Dec. 1–With the market’s renewed love affair with tech stocks, SS&C Technologies Inc. has enjoyed a classic November romance.
Shares have doubled since May of this year, and septupled since May 2000. In September, the company paid its first cash dividend: 10 cents a share, to be disbursed twice a year.
Shareholders have additional reasons to applaud. This Windsor-based provider of online software and consulting services for money managers somehow increased year-to-year profits during Wall Street’s lean years of 2000-2002.
With stock prices posting double-digit gains in 2003, SS&C’s business has picked up even more. The company continues to add new customers. The customers are spending a little more on SS&C services. And, despite a year-to-year rise in demand for its products, SS&C continues to clip spending, while hoarding cash.
“They’re doing everything we like to see. They’re growing earnings. They’re offering a broad range of products, and they’re in a growth business [asset management],” said Tom Barry, co-manager of the Bjurman Small Cap, and Bjurman Micro-Cap mutual funds. The California-based fund company holds 450,000 shares of SS&C stock (ticker symbol: SSNC).
But would-be investors have to wonder whether SS&C, at its current price of $29.33, is a bear trap, instead of a bull with more room to run. The company is expected to earn 84 cents a share in 2003, and $1.04 a share in 2004.
While the recent pace of sales has accelerated, end-of-year sales (about $70 million) will barely exceed levels first reached in 1999. Part of the growth in earnings per share, furthermore, has come through cost cuts and share repurchases; a reduced share count will increase earnings per share on the same amount of profits. One analyst also warned that growth has slowed in SS&C’s service and maintenance segment.
“With SS&C fundamentals possibly decelerating,” we believe current share prices are a bit high, given the projected rate of earnings growth, said Christopher Rowen, an analyst who follows SS&C for SunTrust Robinson Humphrey in Atlanta. Another analyst last week downgraded SS&C from “buy” to “hold,” mainly because the price has raced ahead of the company’s prospects.
Even SS&C’s highest-ranking executive, William C. Stone, filed papers with regulators to sell 135,000 shares in November — although he still holds about 4.5 million shares in the company he co-founded in the 1980s.
Share price hyperinflation should impel would-be investors to wait for a pullback before they buy.
And, before buying, investors should examine SS&C’s underlying businesses and their two working parts: software and service, and the roles each play in managing stock, bond, loan or real estate portfolios.
“Our products help investors measure risk and manage assets,” said William C. Stone, the chief executive of SS&C.
Property managers need to know who owes them how much rent.
Portfolio managers need to know when bond interest is paid or options contracts are about to expire.
And managers of stock, bond, loan, or real estate portfolios need to know if they’re complying with the laws; they must also evaluate risk and projected future cash flows from the assets they’re about to buy or money they’re about to lend, Stone said.
It is this high-rent asset manager that constitutes a typical SS&C customer. And the SS&C customer list includes ING Group, Merrill Lynch, MetLife, J.P. Morgan, Prudential, American International Group and General Electric. These and other SS&C customers manage $4 trillion in assets around the world. Many use portfolio management software they write in-house; these same customers use software created by SS&C and its competitors.
In recent years, SS&C has added hedge funds to its roster of clients. Hedge funds — through the use of sophisticated investment techniques — often manage money for clients with net worths in excess of $5 million. In early September, Wexford Capital LLC of Greenwich hired SS&C to provide software and service for its hedge fund. And in early November, SS&C paid an undisclosed sum to buy Amicorp Fund Services NV, a hedge fund administration service based in Curacao, the Netherlands Antilles.
“Hedge funds have highly complicated tax situations, and SS&C has been adept at delivering products that fill this need,” said Gary Kraft, an analyst with Soleil Securities in San Francisco. Hedge funds, a mere dot on the financial map in 1990, have recently grown to manage about $600 billion in assets in the United States.
Whether SS&C is selling to a hedge fund, bank, credit union, insurance company or money manager, a typical transaction works like this: Customers pay a one-time licensing fee (typically ranging from $125,000 to $350,000); an additional fee of $100,000 to $150,000 for installation; and, quite often, $40,000 to $150,000 a year for ongoing service.
The sale of a license delivers a one-time blast of revenue. The sale of a service contract, however, provides a much-desired steady stream of revenue over several years, Stone said.
“Recurring revenue allows you to plan. You get paid every month. And you often get paid every month over three to five-year periods,” Stone said.
It is the so-called “recurring revenue” that Stone repeatedly highlights in presentations before analysts. And recurring revenue now accounts for about 70 percent of SS&C’s total revenue. In 1999, by comparison, recurring revenue — mainly from service contracts — accounted for just 42 percent of SS&C’s total sales.
Along with changing the make-up of its sales, SS&C has steadfastly hoarded its cash. In 2000, the company held $65 million in cash. Today the company still holds $48 million in cash.
Some of that cash pile has been used over the years to repurchase SS&C stock; the company has spent $45.1 million to take 5 million shares off the market since 1999. The company has also purchased small financial software vendors, usually for no more than $2 million; SS&C now offers 18 different shrink wrapped and online software products.
Yet even with a cash-loaded treasury — and a balance sheet that carries zero debt — SS&C has still kept a close watch on operating expenses. Payroll has been clipped from 416 in 2000 to 315 today. Yearly operating expenses have also been trimmed, from $65 million in 2000 to $45 million at the end of 2002.
This combination of cash, cost containment and new business enabled SS&C to boost its yearly income during the stock market meltdown of 2000-2002. After reporting a $12.6 million net loss in1999, the net income trajectory has climbed a flight of stairs: $2.2 million in 2000, $4 million in 2001, $7.3 million in 2002, and it’s expected to be north of $10 million in 2003.
“That’s what has been most impressive about SS&C,” said Kraft of Soleil Securities. “They showed improving earnings when financial service companies [their chief customers] put a lid on spending.”
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(c) 2003, The Hartford Courant, Conn. Distributed by Knight Ridder/Tribune Business News.
