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 and C Q1 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.
Justine Stone, you may begin your conference.
Welcome and thank you for joining us on our Q1 20 19 earnings call. I'm Justine Stone, Investor Relations for SS and C. With me today is Bill Stone, Chairman and Chief Executive Rahul Kanwar, President and Chief Operating Officer and Patrick Pedanti, 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 ks, 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 30, 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, and thanks, everybody, for being on the call. Our results for the quarter are $1,150,000,000 in adjusted revenue. We earned $0.91 in adjusted diluted earnings per share and our adjusted consolidated EBITDA was $443,400,000 bringing our adjusted consolidated EBITDA margin to 38.5%. The top line organic growth was 1.3% and we believe this was a good quarter indeed. April 16 marked the 1 year anniversary of our DST acquisition.
Thus far we have achieved 265 $1,000,000 of the $300,000,000 in cost synergy goals we set for 2021. We also have achieved synergies of $19,000,000 for the Edge Software and Intralinks acquisitions. We are also implementing and investing in the growth of these businesses. DST has expanded their sales force across the organizations and has had some notable success with the workflow product, AWD and in our healthcare business with an expanding sales pipeline. Adoption of ESS new cloud platform, Ezeclipped, continues to accelerate and there are now over 60 clients signed.
On March 14, we announced the issuance of $2,000,000,000 in unsecured notes with the 5.5% fixed income rate interest rate, I'm sorry. These notes will protect us against any rising interest rate environment and are due in 2027. We use the proceeds from these senior notes to pay down our variable rate term loan debt and we did that in Q1. We expect our leverage ratio to be below 4.0 by the end of the year and our secured debt leverage ratio to be below 3.0.
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 DSD, both in financial services and healthcare and instituted a sales governance process focused on disciplined execution.
We've increased sales focus in many areas including event 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 DSD workflow application with several of our products, including PrecisionLM and BRICS have had positive feedback. We're working on similar integration efforts in several other client facing solutions. The pipelines are building and 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 service capability of our Private Equity Funds Administration business.
Modules for capital raising, deal making, portfolio company monitoring and 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 and 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 and C by combining our private equity fund administration services with Intralinks Private Equity Investor Communications portal displacing a competitor.
SS and C won a fund administration deal for a $30,000,000,000 plus global alternatives manager displacing a competitor. Our large U. S.-based asset manager extended their relationship with SS and C by purchasing our performance measurement and data management system, ANOVA. A turnkey asset manager chose SS and C's Black Diamond as the reporting system for the 160 plus RIAs on their program. 1 of the 20 largest insurance companies and also 1 of 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 2 year engagement with SS and C to upgrade and expand their use of AWD. 1 of the 5 largest U. S.
Managers entered into an agreement to migrate their in house AWD implementation onto SS and C's private cloud. An $800,000,000,000 plus investment manager extended their use of Intralinks funds based portal across their real estate business. I will now turn it over to Patrick to run through the financials.
Thanks, Raul. Results for the Q1 were GAAP revenues of $1,137,200,000 and GAAP net income of $80,800,000 and diluted EPS of $0.31 Adjusted revenue was $1,150,000 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 percent, adjusted operating income increased 144.9 percent and EPS was $0.91 a 71.7% increase from 2018. Adjusted revenue increased $715,500,000 or 164.7 percent.
The acquisitions of DST, ACSIS, EZ and Intralinks contributed 700 and $12,400,000 in the quarter. Foreign exchange had an unfavorable impact of $2,700,000 or 0.6 percent. Organic growth on a constant currency basis was 1.3% driven by the strength in the alternative businesses. Term licenses were lower by $5,200,000 due to the timing of contract renewals in the quarter. Adjusted operating income for the Q1 was $420,900,000 an increase of $249,000,000 144.9 percent from the Q1 of 2018.
Foreign exchange had a positive impact of $4,800,000 on expenses in the quarter. Operating margins declined from 37.2 percent to 36.6 percent in the 1st quarter. DST operating margins were 35.2 percent in the first quarter and annual run rate implemented cost synergies reached 265,000,000 dollars at the end of the quarter. Implemented annual cost rate synergies for Eze and Intralinks combined were $19,000,000 at the end of the quarter. Adjusted consolidated EBITDA was $443,400,000 or 38.6 percent of adjusted revenue, an increase of 148 percent from Q1 2018.
