Business context and reporting period
SS&C Technologies Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. It provides financial software and software-enabled outsourcing services to approximately 11,000 financial-services clients. Its model is highly recurring: subscription-based software-enabled services and maintenance and term-license revenue represented 94% of 2017 revenue. Growth strategy includes product development and acquisitions.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1,675.3 million | $1,481.4 million | +13% |
| Gross profit / margin | $788.9 million / 47% | $680.9 million / 46% | Margin +1 percentage point |
| Operating income / margin | $396.9 million / 23.7% | $288.7 million / 19.5% | Income +37% |
| Net income | $328.9 million | $131.0 million | +151% |
| Diluted EPS | $1.55 | $0.64 | +142% |
| Cash from operations | $470.4 million | $418.4 million | +12% |
| Capital expenditures | $35.6 million | $27.9 million | — |
| Cash and cash equivalents at year-end | $64.1 million | $117.6 million | Down $53.5 million |
| Debt at year-end | $2,092.2 million gross; $2,045.2 million carrying amount | $2,686.1 million gross | Gross debt down approximately $594 million |
Operating cash flow less capital expenditures was approximately $434.8 million in 2017. The company reported $149.1 million available under its revolving credit facility and said it expected cash, operating cash flow and available credit to cover current obligations and projected needs for at least 12 months. Current assets of $359.5 million were below current liabilities of $443.7 million.
Material changes versus prior year
- Revenue increased $193.9 million. Acquisitions contributed $117.7 million net of lost sales, while organic revenue increased $75.0 million; reported organic growth includes acquisition-related deferred-revenue fair-value effects.
- Recurring revenue rose 15% to $1,577.7 million. Software-enabled services increased 16% to $1,114.0 million; maintenance and term licenses increased 12% to $463.7 million. Non-recurring revenue fell 11% to $97.6 million, including declines in perpetual licenses and professional services.
- Operating income improved while operating expenses remained essentially flat at approximately $392 million. Gross margin increased to 47% from 46%.
- Interest expense fell to $108.6 million from $129.9 million, primarily following lower debt balances and a March 2017 credit-facility repricing. The company repaid $512.5 million of debt during 2017.
- Net income benefited substantially from a $46.2 million income-tax benefit, including an approximately $88.0 million provisional benefit from the Tax Cuts and Jobs Act and $16.4 million of excess stock-compensation tax benefits. The 2016 effective tax rate was 20%; 2017’s was negative 16%.
Outlook, risks, contingencies and unusual items
- Management described continued demand for outsourcing, cloud delivery and solutions addressing regulatory complexity, but provided no specific 2018 revenue or earnings guidance in the supplied filing text.
- On January 11, 2018, SS&C agreed to acquire DST Systems for enterprise value of approximately $5.4 billion, subject to shareholder and regulatory approvals and other closing conditions. Closing was expected by the third quarter of 2018. SS&C planned to use a combination of debt and equity to fund the acquisition and refinance existing SS&C and DST debt; management expected substantially higher interest expense. Integration, financing, approval and synergy realization are material risks.
- Other key risks include substantial leverage and variable interest rates (a 1 percentage-point rate change was estimated to affect annual interest expense by about $14.9 million), cybersecurity or service outages, exposure to hedge-fund and financial-market conditions, acquisition integration, competition, regulation, privacy requirements and foreign-exchange movements. The company did not hedge foreign-exchange exposure.
- The company recorded a $2.3 million debt-extinguishment loss in 2017. It reported no litigation expected by management to have a material adverse effect, and its auditor concluded that financial statements were fairly presented and internal control over financial reporting was effective.
- Revenue-standard adoption in 2018 was expected to recognize the license component of certain term-license contracts upfront and increase retained earnings by an estimated $60 million pre-tax cumulative adjustment. This is an accounting change, not an equivalent cash inflow.
Important facts for investors to verify
- Track DST transaction approval, final financing terms, resulting leverage and interest costs, integration progress and realized synergies.
- Assess the quality and sustainability of earnings growth, separating organic growth from acquisitions, purchase-accounting effects and the 2017 tax benefit.
- Monitor recurring-revenue retention, fund-administration demand, client assets and transaction volumes, and the trend in non-recurring revenue.
- Review debt maturities, covenant headroom, liquidity and sensitivity to interest-rate changes; the company reported a 2.04x net senior secured leverage ratio against a 5.00x maximum covenant.
- Reconcile geographic revenue disclosures: the filing reports 22% of revenue from outside North America in one section and 27% from outside the United States elsewhere; these use different geographic bases.