Keeping Our Eye on This IPO

We've mentioned our reluctance to bestow the Morningstar high-interest rating on a lot of the IPO deals coming to market recently. It's not a coincidence; we've had a number of concerns with many of these offerings. But we think the story is different for SS&C Holdings, an intriguing software company that provides products to financial services firms.

Morningstar equity analyst Brad Meeks thinks there's a lot to like about SS&C, including its recent performance, its business model, and its scale advantages. He rates this IPO high interest, and gives an in-depth review here:

"SS&C Holdings provides over 60 specialized software products and software-enabled services that allow financial services firms to automate business processes in their front, middle, and back offices. For example, the firm's software helps automate front-office functions such as trading and modeling, middle-office functions such as portfolio management and reporting, and back-office functions such as accounting, performance measurement, reconciliation, reporting, processing and clearing. The firm's products are utilized in the institutional asset management, alternative investment management, and financial institution vertical markets.

"SS&C is going public after being taken private by the Carlyle Group in November 2005. Because the firm was a leveraged buyout, it has relatively high debt levels for an asset-light business. We anticipate the firm may use a portion of the proceeds from the offering to redeem some of its 11 3/4% senior notes, of which $205 million are coming due in 2013.

"There are several reasons why we think the SS&C IPO is compelling. The firm has generated solid top-line growth and profitability over the past two years. The company's business model provides high recurring revenues (with two- to five-year contracts), fat operating margins, and significant cash flow. This recurring revenue model helps to minimize fluctuations in revenues due to the upfront, perpetual software license and maintenance revenues incurred by its customers. In fact, recurring revenues have increased as a percentage of consolidated revenues from 52% in 2000 to 82% by 2008.

"Additionally, the scalability of the firm's operations also provides a significant benefit, allowing the firm to add customers and assets under management with little additional costs. When coupled with organic revenue growth at a historical mid-double-digit clip, operating margins have trended in the low 20% range with EBITDA margins in the low 40% range. Switching costs tend to be high due to the ingrained nature of the firm's software, which is integrated into the day-to-day operations of its clients. This competitive advantage can be seen best through SS&C's client retention rates, which are close to 90%. Although SS&C is a relatively small competitor in a fragmented industry and is reliant on the capital spending patterns of its financial services clients, we believe the firm has room to grow."

This report is made available compliments of Morningstar IPO Research Services. For more information on Morningstar IPO Research, please contact Marc DeMoss at marc.demoss@morningstar.com or +1 312 384-4052.