SS&C Technologies Holdings Inc (SSNC) 2019 Q2 法說會逐字稿

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the SS&C Technologies Q2 2019 Earnings Conference Call. (Operator Instructions)

Thank you. Justine Stone, you may begin your conference.

Hi, everyone. Welcome and thank you for joining us for our Q2 2019 earnings call. I'm Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Rahul Kanwar, President and Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer.

Before we get started, we need to review the safe harbor statement. Please note that various remarks we make today about future expectations, plans and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the safe harbor 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 be accessed on our website. These forward-looking statements represent our expectations only as of today, July 29, 2019. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so.

During today's call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located in the Investor Relations section of our website at www.ssctech.com.

I will now turn the call over to Bill.

Thanks, Justine, and thanks, everyone.

Our results for the quarter are $1.1558 billion in adjusted revenue and we earned $0.91 in adjusted diluted earnings per share. Our adjusted consolidated EBITDA was $448 million, bringing our adjusted consolidated EBITDA margin to 38.8%. Q2 organic revenue growth was 3.6%. Adjustments made to organic revenue growth include FX; DST out-of-pocket revenue, which we've spoken about before at 0 margin; and lost clients from DST prior to the acquisition close. Patrick will walk you through the exact numerical amounts in his talk.

We have also included a slide deck with our earnings release, which can be found on our investor relations website under Quarterly Results. We will update this period to the slide deck quarterly.

Top line performance was driven by several businesses. Our alternatives business grew over 5% and 4.8% organically and our Real Assets business is thriving. Geneva, our best-in-class portfolio accounting system, had a strong license quarter; and our RIA solution, Black Diamond, continues to post double-digit growth. Black Diamond now has over $1 trillion in assets across 1,400 customers. We are also seeing the DST sales organization moving more to a more aggressive and proactive culture. The cross-sell and upsell opportunity of existing clients is massive and we are starting to see these opportunities come to fruition.

Waddell & Reed marks the latest example of firms moving to an in-house -- from an in-house technology solution to outsourcing with us. In the past 2 years, 20 of our largest clients have outsourced some or all of their operational functions to us. We expect this trend to continue as asset managers focus on their core competencies and move towards a cost-effective variable expense operating model.

Inorganically, the M&A market is very active. We are able to incorporate financial record-keeping from a wider range of end markets, including international opportunities. With our leverage ratio at 4.21 consolidated EBITDA, we have ample capacity for high-quality acquisitions.

I'll now turn it over to Rahul.

Thanks, Bill. We had a strong quarter with innovation, sales performance across the business, good future pipeline development and continued integration.

Innovation remains at the forefront. We are investing in a number of new products and services across our business. These include Singularity, our smart cloud-based investment and operation system; CORE, our central data gathering and enrichment system; and SightLine, which allows for advanced visualization on large and complex data sets. We delivered enhancements to our business process management solution known as AWD, which is particularly relevant to the financial services, insurance, banking and health care industries which have data-intensive and complex processes.

Our services in outsourcing business remains strong. Highlights include our Private Equity and Real Assets business, which continue to win new mandates and gain market share. As investment firms search for operating leverage, our suite of products and services designed to simplify, scale and transform their operations is gaining momentum.

We continued during the quarter to integrate the newest additions to SS&C, Intralinks and Eze. Eze is now selling more into larger and traditional asset managers, which was one of our objectives for this acquisition. Their new product, the Eze Eclipse platform, is a cloud-based solution that further differentiates us in the marketplace. Eze, Geneva and GlobeOp give us a unique front, middle and back-office offering. At Intralinks, we're seeing progress in their alternatives business combined with our Fund Administration business. Seven out of the top 10 M&A deals in North America used Intralinks in 2019, and we continue to invest in next-generation capabilities, including artificial intelligence, to derive insights from deal room data.

Now, I will mention some key deals for Q2 2019. A Chinese fund administrator chose Geneva as the portfolio management system for their $100 billion plus assets under administration; a $12 billion asset manager and Advent client for over 25 years upgraded their on-premise software through our hosted outsourced services model; a $4 billion asset manager and longtime Axys client upgraded their system to Black Diamond; one of the world's largest private equity firms chose Intralinks as investor reporting to a fund space; a Hong Kong-based hedge fund chose a combination of Eze's front-to-back solution and SS&C GlobeOp fund administration services; an existing fund administration client took on more services from SS&C GlobeOp, including investor services, regulatory reporting and tax services; an existing SS&C Health client chose our business process management platform, AWD, to streamline their operations; an existing client in DST asset management chose DST's digital solutions for their statement composition and design.

