Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SS and C Technologies Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Justine Stone, you may begin your conference.
Hi, everyone. Welcome and thank you for joining us for our Q3 2018 earnings call. I'm Justine Stone, Investor Relations for SS and C. With me today is Bill Stone, Chairman and Chief Executive Officer Rahul Kanwar, President and Chief Operating Officer and Patrick Pedanti, 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 ks, which is on file with the SEC and can also be accessed on our Web site. These forward looking statements represent our expectations only as of today, October 31, 2018. 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 www.ssctech.com. I will now turn the call over to Bill.
Thanks, Justine, and thanks everyone for being on the call. As many of you saw last week, we pre released earnings with updated guidance. The substantial beat of our previous guidance drove this decision. We felt we should get the information out quickly. As many of you know we've had quite volatile markets lately.
Our results are about $1,300,000,000 in adjusted revenue and we earned $0.79 in adjusted diluted earnings per share. Our earnings speed is primarily driven by our lower cost base and strong performance on the DST synergy. DST integration and margin improvement is going well. Additional unplanned cost savings were achieved in Q3 primarily through the results of natural attrition. With this in mind, we have raised our synergy guidance for DST to 220,000,000 to 240,000,000 dollars over the 3 years beginning April 16, 2018.
The additional $45,000,000 to $65,000,000 in cost savings will come from transitioning contractors to employees, lower facilities costs and improved provisioning of data and other operating expenses. We are also excited about the opportunities ahead with both Ed's software and Intralinks. Ed's software closed earlier this month and we are already working to get our sales forces integrated and beginning to execute on the $30,000,000 in cost synergies we've outlined. We announced our acquisition of Intralinks in early September and we have communicated with many of you the assets high quality financial growth rates and management team. InterLink shares a lot of mutual target clients of banks and alternative asset firms as SS and C does and allows us to engage with the treasury departments of their Fortune 1,000 corporate clients.
We believe there is plenty of cross sell opportunity here. Intralinks strong technology is also leverageable across our organization and can be used to improve client interfaces at many DST customers. SS and C has been very well served by senior executives of our acquired company. People like Rahul Kanwar, Mike McGaw, Renee Mooney, Darren Berkowitz all came from Eisner fast. Chris Matpak and Christine Egbert and Parma Zwaran from Northport Eric Rocks and Waleed Nazarin from Financial Models Ken Fullerton, Greg Hughes, Benny Locascio, Dev Rajadhan, Ian Holden, Eamon Grieve and Larry Simon from Globop, Rob Rowley, Karen Geiger, Steve Lament and Mark Flammini from AdVent.
Mike Slihtalomuna Troy, Joe Padallero, Virginia Volpi, Al Blanco from Citi Fund Services, Chris Kundrow and Mike Carpenter from Wells Fargo Fund Services, Tom MacMacken from OIF, Richard Shalowitz from VBC, Diane Costin from SAB and Justin Nodg from DST Global, Fong Sin and John Lanikow from Primatics and we're excited about Jeff Schorman from Edge and Leif O'Leary from InterLink joining our team. As you know, we also got many great players from DST that we've talked about on previous calls. SS and C's core business remains strong and opportunities robust. We grew 4.6% organically in Q3 compared to Q3 2017, which was also a good organic growth quarter. We had good performance from our fund administration business, particularly our real estate, our real assets business as well as our institutional and investment management business.
There's a lot going on at SS and C right now and we thrive in this fast paced multidimensional environment. We are conscious of our leverage and the interest rate uncertainty and are dedicated to paying down our debt quickly. We paid back over $640,000,000 in debt since the April 16 closing of DST. We have also grown our last 12 months consolidated EBITDA to almost a $1,500,000,000 This brings our leverage ratio to 4.02. I'll now turn it over to Rahul.
Thanks, Bill. We had a strong quarter
in terms of winning new mandates, providing upgrades for current customers and identifying new opportunities. DST's integration is progressing well. The management team led by Mike Fleithome is focused on high levels of customer service and continues to meet with our clients and present the solution set that the combined organization can offer. We are starting to win opportunities with a combination of SSNC C and DSP products and services and are optimistic about future prospects. We remain focused on getting the maximum value and leverage for our expenditures in various areas and with the support of the talented executives at DST continue to perform very well relative to synergy expectations.
We're also excited to have closed the Eze software acquisition on October 1. Eze is a natural complement to our hedge funds and asset manager middle office and administration services and we're looking forward to the Eze team led by Jeff Shoreman working with our sales force to jointly drive greater opportunity in pipeline. Now I will mention some key deals for Q3. An $8,000,000,000 multi strategy hedge fund chose SS and C because of our comprehensive service model for hybrid funds. Large French asset manager with over $100,000,000,000 in assets chose SS and C's fund services, regulatory services and tax services for their managed account platform.
An existing DST client extended their relationship for call center and correspondence BPO services. A U. K.-based hedge fund with over $17,000,000,000 in assets shows a suite of SS and C Advent products because of our complete solution and integration with many of their partners. A $22,000,000,000 advisor selected our integrated performance and reporting solution. I'll now turn it over to Patrick to run through the financials.