Net interest expense for the quarter was $101,600,000 and includes $4,300,000 of non cash amortized financing costs and OID. The average interest rate for the quarter was 4.77% compared to 4.59% in the Q1 of 2018. We recorded a GAAP tax provision for the quarter of $16,000,000 or 16.5 percent of pre tax income. We currently expect the GAAP tax provision to be approximately 25% for the full year. Adjusted net income was 230 $400,000 and adjusted EPS was $0.91 The adjusted net income excludes 170 $800,000 of amortization of intangible assets, dollars 7,100,000 loss on extinguishment of debt related to the notes offering completed in the Q1.
Dollars 20,400,000 of stock based compensation, dollars 4,300,000 of non cash debt issuance costs, $17,500,000 of purchase accounting adjustment, mostly deferred revenue adjustments and depreciation related to revaluation of assets and acquisitions. $4,200,000 of revenue adjustments related to adoption of 606 and $2,500,000 of other non operating costs including $7,500,000 gain on mark to market adjustments on investments and $3,900,000 of severance costs related to staff reduction. And the effective tax rate for adjusted net income was 26%. Diluted shares increased 21.1% over Q1 'eighteen, 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 $155,000,000 of cash and cash equivalents and approximately $8,200,000 of gross debt for net debt position of $8,100,000,000 At the end of March, we closed on a $2,000,000,000 senior note offering and we used the net proceeds of approximately $1,990,000,000 to pay down the term debt facility.
Operating cash flow for the 3 months of March was 137,400,000 dollars a $67,500,000 or 96.6% increase compared to the same period in 2018. Some highlights for the quarter, we paid down $138,400,000 of net debt. Since the DST acquisition in April of 2018, we've paid down 1,084,000,000 of debt. We paid $96,400,000 of cash interest in the quarter compared to $31,800,000 in Q1 2018. In Q1, we paid $60,300,000 of cash taxes compared to $1,700,000 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 $32,600,000 in cash for capital expenditures and capitalized software, mostly for IT as well as leasehold improvements. In the quarter, we declared a dividend $25,200,000 in common stock dividend as compared to $14,500,000 in Q1 2018. Our LTM consolidated EBITDA, which we use for our covenant compliance was $1,833,000,000 as of March 2019 and includes $287,200,000 of acquired EBITDA and cost savings related to acquisitions. Based on a net debt of $8,100,000,000 our total leverage ratio was 4.4 times And our secured ratio as of March was 3.3 times and will be below 3 times 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 2nd quarter of 2019 is adjusted revenue in the range of $1,138,000,000 to $1,168,000,000 adjusted net income of $234,800,000 to $251,500,000 and diluted shares in the range of $268,000,000 to $269,200,000 For the full year, our current expectation on adjusted revenue is in the range of $4,675,000,000 dollars to $4,765,000,000 and represents organic growth rate in the range of 1.5% to 3.4%. Adjusted net income in the range of $992,000,000 to 1,040,000,000 and diluted shares of 266,800,000 to 268,800,000. We expect the adjusted tax rate the full year to be 26%.
Cash from operating activities will be in the range of $1,095,000,000 to $1,135,000,000 and capital expenditures in the range of 2.6% to 3% of adjusted revenues. And I'll turn it back over to Bill for final comments.
Thanks, Patrick. Yesterday, we also announced that we were awarded $44,000,000 in damages and a trade secrets lawsuit going back 3 years. SS and C's information intellectual property is invaluable to our business and we will vigorously protect it. As we move into Q2, we get increasingly optimistic in our business and what we've done. Obviously, we've always said it 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. And with that, we'll take questions.
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. And in the context of the organic growth guide that you've given us for the full year of 1.5% to 3.4%, if you were to remove that business entirely this year as you're forecasting it as well as last year, would that what would that organic growth profile then look like?
