SS&C Technologies Holdings Inc (SSNC) 2010 Q2 法說會逐字稿

Good afternoon. My name is Katherine, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the SS&C Technologies 2010 second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. We will be taking questions in the order that we receive them. Please note that this conference is being recorded and will be made available on SS&C's website www.ssctech.com.

I would now like to turn the call over to William C. Stone, Chairman and Chief Operating Officer. Mr. Stone, you may begin your conference.

Thank you. For those that know me, I still remain the Chief Executive Officer too. Norm is the Chief Operating Officer. But, Katherine, thank you. And welcome, everybody in joining us for our Q2 2010 earnings call. I'm Bill Stone. I'm the Chairman and CEO of SS&C. Got that straight, I think. With me today are Norm Boulanger, our President and Chief Operating Officer, and Patrick Pedonti, our Chief Financial Officer.

Before we get started, we need to review the Safe Harbor statement. Various remarks we may make on this conference call about our future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may different materially from those indicated by these forward-looking statements as a result of various important factors. These are included in SS&C's filings with the Securities and Exchange Commission, in particular, the company's annual report on Form 10-K for the year ended December 31, 2009.

I'll start with a brief overview of the quarter, and then I'll turn it over to Norm who will take you through some of the details, and then Patrick will take us through the financials. After that, I will summarize some of our business highlights, then we'll open it up to questions.

Your company had a strong Q2. We reported adjusted revenue of $81.7 million, up from $67.3 million in the second quarter of 2009. Those revenues were up $14.4 million, or 21.5% on a year-over-year basis. Our results continue to underscore the strength of our business model. We continue to see momentum in our softwares and service business which is up significantly to $52.6 million, or a $10.8 million increase of 25.9%. We continue to be encouraged by the number of new deals and extensions of our services. Our license number was up $2.1 million, an increase of 52.5%.

SS&C's annual run rate basis of our recurring revenues, defined as the addition of maintenance and software enabled services revenue, was $70.4 million, an annual run rate of $281.6 million. This represents an increase of 21.7% from $57.9 million and $231.5 million run rate in the same period in 2009 and an increase of 4.8% from Q1 2010's $67.2 million and $268.8 million run rate. We believe this annual run rate basis, or ARRB, of our recurring revenue is a good indicator of visibility. And we will report it quarterly.

We are all -- as you know, we are a focused company, and our focus is to enhance service to our 4,500 clients. We aim to be, in the worldwide financial services industry, its leading provider of software and software enabled services. And that's what we're doing here. Through product and service development and acquisition, we are providing the industry with specific software and services. And we deliver these software and services via multiple deployment options, either inhouse in a perpetual or term basis, Saas, or BPO.

We continue to look at a number of interesting companies. But we did not pull the trigger in Q2. Acquiring financial services technology and business services, integrating those products and services with our SS&C suite of products and services, selling our products and Saas deployment options to their clients, and selling their products and services to our client base is in our DNA. We have done this 29 times. But our hallmark is our discipline. We are patient, we move quickly, and we buy right.

We recently welcomed back Phil Banas to SS&C. Phil has joined us as SS&C's Managing Director for Australia. Phil previously ran sales for North America, having joined the company through our acquisition of Financial Models Company in 1995 where he had most recently been managing director of European operations.

I'll now turn it over to Norm Boulanger to talk about our operations.

Thanks, Bill. Bill has already outlined some of the business highlights. And I would like to draw your attention to the current business environment and some operational accomplishments, customer wins and product enhancements we made in Q2.

Today's rapidly changing regulatory environment and increased investor demand for transparency puts additional pressure on our clients. Some examples include increased (inaudible) derivatives, managing impairments, understanding risk, independent and transparent reporting and ensuring administrators have institutionalized control of Saas (inaudible) level 2s, and confidentiality and security policies.

SS&C continues to assist our clients and demonstrate our capabilities to our prospects on how to meet these new demands of software, software as a service solution. The results show up in our financials and in our annual run rate basis over current revenues Bill spoke of earlier. We feel positive about the visibility and momentum in the business.

In Q2, we achieved consolidated EBITDA margins of 41.4%. We have developed a strong culture of high performance that empower our people to drive efficiencies continuously. A good example of our high-performance culture is our professional service organization whose primary mission is to profitably implement sole license and outsourcing. In Q2 (inaudible) professional service gross profit of 36.1%, and for the first half of the year at 36.9%.

