SS&C Technologies Holdings Inc (SSNC) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SS&C Technologies second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Justine Stone. You may begin.

Hello, everyone. Welcome and thank you for joining us for our second-quarter 2016 earnings call. I am Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Norm Boulanger, President and Chief Operating Officer; Rahul Kanwar, Senior Vice President and Managing Director of Alternative Assets; and Patrick Pedonti, Chief Financial Officer.

Before we get started, we need to review the Safe Harbor Statement. Please note that various statements 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 Provision 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, July 27, 2016. 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 related in the investor relations section of our website at www.ssctech.com.

I will now turn the call over to Bill.

Thanks, Justine. SS&C reported record adjusted revenues of $384.4 million for the second quarter and adjusted diluted earnings per share of $0.39. Our sales came in better than expected and our GAAP R&D spend at $40.8 million, which is 11% of our GAAP total revenue and 31.77% of our software and software related revenues, pushed out a range of new releases to our client base.

We are also constantly working to automate and improve our outsourcing business. We have client service centers in North America, Europe, and India, each month 350 enhancements are implemented across our front administration platform. Significant improvements to reconciliation GoWire and valuations are our top focus and we have seen results. For example, now 97% of all reconciliations are automated by the system GoRec, up 40% since 2012. Total wire transfers, 19,000 per month, are 80% automated. The cumulative impact of these product enhancements every month becomes significant year over year and is a huge competitive advantage.

We have now owned Citi Alternative Investor Services business for a quarter and we are impressed and excited about the opportunities which Rahul will discuss later. We celebrated our one-year anniversary of the advent acquisition on July 8. The cost savings have come in quicker than our initial expectations and our cross sales efforts continue to produce large opportunity.

Primatics pipeline is building and we expect the new fad to be standard current expected credit loss, or CECL, will drive demand over the next couple of years. Primatics evolved as a premier full-service solution, addressing this new regulation. SS&C continues to add talent, broadening our perspective and deepening our expertise. On our last earnings call, we introduced Stephanie Miller, Ron Tannenbaum, Mike Sleightholme, Joe Palolaro, and Adam Hall.

This past quarter, we expanded our Management Team further. Rainer Fuchsluger joined SS&C as Managing Director in Hong Kong responsible for developing and executing an Asian business strategy. Will Entwistle will join SS&C in New York and brings nearly two decades of experience driving rapid sales growth. As Senior Vice President of Institutional Investment Management Mr. Entwistle will help drive growth in North America.

Now I'll turn it over to Norm.

Thanks, Bill. SS&C was able to secure several key wins in the operational goals for the quarter. The integration of our most recent acquisitions continues to progress. As Bill mentioned, we've put to work about $40 million in R&D in Q2. This contributed to significant product upgrades for our clients.

Last month, we announced a major new release of our institutional accounting platform, CAMRA. We invested over 50,000 hours bring this new release to market. This is a significant increase for our advance in our technical infrastructure and one of the most comprehensive and functionally rich new releases of CAMRA ever. We also released SS&C Global Gateway, a SaaS delivery platform that makes comprehensive investment, reporting and analytics simple through dynamic dashboards, which are easily customized. This cloud-based solution is designed for insurance companies and other buy side asset managers. It gives our clients the most sophisticated analytics and superior functionality.

Now I'd like to review some key wins for Q2. We sold SS&C Direct Services, our institutional outsourcing service, to both the commercial REIT and business development company subsidiaries of a top global asset manager. Multi-line property and casualty insurers chose SS&C CAMRA and MAXIMUS solutions as their accounting platform.

A $5 billion institutional asset manager chose to outsource their performance measurement and reporting functions with SS&C. A current PORTIA client chose to outsource their middle and back office with SS&C to support their 20% growth rate. A financial advisory firm looking to automate more of their back office processes upgraded to Hosted CAMRA and our new Global Gateway solution.

A large private bank in Singapore chose to replace their existing vendor with SS&C MarginMan because of our large local presence and superior margin and techniques. Three multi-hundred million dollar registered investment advisers chose SS&C's Black Diamond over our competitor. Common themes were our flexibility, quick delivery, and strong partnerships.

$10 billion asset manager chose our products including Geneva, Moxy and Tradex to be the core accounting platform to service them and consolidate in their five business units. And last, a $1.4 billion hedge fund of a middle-market investment bank chose a combination of Geneva and SS&C's reconciliation tool. This was a strong joint sales effort between Advent and the SS&C institutional sales teams.

I will now turn it over to Rahul to discuss alternatives.

Thanks, Norm. Revenue for SS&C's alternative business grew 45.7% for second quarter 2016 compared to the same quarter in 2015. Citi Alternative Investment Services integration is progressing nicely. We are building pipeline in these groups, remain very focused on customers, and have performed several upgrades to technology platforms. Systems now run faster, have more functionality, and are more reliable.

Staff morale is high and on-going client feedback is positive. We're also seeing demand from these customers for other products and services in the SS&C offering. The technology, real estate, and vendor integration processes are well underway and are on target. As Bill and Norm mentioned, we continue to focus on innovation and rolling out new products and services. This quarter, we added solvency to UK Crown Dependencies and Overseas Territories, or CDOT, and Common Reporting Standards, or CRS, in our regulatory business.