Yes, Brad, it'd be a little bit higher, but it's a no it's no in we have no earnings, right? It's a pass through. So our view of it is in Q1, it went from $37,000,000 last year to $26,000,000 this year. So it's just something that we shouldn't ever have done. Of course, we weren't there and we weren't there to make the decisions to do that.
So that's a little gratuitous on my part. But 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. So DST was not organic until the Q2 of this year. So it really didn't impact organic revenue last year, but it will start impacting the organic revenue calculation in the Q2.
Okay. That's helpful, Patrick.
That's why we're adjusting it out for starting in the second quarter.
And 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?
No. The impact for the full year of the lower out of pocket revenue
is
probably about $8,000,000 that represents 8.5 months, right? Okay.
Yes, the
biggest was in Q1, but Q2 I think is 4 and Q3 is I think 2 and Q4 is 2. So that's about right, right Patrick?
Yes, it's about 4, 3 and 2.
Yes, so maybe not. It won't impact earnings.
Completely get it, Bill. And maybe just moving on to an easier topic. Just wanted to see if there are any changes to how you're thinking about the consolidation opportunity outside of the alternatives fund admin market? And perhaps might you 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 in. I think what we're doing right now is seeing making sure that with the assets we have that we're putting together the types of solutions that our clients want. And then 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. So 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.
Yes. 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. So wondering 2 things.
1, if I look at the old organic growth forecast here for the full year, I think it was 1.9% to 4.1%. Now you're saying 1 sorry, I think obviously you lowered it, right? 1.5 to 3.4, I believe. So can you just bridge the delta there from both maybe some of 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, etcetera?
Well, I think ultimately, Alex, it's going to be how well we execute on DST and Intralinks and Eds. Intralinks and Eds are not going to go organic until the end of the year. So there's no pickup on them for that. And then DST has been a flat kind of business for a number of years. And we're making a lot of changes and we're making a lot more changes.
And some of the we have a big pipeline and getting that pipeline to close is a challenge. But it's not because I don't think it's because it's soft. I think it's just it's a healthcare business. They don't move very quickly. Often they only do it on renewal dates.
And so we have to line those up and then go knock them down. And 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 who really start to generate organic revenue growth. And I think that's what's going to happen. It's just as getting the closes done as quickly as we want has been more of a challenge.
All right. And then maybe secondarily, I think just staying on DST for a second, 2 part question. Like one, you mentioned a lot of the sales, I guess, 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.
And then just 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 of maybe any opportunities that you see there to get a little bit more, I guess, 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. And I do think that prior to us acquiring DST, there was a pretty significant upcharge in Europe. And as you well know, those are not particularly popular. And so I think we think we have a pretty good revenue picture. We need a sales execution picture that improves.
We need an intensity in our entire sales organization and I think we're getting there. I think it's we do have a lot of very large opportunities. They range from $3,000,000 or $4,000,000 to upwards $50,000,000 to $80,000,000 right? But closing a $50,000,000 to $80,000,000 account is going to take multiple presentations, multiple meetings, multiple workflow analysis. And I think we're getting very good at that.
And I think we're going to continue to get better at it.
Any specifics on the sales force in the pipeline to my earlier part of the question?
Well, again, I think last quarter we talked about, 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. And look, they're knocking on doors and they're getting in front of people and there's enthusiasm. But enthusiasm and increase in organic revenue growth is an oxymoron, right?
We need income contracts. That's the only thing that really matters. And but 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. And we want people to work hard, but it's job, right?
It's not always an adventure. And so 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 a nickel, I think. And I think we beat Q1 by $0.04 We're not going to miss any meals.
Fair enough. Thank you.
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 cadence as the year progresses and if there is going to be any meaningful impact that we can think about from an expense perspective?
Yes. So I think there's 2 things. 1, we've probably added about 15 to 20 salespeople far. I'd say we're recruiting for at least that number, if not more, but much more than how many, right? It's how good and I think the how good comes in a number of different ways.
But the thing that Bill talked about is a lot of focus around what are those opportunities, where exactly are we with those opportunities, what does it take to win and then can we schedule a signature date, right? And so 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 will continue.
