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&C Technologies third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press star and the number one on your telephone keypad. Please remember, you can ask one question and one follow-up question. If you wish to withdraw your question, simply press the pound key. 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&C. With me today is Bill Stone, Chairman and Chief Executive Officer, Rahul Kanwar, President and Chief Operating Officer, and Patrick Pedonti, our Chief Financial Officer. Before we get started, we need to review the safe harbor statement. Please note that various remarks we make today about future expectations, plans, and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website.
These forward-looking statements represent our expectations only as of today, October 31st, 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 of our website at www.ssctech.com. I will now turn the call over to Bill.
Thanks, Justine, and thanks to 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 $1.3 billion in adjusted revenue, and we earned $0.79 in adjusted diluted earnings per share. Our earnings beat is primarily driven by our lower cost base and strong performance on the DST synergy. DST's integration and margin improvement is going well. Additional unplanned cost savings were achieved in Q3, primarily through the result of natural attrition. With this in mind, we have raised our synergy guidance for DST to $220 million-$240 million over the three years beginning April 16th of 2018.
The additional $45 million-$65 million 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 Eze Software and Intralinks. Eze Software closed earlier this month. We're already working to get our sales forces integrated and beginning to execute on the $30 million in cost synergies we've outlined. We announced our acquisition of Intralinks in early September. We have communicated with many of you the asset's high-quality financial growth rates and management team. Intralinks shares a lot of mutual target clients of banks and alternative asset firms as SS&C does and allows us to engage with the treasury departments of their Fortune 1000 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&C has been very well served by senior executives of our acquired companies. People like Rahul Kanwar, Mike McGaw, Renee Mooney, Darren Berkowicz all came from EisnerAmper. Chris Madpak and Christine Egbert and Aparna Parameswaran from Northport. Eric Rocks and Walid Nassereddine from Financial Models. Ken Fullerton, Greg Hughes, Benny LoCascio, [Dev Rajadan], Ian Holden, Eamonn Greaves, and Larry Simon from GlobeOp. Rob Rowley, Karen Geiger, Steve Leivent , and Mark Flamini from Advent. Mike Sleightholme, Una Troy, Joe Padalero, Virginia Volpe, Al Blanco from Citi Fund Services. Chris Kundro and Mike Carpenter from Wells Fargo Fund Services. Tom McMackin from OFI. Richard Shalowitz from BBC. Diane Kossen from Savage. [Justin Hodge] from DST Global Solutions. Fong Sin and John Lankenau from Primatics.
We're excited about Jeff Shoreman from Eze and Lee O'Leary from Intralinks joining our team. As you know, we also got many great players from DST that we've talked about on previous calls. SS&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&C right now. 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've paid back over $640 million in debt. Since the April 16th closing of DST, we have also grown our last 12 months consolidated EBITDA to almost $1.5 billion. 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 Sleightholme, 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 SS&C and DST 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 are also excited to have closed the Eze Software acquisition on October 1st.
Eze is a natural complement to our hedge fund and asset manager middle office and administration services, and we are looking forward to the Eze team, led by Jeff Shoreman, working with our sales force to jointly drive greater opportunity and pipeline. I will mention some key deals for Q3. An $8 billion multi-strategy hedge fund chose SS&C because of our comprehensive service model for hybrid funds. A large French asset manager with over $100 billion in assets chose SS&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 billion in assets chose a suite of SS&C Advent products because of our complete solution and integration with many of their partners. A $22 billion advisor selected our integrated performance and reporting solution.
We will now turn it over to Patrick to run through the financials.
