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Edited Transcript of SSNC earnings conference call or presentation 31-Oct-19 9:00pm GMT

Q3 2019 SS&C Technologies Holdings Inc Earnings Call

WINDSOR Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of SS&C Technologies Holdings Inc earnings conference call or presentation Thursday, October 31, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Justine Stone

SS&C Technologies Holdings, Inc. - Head of IR

* Patrick J. Pedonti

SS&C Technologies Holdings, Inc. - Senior VP & CFO

* Rahul Kanwar

SS&C Technologies Holdings, Inc. - President & COO

* William C. Stone

SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO

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Conference Call Participants

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* Andrew Garth Schmidt

Citigroup Inc, Research Division - Senior Associate

* Ashish Sabadra

Deutsche Bank AG, Research Division - Research Analyst

* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Christopher Roy Donat

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Daniel Rock Perlin

RBC Capital Markets, Research Division - Analyst

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* James Eugene Faucette

Morgan Stanley, Research Division - Executive Director

* Mayank Tandon

Needham & Company, LLC, Research Division - Senior Analyst

* Peter James Heckmann

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Rayna Kumar

Evercore ISI Institutional Equities, Research Division - MD

* Surinder Singh Thind

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the SS&C Technologies Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Justine Stone. Thank you. Please go ahead.

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Justine Stone, SS&C Technologies Holdings, Inc. - Head of IR [2]

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Hi, everyone. Welcome, and thank you for joining us for our third quarter 2019 earnings conference call. I'm Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Rahul Kanwar, President and Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer.

Before we get started, we need to review the safe harbor statement. Please note that various remarks we make today about future expectations, plans and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, October 31, 2019. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today's call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located in the Investor Relations section of our website at www.ssctech.com.

Now I'll turn the call over to Bill.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [3]

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Thanks, Justine, and thanks, everyone, for joining us today. What 90 days difference makes? Our results for the quarter were $1.1508 billion in adjusted revenue and $0.93 in adjusted diluted earnings per share. Our adjusted consolidated EBITDA was $445.8 million, and our adjusted consolidated EBITDA margin was 38.7%. Q3 organic revenue growth was 3.2%.

We've made a number of organizational changes to streamline our processes and enhance our clients' offering and ultimately, drive revenue. Bob Petrocchi and Ken Bisconti were promoted to Co-General Managers of SS&C Intralinks. And Mike Hutner was promoted to General Manager of SS&C Eze. Eamonn Greaves is now our Global Head of Sales, who is charged with developing a strategy and process across the company to maximize our revenue opportunities in the short term. Eamonn will focus on large and strategic accounts. Rob Stone is now Head of Alternative Asset Sales.

We were expecting between $1.16 billion and $1.2 billion in operating cash flow for 2019, and shareholder-focused capital allocation is always a top priority. In August, the Board approved a $500 million common stock repurchase program. And in the third quarter, we purchased $60 million or 1.3 million shares at an average price of $45. While stock buybacks have not been a priority lately, we are inclined to direct some cash toward repurchases when we feel our stock is undervalued.

We continue to pay down debt, having paid down $629 million so far in 2009 (sic) [2019], 10x more debt repayment than stock repurchase, bringing our secured net leverage to 2.98x and our total net leverage to 4.05. We are also participating in the M&A market. We acquired Investrack in the Middle East earlier this month, and we expect to close Algorithmics, who we are buying from IBM, by the end of the year -- by the end of this year. These acquisitions will provide enhanced technology, talented new employees, new capability and new markets.

And with that, I will turn it over to Rahul.

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [4]

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Thanks, Bill. We had a strong quarter operationally and continued to capitalize on market trends in the financial services and health care industries. We're gaining momentum in several of our businesses. SS&C GlobeOp, our fund services business, continues to win new launches and conversions from other administrators. The Real Assets business has gained momentum in open-ended real estate, opportunity zone funds, and our private equity business is benefiting from increased outsourcing amongst private equity firms. Black Diamond is very well positioned with new launches in the RIA space, and across the company, we're building new products, enhancing our service offerings and expanding our relationships with large and strategic customers.

We're also gaining momentum internationally. We've increased our ground presence in the Asia Pacific region in the last several quarters, and the investments are paying off. Our Advent, Eze and private equity groups have capitalized on the growing assets and new fund launches in Asia, and we're seeing more opportunity within DST's international business in the U.K. and Australia. Delivering new technology to these customers, such as our WalletShare application that we rolled out in Europe, is helping enhance their business intelligence and ability to use information to derive important insights.