We significantly increased the automated processing of Asian notices in our bank loan servicing business, which is a competitive differentiator as we continue to market our services to funds in this asset class. We also continued to enhance our web and mobile platforms and added collateral processing optimization and wire processing on mobile devices this quarter.

Our service offering, which combines the talent and expertise of our professionals with class-leading technology and innovation that has helped us build a comprehensive offering attractive to all types of investment organizations. Some sales highlights for Q2 include: an investment firm launching a private equity fund chose SS&C as their fund administrator, leveraging us for all aspects of their back office. A $1 billion hedge fund converted some of their funds to SS&C fund administration from a competitor.

SS&C won the fund administration business from a multi-strategy start-up fund who decided our strong technology and engaged Management Team as key reasons for the win. A hedge fund backed reinsurance company chose SS&C for fund administration and will leverage our transfer agency and insurance expertise.

A $1.4 billion AUA real estate private equity fund chose SS&C for their new fund launch. A $1 billion private equity fund, a client of the former Citi Alternative Investment Services unit chose SS&C for their $750 million new fund. A family office of one of the wealthiest families in United States chose SS&C's private capital co-sourced services for their middle and back office needs.

I will now turn it over to Patrick.

Thanks, Rahul. When we reported for Q2 2016, we reported GAAP revenue of $373.1 million, GAAP net income of $28.2 million and GAAP EPS of $0.14. Adjusted revenue was $384.4 million excluding the adjustment for acquired deferred revenue for the Advent, Varden and Primatic acquisitions.

We had a strong quarter. Adjusted revenue was up 80.4%, adjusted operating income increased 64.3% and adjusted EPS was $0.39, an 18.2% increase over 2015. So adjusted revenue increased $171.3 million, or 80.4%, over Q2 of 2015. Advent contributed $111.7 million of adjusted revenue in the quarter. The Citi Fund Administration acquisition contributed $53.5 million and the two other acquisitions, including Varden and Primatics, contributed combined $15.2 million for the quarter.

Foreign exchange had a negative impact of about $1.9 million or 0.9% in the quarter. And thus, organic growth on a cost and currency basis was down 3.4% in the quarter. On a pro forma basis, comparing Advent, Primatics and Varden combined to 2015. We had revenue growth of 6.4%. And the Citi Fund Administration business exceeded our expectation for the quarter. Adjusted operating income was $140.5 million, an increase of $55 million or 64.3% for the second quarter.

Operating margins decreased to 36.6% from 40.1% of revenue in Q2 2015. Operating margins were impacted by the Citi Fund Administration business which had 22% operating margins in the quarter. Advent had 47% operating margins in the quarter and we have implemented annual run rate synergies of approximately $43 million at Advent. Consolidated EBITDA as defined in note 3 was $147.5 million or 38.4% of adjusted revenue, an increase of 65% over the prior year.

Net interest expense was $32.8 million and includes $2.7 million of non-cash amortized financing costs in OID. The average interest rate in the quarter, including our bonds, was 4.4%. We recorded a GAAP tax provision of $5 billion or 15% of pretax income. We expect the GAAP effective tax rate for the full year to be between 19% and 21%. And we continue to project the tax rate for adjusted earnings to be between 27% and 29% for 2016.

Adjusted net income was $79.4 million and adjusted EPS was $0.39. The adjusted net income excludes $52 million of amortization and intangible assets, $12.6 million of stock-based compensation, $8.6 million of acquisition purchase accounting adjustments, including the deferred revenue adjustment, $300,000 of acquisition deal costs, $2.7 million of non-cash debt issuance costs, $400,000 of severance pay related to Advent employee reductions, and $600,000 which is mostly related to FX translation of certain balance sheet items. And we as the effective tax rate of 28% through adjusted net income.

For our balance sheet and cash flow for the quarter, we ended the quarter with $95.2 million of cash and approximately $2.665 billion of gross debt for a net debt position of approximately [$2.570] billion. Operating cash flow for the six month ended June was $139.2 million, a $38.6 million or 38.3% increase over 2015.

Cash flow for the six months was driven by improved cash earnings and lower tax payments. For the first six months of the year, we have paid down $155.3 million of debt and $415.3 million since the Advent acquisition approximately 12 months ago. We used $16.9 million for capital expenditures and capitalized software, mostly for IT and build-out for the Citi Fund Administration infrastructure.

We paid $67.9 million of interest in 2016 compared to $9 million in 2015. In the first six months of this year, we have paid $10.6 million of cash taxes. The accounts receivable DSO as of June was 56 days, an improvement of 5 days from March 2016. The Citi Fund Administration receivables continue to adversely impact the overall DSO of the Company, but we expect them to improve over the next several quarters.

And we also, in the last six months, paid $318 million for the acquisition of the Citi Fund Administration business which we closed on March 11. OTM consolidated EBITDA, which we used for covenant compliance, was $588.8 million as of June and it includes $28.5 million of acquired EBITDA in cost savings related to the acquisition. Based on the net debt of approximately $2.6 million, our total leverage was 4.4 as of June.

