SS&C Earnings: Elevated Expenses, Lowered Revenue Outlook Disappoint but Shares Cheap in Our View

Similar to the first quarter of 2023, narrow-moat-rated SS&C’s SSNC second-quarter revenue was in line with expectations, but operating margins were showing some softness. Revenue of $1.36 billion (with 2.5% organic growth) was in line with the FactSet consensus estimate, while adjusted EBITDA of $502 million was 2% below the consensus estimate of $513 million. Looking ahead, while SS&C expects organic growth to accelerate to about 5% by the fourth quarter, management reduced its full-year estimate by 1% to 3% at the midpoint. After increasing our expense forecasts, we have lowered our fair value estimate to $75 per share from $78.

Adjusted EBITDA expenses were $861 million in the quarter, which compares with $854 million in the first quarter and $821 million in the fourth quarter of 2022. SS&C cited higher medical costs, investment spending, and professional fees (which were elevated as the firm faces intellectual property litigation in its fund services business). We expect more details to emerge in the company’s filings.

In addition, we note the firm’s capitalized software spending increased to $97 million in the first half of 2023 which compares with $63 million in the year-ago period. SS&C removes all amortization, including organic amortization of intangible assets from capitalized software in its non-GAAP net income, a practice that we do not agree with.

SS&C has talked about deploying digital workers from its Blue Prism unit to save costs and so far the firm has deployed over 500 digital workers. These digital worker deployments have thus far not expanded the company’s overall margin. SS&C still expects $50,000 in saving per digital worker with a range of plus or minus 10%, but we would note that SS&C called the $50,000 estimate “conservative” at a May 2023 conference. Although we do model margin expansion over the next few years, at this point, we view it as being driven more by synergy realization and revenue growth than digital worker deployments.