Understood. And as a follow-up, wanted to touch base on as an 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?
Yes. So Patrick probably has the figures, but from a just from my view, Intralinks continues to have a lot of momentum. I think bookings are strong. Their opportunity creation process is strong. And then Bill mentioned on, as in particular, we're pretty optimistic about this Eclipse product.
We already have 60 customers on it. We have gone out and demoed it to some of our biggest customers and seeing fair amount of interest there as well. So 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? And then specifically, what was the organic revenue growth for the alternatives business in the quarter?
Yes. The out of pockets as Patrick said is DST and so that had no impact. That only had impact on the total revenue number we supplied, the $1,150,000,000 And then I believe the alternatives business grew at 4.1%.
That's right, Phil.
Okay. And specifically, what are you looking for, for 2nd quarter organic revenue growth?
Under 0.5% in the second quarter.
And if you can just explain why that's lower than your full year guidance?
Well, the amount of revenue that we get in the Q2 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 and tax returns and all that preparation time. So there's a lot of revenue that comes in with that and a lot of regulatory revenue as well. So the Q2 is always more of a challenge. And then we will have DST starting as of April 16.
So for 2.5 months, we'll have this $550,000,000 in revenue that was basically flat. So flat doesn't add to 1.3 it deducts. And so I think that's the biggest challenge. But like I said, we've got opportunities and if we execute and things fall in line for us, maybe we can surprise you positively.
And 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. But DST, 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. Just the first question I had, just to talk a little bit more about organic growth and your plans for accelerating it in the back half of the year. Obviously, DST is a big component of that.
But 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?
Yes. I mean, I would say that it's some of both with probably executing on unsold probably being 3 quarters and maybe the getting it implemented being 1 quarter. But 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.
And again, we thought when we bought DST that we were going to have somewhere around 100 and $25,000,000 to $150,000,000 worth of synergies. And we're already at 265 and I think we will get to the 300 that we're targeting by the end of 2021. And so 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. But 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. And then just one quick follow-up for Patrick. Would it be possible to get the breakout of revenue from DST, Intralinks and Eze? I know you gave it as a group, but it might be helpful to us if we can get those 3 broken out since they're obviously larger than usual?
Yes, sure. So the total acquisition revenue was
$712,400,000
CST was 557.1 dollars as was 68.6 dollars Intralinks was 84 point 3 and then there was a couple of million from the CEASE, which we closed in Q2 of last year.
Perfect. Thank you very much.
Your next question comes from the line of Hugh Miller with Buckingham. Your line is open. Your next question comes from the line of Hugh Miller with Buckingham. Your line is open.
Thank you very much. So 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 2 just in terms of kind of the pipeline and the extension of kind of contracts coming to close and 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 large chunky recurring revenue business into big sophisticated organizations. And often you have renewal dates that tend to be the ones where you have opportunity. We have just recruited another topic executive for us down in Kansas City, Rob Culas, who's going to run our part of our healthcare business. And we have a lot of excitement about him. We also have, as I said, new heads of sales in healthcare and in financial services.
And as Rahul said, we have 15 or 20 new salespeople. So we're doing the things necessary. Somebody's got to catch a pass and somebody's got to make tackle and we've got to get in the end zone and we're more than aware. That's what we have to do. But we did make $0.91 this quarter and last year we made $0.53 We're saying why about where we are and that does not mean that we are asleep.
We are not.
Okay. I appreciate the color there. And then shifting a little bit towards Black Diamond, if you could just talk about kind of the growth that you're seeing there, peer of yours that 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 kind of 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 Levent, who works for Rob Rowley and they run that business and Bob Contiglia runs the sales side of it, but 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 2nd quarter and how DST goes into the calculation, I would have thought that with the positive market action, your assets under administration, assets under management would have been at a high point at the end of the quarter and that would have had some benefit. I mean, does that suggest that DST's revenue on an organic basis might be down 3% or so in the Q2?
I don't know about 3%. I think that relative to Q2 for DST last year, when obviously, we owned it for 2.5 months. It will be it will probably be down $10,000,000 or $12,000,000 is my guess, which is probably between 2%, 2.5% maybe. But again, they have opportunities and it really is changing the cadence of the sales process and 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. But again, we have to accelerate to close.
