SS&C Technologies Holdings, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. SS&C provides software-enabled services, maintenance and term licenses, and professional services and perpetual licenses. The quarter includes Citigroup Alternative Investor Services (AIS) from its March 11 acquisition date.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Revenue | $324.1 million | $205.7 million; up 58% |
| Recurring revenue | $300.8 million; 92% of revenue | $193.5 million; 94% of revenue |
| Gross profit / margin | $147.4 million / 45% | $93.4 million / 45% |
| Operating income / margin | $50.4 million / 15.6% | $43.1 million / 21.0% |
| Net income / diluted EPS | $7.0 million / $0.07 | $26.2 million / $0.30 |
| Operating cash flow | $18.6 million | $31.2 million |
| Cash and cash equivalents | $101.8 million | $434.2 million at Dec. 31, 2015 |
| Debt | $2,724.0 million carrying value, net of discount and issuance costs; $2,790.2 million principal | $2,751.4 million carrying value |
Revenue growth primarily reflects recent acquisitions—Citigroup AIS, Primatics, Varden and Advent—along with continued demand for fund administration services. The acquisitions contributed $105.6 million of Q1 revenue, before stated acquired deferred-revenue fair-value adjustments. Foreign currency translation reduced revenue by $3.1 million. Operating expenses rose 93%, including $5.0 million of charges related to eliminating redundant acquired-business positions and a $5.5 million increase in stock-based compensation. Net interest expense rose to $33.1 million from $5.6 million, reflecting the higher debt associated with the Advent acquisition. The effective tax rate increased to 55% from 27%, primarily due to a state apportionment change related to Citigroup AIS.
Cash from operations was lower year over year; the filing attributes this partly to working-capital outflows, including annual employee bonus payments and higher receivables and days’ sales outstanding. Investing cash outflow was $322.5 million, including $317.6 million net cash paid for acquisitions. Financing cash outflow was $27.9 million, including $29.8 million of debt repayments and $12.4 million of dividends. Cash fell mainly because of the acquisition, debt repayments and dividends.
Debt, liquidity and outlook
- At March 31, debt included $2,190.2 million under senior secured facilities and $600.0 million of 5.875% senior notes due 2023. The secured facilities’ weighted-average interest rate was 3.92%. No amount was drawn on the $150 million revolving facility.
- The company reported compliance with its debt covenants. Its consolidated net senior secured leverage ratio was 3.57x against a maximum of 5.50x. Management said cash on hand, operating cash flow and revolver availability should be sufficient for obligations, working capital and capital spending for at least the next 12 months.
- Management forecast a 19%–21% consolidated effective tax rate for 2016. No specific revenue or earnings guidance was provided in the filing.
- A 1% increase in interest rates was estimated to increase annual interest expense by approximately $15.6 million. About 27% of quarterly revenue came from clients outside the U.S.; the company described foreign-exchange exposure and said it does not use derivatives for trading or speculation.
Other material matters
- Citigroup AIS was acquired for approximately $321 million in cash, plus transaction costs and assumed liabilities. It contributed $11.6 million of reported revenue from acquisition through quarter-end. Purchase-price allocation was preliminary and included $98.4 million of goodwill.
- Illustrative pro forma results, assuming the specified acquisitions had occurred earlier, showed Q1 2016 revenue of $382.9 million and net income of $19.3 million, versus Q1 2015 revenue of $384.6 million and a net loss of $3.0 million. These are not actual reported results and are not necessarily indicative of future performance.
- Management reported that substantive claims in the Millennium Actions had been settled or resolved in GlobeOp’s favor; the remaining attorneys’ fees and costs issue was resolved, with formal closure expected. Management said other proceedings were not expected to have a material adverse effect.
- Disclosure controls were assessed as effective at the reasonable assurance level, with no material changes to internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of reported growth and future performance is attributable to acquisitions versus organic demand, and how the acquired businesses integrate.
- Whether operating cash flow improves as receivables, collection timing and post-acquisition working capital normalize.
- Debt reduction, covenant headroom, refinancing terms and sensitivity to interest-rate increases.
- The effects of acquisition-related amortization, purchase accounting, stock compensation, severance and the elevated Q1 tax rate on underlying earnings.
- Completion of the Senior Notes exchange offer and any related registration or additional-interest implications.