Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the SS&C Q1 2019 earnings conference call . All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Justine Stone, you may begin your conference.
Welcome. Thank you for joining us on our Q1 2019 earnings call. I'm Justine Stone, Investor Relations for SS&C. 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, let me 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, April 30th, 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. I will now turn the call over to Bill.
Thanks, Justine. Thanks , everybody, for being on the call. Our results for the quarter are $1.150 billion in adjusted revenue. We earned $0.91 in adjusted diluted earnings per share, and our adjusted consolidated EBITDA was $443.4 million, bringing our adjusted consolidated EBITDA margin to 38.5%. The top-line organic growth was 1.3%. We believe this was a good quarter indeed. April 16th marked the one-year anniversary of our DST acquisition. Thus far, we have achieved $265 million of the $300 million in cost synergy goals we set for 2021. We have also achieved synergies of $19 million for the Eze Software and Intralinks acquisitions. We are also implementing and investing in the growth of these businesses. DST has expanded their sales force across the organization and has had some notable success with the workflow product, AWD, and our healthcare business , with an expanding sales pipeline.
Adoption of Eze's new cloud platform, Eze Eclipse, continues to accelerate. There are now over 60 clients signed. On March 14th, we announced the issuance of $2 billion in unsecured notes with a 5.5% fixed interest rate. These notes will protect us against any rising interest rate environment and are due in 2027. We used the proceeds from these senior notes to pay down our variable-rate term loan debt. We did that in Q1. We expect our leverage ratio to be below 4.0x by the end of the year and our secured debt leverage ratio to be below 3.0x. I will now turn the call over to Rahul.
Thanks, Bill. We had a strong Q1 with good execution across the business in product and pipeline development, customer satisfaction, and innovation. We're having success at our recent acquisitions on several fronts. We've added sales talent at DST, both in financial services and healthcare. Instituted a sales governance process focused on disciplined execution. We've increased sales focus in many areas, including event center processing, BPO outsourcing, global transfer agency, advanced care groups with our exclusive relationship with Johns Hopkins, and a greater emphasis overall on professional services. Product integrations between AWD, a DST workflow application with several of our products, including Precision LM and BRIX, have had positive feedback. We're working on similar integration efforts in several other client-facing solutions. The pipelines are being built. We are optimistic.
At Intralinks, we're working on offering private equity and real estate firms a combination of the Intralinks investor reporting platform and the software and services capability of our private equity funds administration business. Modules for capital raising, deal-making, portfolio company monitoring, accounting , and reporting are now available to our customers and prospects. More information can be found on our newly launched Intralinks webpage. We've integrated Eze into our hedge fund and asset management offering. The comprehensive front, middle, and back office suite is getting a positive market reception. Now I will mention some key deals for Q1 2019. A Baltimore, Maryland-based private equity firm chose SS&C by combining our private equity fund administration services with Intralinks' private equity investor communications portal, displacing a competitor. SS&C won a fund administration deal for a $30 billion+ global alternatives manager, displacing a competitor.
A large U.S.-based asset manager extended their relationship with SS&C by purchasing our performance measurement and data management system, Anova. A turnkey asset manager chose SS&C's Black Diamond as the reporting system for the 160+ RIAs on their program. One of the 20 largest insurance companies and also one of the 40 largest mutual fund companies chose the DST Event Center to provide call center processing and return mail support services for their books and records mailings. The U.S. division of a top 10 global insurer entered into a two-year engagement with SS&C to upgrade and expand their use of AWD. One of the five largest U.S. managers entered into an agreement to migrate their in-house AWD implementation onto SS&C's private cloud. An $800 billion+ investment manager extended their use of the Intralinks workspace portal across their real estate business.
I will now turn it over to Patrick to run through the financials.
Thanks, Rahul. Results for the first quarter were GAAP revenues of $1,137.2 million, GAAP net income of $80.8 million , and diluted EPS of $0.31. Adjusted revenue was $1,150 million, excluding the adjustments for implementing the new revenue recognition standard and for acquired deferred revenue adjustment for the DST and Intralinks acquisition. We had a strong quarter. Adjusted revenue was up 164.7%. Adjusted operating income increased 144.9%, and EPS was $0.91, a 71.7% increase from 2018. Adjusted revenue increased $715.5 million or 164.7%. The acquisitions of DST, Eze, and Intralinks contributed $712.4 million in the quarter. Foreign exchange had an unfavorable impact of $2.7 million or 0.6%. Organic growth on a constant currency basis was 1.3%, driven by the strength in the Alternatives business. Term licenses were lower by $5.2 million due to the timing of contract renewals in the quarter.
