SS&C Weathers Delayed Deals En Route to a Mixed Quarter

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SS&C Technologies Holdings (NASDAQ: SSNC) announced slightly weaker-than-expected third-quarter 2017 results on Wednesday after the market closed, highlighting significant margin expansion and its 22nd straight quarter of top-line growth despite a number of perpetual license deals being pushed back.

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With shares down modestly on Thursday, let's dig deeper to understand how the financial software services company kicked off the second half of the year, and what to expect in the months ahead.

SS&C Technologies results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Growth

GAAP revenue

$418.3 million

$383.3 million

9.1%

GAAP net income

$64.2 million

$38.7 million

65.8%

GAAP earnings per share (diluted)

$0.30

$0.19

57.9%

What happened with SS&C this quarter?

  • On an adjusted (non-GAAP) basis, which excludes purchase accounting adjustments to deferred revenue related to acquisitions, revenue increased 7.1% to $419.6 million -- below SS&C's latest guidance for a range of $420 million to $428 million.
  • Adjusted net income increased 20.6% to $105.5 million, and adjusted net income per diluted share grew 19% to $0.50. Both figures were within SS&C's guidance ranges for earnings of $103.5 million to $108 million, or $0.49 to $0.51 per share.
  • Adjusted recurring revenue climbed 9.6% year over year to $395 million, including 13.4% growth in software-enabled services recurring revenue to $282.1 million, and 1.2% growth from maintenance and term licenses to $112.9 million.
  • Adjusted non-recurring revenue declined 1.6% to $23.3 million, including an 18.5% decline in perpetual licenses to $3.6 million, and a 15% decline in professional services revenue to $19.7 million.
  • Adjusted consolidated EBITDA grew 14.2% to $178.8 million.
  • Through the first three quarters of the year, SS&C has generated cash from operations of $307.1 million (up 29.6% year over year) and paid off $292.8 million of debt, bringing its net debt to consolidated EBITDA leverage ratio to 3.19.
  • Subsequent to the end of the quarter, SS&C closed on its acquisition of CommonWealth Fund Services, a Toronto-based fund administrator with $8 billion in assets under its administration and relationships with over 100 funds.

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What management had to say

SS&C Chairman and CEO Bill Stone added in a prepared statement:

We are pleased with our ability to report adjusted diluted earnings per share up 19.0 percent on a 7.1 percent increase in adjusted revenue. We had many deals push to Q4; nevertheless we ramped up our margins with 42.6 percent adjusted consolidated EBITDA margin across the entire business. We expect a solid Q4.

During the subsequent conference call, Stone elaborated that there were more than 30 deals pushed to the fourth quarter, most of which are perpetual or term license deals. But he also insisted that the company is "actively managing those deals." In addition, Stone says synergies from SS&C's acquisitions of Citi's Alternative Investor Services business, Wells Fargo's Global Fund Services business, and Conifer Financial services "were a big driver to our Q3 earnings margin increases."

Looking ahead

For the fourth quarter, SS&C anticipates adjusted revenue of $427 million to $437 million and adjusted net income of $110 million to $113.9 million. Based on the midpoint of its expected diluted share count, that should translate to adjusted net income per share in the range of roughly $0.52 to $0.53.

As such, SS&C now expects full-year 2017 revenue of $1.670 billion to $1.680 billion (narrowed from $1.669 billion to $1.689 billion previously), and adjusted net income of $404.7 million to $408.6 million (narrowed from $403 million to $413 million previously). SS&C also reiterated its expectation for full-year cash from operations of $485 million to $500 million.

Apart from those perpetual license deals slipping into the fourth quarter -- a large number of which SS&C is likely to close by the end of the year -- this was as solid a performance as SS&C investors could have asked for. So while shares fell around 3.6% when all was said and done today, it appears SS&C's long-term thesis remains firmly intact.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends SS&C Technologies Holdings. The Motley Fool has a disclosure policy.