This is William Jellison. I'm a software analyst with D.A. Davidson, and I'm standing in for Pete Heckman, who could not be with us. He came down ill ahead of this. I would like to thank all of you for being here and participating in D.A. Davidson's Tech Summit this year. I'm here with Rahul Kanwar, President and Chief Operating Officer of SS&C, Brian Schell, the company's new CFO, and Justine Stone, Director of Investor Relations. This is our fireside chat with SS&C Technologies. Good afternoon to you three. Thank you for being here.
Good afternoon.
Let's get started, Rahul. The company's original focus was on automation software for investment managers in the areas of portfolio accounting, and the company solidified its strong market position with the acquisitions of several competing platforms, including Advent Software, in 2018. How would you characterize the current outlook for spending in the areas of portfolio accounting, portfolio management, and trading systems?
Sure. And, you know, one, thanks for having us. We really appreciate it. The one way to think about the things we do is investment process, almost regardless of asset class, or regardless of type of entity, or regardless of type of part of the world that it's in, you know. We facilitate the entire flow from trade order execution, management execution, decision, all the way through settlement, reconciliation, valuation, reporting. We do that for hedge funds and private equity funds at scale. We do that for banks and insurance companies. We do that for broker-dealers. We do that for traditional asset managers, all kinds of things, right? So I think when you look at it from that lens, we feel really good about the size of the market.
Most of the kind of individual spots we're in, in that market were, you know, a small fraction of what people spend. And our growth opportunity is, we think, tremendous. The other thing we do, and we're, you know, pretty excited about some of the new things we have coming out here, is in healthcare, we are also a supplier of, we adjudicate and process pharmacy claims and medical benefit claims. And we're approaching it the same way we did in financial services through building technology and having technology be a key differentiator. And once again, we think we have a lot of opportunity there also.
Okay.
And I would just add that, you know, the overall spend and what we offer to the market is not just a pure, you know, technology installation or software installation. We bundle services and outsourcing services and hosting services around all that technology, and it makes, you know, our ability to be a partner to our clients and to provide more value-add for them much greater. And it makes each individual deal size and our potential revenue that we can gain much, much greater when we incorporate services across the board.
Okay. Well, that's a great introduction. Rahul, can you discuss some areas of heightened investment in product development, such as Singularity and Aloha, to upgrade older portfolio accounting solutions and the market's response to this?
Sure. You know, broad trends in the end markets that we service are people want newer technology. They would like, you know, it used to be cloud-native, API-driven. Increasingly, over the last couple of years, it's how much AI can you get in there? And really what folks are looking for is operating leverage, right? They're looking to have their workflow processed more efficiently with fewer people, generally more accurate. And whether it's generative technologies or machine learning or robotic process automation that we're big believers in, and we bought a company called Blue Prism that that's what they do. And we have seen firsthand over the past 12 months or so how much of a transformational impact it's had within SS&C and our own workforce and the kind of productivity.
So a big area of investment for us continues to be making those workflows as efficient as possible, taking advantage of some of the newer technologies that are out there. The other kind of broad area or the broad theme that goes really across our products and services is the quality of the user interface, particularly as it's put in front of the end clients. So whether that end client is an investor in a hedge fund or a, you know, somebody that goes to a financial advisor for wealth management-type services, what's the web portal that they're going into? What's the mobile app that they have? How much can they do on it? What kind of questions can they ask? And what kind of information can they receive? These are really big priorities for our customers.
They're also the kinds of things where, you know, build it once doesn't really scale. So what used to be 10 years ago, you know, everybody would go out and build their own web portal or something like that. Now they want that really rich experience on an outsource basis, which helps us.
With $2.3 trillion in assets under administration at the end of the third quarter, SS&C has become the clear leader in alternative fund administration. How do you think about the underlying growth of the alternative fund industry and SS&C's ability to continue gaining share in that market? Will most of that growth stem from PE and real asset funds?
Well, PE and real asset funds, just to pick up on the last part of that, has been really strong for us, right? So our private markets business, which is closed-end real estate, private credit, and private equity, has been growing 20% or better now for a number of years. And we're still small enough relative to the total volumes processed there, particularly by some of the larger private equity firms that are still doing a lot of this work in-house, that, you know, there's a lot of opportunity left for us. So we think we can sustain that growth rate. Our hedge fund business is by far the bigger piece of, you know, within SS&C GlobeOp, which is our fund administration business.