Now for our outlook for the year, for the full-year 2016, we currently expect adjusted revenue in the range of $1.511 billion to $1.524 billion, adjusted net income of $326 million to [$334] million, and diluted shares in the range of $205.2 million to $205.9 million. We have assumed that out of approximately $42 million of Advent synergies that we have implemented, that we'll get the benefit of the P&L for about $38 million to $40 million of those synergies for the full-year 2016.

And we've also assumed that adjusted operating margins for the full year will be approximately between 37.8% and 38.2% of adjusted revenue. For the full-year 2016, we expect cash from operating activities to be in the range of $380 million to $395 million and capital expenditures to be in the range of 2.5% to 2.8% of revenues.

For Q3 of 2016, our current expectation is for adjusted revenue in the range of $388 million to $394 million, adjusted net income of $82.5 million to $85 million, and diluted shares in the range of $206 million to $206.4 million.

I will now turn it back to Bill for a final comment.

Thanks, Patrick. As you can see, our business model remains resilient. We've done 44 acquisitions in the last 20 years and we've added a lot of talent and tremendous stores of intellectual property. We are determined to protect these assets.

Just yesterday on the sales front, we signed a contract with Russell Investment to manage $244 billion in assets globally. We're going to provide a wide range of middle and back office services, including accounting, performance measurement, reporting, and data management services.

Our integrated solution will create scale and harmonize processes across Russell's operating model. This allows Russell to focus on their core competencies, running money, retaining clients, and winning new clients.

With that, we will open it up to questions.

Thank you.

(Operator Instructions)

Sterling Auty, JPMorgan.

Hello, guys. Thanks for taking the questions. Bill, we're going to start with your favorite topic. Let's talk about organic growth. See the organic growth in the quarter. I think it's kind of in line with what you guys had discussed but can you update everyone in terms of what your guys thoughts are for the full-year organic growth for the Company?

Yes, I think that our organic growth was a negative 3.4% for Q2, about what we had expected. Then Q3 and Q4 looks like it's going to get better and I think for the whole year, we will be positive on organic revenue growth and I think Patrick has a number, somewhere between 3% and 4.5%. Is that right, Patrick?

Yes, for the full year, Bill, the range is 3% to about 3.5%. Q3, we expect about between 4% and a little over 5.5% in our range we provided in the guidance.

And, Sterling, what that says is Advent came in a little bit stronger in Q2 than we had anticipated, so some of the stuff that if I thought was going to come in in Q3, which I would've made it organic. But we got it in in Q2 and we took it. So we are not really trying to manipulate those numbers. Those numbers come in where it's best for our customers and the same thing with Citi. Citi was better than we expected, but we've also done a lot of work with Citi and we've provided all kinds of services for Citi and we don't do intercompany cash or accounting movements. We just let the chips fall where they may.

So we're pretty excited about what is going to happen for the rest of the year. We are excited about winning Russell. We have other huge opportunities in our book of business and we're going to be selective about who we choose. It's gotten to the point where we have lots and lots of opportunities and we can get a little more picky and get a little stronger on price.

I think that sounds good. Maybe one follow-up and I will jump back in line. The Citi assets, you mentioned, did a little bit better than expected. How should we think about the contribution as it flows through the year?

I think there was a thought that you would have a little bit of shift in maybe some of the customers that were kind of already in the process of moving off the platform, but maybe now that you've had it for little while, is there maybe some offset and perhaps you end up with a little more contribution than you originally thought for the full year?

I think we are improving the business and really we have, I think once they went into Citi Holdings, which was now almost 18 months ago, they were not allowed to sell again, so they couldn't bring in new customers and there's a lot of talented people that we acquired with Citi and now they get to sell again and they are winning.

So they are a winning a number of new deals and that breeds confidence which is going to win more deals and then SS&C has a pretty good track record about managing our products to give us maximum flexibility and high margins and I think Rahul is optimistic about where he can take that business and maybe he will surprise us positively.

Thanks.

John DiFucci, Jefferies

It's AJ Ljubich on for John. Thanks for taking the question. Just wondering, last quarter, you have outlined a few catalysts to accelerate organic growth in the back half, which included strong growth from Advent's robust sales pipeline, cross-selling from acquired businesses and improved retention rates.

Can you just sort of walk us through where the those stand and give us sort of a status update for some of those catalysts and, in the light of somewhat of a guide down a bit for organic revenue growth, have any of those sort of softened in your perspective?

Well, I think that the business is as strong as it has ever been. I think Advent was up over 8% in the second quarter and some of that was probably accelerated from the third quarter. But it's going to have a strong quarter in Q3 and I believe it's going to have another strong quarter in Q4.

So that the business, I think, is performing pretty well on that basis. I think we are doing more cross-sell and upsell. I think we had a real good joint win with the Advent and our institutional business this past quarter on a large deal and I think that our pipeline are strong and the amount of money that we've been spending on R&D has to deliver us new products and new services that are going to prove to be very well received by our client base.

And you have to get through these acquisitions and this acquisition accounting and get on a steady state basis, but I think the, we first engaged with Russell probably in February and I believe that, we signed a contract yesterday, which is obviously July, but that's pretty quick for that big of an organization and I think our teams are getting stronger and our approaches are getting better and I just believe that we're going to have a strong close to 2016 and I think we're going to be well-positioned for 2017.

Thanks and just a quick follow-up, a sort of a bookkeeping item. Do you have the latest AUA figures for the quarter? And if you could, is there any way to parse out what is Citi?

