SS&C Technologies Holding, Inc.
Zachary Schwartzman
Virginia Tech SEED
September 13th, 2023
Company Overview
Founded in 1986 by William Stone, SS&C Technologies is the largest hedge fund and private equity administrator worldwide, with over 20,000 clients throughout financial service and healthcare functions. Incorporated in Windsor, Connecticut, the acquisitive company utilizes end-to-end experts to own and operate full stack technologies tailored to the needs of each enterprise composing their diverse clientele. The business operates in over 60 nations and hosts over 27,600 employees, with a distinct focus on client support and consulting services making up over 80% of their human capital.
IPO Date | April 1, 2010 | Ticker | NYSE: $SSNC |
Current Share Price | $55.73 | 52-Week Range | 45.25 - 64.52 |
Market Cap | 13,825.9 mm | EV | 20,300.7 mm |
Financial Overview
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TTM Financial Performance ($M)
Revenue | $ 5283.0 | Gross Profit | $ 2,549.30 |
Operating Profit | $ 1,173.80 | Net Profit | $ 624.50 |
FCF | $ (1,320.00) | D/E | 1.10 |
EPS | $ 4.50 | P/E | 23.03 |
Generating Revenues
SS&C drives sales in two respective avenues. The bulk of revenue is driven through software-enabled services, which are prone to fluctuation that stems from supply of new customers in the space along with the assets under management of their clients. Service contracts span 1-5 years, as clients pay SS&C on a monthly or quarterly basis. Those revenues are recognized on behalf of the firm during the period during the month which the service was performed. Moreso, the top line may move due to “out-of-pocket” expenses, which can consist of postage, telecommunication, and other charges. By categorizing these expenses as reimbursable, the collection of the expense is categorized as a revenue, thus not impacting gross, operating, or net profits.
Percent of Revenue
Sales and Operating Costs
Software-enabled services cost of sales fluctuates around 55%, mostly consisting of costs linked to salaries and wages of those servicing the software as well as the amortization of intangible assets. License, maintenance and other related costs are made of further salaries and wages, implementation, conversion, and system integration costs consuming roughly 38% of revenue. Cost of goods sold rose 4.8% in 2022, $123.6 million on which can be credited to organic and $63.8 million to acquisition costs. Foreign currency translated to a $61.4 million favorable sway in expenses.
Operating expenses consists of selling & marketing, research & development, and general & administrative. To capture their share of the rapidly expanding demand for data processing and outsourced professional services, SS&C has increased their operating expenses by over 17.6% over the past year.
Fiscal year 2022 revenues rose 4.6%, notably boosted by $223.6 million due to acquisitions paired with a $101.7 increase in organic revenues, though these strides were combatted by an unfavorable foreign currency translation to the tune of $93.3 million.
Cost of Goods Sold
12.8%
87.2%
S&M | $ 500.1 | 26.9% |
R&D | $ 447.3 | 7.8% |
G&A | $ 425.0 | 28.8% |
Operating Expenses
Cost in Y/Y
Millions Increase
Acquisition Strategy
SS&C pursues acquisitions in order to expand product and service offerings to new markets and client bases. To locate target companies, the firm seeks companies that satisfy financial metrics, provide complementary products or services, and possess proven technology and established customer base that will ensure ongoing revenue. Often, they will target highly specialized businesses in niche markets. Following a completed acquisition, the firm seeks to improve the target business’s operating performance and profitability, often successfully increasing revenues of the acquired company by leveraging SS&C’s existing products, capitalizing on larger sales capabilities and client bases. Since the beginning of 2020, SS&C has used approximately $1.9 billion on seven acquisitions, financing the activities through a combination of debt and cash.
YTD Performance VS Benchmarks
May '20 | Innovest | Added web-based trust accounting and unique asset servicing solutions |
March '22 | Blue Prism Group Plc | Added expertise in intelligent automation and robotic process automation |
March '22 | Hubwise Holdings Limited | Enhanced ability to help customers create highly automated and efficient multi-asset, multi-currency and multi-wrapper strategies |
Notable Acquisitions Include
1
19.1%
80.9%
Remaining revenue is generated by license, maintenance, and related revenues. License software revenues are recognized at the time the software has been delivered. Term license fees are charged in annual installments. Maintenance revenues are recognized ratably over the period of the underlying contract.