Adjusted operating income for the first quarter was $420.9 million, an increase of $249 million or 144.9% from the first quarter of 2018. Foreign exchange had a positive impact of $4.8 million on expenses in the quarter. Operating margins declined from 37.2% to 36.6% in the first quarter. DST operating margins were 35.2% in the first quarter, and the annual run rate implemented cost synergies reached $265 million at the end of the quarter. Implemented annual cost rate synergies for Eze and Intralinks combined were $19 million at the end of the quarter. Adjusted consolidated EBITDA was $443.4 million or 38.6% of adjusted revenue, an increase of 148% from Q1 2018. Net interest expense for the quarter was $101.6 million and includes $4.3 million of non-cash amortized financing costs and OID. The average interest rate for the quarter was 4.77% compared to 4.59% in the first quarter of 2018.
We recorded a GAAP tax provision for the quarter of $16 million or 16.5% of pre-tax income. We currently expect the GAAP tax provision to be approximately 25% for the full year. Adjusted net income was $239.4 million, adjusted EPS was $0.91. The adjusted net income excludes $170.8 million of amortization of intangible assets, $7.1 million loss on extinguishment of debt related to the notes offering completed in the first quarter, $20.4 million of stock-based compensation, $4.3 million of non-cash debt issuance costs, $17.5 million of purchase accounting adjustment, mostly deferred revenue adjustments , and depreciation related to revaluation of assets in acquisitions. $4.2 million of revenue adjustments related to the adoption of ASC 606, and $2.5 million of other non-operating costs, including $7.5 million gain on mark-to-market adjustments on investments, and $3.9 million of severance costs related to staff reduction.
The effective tax rate for adjusted net income was 26%. Diluted shares increased 21.1% over Q1 2018, mostly due to the share issuance in connection with the acquisition of DST and Intralinks, as well as the increase in the average share price in Q1 2019. On the balance sheet and cash flow, as of March, we had approximately $155 million of cash and cash equivalents and approximately $8.2 billion of gross debt, for a net debt position of $8.1 billion. At the end of March, we closed on a $2 billion senior note offering. We used the net proceeds of approximately $1.99 billion to pay down the term debt facility. Operating cash flow for the three months of March was $137.4 million, a $67.5 million or 96.6% increase compared to the same period in 2018.
Some highlights for the quarter, we paid down $138.4 million of net debt. Since the DST acquisition in April of 2018, we've paid down $1.084 billion of debt. We paid $96.4 million of cash interest in the quarter compared to $31.8 million in Q1 2018. In Q1, we paid $60.3 million of cash taxes compared to $1.7 million in Q1 of 2018. Our accounts receivable DSO at the end of the quarter was 53.7 days. That compares to 54.9 days as of March 2018. We used $32.69 million of cash for capital expenditures and capitalized software, mostly for IT , as well as leasehold improvements. In the quarter, we declared a dividend of $25.2 million in common stock dividends as compared to $14.5 million in Q1 2018.
Our LTM consolidated EBITDA, which we use for our covenant compliance, was $1.833 billion as of March 2019, and it includes $287.2 million of acquired EBITDA and cost savings related to acquisitions. Based on a net debt of $8.1 billion, our total leverage ratio was 4.4 x. Our secured ratio as of March was 3.3 x, and it will be below 3.0x by the end of 2019. On outlook for Q2 and the full year 2019, we've made one assumption on the organic growth calculation. For the organic growth calculation, we've eliminated the impact of lower out-of-pocket reimbursement revenue as DST, as we're progressively getting out of that zero-margin business. Our current expectation for the second quarter of 2019 is adjusted revenue in the range of $1.138 billion - $1.168 billion, adjusted net income of $234.8 million - $251.5 million, and diluted shares in the range of 268 million-269.2 million.
For the full year, our current expectation on adjusted revenue is in the range of $4.675 billion - $4.765 billion and it represents an organic growth rate in the range of 1.5%-3.4%. Adjusted net income in the range of $992 million- $1.042 billion, and diluted shares of 266.8 million-268.8 million. We expect the adjusted tax rate for the full year to be 26%. Cash from operating activities will be in the range of $1.095 billion - $1.135 billion, and capital expenditures will be in the range of 2.6%-3% of adjusted revenues. I'll turn it back over to Bill for final comment.
