Everyone, thanks for joining us. I'm Michael Infante. I'm an equity analyst here covering fintech for Morgan Stanley. Very pleased to be joined by Brian Schell of SS&C. And thank you all for joining us today. So, Brian, I just wanted to start with the question that's often most topical as we speak with investors on the name, and that relates to organic growth. I think if I think about the medium-term organic outlook of 4%-8%, over the last several years, you've been operating a touch below that. I think most of the underlying business segments you can make the case for near to medium-term acceleration. How do you feel about your confidence level in being able to durably execute on that 4%-8%?
Great. Thank you. First of all, let me just say thank you for inviting us and hosting. This has been a terrific event and putting this all together. What brings confidence, I think? I think you started to hear some of that confidence starting to grow mid-year last year when we started to see a little bit of that dynamic shifting after maybe a little bit less uncertainty in the markets coming off of COVID. Maybe people had a sense of where the economy was going, interest rates, that as a positive backdrop. I think what you saw is you saw certainly fewer negatives, and you saw positive momentum of different events and different investments starting to show up as far as driving that organic revenue growth rate. You saw what we believe was going to be a flattening of some of the healthcare business.
We knew there was going to be some client losses, and that was kind of dragging it down. We started to see improvement in our GIDS business, right, from being slightly negative to now being slightly positive and approaching mid-single-digit type of growth rates as it was continuing to increase its share of wallet with its clients and some international expansion. You saw the organic growth efforts of some big client wins in 2023 that were starting to take effect in incremental AUM that was occurring. You saw portfolios starting to grow. You saw us winning more outsourcing agreements, winning more PE firms, more real estate, more of the alt assets. So, kind of across the board, we really saw a strengthening in each of those services that we offered. And then I'll cap it off with the largest growth rate of our business units was Intralinks, right?
Intralinks, early in the year, we saw that strong double-digit growth rate as we saw the backdrop of the M&A environment already improving.
Perfect. That's helpful. How should we think about what you've seen post-regulatory and geopolitical clarity of late? Have you seen any positive sentiment from your end customers, either from a specific vertical or customer type that is really more optimistic about the near-term environment?
Yeah, I would say it hasn't changed too much. I'll be honest. I'd say we'll probably see the most potential optimism around actually the horizontal meeting with Intralinks, right, because there is this view that maybe there is a more positive M&A environment. But I think some of that was, and whether that's the Trump administration being more lenient or looking at things, I don't know. I mean, that's probably more applicable to the really large, super large deals. And a lot of what we've been doing is obviously something that may not hit quite as much scrutiny as far as some of those higher profile cases. But there's been a lot of work being done behind the scenes that may not have printed M&A, but still a lot of work being done. I would say the interest rate environment certainly helped that.
Again, I mentioned that earlier with the administration. So I see it positive overall, but not as much of a change because I think it's more of a sentiment more broadly. Regardless of the industries that win and lose, I think we're supporting them overall.
Helpful. Maybe from a product perspective, it'd be great to hear the early feedback from your customers on the Genesis platform and some of the early cross-sell opportunities you're seeing there. I think one of the things that's underappreciated about SS&C is not only your relative position in the fund admin space, but just the breadth of capabilities that you can bring across front, middle, and back office. So we'd be curious to hear how you sort of re-incentivize the sales force to drive adoption of that.
Yeah, so that's a really great example of why SS&C has the breadth and depth of offerings that we have because each of our businesses do complement each other. So we're obviously very much in a service business. You talked about the fund administration. We started off, we talked about our global and investor distribution services and servicing those clients. But behind all that is the software that's helping support either that fund administration or, in this particular case with Genesis, is we get client feedback across the board from all the clients that we serve. And we're able to incorporate that feedback into the product development itself. And so that came from as a result of people looking at us and say, "Hey, this was from a wealth manager, asset manager, hybrid conversations." It would be great if, right? So those are the best conversations to have with clients.