I will now turn it over to Patrick to run through the financials.

Thank you. Results for the second quarter were GAAP revenues of $1.148 billion, GAAP net income of $121.1 million and diluted earnings per share of $0.45. Adjusted revenue was $1.1558 billion, excluding the adjustments we're implementing the new revenue recognition standard and for acquired deferred revenue adjustment for the DST and Intralinks acquisitions.

Overall, we had a strong quarter. Adjusted revenue was up 27.2%; adjusted operating income increased 56.8%; and diluted EPS was $0.91, an increase of 46.8% over 2018.

Adjusted revenue increased $247.3 million. The acquisitions of DST, CACEIS, Eze and Intralinks contributed $244.3 million. Foreign exchange had an unfavorable impact of $9.2 million or 1% in the quarter. DST pre-acquisition terminated clients and a reduction of out-of-pocket revenue impacted the quarter for $20 million. Organic revenue growth on a constant currency basis and adjusted -- adjusting for the reduction of the DST revenue was 3.6% and driven by strength in the alternatives and Advent businesses.

Adjusted operating income for the second quarter was $426.2 million, an increase of $154.4 million or 56.8% over Q2 of 2018. Foreign exchange had a positive impact of $8.2 million on expenses in the quarter. Operating margins improved sequentially from 36.6% in the first quarter to 36.9% in the second quarter. DST operating margins were 33.8% in the second quarter and the annual run rate implemented cost synergies reached $288 million as of June 30, 2019.

Adjusted consolidated EBITDA was $448.2 million or 38.8% of adjusted revenue, an increase of 53.6% over Q2 2018. Net interest expense for the second quarter was $104.3 million and includes $4.5 million of noncash amortized financing costs and OID. The average interest rate in the quarter for our credit facility and our senior notes combined was 4.96% compared to 4.39% in the second quarter of 2018.

We recorded a GAAP tax provision in the quarter of $34.2 million or 22% of pretax income. We currently expect the GAAP tax rate to be approximately 23% for the full year.

Adjusted net income was $241.6 million and adjusted EPS was $0.91. The adjusted net income excludes $158.8 million of amortization of intangible assets; $18.2 million of stock-based compensation; $4.4 million of amortization of noncash debt issuance costs; $12.1 million of purchase accounting adjustments, mostly deferred revenue adjustments and depreciation related to revaluation of assets; $3.9 million of revenue adjustments related to adoption of revenue standard 606; and $26.3 million of nonoperating net gains, including a $29.5 million gain for mark-to-market adjustments on investments and $4.5 million of severance costs related to staff reductions. The effective tax rate used for adjusted net income was 26%. Diluted shares increased 7.3% over Q2 '18, mostly due to shares issued with the Intralinks acquisition in the fourth quarter of 2018 and employee stock option exercises.

On our balance sheet and cash flow, as of June, we had approximately $131 million of cash and cash equivalents and approximately $7.9 million (sic) [billion] of gross debt or net debt of approximately $7.8 billion. Operating cash flow for the 6 months ended June was $416.6 million, a $296.9 million or 248% increase compared to the same period in 2018.

A couple highlights for the 6-month period ended June. We've paid down $414.9 million of net debt year-to-date, and that brings the total paid since the DST acquisition in April 2018 to $1.339 billion. We paid $73.5 million of cash interest compared to $100 million the same period last year. The unsecured note interest is due semiannually in September and March, so we did not make a payment on the unsecured notes in the second quarter. We paid $125.8 million cash taxes compared to $67.9 million in the same period last year. Our accounts receivable DSO improved in the quarter to 51.8 days compared to 53.7 in March 2019. And we used $59.5 million of cash for capital expenditures and capitalized software, mostly for IT and leasehold improvements. Our LTM consolidated EBITDA used for covenant compliance was $1.853 billion as of June 2019. Based on net debt of $7.8 million (sic) billion , our total leverage ratio was 4.21 as of June and our secured leverage ratio was 3.13 as of June 30.