Thanks, Patrick. Yesterday, we also announced that we were awarded $44 million in damages in a trade secrets lawsuit going back three years. SS&C's information and intellectual property are invaluable to our business, and we will vigorously protect them. As we move into Q2, we get increasingly optimistic in our business and what we've done. Obviously, we've always said that when you do acquisitions, you make sure that you get the cash as quickly as you can and the expense reductions and synergies. At the same time as we're doing that, we're building out our sales forces , and we're getting focused on our sales so that we have individual names, individual targets, individual sales prices, and individual close dates. We're getting increasingly strong as a company. With that, we'll take questions.
Thank you. At this time, if you'd like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brad Zelnick with Credit Suisse. Your line is open.
Excellent. Thank you so much, Bill, Patrick. Great disclosure, really appreciate it. I specifically wanted to ask about the out-of-pocket reimbursements associated with DST winding down. In the context of the organic growth guide that you've given us for the full year of 1.5%-3.4%, if you were to remove that business entirely this year , as you're forecasting it as well as last year, what would that organic growth profile then look like?
Yeah, Brad, it'd be a little bit higher, but we had no earnings, right? It's a pass-through. Our view of it is that, in Q1, it went from $37 million last year to $26 million this year. It's just something that we shouldn't have ever done. Of course, we weren't there, and we weren't there to make the decisions to do that's a little gratuitous on my part. We just don't do things where we don't have margin, and I think that's something that we're trying to explain.
Makes perfect sense, and I guess- I'm sorry.
Sorry. I just want to make sure I understand your question. DST was not organic until the second quarter of this year; it really didn't impact organic revenue last year, but it will start impacting the organic revenue calculation in the second quarter.
Okay. That's helpful, Patrick.
Yeah. That's why we're adjusting it out for starting in the second quarter.
Just so I understand, if I look at the revenue guide down, it's solely given your view on where those out-of-pocket reimbursements are relative to the last guidance that you gave us, correct?
The impact for the full year of the lower out-of-pocket revenue is probably about $8 million. That represents eight and a half months.
Fair enough.
The biggest was in Q1, but Q2 I think is $4 million, and Q3 is, I think, $2 million, and Q4 is $2 million. That's about right, Patrick?
Yeah. It's about $4 million, $3 million, and $2 million.
Maybe not. It won't impact earnings. I can assure you.
Completely get it, Bill. Maybe just moving on to an easier topic. Just wanted to see if there were any changes to how you're thinking about the consolidation opportunity outside of the alternatives fund admin market. Perhaps you might consider larger acquisitions in newer adjacencies? For example, in treasury management, given the reach you now have into corporates with Intralinks, for example.
Well, I think that's a really good question, and it's something that we have a lot of interest in. I think what we're doing right now is making sure that with the assets we have, we're putting together the types of solutions that our clients want. As we go out and show them, whether it's our Singularity product that's getting a lot of traction or the Eze Eclipse product that now has 60 signed clients. We have a lot of stuff coming into the marketplace, and Intralinks as well. We want to make sure that we have a strong handle on what we can offer without any more acquisitions, and then go after acquisitions that we think will really enhance that profile.
Excellent, Bill. Thanks so much.
Your next question comes from the line of Alex Kramm with UBS. Your line is open.
Yeah. Hey, good evening, everyone. Just coming back to organic growth for a second. I know, obviously , everyone is very focused on integrating, but clearly , organic growth still matters. Wondering about two things. One, if you look at the old organic growth forecast here, for the full year, I think it was 1.9%-4.1%. Now you're saying , you lowered it, right? 1.5%-3.4%, I believe. Can you just bridge the delta there from both , maybe some of the stuff you talked about just now with the pass-through, but also what in the business maybe is running a little bit softer than you thought originally, given that markets are up, hedge funds are doing better, et cetera?
Well, I think, ultimately, Alex, it's going to be how well we execute on DST , Intralinks , and Eze. Intralinks and Eze are not going to go organic until the end of the year, so there's no pickup on them for that. DST has been a flat kind of business for a number of years. We're making a lot of changes, and we're making a lot more changes. We have a big pipeline, and getting that pipeline to close is a challenge. I don't think it's because it's soft. I think it's a healthcare business. They don't move very quickly. Often , they only do it on renewal dates. We have to line those up and then go knock them down.