That hedge fund business has grown nicely despite the fact that the market backdrop hasn't really been, you know, as good as it was even a few years ago. We're doing a lot with technology there. We're doing a lot with execution there. We think we can drive that growth rate up as well. On a combined basis between our hedge fund business and our private equity business, we expect growth to improve from here. It's a nicely growing business now.
Interesting. Well, as a follow-up to that, I mean, with interest rates as high as they are presently, you would think that perhaps the tailwind that just buying an index fund for the last 10 or 20 years might be going away. Have you heard any of your customers talk about the relative strength of these alternative assets versus indexing and how that might benefit you?
Yeah. I mean, we are continuing to benefit from people looking for assets that aren't as broadly correlated to, you know, what else they can get, right? So, and that's kind of where private credit and real assets and some of these things have really been good asset classes for people. You know, the other thing that's happening in all of these markets, similar to some of the discussions a little while ago, is internally within these fund organizations, there's really a big drive to get scale, get operating leverage, take costs out, move people out, outsource more. And that is, that's almost better when the markets are tough. So, you know, what tends to happen in these kinds of cycles is we come through it with a lot more addressing a lot more of our clients' needs than we did going in.
And then as the market returns, you know, we benefit from that.
Okay. So moving to the financial advisor technology side of the business, the acquisitions of Advent and DST provided a company with a nice foothold in that space. But SS&C hasn't participated as much in the M&A that's occurred in this space over the last, say, five years. So how would you size this particular business within SS&C? And is this an area where you would still look to grow by acquisition?
You guys want to, yeah.
You know, I think we have, we do have a really nice kind of footprint in this area. You know, within kind of global wealth management and superannuation funds in the U.K. and in Australia, our GIDS business, Global Investor and Distribution Solutions, has a really nice foothold, and that's been a growth, a pretty good growth driver for that part of the market. You know, Global Wealth Platform, or GWP, is kind of a software solution that we have for the wealth area. And then our newest software that we talked about earlier, Aloha, is also kind of targets the wealth management space and has picked up traction in recent years. We just rolled it out, you know, maybe 18 months ago.
Then Black Diamond, particularly in the RIA, has been a premier solution for a number of years now and continues to grow, you know, 15%-20% for us. So, you know, I think we're pretty happy with the solutions that we have and the, you know, innovations that we continue to drive into that industry. And, you know, M&A, you know, particularly in wealth, tends to be more expensive in recent years. And with valuations elevated, we think that we have just as much opportunity organically to drive growth and to drive value.
Fair enough. So DST's core mutual fund transfer agency and 401(k) record-keeping businesses were a bit of a drag on overall growth for the last two to three years. But both areas, and particularly 401(k) record-keeping, are seeing better growth in 2023. And I'm curious what you think is driving that?
You know, we worked hard on execution over the last couple of years. And that included making sure that the product roadmap and the pace of innovation was what we would have wanted it to be. We have put in, you know, leadership that we have a lot of confidence in. We've invested heavily in the sales and marketing organizations and, in some cases, rebuilt the sales force and, you know, continued to focus on customers and making sure they're getting what they need and they're happy and they're good references for us. And you do those things enough and you do them reasonably well, you know, it starts to show up in the numbers. And that's what we think is happening. So we have opportunity in that GIDS business in particular, which is a transfer agency business, both in, you know, competitive takeaways and market share.
But also, we have increasingly pivoted that business toward wealth managers because they have many of the same requirements with end clients. And that we're putting up websites for them. We're dealing with client onboarding. We're helping them with model selection. We're providing reporting after the fact. And those have been some of the biggest deals that we've had. There's a lot of opportunity that remains in that space. Our retirement services business has won a number of big clients. Some of those have gone live. Some of them are in the process of implementation. And we expect for them to go live, you know, in some cases early in 2024. So we've got a reasonably predictable and healthy growth rate built into that business.
Okay. This is a bit of a pivot here. For years, the company was primarily focused on the investment management vertical, pieces of which we spoke of. The 2018 acquisition of Intralinks and 2022 of Blue Prism brought horizontal technology solutions to SS&C. Can you talk about the rationale for these deals and then give some examples of where successful cross-sells might have happened?
Sure. You know, if we kind of go in order, Intralinks, when we acquired them, was, you know, a very good grower in maybe 8%, 5%-8% historical average and a good business in its own right with 70% of the business coming from M&A, virtual data rooms for the M&A process, and, you know, most of the rest coming from alternatives. That overlap with alternatives was really for us a big part of the strategic thesis because Intralinks, for the longest time, was one of the biggest website providers to private equity firms. So if you had a, you know, an LP portal where you posted your capital call statements or their asset values and things like that, Intralinks did that. There was a lot of overlap, right? That was a part of our strategic rationale.