Thanks, Rahul. Results for the third quarter of 2018 were GAAP revenues of $992.4 million, GAAP net income of $57 million, and diluted EPS of $0.23. Adjusted revenue was $1,002.9 million, 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 to 102.6%, and adjusted EPS was $0.79, a 58% increase over 2017. Adjusted revenue in total increased $583.4 million over Q3 2017. The acquisitions of DST and a couple of three smaller acquisitions contributed $566.2 million in the quarter. Foreign exchange had an unfavorable impact of $2.1 million, or 0.5% 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 $344.7 million, an increase of $174.6 million 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 $2.5 million in 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. DST's annual run rate synergies as of September 2018 are at approximately $200 million. Adjusted EBITDA was $365.9 million or 36.5% of adjusted revenue and increased approximately 105% over Q3 2017. Net interest expense for the quarter was $78.1 million and includes $3.5 million of non-cash amortized financing costs and OID. The average interest rate in the quarter for the term facility was 4.5%, compared to 4.1% in the third quarter of 2017.
We recorded a GAAP tax provision for the quarter of approximately $60.9 million or 51.7% of pre-tax income. Adjusted net income was $199.8 million, adjusted EPS was $0.79. The adjusted net income excludes $114.5 million of amortization of intangible assets, $18.4 million of stock-based compensation, $13.7 million of purchase accounting adjustments, $7.2 million of revenue adjustments related to the adoption of ASC 606, $5.5 million of acquisition deal costs, $4.6 million of severance related to reductions, $3.4 million of non-cash debt issuance costs, a gain of $11.4 million of mark-to-market adjustments on investments, and another $3.7 million of other gains. Diluted shares increased 18.9% over Q3 2017, mostly due to the equity offering of 30 million shares of common stock. Associated with the acquisition of DST, as well as the increase in the average stock price. The effective tax rate we used for adjusted net income was 26%.
Some highlights on our balance sheet and cash flow, we ended the quarter with $732.2 million of cash and cash equivalents and $6.759 billion of gross debt for a net debt position of $6.027 billion. Operating cash flow for the nine months ended September 2018 was $322.4 million, a $13.9 million or 4.5% increase compared to the same period of 2017. DST acquisition and financing costs and severance costs impacted cash flow this year for about $210 million. For a couple other highlights, we've paid down $641.2 million of debt since we acquired DST on April 16th of 2018. This year, we paid $171.7 million of interest compared to $82.2 million through the third quarter of 2017. On cash taxes, so far in the nine months, we've paid $95.1 million in cash taxes compared to $48.4 million the same period last year.
Our accounts receivable DSO was 55.2 days at the end of September compared to 53.7 days on June 2018. We've used approximately $58 million of cash for capital expenditures and capitalized software, mostly for facilities expansion, IT, and leasehold improvements. We've declared dividends for $50.7 million of common stock dividends as compared to $39.9 million through the third quarter of 2017. We increased our annual dividend by 14.3% to $0.32 per share or $0.08 per quarter in August of 2018. Our LTM consolidated EBITDA that we used for our covenant was $1.499 billion as of September and includes approximately $471 million of acquired EBITDA and cost savings relating to the acquisition. Based on net debt position, our total leverage was 4.02 times as of September.
On outlook for the fourth quarter, right now we're assuming that as is included in the outlook, as we close that acquisition on October 1st, our outlook currently does not include Intralinks acquisition. Our current expectation for the fourth quarter is adjusted revenue in the range of $1,075,000,000 to $1,085,000,000. Adjusted net income in a range of $210 million to $220 million, diluted shares in the range of 256.2 million to 255.2 million. Our current expectation for the full year is cash from operating activities to be in the range of $550 million to $570 million. Capital expenditures to be in a range of 2.3% to 2.7% of revenue. We expect a tax rate in the fourth quarter of 26% and adjusted tax rate of 26%. I'll turn it over to Bill for our final comments.