That's why we went and worked as hard as we could to do the synergies we could get, so that we always had the earnings, and we had enough cash in which to invest in our sales and marketing organizations , which really started to generate organic revenue growth. I think that's what's going to happen. It's just getting the closes done as quickly as we want has been more of a challenge.
All right. Then maybe secondarily, I think just staying on DST for a second, two-part question. One, you mentioned a lot of the sales investments just now. Maybe you can be a little bit more specific and also be more specific in terms of the pipeline. I think last quarter you said it was standing at a record. Then , secondly, the bigger picture. I think when you acquired Advent a few years ago, there were some opportunities for pricing because I think Advent may have taken a little bit of a different approach. Can you just talk about this in the context of DST, maybe any opportunities that you see there to get a little bit more economic on some of the contracts, and how that could impact the business going forward? Thank you.
Well, I think that we have great clients, large, sophisticated players around the world. I do think that prior to us acquiring DST, there was a pretty significant upcharge in Europe. As you well know, those are not particularly popular. I think we have a pretty good revenue picture. We need a sales execution picture that improves. We need intensity in our entire sales organization, and I think we're getting there. We do have a lot of very large opportunities. They range from $3 million or $4 million to upwards of $50 million-$80 million, right? Closing a $50 million-$80 million account is going to take multiple presentations, multiple meetings, multiple workflow analyses, and I think we're getting very good at that. I think we're going to continue to get better at it.
All right. Any specifics on the sales force in the pipeline for my earlier part of the question?
Well, again, I think last quarter we talked about how we have a new head of sales in financial services for DST. We have a new head of sales in healthcare. We have hired a number of salespeople to come in, senior people. Look, they're knocking on doors, and they're getting in front of people, and there's enthusiasm. Enthusiasm and an increase in organic revenue growth are an oxymoron, right? We need ink on contracts. That's the only thing that really matters. We're going to execute in a very forthright way. We are a very ethical company, and we're going to continue to be that. We want people to work hard, but it's a job, right? It's not always an adventure. I think that we're in good shape. We're going to make a lot of money.
I think we raised our guidance for the year up $0.05, I think, and I think we beat Q1 by $0.04. We're not going to miss any meals.
Fair enough. Thank you.
As a reminder, please remember to limit yourself to one question and one follow-up question. Your next question comes from the line of Surinder Thind with Jefferies. Your line is open.
Good afternoon, gentlemen. I just wanted to follow up on the sales force ramp-up . Can you provide a little bit color in terms of the size of the increase that we're looking at , and maybe the cadences as the year progresses, and if there is going to be any meaningful impact that we can think about from an expense perspective?
Yeah. I think there are two things. One, we've probably added about 15-20 salespeople so far. I'd say we're recruiting for at least that number, if not more. Much more than how many, right? It's how good. I think how good comes in a number of different ways. The thing that Bill talked about is a lot of focus around what those opportunities are. Where exactly are we with those opportunities? What does it take to win? Can we schedule a signature date, right? That's the kind of attention that the sales force is getting on each and every opportunity that they have. We're already starting to see it pay off, and we're optimistic that it will continue.
Understood. As a follow-up, I wanted to touch base on as in Intralinks. Any color you can provide there on those businesses , standalone from like an organic growth perspective, meaning what kinds of gains are you seeing there year-over-year at this point, given that they're not in the organic numbers?
Yeah. Patrick probably has the figures, but just from my view, Intralinks continues to have a lot of momentum. I think bookings are strong. Their opportunity creation process is strong. Bill mentioned that, in particular, we're pretty optimistic about this Eze Eclipse product. We already have 60 customers on it. We have gone out and demoed it to some of our biggest customers and seen a fair amount of interest there as well. I think we feel good about both those businesses.
Got it. I'll save myself for the follow-up. Thank you.
Your next question comes from the line of Rayna Kumar with Evercore ISI. Your line is open.
Good evening. The 1Q organic revenue growth of 1.3%, help us better understand how much of that was related to the lower pass-through revenue versus other underlying factors. Specifically, what was the organic revenue growth for the Alternatives business in the quarter?
Yeah, the out-of-pocket, as Patrick said, is DST, which had no impact. That only had an impact on the total revenue number we supplied, the $1.15 0 billion. I believe the Alternatives business grew at 4.1%.
That's right, Bill.
Specifically, what are you looking for in the second quarter organic revenue growth?
I think, Pat-
As I mentioned-
Go ahead, Patrick.
Under 0.5% in the second quarter.
