All right, good afternoon, everybody. We'll go ahead and get started with the next session. I'm Patrick O'Shaughnessy, Capital Markets Technology Analyst here at Raymond James. Up next we have SS&C Technologies, and on their behalf we have Founder and CEO Bill Stone. Bill, thanks for joining us.
Of course, Patrick. Thanks for having me.
So maybe for the benefit of folks in the room who aren't as familiar with SS&C, can you maybe just go through the company's business model? What do you guys do, and how has that changed over the last few years?
Yeah, so SS&C is a worldwide provider of software services to financial services and healthcare industries. And we've been around for coming on 40 years, and we have a broad range of products and services. We go from analytics front to back and sophisticated trading. We service many of the largest asset managers, banks, insurance companies, hedge funds, private equity funds, private capital funds, and so on there. And we have done 72 acquisitions, and we generally price on assets under management or transactions.
So Bill, you started the company. If you were to want to start the company today, what would make it impossible to replicate what SS&C does?
Well, I don't think that necessarily that starting a fintech company is particularly difficult. There's a lot of people that can start fintech companies, but to get the size and scale and scope and expertise together that SS&C has done, I think it'd be difficult. We have about 27,000 people. We have 140 offices in 40 countries, and we probably have more CPAs than almost anyone than a CPA firm. And then we have CFAs and mathematicians and then 5,000 or so technology people.
Client retention at SS&C is essentially at an all-time high, up 150 basis points from two years ago. That's despite the company leaning a bit more into pricing in recent years. Do you feel like you're in a better position competitively today than you had been in the past?
I think we have made tremendous investments. I do think that we've always been pretty competitive, and I think we've concentrated.
Thank you for that. People are talking to the public. Thank you.
Just kidding. So I think we've always been pretty competitive. I think we've focused more. We brought in relationship managers and stuff where people have the one throat to choke on the SS&C side versus having multiple people and getting kind of confused. Is this person from SS&C, or is it from some acquisition we did five years ago, 10 years ago, 20 years ago? So I think we've focused on that, and that has improved our relationships with a lot of our clients and, again, got them better service and more ears listening to them.
What are some of the secular tailwinds that you see benefiting SS&C over the medium term, and how can those offset the secular headwind of a consolidating and under-pressured traditional asset management industry?
Well, complexity generally helps us. And I don't think the world's getting less complex. I think it's getting more complex. Regulation generally helps us because people don't want to do regulation themselves. They want to outsource it to somebody, and we're particularly expert in that. So we get that, and then you have taxation and various and sundry regulatory authorities around the world, and that also adds to the opportunities to do 10, 12 years ago. It was Form PF, and then now it's if you buy back your stock, you got a 1% tax. There's always something, right? I mean, I'm from the government. I'm here to help you run. So it's a little bit that kind of an environment.
Wall Street and The City and other financial centers around the world, there's a lot of bright people, and they create a lot of very interesting products, often structured, often difficult to understand. It's often difficult to get the cash flows and get the cash flows correct. So getting yields right in different kinds of fixed income securities can be a challenge.
The traditional asset management industry, obviously, is under pressure, but are there some end markets of yours where you actually do see kind of growing clients, new firms emerging, kind of a growing market opportunity because of that?
Sure. I think there's a number of well-known private equity firms that are huge, $100 billion and upwards to $1 trillion. And they've created all kinds of new assets, primarily in private capital, private debt, distressed. And you can talk to some of them, and they're pretty bright people. And they basically say they can get 200-300 more basis points for their customers in the private markets than you can get in the public markets. And obviously, all of you understand that if you can compound at 200 or 300 basis points more than you are now, that that can really grow quite a bit more rapidly.
In terms of near-term growth, SS&C is a diverse company with related but still different businesses with unique demand drivers. In the past couple of years, it's always kind of been one or two problem children. Most of the companies are doing pretty well, but then this business was struggling, or the next year, some other business was struggling. As you kind of look to 2024, what's your confidence level that kind of everything is going to be rowing in the same direction?
Yeah, that's a great question. We would say that we've always gone in with our eyes open. We bought DST. We liked to think we knew what we were doing. Okay, so maybe we didn't know exactly what we were doing, but we knew pretty well. We bought $2 billion-$2.1 billion in revenue of $400 million in EBITDA, and we paid $5.4 billion. So now we probably do $2.2 billion-$2.3 billion in revenue in DST, but they make $900 million in EBITDA. So if you do 5.4 and divide it by nine, you get six. And it's $900 million and $2.2 billion-$2.3 billion in revenue, and 75 of our top 100 clients came from DST. Not that that part was growing, but it gave us platforms on which to go sell all kinds of more stuff.