And then you feed back that loop into your product development and say, "Okay, this is what you want. Here's what we heard. This is what we're going to deliver." So those incremental capabilities make us stand out, again, gathering that research and that feedback from so many different parties, enabling a higher likelihood of success of adoption of a new software rollout or an enhancement.
Helpful. How about just with the inflection we've seen in private credit over the last couple of years and effectively over the last 12 months with the acceleration? What have you seen or what have you done from a product perspective to position SS&C to be a beneficiary there, I think, of things like Black Diamond and what you're doing in terms of alternative asset reporting? But any highlights here that you would call out?
Yeah, I would say that one of those examples would be trust services adding with the Black Diamond. And as we think about a natural evolution of an RIA and their clients, and as their clients grow in wealth or success, and they have some of those in that portfolio, and they want to make sure they retain them, what those clients are going to demand is like, "Hey, I want to think about setting up trust now for family members or for some estate planning." And to be able to have that as part of the service with Black Diamond was an idea that evolved out of there. So having that trust suite, I was in a client meeting the other day where it was involving our GIDS middle office, Black Diamond RIA front end, and then some other distribution services that we have.
And they came to us and said, "You're like the only person we know who can actually help us with all of this in one location without having to try to do the various integrations." So that product development feedback loop, like I mentioned earlier, is so important. We'll probably have over $500 million in R&D effort this year. And what we've done with our technology group as we've continued to try and look at our go-to-market integration as well as our technology integration, how do we pull the resources together to make sure we deploy that software development capability and what we think is going to be the highest ROI? And we think that's largely informed by client feedback and what they're looking for in the services and products.
Perfect. Maybe just progressing to the healthcare business. I know this has been a challenge over the last, call it, 12 to 18 months. I think Bill has been of the view that we would see that business sort of stabilize and get back to growth. What caused the drivers of some of the sequential acceleration that we saw in 3Q? What gives you the confidence that that business is close to or at a trough?
Yep, that's a very timely and appropriate question. There were a couple of contracts that we thought were going to hit in Q3 that was going to kind of change that trajectory. So we didn't think it was going to quite hit the way that it did. And overall, there were a couple of others that we thought were going to occur that didn't. So I'd say that trough we thought was going to occur Q3, we think it's now Q4. And we have a high degree of confidence around that being Q4 now. So it just didn't happen quite as quickly as we had originally thought. Like I said, there were some assumptions we made.
Some of it was a little bit of licensing revenue that at the end of the day, sometimes signing those contracts is a little bit like pushing a string, but we thought we had decent visibility. So we were off a little bit, but contract in hand, good to move forward, and so we think with what we see in the pipeline going forward with the healthcare, we see that, I would say, that growth rate that's been stabilized as far as the year over year and the client losses that we had and then starting to backfill that bucket, we feel good about for 2025.
One of the more exciting components about the healthcare business is DomaniRx. Maybe just unpack what you're doing there, what the opportunity set looks like, and how you think about the potential for that business to be a real growth driver in the healthcare business specifically.
Sure. I'd say that's probably the exciting asset within this line of business. It's arguably the only or the most or the newest, I'll call it technology platform deployment at scale in the industry in a long time. It's been tested. It's probably executed beyond our expectations. The DomaniRx technology platform essentially is a claims adjudication platform with the pharmacies within the PBM network and the insurance companies and obviously the clients in that process receiving the prescriptions. In the process and making sure it's protected from cyber, as we learned, is incredibly important with stability of systems. This was done in conjunction with Humana and Elevance. We own 80%. They're in for each for 10%, roughly.
And so getting their input and building this platform to meet the needs that them as participants will need both from either a commercial standpoint, a discount card program, from Medicaid, Medicare, all of them can be very different. And how do we make sure we have the capability of this platform to meet their needs? And what we think the relevance of this is that it's very robust. It's very low cost. So we think it's far superior in delivering and processing the prescriptions and the claims processing than probably anybody can do in-house. And honestly, I think the long-term potential play for that is this could be us as independent could be a claims processing platform for the three largest health insurance players right now.