If you can just explain why that's lower than your full-year guidance? That would be helpful.
Well, the amount of revenue that we get in the second quarter is historically more of a challenge across all of our businesses, right? Because Q1, particularly in the funds businesses, includes an awful lot of stuff for financial statements , tax returns , and all that preparation time. There's a lot of revenue that comes in with that and a lot of regulatory revenue as well. Then, we will have DST starting on April 16th. For two and a half months, we'll have this $550 million in revenue that is basically flat. Flat doesn't add to 1.3%, it deducts. I think that's the biggest challenge. As I said, we got opportunities , and if we execute and things fall in line for us, maybe we can surprise you positively.
I think if you go from Q1 to Q2 organic, our core business, based on the midpoint of our guidance, improves in Q2 over Q1. The impact of DST lowers the organic growth sequentially.
That's very helpful. Thank you.
Your next question comes from the line of Chris Shutler with William Blair. Your line is open.
Hi, guys. Good afternoon. This is actually Andrew Nicholas filling in for Chris. The first question I had was just to talk a little bit more about organic growth and your plans for accelerating it in the back half of the year. DST is a big component of that. I'm just curious if you could provide any more color on what gives you confidence in that acceleration in the back half of the year, and if any of that confidence is based on sales that are already closed but not yet converted, or if it's more to some of the points you already made about executing on current sales processes.
I would say that it's some of both, with probably executing on unsold being three quarters, and maybe the getting it implemented being one quarter. Our Alternatives business remains strong. I think we think it will accelerate through the year, and Rahul can comment on that. We have a lot of initiatives that we're pretty optimistic about. We thought when we bought DST that we were going to have somewhere around $125 million - $150 million worth of synergies. We're already at $265 million, and I think we will get to the $300 million that we're targeting by the end of 2021. We try to put our management time where we can make the most impact on our financial statements.
Obviously, getting into the sales cycle on these long sales cycles and trying to change attitudes and approaches is a difficult process. We've been working at it, and we're going to keep working at it, and we've got some really good people working on it, and we have a lot of confidence in their capabilities.
Great. Thank you. Just one quick follow-up for Patrick. Would it be possible to get the breakdown of revenue from DST, Intralinks, and Eze? I know you gave it as a group, but it might be helpful to us if we could get those three broken out since they're obviously larger than usual.
The total acquisition revenue was $712.4 million. DST was $557.1 million. Eze was $68.6 million. Intralinks was $84.3 million. There were $2 million from CACEIS, which we closed in the second quarter of last year.
Perfect. Thank you very much.
Your next question comes from the line of Hugh Miller with Buckingham. Your line is open.
Thank you very much. As we think about DST and the split between the healthcare side of the business and the financial side of the business, can you talk about what you're seeing there between those two, just in terms of the pipeline and the extension of contracts coming to a close? Just giving a little bit more color there between those two businesses. Are you seeing any differences among them?
Well, again, obviously , they're not the same businesses, but you're selling a large, chunky, recurring revenue business into big, sophisticated organizations. Often , you have renewal dates that tend to be the ones where you have an opportunity. We have just recruited another top executive for us down in Kansas City, Rob Kulis, who's going to run part of our healthcare business. We have a lot of excitement about him. We also have, as I said, new heads of sales in healthcare and in financial services. As Rahul said, we have 15 or 20 new salespeople. We're doing the things necessary. Somebody's got to catch a pass, and somebody's got to make the tackle, and we've got to get in the end zone, and we're more than aware. That's what we have to do. We did make $0.91 this quarter, and last year we made $0.53.
We're sanguine about where we are, and that does not mean that we are asleep. We are not.
Okay. No, I appreciate the color there. Shifting a little bit towards Black Diamond, if you could just talk about the growth that you're seeing there. A peer of yours kind of enhanced their wealth planning offering through acquisition. Wanted to get a sense of what you're seeing in terms of the Black Diamond, how it's competitively positioned, and if you're seeing a need to make further investments in that offering, and your thoughts there for the growth opportunities.
Hey, we think that's a great product. We think Steve Leivent, who works for Rob Roley , and they run that business, and Bob Conchiglia runs the sales side of it. They're very talented people, and they're investing in that business all the time, and have the full support of our organization, and we're looking at acquisitions to bolt into Black Diamond all the time, and we think it is a very competitive product.
Thank you.
Your next question comes from the line of Peter Heckmann with Davidson. Your line is open.