Now I will mention some key deals for Q3 2019. A $50 billion-plus asset manager expanded their relationship to include cloud delivery and Advent outsourcing services. An Australian investment management company extended their GWP and Recon licenses to include a new acquisition. A $400 billion-plus publicly traded bank extended their Primatics relationship to use our CECL accounting solution for the bank's entire loan portfolio. A $100 billion-plus alternative asset manager, an existing fund administration client, chose Intralinks fundraising portal to replace a competitor's system. A large mutual fund client extended their relationship to include [event center] services. An existing Blue Cross Blue Shield client chose SS&C Health solutions for their Medicare operations. A $9 billion AUA hedge fund, who is a Geneva client, wanted to consolidate operational processes under one roof and chose SS&C's fund administration, middle office, investor and regulatory services. A multibillion-dollar start-up hedge fund chose SS&C GlobeOp for their fund administration and reporting requirements. An existing Private Equity Services client chose to combine Fund Administration Services with DST ALPS transfer agency services for their interval fund.

We'll now turn it over to Patrick to run through the financials.

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [5]

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Thanks, Rahul. Results for the third quarter were GAAP revenues of $1.1442 billion, GAAP net income of $95 million and diluted EPS of $0.36. Adjusted revenue was $1.1508 billion, excluding the impact of the adoption of the revenue standard 606 and the acquired revenue adjustment for DST and Intralinks acquisitions.

Overall, we had a strong quarter. Adjusted revenue was up 14.7%. Adjusted operating income increased 23.5%, and adjusted diluted EPS was $0.93, a 17.7% increase over Q3 2018. Adjusted revenue increased $147.9 million or 14.7% in the quarter. The acquisitions of Eze and Intralinks contributed $148.8 million. Foreign exchange had an unfavorable impact of $9 million or 0.9% in the quarter. Organic growth was 3.2%, driven by the strength in our institutional management, alternatives and Advent businesses.

Adjusted operating income for the quarter was $425.6 million, an increase of $80.9 million or 23.5% over -- from the third quarter of 2018. Foreign exchange had a positive impact of $7.5 million on expenses in the quarter. Adjusted operating margins improved from 34.4% in the third quarter of 2018 to 37% in the third quarter of 2019. DST adjusted operating margins were 35.1% in the third quarter of 2019, and annual run rate implemented cost synergies reached $320.5 million at the end of the quarter. Adjusted consolidated EBITDA was $445.8 million or 38.7% of adjusted revenue and increased 21.8% over Q3 2018.

Net interest expense in the quarter was $98.5 million and includes $4.5 million of noncash amortized financing costs and OID. The average interest rate in the quarter for the credit facility, including the senior notes, was 4.84% compared to 4.59% in the third quarter of 2018. We recorded a GAAP tax provision of $23.7 million or 20% of pretax income. We currently expect the GAAP tax rate to be approximately 22% for the full year.

Adjusted net income was $245.3 million, and adjusted EPS was $0.93. Adjusted net income excludes $160.2 million of amortization of intangible assets; $17.1 million of stock-based compensation; $4.5 million of amortization of noncash financing costs and OID, $11.4 million of purchase accounting adjustment, mostly deferred revenue adjustment and depreciation related to revaluation of assets; $4.1 million of revenue adjustments related to the adoption of ASC 606; and $15.4 million of nonoperating costs, including $10.5 million loss for mark-to-market adjustments on investments and $2.8 million of severance related to staff reductions. The effective tax rate we used for adjusted net income was 26%.

Diluted shares increased 4% over Q3 2018, mostly due to the shares issued for the Intralinks acquisition in the fourth quarter of 2018 and option issuance. Those were offset in Q3 by share repurchases.

On the balance sheet and cash flow, we ended the quarter with approximately $158 million of cash and cash equivalents and approximately $7.7 billion of gross debt for a net debt position of approximately $7.6 billion. Operating cash for the 9 months in 2019 was $755 million, is a $433 million or 134% increase compared to the same period in 2018.

Couple of highlights for the 9 months. We've paid down $629 million of debt, and that puts us at paying down $1.553 billion of total debt since we did the DST acquisition in April 2018. We paid $294.6 million of cash interest compared to $171.7 million in the same period last year. In the 9 months this year, we paid $180.3 million of cash taxes compared to $95 million last year. The accounts receivable DSO at the end of the quarter was 51.2 days, and that compares to 51.8 days at the end of June 2019.