In the second quarter, our business benefited from disciplined sales efforts and improved market conditions. Although our customers continue to be cautious in approving added expenses, as does SS&C, we offer mission critical products and services which are acceptable as well.

The notable wins in Q2 include [Lumex]. SS&C was selected to administer the Lumex managed account platform and by Fund Accounting and Fund Administration Services. Lumex's platform was originally commissioned by EIM Group who provided EIM clients with access to a full range of some of the best hedge funds in the industry through structure, design and fiduciary standards of structural independence, unbiased governance, safe keeping of assets, independent valuation, main data control and data transparency.

[Bombardier's] Pension Asset Management position signed an agreement to use SSC's (inaudible) platform which leverages our traded and model [loan suite] Pacer [indirect] derivatives via a software as a service solution.

Geneva-based [Oxiz] selected MarginMan to handle their trading of foreign exchange, precious metals and over-the-counter FX options. Bank of Nova Scotia, Canadian-based bank, committed to upgrades into the sequel-based version of CAMRA. Approximately half our CAMRA clients have now upgraded to our sequel version.

Arab Banking Corporation in Bahrain had been just a CAMRA client. In Q2, Arab Banking has invested in upgrades in modules for CAMRA as well as some middle office components to help their keep their workflow profit (inaudible).

We also signed one of Norway's largest financial services groups. They target high-network individuals in the regional markets to trade FX on a collateralized basis. They will use margin management to monitor these clients' positions from a risk management perspective in Oslo, [Bjork] and (inaudible).

In addition, a US provider of real estate investment services purchased our loan management module Borrowers Viewpoint, which I'll talk a little bit more about later. We released a new module to our loan management system in Q2. Borrowers viewpoint gives our customers' clients direct access to their loan information. We are pleased with the interest we received since its release.

Our (inaudible) division signed Newedge USA. And they will use our OATS Consolidator Solution to meet (inaudible) order audit trail system requirements.

And last, [Guardian] Capital, an investment management firm, services both institutional and private wealth clients. In Q2, they renewed an agreement with us, to extend the terms from two to five years. We were able to extend the use of sales in Recon and Pages as part of our [Pierce] platform for both their institutional and private wealth businesses.

This quarter resulted in the release of a number of new software products and services. Risk Analytics, which we released last quarter for insurance companies and asset managers, was offered in our outsourcing business in Q2. We integrated Risk Analytics into our fund administration business and now offer daily, monthly risk reporting for our hedge funds, fund to funds, private equity and managed account clients. You may have seen a press release on the launch of risk recording services a couple weeks ago, along with a new fund of funds client already on board. We are pleased with the attention this (inaudible) has received so far.

As I mentioned, LMS Borrowers Viewpoint is a comprehensive web solution that allows borrowers to access their loan information from a website. Information can be accessed, including loan, collateral and balance information, current billing information, payment history, transaction history, commission and track and service requests.

TradeThru Web Foreign Exchange Portal provides banks with a flexible web-based trade entering assessment processing solution that enables clients to have direct access to banks FX portal for execution of clients' FX transactions. By personally eliminating the need for manual intervention by a trader or middle and back office personnel, TradeThru's web FX solutions allows your bank not only substantial increased trading volume but also significantly reduces the costs of processing clients' FX transactions.

SKYLINE. In this quarter, we announced and released SKYLINE, our real estate property management solution. The release includes three key features including in our new web-based [clerk] request portal, parameter-driven risk-focused [stacking] plan and universal interface utility billing systems.

Tradeware Fixed Link. The Australian Security Investment Commission has introduced a mandatory daily report on vendor-based short positions by any seller on its registered markets. Market participants are required to deliver the reports via 650 messaging. We've updated our global broker neutral multi-asset fixed connectivity network called Fixed Link. And it is live with the Australian Security Investment Commission now for two institutional clients.

Last, our PEI Solutions, which is the leveraging of our acquisitions of TheNextRound, Geller Investment Partnership Services, along with our previous acquisition of Northport and our existing private equity outsourcing business, we now, as far as we know, are the only provider of both private equity, software and fund administration services in the industry. In June, we hosted a launch of our solutions for the private equity industry in New York City. And SS&C's PEI Solutions services more than 1,000 funds worldwide today.