Good afternoon. Thanks for answering all these questions. Just thinking about your guidance for the second quarter and how DST goes into the calculation. I would've thought that with the positive market action, your assets under administration, assets under management would've been at a high point at the end of the quarter, and that would've had some benefit. Does that suggest that DST's revenue on an organic basis might be down 3% or so in the second quarter?
I don't know about 3%. I think that relative to Q2 for DST last year, when obviously we owned it for two and a half months. It will probably be down $10 million - $12 million is my guess, which is probably between 2%-2.5%, maybe. Again, they have opportunities, and it really is changing the cadence of the sales process. It's happening. We wish it would happen faster, but it's a very large organization, and we have good people in there, and they're working hard. Again, we have to accelerate to close.
Right. You still feel confident, though, that the cost reductions at DST are not impeding your ability to re-accelerate the top line?
It's improving it.
Good. I'll look forward to that. Thanks.
Your next question comes from the line of Mayank Tandon with Needham & Company. Your line is open.
Thank you. Good evening. Rahul, you mentioned several competitive wins. I would love to get some more details around what the determining factors are behind those wins. Is it price, the technology, a combination of both, or other factors that might have played a part in you winning and displacing some of these competitors?
Mayank, obviously, everyone is somewhat unique, but I think the things that go across them are, as we've collected a lot of these capabilities and built a lot of capabilities, when we go into some of these opportunities, the number of things that we can do for them and the number of pain points we can address is differentiating, right? If you look at any one of the larger opportunities, we might be selling five, six, seven products and services in there, whereas our competitors might be in for a point solution or two or three at the most. It makes us a lot more strategic and improves the likelihood of us winning.
Right. Great. As a quick follow-up, for Patrick , maybe. I think you may have mentioned or Bill did , the $19 million in synergies from Eze and Intralinks. Could you remind us of what the plan is and where you are tracking versus that plan? If we isolate the impact of the synergies from the acquisitions, are core margins still improving about 50 basis points, give or take, on an annualized basis? Thank you.
I think that, Patrick, the combined Eze and Intralinks synergies target, I think, was $45 million at the end of three years. That's our target at the end of three years. We're at $19 million right now, $18 million-$19 million implemented. Not all realized at this point, but implemented.
Right. Patrick, if you isolate the impact of the synergies on a core basis, are you still improving margins by about 50 basis points annually? Is that still the target model for the company?
Yeah, that's definitely the target model for the company. I think, obviously, we've become a much bigger company in the last 12 months, and we've got higher corporate function costs like marketing , finance , and HR. We're not necessarily allocating those to new acquisitions. If you strip out the increase in some of the corporate functions that are supporting the whole business, our goal is to continue to improve core margins, and we're seeing that.
All right. Thank you.
Your next question comes from the line of Andrew Schmidt with Citi. Your line is open.
Hey, guys. Thank you for taking my questions. First question regarding, I guess, the pipeline. Last quarter, you guys mentioned that lumpiness in the pipeline, some large deals, and I assume some of the back half pickup is predicated on that. What's your visibility relative to last quarter in terms of just realizing those deals?
P robably the things that I would point to are, in addition to the lumpy ones, what we've been able to do in places like DST is create some opportunities for some medium-sized ones and some smaller ones. It's a little more balanced than it was before. As we get closer to the sales force and as we get a little more discipline, we're also getting a lot more visibility into exactly where we are on those opportunities and when we expect to close. We've closed several, and there are lots more that we're working on.
Got it. That's helpful. If I can remember correctly, I think DST client roll-offs that occurred last year have an impact on DST growth this year. To what extent, I guess, is that impacting growth this year? If you could try to parse that out, that'd be helpful to try to get a better sense of the underlying growth there.
Yeah. I don't know that I've got the figures, but there are certainly, if you look at DST last year, there are some one-time things related to customers that, by definition, don't repeat. That does have an impact.
Okay. As someone alluded to, obviously , there's been M&A in the space, large asset managers, nothing out of the ordinary. When you go to clients for deals, has anything changed in terms of just the conversations or how you go to market, or has the value proposition changed at all?
I wouldn't say the value proposition has changed, but the view on how technology is used in all of these different segments and sub-segments is changing a little more rapidly. Particularly , the use of AI and robotics and machine learning , and all of that is coming together. The systems continually get more powerful, and you will see where different organizations are. I think Mitsubishi just said they're going to cut half of their corporate staff because they can automate them. I think that that's going to be a pretty strong wave going forward, and I think SS&C has been smart and gotten out in front of that, and I think we're going to be able to catch that wave. Hopefully , we start catching it in the second quarter and third and fourth quarters. We're very optimistic about it.