So the combined AUA at the end of the quarter is $1.056 billion, which is about flat from what it was last quarter. I don't have Citi parsed out. At lease for the purposes of this call.

Great. Thank you.

Rayna Kumar, Evercore ISI.

Good evening. Can you discuss your current acquisition pipeline and what types of acquisitions you're seeking? And secondly, what is your leverage limit in your credit agreement and how much flexibility do you have on leverage so you could do more acquisitions?

We're seeing a lot of opportunities in the acquisition arena that are, we probably have any number of discussions going on and we'd be a little disappointed if we don't close anything by the end of the year. I think that we are still looking for new technologies and we like having IP and we are also looking for ways in which to lever certain types of technology across all of our different service businesses as well as being able to market the technology on its own. As far as leverage is concerned, I think at the end of June, we were at 4.36 times levered and I think our covenant is 5.5. Is that right, Patrick?

Our only leverage covenant is on actually on secured leverage excluding the bonds, so our secured leverage is 3.4 times right now and the covenant is 5.5 on secured leverage.

So that gives you basically two turns on a $600 million EBITDA basis, that gives you $1.2 billion. We would acquire some EBITDA, obviously. So depending on what kind of price we paid, we'd probably have $1.5 billion to $1.7 billion in purchase ability.

I don't think we will spend $1.5 billion to $1.7 billion this year, but we are always looking for opportunities to improve and increase shareholder value and if we saw something that was irresistible, we would move as quickly as we could to secure those assets and then, at the same time, we have a reasonably strong equity currency that, if we had a good enough deal, we would be willing to sell shares.

Got it. That's very helpful. Your new 3% to 4.5% organic revenue guidance for the full year, it stills implies a significant ramp in the back half. I think it's 6% to 7%. How confident are you with those numbers? And maybe you can help us by quantifying your current sales pipeline.

Well, on our sales pipeline, we use things like large, strong. We don't really tell you the dollar value that is in the pipeline, but it's a strong as it's been in any of the last several years and I think that our ability to close is getting better. I think we're getting more disciplined, we're having an approach that's better. Some of the people that we have talked about as the talent that has come in here. That Russell deal was closed with Tamara Sablic and Amy O'Leary.

The top three salespeople we have in the Company are now all women, which is great. They are very effective and I believe that they had a great team around them that helped them close that business, including John Anderson and Eamonn Greaves and Rahul Kanwar and the whole organization. And we are methodically doing that with large organizations around the world and we have talented people that are ambitious and I believe are compensated in the right way to incentivize them in the right way.

So I'm very optimistic and we're not ones generally to lower anything, so for us to lower our organic growth rate in the second half is not something we are proud of. At the same time, it is something that is prudent. We are running at a really fast clip. I think our revenue was up 80.4% this quarter and Citi wasn't better than expected because we didn't do anything. It was better than expected because of what we did.

Advent didn't get 47% operating margins because we said go get him, guys. We worked with them on a day-to-day, week-to-week, month-to-month basis. In our lexicon, is called management. I think that that's what we'll do for the rest of the year and I'm optimistic about where we will end up.

And, Bill, just for me to add to that, Bill. One thing you have to remember is, if you look across the business, look in Q2, it was a pretty broad-based effort. We had some great sales in Sylvan and Pages as well as HiPortfolio and Geneva and a lot of these are recurring, like we have recurring revenue businesses. So going into Q3, a lot of that business has been sold.

So I'm very comfortable that we've got some achievable targets for Q3 and Q4 and it's not single-threaded through a business and that's with a headwind that, if you look across Black Diamond, some of the Geneva customer base on the license side in fund services, we're not getting the same lift in terms of AUM that we normally get in stronger markets.

So I look at the core business and I think it is contributing and getting stronger and we're still built to still deliver some pretty strong organic growth rates over the next couple quarters if we execute and, obviously, it comes down to executing on those sales in that pipeline. Russell was a great win for us to be able to close yesterday to be able to announce it for this call. So that is what the game is all about is us getting those prospects and closing them and I feel pretty good that we have a strong opportunity the rest of the year.

This is Patrick. So, I think, if you look at our business and how we get there in the second half of the year, in Q2 of this year, we had a fairly tough license comp from Q2 2015, which we don't have in Q3 and Q4. And if you take out that license comp, basically, the 3.5% negative comes up to somewhere around 2% growth for the rest of the business in Q2.

And then the first thing we have is we've got retention rates this year running about 1.5% better than last year. So the higher retention rates start helping us in the second half of the year. Next, we've got Advent that comes in and becomes organic in the second half of the year and they are running at 6% to 8% growth and they are about a third of our business so that's going to add another 2%. So you go from 2% to 3% to 5% where that's at and then we've got the rest of our business performing well. So that's how we get there on the math.

That's very helpful. If I can just sneak two final questions in here. One, could you just discuss your progress with post-trade matching in the US? And second, could you just call out the alternatives organic revenue growth rate for the second quarter?

I mean, the alternative, the total alternative business grew 2.1% in Q2 organically.

Got it.

And in post-trade matching, we've had several large-scale meetings with all the major custodians and all the major broker dealers. We're making great progress. Bob Moitoso is driving that for us, and hopefully, we can get revenues start rolling in on US-based post-trade matching services by the start of the fourth quarter.