We expect to continue to make investments in our products, infrastructure and people. Our people are very focused on execution in order to capitalize on our market opportunities.

With that, I'll turn it over to Patrick for the quarter's financial highlights.

Thanks, Norm. Results for Q2 in 2010 are adjusted revenues of $81.7 million and adjusted net income for the period of $16.2 million and adjusted diluted EPS of $0.22. Adjusted revenue, excluding one-time acquisition-related purchase accounting adjustments, was $81.7 million, an increase of $14.4 million, or 22% over Q2 2009. Excluding acquisition revenue and a positive impact to foreign currency, organic revenue increased 6.6% in the second quarter.

Acquisitions, including Maximis, TheNextRound, Tradeware and the Geller Gifts business contributed $8.6 million in the quarter. And foreign exchange positively impacted us by $1.4 million, or 2.1%. The business had strong growth in the fund services business provided to hedge funds, fund to funds and private equity funds and new license sales to institutional clients. We also had strong contributions from recent acquisitions.

Adjusted operating income for the second quarter was $32.4 million, an increase of $6.4 million or 25% over the second quarter of '09. Operating margins improved to 39.6% from 38.6% for Q2 2009 as cost controls, software-abled services, process improvement initiated into 2009 and favorable one-time improvement of health benefit claims resulted in improved margins.

Consolidated EBITDA in note 3 of the financial statement, as defined in our credit agreement, is used for calculating covenant compliance. Consolidated EBITDA for the quarter was $33.8 million. Adjusting consolidated EBITDA, excluding the adjustments for acquisitions, was 33.8%, or 41.4% of adjusted revenue. This is an improvement of $6.6 million compared to Q2 2009, or 24%. Net interest for the second quarter was $8.1 million. It includes $554,000 of non-cash amortized financing costs.

We booked a loss on the extinguishment of debt related to the reduction of $71.8 million of senior subnotes. It was $5.5 million and includes $4.2 million premium paid and $1.3 million of non-cash writeoffs of deferred financing fees.

We recorded a cash -- a GAAP tax provision in the quarter of $2 million, or 31.5% of pretax income. On a cash basis, we paid $10.9 million of taxes for the six months ended 2000 -- six months ended June 2010. Adjusted net income defined in note 4 was $16.2 million. And adjusted diluted EPS was $0.22. The adjusted net income excludes $8.7 million of amortization of intangible assets, $3.9 million of stock-based compensation, $5.5 million related to the subnote redemption, $228,000 of capital-based taxes and $372,000 of unusual and nonreoccurring gains, mostly foreign exchange gains, acquisition-related items and one-time extraordinary gains.

We ended the quarter with $88.9 million in cash and $315.4 million of debt for a net debt position of about $226 million. The IPO proceeds and the issuance of common stock was recorded in Q2 since the closing date of the IPO was in April. Net proceeds for the issuance of 9.8 million shares was $134.6 million.

On May 24th, we redeemed $71.8 million of the subnotes with a portion of the IPO proceed. The cash used for the redemption, including the 5.87% premium fee, was $76 million. This redemption will reduce quarterly interest by $2.1 million. We generated $23.4 million of operating cash flow in the six months ended June, a $2.5 million improvement, or 12% over the same period in '09. In the six months, we completed the acquisition of [GIPS] for $11.4 million. We used $2.2 million for capital expenditures, or 1.4% of revenue.

We expect CapEx to be slightly higher in the second half as we continue to invest in the business. We've paid down $9.8 million of current debt in addition to the subnote reduction. And we paid $10.9 million in taxes compared to $11.8 million in the same period 2009. Accounts receivable DSO was 49 days as of June, an improvement from 53 as of December '09 and 51 days as of June 2009. In financing activities, we recorded income tax benefit of $3.6 million related to the option exercise and had net cash flows related to stock option exercises of $4.2 million.

Our LTM EBITDA use for covenant compliance includes acquisitions, as if owned for the period, was $128.4 million as of June. Our EBITDA growth and lower debt position has reduced our leverage from approximately [6.8] at the end of 2005 to [2.2] as of June 30th, 2010. Our leverage covenant limits cash credit to $30 million. If we had received full credit for our cash position of $88.9 million, our leverage would be 1.7 times EBITDA.