Got it. Thanks, guys. Appreciate the thoughts.
Your next question comes from the line of Ashish Sabadra with Deutsche Bank. Your line is open.
Thanks. Patrick, you mentioned that the term license was lower due to the timing of the contract renewal. Were those revenues pushed out from the first quarter to the second quarter, and did they impact the organic growth in the first quarter?
Just some background , though. When ASC 606 was implemented last year, it changed revenue recognition from ratably to recognizing the license portion of the contract up front. At Advent, a lot of contracts are multi-year. Very few are annual contracts. If a contract came up for renewal in Q1 of 2018 and we renewed it for three years, we'd have three years of license revenue in Q1 2018; it wouldn't come up for renewal in Q1 of 2019, we'd have zero revenue for that contract, other than we'd have the same maintenance. That's kind of what's impacting us a little bit in this second year of the ASC 606 revenue standard , is that any contracts that we signed with multi-year arrangements last year, we're not getting any revenue on this year.
Okay, that's helpful. Is that weighing on the organic growth in the quarter? I know this question was asked multiple times in different ways. DST was not organic in the quarter, so it wasn't clear what really made it cause that.
The term license, I think , as we mentioned, the Alternatives business was up 4.1%, the term license business was down.
Okay. That's helpful.
It was down, like-
$5 million, I think.
Yeah. $5 million, which is-
Maybe just a quick model question, just the AUA at the end of the quarter , and how much was the retention rate?
Yeah. The AUA is $1.67 trillion.
Okay. Thanks. The retention rate?
Did you ask for client retention?
Yes.
Yeah. We measure client retention for the last 12 months. The last 12 months, as of the end of March, total client retention was 94.9%.
That's helpful. Thanks.
Your next question comes from the line of Jackson Ader with JP Morgan. Your line is open.
Great. Thanks. Good evening, guys. The first question from my side, of the 60 or so customers that are now using the Eze Eclipse platform, the cloud offering from Eze, can you give us any kind of a sense of what those customers look like as far as size, maybe what types of funds they are? Just the flavor of those 60 customers.
Look, Eze's client base in general is geared towards hedge funds, right? Within hedge funds, it's geared more towards equity and equity-linked derivatives than it is towards fixed income workflows. You know that the Eclipse client base reflects that. We do have some diversity in the sense that there are some asset managers with broader portfolios in there as well, and as we look at our pipeline, it's pretty well-rounded.
Okay, that's helpful. Then a follow-up for you, Patrick. Gross margins up again, nicely sequentially. When or where should we start thinking about these topping out? Is the 60% kind of non-GAAP gross margin range that we saw a couple of years ago , before all this kind of flurry of acquisitions, is that the right range we should be thinking about?
Well, I think, if you look at the synergies, we've got another $35 million at DST and another $20 million or $25 million at Eze and Intralinks. A good part of those will be at gross margin. Those will continue. The acquisitions will continue to improve at gross margin. Then our target of improving operating margins by 50 basis points a year, a good portion of that is also at gross margin as we continue to invest in research and development and sales.
All right. Thank you.
We expect it to expand.
Okay. Thanks.
Your next question comes from the line of Chris Donat with Sandler O'Neill. Your line is open.
Hi. Just wanted to ask Patrick on the full-year guidance for revenue and earnings. Just because when we look at what the first quarter results were, and the full-year guidance, we see that adjusted net income should be up about 2.5 % from what your prior guidance was. Revenue's down around 40 basis points. Can you just talk us through what the major moving pieces of that were from three months ago?
I think the major moving pieces are. We were up about $3 million in Q1 from the midpoint of our guidance. Our current guidance in Q2 is down about $20 million, I think. The rest of the year is pretty steady from where we thought it would be. We've got good operating margin improvement in Q1, which we're building into the annual forecast. That's helping us out. All that is being offset a little bit by the share count increase, which is mostly due to the stock price being up. That impacts diluted share count. It's kind of a mix of those three. In the end, I think we're up about $0.05 or so-
Yep.
On the range.
Okay. Within Q2 , being down $20 million from prior, just any color there?
The Alternatives business continues to perform well and continues to meet our expectations for the rest of the year. I think we're seeing more impact on this term license than we expected, and the DST contribution is a little bit less.