Thanks, Patrick. We're really pleased with our results, this is the first time in the last 60 quarters that I haven't been on this call with Norm Boulanger, who's now become our Vice Chairman. I just thought that he did a great job for us on the 15 years he was on these calls, I thought I'd just call him out. We are also hosting an Analyst Day in New York City on November 15th, which hopefully many of you are going to attend in person. For those who can't, we will have it webcast. You can reach out to Justine for the particulars. Now we would open it up to questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star and the number 1 on your telephone keypad. Please remember, you can ask one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. Your first question comes from 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 third quarter, 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. Then the corollary of that is on the fourth quarter, what is the expectation for organic growth? 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 number of accounts and number of transactions. It's not really particularly tied to AUM. On our business prior to DST, if you want to use the S&P 500 as the proxy, then I think about 14% of our revenue would be tied to the S&P 500. Those are the two, 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%.
I'll turn that a little bit over to Rahul on the funds business, and then Patrick, if you have anything else to say.
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. Maybe Patrick, you want to comment on what's in our guidance for Q4?
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. The fourth quarter right now is at about 2.9% of organic growth in the fourth quarter.
Okay, great. I think just in terms of just the organic growth assumptions for the fourth quarter, 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've made some good progress with DST cross-sell conversations and such, but if we disaggregate the two, that would be helpful.
I think what we're seeing right now for the fourth quarter is probably a step up on the alternatives business from 3.5% to the mid fives. Our software businesses compared to include Advent and all the other institutional and asset management software businesses, it grew combined about 5% in Q3. 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 looks like it's supporting de-leverage too. What is the sensitivity to sort of outperformance in the new target? Pretty quickly, you guys had some good unplanned cost synergy execution here. Just if we take the new target and we think about areas where you could exceed that, I know 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.
Yeah, 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 have fewer people, you're going to have fewer facilities costs and all the attendant expenses of those facilities costs. We think we're going to be able to coordinate the buying of data and other things in IT and stuff like that's going to allow us to accomplish the new targets and perhaps exceed them.
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 fourth quarter guidance? I think DST had a little bit of seasonality that I want to make sure that we've captured correctly.
In the fourth quarter, we're going to have some of the smaller acquisitions drop off. We'll have DST, which will be fairly similar in number to what it was in what we're assuming right now to what it was in Q3, about $360 million-$362 million. A couple other million from one of the smaller acquisitions. Then we're expecting plus or minus somewhere around $70 million from Eze.
Patrick, I think you mean $562 million, right? Not 362.
$562 million. Thanks, Bill.
Right. I captured that. I thought on a year-over-year basis, I thought DST had a little bit more seasonality in the fourth quarter, and I was looking for something closer to 590. Was there a change in the accounting method perhaps, or maybe just being a little conservative?
I think.
Go ahead, Bill.
I think a couple things that you want to think through is that one thing is that they have pretty big business in the U.K. The British pound has been particularly weak. The FX has been a bit of a headwind. 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. I think in Q3 and Q4 that's maybe about a $10 million number. 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. We're pretty excited about it.
Great. No, that's helpful. 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's approximately a little more than GBP 100 million per quarter in British pounds. There's a little bit in, it might be AUD 5 million-7 million in the Australian dollar, but that's about it.
Okay.
Same thing with the Canadian dollar, right? We probably
A little bit on the Canadian dollar.
Sure.
yeah, the vast majority is the British pound.
Got it. Okay.
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. Clearly, DST's revenue in the third and fourth quarter has been impacted by the drop in the British pound. That makes sense. I appreciate it. I'll get back in the queue.
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?
Well, Brad, I think actually it's a very similar clientele, right? It's the big investment banks and the private equity firms are two big chunks of their primary businesses. Another big chunk is the Fortune 1000 treasury departments that do a lot of acquisitions. We have a number of solutions besides Intralinks that we think we can cross-sell into there. We're building out treasury solutions all the time. 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. We think there's an opportunity there. We're pretty excited about that.
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 watermarking process and a whole number of things that they do. They have a strong team and good markets, and they're both ambitious, and they have good plans. We're pretty excited about it.
I appreciate that, Bill. That's helpful color. 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?