Concerning our outlook for Q3 and the rest of the year, our annual run rate basis recurring revenues are about $282 million as of Q2. And based on the current run rate, we expect third quarter revenues to be about $82 million to $83 million, which represents a growth of 19% to 20%. EBITDA will be in the range of 40% to 40.5% of revenue. Adjusted net income in the range of $16.3 million to $16.8 million and fully diluted shares of 75.5 to 76 million shares. The increase in Q3 is mostly due to the IPO shares which we didn't have a full quarter's impact in Q2 since they were issued in April.

For the full year 2010, we expect revenues of $325 million to $329 million, EBITDA in the range of 40% to 41%, adjusted net income of $63 million to $64 million. And we expect outstanding fully diluted shares to increase by approximately $0.5 million in the fourth quarter compared to Q3.

I will now turn it over to Bill for final comment.

Thanks, Patrick. In closing, we're encouraged by our revenues and operating margins since going public on March 31st. For you, our shareholders, we treat your money as if it was ours. Regardless of market conditions, we're going to operate in a way which provides value to our shareholders, clients and employees. We will continue to automate processes internally, and we believe we can continue to maintain and improve operating margins. We are growing, and we are a public company. These facts require our management team to remain vigilant and focused on new customers and fulfilling the needs of current customers, looking outward for our growth profitability and prosperity.

We'll now open the lines up for questions.

(Operator Instructions) Our first question comes from the line of Tim Fox from Deutsche Bank.

Hi. Thanks. Good afternoon, and nice job in the quarter. My first question was regarding, maybe for Bill, just the overall environment. You mentioned that things are still a little cautious with some customers. But just wondering, in some of the regulatory changes that have been passed through the legislature and just the broader market in general, what are you seeing from a pipeline and sales closure perspective?

Well, we're seeing increased activity across all of our businesses. You start seeing things like the Australian Securities Investment Committee asking for new information on short positions. And that just really backs up what's happening in Washington, D.C. These people are cautious, but they're moving to get their businesses in line with reporting requirements that are going to come down the line with the Dodd-Frank bill. And so SS&C is getting prepared. We're dealing with a lot of different customers that are very interested. And we think that we'll benefit in some ways increasingly through Q3, Q4 and 2011.

And for Norm, if I could just ask for a little bit more color on it, you mentioned there's an upgrade cycle going on with CAMRA. I believe you said it was to the sequel version. And you mentioned I think about half of the base has upgraded. I was just wondering, over what period of time has that upgrade occurred? How long do you think it might take for that incremental base to upgrade? Is this an incremental opportunity on a run-rate basis as they upgrade to this new version?

Well, to answer your first question, it's been about four years or so, I think it's been, the first part of the cycle. A lot of things derived that decision. A lot of that's IT policy rather than specific need that a client's trying to solve. We've been pretty patient about allowing our customers to make those decisions for themselves. That's done two things. It's given them comfort. They are on an excellent version of the system as it is. And it's also allowed us to command premium prices for those upgrades. Those -- when they do upgrade, they will also pay additional maintenance on that upgrade (inaudible) to the original (inaudible). So it'll take some time because it's been our strategy to allow customers to make that decision when they choose to and not try to force that path. So my guess is that that cycle will be maybe another two, three years.

Got it. Great. And lastly, for Patrick, just on a cash flow, I believe growth was a little over 12% in the six months ended, and lagging a little bit on the -- at least the total revenue growth perspective. What are you thinking from a cash flow for the full year relative to either the absolute number or growth?

Well, we think on a full-year basis, if you look at just free cash flow, operating cash flow less CapEx, we'll be somewhere around, plus or minus $1 million, around $60 million. $60 million (inaudible).

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Sterling Auty from JPMorgan.

Hi, guys. This is Zach in here for Sterling. Just this one question from my side. So you had mentioned that -- to your knowledge, you're the only provider out there of both software and fund to admin product to the private equity industry. Can you talk to us about how much revenue you currently generate from the private equity community and how big of a revenue opportunity you think that is?