Right. And so you're you still feel confident though that the cost reductions at DST are not impeding your ability to reaccelerate the top line?
It's improving it.
Good. I look forward to that. Thanks.
Your next question comes from the line of Mayank Tandon with Needham and 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 are the determining factors 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?
Mike, obviously, everyone is somewhat unique, but I think the things that go across them is 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? So if you look at any one of the larger opportunities, we might be selling 5, 6, 7 products and services in there, whereas our competitors might be in for a point solution or 2 or 3 at the most. So it makes us a lot more strategic and improves the likelihood of us winning.
Great. Great. And then as a quick follow-up for Patrick maybe. I think you may have mentioned or build it the $19,000,000 in synergies from Eze and Intralinks. Could you remind us of what the plan is and where you are tracking versus that plan?
And 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 this is Patrick. The combined as an Intralinks synergies target,
I
think it was $45,000,000 at the end of 3 years. That's our target, the answer is we're at 19,000,000 right now, 18000000, 19000000 dollars implemented, not all realized at this point, but implemented.
Right. And Patrick, if you isolate the impact of the synergies on a core basis, are you still improving margins about 50 basis points annually? Is that still the target model for the company?
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 and finance and HR. We're not necessarily allocating those to new acquisition. But 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. Got
it. 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, 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. But do you have any what's your visibility relative to last quarter in terms of just realizing those deals?
You think probably
the things that I would point to are in addition to the lumpy ones, what we've been able to do in places like DSD is create some opportunities for some medium sized ones and some smaller ones. So it's a little more balanced than it was before. And as we get closer to the sales force and as we get a little more disciplined, we're also getting a lot more lots more that we're working on.
Got it. That's helpful. And 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.
Yes. 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. So that does have an impact.
Okay. And then someone alluded to, obviously, there's been some there's been M and A in the space, large asset managers, nothing out of the ordinary. But 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 that's 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. And I think that that's going to be a pretty strong wave going forward. And I think SS and C has been smart and gotten out in front of that.
And I think we're going to be able to catch that wave. And hopefully, we start catching it in the 2nd quarter and third Q4, but 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 the term license are lower due to timing of the contract renewal. Can you just were those revenues pushed out from Q1 to Q2? And did they impact the organic growth in the Q1?
Just some background. When 606 was implemented last year, it changed revenue recognition from ratably to recognizing the license portion of the contract upfront. So at Advent, a lot of contracts are multi year, very few are annual contracts. So if a contract came up for renewal in Q1 of 2018 and we renewed it for 3 years, we'd have 3 years of license revenue in Q1 2018 and then it wouldn't come up for renewal in Q1 of 2019 and we'd have 0 revenue for that contract other than we'd have the same maintenance. So that's kind of what's impacting us a little bit in this 2nd year of the 606 revenue standard is any contracts that we signed multi year arrangements for last year, we're not getting any revenue on this year.
Okay. That's helpful. And is that being on the organic growth in the quarter? Because and I know this question was asked multiple times different ways, because DST was not organic in the quarter. So it wasn't clear what really caused that?
The term license, I think as we mentioned, the alternative business was up 4.1% and the term license business was
down. Okay. That's helpful.
$5,000,000
$5,000,000 which is?
And maybe just a quick model question, just the AUA at the end of the quarter and how much was the retention rate?
Yes. So the AUA is $1,670,000,000,000
Okay. Thanks. And the retention rate?
Did you ask for client retention?
Yes.
Yes. Client retention
for
the last we measure for the last 12 months. So 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 JPMorgan. 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 Eclipse platform, the cloud offering from Hess.
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?