Thanks, Raul. Results for the Q3 of 2018 were GAAP revenues of $992,400,000 GAAP net income of $57,000,000 and diluted EPS of $0.23 Adjusted revenue was $1,000,000,000 excluding the adjustments for implementing the new revenue recognition standard and the acquired deferred revenue for the Advent and DST acquisitions. We had a strong quarter, adjusted revenue was up 139%, adjusted operating income increased 102.6% and adjusted EPS was $0.79 a 58% increase over 2017. Adjusted revenue in total increased $583,400,000 over Q3 2017. The acquisitions of DST and a couple of 3 smaller acquisitions contributed $566,200,000 in the quarter.
Foreign exchange had an unfavorable impact of $2,100,000 or 0.5 percent in the quarter, mostly due to the weakness of the Canadian and the Australian dollars. Organic growth on a constant currency basis for the quarter was 4.6%. Adjusted operating income in the quarter was $344,700,000 an increase of $174,600,000 or approximately 102% over Q3 2017. Adjusted operating margins decreased to 34.4% from 40.5% in Q3 of 2017. Foreign exchange had a positive impact of about $2,500,000 on expenses in the quarter.
The margin decline was mostly driven by the DST acquisitions where operating margins were 31.7% in the quarter. DST's operating margins increased sequentially from 22.1% in Q2 2018. And DST's annual run rate synergies as of September 2018 are at approximately $200,000,000 Adjusted EBITDA was $365,900,000 or 36.5 percent of adjusted revenue and increased approximately 105 percent over Q3 'seventeen. Net interest expense for the quarter was $78,100,000 and includes $3,500,000 of non cash amortized financing costs in OID. The average interest rate in the quarter for the term facility was 4.5% compared to 4.1% in the Q3 of 2017.
And we recorded a GAAP tax provision for the quarter of approximately $60,900,000 or 51.7 percent of pre tax income. Adjusted net income was $199,800,000 adjusted EPS was 0 point 7 $9 The adjusted net income $9 The adjusted net income excludes $114,500,000 of amortization of intangible assets, dollars 18,400,000 of stock based compensation, $13,700,000 of purchase accounting adjustments, dollars 7,200,000 of revenue adjustments related to the adoption of 606, dollars 5,500,000 of acquisition deal costs, dollars 4,560,000 of severance related to reductions, $3,400,000 of non cash debt issuance costs, a gain of $11,400,000 of mark to market adjustments on investments and another $3,700,000 of other gains. Diluted shares increased 18.9 percent over Q3 2017 mostly due to the equity offering of 30,000,000 shares of common stock associated with the acquisition of DST as well as the increase in the average stock price. The effective The effective tax rate used for adjusted net income was 26%. Some highlights on our balance sheet and cash flow, we ended the quarter with $732,200,000 of cash and cash equivalents and $6,759,000,000 of gross debt for a net debt position of $6,027,000,000 Operating cash flow for the 9 months ended September 2018 was $322,400,000 a $13,900,000 or 4 point 5% increase compared to the same period of 2017.
DST acquisition and financing costs and severance costs impacted cash flow this year for about 210,000,000
dollars For
a couple of the highlights, we've paid down $641,200,000 in debt since we acquired DST on April 16, 2018. This year we paid $171,700,000 of interest compared to 82 $200,000 through the Q3 of 2017. On cash taxes, so far in the 9 months we paid 95 $100,000 in cash taxes compared to $48,400,000 in the same period last year. Our accounts receivable DSO was 55.2 days at the end of September compared to 53.7 on June 2018. And we've used approximately $58,000,000 of cash for capital expenditures and capitalized software, mostly for facilities expansion, IT and leasehold improvements.
And we've declared dividends for $50,700,000 of common stock dividends as compared to 39.9 through the Q3 of 2017. And we increased our annual dividend by 14.3 percent to $0.32 per share or $0.08 per quarter in August of 2018. Our LTM consolidated EBITDA that we use for our covenant was $1,499,000,000 as of September and includes approximately $471,000,000 of acquired EBITDA and cost savings related to the acquisition. Based on our net debt position, our total leverage was 4.02 times as of September. On outlook for the Q4, and right now we're assuming that as is included in the outlook as we close that acquisition on October 1, but our outlook currently does not include Intralinks acquisition.
Our current expectation for the Q4 is adjusted revenue in the range of 1,075,000,000 to $1,085,000,000 adjusted net income in the range of $210,000,000 to 220,000,000 and diluted shares in the range of $256,200,000 to $255,200,000 Our current expectation for the full year is cash from operating activities to be in the range of $550,000,000 to $570,000,000 capital expenditures to be in the range of 2.3% to 2.7% of revenue and we expect a tax rate in the Q4 of 26% and adjusted tax rate of 26%. And I'll turn it over to Bill for our final comments.