We used $99 million in -- for capital expenditures and capitalized software, mostly for IT and leasehold improvements. We've declared and paid $76 million of common stock dividends as compared to $50.7 million in the same period last year.

Treasury stock buybacks in the quarter were a total of $60.3 million to purchase 1.3 million shares at an average price of $45. The impact on diluted shares in the quarter was 571,000 shares on a weighted average basis. Our LTM EBITDA, which we use for our covenants, was $1.868 billion and includes $85 million of acquired EBITDA and cost savings related to the acquisition.

Based on net debt of $7.6 million (sic) [$7.6 billion], our total leverage ratio was 4.05x. Our secured leverage ratio was 2.98x. Outlook for the fourth quarter. Our current expectation for the fourth quarter is adjusted revenue in the range of $1.154 billion to $1.184 billion, adjusted net income in the range of $247 million to $264 million and diluted shares in the range of 265 million to 267 million. Our expected organic growth will be in the range of 0.6% to 2.9% for the quarter.

For the year, we continue to expect to have the adjusted tax rate at 26%. And we expect cash from operating activities to be in the range of $1.160 billion to $1.2 billion and net capital expenditures to be in the range of 2.7% to 3% of revenues.

And then I'll turn it over to Bill for final comments.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [6]

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Thanks, Patrick. Last month, we hosted our largest client conference to date in Orlando, Florida. With over 800 clients and 1,300 attendees, we had excellent presentations, workshops and panel discussions. The client conference is called SS&C Deliver because of our commitment to deliver to our clients. We welcomed clients who use 48 different SS&C products and services, and we have had very positive impact. This week, we hosted 175 SS&C personnel at our first top talent event. We again had overwhelmingly positive response as we continue to bring a diverse group of talented employees together.

We service some of the largest financial services and real estate organizations in the world with a wide array of detailed products and a whole host of both hosted and BPO services. It's the deep subject matter expertise we have in all of the different asset classes and a very large and talented engineering capability which is the core of our success. We intend to deliver for our shareholders as well.

Now we take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Dan Perlin from RBC Capital Markets.

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Daniel Rock Perlin, RBC Capital Markets, Research Division - Analyst [2]

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And you're right, Bill, like what a change in 90 days. So congratulations on the shift.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [3]

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Just got smarter, Dan.

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Daniel Rock Perlin, RBC Capital Markets, Research Division - Analyst [4]

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What's that?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [5]

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I just got smarter.

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Daniel Rock Perlin, RBC Capital Markets, Research Division - Analyst [6]

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I hear you. So I did want to talk about a lot of those changes. You made a lot of management changes. You stepped into the buyback. You did a couple of additional acquisitions that you called out. I'm wondering -- so do you feel like you've got -- with all of those changes, in particular in management, do you think you have like the sustainability and kind of better communication throughout the organization to give you that line of sight in 2020? And maybe you can just talk anecdotally about why that would be the case.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [7]

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Well, I think that's a great question for starters. I mean, obviously, you're putting in some -- we're putting in some very talented people. And the people that left us are talented people as well, although they were owned by private equity firms in the case of Eze and Intralinks, and they got big payouts. And so they left. I mean that happens all the time.

The new people that we've put in, Bob Petrocchi and Ken Bisconti in Intralinks and Mike Hutner in Eze, are the next generation of leaders. They're ambitious. They're smart. They're hungry. And we have a lot of hope and a lot of faith in them.

But to tell you, 30, 60 days in that we're 100% confident that all is going to play out well, I would be BS-ing you and I don't do that.

So what I would say is we're optimistic, and we have a lot of things that are really working out well for us. We still have to execute. It's an execution game, but there's a lot of positives. There's a lot of really good, smart people in the business, and we have to look ourselves in the mirror and make sure we're making the right decisions. We need to make sure that our best people are getting the best opportunities. We're extending the contracts and capabilities of our best people that have proven results to us, right, that we're not doing things on whim. And I think as we execute through that process and get the best people -- I mean that's why our real estate organization is growing so well is that, look, we've been selling commercial loan systems and property management systems for over 20 years. But Bhagesh Malde, who came in from State Street and JPMorgan, has done a wonderful job. We get all kinds of talent that he's brought in and all kinds of talented people that are trying to come work for us.

So we're really optimistic about that part of that business. We're optimistic as Rahul talked about Black Diamond. We have huge opportunities in health care, and Sean Hogan has a great opportunity to take advantage of that. So there's a lot of great things that we're doing. And I'm really excited about 2020, and I'm excited about Q4.