Again, right, when we close that Intralinks, I think we floated another $875 million in debt, right? We're getting about $135 million in EBITDA. That's what? About six and a quarter, six and a half times leverage. It's about maybe about 11% of our whole debt stack will be Intralinks. As you've seen, right, since April 16th through September 30, we've paid off $640 million in debt and really ran up our EBITDA. Our EBITDA will go from about $1.5 billion to $1.635 billion. Hopefully, we're going to grow our earnings in Q4 and pay down some more debt. My guess is that the leverage ratio is not going to change a whole lot. Maybe a quarter. We go from 4.02-4.30 maybe, or 4.27.
I think you will see us, as we always have been, very focused. Also, we are low-hanging fruit pickers, right? We've had a lot of low-hanging fruit that we went and picked. We're also pretty good performers when we're out of low-hanging fruit, and we got to climb up a few trees and go pick some more. I think that we're in a very strong position to continue to execute. It's obvious that I think our earnings expectations for Q4 on an adjusted diluted basis, I think is something like $0.82-$0.86. Is that right, Patrick?
That's right, Bill.
I mean, what's that, a midpoint of $0.84? I think most of all of you guided us at about $0.70 for Q4, $0.71 at the beginning of the year, we're at $0.84. For Q3 we were at a midpoint of $0.65, I think we ended up at $0.79. Then Q2, we were at a midpoint of $0.55, we ended up at $0.62. We're now on a run rate basis, if you take Q4 estimate at being $3.36. That's pretty good improvement, that's what you pay us for, 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.
Okay.
Your next question comes from the line of Alex Kramm from UBS. Your line is open.
Hey, good evening, everyone. Just coming back to the synergies for a minute. Hopefully, I understood all this correctly. For DST, I guess you're saying you're running at $200 million at the end of the year, that gives you, what, something like $20 million to $40 million left. I think you said same three-year period. Should we assume that, I don't know, $30 million at the midpoint really comes over the next two years? Or is this really a 2019 event? Maybe an update on the SS&C synergies as well. Where do you think you're going to be at the end of the year? That $30 million, how quickly do you think you're going to realize that?
You sound a little picky there, Alex Kramm. I think that we've raised the estimates from $175 million to $220 million to $240 million. Obviously we're at $200 million already. The $20 million to $40 million, 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 IT purchases, on data purchases, on different provisioning of other expenses that we have in the business. We have Anthony Chiozza working closely with the DST IT team. They're finding all kinds of great stuff that we can do and improve our customer experience, at the same time as strengthening our infrastructure and lowering our costs. Those are really good things. I would guess that you're probably looking at $25 million more in 2019 and then the last $20 million in 2020. Could that change?
Well, of course. Right now that's what we would be projecting.
Okay. No, that's helpful. Just on the Intralinks side, I don't think that was asked yet. I think a big business is the M&A, I guess, data room business. Have you stress-tested? Can you just go back a little bit? Have you stress-tested that business in terms of the M&A cycles, how that will react? I think it's a very diverse business with a lot of clients. Maybe just a little color given that M&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. Right? The idea that people aren't going to be kicking the tires all the time, I don't think is very realistic. Over the last four or five years, they have grown their revenue each year, and right now it's accelerating. They've brought out new products and new services and extensions. They're pretty confident. I think they're pretty talented. Right now we're very pleased with where we sit right now and how we can help cross-sell and upsell some of our things into the Intralinks client base, as well as some of their things into 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, it looks like the revenue guidance is up $35 million-$65 million. We've got the inclusion of ES, and then the issue you talked about before with maybe DST timing. Is there anything else in there other than the British pound versus U.S. dollar currency rate? Just anything else we should be thinking about?
No, I don't think there's anything else that impacted other than that GBP 100 million of British pound revenue is now converting into a lot less dollars. That's the significant item.
Okay.
We have Eze, right, in Q4 too.
Right. Thinking about the tax rate for 2019, I know you're guiding to 26% effectively for the fourth quarter. 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 third quarter from 25% to 26%. Most of that was due to, we were getting a lot more U.S. earnings. 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%. We're going to work hard to try to get it 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 & 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 three or four months of contribution for 2019 numbers.