Thanks Patrick. We're really pleased with our results and this is the first time in the last 60 quarters that I haven't been on this call with Norm Bollinger, who's now become our Vice Chairman. But I just thought that he did a great job for us on the 15 years he was on these calls and I thought I'd just call him out. We're also hosting an Analyst Day in New York City on November 15th which hopefully many of you are going to attend in person, but for those who can't we will have a webcast. You can reach out to Justine for the particulars and now we would open it up for questions.
Thank Your first question comes from the line of Andrew Schmidt from Citi. Your line is open.
Hey guys, thank you for taking my question. Good to see the tick up in the organic growth here and the progress on the DST integration. On organic growth in the Q3, I guess, could you talk a little bit about what drove that step up? I know you mentioned some renewals in the release. Just curious by end market, if we could talk about that.
And then the corollary of that is on the Q4, what is the expectation for organic growth? And if you could remind us what your sensitivity to market volatility is, that would be great since I think it's changed a little bit since you acquired DST in terms of just exposure to AUA and such? Thanks.
Well I'll take part of this and then I guess Patrick and Rahul can take. As far as the sensitivity to the markets DST is basically paid based on a number of accounts and a number of transactions. So it's not really particularly tied to AUM. And on our business prior to DST, if you want to use the S and P 500 as the proxy, then about I think about 14% of our revenue would be tied to the S and P 500. So those are 2 and then our organic revenue growth of 4.6%.
We had a strong quarter in our institutional and investment management business, which was up 6%, 7%. I think the funds business was up about 3.5% and I think the advent business was up maybe 2%, 2.5%. But I'll turn that a little bit over to Rahul on the funds business and then Patrick if you have anything else to say.
Yes. I think we had a good quarter on the funds business. It's impacted a little bit by seasonality. We've got some seasonal work that we do for tax and financial statements. And this year, we did a little bit more of it in Q1 and Q2 than we did in Q3.
Also from a comparison standpoint, Q3 last year was particularly strong for us compared to just from a comp standpoint. And then maybe Patrick, you want to comment on what's in our guidance for Q4?
So right now what we're expecting for the full year of organic growth on the high end of the guidance is 4.1% for the full year. And in the 4th quarter right now is about 2.9% organic growth in the 4th quarter.
Okay, great. And then I think just in terms of just the organic growth assumptions for the Q4, is that a function of the market volatility we've seen? Or I guess try to break out the volatility versus the underlying contract sort of signings. And I know you made some good progress with DST cross sell conversations such, but if we disaggregate the 2, that would be helpful.
I think what we're seeing right now for the Q4 is probably a step up on the alternatives business from 3.5% to the mid-5s. And then our software businesses compared to include Advent and all the other institutional and asset management software businesses, it grew combined about 5% in Q3 and we expect right now that business to be flat organically in Q4.
Got it. That helps. If I could just sneak one more in. On the upwardly revised cost synergy outlook, Good progress here in terms of the timeline. Clearly, it looks like it's supporting deleverage too.
What is the sensitivity to sort of out outperformance in the new target? Pretty quickly, you guys had some unplanned good unplanned cost synergy execution here. So just if we take the new target and we think about areas where you could exceed that, I it's a little bit early since you guys just raised it, but what would those areas be? Is it continued unplanned attrition? Are there other areas?
Just anything there would be great. Thanks a lot.
Yes, I wouldn't say that we have anything other than what we put in my quote about we think that we will have some savings when we convert some of the contractors that we're using into employees in India which we have done on a number of times with other acquisitions. We also think facilities obviously when you're you have fewer people you're going to have fewer facilities costs and all the attendant expenses of those facilities costs. And then we think we're going to be able to coordinate the buying of data and other things in IT and stuff like that, that's going to allow us to accomplish the new targets and perhaps succeed.
Got it. Thanks a lot guys. Appreciate it.
Your next question comes from the line of Peter Heckmann from Davidson. Your line is open.
Good afternoon, everyone. Thanks for taking my call. Hey, Patrick, just so I can triangulate a little bit better on your guidance, what would be the total level of acquired revenue included in your 4th quarter guidance? I think DST had a little bit of seasonality that I want to make sure that we've captured correctly. I think in the Q4 we're going to have some of the smaller acquisitions drop off.
So we'll have DST which will be fairly similar in number to what it was in what we are assuming right after what it was in Q3 about $360,000,000 to $362,000,000 a couple other $1,000,000 from one of the smaller acquisitions. And then we're expecting plus or minus somewhere around $70,000,000 from Eze.
Patrick, I think you mean $562,000,000 right, not $362,000,000
$562,000,000 Thanks, Phil. Right, right. I captured that. I thought on a year over year basis, I thought DST had a little bit more seasonality in the Q4 and I was looking for something closer to $590,000,000 Was there a change in the accounting method perhaps or maybe just being a little conservative?
I think a couple of things that you want to think through is that one thing is that they have pretty big business in the UK and the British pound has been particularly weak. So the FX has been a bit of a headwind. And then secondly, they record revenue on out of pocket expenses that they incur and then rebuild to clients and we're trying to move away from that practice. And I think in Q3 and Q4 that's maybe about a $10,000,000 number. So and again, we're just now kind of ramping up the sales force at DST.