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Daniel Rock Perlin, RBC Capital Markets, Research Division - Analyst [8]

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That's great. Patrick, can I just ask you what -- why would you expect maybe the downdraft on the organic growth? I think you said 4Q for you guys implies, on the current definition on Slide 5, of 60 bps to 2.9% organic growth. So that is a bit of a downdraft from what you've done in the past couple of quarters, which has been pretty reasonable, and I'm wondering if you could also just give us a sense of what's going to be the puts and takes to get you to the low end of that range versus the high end of that range.

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [9]

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Well, I think the organic growth going down slightly sequentially is really mostly due to the DST business when you compare it to Q4 2018, when that had a fairly strong quarter at $564 million in revenue. Overall, if you look at what we would call our core business, which is the -- our alternatives and software business, excluding DST, Intralinks and Eze, the acquisitions we did in 2018, our core business continues to perform really well. In fact, in Q3, I think our core business was up organically about 5.4%, and then we expect it to accelerate a little bit to a little over 6% in Q4. So our core business is doing really well, and we're getting a little bit of drag on DST but working hard to turn that business around and sign some new deals with clients.

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Daniel Rock Perlin, RBC Capital Markets, Research Division - Analyst [10]

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Okay. And does that explain kind of the range there as well? I mean is that the -- that's the delta in terms of the 60 bps to 2.9%? Like, it all depends on DST. Is it more...

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [11]

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Well, the range, yes -- the range is -- yes, the range is DST, which the revenue really depends on transaction volume, which is hard to predict precisely. And then we do have a lot of license deals to sign to hit our target, and so there's a range for that.

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Daniel Rock Perlin, RBC Capital Markets, Research Division - Analyst [12]

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Okay. And if I could just ask one more, sneaking in. Investrack and Algorithmics, can you just give us some framework in terms of revenue contribution that you would expect on an annualized basis or a quarterly basis? And then what kind of margin profile do those businesses have as we think about it compared to your core?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [13]

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Dan, I'm going to take that. I mean I think that we expect out of Investrack and Algorithmics something on line of $50 million to $60 million in revenue. And profitability, we're going to have to do some work on both of those companies, but we expect to get profitability up to our standards in the next 12 months. And if we take 5 questions from everybody, we're going to be here until midnight. So thanks.

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Operator [14]

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(Operator Instructions) Your next question comes from the line of Rayna Kumar from Evercore ISI.

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Rayna Kumar, Evercore ISI Institutional Equities, Research Division - MD [15]

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Good results here. Could you flesh out a little bit on just DST performance in the quarter, specifically for health care and also for financial services?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [16]

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I think as we've talked about over the last several weeks, we continue to see progress at DST, and progress measured by increasing pipeline as well as more executions, and that's -- I think that's kind of what we saw in the quarter. There is obviously [some layers], as Patrick talked about. There are some things we're trying to overcome year-over-year. There's also some client attrition that we knew about going into it that obviously is going to continue to happen over the next 12 to 15 months or so. But we're performing really well on both the pipeline and revenue acquisition or opportunity front as well as on the expense management front. I think 1 of the other things that was said was we're at about $320 million in synergies, which is obviously real strong, and we expect to be able to keep both of those engines going.

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Rayna Kumar, Evercore ISI Institutional Equities, Research Division - MD [17]

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Understood. And just 2 quick housekeeping questions. Could we just get the organic revenue growth rate on the old definition for the third quarter and also your expectations for the fourth quarter? And what was the alternatives revenue growth for the third quarter, please?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [18]

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Rayna, we have a slide deck of all kinds of numbers in that you can go look up how we calculated befores and afters. And I think, again, we expect our fund administration business to grow 5% to 7% in the fourth quarter.

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Rayna Kumar, Evercore ISI Institutional Equities, Research Division - MD [19]

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And what was it in the third quarter, alternatives growth?

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [20]

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It was about 4.5%.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [21]

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About, yes, 4.5%.

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Operator [22]

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Your next question comes from the line of Andrew Schmidt from Citi.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [23]

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In DST, particularly transfer agency, wondering if you'd talk a little bit about just the pipeline as you see it today. And then heading into 2020, what sort of gives you confidence to stabilize that and get that back to the low single-digit growth that you guys are expecting?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [24]

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So we think our opportunities at DST are -- fall into several different categories, right? It's a big complicated business with lots of big customers and many different areas that we address. Just to run through some of them, most of the big mutual fund companies and other fund managers that we have, have big operations where they're performing several of the same things that we do on an outsourced basis, whether that is transfer agency that they're doing on their own book, or on the investment side of the house, investment operations and the technology and other systems required to support that.