Well, I'll give the first shot at that, Zach. But I would say we do over a thousand funds in private equity. And my guess is that that's probably generating somewhere in the mid teens in millions. And I would say that probably our opportunity is maybe triple that number. Again, it will determine what happens. But more and more, larger and larger private equity firms are recognizing that investment accounting and reporting for their LPs is not necessarily the core competency that gets them their internal rates of return that they use in order to market themselves. So we see more and more of an opportunity to be a trusted service provider to that group of prospects.

Got it. And one more from my side for Pat. So given your update guidance, what should we think about that in terms of organic growth?

We think organic growth will be somewhere between 6% and 7% for the full year. It obviously depends on how FX turns out. But assuming it stays about where it is right now, we're mostly exposed to the Canadian dollar and a little bit to the British pound, but somewhere around 6% to 7%.

Okay. Thank you.

Thank you. Our next question comes from the line of Brian King from Credit Suisse.

Hi. This is Al [Magocki] for Brian King. How are you guys doing?

Good.

Good. I was wondering, would you mind just going through the certain corridors, US, Canada and Europe, just tell us what you're seeing there?

Sure. I mean, I think that in general, the financial services industry worldwide is in kind of a reawakening. And I think that that reawakening is allowing additional investments in technology that they have been waiting to make sure Armageddon didn't happen. And since it hasn't, I think that they've got a pent-up demand. And as they start deploying additional technology, what they really end up needing is the resources and software that that really represents the heart of that technology. So we're seeing a lot of activity across each one of those geographies. I would say that right now probably the US is the strongest, with maybe Europe second and Canada third.

Okay. That's great. And then just looking at the visibility to 2010. Normally, typically you guys have pretty good visibility. Has that changed at all through the course of the quarter? And what is it?

Well, we start off the quarter with, I think, in excess of 90% of knowing where we're going to come in. And I believe that that has remained constant. I also think that what we're trying to do with this annual run rate basis for our recurring revenues is to kind of give you guys a number that you could already see that our base number in Q2 of 2010 is already $281 million. And that doesn't include any professional services. It doesn't include licenses. So I think that it shows the robustness of our business and also kind of the wave that you get as you add these new clients and it continues to add. And as those clients grow you do more volume, and that type of stuff adds to the overall revenue environment. And if we can continue to add process improvements, we have very great opportunity to expand margins. And as we expand margins, and as we improve our processes, that's a very virtuous cycle that improves the customer satisfaction, which gives us more clients.

Right.

The other thing, too, is our recurring revenue as a percentage of total keeps increasing. Last year, it ran about 84.5% of total revenue, and the first quarter was 86.3% of total revenue. So that keeps increasing our visibility.

What was this quarter?

86.3%.

In Q2.

Q2.

And Q1 was?

Well, last year was about 84.5%.

And Q1?

86%.

So we're up another 300 basis points this time.

Yes.

And then just looking from a pricing perspective, has anything changed there? And how do you guys expect it sort of going forward?

We haven't seen much of a change in the pricing environment. I would say in the (inaudible) services business that it is competitive. But there is as many people trying to get out of the business as there are trying to get in the business. And so you have an industry that is really trying to define itself. SS&C has made a strategic decision to be in this business. And we're bringing all of our technological resources as well as our considerable manpower to bear in this business. And we think that we're able to deploy many less people on an account than our competitors. And that gives us a cost advantage. And it also gives us a quality advantage. Obviously, competers are -- they work 24/7, and they don't make too many errors. So we think we're in very good position in that business.

All right. Well, that's great. Thanks a lot, guys.

Thank you. Our next question comes from the line of Adam Frisch from Morgan Stanley.

Hi. This is Glenn Photo for Adam. Congratulations on another good quarter out of the gate. Nice jump in the organic growth. On the last earnings call, you talked about, in normal times, possibly getting to 8% to 15% organic growth. It's still a long way from here. I was just wondering if you can walk us through how you can see yourselves getting sort of, say, to the upper end of that range from where we are today. I mean, obviously, there's market improvement in the backdrop. But can you give me in a more detailed context on the walk up?

Well, again, organic revenue growth for us, when you have, as we just said, 86.3% in recurring revenue is that as our clients launch new funds and grow, and as we cross-sell into that client base, and as you start seeing more and more technology purchases happening in the second half of 2010 on into 2011, I think we're going to get some natural uplift in there. I think we have a very strong position. I think Norm mentioned four or five new products and modules that we have rolling out. We have the CAMRA sequel product as well as the Borrowers Viewpoint, the FX portal and a variety of other things that we've done. I think all of those things are going to continue to drive organic growth. And when SS&C doesn't do acquisitions, its management focuses on organic growth. And we think we have great management. And we think that also will drive organic growth.