We're hiring people, we're restructuring, we're getting ready to start advancing that process and we're pretty excited about it.
Great, great. That's helpful. And if I could just follow-up then on your last comment, I know that DST did bring a concentration to the U. K. Pound, but on the current set of assets, including closed deals, about how much is billed in U.
S. Dollars and how much is international at this point? There is approximately a little more than $100,000,000 per quarter in British pounds. And there is a little bit and it might be $5,000,000 to $7,000,000 but that's about it.
And same thing with the Canadian dollar, right? We probably bill out.
A little bit on the Canadian dollar, but the vast majority is the British pound, which has been impacted where I think the year started out at 1.4 exchange rate and I think today we're at 1.27. So clearly BST's revenue in the 3rd and 4th quarter has been quarter has been impacted by the drop in the
British pound.
Your next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.
Excellent. Thank you so much and nice job on these results guys. I guess I have one on Intralinks. Now as you get closer to closing the deal, can you share more detail on the synergies you see here and outside of the typical back office functions, where do you see overlap and how do you plan to approach what seems to be a different clientele?
Brad, I think actually it's a very similar clientele right. It's the big investment banks and the private equity firms are 2 big chunks of their primary businesses. And then another big chunk is the Fortune 1,000 Treasury Department that do a lot of acquisitions. And we have a number of solutions besides Intralinks that we think we can cross sell into there and we're building out treasury solutions all the time. So we're pretty excited about that.
I think we process something about somewhere around 99.5% of all the commercial paper transactions by issuing companies. So we think there's an opportunity there. And so we're pretty excited about that and then we're pretty excited about some of the things that Intralinks brings that we'll be able to sell across our client base like their secure document facility and their water marketing process and a whole number of things that they do and they have a strong team and good markets and they're both ambitious and they have good plans. So we're pretty excited about it.
I appreciate that, Bill. That's helpful color. And if I could just follow-up on getting the leverage ratio down to 4.02 times, nice work there. Where should we expect that goes once you close Intralinks? And what's your appetite to do more deals at that point, Bill?
Well, again, right, if we when we close that Intralinks, I think we floated another $875,000,000 in debt, right? And we're getting about $135,000,000 in EBITDA. So that's what about 6.25x, 6.5x leverage. But it's about one maybe about 11% of our whole debt stack will be intra linked. And as you've seen, right, I mean since April 16 through September 30, we paid off $640,000,000 in debt and really ran up our EBITDA.
So our EBITDA will go from about $1,500,000,000 to 1,635,000,000 dollars and hopefully we're going to grow our earnings in Q4 and pay down some more debt. So my guess is that the leverage ratio is not going to change a whole lot, maybe a quarter. So we go from 4.02 to 4.30 maybe or 4.27. But I think you will see us as we always have been very focused and also we are low hanging fruit pickers, right. So we've had a lot of low hanging fruit that we went and pick.
So we are also pretty good for farmers when we're out of low hanging fruit and we got to climb up a few trees and go pick some more. So I think that we're in a very strong position to continue to execute. It's obvious that I think our earnings expectation for Q4 on an adjusted diluted basis, I think is something like $0.82 to $0.86 Is that right, Patrick?
That's right, Bill.
So I mean, what's at a midpoint of 0.84 dollars I think most of all of you guided us at about $0.70 for Q4, dollars 0.71 at the beginning of the year and we're at $0.84 and for Q3 we were at a midpoint of 65 and I think we ended up at 79 and in Q2, we were in midpoint of 55 and we ended up at 62. So we're now on a run rate basis if you take Q4 estimate at being $3.36 So that's pretty good improvement. That's what you pay us for and that's what we try to deliver.
Excellent stuff. Look forward to seeing you in a couple of weeks at the Analyst Day. Thanks so much.
Your next question comes from the line of Alex Karam from UBS. Your line is open.
Just coming back to the synergies for a minute, hopefully I understood all this correctly. But for DST, I guess you're saying you're running at 200 at the end of the year. So that gives you what something like $20,000,000 to $40,000,000 left. And I think you said same 3 year period. But so should we assume that, I don't know, dollars 30,000,000 at the midpoint really comes over the next 2 years?
Or is this really a 2019 event? And then maybe an update on the S synergies as well, where do you think you're going to be at the end of the year? And that $30,000,000 how much of how quickly do you think you're going to realize that?
You sound a little picky there, Alex, but I think we've raised the estimate from 175,000,000 to 220,000,000 to 240,000,000 so that we're at 200,000,000 already. So the 20,000,000 to 40,000,000 it's not once again, we've done most of the low hanging fruit, although we haven't gone through all of our budgeting processes and everything that we have for 2019 on purchases, on data purchases, on different provisioning of other expenses that we have in the business. We have Anthony Chiappa working closely with the DST IT team and they're finding all kinds of great stuff that we can do and improve our customer experience at the same time as strengthen our infrastructure and lowering our costs. And so those are really good things. And I would guess that you're probably looking at $25,000,000 more in 2019 and then the last $20,000,000 in 2020.
Could that change? Well, of course, but right now that's what we would be projecting.