Well, Mayank, I think that if you look at Intralinks, we would expect something in the 8%-10% range. We would expect Eze to be in the 4%-6% range. We're optimistic on DST, but we're not done chopping wood, so we got to get in there, and we're pretty optimistic on our earnings picture there. We want a growth company. We're not trying to milk DST by any stretch of the imagination. We're reinvesting in that business, and we're hiring some pretty senior sales talent to come in and help. Over the next few weeks, we'll be coming out with some of that information to the street. We would like to see the overall organic revenue growth rate in 2019 to be in the 5% range. We're at a $4.4 or $4.5 billion revenue company now.
That's a lot of new sales, and we're kind of adopting new ways to sell and going after bigger chunks of business. 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. If I can also follow up very quickly with some of the deals that Rahul 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.
I 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 technology stack. They're looking for operating leverage, right? It's rarely about price, and it's almost always about what can we deliver for a certain RFP or a certain mandate that they might have. Generally, when they look at us, they find that we have much more capability than a lot of the other providers that they look at, just simply because of all the applications that we have either built or added via acquisition. That's been working out pretty well.
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 eight basis points to nine basis points, or 10 basis points to 12 basis points. It's not like they don't negotiate, but the service level is way more important, really, than that last bit for two. 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. Then we have challenges as we're implementing. I would say that in general and on balance, SS&C does a way better job about that than a number of our competitors that are just way over their skis. Then we get great chances on the rebound when those clients are very frustrated.
That's great. Thank you very much.
Your next question comes from the line of Ashish Sabadra from Deutsche Bank. Your line is open.
Thanks, congrats on the good results. My question was about the fund admin business. That's expected to improve to 5.5% in fourth quarter, despite the market turmoil that we saw in October. Maybe Rahul, I was just wondering if you could highlight some of the things which will drive that improvement in the growth profile there.
Yeah. I think rather than sort of characterize it as market turmoil, most of what we would call Q3 being a little more muted than usual is, we had a really strong Q3 last year, where I think from Q2 to Q3 revenue in the fund admin business grew something like $8 million on a $210 million base. 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. We're really expecting similar performance in Q4, and I think pretty confident we can get there.
Oh, that's helpful. You did talk about the combined opportunity with DST. I was wondering if you could give us some examples just to better understand what these opportunities look like. As we think about, 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've historically seen with DST as an independent company.
Yeah. I think a few examples. We recently sold a customer our Precision LM 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 our fund administration offering has a 40-act component to it, which DST has been servicing for a long period of time. We're also seeing opportunities to bring some of the business insight analytics products, such as WalletShare and some other ones, into our client base who are looking for data aggregation and then some intelligence out of that data aggregation. There's a number of different opportunities. It goes the other way as well, where we're seeing our products coming into the DST solution set and what they're looking for to offer their clients and strengthening their process as well and their pitch as well.
That's helpful. 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. Yeah, I would just say that we did use an FX rate of 1.4 when we closed DST, and now it's 1.27. On that $400 million in annual revenue, you're talking about a 10% hit to that. There is some FX wins. Obviously, that could come back into the sales too. That would be the only difference.
Okay. No, that's helpful. Thanks.
Your next question comes to 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&L for the second, third, and expected in the fourth quarter. Could you just let us know what the cost savings in the quarters was?
Yeah. The cost savings in Q3 was about. If you compare it to where they were running at Q2, it's probably around $50 million. That's how we get the $200 million implemented synergies. At this point, we're not expecting a whole lot more in Q4. We're 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 them to be pretty similar to Q3.
Okay, thanks. In the fund admin business, Patrick, can you just remind us how much of that revenue is usually priced on prior quarter ending assets? How much is more or less of a lag than that? Thanks.
How much of it? I think it's pretty much all priced on assets under management.
Yeah, and it's-
Is it on a one quarter lag?