And then there's some near-term margin pressures because of the acquisitions, which is well understood. Seems like you're ahead of schedule onramping these up to SS&C-type margins. I just wanted to see if you can confirm my assertion there. And also, what's the timing for getting these fully integrated and ramped?

Well, we -- there was some pressure even in the second quarter from some of the recent acquisitions we did in the fourth quarter of '09 and in the first quarter of '10 on our EBITDA margins. And those were offset a little bit by some gains we had on healthcare claims. We've experienced some good claim history so far this year, so we had a pickup there. That helped our margins in the quarter. So it's about half and half. But we think -- we look for these businesses to be at our margins within 12 to 18 months.

Thanks a lot.

Thank you. Our next question comes from the line of Terry Tillman from Raymond James.

Good afternoon, gentlemen. Thanks for taking my questions. I guess the first question, Bill or Norm, just relates to -- as it relates to the upside on the quarter on the revenue front and just the commentary about good momentum and visibility, could you tell us -- maybe give us a sense on the relative strength of extensions and add-on sales into the install base and them launching new funds versus the strength on the new customer business? Maybe a relative strength depiction.

I guess I'll characterize the answer to that is the majority of this is new business. Some of the (inaudible) business model that we have enjoyed in past years like (inaudible) increases, things of that nature, market value increases, they're a little more depressed this year. So the majority of our sales have been new customers, extensions of existing relationships, not so much new fund launches, not so much market value we're growing in interest this year. So I think, to me, that means we're focusing on our sales organization. And when that bears through, and the markets improve, we'll get the benefit of that additional lift.

We also have done a little bit more marketing. So we've done a number of campaigns with Bloomberg, Bloomberg Radio and Sirius and XM radio around the country. We have seen a marked pickup in the number of inbound inquiries, again in the fund administration business. We've also seen a pickup in regional banks that are interested in offering FX capabilities. And we have a number of those in the pipeline. We also believe that our Borrowers Viewpoint and our loan management process is getting some traction. And we just have a real focus on delivering on these products and services. And I think that's something that's giving us lift throughout our entire business.

Okay. And maybe, Bill, a followup just relates to -- there was a press release earlier in the quarter, if I'm not mistaken, around your impairment module as an extension of CAMRA. I thought maybe you had -- the idea was you had at least several hundred prospects. Any update on how much attach rate you've had so far? Or how do we think about that? I know you didn't talk about it in this press release. But how relevant is that? (Inaudible) double potentially in term of driving business?

I think that that's one of those things where -- as I talked early on in the call about what's going on in the regulatory environment, the ones people are worried are not the healthy investments. They're worried about the unhealthy investments. The unhealthy investments are exactly what our impairments module is all about. So we've been going out to our clients. We've sold it a few times to big level companies. And we think that there's a real opportunity for us. And it's ramping a little slower, I think, Terry, than I had hoped. But I think there's an opportunity -- and in general, they start letting a lot of this capital spending go in the fourth quarter in these big institutions, which is where that's targeted. And I think the big institutions will be pretty attracted to this in the fourth quarter of 2010.

Okay. And maybe just the last question, Patrick, relates to, you guys are well ahead of my software enabled services number. It looked like professional service and end maintenance were a little bit down sequentially. Was that as expected? Or is there anything there to think about from just a Q-over-Q perspective? Thanks, guys. And nice job.

Concerning maintenance revenues, we had a one-time pickup in Q1 that artificially increased it from our run rate. We're cautious on revenue recognition of what clients might not pay us for their maintenance. So in that situation, we got paid for an older invoice. And we picked up the whole period in Q1. So our Q2 right now is pretty much what our current run rate is running at. And our professional services, we -- our professional services provides support for license and outsourcing implementation. I think it's pretty much what we expected.

And it is worse than expected. You will get some fluctuation in that number based on the makeup of the number of customers outsourcing clients versus licensed client (inaudible). As we implement a client, finish that account, start a new one, you're going to get a little noise in that number. So we're not expecting that number to grow sequentially over the second quarter. It'll have some fluctuations in them.