Okay. Thanks very much, Patrick.
Your next question comes from the line of Brian Essex with Morgan Stanley. Your line is open.
Hi, good afternoon. Thank you for taking the question. I guess, Bill or Rahul, maybe if you could talk a little bit more in terms of what you're seeing in the market in terms of pressure that your customers are under, particularly in the asset management space. We have asset manager PE multiples at 20-year lows. Those have declined dramatically over the past couple of years. Passive is now 25% of global AUM. What kind of strategies are you seeing your customers deploy to, I guess, to remain competitive in the market? Is it penetration of emerging markets, private markets, or packaging solutions? You mentioned AI. Are there any kind of prevailing themes that you're seeing , and maybe how you're lined up or how you're strategically thinking about getting ahead of those other ones? Again, outside of AI, ML.
Yeah, Brian, I think what the big asset managers are trying to do is to become more strategic with their customers. That requires them to have a broad array of product types and a broad array of experts, whether those experts are in estate planning, tax, wealth preservation, those types of things. I think, whether it's a Morgan Stanley or it's a St. James's Place or it's Old Mutual, right? They all have different wrappers around their products, and there's a tremendous amount of regulation around the world. So how those wrappers work with the regulation and with the taxing authorities becomes increasingly important to the individual investor, and then by default, into the pension funds , endowments , and others that are really collective pools of money for those people.
We think that having the intellectual capability that we have and the prowess that we have with building software is something that's going to be a winner. When these big organizations want to protect their businesses, they're almost all pretty well aware that doing it in-house is an extremely expensive process, where the people who built their systems for them want to move on to another system, and then they have people maintaining their systems that aren't as bright as the people who built their systems. I think the value proposition that we bring is pretty tangible, and I think that that's going to play out, and I think it's going to really work to our favor versus some of our larger competitors.
Right. Okay, that's helpful. Any movement yet on the private equity side or real assets in terms of acceleration of decisions to outsource because of what they're seeing in the market, or is that still kind of a slow grind?
Those are good businesses for us, right? We have really strong pipelines and good conversion, and they're growing faster. I wouldn't really say that there's a huge catalyst to outsourcing, but there seems to be some steady pickup every year. For us, that has been pretty positive.
I also think that on that point, the very large ones that haven't outsourced are trying not to insource anymore. As they have new funds or as they get into a new asset class or as they go into a new geography, now they're looking to try, say, us, as a complement to what they do. Then over time, if we do a really good job, they may move some of their stuff to us, and that's what we've seen.
Right. We just need to knock down another top-five asset manager PE firm. Very helpful. Thank you very much.
Your next question comes from the line of Alex Kramm with UBS. Your line is open.
Yeah. Hey, thanks. Again, just a couple quick ones. One, Rahul, you just gave the AUA number earlier when somebody asked. I noted it was down quarter-over-quarter. I know redemption activity was obviously elevated, given the end of last year, but hedge funds did really well in the first quarter. Maybe you could just flesh out the puts and takes and why that number wasn't better, which is what I expected.
Look, I think the comparison is it's down $17 billion Q4 to Q1, right? Included in that is one customer for $32 billion of assets and very little revenue. Not much impact or change to our revenue profile, but when you look at it in terms of AUA, that's the primary difference.
Okay, great. Maybe just real quick, just to finish on the synergy side and the cost side, I think DST, you're almost done now. I think $35 million left. Can you just give us a couple of the big buckets that are in that $35 million, because you're clearly saying 2021. Just wondering what kind of big projects are still left. Any stones you haven't turned over yet? Any areas where we haven't really looked in much detail yet that we should be thinking about?
The big areas for us, IT and IT spending, and in general, spending on third parties , continue to be. We're really trying to do it when the contracts come up for renewal, which happens in a regular way throughout the course of the year and next year. We're very focused on productivity and productivity pickups, which are automation and building software. That is also something that's a continuous process.
Also, Alex, we have two enormous data centers, one outside of Kansas City and one outside of St. Louis, and we also have one, obviously , in Yorktown Heights here in New York. I think our ability to begin to leverage that data processing capability to sell it, I think is pretty valuable, and people are interested.
All right, thanks again. Good night.
Thanks.
That concludes our questions for today. I now turn the call over to Bill Stone for closing remarks.
Well, we appreciate, as we said before. We look forward to seeing you next quarter. Bye.
This concludes today's conference call. You may now disconnect.