SS&C Technologies Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 1, 2019. The filing also presents unaudited quarterly data, including fourth-quarter results. SS&C provides software and software-enabled services primarily to financial services and healthcare clients. Results include major 2018 acquisitions, notably DST Systems, Eze, and Intralinks.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3,421.1 million | $1,675.3 million |
| Gross profit / margin | $1,370.0 million / 40.0% | $788.9 million / 47.1% |
| Operating income / margin | $429.1 million / 12.5% | $396.9 million / 23.7% |
| Net income | $103.2 million | $328.9 million |
| Diluted EPS | $0.42 | $1.55 |
| Cash provided by operating activities | $640.1 million | $471.8 million |
| Interest expense | $280.1 million | $108.6 million |
- Revenue increased 104.2%; acquisitions contributed $1,709.9 million of the increase. Software-enabled services were $2,798.9 million, or 81.8% of revenue, versus $1,114.0 million, or 66.5%, in 2017. Management states that contractually recurring revenue was 97% of total revenue.
- Gross margin fell to 40.0%, principally reflecting the changed revenue mix and acquisition-related costs. Acquisition integration severance totaled $62.6 million; DST-related transaction expenses were $97.8 million.
- Net income declined despite revenue growth, with substantially higher interest expense, transaction and integration costs, and a less favorable tax comparison among the factors. The 2017 tax provision included an $88.0 million benefit related to the Tax Act; 2018 effective tax rate was 17.5%.
- Debt was $8,347.3 million at year-end, including $8,319.1 million of variable-rate debt. The company reported $242.4 million available under its revolving facility and a 4.54x consolidated net secured leverage ratio against a 7.25x maximum covenant level.
- Year-end cash, cash equivalents, and restricted cash totaled $1,113.3 million, including $940.2 million of funds held on behalf of clients. Cash and cash equivalents were $166.7 million; client funds obligations were $1,014.7 million. Management said available cash, operating cash flow, and credit availability should fund obligations and projected needs for at least 12 months.
- The company paid $70.9 million in dividends during 2018. It issued about 30.3 million shares in a public offering, raising net proceeds of $1.4 billion, and issued 9.9 million shares in connection with the Intralinks acquisition.
Material changes and quarterly results
- The four 2018 acquisitions expanded the business and materially increased goodwill, intangible assets, debt, and the scale of operations. DST was acquired in April, CACEIS in June, Eze in October, and Intralinks in November. Acquisitions since the beginning of 2016 cost approximately $8.7 billion.
- FY 2018 revenue growth was predominantly acquisition-driven; the company also cited continued demand for fund administration and advisory and wealth-management services. The largest client represented less than 5% of revenue; the top ten represented approximately 16%.
- Fourth-quarter 2018 revenue was $1,111.0 million, operating income $212.4 million, and net income $58.7 million, compared with $438.4 million, $113.3 million, and $165.4 million, respectively, in fourth-quarter 2017. Second-quarter 2018 included an operating loss of $50.7 million and net loss of $63.7 million.
- SS&C adopted ASC 606 on January 1, 2018 using the modified retrospective method, changing the timing of term-license revenue recognition and treatment of certain commissions. The adoption increased opening retained earnings by $47.9 million, net of tax; prior-period results were not restated.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management’s stated priorities include integrating acquisitions, expanding software-enabled services and international business, investing in product development, and pursuing further acquisitions.
- Management highlighted substantial acquisition-related integration demands and risks, including retaining acquired clients and employees, realizing synergies, and coordinating global operations. Goodwill was $7,858.0 million; management reported no impairment at year-end.
- Debt and interest-rate exposure are significant: a 1% LIBOR change was estimated to affect annual interest expense by approximately $83.2 million. The filing also discusses LIBOR’s planned phase-out and refinancing risk.
- Other material risks include market and client-asset fluctuations, competition and client consolidation, cybersecurity and service disruptions, privacy and regulatory compliance, foreign-exchange exposure, and the ability to attract and retain staff. International revenue was 28% of total; U.K. revenue was $503.9 million.
- The company disclosed DST-related ERISA litigation and approximately 278 substantially similar individual arbitration demands as of February 22, 2019. Management said it could not yet determine the effect, if any, on financial position or results.
- PwC issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor’s internal-control audit excluded DST, Eze, and Intralinks, which together represented approximately 17% of year-end assets and 50% of FY 2018 revenue.
Important facts for investors to verify
- How much organic revenue growth and margin improvement remain after separating acquisition contributions, integration charges, and the ASC 606 accounting change?
- Can SS&C integrate the 2018 acquisitions, retain their clients and employees, and achieve the anticipated cost and revenue synergies?
- How will the $8.3 billion debt load, predominantly variable-rate exposure, covenant requirements, and refinancing needs affect cash available for investment and dividends?
- What are the eventual financial and operational effects of the DST ERISA claims and arbitration demands, and of other disclosed contingencies?
- How do client funds and related obligations affect assessments of reported cash and short-term liquidity? Check the underlying balance-sheet and cash-flow details.
- How will cybersecurity, privacy, regulatory, currency, and market-activity risks affect client retention, service reliability, and future results?