Thank you.

Chris Shutler, William Blair.

Hello, guys. Good afternoon. On the Russell win, I'm guessing that was a competitive takeaway. Was that from a big bank? Or what type of firm was that from? And what do you think, ultimately, won it for SS&C and when will that go live?

We would expect parts of what we are going to deliver to Russell to be live in the first quarter of next year. We have their COO going to come out and see us next week, actually Friday this week, and we're ramping and their COO is the ex-president of GlobeOp, Vernon Barback, really talented guy. It was particularly [talented] that he hired us. But we think we will be in full force with Russell by the end of 2017. So we're going to ramp this as quickly as we can. We're going to put a top team on it.

I think we won because we're not a big bank. We move a lot faster, we have way better technology, we're constantly improving it, and I think, well he knew it because he'd built part of the team that did it and he's very comfortable with those people who are very talented, whether it's Ken Fullerton or John Anderson or a number of other of our team.

I think that we are poised to really have a great relationship with Russell and it's a five-year contract and I think it's going to be probably in excess of $50 million for that five years. So that's just a good start and we have lots of stuff in our pipeline that I think can allow us to go forward in a pretty strong fashion.

Got it. And then, Bill, you also, you made the comment earlier that maybe you can get pickier with, it sounds like who you choose as customers, maybe stronger on price. Can you just maybe dive into that comment a little bit more? Help us understand what you are talking about?

Well, there's a lot of people that want us to do stuff for them and there's a lot of, I would call it, stress in some of the large funds and they are looking to move their internal operations externally and they would prefer lift-outs, but I don't believe that SS&C is too anxious to do lift-out. Very selectively we might, but basically, they want you to lift out. They don't want you to change anything. They don't want to spend any more than they are spending now. Well how do we make any money if we do that?

And all it seems like all we do is add heartburn, so we're not going to do those things if we can't see a path to our EBITDA percentages and a great experience for the customer that we acquire in that process and then also our people that work on those deals. You can't work on the biggest funds in the world and just get clobbered everyday because of the intensity and drive of these funds. These are humans and they are important to us.

So we need to have our teams getting really well compensated and the accolades they deserve. We've taken some of these people from 24th on an [LSPA] to 7. No one talks about it and that is 17 steps up. Now they want to know when are we going to get to 6. Well, look, we want to get to 6 too, but you have to celebrate your successes or you create such a grind business.

So we are very sensitive to training our people, giving our people realistic goals, making sure that our clients understand what are realistic goals, and then making sure that we're getting paid. So I think those are things that are really make for a great business and it's something that we are focusing on across our entire range of products and services.

Okay. Thanks for that. And then just two real quick ones on the organic growth topic. First, you just mentioned the alternatives grew 2.1%, that business. I'm assuming that's the alternative fund administration business excluding Geneva or does that include Geneva? Go ahead.

That excludes the Geneva portion.

Okay. So that's pure fund administration. And the second-half organic guidance, Patrick, that you talked about, what does that assume for the alternatives fund administration business?

It assumes probably somewhere in the range of 3% to 5%.

Okay. So, slight improvement, I guess, over what we saw in Q2. And then sort of along that same topic, looking at the deferred revenue balance on the balance sheet, so since December 31, deferred revenue increased about $17 million over those six months. If I look up back over the last couple of years and include Advent, it looked like the deferred revenue was typically down a little bit from [12/31 to 6/30] levels.

So, I guess, I'm just wondering if how much of that higher deferred revenue balance is related to sales which will flow through into the P&L where it's maybe projects that will flow into the P&L over the next few quarters. Or how much of it is due to, I think in the 10-Q, you called out collection of annual maintenance fees. So maybe just help us decipher that a little better. Thanks.

I think when you look at the deferred revenue you also have to remember to adjust it for that haircut we took on deferred revenue when we acquired Advent. Because that is making it look artificially low. But, yes. If you look at the SS&C business, pretty much, the vast majority of deferred revenue is really maintenance related to maintenance, annual maintenance contracts.

On the Advent business, they both have some maintenance related to some of their legacy license deals and then they've got all of the deferred term license in there, and in addition, they've also got some deferral on projects that are waiting to be implemented. And for the second half of the year, there's probably somewhere around $5 million to $8 million of potential deferred revenue to be recognized, assuming we complete projects.

Okay. Thank you.

They pretty much have that every quarter, right? I mean, it's pretty much, every quarter, there's some amount of deferred revenue being recognized based on project completion.

So pretty standard, not outsized, then.

Yes, pretty standard.

Okay. Thanks, Patrick.

Dan Perlin, RBC Capital Markets.

Thanks. Hello, Bill, you had alluded to, I think at our conference, that there was, in the back half, there might be large institutional license deals that you thought would be recognized in the third quarter. I wonder is any of that getting pulled into this quarter? Are those still on track? Has anything changed there? And if you could just kind of elaborate on that a little bit, please.

I would've said that we're still expecting to get some of that in Q3 and Q4 and then I would say that, I think Patrick said that Advent's revenue in Q2 was $111 million I think. And that's up from about $101.5 million. So I think it was over 8% growth in Q2 and I think some of those big projects got completed in Q2. And that revenue flowed into Q2, so I still think we have some large ones coming in in Q3 and Q4 and then some of them got done in Q2.