So there's a lot of revenue that we've generated out of that client base that doesn't go to DST. So we think those things are things that make SS&C unique. Somebody sent me a note today. He says, "Yeah, the shorts finally threw in their towel. They lost about 30%. They really didn't. They thought you overpaid for Blue Prism, and they didn't like your capital allocation." So with Blue Prism, we bought that coming in April to be two years or March or April to be two years. And we bought them. They were 4% negative EBITDA. But I've been a pretty big believer that this AI, robotic process automation, natural language processing, and machine learning stuff is going to change the world. And I thought that for a long time. So when we got a chance to buy Blue Prism, we pounced, and we paid GBP 1.7 billion.
And, "Oh man, you're dumb as ever." And I said, "Well, now that minus 4 is at 30. We think the EBITDA margin will get to 40." And people said, "Yeah, but it was growing faster when it was on its own." Yeah, it was growing faster and losing a lot more. Now it doesn't grow quite as fast, and it makes a lot of money. So then people said, "What about UiPath?" And that's where I went and told Rahul Kanwar, our president, "Why can UiPath grow 19%, and we only grew constant currency 8% or so?" He said, "Well, Bill, last quarter, they lost $55 million, and we made $30 million, which would you rather have? I want to grow at 19 and make $50 million." So you kind of sometimes make choices. And we don't like to piss away money. That's not our bag.
I am not a big, gigantic supporter of Blue Prism TV. I just don't think we can compete against Netflix, and so we're not really going to try.
Well, so you did touch on robotic process automation and Gen AI. How do you think that is going to impact your business over the next 5-10 years, both in terms of operational efficiencies and taking out costs or being able to scale better, but also being able to monetize it externally?
Well, I think the ability to use digital workers to do more mundane tasks. We can create digital workers that the state of New Mexico took the enrollment in Medicaid from three to 30 days to 15 minutes. We use digital workers to analyze client statements for some of our big hedge fund clients because the LP statements are so important to them. It was taking two or three people, two or three days to go through all 500 LPs' statements. Put a digital worker on there. They don't take any breaks. They don't like coffee, really. They don't ever have to give them a raise. They've never had one bitch at me. It takes about four hours. They don't make mistakes. They don't go to sleep. And humans, you start looking at statements for four or five hours. You get bored.
Then they spell Smith without an i, what's that? PDL? Smth? There's no i, I guess. They'll just write you stuff, spelled name wrong. Everybody gets all ticked off. So some of those things will make it all better. Then also what you're going to find is it's going to keep getting better at speeds that none of us are really aware. It's no different than E-ZPass. Remember when it first came out? You could go through there at about five miles an hour. Now you can go through there at 100 miles an hour. You still have to pay a toll, but you also get a speeding ticket, right? So there aren't toll takers anymore, right? And there's a lot of things like that. You go into a—I'm not that big of a McDonald's fan, but I've been in them, and they got a kiosk.
You press a couple of buttons, and some bag come about and hit you in the head. So there's no humans again. And that's what this is going to do to our businesses. If you don't have a specific skill that is somewhat world-class, then you're going to be redundant. And I think that's what these things and I started this in 1986. A bunch of you probably weren't born, but in 1986, it was the 386. In 1987, maybe 486, then the Pentium chip. It's all been client-server architecture ever since today. But this stuff isn't about making it faster or anything like that. It's about reducing the labor cost. And it's going to do it. And we've proven it. We implemented 1,300-1,400 digital workers in 2023. And we think it was a big reason why we have 2,000 less people than we thought we would have had.
What is your ability to deploy digital workers and AI relative to your competitors? Do you feel like your scale plus your investment in Blue Prism gives you a pretty differentiated advantage on that front?
Sure. I mean, we spent $1.7 billion. We got 1,400 experts, right? But they're technology experts. And we marry them with our 27,000 people that are expert in almost any of the accounting and reporting and performance, performance measurement, compliance, risk, all those things. And you marry that with those 1,400 that work for you, right? We get to cherry-pick. We get the best ones, right? If you put a dumb person to build a digital worker, you know what you get? You get a dumb digital worker. So you can't do that. You got to get a smart person, right? And really, really smart, right? Because every error or every piece of knowledge that that person doesn't know, there's no way for that digital worker to know.