An outlook for the third quarter of 2019, our current expectation for the third quarter is adjusted revenue in the range of $1.123 billion to $1.153 billion, adjusted net income of $227.5 million to $243.5 million and diluted change -- shares in the range of 266.4 million to 267.6 million. The current expectation for the full year is adjusted revenue in the range of $4.571 billion to $4.631 billion, adjusted net income of $947.5 million to $988.5 billion and diluted shares in the range of 265.7 million to 266.7 million. And we continue to expect that the adjusted tax rate will be 26% for the full year. Cash from operating activities will be in the range of $1.050 billion to $1.080 billion and capital expenditures in the range of 2.6% to 2.8% of adjusted revenues.

And I'll turn it back over to Bill for final comments.

Thanks, Patrick.

We continue to work hard for our shareholders. And even though our growth has slowed, we believe that we are putting the things in place to start to accelerate it again. Our 3 2018 acquisitions have encountered some headwind. Trading volumes are down across all 3 and this will impact Eze's network fees by about $10 million for the rest of the year. We have also seen M&A slow. And with that slowing, Intralinks' revenue growth will slow by about $23 million. Finally, DST has attrition and revenue for the year is expected to be down $53 million from our guidance at the end of Q1.

Obviously, our core businesses are also in financial services, which have slowed and trading has slowed, and so we're going to have some trade win -- some headwinds in there. And we expect that the overall core business to be down about $32 million. Now, with all that, at the midpoint, we're going to be at $4.6 billion in revenue, which is up about 34% from last year, and our earnings again will be considerably stronger than that.

And as we announced last week, we believe the new management team at SS&C Health has a tremendous opportunity to grow. I'm holding our new President of SS&C Health to be responsible for both our Health and Pharmacy Solutions Group and is charged with growing these businesses. Rob Kulis, President of SS&C Health Solutions, is focused on extending SS&C's position in claims and medical management, plan growth and advisory enablement. And Marc Palmer, President of Pharmacy Solutions, who has been with our team since 2014, is responsible for providing technology-enabled solutions that improve clinical and financial outcomes for clients. We're excited about this team and expanding our market position and maximizing our exclusive relationship with Johns Hopkins going forward.

I will now open it up to questions.

(Operator Instructions) The first question comes from Brad Zelnick of Credit Suisse.

Bill, I appreciate your commentary and some of the numbers that you gave us in your final remarks, bridging from the prior guidance to your current outlook for the full year. But I specifically wanted to drill down into the DST revision, downward $53 million from where you were guiding out of Q1. Can you just talk us through what's changed? More specifically, this -- the relationships that you expected to endure that maybe now are leaving, where are they heading to? Because I thought this was a stickier kind of business with very high switching costs for the customer.

Well, I mean, that's a good question, Brad. I think -- realize that you're talking about a $2.2 billion business, right? So when you talk about $53 million, that sounds like an enormous amount of money, but it's just really tied up in a few customers. And some of the attrition in DST prior to us acquiring them, they were able to get off quicker than we had expected, and I think that you're going to have some attrition.

I think the business is way stronger. We're earning way more money. And the changes to the business and the operating model and the sales culture and the cross-sell and upsell and getting releases on their technology out on time -- we've made 3 releases on the Advanced Workflow Distribution system, AWD, and it's made a huge impact on our client. So I think there's a lot of things that we're doing right and there's a -- there's kind of a slowing on Wall Street right now that is not exactly putting wind in our sails and we have things like large fixed network fees and we have our own data business. And so none of those things are really adding to any growth whatsoever, and I think that's what's really happened.

And we're still optimistic on DST. We have lots of things. Sean is a really talented guy. And with Rob and Marc Palmer, we think we have a great group there. And we've made changes across financial services, whether it's people like Bernie O'Connor or putting in Mike Sleightholme or bringing in a whole new group of managers. Probably 10 of the senior people from DST have left in the first 7, 8 months of 2019. And we're rebuilding and rearming and we think that we'll end up with a really great business that's growing in mid-single digits, and it's just going to take us a couple more quarters than we expected.

Maybe just a follow-up. I mean, look, there's clearly a lot of bright spots and good things happening within the portfolio, but in light of what you characterized as just a broader slowdown in financial services, if we think about the expense structure, and maybe a question for Patrick, how do you think about the investments you're making, the hiring plans going into the remainder of the year in light of these various pressures, whether it's in the context of synergies that you're able to deliver on the deals that you've done or even in the core business. Any updated thinking there would be helpful.

