SS&C Technologies (SSNC): A Dominant Force In Financial Services With Strong Financials

SS&C Technologies Holdings Inc. (NASDAQ:SSNC) is a provider of software products and services that serve a diverse range of customers, primarily in the financial services sector, but also in healthcare. The company’s subsidiary, SSNC GlobeOp, offers fund administration services to both alternative and traditional asset managers. SSNC also offers a range of software solutions for asset management, banking, lending, and more, to banks, asset managers, and financial advisors. The company’s acquisition of Intralinks in 2018 for $1.5bn USD has made it a major player in Virtual Data Room solutions. With its purchase of DST Systems for $5.4 bn USD in 2018, SSNC has established a presence in the healthcare industry, offering pharmacy health management and medical claim administration services.

SSNC Closes 2022 with Strong Revenue Retention Amid Challenges in Healthcare and Financial Services Sectors

SSNC ended 2022 with a decent fourth quarter. Its organic revenue growth, measured in constant currency, was flat, which was in line with market expectations, despite a challenging macro environment and weakness in the healthcare sector. Importantly, revenue retention for the year reached 96.3%, up from 95.6%. This high retention rate suggests that SSNC’s solutions are difficult to replace.

I believe that SSNC has several attractive characteristics, including a moderate level of cyclicality and high revenue retention. The 17.5% decline in the healthcare business was a major factor that weighed on organic revenue growth, due to client losses. Excluding this, organic revenue growth would have been 1.3%. The DST financial services business posted a 3.2% decline and is likely to remain challenging as consolidation continues among asset managers and as investment shifts from mutual funds to exchange-traded funds. The alternatives business performed well, posting 4.5% organic growth, with private markets growing in the high teens.

A History of Growth through Acquisitions, Disciplined Valuation Approach

Founded in 1986, SSNC is a software provider for mostly financial-service companies. SSNC introduced its asset management, reporting, and accounting solution, CAMRA, in 1989. The company has grown significantly through acquisitions, acquiring 65 companies over the years, targeting those with steady revenue streams and cutting costs to increase margins. SSNC has had a successful history of acquiring companies and improving their earnings. For example, in 2012, SSNC purchased fund administrator GlobeOp for an amount of $834 million, which resulted in an increase in EBITDA margins from 31% to 39%. Then, in 2015, the company acquired Advent Software for $2.6 billion and boosted its EBITDA margins again, this time from 35% to 47%. While SSNC has a strong track record of growth through acquisitions, it may be more challenging to achieve similar results in the future. However, SSNC’s willingness to not overbid for a company is a positive sign of its disciplined approach to valuation.

Competitive Edge: Long-Term Contracts, Leading Software, and Network Effects in Financial Services Industry

SSNC has a competitive advantage based on the cost and time involved in switching to a different provider. Fund administration contracts typically last three to five years, and it takes several months to a year to onboard with a new provider. Despite fluctuations in net flows to hedge funds, hedge fund clients are considered attractive due to their high fees and the potential additional scrutiny that may result from switching administrators.

Advent’s clients may rotate accounting systems every decade or so, which limits the addressable market. SSNC’s main competitors in this field are Sungard for asset managers, Envestnet and Orion for Black Diamond. The company has slightly above inflation pricing power.

SSNC’s Eze software, which includes an order management system and an execution management system, is leading in market share and has high operating margins. SSNC’s Intralinks provides virtual data rooms, secure collaboration, and deal management software for banks and corporations during the M&A process. The collaborative nature of the process creates a slight network effect, as corporations and banks prefer to use a familiar platform. Intralinks has more than 4,000 customers, including most of the Fortune 1000. DST provides information processing solutions for mutual funds, alternative investment funds, retirement plans, participant accounting, and record keeping for wealth management. However, the company has experienced pricing pressure and customer attrition in the past, and customer concentration and consolidation in the healthcare sector limit its pricing power for healthcare outsourcing services.

Impact of Pricing Pressures on SS&C’s Fund Administration and Diversified Revenue Streams

SSNC faces pricing pressures in the financial services sector, but the impact is minimal in its fund administration business. This is due to a diverse portfolio of hedge funds served, including long-short, commodity, credit, event-driven funds and others, as well as tiered pricing in fund administration that does not directly affect prices based on asset levels.

However, SSNC’s Eze revenue is impacted by trading volumes, with 30% of its revenue based on usage, and its Intralinks revenue, which offers Virtual Data Rooms, is sensitive to M&A volumes. The company’s revenue is diversified, with its largest client accounting for less than 5% of its revenue and 29% generated from outside the US.

The success of SSN’Cs fund administration business may be impacted by a significant decline in hedge fund assets and an increase in hedge fund outflows. The company’s acquisition strategy requires a favorable financial market and reasonable prices for target companies, making it challenging to find suitable acquisition opportunities when valuations are high. SSNC’s organic growth has been limited, with flat results in 2020 and low single-digit growth prior to the COVID-19 pandemic. While there are signs of improvement in 2021, it is uncertain if this trend will continue. As shown below, SSNC’s growth has been lagging the sector and even its own 5-year average.

Strong Financials and Prudent Investment Approach

I believe that SSNC has a solid financial standing, makes well-informed investment choices, and manages its capital returns effectively. With a net debt to adjusted EBITDA ratio of 3.4 times at the end of December 2022, SSNC is utilizing its recurring revenue model to its advantage. Its record of 65 successful acquisitions highlights its ability to drive growth and increase margins after acquisitions. The company is discerning in its approach to acquisitions, only proceeding with deals that make financial sense.

Although SSNC started paying a dividend in 2014, it has prioritized reducing debt and seeking new acquisition opportunities over aggressive dividend payouts. Nevertheless, the dividend has steadily increased over time and currently offers a yield of 1.3%.

Valuation

After reviewing the company’s Q4 2022 financial results, I have updated my valuation to $79 per share. In 2021, SSNC benefited from a favorable market environment with growth in its fund administration and Intralinks businesses driven by alternative asset flows, market appreciation, and deal activity. Although the market conditions weakened in 2022, SSNC still managed to maintain positive organic growth of 2.0%. For 2023 and beyond, I expect revenue growth of 2% to 3.0% despite the challenges in the industry. My projections for organic growth are slightly lower than the formal guidance due to the factors discussed in this article.

At $79 per share, the multiples are within the historical ranges as shown below.

Conclusion

SSNC has a long history of growth through acquisitions and a disciplined valuation approach. The company has a competitive edge based on its long-term contracts, leading software, and network effects in the financial services industry. The financial services sector is facing pricing pressures, but the impact is minimal on SSNC’s fund administration business due to a diverse portfolio of clients and tiered pricing. On the other hand, the company’s revenue from Eze and Intralinks is impacted by the trading volumes and M&A activity, respectively. Despite these challenges, SSNC has a strong financial standing and a prudent investment approach, and its high revenue retention rate suggests that its solutions are difficult to replace. However, the success of SSNC’s fund administration business may be impacted by market conditions and limited organic growth, making it uncertain if the trend of improvement will continue.

My fair value is $79 per share offering a 25% upside. I recommend building a position as SSNC’s financial administration and software offerings are highly valued by its clients, as shown by their high retention rates. Additionally, SSNC sees a significant opportunity for growth in the healthcare outsourcing market.