Okay. That's helpful. And then just on the Intralinks side, I don't think that was asked yet, but can you just I think a business is the M and A, I guess, data room business. Have you stressed us that? Can you just go back a little bit?
And have you stressed that business in terms of the M and A cycles, how that will react? I think it's a very diverse business with a lot of clients. But maybe just a little color given that M and A seems to be peaking here, how you feel about that business?
Well, one
of the great things Alex is that you don't have to consummate the deal for us to get paid. So the idea that people aren't going to be kicking the tires all the time I don't think is very realistic. And over the last 4 or 5 years, they have grown their revenue each year and right now it's accelerating. They brought out new products and new services and extensions And they're pretty confident. And I think they're pretty talented.
So right now, we're very pleased with where we sit right now and how we can help cross sell and up sell some of our things into the Intralinks client base as well as some of their things in our client base.
All right, fair enough. Thank you.
Your next question comes from the line of Chris Donat from Sandler O'Neill. Your line is open.
Good afternoon. Thanks for taking my questions. Patrick, I wanted to ask something about the full year guidance and the major puts and takes because it looks like the revenue guidance is up $35,000,000 to $65,000,000 You've got the inclusion of Eze and then the issue you talked about before of maybe DST timing. Is there anything else in there other than like a British pound versus U. S.
Dollar currency rate? Is there anything else we should be thinking about?
No, I don't think there's anything else that impacted other than that $100,000,000 of British pound revenue is now converting into a lot less dollars. That's the significant item.
Okay. And then And then
we have as right in Q4 too.
Right. And then thinking about the tax rate for 2019, I know you're guiding to 26% effectively for the Q4. Is there anything out there that we should be thinking about that might change that rate or is that a reasonable assumption going forward just with maybe the business shifting a little bit geographically with Intralinks or anything else going
on?
No, I don't think so. I think we saw an uptick in the Q3 from 25% to 26%. Most of that was due to we were getting a lot more U. S. Earnings.
And when you apply the federal rate and some of the high tax rates like New York and Massachusetts and some other states that have high tax rate, it kind of bumped up our rate from 25% to 26%. So I mean we're going to work hard to try to get it down, back down over time, but I would assume for now 26%.
Okay. Thanks very much.
Your next question comes from the line of Mayank Tandon from Needham and Company. Your line is open.
Thank you. Good evening. Maybe for Bill or Patrick, either if you could give us maybe some framework for thinking about 2019 revenue in terms of your expectations for organic growth and then the growth expectations from the recent acquisitions, especially as an Intralinks and also any growth potential from DST given that it will be an additional 3 or 4 months of contribution for 'nineteen numbers?
Well, Mayank, I think that if you look at Intralinks, we would expect something in the 8% to 10% range. We would expect Eze to be in the 4% to 6% range and we're optimistic on DST, but we're not done chopping wood. And so we got to get in there and we're pretty optimistic on our earnings picture there, but we want a growth company. We're not going to we're not trying to milk DST by any stretch of the imagination and we're reinvesting in that business and we're hiring some pretty senior sales talent to come in and help. And over the next few weeks, we'll be coming out with some of that information to the street.
And so we would like to see the overall organic revenue growth rate in 20 19 to be in the 5% range. We're at 4.4 $4,000,000,000 4 $500,000,000 revenue company now. So that's a lot of new sales and we're kind of adopting new ways to sell and going after bigger chunks of business. And so there's a lot of work to do, but we got a lot of capability and a lot of smart people and we're pretty excited about what we can accomplish.
That's very helpful Bill. And then if I can also follow-up very quickly with some of the deals that Raul mentioned. Any change in the competitive landscape? And in these competitive situations, what is the determining factor behind the wins? Is it price?
Is it the solution set? Is it a combination of both or other factors that might come into play? Thank you.
You think most of the time the organizations that we're talking to are really looking for the optimal way to structure their technology stack as well as the workflows that happen in that for a certain RFP or a certain mandate that they might have. And for a certain RFP or a certain mandate that they might have. And generally when they look at us, they find that we have much more capability than a lot of the other providers that they looked at just simply because of all the applications that we have either built or added via acquisition and that's been working out pretty well.
And Mayank, I'd also say is that often we're dealing with complex organizations that are trying to get service And at the same time, they prefer 8 basis points to 9 basis points or 10 basis points to 12 basis points. And so it's not like they don't negotiate, but the service level is way more important really than that last BIP or 2. And what happens though is that some of our competitors and we're probably guilty of this at times too. We look at our capabilities through rose colored glasses and then we have challenges as we're implementing. And I would say that in general and on balance, SS and C does a way better job about that than a number of our competitors that are just way over their skis.
And then we get great chances on the rebound when those clients are very frustrated.
Your next question comes from the line of Ashish Sabadra from Deutsche Bank. Your line is open.
Thanks and congrats on the good results. My question was about the fund admin business. So that's expected to improve to 5.5% next in Q4 despite the market turmoil that we saw in October. So maybe Rahul, I was just wondering if you could highlight some of the things which will drive that improvement in the growth profile there?