Thank you. Our next question comes from the line of Tim Willie from Wells Fargo.

Thank you, good afternoon. Couple questions I had. One was around expenses, Patrick. I apologize if you hit this earlier. But the general administrative just were -- they were stronger than I was modeling, and it looks like actually a pretty nice bump up sequentially. Is that -- is there anything there we should think about in terms of a run rate from this point that was just maybe one time in the quarter?

I'm sorry. You're saying that the admin expenses were lower than your model?

No, more.

Were higher than our model.

I don't think we had anything special in there in the quarter. We do obviously have some higher admin costs as a result of having public company DNO insurance and some other costs related to being a public company. But there was nothing unusual in the quarter.

I want to say, Tim, that we didn't do four acquisitions, and we have not quite gone through that whole process.

Okay. But there wasn't like a client conference or anything that might have filtered it to some of the GNA expenses or anything like that that we should be aware of.

No.

Stuff like that. Okay. The second thing was, thinking about what sounds like an improved tone of business and the metrics you give around the annual recurring revenue run rate, is there anyway to sort of give us a feel for what may sort of being booked or contracted but is not yet filtered into the income statement relative to that $280 million, just a way to sort of think about that in terms of revenue that's yet to flow in? Any kind of sort of unofficial backlog, I guess, comment is what I'm looking for.

Well, I do think that the number -- and we could have put a chart in here for the last few years. But I think, Tim, that what I'd tell you, like all that $281.6 million is all (inaudible).

Yes, right.

That's all booked. But if you look at the change between the prior quarter and that quarter, you go from $267 million to $281 million, right? That's $14 million, right. If you went the quarter before that, it did the same thing. You'll see something very similar. And I would say that that's what you could use as a barometer of what we're booking upon a quarterly basis. Our business is not as simple as signing a contract. It's a contract value. There are many, many ways in which we get embellished revenues in our contracting process. And so we're very sensitive to what our clients want. We build contracts the way they want them. And a lot of times that gives us a lot of upside.

Okay. And the last question I have is just on the M&A front, with what sounds like, again, an improving tone of business. Are you seeing potential targets or potential -- I guess buyout candidates get more confident about their own business and decide to try to remain independent, and then conversely, are the buyers maybe getting more judicious about the quality of vendors if there is confidence from the people you would be targeted, that they may find out that their end market is not necessarily as receptive as they thought it would be in this sort of cyclical upswing around purchasing decisions. (Inaudible.)

Yes, I think the biggest thing on the acquisition front is that prices are firmer, right? So I think the people that are selling have confidence in their business. And more than that, they have a lot of investment bankers and others telling them what they're worth. And that's a big number, right? So you go from a high number, say 12 months ago being eight or nine times EBITDA. A high number now is 12 to 14 times EBITDA and up, right. So I think that's something, where you start getting into those numbers, SS&C is much more likely to focus on organic growth and not do as many acquisitions. Although there's still opportunities for us, it just needs to be done in a way where we really do our due diligence and understand how we're going to get the earnings we need out of that acquisition.

Do you sense selectivity at the end market level will eventually bring those expectations maybe back down to earth a little bit when people maybe find out that their business does not necessarily bounce back if customers are getting a little bit more careful about the quality of their vendors?

I think there's a bigger -- I think that's got some validity to it, Tim, but I think a bigger swing is that private equity is not in here yet. And when they come in, they firm prices even more. So I think that there's a wave of money on the sidelines. I think in corporate America, there's something like $2 trillion in cash on the balance sheets. Those are the people we compete against. I mean, you look at somebody like Cisco or somebody like that and how much money they've got on their balance sheet, $30 billion in cash, right? So if there's something that's attractive to people, they're willing to pay up. I think what SS&C has as a core strength is that we don't really covet anything because anything we really covet we'll just build ourselves, right? So it's not something where we're going to go out and pay 20, 25 times EBITDA because we need some piece of technology. We believe we're very good technologists as well. So we're not as quick to jump as some of our competitors and some others that want to get into our space. And I think that gives us a real balance when it comes to being able to have a lot of visibility in our earnings and also a lot of confidence in our ability to grow our revenues.

Great. Thanks for your time.

