Long SS&C Technologies (SSNC)

By Rayan Yu, rayanyu@wharton.upenn.edu

SS&C Technologies (NASDAQ:SSNC) provides software and software-enabled services to financial firms and the healthcare industry. Their provisions service the full financial services workflow across securities accounting, front-to-back-office operations, and performance and risk analytics, and service a growing number of end-to-end workflows in healthcare management including regulatory reporting and healthcare information processes. They trade at $47.91 and 17.96 P/E as of September 27th, 2022, below the IT average of 20.5 and application software average of 28.9. Their operations integrate software licensing and software-enabled services—I see them reasonably compared between the average multiples of IT services and pure software. I believe SSNC is undervalued because the market misunderstands its history of inorganic growth and underestimates the pricing power of SSNC’s compounding moat, trading SSNC at below software multiples even though it recently received the same relative software discount.

The street sees SSNC as a serial acquirer with slow, inorganic growth, applying a discount relative to both larger, more generalized providers like Fidelity (55.72 P/E) and smaller, leaner growers like Clearwater Analytics (provider of institutional investment accounting & reconciliations software, NYSE:CWAN at ~64.52 forward P/E vs. SSNC at ~9.26). As such, interest rate hikes and decreased investment activity drive current analyst sentiment that SSNC will lag due to their reliance on debt financing for acquisitions and supposed inability to grow organically; per middling analyst projections of ~2-3% revenue growth (next 5 years). SSNC does have has a cyclic history of levering/acquiring/rapid de-levering, but 11/14 recent acquisitions (trailing 5 years) are low-asset software products with high margin and organic growth potential. SSNC paves clear strategic trends to combat the upcoming rate rise and illiquid market with recent acquisitions—acquiring Trumid (proprietary internal credit trading network) allows SSNC’s customers to access quick, flexible trading protocols for asset liquidity from within their ecosystem, whilst acquiring Algorithmics allows automated risk analytics for credit and other liquidity provisions from within the SSNC ecosystem. Interestingly enough, SSNC organic growth and margin improvement also demonstrate the most growth during period of decreased transactions and M&A, historically climbing to 10-15% organic revenue growth when halting significant acquisitions (i.e. when leverage <2.5x EBITDA).

But SSNC already demonstrates a quiet self-driven growth turnaround. Organic revenue growth as a percentage of FCF and operating revenue has steadily increased the past few years (272.2/383mm of software revenue growth (~2/3) from organic growth last year). CEO Bill Stone continues to improve margins, spearheading recent restructurings to reduce real estate ownership, shift to asset-light software offerings, and reduce unnecessary headcount. Specific guidelines to replace 20-30% of existing workers with digital workers byway of recent acquisition Blue Prism (automotive robotics provider) project to expand margins by 5-10% in the next 2-3 years, which at just 5% translates to ~330mm (based on 2020 earnings) in gross profit increase across said time frame. Above-mentioned analyst projections at 2-3% (150mm-200mm) YoY revenue growth within the same time frame clearly disregard said margin expansion, but I believe Bill Stone’s track record of improving net margin from 3% to over 15% and operating margin from 11-25% in the past 5 years speaks for itself. Newer high margin offerings also pave the way for increased organic growth—Blue Prism is growing 15-20% quarter-over-quarter since acquired 2Q22 (167mm revenue FY’21 for context), and Intralinks is growing at 15% while only making up ~10% of SSNC’s revenue according to analyst reports. Analysts cite margin concerns for Blue Prism (currently just below profitable), but I weigh SSNC’s historic track record of bringing all acquisitions to 40%+ EBITDA margins more (internal projections 15-20% 2023 and 40%+ post-2024). Analysts cite comparables like privately-owned Datasite which failed to maintain high growth rates (similar rates previously before stalling in 2020) in concerns over Intralinks, but Datasite lacked the intense vertical integration SSNC possesses with the rest of their product suite, where a small portion of their current 18,000+ client portfolio offers tremendous runway for growth just from internal upselling.

SSNC is the industry leader in alternative asset management admin software. Intuitively, they’ve maintained incredible reputation in a reputation-centric industry with high switching costs and sticky clients. Objectively, they maintain an absurd 95% retention rate, with an unbelievable bottom of 91% during the financial crisis of 2008. SSNC is one of the best built software-centric companies for any macroeconomic crisis, capitalizing on high investment volume during bull runs and propping up infrastructure for steady asset managers during bear runs. They hold 3rd party advantage since internal bank infrastructure or fund manager software have conflict of interest selling to others, and time only compounds their already industry-dominant moat against other 3rd parties. Specialized third-parties stagger against their vertically integrated one-stop shop since every offering integrates with the next and switching costs skyrocket with the scale of systems being used. All of SSNC’s offerings are proprietary and hosted on a private cloud, mitigating competitive technical risk. SSNC’s economies of scale compound over other offerings through time and the flywheel of vertical integration in a sticky ecosystem. I just don’t see this being priced in when SSNC trades relatively discounted even to itself, currently at almost half the P/E it did this same time in 2017 (36.71), when over the past five years EPS has grown steadily over 2.5x, operating income over 3.5x, EBITDA 3x, etc.

SSNC has received a strong relative software discount this year (down ~42% TTM vs software S&P down ~33%) when churn, stable profits, and unrealistic growth projections clearly aren’t the problem for them—they’re constructed to thrive in tough macro environments where the market sees pure consumer SaaS bursting. Investors seem to have discounted SSNC relative to both the software die-down and an implied upcoming financial crisis, leading me to believe there is an underappreciation for the limited direct exposure SSNC has to hedge fund and investment management performance—see their diversified customer base and expansion into new end markets and geographies (SSNC’s top 10 clients make up <15% of revenue, and the highest single client is <5% of revenue). 

The primary risk is considering the worst case when all such discounts might be accurate in terms of minimal growth and financial crisis. However, I see SSNC as best positioned for any of these with their retention during any sort of crisis, and well-positioned product line in any investment market. If considering all else null, Bill Stone has proclaimed to “increase cash dividends, allocate more capital towards stock buybacks, and continue to pay down debt” in times of difficulty. This is evidenced by share repurchase rates increasing 5x over in the past 3 years (~500mm 3Q21), with a new 1B buyback announced the month before last—if even a quarter of the buyback continues happens (per the declaration of action from Stone), SSNC would grow individual equity value significantly for investors in a down-turn if growth couldn’t play out. As such, I see SSNC trading at a relative discount even under analyst growth projections and only continuing to push forward as normal within any macroeconomic crisis.