Yes. So I think rather than sort of characterize it a market turmoil, most of what we would call Q3 being a little more muted than usual is we had a really, really strong Q3 last year, where I think from Q2 to Q3 revenue in the fund admin business grew something like $8,000,000 on a $210,000,000 base. So that comp is harder and then we've done more of our financial statement and tax work in Q1 and Q2 this year. Last year it was more evenly spread. So we're really expecting similar performance in Q4 and I think pretty confident we can get there.
That's helpful. And then you did talk about the combined opportunity with BST. I was wondering if you could give us some examples just to better understand what these opportunities look like. And then as we think about and as Bill mentioned that the hope is with new salespeople in that we could potentially see an improvement in the DST growth profile than what we have historically seen with DST as an independent company?
Yes. I think a few examples. We recently sold a customer, our PrecisionLM loan module and system and combined that with DST's AWD product, which is a workflow engine and that was pretty well received. There are also a number of opportunities where fund administration off our fund administration offering has a 40 Act component to it, which DST has been servicing for a long period of time. And we're also seeing opportunities to bring some of the business insight analytics products such as wallet share and some other ones into our client base who are looking for data aggregation and then some intelligence out of that data aggregation.
So there's a number of different opportunities. And it goes the other way as well, where we're seeing our products coming into the DSC solution set and what they're looking to offer their clients and strengthening their process as well and their pitch as well.
That's helpful. That's helpful. And just that we understand, so none of the revenue synergy was really baked into the expectations when you closed the acquisition or when you really gave the synergy guidance, is that right?
That's right. Yes, I would just say that we did use an FX rate of 1.4 when we closed DST and now it's 1.27. So that $400,000,000 in annual revenue, you're talking about a 10% hit to that. So there is some FX wins, but obviously that can come back into the sales too. But that would be the only difference.
Okay. No, that's helpful. Thanks.
Your next question comes from the line of Chris Shutler from William Blair. Your line is open.
Hi, good afternoon. The DST cost savings, I just want to make sure that I understand what was actually achieved in the P and L for the second, third and expected in the Q4. Can you just let us know what the cost savings in the quarters was?
Yes. The cost savings in Q3 was if you compare it to where they were running at at Q2, it's probably around $50,000,000 So that's how we get the $200,000,000 implemented synergies. And then we don't at this point, we're not expecting a whole lot more in Q4. We are going to replace some of the critical positions and some of the remaining synergies like replacing contractors with employees and facilities take a little bit longer to do. We might get a little bit more synergies in Q4, but right now we're expecting to be pretty similar to Q3.
Okay, thanks. And then in the fund admin business, Patrick, can you just remind us how much of that revenue is usually priced on like prior core ending assets? How much is more or less of a lag than that? Thanks.
How much of it? I think it's all it's pretty much all priced on assets under management.
Yes. And it's But is it on
a 1 quarter lag?
No. Sorry, go ahead, Patrick.
I mean, go ahead, Raul. You probably have more details on it than I do.
Yes. The vast majority is either quarterly or monthly and advance. So if it's monthly and advance, it's the same month, just the 1st day and quarterly advance, we might be ahead by 60 or 90 days depending on where we are.
And I think the biggest customers are monthly, right, Raul?
That's right.
Yes.
Okay. Thank you.
Your next question comes from the line of Brian Essex from Morgan Stanley. Your line is open.
Hi, good afternoon guys and thank you for taking the question. I guess, Bill, maybe if you could speak and I want to dig into DST a little bit, just in terms of how you think about the business and where you're spending your time, you and your team. So I mean, I guess, the healthcare business was a little bit better margin business, well, maybe a lot better margin business. And I just want to get a sense of is that business, in your view kind of a little bit more self sufficient in terms of where you need to spend your time? And I guess Part B of the question is where is most of the attrition coming from?
Is it mostly on financial services? Is there is more overlap? Or just to kind of think about, I think about 1, integrating those businesses and then 2, where you need to spend your time to run those businesses going forward?
Yes, well Mike Slidholm has done a great job and we have good people in the healthcare business, Jonathan Behm and Mel and Duffield and Mark Palmer are all very, very talented people. And at the same time, those are big contracts with big opportunities. And SS and C is a pretty big place and we have linkages to a lot of different healthcare institutions and a lot of what we think are prospects. And we're excited about making sure that we get all the cross sell and upsell opportunities that we can. And in general, the clients at DST Health Solutions are multimillions to tens of 1,000,000 of dollars.
So it gets our focus and we're excited about our opportunities. And we continue to look for new talent to come help us. And so we're doing that as well. And so my time is spent kind of wherever our biggest opportunities are across the spectrum of clients that we have and prospects that we have and we have huge clients in the UK, we've got huge clients in Australia and we have huge clients here in the U. S.
And we just need to make sure that they know that we're paying attention and I think they see us accelerating the decision making and the necessary items that you have to do to improve customer satisfaction. So we're excited about that. We have a hot product in data analytics for the long only business and it's very popular here in the U. S. And DSP was planning on rolling it out in the Q1 of 2020.