So look, as is client base in general is geared towards hedge funds, right? And within hedge funds, it's geared more towards equity and equity linked derivatives than it is towards fixed income and workflows. So that the Eze Eclipse client base reflects that. We do have some diversity in the sense that there's 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. And then a follow-up for you, Patrick. Gross margins up again nicely sequentially. So 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 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 and we've got another $35,000,000 at DST and another $20,000,000 or $25,000,000 as in Intralinks. A good part of those will be at gross margin. So those will continue the acquisitions will continue to improve at gross margin. And then our target of improving operating margins by 50 bps 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
to continue 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 one
of Patrick on the full year guidance for revenue and earnings. Just because when we look at what the Q1 results were and the full year guidance, we see that adjusted net income should be up about 2.5 percent from what your prior guidance was, revenues down around 40 basis points. Can you just talk us through what the major moving pieces of that are from 3 months ago?
Well, I think the major moving pieces are we were up about $3,000,000 in Q1 from the midpoint of our guidance. Our current guidance in Q2 is down about $20,000,000 I think and then the rest of the year is pretty steady from where we thought it would be. We're seeing and then we've got good operating margin improvement in Q1, which we're building into the annual forecast. That's helping us out. And then this is all that is being offset a little bit by share count increase, which is mostly due to the stock price being up and that impacts diluted share count.
So it's kind of a mix of those 3. And in the end, I think we're up about $0.05 or so at on the range.
Okay. And then within the second quarter being down $20,000,000 from prior, just any color there?
I mean, the alternatives business continues to perform well and continue our expectation 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, Fahedra.
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 Raul, 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, remain competitive in the market? Is it penetration of emerging markets, private markets, packaging solutions? I mean, you mentioned AI. Is there 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, kind of again outside of AIML?
Yes, Brian. I think what the big asset managers are trying to do is to become more strategic with their customers. And that requires them to have a broad array of product types and a broad array of experts, whether those experts are in the state planning, tax, wealth preservation, those types of things. And I think whether it's a Morgan Stanley or it's a St. James 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. And 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 and endowments and others that are really collective pools of money for those people. So 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.
So that when the big organizations want to protect their businesses, that they're almost all pretty well aware that doing it in house is an extremely expensive process, where the people that 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 that built their systems. So 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. And any movement yet on the private equity side or real assets in terms of acceleration of decisions to outsource because what they're seeing in the market? Or is that still kind of a slow grind?
Those are good businesses for us, right? And we have really strong pipelines and good conversion, and they go and they're growing faster. So I wouldn't really say that there's a huge catalyst to outsourcing, but there seems to be some steady pickup every year. And for us, that has been pretty positive.
And I also think that on that point that the very large ones which haven't outsourced are trying not to in source anymore, right. So 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 compliment to what they do. And 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 you to
knock down another top 5 asset manager, PE firm, but very helpful. Thank you very much.
Your next question comes from the line of Alex Kramm with UBS. Your line is open.
Yes. Hey, thanks again. Just a couple of quick ones. One, Rahul, you just gave the AUA number earlier when somebody asked and 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, really well in the Q1.
And so maybe you could just flush out the puts and takes and why that number wasn't better, which is what I expected?
Yes. So look, it's I think the comparison is it's down $17,000,000,000 Q1 to Q2, right? Included in that is one customer for $32,000,000,000 of assets and very little revenue, right? So 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. And then maybe just real quick, just to finish on the synergy side and the cost side. I think DSD almost done now, I think $35,000,000 left. Can you just give us a couple of the big buckets that are in that $35,000,000 because you're clearly saying 2021. So just wondering what kind of big projects are still left?
And then then 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 2 the big areas for us, right, IT and IT spending and in general spending on third parties is continues to be and we're not we're really trying to do it when the contracts come up for renewal, right, which happens in a regular way throughout the course of the year and next year. And then we're very focused on productivity and productivity pickups, which is automation and building software. And that also is something that's a continuous process.
And also Alex, we think that we can let we have 2 enormous data centers, 1 in outside of Kansas City and one outside of St. Louis. And we also have 1, obviously in Yorktown Heights here in New York. And I think our ability to begin to lever that data processing capability to sell it, I think is pretty valuable and people are interrupting.
All right. Thanks again. Good night.
Thanks.
That concludes our questions for today. I'll now turn the call over to Bill Stone for closing remarks.
Well, we appreciate, as we said before, and we look forward to seeing you next quarter. Bye.
This concludes today's conference call. You may now disconnect.