So as we talk to these customers, we are seeing lots of opportunities for -- to go in there and be able to either enhance what they have or help them get to the next generation or, in some cases, convert over some portion of their book. And we think that'll continue. So that's the big part of the TA opportunity there, but there's also -- DST has a more full product called AWD, which is a strong business that we have done a number of releases on over the course of this year. And we think that that'll continue to grow.

I talked a little bit about how we rolled out our WalletShare, which is sales intelligence and distribution intelligence for fund managers in Europe, and that continues to be -- that process of building technology in areas where they could really benefit from, it continues to be pretty important for us. So across DST, we have a number of opportunities that we feel good about.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [25]

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And we also have a huge infrastructure in India that we're opening up the possibility of our large clients being able to co-locate with us, be able to have small technology groups that we manage for them. There's a whole series of things that we can give them that gives them better productivity, a more secure employee base where we have a large organization that knows how to recruit and retain people in India. And I think that's something that is really resonating with our large clients.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [26]

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Got it. And then good to see the pickup on the organic growth. I was wondering if you could dig into that a little bit more, especially the outperformance relative to expectations. It's good to see the pickup in traditional asset management. So I guess particularly whether you're seeing any change there in terms of just acceptance of solutions and shift to outsourcing. Obviously, those guys have been under pressure for some time, but wondering whether you're seeing a more sustained shift now versus historically.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [27]

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Well, again, I think Q3 of this year, particularly September, there became a little more volatility in the markets. A number of our clients even saw inflows in their active accounts. And so most of this thing, when it comes to buying technology and doing new initiatives, comes with confidence. So I think -- I'm not an economist or anything, but the Fed cutting interest rates again, the market's performing pretty strongly, the prospect that we do get a deal with China, there's a lot of opportunities that come with that. And we have, again, large sophisticated clients across our client base, and we have large opportunities. It all comes down to getting ink on paper, and we're optimistic. We sold big business in Australia, big business in Europe, big business in North America, and that's kind of the strength of our model.

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Operator [28]

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And your next question comes from the line of Mayank Tandon from Needham.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [29]

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Bill, last quarter, you had mentioned that several large deals slipped, I think, particularly on the DST side. Could you just comment on where the pipeline is, conversion is? And how do you expect that to shake out for 2020 in terms of organic growth potential?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [30]

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Yes, Mayank. I think that similar to Q3, we have had a number of deals that have slipped to Q4, but we've also had some pretty good success in October about bringing those home. So we're pretty optimistic about that.

I think the large scale that we're doing and I think the more we get to get inside of these great, big organizations and show them how we do things versus how they do things has started to resonate increasingly. And so I think that in 2020, as we keep rolling out more technology and more solution-based businesses, the ability to marry Eclipse with Geneva or marry Eclipse with APX, be able to have multiple platforms for people that use different levels of sophistication gives us way to price differently. We're also going through our entire client base and making sure that we get more methodical about price increases and making sure that we know where we are in the market and how we can maximize our opportunity in our current client base.

So there's lots of opportunity around the world. If we can show big cost savings for them, it tends to give us a great opportunity. And I think we can accelerate organic revenue growth in 2020 to 3% to 5% and maybe better if we get some tailwind.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [31]

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That's helpful. And then for Patrick. Patrick, in terms of margins, I'm looking at the model this year. I think we're going to end up with about a 37% operating margin or a 39% EBITDA margin if my math is correct. How do you think margins shake out for 2020 in the absence of any more acquisitions? Maybe break it down between organic versus any additional synergies that you hope to capture to drive margin improvement in 2020.

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [32]

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Well, we have -- I think at the midpoint for this year, operating margins will be about 37%, maybe a little bit under, 36.9%, 37% for the full year. And we continue to target 50 to 100 basis points improvement year-to-year, excluding maybe some synergies we can also achieve at Intralinks and Eze.