We think it's better to roll it out the Q4 of 2018 to Europe. So we've accelerated that and we've done a lot of things like that.
Okay. I guess maybe a follow-up on the cost side, is most of the improvement to that kind of 31% level, has that come from Financial Services getting that to par? And is that where most of the attrition has come from? Or has it been more evenly balanced between financial services and healthcare at DSD?
Most of the cost savings has come from us paying a lot of attention to where they're spending money primarily on infrastructure, right? So whether that's IT infrastructure, data centers, different vendors that we might be paying and most of those go across the business.
Okay. And I guess maybe just on the attrition side, is that been weighted one towards the other?
I don't think so. I think it's been once again pretty evenly spread.
Got it. Financial services is a much bigger business in the healthcare, right?
Sure.
Yes.
So a lot of more of the attrition is probably coming from there, but probably equally. And then the other thing too, there's been a lot of in combining the functions at both companies, there's been a lot of corporate type cost reductions also.
Okay. That's helpful. Thank you.
Your next question comes from the line of Jackson Ader from JPMorgan. Your line is open.
Great. Thanks for taking my questions, guys. First one, Bill, you guys are rolling these acquisitions into the fold and working on integrations, do you ever see a pause in buying behavior from potential customers because maybe they're waiting to see what kind of bundled offer SS and C is going to roll out?
I don't think that that's a major delay in revenue. I think that they're interested in seeing us and hearing what our plans are. But I think in general we're reasonably buttoned up on that and them confidence rather than give them pause. So I don't think that's a big issue for us, although certainly in an isolated incident here or there, some people don't like companies that buy other companies. And I'm a believer that in our business, kind of like the names I rattled off, right, we got an awful lot of talent that came in through acquisitions.
Okay. And then a quick follow-up on the real estate business. There was an announcement the other day about a skyline, the property management win. Can we just drill down into just generally speaking, where do you see the most success in property management? Is it on the commercial side, residential side?
And then what kind of sizes of properties?
So we've got several 1,000 property managers that say most of ours are commercial. But what we've been working hard on is integrating that with our funds offering where we're doing a number of real estate partnerships and things like that and looking to expand that capability. So we've done we did a release on that. We expect to have a lot more development and innovation in the roadmap there. And as those businesses keep coming closer together, I think that the both the solutions that and the pipeline will get a little more diversified.
Okay. Thank you.
Your next question comes from the line of Surinder Thind from Jefferies. Your line is open.
Hi, Bill. I just wanted to revisit the topic of the cost synergies and guidance. You've clearly mastered the art of kind of beating expectations here, but the beat this past quarter was unusually large. And so what I wanted to understand here was what actually changed between reporting the 2Q results when you gave the 3Q guide and then just 2 months later significantly beating these expectations? Was this just a one off related to DST or were there things that you guys just hadn't even looked at or thought about?
And then maybe as a follow-up, I mean, are you perhaps setting yourself up for some unrealistic expectations in that your future guidance is going to be viewed increasingly conservatively?
Well,
you have to surprise you guys. You try to surprise you guys on upside, right? I mean, it's not really a function of being able to we don't push off revenue. We don't not sign contracts and try to get them in the next quarter because we are superstitious, right. We think that if we push off revenue, it's going to go away.
It's not going to come to us. And so we're very economic, very commercial about that. And then secondly, right, it's 2018, right. It's you don't keep the books open past 31st on December 31st midnight, and that's it, game shot, that's over, right? And that's just the way it works, right?
So there's no smoothing or anything that you can do anymore. And, hey, we have all these cost savings and that's what happened. I don't think we thought we would have quite as much opportunity as proven that we have had. And I think that going forward, we will continue to execute. And we're going to give what we think is fair guidance and not give either particularly conservative nor particularly ambitious.
But and then if you look at our earnings picture for Q4, I think it's 82 to 86 and that's up from 79. 79 was up from 65 or 72 I guess when we reported, but 65 was the guidance. So we're going to have gone 72 versus 65, 79 versus 65 and then right now guidance is 84 up from 71. So we're not accelerating, we're not decelerating, we're giving our best estimate.
Understood.
This is Patrick. I think one of the things, there are a couple of things that happened in the quarter that were very that you couldn't predict. One is, I think as Bill says said in his opening comments it was much more employee attrition than we expected. Now we're going to replace some of those critical positions, but where we have to now, but I think we have more attrition faster than we expected at DST. The other thing too is when you're doing these synergy plans, you're really A lot of the discretionary stuff and they really don't need to spend to operate the business and that each one of those is not $1,000,000 items, it might each be $5,000 or $10,000 or $50,000 each, but there are a lot of them and that discretionary area really contributed to the outperformance in Q3 which also wasn't something that could easily predicted when we ended Q2.
That's helpful. So just as a follow on to that, then I assume that the run rate though for 4Q is the fair or the 3Q is the fair run rate going forward at this point. Is that the right way in the sense that you talked about a lot of discretionary stuff being cut, maybe there's more attrition, so you kind of need to hire back at this point? Is that kind of what the pause in 4Q is at this point?