No.
No. Sorry, go ahead, Patrick.
Go ahead, Rahul. You probably got more details on it than I do.
Yeah. The vast majority is either quarterly or monthly in advance. If it's monthly in advance, it's the same month, just the first day. Quarterly in advance, we might be ahead by 60 or 90 days, depending on where we are.
I think the biggest customers are monthly. Right, Rahul?
That's right.
Yeah.
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. Bill, maybe if you could speak, I want to dig into DST a little bit. In terms of how you think about the business and where you're spending your time, you and your team. The healthcare business was a little bit better margin business. Maybe a lot better margin business. Want to get a sense of, is that business, in your view, a little bit more self-sufficient in terms of where you need to spend your time? Part B of the question is, where is most of the attrition coming from? Is it mostly on financial services? There's more overlap? To think about one, integrating those businesses, and then two, where you need to spend your time to run those businesses going forward.
Mike Sleightholme's done a great job, and we have good people in the healthcare business. Jonathan Boehm and Ellen Duffield and Mark Palmer are all very talented people. At the same time, those are big contracts with big opportunities. SS&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. We're excited about making sure that we get all the cross-sell and up-sell opportunities that we can. In general, the clients at DST Health Solutions are $multimillions to $tens of millions. It gets our focus.
We're excited about our opportunities. We continue to look for new talent to come help us. We're doing that as well. My time is spent wherever our biggest opportunities are across the spectrum of clients that we have and prospects that we have. We have huge clients in the U.K., 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. I think they see us accelerating the decision-making and the necessary items that you have to do to improve customer satisfaction. We're excited about that. We have a hot product in data analytics for the long-only business. It's very popular here in the U.S., and DST was planning on rolling it out in the first quarter of 2020.
We think it's better to roll it out the fourth quarter of 2018 to Europe. We've accelerated that. We've done a lot of things like that.
Okay. I guess maybe to 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 up to par? Is that where most of the attrition has come from, or has it been more evenly balanced between financial services and healthcare at DST?
Most of the cost savings has come from us paying a lot of attention to where they're spending money, primarily on infrastructure, right? Whether that's.
IT infrastructure, data centers, different vendors that we might be paying, and most of those go across the business.
Okay. I guess maybe just on the attrition side, has 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 than the healthcare, right?
Sure. Yeah.
More of the attrition's probably coming from there, but probably equally. 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 of cost reductions also.
Okay. That's helpful. Thank you.
Your next question comes from the line of Jackson Ader from J.P. Morgan. Your line is open.
Great. Thanks for taking my questions, guys. First one, Bill, when you guys were 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&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. I think in general, we're reasonably buttoned up on that and giving them confidence, rather than give them pause. 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. I'm a believer that in our business, like the names I rattled off, we got an awful lot of talent that came in through acquisitions.
Okay. A quick follow-up on the real estate business. There was an announcement the other day about 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?
We've got several thousand property managers. I'd 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. We did a release on that. We expect to have a lot more development and innovation in the roadmap there. As those businesses keep coming closer together, I think that both the solution set 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. What I wanted to understand here was, what actually changed between reporting the 2Q results when you gave the 3Q guide, and then just two 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? Maybe as a follow-up, are you perhaps setting yourself up for some unrealistic expectations in that your future guidance is going to be viewed increasingly conservatively?
Well, if you have to surprise you guys, you try to surprise you guys on the upside, right? 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 in the next quarter because we're superstitious, right? We think that if we push off revenue, it's going to go away. It's not going to come to us. We're very economic, very commercial about that. Secondly, right, it's 2018. You don't keep the books open past the 31st on December 31st at midnight. Man, that's it. Game shut. That's over, right? That's just the way it works, right? There's no smoothing or anything that you can do anymore. 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 has proven that we have had. I think that going forward, we will continue to execute. We're going to give what we think is fair guidance and not give either particularly conservative nor particularly ambitious. If you look at our earnings picture for Q4, I think it's $0.82-$0.86, and that's up from $0.79. Now $0.79 was up from $0.65, or $0.72, I guess, when we reported, but $0.65 was the guidance. We're going to have gone $0.72 versus $0.65, $0.79 versus $0.65, and then right now, guidance is $0.84, up from $0.71, I think. We're not accelerating, we're not decelerating. We're giving our best estimate.