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Operator [33]

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Your next question comes from the line of Surinder Thind from Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [34]

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Also congratulations on the quarter, guys. Just a follow-up question on DST. You guys talked about the significant jump in the cost synergies. Can you walk me through a little bit about what that change was? I understand that you guys were, at one point, looking at moving some operations to India. Was that the delta? Or is there something else?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [35]

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It's pretty widespread, right? There are still a number of initiatives in India that haven't kicked in yet that we expect to be able to realize towards the middle of next year. What -- really across DST, whether it's productivity and automation or how we manage our third-party relationships with vendors and contractors or the IT spend process. There's been a pretty big cultural shift. I think the management there is very, very focused on making sure that they're getting value for what they're spending, and that's coming through in the numbers.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [36]

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Understood. And I guess related to that, I think the suggestion was that there's still a decent amount more to potentially come. Is there any color you can provide on that?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [37]

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Well, as we look around, right, we're not done yet, right? And I don't know that we're going to keep calling it synergies or keep signing up for bigger and bigger targets, but we do expect continuous operating income improvement in DST and really across our business.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [38]

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Yes. I mean we run a large operation, so we expect operating leverage. We have probably 7,000 people in our engineering department. We're supposed to engineer, right? We engineer to get better, right, not to stay the same, not to get worse. So it's something where we get a little more insistent about what we think and what we want to do, and we have the talent and capability to get it done.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [39]

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Understood. And as my follow-up question, can you talk a little bit about maybe the flexibility in the cost structure? We -- it seems like we've had a little bit of fits and starts when it comes to the macro environment. But if there was, let's say, sustained downturn, can you talk a little bit about that in terms of the sales force and the leverage there? Is it like kind of a 70-30, where 70 is base and 30 is variable? Any color you can provide there and maybe the size of the sales force relative to the size of the engineering teams for the rest of the firm?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [40]

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Well, I think if you look at our operating expenses for Q3, you'll see that, I think, R&D rose from $85 million to $94 million and sales and marketing raised from $50 million to $88.7 million. So I think you can see where we are both investing more in R&D. And remember, when you look at our R&D, we have about an $800 million services business, right? So we also sell the same R&D as software licenses. So we use Geneva or we use Eclipse or we use our derivatives or whatever it is in our services business, and we also get the benefit of being able to have world-class products that we can sell independently. So that $94 million is a way higher percentage of our software revenue than it is our overall business revenue.

And then I think as far as sales and marketing is concerned, we believe we have a big opportunity, and we want to make sure we're investing and investing in the right people, putting things in like our Real Assets business. We're investing heavily in R&D, investing heavily in sales and marketing, and we believe we have a huge opportunity.

Similarly, Black Diamond, we've got similar kind of opportunities in Black Diamond. And we think we have a huge opportunity with Eclipse. We are rolling out a new product called Singularity that we have made a few sales. We're getting some traction. We like our opportunity. And I think as you go through and we get our message out into the marketplaces, I think that our ability and our capability is not matched by any of our competitors.

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Operator [41]

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Your next question comes from the line of Chris Shutler from William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [42]

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What's the Q4 organic revenue guidance if you -- I think if you include the clients that were lost prior to closing DST? I think it looks like 1.4%, but if you could confirm that. And then just -- or for Q3, it's 1.4%. And then what would you think it would be for Q4?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [43]

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Well, I think we said 0.6% to 2.9% and 3.2% for Q3. So I mean that's -- those are the calculations we have.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [44]

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Yes. I'm sorry, Bill, I wasn't clear. If you were to also consider the clients that you lost prior to the DST deal, if you were to include those in the calculation of organic, would it be like a similar impact to Q3, I'm guessing?

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [45]

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It's a little bit [below]...

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [46]

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Well, yes, the same, right? I mean we're just taking the attrited revenue prior to us acquiring DST and just taking it out of the calculation.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [47]

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Okay. Fair enough. And then the -- what's in the Q4 revenue guide for Investrack? I'm guessing Algorithmics is not in the guide, correct?

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [48]

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Yes. Investrack is negligible.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [49]

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Okay.

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [50]

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And we have not added Algorithmics either into the revenue or cash flow forecast.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [51]

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And then lastly, for 2020, any updated thoughts on tax rate given the reduction that we've seen in India and in the U.K.?

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [52]

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We don't have a large impact in India because we really have just a service business there. We really don't have any revenue, so the profit margins are fairly low at cost plus. We should get a little bit of help in -- as you said, in the U.K., but we don't expect them to be materially different.