I think we have to replace some of the employees, some of the staff And then we took an approach that the discretionary spending is going to be pretty similar to Q3 and Q4, because it came down significantly really fast. So those are kind of the assumptions we're making at this point on Q4. And we're also raising guidance from
yes, I mean we're obviously we're taking our earnings up from $0.79 in Q3 to $0.82 to $0.86 or so midpoint of $0.84 in Q4. I mean we got 260,000,000 shares outstanding and we're raising our earnings up a nickel in a quarter. I mean that's still a lot of money.
Absolutely. And then in one big picture question here, just kind of revisiting the Healthcare business. When the DST acquisition closed or when you guys made the announcement, you said that was one of the segments that you were most excited about. How are you guys thinking about that going forward in the sense that at what point do you turn maybe more of your attention to the healthcare business or maybe we start hearing more announcements about what's going on there? How much love and attention is it getting right now relative to everything else?
Well, I think we're paying attention. Rahul and I and Mike Swadhill went out and saw some of their clients. And we have big sophisticated players that are looking for technology solutions from us. And I think SS and C brings a really fresh approach to this with a lot of top technologists. And I think so far it's been pretty well received.
But you got to execute, you got to get wins. We have gotten a number of wins where when we first acquired, they were rumblings about them leaving, but that hasn't happened. We've gotten some multiyear re signs. And so there's a lot of good stuff we're doing. And I think that we would be trying to give a bullish view of our business from here including healthcare.
That's helpful. That's it for me. Thank you, Bill.
Your next question comes from Alex Kramm with UBS. Your line is open.
Yes. Hey, again, I guess, just a couple of quick follow ups. Didn't want to get away without giving us some of the numbers you usually give. Can you give us AUA, Rahul, at the end of the quarter? I don't think you've given that it may be also client retention, I think it's something that you sometimes disclose?
AUA at the end of Q3 was 1,680,000,000,000.
And do you have the client retention at all, Andy?
Yes. Client retention, we calculated the last 12 months was a little over 95%.
Okay, great. Thanks. And then just coming back to, I guess, DST and what you talked about earlier in terms of restructuring some of the contracts and I guess some pass through revenues going away. Can you just flush it out a little bit more in terms of magnitude? And one of the reasons why I'm asking is, Bill made this comment earlier a little bit coming attraction in terms of 5% organic growth.
But I assume some of that kind of restructuring could actually weigh on the growth rates a little bit if those revenues are just going to go away and obviously we're in 2018 numbers. So maybe just give us a little bit more detail there what's happening, how big that stuff is, so we can think about this correctly?
Yes, I mean obviously if we're going to take it out of 2019 we're going to go see our auditors about taking it out of 2018 too, right. So hopefully that's not a drag on organic revenue growth and stuff like that. It might mean that our revenue, which will be $30,000,000 or so a quarter, sometimes $40,000,000 a quarter in these rebuild expenses will come out of the revenue, but there's no margin on it anyway. So it shouldn't be in there anyway. But you got to make sure you do the accounting right.
And I can assure you in this area, it is very arcane.
Okay. Now that makes sense. Just want to clarify. Then just lastly, real quick, on Eze, I think you said $70,000,000 for the quarter. I don't think anybody asked about that, but I was at $75,000,000 given some of the disclosures we had seen.
Is there anything going on there? Is that business slowing a little bit or any contracts that have been falling away between you talking about the business and closing it? Or is that or did I get the run rate incorrectly or is that seasonality or something?
Yes, I think we announced that the as annual run rate is about $280,000,000 which is $70,000,000 a quarter.
All right. That's it for me. Thanks again.
Your next question comes from Patrick O'Shaughnessy with Raymond James. Your line is open.
Hey, good afternoon. A follow-up on the healthcare business. Bill, at a September conference, you mentioned that you'd receive 6 or 7 inquiries for that business. Any update on where things stand in terms of understanding the value of the healthcare business? And if you were to sell it, would intention be to recycle the proceeds into additional financial services acquisitions or what do you think about paying down debt?
Hey, that's a great question, Patrick. And at the present, we are not contemplating a sale
of the
healthcare business. So that the secondary thing where what will we do with the proceeds is really mute at this point. And under any circumstances when SS and C has capacity, whether it's with cash on the balance sheet or our debt facilities or the ability to raise capital and we find businesses that we want, we're willing to deploy capital to go win that business, right, win that acquisition. But we have a lot to do right now and we have what seems to be a pretty reasonable path for earnings growth over the next number of quarters. And so we're not we want to get DST completely bedded down.
We want to start really cross selling with Jeff and the people that is and we want to get Leaf and the Intralinks team in here and start to accelerate that business. And so we have plenty to do without chasing every potential opportunity, but that doesn't mean we're not kicking any tires.
All right, great. Thank you.
There are no further questions at this time. I will now turn the call back over to Bill Stone.
Again, we really appreciate you guys and gals support. We work hard for our shareholders and we work hard actually for our debt holders and that's what we'll continue to do and I look forward to talking to you in another 90 days. Thanks.
This concludes today's conference call. You may now disconnect.