Helpful. Maybe progressing to some of your earlier commentary on M&A. The Intralinks business has been growing well north of the corporate average for quite some time. I think if you look at the level of announced M&A relative to U.S. nominal GDP, it's been running well below historical levels for quite some time. There's the view that we're not only going to get an inflection in 2025, but that inflection is going to prove durable in 2026 and 2027. How do you sort of think about the capacity of that business to continue to grow in this mid- to high-teens range over the next several years?
Yeah, we feel, again, we feel really good about this business. There was a lot of behind-the-scenes work done on the virtual data room to support a lot of, I'll call it, M&A activity that didn't print. And based on more of this consumption-based model, the complexity, the length of time basically drives the ticket price of a transaction more broadly. And I like this because it has a vertical, excuse me, a horizontal nature to it. It does have a little bit more kind of market share within the financial services market. But again, it goes across any industry as far as in the M&A environment. So we can benefit from that.
And so we think it's the services that we continue to add, not just be, "Hey, you can just organize your data and here's, you get it and it's secure," is offering AI services as part of being able to digest various CIMs, looking for different keywords. We think it's great at the ability to redact certain sensitive items early on in the diligence process, say, round one, that you may not be willing to disclose certain things. Take a document and look for key search terms or certain non-conforming items that are like, "Ooh, that could be a risk element that we're not willing to look at or we should be made aware of." So a lot of technology tools that really can help save time and help pinpoint some issues that you may not be able to have seen before.
So we're continuing to see new services and rollout to help those clients. The other part of Intralinks that people don't know as much about or aren't as cognizant of, it also serves as the investor portal for our fund administration business. And as that business has continued to grow, the subscription business within Intralinks has been continuing to grow. It's about 25% of the overall business. So we're seeing that grow as an investor portal and more and more people use it. And as more and more of those funds become more and more complex, the more necessary a sophisticated portal is.
Helpful. One of the assets that you've acquired in the last couple of years is Blue Prism. You have been pretty prescriptive just in terms of the level of savings that you're able to generate per digital worker deployed. I think one of the things that's been interesting is that asset was growing, was growing at a really healthy rate at the time at which you acquired it. That growth rate has now stepped a little bit below 10%. How do you think about not only the level of expense savings that you're able to generate, but also the capacity to sort of incentivize the sales force to really re-accelerate the growth profile?
Yeah, I would say that we do think it is. There's probably been a little bit of an industry slowdown, so it probably hasn't just been us, and again, that's not meant to make an excuse or anything. I think we have seen a little bit of that pause, a little bit, but we're still seeing growth, and we had a lot of early, early success that, like I said, but we're still seeing more sales, just not as high of a rate. I'd say where we are excited about our internal use, we continue to see the next level of deployment and sophistication. Just like anything, you have the immediate low-hanging fruit of this kind of no-brainer reconciliation process, put a digital worker on it, completed, and then we're starting to look at more and more activities that it can deploy and become effective at.
And now we're in a, instead of a, call it a headcount replacement, is what it did a lot of because of the repetitive nature of a lot of those tasks. We're seeing a capacity building of it. And so you're seeing us able to add more business. And many firms that we're servicing add more and more revenues or accounts or whatever the metric is that need to be serviced without adding an additional resource because of the digital worker being able to have more and more capacity. So that's in a kind of efficiency on incremental revenue that we would expect to continue to see over time. And like I said, I think that what we'll see is we are within Blue Prism revenue sales themselves. We're continuing to refine our go-to-market strategy. We're launching next generation of the software. It'd be more desktop-based.
Continue to enhance the overall enterprise model itself.
Perfect. Maybe just on the GIDS business, great to see that business re-accelerate to mid-single digit growth in the most recent quarter. I think one of the things that we've been monitoring is if you look at the commentary from some of the asset managers and brokers about the potential for tokenization and what that might mean in terms of bringing down the unit cost of transfer agency. What have you all done to sort of position SS&C to continue to grow at this low to mid-single digit type growth rate in the GIDS business?