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Operator [53]

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And your next question comes from the line of Jackson Ader from JPMorgan.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [54]

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First one, Bill, you mentioned Eamonn, the new Global Head of Sales, early in your prepared remarks, and you kind of -- you emphasized that there were opportunities here in the short term. So I just wanted to see if you wanted to maybe rank order the priorities that you think here in the short term or the lowest hanging fruit Eamonn has to go after here over the next maybe 3 to 6 months.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [55]

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I mean would you like our prospect names and what we've [bid]?

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [56]

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Yes. Yes, that would be perfect.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [57]

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That's not likely either. I think he's got really great opportunities across both the institutional markets as well as the hedge and private equity markets. So we have all kinds of opportunity to close on deals that range from $5 million to $50 million. And it's the first time we've had an overlay over the entire sales organization, which is what Eamonn represents, right? So Eamonn gets to draw on the entire business, and Eamonn reports to Rahul, which gives him a lot of organizational pull and a lot of organizational responsibility and recognition.

So our ability to use parts of our institutional business or parts of our real estate business or parts of our fund administration business to give somebody a solution of what they need. There's a large client opportunity for us in Australia, and it's a complex delivery of both an IBOR and all kinds of middle office services, and being able to get the entire organization to work together is really Eamonn's responsibility. And he's the man for the job. He's been here since we acquired GlobeOp in 2012, and he was with GlobeOp for about 7 years prior to us buying them.

So we're very confident in his capability. We're very confident in the new guys we have in both Intralinks and Eze, and there's lots of commonalities in those products, too. So I think the ability for us to upsell and cross-sell and deliver into our client base both new products and new services and also be able to close these big opportunities.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [58]

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Okay. Great. And then the follow-up is for you, Rahul, in the -- one of the customer wins that you mentioned was a start-up hedge fund that selected GlobeOp for outsourcing. I'm just curious, what would you estimate maybe SS&C's win rate is for brand-new fund starts that end up going with outsourcing solutions?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [59]

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I'd say pretty close to 50%, maybe a little less than 50%. That win rate goes down a little as the opportunities get bigger, but in the start-up section, we really, both from a technology and expertise standpoint, have a very, very strong offering. And it's been that way for many years.

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Operator [60]

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Your next question comes from the line of Chris Donat from Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [61]

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Had another one for Rahul, looking at the alternative assets under administration, your Slide 9 of the deck. It looks like growth has picked up the past couple of quarters in your AUA. And I'm wondering if you can give us some color on is that more performance or flows. I suspect it's on the flow side but just wondering what dynamics are driving it, particularly the last couple of quarters.

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [62]

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Yes. There's obviously a few different things going on there, and flows are part of it. The other thing that's a pretty big part of it is just new wins in the marketplace, right? So we've been able to do takeaways of existing funds that have assets, and that's true in our real assets business. It's also true in our private equity and hedge businesses, and that have contributed. And then asset flows have remained reasonably positive. And the last bit of it is performance, as you point out.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [63]

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Okay. And then just can you help me roughly size between flows and new wins? Is it -- which one's been bigger over the last year or so?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [64]

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New wins has been bigger. So new clients that we win or current clients starting new funds are, by far, the biggest impact.

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Operator [65]

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And your next question comes from the line of Ashish Sabadra from Deutsche Bank.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [66]

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Congrats on the good results. Question around the health business. You called out a client taking on some more solutions, buying some more solutions from you. I was just wondering how big is the cross-sell opportunity in your existing customer base. And also, how are the conversations going with other Blue Cross Blue Shield customers, which may not be a client today?

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Rahul Kanwar, SS&C Technologies Holdings, Inc. - President & COO [67]

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Yes. So we -- I think one of the nice things about having Sean Hogan in that business is Sean is really looking at both our pharmacy business and our medical claims business and looking at and identifying lots of opportunities for us to bring them together.

One of the things traditionally in that DST client base was there was not a lot of shared clients between those 2 groups, and we think there ought to be because they buy the same services from other vendors. So we've been working on that, and we think that, that opportunity will remain valuable for us for the next several quarters to years. And then, without commenting on any individual prospect, I would say that the areas where we have won customers, we think that there are others in those families that we can go after.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [68]

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That's helpful. And maybe just a question for you, Bill, is when you think about the progress that you're making on the organic growth front, the pipeline seems to be progressing pretty well. And as some of these headwinds come off, how should we think about organic growth in 2020 and 2021? Any preliminary thoughts there?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [69]

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Well, Ashish, as you know, right, it's a bunch of different presentations around the world, where it's almost always competitive. We have to get prepared in a very detailed way. We need to be able to take all the best parts of our business and put them into a solution. We need to have the people in our organization, make sure they're asking the smartest people in the organization how we can succeed, right? This is not a lone ranger, right? This is a posse, right? So people need to make sure that they're getting the best advice they can get, and they can't try to do it on their own without getting help from Rahul or Patrick or me or Anthony or any of our other top executives and subject matter experts.