Good. Okay. Then it's a high quality problem, so that's good. This Citi revenue came in, I think, a lot better at least than we had anticipated and if we look at how that run rates, I think you had originally guided to $150 million for 2016, but if it's still running at $53.5 million a quarter, that puts you at like 15% above that target. Is there any reason to believe that there is something that is going to kind of dovetail off in the back half the year or do you think that that's an achievable target?

I think you have to remember we said that, I think we said that we bought about $187 million of annual run rate revenue when we acquired the Citi Fund Administration business and there were some clients that we're going to continue to have revenue for in the first couple quarters that have not come off the platform yet. So we expect currently that revenue from Citi will be lower in the second half of the year than this Q2 run rate.

Okay. Got it. The other thing I just wanted to explore a little bit, the, you talked a lot about R&D yielding a lot of new products that you've pushed out. I'm trying to get a better sense of how we should be thinking about [ren sensing] that, just that new product growth versus kind of maybe its legacy growth. So that would be one.

And then the second really just goes back to pricing. Are these new products that you are rolling out, are they enabling you to actually pick up pricing as opposed to the comment before where you are being more picky in who you choose, I'm wondering if it's a mix shift of these new products that you spend all this R&D on that might enable you to have better pricing. Thanks.

I think the new stuff in the legacy businesses help us both retain clients and then also get new clients because you have the functionality of 2016. I think in the number of the improvements and modules that we have created allows us to deliver a way richer proposal to our prospects and current clients that want to upgrade and I think all of those things make for winning things like Russell.

I mean, Russell interviewed everybody, started off with like 11. And you get down and you compete through the process and I think when these things happen, I think when we can get in and pitch against the major competitors we have, that we have an awfully strong product and service offering and great references. And I think that's what all this new technology should bring to the fore.

Got it. One last one for Patrick. You said retention rates are up 1.5 points better than last year. I think last quarter, you had alluded, it was only up 1. Is that just a nuance or is it actually better? Thanks.

So, retention rates, and we calculate this on an LTM 12-month basis, so if you compare the retention rates June 30, LTM were 95.7%. And at the end of Q1, we reported they were 95.1%, so we got a little over 0.5% improvement from Q1 to Q2 and then now we are running about 1.5% better than the full-year 2015.

Excellent. Thank you, guys.

Ashish Sabadra, Deutsche Bank.

My question was about the alternative revenue growth and that moderated a bit from 5% to 2.1% in the second quarter. Were there any puts and takes there in terms of fund flows or redemptions? And then when you think about the back half and 3% to 5% growth in the back half, what are the expectations around, again, the fund flows and redemptions there?

I think that probably the single biggest change from Q2 of last year to Q2 of this year, as we've said a few times, we're not seeing the AUA lift we have seen historically, so obviously that has had a little bit of a dampening effect on the growth rate. I think as it relates to Q3 and Q4, we are expecting, from an AUA perspective, a pretty similar neutral to slightly down environment, which is what we've experienced in Q2.

Okay. That's helpful. And just on, a quick question on margins. It looks like the synergies from the acquisitions have been tracking ahead of expectations. Just on the core business, we're just wondering how are those margins tracking? Any comments there.

I'm not sure I understand the question.

You mean on the core business, how the margins are tracking on the core business?

Yes. Yes.

The margins on the core business, operating margins in the core business continue to track where we've been historically, around high 39% rate on an operating margin. So they continue to track there.

Okay, no. That's helpful. And maybe one final question. When we think about the pro forma organic growth, that was 6.4% in the second quarter. Is there a way for us to think the pro forma organic growth in the back half of the year?

Well, the --

Or will the organic growth be almost equal to the pro forma growth?

The only thing that's going to be different in the second half the year is the Citi acquisition. It's going to be tough to measure the Citi acquisition because, obviously, their revenue run rate in 2015 was a lot higher than what we acquired from them. But if you take out, without Citi, excluding Citi, which I think, we think will continue to perform well, a little better than we expected, and start growing in 2017, that the organic revenue is pretty similar.

You also got to remember that Citi was a Geneva customer so that revenue goes out of the Advent business.

Sure, no. That helps. And then maybe one final question is more around like, Bill, again, you talked about a lot of new wins in the quarter and you have a very strong pipeline. But how should we think about organic growth going forward? You have the headwinds from potentially redemptions of fund flows been pretty modest versus, you have the deal inflow. So how should we think about, once these acquisitions anniversary, organic growth going forward?

Well, again, I think you run your business in order to maximize your cash flow and maximize your opportunities. I mean, we do live in a 90-day world, but we're also trying to make sure that we have stuff that's going to come online in 2017, stuff that's going to come online in 2018, and again, if we can buy acquisitions and get tremendous amounts of EBITDA in shorts periods of time, we're going to do it and that's going to take a lot of management because you've got to manage these things or it doesn't happen.

And if we get 80% growth a year, year-over-year, I will be happy. You guys might say, boy, that's always 80% is acquisition and we're getting 40% margins on it and we're only paying x times EBITDA, I'm taking it. But we're still spending $41 million this quarter to build new software. And we're not building new software not to sell it. So I think that we have opportunities to be in excess of 5% organic revenue growth and if the economy was ever to grow again, like oh, surprise 4% or something, we'd grow faster.