Understood.
This is Patrick.
Yeah.
There are a couple things that happened in the quarter that you couldn't predict. One is, I think as Bill 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, where we have to now. I think we got more attrition faster than we expected at DST. The other thing, too, is when you're doing these synergy plans, you're really focusing on the big stuff. Where can you really make an impact? I think what we saw in the third quarter is a lot of the little spending come to a screeching halt, a lot of the discretionary stuff that they really don't need to spend to operate the business. Each one of those is not million-dollar items.
It might each be $5,000 or $10,000 or $50,000 each. There were a lot of them, and that discretionary area really contributed to the outperformance in Q3, which also wasn't something that could be easily predicted when we ended Q2.
That's helpful. 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.
Right.
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. Then we took an approach that the discretionary spending is gonna be pretty similar to Q3 in Q4, because it came down significantly really fast. Those are kind of the assumptions we're making at this point on Q4.
That's helpful. Then one-
We're also-
Yeah.
We're raising guidance from I mean, obviously, we're taking our earnings up from $0.79 in Q3 to $0.82-$0.86 or so midpoint of $0.84 in Q4. We got 260 million shares outstanding, we're raising our earnings up $0.05 in a quarter. I mean, that's still a lot of money.
Absolutely. 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 Sleightholme went out and saw some of their clients, we have big, sophisticated players that are looking for technology solutions from us. I think SS&C brings a really fresh approach to this with a lot of top technologists, I think so far it's been pretty well-received. You got to execute, you got to get wins. We have gotten a number of wins where when we first acquired, there were rumblings about them leaving. That hasn't happened, and we've gotten some multi-year re-signs. There's a lot of good stuff we're doing. 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.
Yeah. Hey. Again, I guess, just a couple of quick follow-ups. Didn't want you 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, and maybe also client retention, I think is something that you sometimes disclose.
AUA at the end of Q3 was $1.68 trillion.
Do you have the client retention at all, Andy?
Yeah. Client retention, we calculated the last 12 months was a little over 95%.
Okay. Great. Thanks. 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 flesh it out a little bit more in terms of magnitude? 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. 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.
Yeah. 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? Hopefully that's not a drag on organic revenue growth and stuff like that. It might mean that our revenue, which will be $30 million or so a quarter, sometimes $40 million a quarter, in these rebuild expenses will come out of the revenue. There's no margin on it anyway. It shouldn't be in there anyway. You got to make sure you do the accounting right. I can assure you in this area, it is very arcane.
Okay. No, that makes sense. Just want to clarify. Just lastly, real quick, on Eze, I think you said $70 million for the quarter. I don't think anybody asked about that, but I was at $75, 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 did I get the run rate incorrectly? Is that seasonality or something?
Yeah. I think we announced that the Eze annual run rate's about $280 million, which is $70 million 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 received six or seven inquiries for that business. Any update on where things stand in terms of understanding the value of the healthcare business? If you were to sell it, would intention be to recycle the proceeds into additional financial services acquisitions, or would you think about paying down debt?
Hey, that's a great question, Patrick. At the present, we are not contemplating a sale of the healthcare business. The secondary thing where what will we do with the proceeds is really mute at this point. Under any circumstances, when SS&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, win that acquisition. 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. We want to get DST completely bedded down. We want to start really cross-selling with Jeff and the people at Eze.
We want to get Leif and the Intralinks team in here and start to accelerate that business. We have plenty to do without chasing every potential opportunity. 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 your guys' and gals' support. We work hard for our shareholders, and we work hard actually for our debt holders. 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.