We know that the, I'll call it, the revenue TAM of that business is under pressure, and so we've kind of prepared. We know that if we're going to succeed in this business, it's still a necessary business. We still like the cash flow. We still think the clients are a tremendous source of revenues across our spectrum here of what we do have, and offering them some of the additional services that they might benefit from is the implementation of the digital worker has helped enable us, again, to that cost because there's increasing cost pressure everywhere, right, and not just in this business, the 40 Act funds that we think about it, but in the alt space, financial services, healthcare.
Again, I think we're going to see. I didn't mention that earlier, but I also see that as a positive trend for our business is, I would say, regardless of any administration, they're going to want to try and help push healthcare costs down. So there's likely to be pressure on all parts of the business, prescription and the insurance providers, anybody in between, they're going to be looking to do that. And hopefully we can help provide a mechanism to do that. But on the GIDS business itself, what we've been able to do successfully is grow more so internationally. There's been some really nice international opportunities in Australia and in Europe. We've been able to gather, I would say, more projects that create a larger share of wallet from our clients that help continue to move their technology forward and help them service their clients better.
So we're doing that more and more. And I think we can take those learnings and those professional services and then deploy them to other clients as well. So it's been a really nice, I'll say, expansion of our services both domestically and particularly internationally.
Helpful. One of the key metrics that I tend to look at to determine whether or not a business is sort of being successful at sort of exerting pricing power is churn, right? And if you look at the churn metrics that you all have been producing and how retention continues to sort of sequentially uplift while you're continuing to take price, I think it's evidence of the fact that SS&C is still pretty dominant in the space. With that said, there's obviously been a cohort of businesses that came public around the 2021 IPO period that compete with you across certain segments. And there have also been some European competitors that are incrementally more interested in sort of penetrating the U.S. market and probably getting creative with price to do that.
Maybe just a state of the union on what you've seen competitively over the last, call it, 12 months and whether or not anything has sort of changed from a rate of change perspective.
I would say that certainly we're seeing names. I wouldn't say that I'm seeing anything that says our rate of loss has changed. I think it's still very strong. I think where we are seeing the competitors have been at some of the smaller, I would say, potential clients that we have premium pricing because of what we do, the complexity of what we're able to provide or to simplify to our clients. And where we don't lose very often is the more complex clients with multiple asset class offerings, whether it be a traditional long-only hedge fund, whether it could be a real estate portfolio, whether it's a PE firm, whether it's a different insurance company capability, whether it be real estate, whether it be private credit. And when you start mixing all those together in any one firm, we tend to win those.
If I look at where our incremental revenue in that business has come from, it's come from those clients. Not only are we winning those, we're keeping those and we're actually generating more revenue because they're seeing the value in those services. That's what tells me we're on the right track. Yes, we do have competitors, but being able to take it to the next level and service that level of complexity, that's a completely different ballgame that I think we're continuing to win, we continue to reinvest in, listen to our clients, and hopefully continue to service them well.
Helpful. Maybe just on the margin front, I think if you sort of listen to Bill over the years and you sort of think about the trade-off between growth and profitability, he's often expressed this view that there is a level of diminishing marginal returns as margins sort of proceed to the low 40s type range. How do you sort of think about your willingness to reinvest and push margins beyond 40%, or is it more of a function of driving higher levels of organic growth?
Yeah, I think it's more about driving the higher levels of organic growth. I think that when you look at that is the, I'll call it north of 42, I think is the number you cited there. And sometimes you take a step back and say, is that a sign of me not investing enough? And am I going to feel the pain of that in two or three years because I didn't do enough product development or product enhancement to get that revenue growth? I think what we've said and the way I think about this is all else being equal, we're going to look to continue to have that margin on incremental revenue higher than where we are today, call it that 45%-55% range. And that will potentially vary based on if there's an opportunity to significantly increase the revenue growth.