But you're in a 2% economy growth and the financial services industry as a whole is the whipping boy of at least one of the parties and maybe both of them. So you're not going to have tremendous bank formation or insurance company formation or mutual fund formation. You're still going to have hedge funds, private equity funds, real estate investment trusts, RIA. Those of the four areas you might get a little fund to funds, but not much.

With that backdrop, if we can get back to 5% organic revenue growth, I think we're doing pretty well. And when we talk about Q2 of 2015 being a tough comp, Q2 of 2015 had $13 million in license revenue, perpetual license revenue. This quarter had $5 million. HPA, which is the HiPortfolios business that we bought from DST in December of 2014, in the second quarter of 2015, had its best quarter, I think, in 10 years and did over $18 million in revenue.

But a lot of that was pent-up because they had been for sale for a while and people were not buying. So there was probably an additional $4 million or so in HiPortfolios that didn't come in in Q2 of 2016. It still had a great quarter, probably had over 50% margins or a real high 40%, and it's been a great acquisition, but just on a Q2 2015 tough comp.

That is $8 million in perpetual license and another $4 million in not in DST and part of that might be in the perpetual license, but most of it isn't. And so you've got $10 million, $11 million that we don't have in Q3 or Q4 as comp. Is that right, Patrick?

That's right.

Thanks for the color. Thanks, Bill.

Peter Heckman, Avondale.

Good afternoon, everyone. My questions have mostly been answered. I was wondering if, Bill, you could give an update on the revenue synergies around Advent and talk about if you've had any success moving hosting over to SS&C or convincing in-house license customers to move to outsourcing relationships.

We've won several. We have several in the queue. We're still ramping that process up. We've started taking a number of the large-scale Geneva customers have gone through our Yorktown Heights data center and it's a very impressive facility probably 30 miles outside of New York. And so I think that as they get more comfortable and see what we do, I think that's a natural kind of river of revenue that is coming towards us and it will get larger, I think, year-over-year for the next several years.

Okay and then when you think about, and I'm probably following up on someone else's question, but just on the revenue synergies at a $43 million run rate, would've thought there was a possibility of you raising the cost synergy, the guide here. Is there a target in mind? Some sort of investment that you are considering or some other expense that you are looking to potentially eliminating before you would increase that cost synergy guidance?

We're at $43 million at the end of the first year. I think we'd said we'd get to $45 million by the end of three years, so we think we are well on our way. Now, whether or not we are able to do more, I think it's probably pretty obvious that we can. But I don't think that we've really spent a whole lot of time trying to figure out how to raise guidance on cost synergies on Advent.

Worrying about, that's not a high priority thing when you're trying to integrate Citi, you're trying to make sure that you got new product releases going out, you're training a sales force. There's a lot of things that are going on and I think Patrick's area is integrating five acquisitions in the last 2.5 years and it's 3,500 people and $700 million in revenue and that takes time and it takes effort and his team, I mean, I think today is 27th of July and it's the, I think, 16th business day and last year, we reported on the 18th business day.

So that's an improvement of 10% and that's pretty impressive and Patrick and his team Marc Beliveau and Jeff Castellani and those guys, Dave Jonathan. So they have done a great job and there's a lot of work to do to be able to get all of this information. We're a global business. We have a lot of business units and so I think that we're managing this well, we're getting a lot of cost synergies.

Nandini Sankar out in India has built the Gurgaon office, done a great job with that. We have Stephanie Miller who's been to our India operation, been out to London. She's getting very involved in our pitch and putting in some really strong process in our sales culture. So I just think we're doing the right things, we're adding a lot of talent and we're still in a hurry.

Got it. Got it. Fair enough. I appreciate the commentary.

Brian Essex, Morgan Stanley.

Great. Thanks for taking the question. I was wondering if we could circle back on that prior question a little bit and maybe put a finer point on it. And so if we were to look at Citi and Advent in particular, how far away from them, I guess how far away from corporate average operating margins are they and is there anything substantial left to get them up to corporate average margins?

I will take the Advent, Bill. Advent is already at our --

Above.

Above our operating margins for the last couple quarters and to pick up on Bill's point from the previous question, we're trying to focus on the right things. And that's what products to invest in, what products to roll out where we can drive revenue growth and a lot of the synergies are a result of thinking through those processes. They're not a result of a synergy targets.

So what we're trying to do is grow the business and satisfy our customers and compete against our competitors. So I think there's more opportunity as we continue to explore that and there's things like Syncova as a service that Advent wasn't in a position to offer as a service that we're having some success with in fund administration businesses taking over the services for that.

So I think there's lots of opportunity for us to continue to improve the business and drive more revenue synergies, but I don't want to have the impression that we are shooting for specific targets versus the quality of the business we're trying to grow and whether that's another two more points or it's two points less, we're not thinking of it that way.

Okay. And on the Citi side, is there substantial room to go, or (multiple speakers)?

As Patrick said, in the quarter, Citi was 22%. That's probably a little higher than their normalized baseline because we got a little more revenue. But we think that that Citi business will run like the rest of our fund administration business in the low 40%s over the next 24 months or so.

Got it.