So we have the opportunity. It's really getting people to understand that it's getting in front of that prospect and somewhat overwhelming them with our capabilities and being able to show them in a very articulate fashion. So I think given that background and that we execute, we ought to start moving our organic revenue growth to the mid-single digits by the middle of 2020 and hopefully, moving towards the higher single digits in '21.

But we got to execute and talk's cheap, and we need to make sure that we post results. We got to post results. I can say, "Oh, it's a great this or it's a great that." And you say, "Well, how much revenue did we put in this quarter?" That's all I ever asked people, was how's those numbers, right? And when people start telling me about leading indicators, I ask them how much revenue we get to book on those leading indicators.

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Operator [70]

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Your next question comes from the line of Peter Heckmann from D.A. Davidson & Co.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [71]

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Could you comment a little bit about some of the trends in the third quarter on some of those metrics, like M&A volumes for Intralinks, trading volumes for Eze as well as could you just talk about the organic growth rates that you're seeing out of the Health Solutions piece of the business?

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [72]

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Yes. I think, Pete, if you think of the trends, I mean, obviously, in Q3 September, we had some volatility, and that helped to improve some of the transaction volumes that we posted through Eze and Intralinks. As far as the M&A, when you see things like the Fiat Chrysler-Peugeot merger, those kinds of things create immediacy. So as you get immediacy, the CEOs of these various companies know that really the path to greater earnings per share is probably through more scale, right? So I think that's the same thing that we're seeing in financial services, is if BB&T and SunTrust can merge, maybe other big banks can merge, too. And the more that you start seeing that, the more it tends to help Intralinks' business and tends to, I think, improve the overall speed in which the economy will grow. And then just as in financial services, where you have so many new RIAs coming out of the large wirehouses, I just think that's a real positive thing for the country, and it's a very positive thing for SS&C.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [73]

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Great. Great. That's helpful. And then I don't think you had provided a purchase price for Algorithmics. I don't know if it's totally settled. But could you give us an idea where that leverage would stand post closing of that deal.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [74]

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Pete, I don't think it's really particularly meaningful to us. It's quite a bit less than $500 million.

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Operator [75]

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And your next question comes from the line of James Faucette from Morgan Stanley.

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [76]

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Great. I just wanted to ask quick questions as it relates to development on pipeline, et cetera. And can you talk a little bit about what your conversion rates are on first retention rates on the DTC product and then also on conversion rates around pipeline? I think you kind of indicated that sometimes the leading indicators can look good. But I'm wondering how -- what those conversion rates look like to customers and how those are tracking and where you think there may be room for improvement.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [77]

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First, there's room for improvement everywhere, right? And I think from a standpoint of pipelines, I think that we have as strong a pipeline as we've ever had. In different parts of our business, they use different metrics in which to estimate.

But I would say that, in general, on sales cycles of large deals, large deals probably take somewhere between 6 months and 18 months to get them done. And I would say, in general, we probably have closed 10 to 15 large deals in each of the last couple of years. And I think we would be shooting for 30 to 40 large deals closing in 2020. And I would say a large deal is $4 million to $50 million.

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [78]

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Got it. Got it. And then what about -- that's actually really helpful. And then what about in terms of customer and client retention that allows you to build on those new deals? What does that look like? And are you also -- should we also anticipate some improvement in those metrics?

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Patrick J. Pedonti, SS&C Technologies Holdings, Inc. - Senior VP & CFO [79]

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This is Patrick. Overall client retention for the last 12 months -- and this is calculated based on revenue -- was running at 96.4%. So that's generally on the high end of a range that we would be in, probably 94% to 97%, generally, over the past several years.

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Operator [80]

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There are no further questions at this time. Mr. Bill Stone, I turn the call back over to you for any closing remarks.

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William C. Stone, SS&C Technologies Holdings, Inc. - Founder, Chairman of the Board & CEO [81]

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Again, we appreciate everybody getting on this call today. I know it's Halloween, and a bunch of you are probably going -- you're still young. You're going trick or treating or maybe you have youngsters and going trick or treating. But I wish you well, and I look forward to talking to you at the end of the fourth quarter. Thanks.

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Operator [82]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.