed cash offer for GlobeOp at 485 pence per share, approximately $940 million in aggregate equity value at the cited exchange rate. The filing says there was no certainty SS&C would make an offer; proposed funding would combine a new credit facility and cash.
- Management described financial-technology spending as modestly positive in 2011 and the 2012 recovery as generally on track, but expected a small decline in Western European spending amid Eurozone uncertainty. The company intended to grow recurring services, develop products, expand internationally and pursue acquisitions; it provided no numerical revenue or earnings guidance.
Risks, contingencies and unusual items
- Demand is exposed to financial-market and economic weakness, changes in client assets under management, industry consolidation, pricing pressure and competition from larger vendors or clients’ internal systems.
- Service interruptions, cybersecurity incidents, data loss, software defects and inability to protect intellectual property could damage client relationships and create liability. Acquisition integration and retention also present execution risks.
- Debt carries variable-rate exposure: a 1% rate change was estimated to affect annual interest expense by approximately $1.0 million. The credit facility’s covenants restrict, among other things, additional debt, acquisitions, dividends and asset sales. Dividends were not expected in the foreseeable future.
- Goodwill was $931.6 million, a substantial portion of $1.21 billion in total assets. No impairment was recorded; management reported reporting-unit fair value more than 25% above carrying value at year-end. Future underperformance or valuation declines could nevertheless trigger impairment.
- Unrecognized tax benefits were $9.6 million, with $2.3 million of related interest and penalties. A tax audit covered U.S. federal tax years 2007 and 2008. Management did not believe ordinary-course legal matters would materially affect the company.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether organic growth and recurring-service momentum continue, and how much future growth depends on acquisitions versus existing operations.
- Final financing, closing conditions, integration costs and expected returns for PORTIA; whether SS&C ultimately made an offer for GlobeOp and how any transaction would affect leverage.
- Cash generation after working-capital effects, remaining facility availability, variable-rate sensitivity and ongoing covenant headroom.
- Goodwill and acquired-intangible valuations, including impairment assumptions and the effect of amortization on reported earnings.
- Customer retention, service reliability and security performance, particularly as hosted services scale and regulatory demands change.