You know, since we've had them, the growth rate has accelerated. The margin's gotten better. The alternative business now runs our alternatives technology for their web portals. And we've been able to collaborate more and more on shared deals that we're selling. And so it's worked out really, really well. And that's what we're trying to do. So it is an example of a business that, you know, serves a lot of industries. But in particular, the things that we're closest to, private equity being one of them, we have a good amount of overlap. Blue Prism is incredibly compelling for two reasons. One being, you know, 50% of that client base is financial services. So there's a fair amount of overlap there too.
But we think that being a very large outsourcing provider ourselves and having lots and lots of people engaged in the kinds of workflows that Blue Prism addresses gives us the, you know, the right lab, so to speak, and the right testing ground for us to build new technology and new applications, pressure test it at really high rates of volume, and then go out and kind of resell that. So from a growth standpoint, and you'll see this a little bit in what's happened with the Blue Prism ratings in the market in the year and a half or so that we've owned them. You know, they've continuously continued to improve, whether it's rated by Gartner or rated by some of the other ones. So people are liking what we're putting back into the technology.
We've been able to use it ourselves over the course of this year to make a pretty dramatic, you know, we calculate about a 2,000-person full-time equivalent benefit in productivity that we've been able to achieve over the last 12-15 months, and we're just getting started.
Yeah. Great. I did see Blue Prism show up right there with UiPath in that recent rating from Gartner. Clarifying question, because this was something that Pete asked, and I just wanted to make sure. Are you deploying Blue Prism in your own organization as well?
So we have, you know, we announced probably towards the end of last year that we thought we could have 5%-10% of our workforce become, you know, really more analytical, move up the chain, and have that 5%-10% of jobs being done by technology. That technology is not all Blue Prism, but a significant portion of it, maybe half of it or more, is Blue Prism. The rest of it is core automation. So we've been working hard at that. We've made a lot of progress. It also is a process that we think is sustainable, and we can keep doing it for the next several years.
Okay.
We also think that being the biggest user of this technology, and that's been kind of our philosophy on all of the technologies that we have, we want to own the technology that we use to service our clients. We did it with Geneva, with kind of internal technology that we've acquired with DST and how we, you know, how we deliver our transfer agency services and our other operational services within that business. Now with Blue Prism, as the biggest user of that technology, we're also its biggest advocate. We can really turn it into sales opportunities as we identify use cases for it. We can go turn around and market and sell those use cases to our client base.
Yep. And with Blue Prism currently, is it complemented by technologies such as process mining or document understanding? And are there any on the roadmap to bring into the fold as well?
It is. So, you know, in a simplified way, large data sets, right? Large data sets. So doing the same thing thousands and thousands and tens of thousands, hundreds of thousands of times. So we're the process mining, and we have a product called BPPI, which stands for Blue Prism Process Intelligence. It's a monitor. It runs on people's desktops, and it keeps track of what they do all day. And, you know, you collect that data over a period of time. It's usually a week or two. And you come back with suggestions on, here are your best opportunities to get some automation. You know, it seems like they spend an awful amount of time in this process or this other process, things like that. And that's really eye-opening for our customers to see.
It's also eye-opening for us internally when we run it in our own fund administration business or in our own mutual fund transfer agency business or something like that. So that's a big part of how we achieve the benefit.
Okay. Great. I want to step backwards for a moment because we did mention that Brian was new to the company. So Brian, would you like to take this opportunity to give an introduction and background?
Sure. Thank you. Again, happy to be here and happy to be part of this leadership team. I was formerly CFO in a related space in financial services at Cboe, again, exchange space. But with this opportunity here, I'm very excited to be here. I think it's a huge what this team has done as far as its revenue growth, its earnings, its cash flow. I thought it's a tremendous opportunity to join the team. And as I was talking with, you know, the opportunity here and, you know, how do we continue to try and accelerate that growth? How do we continue to enhance the investment thesis with investors? Obviously, and you'll hear this from a lot from management teams that, you know, they believe their company is undervalued. I strongly believe that. That was the primary reason for joining here.
Given the underlying dynamics and where I see we're trading, I think there's more we obviously can do. So I'm here to actually, you know, participate in that growth to help improve margins, to help work with the team as far as everything across the board for revenues, expenses, and then continue to provide some transparency and metrics both internally as far as how do we help maybe make that decision a little faster, a little bit more timely, a little bit better informed, as well as the external community and what they see and what they do. So, like I said, I'm excited to be here after all of four months. But thank you.