So you have to design it and develop it and test it and recognize that this is going to change how you do things. A digital worker can create an email, send an email to the counterparty, get a response back, and clear a break. No humans. And depending on how much and we do millions and millions and millions of transactions a day. So the more you can automate that, the more you can make that seamless, the more you can go in and show your prospects what you can do compared to what other people can do. A lot of people create financial statements for their auditors that are in these funds. They use spreadsheets and do all this kind of stuff and create them. We hit a button. It says, "Oh, who are you audited by? EY." Well, here's their format. All the data goes right in.
Same thing with any of the other Big Four and probably the next 20 biggest accounting firms. So we build templates. We have processes. It's all automated. Not very many errors, like none.
So Blue Prism was your last meaningful-sized acquisition. You've done a couple of pretty small tuck-ins since then. Your leverage, I think, is at a place where you're pretty comfortable with it. What are you seeing out there right now on the M&A front? And kind of strategically, what is intriguing to you at this point?
Well, I think with interest rates where they are today and the sellers still having a very high regard for the value of their assets. It makes M&A a little more challenging. There's good companies that we would like to own. But when they want 10x revenue, I always say, "I would like to sell to you at 10x revenue. I'm not going to buy from you at 10x revenue." So you have to be disciplined. And you can't get in such a big hurry that you can't wait. So that's kind of my view of how this ought to work is, is go do acquisitions when it makes sense. That wasn't me. And don't do it when it doesn't make sense. Don't overpay to the point where you have to be perfect to make any money.
If you have to be perfect to make money, you're not going to make any money. Problem being a human. Not many of us are perfect.
So then in the meantime, as you're waiting for those deals to come along that do make financial and strategic sense, just continue to balance plan of debt reduction as well as share repurchases, shift a little bit more towards share repurchases now?
That's been our strategy for the last most of the second half of last year. And I think, too, that we have various and sundry assets on our balance sheet that if we can liquefy them, we'll pay off additional we'll buy back additional shares or pay back more debt.
So you've obviously been a pretty active acquirer over the years. I don't think I recall you guys divesting any businesses. Maybe I just don't remember it. To the extent that you feel like you have undervalued assets, why haven't divestors been a part of the SS&C playbook?
That would mean that I would have to admit that somebody can run that business better than me. I'm not in that. I'm not in that business. I don't believe that, right? So I think that we are getting the most productive value out of our assets. I mean, it's not like we haven't ever looked to sell stuff. We have. And we've had some things that were extremely attractive. But we're an IP place. We're a human resource place. That value is those people. They used to come in the office, but now work from home and very hard. But anyway, that's our value, right? So when we go to do some sort of a divestiture, it's got to pass HSR. And whoever the buyers has to be able to get the finance and all this other stuff.
And when we're selling, obviously, if they're going to merge it with one of their fund companies, right, one of their portfolio companies, they need control. So they got to have over 50% ownership. So we would be obviously less than 50% ownership, which would put our management teams at risk, right? They know they're not going to be in charge, and they'll quit, especially the best ones. The best ones always quit because they can always get a job, right? And then you're left with not the best ones, right? And you might have a really, really good business that you just clustered, right? And so I'm willing to do it, but I want guarantees. And then they won't give you any. So you take all the risk. Hey, they're going to give you a great big number if you can get it done.
But I just keep thinking that it's got more risks than I want. And it's like I don't know. I mean, $2.2 billion in revenue or in earnings and $5.7 billion-$5.8 billion in revenue. And I bet I don't miss any meals.
SS&C's free cash flow conversion dipped the past two years. Historically, it was around 100% of adjusted net income, but it fell to 76% in 2022 and 82% in 2023. What's a realistic outlook for your free cash flow conversion going forward? And to what extent is the recent higher capital intensity structural as opposed to more cyclical?
I think it will tick back up this year. It'll probably be higher than the 1982. How much higher, I'm not sure. We had a few things that caused it to dip. We had a settlement with the government on an ERISA issue with the acquisition of DST. We've had some timing of when we paid our bonuses versus first quarter or second quarter that have changed some of those things. We've had various and sundry legal settlements and tax issues that changed a little bit. In general, I think on CapEx, we've capitalized more software this year than we have in the past. We delivered Domani Rx on 1/1/2024. We also delivered a huge system to Nationwide. The Domani is about 1 million hours system build that we did. Nationwide is about 350,000.