And if I need to, if I can get that revenue growth with an opportunity and if my margin actually may be slightly below that for the first couple of years, but I see a path, as Bill has demonstrated this company, to take operations that might be inefficient and make it more efficient over time with scale and the platform, the technology, and the people, you could see that grow back up into that, call it that 40% range. So I could see that a little bit of pressure on that in any short term in any one particular quarter or shorter timeframe driving that incremental revenue growth at a slightly lower margin because we think it does produce that outsized organic growth.
Helpful. Continuing on this M&A theme, talk to us about the strategic rationale of the Battea acquisition, the type of financial performance that that business is putting up. I know it obviously is running at some pretty high incremental margins relative to the existing opportunity there. So what interested you there and sort of how do you think about what you can do to drive higher levels of growth in that business?
I think this transaction is reflective of the point you made earlier about probably a more robust M&A environment. So I think this asset came to market with PE firms generally wanting to return some cash, return some capital to its LPs. Valuations are coming down maybe to enable that from maybe where they held earlier, at least what they were thinking. Going to strategic buyers makes complete sense. This was in our wheelhouse within our fund administration space. This is a service offering where we're going to go to market as you almost have to opt out because we are going to do this for you.
So the strategic rationale was very strong because there was some client overlap already between the two, but we were very familiar with each other because we were housing a lot of the data that enabled basically the IP and this team and the process to go be incredibly successful and capture its market share in security claims, litigation, recovery, take a piece of that for their own revenue and distribute back to the clients. So I do believe, and I've been a lot of my job a lot of times is sometimes to be the adult in the room around expectations of models on a spreadsheet. I think you can generally rely on cost synergies and what needs to happen and take out. We didn't need that in this case. We didn't need the revenue synergies because it was doing so well. We believed in it.
It had a nice growth trajectory. Here, I do believe we're going to see strong revenue synergies, call it in that one- to two-year timeframe only because it takes a while for securities class action claims to come to fruition because of the coverage and the natural, basically the two, the clients are essentially the same as far as who we serve in that industry. So very excited about it. Fits very naturally and culturally. It's just a really good fit.
Helpful. Just given the perspective that you have in private market valuations, I'd be curious to get your thoughts on how you're thinking about capital allocation on a go-forward basis. What are you seeing in terms of private market valuations? And if there is an asset that is particularly interesting, any particular vertical and/or geography that you think would tick the box?
Yeah, I would say that we're continuously seeing that pressure come down, or pressure is the right word, but we'll see it come down to more of where, I'll call it SS&C would think that it can add shareholder value or have a higher likelihood of adding shareholder value. So I think Bill and the leadership team have always had strong price discipline around M&A. I think it's been a key fundamental part of it, as well as strong operational execution to drive the margins up. So we continue to see that. I would say the existing verticals that we have today, we're open to anywhere that's going to help enhance a potential product or service offering gap or enhancement that we can get more revenue incrementally or continue to drive up the retention.
Perfect. I think we're just about out of time. Thank you all for joining us.
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Yep. Great. All right. Welcome back, everybody. Happy to be here with the management team of Western Digital, CFO Wissam Jabre and head of IR, Peter Andrew. Peter, I think you wanted to read the safe harbor and then we'll jump right in.
Yep. Thanks, Joe, and thanks for having us today. Before we jump into it, I've got to read the safe harbor statement here. Today, we will be making forward-looking statements based on management's current assumptions and expectations, including with respect to the separation of our businesses, our product portfolio, business plans and performance, market trends and dynamics, and future financial results. These forward-looking statements are subject to risks and uncertainties. Please refer to our most recent financial report on Form 10-K and/or other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also be making references to non-GAAP financials, and a reconciliation of our GAAP to our non-GAAP results can be found on our website. So back to you, Joe.
Great. Well, thank you. And thanks, guys, for being here. I think I was disappointed to hear you have one more presentation after this, but very close to the end of the combined entity of Western Digital before the separation coming in the first quarter. So maybe if you could start with just an update on that process. And the Form 10 is out. Seems like you're making progress towards kind of doing this at some point in Q1. But just generally, where are you in the process of separating out the Western Digital hard drive business and the SanDisk memory business?