Yes, thank you for that. The next question I want to ask you, which is, the company ended third quarter with net leverage of 3.2 times pro forma EBITDA, and SS&C should generate about $1 billion in free cash flow this year, so sourcing, negotiating, and integrating acquisitions has been a core competency for the company, but how does management think about allocating capital into additional acquisitions relative to repurchases as an alternative with the current balance sheet?
Yeah. I think that's a terrific question. I think that this organization has done a really nice roadmap of what it's done in the past. It continues to plan to do going forward. So you'd asked earlier about, you know, potentially a specific space about M&A that Justine kind of laid out kind of where our competitive elements are and how we feel good about that space. More broadly, obviously, if there was an opportunity, we would pursue it if we thought it brought long-term shareholder value. At the end of the day, that is the number one thing that is at the top of our radar list is how do we think that this adds value for our shareholders? Is it the right price? Is it the right strategy? Does it add scale? Does it add incremental market share?
Does it add something that makes it more sense to be in our hands versus another, and is it, you know, like I said, does it really continue to boost that growth, and is there something we can do with it that then help that organic growth, whether that's from a revenue driver side or from incremental margin, and I think you've seen a history of this leadership team's ability to take something that may be underperforming from an earnings contribution side to then change that into the right earnings trajectory, so that capital allocation, I think, has been pretty clearly laid out as the case. It's not a requirement for us to continue to grow, but if it's there, we will always pursue it and take a look at it as far as that's something to do.
Absent that, obviously, then the next logical choices are obviously, as we're looking at, share buyback as well as then I'll call it delevering. Given the fact that our leverage of roughly 3.2 times, it's a very comfortable position to be in, right? If we wanted to pursue that acquisition that we just talked about, we actually have some balance sheet capacity to go do that within a reasonable size, but given where the stock is trading, and we've said this, is that we believe the best spend, the next best return on the next dollar coming in is share buyback, right? The yield on the cash flow, the return that we think it provides us, that's where we're going to dedicate that cash flow.
So we will make that decision opportunistically where we are, given the leverage ratio is where it is, that we believe in the long run that share buyback is definitely the, you know, where we're going to put those dollars.
Yep. Okay. Great. With respect to deciding whether or not an acquisition is going to be a good fit, are there any specific KPIs that you're looking for to evaluate the return potential of a deal?
Yeah. It's both qualitative and quantitative, right? So quantitative, we are looking at things like, you know, revenue growth rate, margin. Usually, these are the companies we look at are in businesses we already know well or adjacent to businesses we already know well. So there's a number of other metrics depending on what it is. So if it's a fund administration business, we might be looking at yield on assets under administration or how many, you know, how do their customers rate them or what their employee retention or turnover has been like. So it's a number of financial metrics. From a qualitative standpoint, we are very interested in the product, right? We're very interested in the evolution of product. We're very interested in how does it plug and play with what we have? How do we think we can help improve it?
This is very much the businesses we're in are all people businesses, right? So we're trying to understand management team, what they would like to do, how good of a fit that is. If to the extent they want to stay, that's fantastic. And can we make that work? Or if they want to leave, do we have the right management team to put in? So these are all things that go into that process. None of that is, you know, particularly rocket science other than we've done a lot of it. So we think we're pretty good at it. We're also pretty good at arriving at decisions fairly quickly. So we're not spending a lot of time on things that don't really have a chance.
Yep. Absolutely. Well, Rahul, you mentioned being excited about health at the beginning of this fireside. And so I want to ask you about that now because 85% of the business, more or less, has a lot of commonality around capital markets, but health is relatively new. So how do you view the current opportunity to drive returns in this new vertical?
Yeah. So you know, we're really excited about kind of where we are having been through, you know, some challenges with the health business where we've had some attrition and we've had to overcome that attrition. But you know, now where we are is the renewal rates in that business, which is obviously our start point for the year. They look a lot like the rest of our company. So we're happy about that. We have exciting new technology that we're, you know, hoping to conclude in the next 45 days or so and have it go live in January 2024. So you know, whenever anytime you're at the end of a multi-year software project and you feel really good about your ability to bring that live, that's a good moment for us. And it's a credit to that team and the job they've done.
We have really good partners that are building that technology with us. And we think our opportunity to put them on the platform, have them take advantage of some of the additional modules and functionality that we have built, and then go out and resell that is really powerful because the amount of money there is in healthcare and the size of tickets that we can sell are big enough that not only could they be transformational for this business, but they have a pretty positive impact on the company.