I think what Rahul is saying too is that Q2 was at 22%, but that's with $53.5 million in revenue and that's going to probably drop to high 40%s by the end of Q4.

But it's starting to grow again too. I mean, we've got new to come in besides the legacy roll-off. But you're going to have some margin pressure as that revenue rolls off that might dip below the 22%, end the year at somewhere between the 20%, around 20% and then I think it will slowly march to 40%, maybe 41%, 42%. I mean, we're doing a lot of things. We're getting great feedback. We've saved several customers and I think that the user experience inside SS&C has been very, very good for the Citi clients.

Great. Very helpful. Thank you very much.

Hugh Miller, Macquarie.

Thanks much for taking the questions. Just I guess one quick one that wasn't touched upon. As you guys think about kind of consolidation in the fund admin business, are there any triggers say over the next 12 to 18 months that you think can be a catalyst for M&A in this space among the larger providers?

Again, I think that -- are they going to get more regulated? If they get more regulated, that I believe they are talking about a financial transaction tax and a trade tax and this tax and that tax. And it doesn't look like the Fed's lightening up on the capital requirements and so some of these businesses become capital hogs where the large banks can't get the returns they want.

You're not going to have the big processing banks getting out of this, but the ones that are major international banks where this is a $200 million to $300 million in revenue business, is it something that they're $5 billion a quarter and they're going to have this business that's really not even a rounding error for them. If it gets more and more regulated, you will see them move more quickly to exit.

Got it. That's helpful. And then one quick follow-up just to double check. You guys mentioned for the second-half 2016, organic growth of fund admin of 3% to 5%. That was assuming flat to modestly negative asset flows for the industry? Is that how you were viewing it?

That's right.

Great. Thank you so much.

And just add to that, that's for hedge funds. You'd think it'd be private equity funds where the asset flows don't impact that.

Right, right. Thank you.

Patrick O'Shaughnessy, Raymond James.

Hello. Good evening. I wanted to refresh my memory. How are you guys thinking about your pricing power right now? And would it be fair to say that, in this environment, you probably have more pricing power on the software side of things?

Patrick, I don't really think so. I think that we are starting to see some pushback when we go out with hey, we think this would be a $2 million deal and people are saying wow, that sounds really good.

And then we go we go, oh (expletive), we should have said $2.5 million. But I think you didn't get that for the last couple years. The last couple years, you said $2 million, they said $1.5 million. So I think there's just been -- there are less providers of the services that we provide than there used to be and we have begun to differentiate ourselves on a technology and expertise basis and we are articulating that better than we have in the past.

And I think that's a combination of things that it's giving us some confidence that maybe we're looking at getting another half a basis point or basis point on our services than what we might've gotten in the last couple of years.

Well that's interesting. Thank you. And then, my follow-up question. So one of the pockets of growth that you talked about was the advisor space. What sort of opportunities are you seeing there right now? I think in particular with your Black Diamond product. But also, are there any acquisitions that you think might be in your future at some point?

Well, Dave Welling is the guy that runs that business for us. He's doing a really good job. He's looking at all kinds of things as far as how to augment his offering, and obviously, he has a talented development team down there in Jacksonville and he's looking at a number of acquisitions, and again, I think that there's a lot of technology that's for sale now. There's a lot of people that see that the stock market is trading at highs again. They think they can get some liquidity.

And I think that we're a pretty good home and I think there will be opportunities for us to build out the Black Diamond space and that continues to grow well and we expect it will for the rest of the year.

All right, great. Thank you.

Crispin Love, Sandler O'Neill.

Yes, it's actually Chris Donat. I hijacked Crispin's line. Just had one quick question for Patrick on the revenue guidance for the full-year. Just comparing it to the guidance from a quarter ago and having the effect of the significant depreciation of the pound versus the dollar. I thought I would see a little bit more effect on the revenue side and obviously some offsets on expenses. But just wondering what's your, like how do you model currency rates going forward? And was there any positive stuff to offset the negativity of the impact of the pound?

There is, actually. So we had about $1.9 million in negative FX in Q2 and then in the second half of the year, based on current FX rates -- I mean, obviously, it's going to be hard to predict where they end up -- but based on current FX rate, we are no longer going to have negative FX on the Canadian dollar because that current FX rates in the Canadian dollars are pretty similar to where it were in the second half of last year.

Obviously, the British pound has dropped and that's going to affect us, so they're kind of going to both offset each other. And we think right now, based on current rates, that the FX impact in the second half of the year will be a little bit less than it was in Q2.

Okay. That's helpful. And then just to slide one in for Rahul here, so we'd look at the GlobeOp hedge fund indexes on a monthly basis. Do those now incorporate Citi? And is there any pitfall to using the redemption index and just the value index as proxies for how business is for you on a monthly basis?

I think, to the first part of that question, they don't as yet incorporate Citi. They usually, we will probably target the first of the year to roll in that book of business. I think that the, as to the second part, they're a reasonable proxy to what we're experiencing in the hedge fund business.

Okay. Got it. Thank you.

Thanks you. And I'm not showing any further questions at the time. I like to turn the call back to Mr. Bill Stone for any closing remarks.

Thanks, everybody, and we appreciate the questions. Hopefully it was informative and we look forward to talking to you at the end of next quarter. Thanks again.

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