Well, as you know, we manage our expenses pretty tightly. And as people understand, when they don't hit their revenue targets, they're not going to hit their expense targets either. So we've implemented plans. And again, we're still going to generate close to $1 billion in free cash flow and we're paying off debt quickly. I think we've paid off $1.339 billion since the DST acquisition. And so we're going to continue to do those things and we're still going to invest in products that we think are going to give us competitive edge. We're still winning large deals and I think that will continue.

If you look at the guidance we provided for the quarter, I think you'll see that. Obviously, we talked about the revenue reduction, but we've also got cost controls that we're putting in place. And the plan is showing reducing costs from our previous guidance.

Your next question comes from the line of Dan Perlin of RBC Capital Markets.

So Patrick, I'm just trying to make sure I understand. What's the -- what are you embedding based on this definition that you used for organic growth in third quarter and then for the full year? So let me just start there first.

Yes, sure. So right now, what we're seeing and what's embedded in the guidance for Q3 and Q4 is approximately $10 million of FX in the 6 months and about $38 million of DST lost clients that we were notified prior to the acquisition.

Okay. So is the -- okay. So are you suggesting it's going to be running below the 3-plus percent range in the back half of the year? Is that what your calculations are telling now?

I think, at the midpoint, it will probably -- I mean it will run in the range of 1% to 1.5% as of this point.

Yes. Okay. So Bill, when we talk about -- I mean, like golly, I think you were talking about getting back to the mid-single-digit growth rates as a company and it's taken a couple of quarters. I mean this seemed to unravel pretty quick. And you've always prided yourself on being able to kind of hit EPS numbers even if organic growth kind of be down. And this quarter, kind of a lot of those things actually fell apart in the kind of calculus. And so I'm just trying to understand why you think you can get this thing back up to mid-single digits when I think a lot of these acquisitions maybe ended up surprising -- certainly surprised us, but maybe they surprised you guys as well.

Well, again, I wouldn't say that they performed exactly like we had thought they would or had expected they would, but they're still good businesses and we don't have to -- I think second quarter was actually really good, frankly. It's record earnings, record revenues. And so it's not second quarter that was a problem, Dan. I think it's maybe the third and fourth quarter that are more of a problem. And we -- it's not like we don't have chances. We've got chances, but it's -- in these kinds of somewhat headwinds, you have to execute at a very, very high level and make -- getting the team to work together and recognize that some of the things we have will work with 2 systems, right? You don't need to build 2 of them, but it's a big organization now with lots of people and lots of things that you have to change, and I think that's something that the intensity level in different parts of the business will probably be ratcheted up over the next several quarters.

Your next question comes from Alex Kramm of UBS.

Just to clarify again, I think, Patrick, you just said, at the midpoint, 1% to 1.5% organic growth. Was that a 3Q comment or for the full year? Maybe just give those 2 periods separately, please.

Yes. No, that was the range for the second half. But right now, at the midpoint, the full year is about 1.7% and third quarter is about 1.4%.

Okay. Great. And then just maybe just the second quarter again. I mean I'm just looking that up, what you changed here in terms of the organic growth presentation. If I think about this correctly, I think you said last quarter that you thought organic growth was going to be less than half of a percent. If I take that adjustment out, I still get to, I think, 1.3% or so. I just want to make sure I'm comparing the numbers correctly. Did organic growth actually come in a little bit better than you thought for the second quarter? And if so, why? Or am I just not comparing these numbers correctly with the new presentation?

No. So the -- as we said here, if we include the lost DST clients pre-acquisition, we're at 3.6%. That lost revenue was $16.1 million in the quarter. So that takes -- that helps your organic growth by about 1.8%. So we were at about -- under the old calculation, we were up about 1.8% organic growth, which is definitely an improvement over the guidance.

And any particular reasons why? Sorry. Or anything that was better than you had expected?

Yes. We had...

We had a -- sorry, Patrick. We had a pretty good quarter in alternatives, but we had a particularly strong quarter in our Advent license business. And so those are some of the reasons.

Your next question comes from Rayna Kumar of Evercore ISI.

The $53 million reduction in the DST revenue, is that related to the Financial Services business or the Healthcare business? And if it's both, how much comes from each business?

It is wide -- it is across the business. I don't have the exact across each group, but I would suspect probably 2/3 of it is out of the Financial Services business and the rest out of Healthcare.

And I think the majority of the Financial Services is from Europe.

Understood. If you can also help us -- give us an idea of the alternatives organic revenue growth that you're expecting specifically for the third quarter and then for 2019 as a whole.