Of course. And thanks, Joe. Happy to be here. So on the separation process, we did file our Form 10 publicly a couple of weeks ago. And this is the form that is an SEC form that basically details and provides an overview and details on the transaction, proposed transaction. So in it, you'll find the details on the capital structure of the Flash business, SanDisk, in addition to some additional information regarding the transaction itself. And so that's sort of one of the key milestones for us. In addition, we also launched early last week a financing of around $2 billion of Term Loan B for SanDisk. That's also been in the public domain.
When we look at what went into the Form 10 with respect to the capital structure of SanDisk, the idea is to start on day one, the company with $2 billion of debt and $1 billion of cash with a net debt of around $1 billion, and if you sort of look at the overall context of where Western Digital balance sheet or debt levels were at the end of September, you sort of take out the $2 billion, then you could get closely to where a hard drive or the remaining portion of Western Digital would start around that sort of on the same date of the first day of the spin from a debt level. In addition, the transaction will have hard drive or Western Digital will retain around 19.9% retained stake in the spun-out entity.
The idea for this retained stake is for it to be liquidated within 12 months post-spin with the intention to continue to delever on the hard drive side. That can be done if it's done within the 12 month post-spin. That can be done tax-free while preserving the sort of tax-free manner of the spin. If you sort of fast forward 12 months from the date of the spin, we aim to have two public companies with stronger balance sheets and ideally best-in-class balance sheets. In parallel, we announced earlier in the quarter that we've started sort of operating in a soft spin phase, which is really running internally the company as if it's more or less two companies.
And so what this allows us to do is we can test the processes and the systems and the various sort of entities and changes we put in place to sort of make sure that we can operate as two separate companies. And the purpose is to give us enough conviction that by the end of the quarter, we can close the books also as two separate companies. Even though for calendar Q4, we plan to close the books as Western Digital and sort of we will do internally the dry run on two separate companies, but in reality, for the outside world, we will be reporting one company.
And then once this is done, we would be starting the spin process, which we would start with the investor days and where we would be detailing more the long-term models for each of the businesses, as well as the capital allocation framework and other types of information that the investment community would be interested in leading to the actual spin of the business. So making progress, being on track, and we still have a few more things to do, but so far, we're happy with the progress.
Is there anything that could delay that timing that you can see as a potential risk?
I mean, from where we stand today, I don't see anything that has the potential to delay the process.
Just because I get the question, I mean, your resolve to do this is very strong. There's no question.
There's no questions around that, and throughout the whole process, since the October 30th, 2023, when we announced the plan to spin and separate the Flash business, we've been providing updates and basically telling the investment community what we plan to do and delivering on what we say, and the latest two milestones obviously are the ones that I just mentioned, which are filing the Form 10 and the financing process that is supposed to conclude later this week.
The analyst days would presumably come after the quarter is reported.
That's correct, and so we would report the quarter as one company and then would have analyst days and execute on the final sort of stages. The process itself is probably a few weeks, and so we will be executing as we need to make sure we get to that.
I mean, the annoying thing is I'm the one that has to initiate coverage, and our hard drive team takes over Western Digital, which we've already covered, because SanDisk is the new entity. But that's my problem.
You still have your old SanDisk model.
Yeah, we'll figure it out. And I was excited to see you resurrect the SanDisk name as well around this. Anything change about how you report the December quarter, or is that just kind of, I guess, the data that's in the Form 10, the splits, we'll have that data in December? Anything else that's different?
We don't anticipate any changes. I mean, we're still reporting the December quarter as one company, and so yeah, I don't anticipate any changes for December quarter.
Okay, great.
So maybe if we could talk about some of the businesses, can you give us a sense of the NAND market? I think you guys had talked about more of like a pause in terms of the prices going up, and you're not seeing it as kind of an end-of-cycle weakness, but I know there's a lot of anxiety about what's happening in the NAND market. Just wondering if you guys could give us the lay of the land there.
Yeah, so we did talk about sort of a mid-cycle pause, if you like, in the.