SS&C Earnings: Software Businesses Seeing Some Air Pockets but Company Is Seeing Margin Progress

SS&C SSNC reported a third quarter that was a tad soft on revenue. Revenues, adjusted EBITDA, and adjusted EPS of $1.37 billion, $534 million, $1.17, respectively, compared with the FactSet consensus estimates of $1.38 billion, $532 million, and $1.18. Overall, there was little in the firm’s third-quarter earnings release that would alter our long-term view of the firm, and we will maintain our narrow moat rating and fair value estimate of $75 per share.

While the revenue miss may disappoint investors, we’re not too concerned with it, as software license revenue can be lumpy and the firm’s other businesses were healthy. In addition, the firm’s retention rate of 97.3%, while up modestly sequentially, was the highest we’ve seen in several quarters. The alternatives fund administration accelerated to 8.4% organic growth from 6.1% in the second quarter. Intralinks revenue growth of 11.6% also accelerated, and we view this as a good result considering that deal activity is muted. Eze, which is about 6% of the firm’s revenue, continues to be soft, and we believe competitor State Street’s Charles River product is growing faster. SS&C did modestly decrease its fourth-quarter outlook from the implied guidance in the previous quarter as license revenue headwinds continue amid uncertainty and the company takes a cautious approach. Adjusted EBITDA expenses were $833 million, a meaningful downtick from the $861 million seen in the previous quarter. This suggests to us some of the firm’s cost-containment efforts are showing efficacy.

Acquisitions have historically been a big driver of the firm’s earnings growth, and management has proved to be disciplined on price. SS&C stated that it expects to deploy $100 million in the next three to six months on acquisitions. In our view, smaller deals may be more accretive on a per-dollar basis than larger deals, but their smaller size makes them less material to the firm overall.