Yes. Okay. Great. And can you provide an update on the development of the next generation pharmacy claims adjudication platform held within the joint venture with Humana DomaniRx?
Yeah. Yeah. So DomaniRx, we're expecting in early 2024, we'll be online. We're, you know, at the sort of at the conclusion of the code development process, and we're in kind of last-minute testing and deployment. So we feel really good about that. We are migrating a fairly significant amount of our business, things that we service today, onto that platform in early 2024. And we have a number of opportunities and a number of commitments from people to do the same. So we expect it to be positive for us in 2024 and even more positive for us, you know, from that point forward.
Okay. Great. At this juncture, I do have more questions, but I'd like to open it up to the audience to see if they have any? Yes, sir.
Any kind of comments on this era we're in of fee compression, whether that's subsiding or make a case that we could reverse in the equity security, whatever, the capital market?
Yeah. You know, what we've been able to do, and maybe somewhat overdue, but over the last couple of years, we've actually gone the other way where we have in a very disciplined way gone back out and gotten price increases from people, right? And that process has gone well. So it hasn't been, you know, obviously nobody really wants to get a price increase, but clients have understood. And being in an inflationary environment, I guess, makes it a little easier to understand. But most of what that comes down to is fundamentally we do things that people have to have, right? They're mission-critical kind of things. We do portfolio accounting. We do regulatory reporting. We do client reporting. These are not, you know, these are not luxuries. They're not things that are optional, and you can turn them off if you decide you don't like them.
And we pay a lot of attention to customer service and to continually improving the services that we offer. So all of that means we've got some pricing power. And, you know, our job is to continue to deliver value for that pricing power whenever we can exert it a little bit.
Any others? Yes, sir.
Rahul, you mentioned at the very beginning that the spend that SS&C is associated with is a smaller part of what people spend to their customers. How do you gain wallet share with existing customers versus adding respective customers to your platform?
Yes. So a lot of it for us over the last couple of years has just been on making sure that the integration points between products and services that we already own continue to get deeper, right? So, for example, we sold a UK-based wealth manager about eight months ago, and it's a combination of GIDS services, so end-client support type services combined with Advent technology, right? Or we've got something that we're building right now, which is Blue Prism bots used by our fund administration service to provide a document collection and data collection and then data delivery service back to Black Diamond customers, something we call SS&C Chorus.
So the more we can do those kinds of things, then when we go talk to a prospect, then what we're talking to them about is just so far more comprehensive than what they could get from a few different point solutions. And then that makes it a bigger sale.
Okay. I want to ask one more. And it's a hot topic. So if we go a little bit over time, I think it'll be worth the while. And that is, you guessed it, AI. So I'm wondering how SS&C is leveraging AI, whether it be in Blue Prism or elsewhere across the organization and what kind of potential you think it has for the business.
Yeah. So look, AI is a lot of different things. And clearly, it's also one of those terms that gets invoked all the time, right? Sometimes without a lot of substance. I'll give you some practical examples, right? And we're using really all of it, right? We're using GPT, which is content, primarily content, right? And we're using that in training manuals and document analysis and so on and so forth. And we're using machine learning on workflows. And we're using robotic process automation, which is what, you know, the biggest part of what Blue Prism does. We think it is transformational, potentially transformational. It's a huge leap forward in terms of how much productivity we can drive and how differentiated the services can become.
You know, most of the people we compete with, when they talk about using AI, they're talking about using a vendor, and they're talking about using it sort of in, you know, somewhat of a superficial way to improve some workflow or something like that. We're deep in the source code, right? So we're trying to eliminate whatever caused that workflow. That's the first step. But if you have something that you need to do, for example, if you're reconciling two securities and you get some differences and you continuously get them, being deep in the source code allows you to eliminate that so it doesn't happen at all, right? And that is the most effective way to get just a huge amount of operating leverage.
Then if you can't do that, okay, you know what, I can be as smart as I can, but if I'm in the credit agreement kind of space and I'm going to get a paper document, there's only so much I can do. Then you bring in something like Blue Prism or now I want to read and understand that document. So you bring in a GPT type technology. We're doing all of those things. We're running probably 50 pilots across the company. We have commercial applications that are already available. We do think that from a tech-driven software and services company, these things are very valuable tools.
Yep. Great. Well, thank you all three of you for joining us. And thank you for the audience for being here. That concludes this fireside chat. Have a good afternoon.
Thanks a lot.