Thank you. Our next question comes from Ross MacMillan from Jefferies.

Thanks. Bill, now that the Dodd-Frank bill has been signed, can you just talk about specific deadlines for compliance within the bill that you and your customers are focused on? And in addition to that, just what specific product there is, do you think are the hot buttons? Thanks.

Well, I think the biggest thing, Ross, is the derivatives and how they're reporting on derivatives and the move to have clearinghouses and exchange trading derivatives. So I think those are the biggest things. I think that the bill gives guidance to have that done by the end of 2011. But we will see whether or not that is able to happen. I think that that's going to require an awful lot of change in organizations such as yours and other large investment banks in how you trade derivatives and how you use them. And this is going all the way down to agricultural commodities and how individual co-ops and farmers use them to hedge their own pricing revenue.

Okay. That's helpful. Again in your portfolio, do you believe that it will end up -- do you see basically an outsourcing wave because of that? Or do you really just see it's going to be more product driven demand rather than customers looking to kind of park those processes with someone like yourself?

I do think it's both. But I think, increasingly, that the ability to use third party providers such as SS&C, just like when you walk into your office, if you flick on the light, you flick on your computer, you expect the internet to be there. You use an outlet. You plug into an outlet, right. You're using third party services all the time. And in general, if you think about a Jefferies and an investment bank, your core competencies is the research that you're able to write, the ideas that you come up with, the ideas that your investment banks are able to pitch to companies such as us and others and then the ability for you to trade the securities and be able to underwrite them. When you say those four things, right, the research, the trading, the investment banking and the asset management, I don't think anyone said accounting or IT in those four things. So those don't tend to be core competencies. They tend to be things that are extremely necessary. But if there is a trusted partner that can deliver it to our organization, I think a lot of organizations are saying, take these headaches off my hands.

Makes sense. And then just on -- you talk a lot more about incremental fund administration services being added to your software. You mentioned private equity. And obviously, the GEARS platform seems to be in demand on a hosted basis. I'm just curious as to, when you think about your model, obviously the procuring revenue is increasing. But are we starting to see install base customers and maybe licensed products and [pay you] maintenance. Do you think there's going to be an accelerated transition towards the outsource model for any of those? Or do you think it's a transition that will continue to be gradual? I'm just curious as to that path.

I think what's happening -- and we see a pickup in demand to host, right. So they want us to host the application and then do what we call ASP plus services, which would be to handle all the data feeds, do some reconciliation and really give everybody a head start when the accountants and operations people come in in the morning. So I think the first transition is going to be hosted solutions, ASP services, data management, data transformation, data delivery. I think that's going to be the first wave. And then once that wave is fully engaged and management starts to come in and look at another wave, then I think that's when the securities accountants and securities operations people and other asset class people could be listed out or really consolidated into outsourcers.

So we're still in that first transition.

I think so. Our technology in general is highly scalable and highly useable. And so people that have been implementing it in the ways we've suggested, and then stayed up on our releases and take our training and those kinds of things, they have a good process. But increasingly, it's hard to hire the people and then also retain those people. And when you have turnover, it's an expensive process getting someone back up to speed.

Yes. And then just two followups for Patrick. Your pro service's gross margin is nicely ahead again. Looks like they're materially higher than where they were at this point last year. How should we think about the gross margins of professional services for the balance of the year?

We've been running generally mid to high 30% gross margins in professional services. And we think we'll continue around there.

Okay. And then just on that, you laid out, Patrick, helpfully, the FX impact on revenues. Was there anything material on the cost side this quarter? And then the second FX question would just be, if we stayed at the kind of prevailing rates, is there going to be much impact from FX on revenues in the third quarter? Thanks.

Sure. As far as expenses, the only extraordinary item we have in the quarter was a pickup on healthcare about a half a million dollars in the quarter. It's a one-time pickup from last year's claims. And then as far as FX is concerned, I think if they hang around where they are right now, especially the Canadian dollar, that then we'll have less impact or kind of flat in Q3 from FX on revenue.

Okay. Thank you. Good job.

Thanks.

I'm showing no more questions in the question queue. I would now like to hand the call back over to the speakers.

Thank you, Katherine. And thank everybody for being on this call. We look forward to talking to you in late October, early November. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now all disconnect. Everyone have a great day.