Financial Analysis
At the end of the second quarter, SS&C reported $6,863.2 million in long term debt, a stark increase from the mark of $2,901.5 million at the end of FY 2021. Of the standing long-term debt, $5129.1 is floating rate, recently tied to LIBOR, though currently benchmarked by SOFR. Management increased debt repayments over the past quarter as they seek to deleverage the balance sheet. Rather comfortable liquidity ratios provide management with flexibility in terms of servicing indebtedness. The debt mostly composed of senior secured credit facilities, holding a weighted-average interest rate of 7.09% and 6.27%, respectively. Most remaining debt comes from 5.5% senior notes, due in 2027.
Data Processing and Outsourced Services Industry Overview
The rapid digital transformation within a plethora of industries created massive demand for data processing and hosting services, giving rise to a $325.4 billion industry. Analyst believe that the outsourcing of professional services will continue to drive growth in the coming years. Small and medium sized businesses continue to adapt to the post pandemic landscape as online services are pushed to the forefront, ultimately demanding more IT security and functionality from their service providers.
Corporate profit levels also work to indicate growth within the industry, as higher profits typically result in increased spending on the latest technology and software to maximize efficiency. Moreso, Moore’s law, the premise that every two years the efficiency of computers double while the cost halves, provides companies within the industry with cheaper access to more powerful machines fueling their products.
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$325
$351
$367
$390
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$445
$477
Data Processing and Outsourced Service Projected US Revenues ($B)
Investment Theses – Buy SS&C
Diverse Client Base
Since their initial public offering, SS&C has proven their ability to drive sales time and time again, to the tune of a 26% CAGR since the IPO. With revenue streaming through a wide variety of financial service providers and several healthcare firms, the firm has stood out from competitors thanks to their ability to retain clients, at a rate of over 95%. Their top 10 clients accounted for roughly 13% of revenues during FY ‘22, further highlighting the potent reach of the company. Though roughly 70% of revenues arise from domestic customers, a strong global presence across Asia Pacific, EMEA, and North America in both office locations and customers allows SS&C to reach untapped markets. Furthermore, the nature of the financial service industry and increased investments in alternative asset managers continues to fuel the firm's growth.
As a mature, established company, SS&C find themselves driving innovation in the data processing and outsourced service industry through many avenues. With over 38 years of experience, the firms trust and reputation among clients paired with diverse product offerings of over 100 software applications ensure that SS&C remains at the forefront of the industry. Their massive top line allowed the company to commit over $1.6 billion to R&D over the past four years alone as they continue to set the standard in the space. Moreso, their powerful economic engine allows them to absorb smaller competitors through their acquisitive strategy, further cementing their leading position in the space.
Industry Leadership
Strong Financial Footing
As acquisition based and organic growth continue to thrive, SS&C’s strong financial standing affords them with much flexibility. The company has proven their ability to consistently deliver operational cash flows, supporting their efforts to grow through acquisitions, increase share buybacks & dividends, and deleverage their balance sheet. During the second quarter of FY ‘23, the firm increased debt repayments by $80.7 million to $125.2 million. Their consistent margins further indicate the operational efficiency of the firm.
Risks
The direct connection between clients' assets under management and SS&C’s revenues exposes the company to risks associated with a potential recession. Economic troubles would lead to further pain as financial service and healthcare providers move to cut costs, typically involving IT services.
In addition, the Federal Reserves interest rate hiking campaign over the past year has drastically increased the cost of capital, a sharp blow to the SS&C’s M&A focused growth strategy. Inflated valuations, notably within the IT space, also pose a threat to the company as they may be positioned to overpay for a company and increase their already high debt levels.
Recessionary Headwinds
2
Through cash flows generated from operating activities to cash available under their credit agreement, SS&C can cover interest payments on debt, fund research and development, acquire complementary businesses and asserts, and pay dividends, which were recently adjusted 20% by management, from $0.20 a share to $0.24. This places SS&C’s dividend yield at 1.4, in line with the industry average. Earnings per share currently sits at $4.50 annually, boasting an impressive 20% increase over the past five years.
Current Ratio | 1.19 |
Current Liability Coverage Ratio | 0.40 |
Interest Coverage Ratio | 2.47 |