Knock on wood, they both work. A lot of times in these things, what they mostly do is get postponed.
So for something like Domani Rx, for example, how are you guys thinking about the required return on investment for something like that, which is a big upfront expenditure? What are your expectations when you do underwrite a project like that?
Well, my view is that so we do a lot of pharmacy claim adjudication and payment. So last year, we did 437 million or some number like that. But we're not getting into healthcare business, right? We're not hiring a bunch of doctors. We're not hiring a bunch of nurses. We're going to do accounting. And we're going to do those millions and millions of scripts. And we're going to process them and then slice them and dice them and deliver them back in different reporting formats. And we're going to do it better than anybody on earth. And when we do it better than anybody on earth, we're going to make tons of money. And I think it's an enormous market, enormous. I was with the CEO of one of the biggest healthcare companies in the country. And he told me he does two billion scripts a year.
So if we can get that client, it's a really big deal. And we have new technology. He's running on 40-year-old technology. And that's being charitable, right? So we have huge opportunity. We just have to keep executing. And again, the great thing about healthcare, it's other people's money. And obviously, you're not really going at some hedge fund general partner and asking for his money or her money. You're, "I'm from the government. I got bags of money." We just want our fair share.
In your meetings with your long-term shareholders, so the ones who really understand the company well, they've followed you for a long time, what are they asking for from the company? And what are they asking you guys to not do?
They're asking us to get the stock price higher. They're telling us not to make it lower. The problem with that is it's pretty clear, but they're not really giving me any strategies on which to make that happen, right? But I think reality, a lot of people didn't like that we bought Blue Prism. That's one of the biggest strengths that SS&C has. We're pretty nimble. If it's something we like, we pounce. When we let other people whine and bitch, we're going to just go right down that road. It's already proven, right? We think we have $100 million in run rate savings internally at SS&C. We're the fastest deployment of Blue Prism in its history, right? We're going to deploy that many more this year. It's a huge opportunity.
There's not many things you can do where you can keep selling it. It's about a $300 million business, about 30% margins. So it throws off $90 million. Plus, we've saved maybe, like I said, $100 million we will have saved by the time I think 12 months is in April. But you take that. If you take the $100 million and you take the $90 million, you get $190 million on a $1.7 billion acquisition. And you become one of the leaders in all of this new technology. And we're in the Magic Quadrant of Gartner. So not that Gartner's always right and all that and not that we don't have to keep managing the business. But it's not like we went out and paid 20x revenue and all that stuff. We think we did it smartly. And so those are the types of things that SS&C does.
And again, look, we fund administration. We got in in 2002. We had zero in assets under administration. Now we have $3.4 trillion. How come? Because they said, "You can't do that. Goldman Sachs and Credit Suisse and JP Morgan and State Street and Bank of New York and Northern Trust, they dominate." It ain't banking. It ain't banking. It's accounting. It's accounting and reporting. What's pharmacy adjudication and payments? Accounting. And it's reporting. It's systems processing. We have huge data centers, tons of MIPS. And that's all it is. Speed. How fast can you do it? How quickly can you get it back to the people that are running the place? And how confident are they in the data you delivered? If you can deliver those things, you can get pretty big. And then when you compete against who we compete against, they don't have a chance.
They don't have a chance. We're going faster than them. We're ahead of them. That means over the long term, they can't ever catch us, right? I know that because I own a couple of racehorses. When she gets ahead, no one ever catches her. She's got to get ahead. It's similar.
If you're ahead and you're getting further ahead, does that imply that your business should have more pricing power going forward?
Yes. But we're accountants and systems people. Asking for more money seems to be genetically a problem. We're getting better, though. We're getting better. We're doing training classes. No, you cannot pull a gun on them. You can't do that. It's against the rules. You have to have a sheet that tells them what we've done. "Hey, we've did these two releases. We've got these 400 improvements. We've done this, this, and this. You've got your same team. You know how much more we have to pay that team than we did two years ago?" Then we just have to have an argument. Are they going to like price increases? Of course not. Everybody raises prices. We get two, two. I think we're getting better at it. I think last year, I think we averaged maybe a little better than three.
We hope to do better than that.
Terrific. Well, I think we are up against the clock here. That seems like a good point to end it. Thank you, everybody, for joining us this afternoon. Thank you very much, Bill.
Thanks, Rob.