Well, we're expecting about 4.2% in the third quarter and about 4.2% for the full year at the midpoint of the guidance.

Your next question comes from Andrew Schmidt of Citi.

Quick question on the core business. You mentioned the $32 million reduction. I was wondering if you could talk about to what extent the reduction is. Market related factors versus attrition and other factors. Just to drill down a little bit there, that would be great.

So I think there's a few different things going on, one being, as Bill said, that in general, the environment, with reduced trading volumes and some slowdown in the pace of activity has an impact on the demand environment across our business, so that's probably a part of it. I think we are seeing a little bit of an overhang in our Hedge Fund business as kind of one example. And then I think in our software businesses, particularly in Advent, we still have a little bit of a comp issue with 606 and the way revenue is recognized on renewals, and that's a part of the issue.

Got it. That's helpful. And then switching back to DST, I was wondering if you could talk about to what extent the attrition that you're experiencing continues in FY '20? And then at what point do you think the initiatives you've set in place can offset some of the incremental attrition you have recently experienced?

Yes. I think that -- I think Sean started 3 weeks ago. So we're not going to load him up with too much just quite yet, but we think he'll start having an impact towards the end of this quarter and then in the fourth quarter. But these are large contracts and the revenue doesn't start flowing until sometimes 60, 90 days after you sign them. In some cases, 6 months after you sign them. So we still have a bunch of revenue that we're still getting ready to start recording, but it takes time to get them installed and get them processing. So -- but I would think that by the second quarter of next year, we should have all kinds of new Singularity sales, of new integrations with AWD and Precision LM and opportunities throughout the transfer agency business with some of the stuff that we've done in AI and machine learning and robotic process automation. But this stuff takes time to get people to adopt it. And we have all kinds of enthusiasm, but it didn't account for much revenue. We need to get the revenue. We need to get the ink on the contract and get the people installed and we need to have an intensity kick up.

I think it's important to note that the major part of what's impacting the DST revenue are clients that terminated pre-acquisition that are now coming off the platform. But if you look at DST revenue retention since we've acquired them, when you look at revenue retention over the last 90 -- last 12 months, it's averaging at about 96%. So we've had pretty good retention at DST since we acquired them, but we're getting impacted by some of the terminations pre-acquisition.

Okay. That's helpful. Just to be clear, the incremental $53 million is attrition post the acquisition, correct, was completed?

No. The attrition post acquisition for the year of '19 is somewhere around -- I think somewhere around $20 million for '18. A lot of the slowdown is the pre-acquisition terminations and some of the professional services work that's not being replaced.

Yes. I think the other kind of point is we're comparing guidance to guidance, right? So included in our guidance at the end of the last call for DST had a sales projection in it. So it's not all attrition and lost clients. It is also as we're going out in the marketplace and we're competing for these big deals, like Bill said, getting ink on paper and then getting that revenue started is a process. And we're finding that, that's taking more time than we had anticipated.

And I think the total amount of revenue that had been terminated prior to our acquisition was $119 million, of which $80 million has already been absorbed. So there's still $39 million to go. So of the $53 million, that $39 million is probably not completely in that $53 million because that $39 million might run off some in 2020, but it all depends on how quickly very large organizations can get off a platform that is, as someone said, very sticky.

Your next question comes from Surinder Thind of Jefferies.

A couple of quick questions here. Just revisiting the organic growth, is there a way that you can perhaps simplify it or give a pro forma number? There's lots of different growth numbers out there, but if we just think of it in terms of all of the acquisitions having closed maybe at the beginning of 2018, what does that organic growth number in 2019 look like, excluding the -- obviously the adjustments for DST? Are you able to provide that number? And then maybe what the breakdown might be at the individual level in terms of like as in Intralinks and DST and core?

You mean pro forma in 2018 for the acquisitions?

Correct. Yes, what 2019 looks like versus 2018 on a pro forma basis.

(inaudible)

I apologize. I didn't hear that.

We haven't prepared those numbers pro forma.

Okay. Understood. Maybe a different big picture question here. Following up on an earlier question about the cost structure, at what point do you guys think about -- or how much -- how lean are you currently running is maybe the better way to ask this question in terms of the flexibility that you might have if we were to kind of remain around the current growth rates of flattish to maybe slightly positive?

We ran the second quarter at 38.8 % EBITDA margins. We have opportunities wherever we want to have opportunities. The growth rate impacts us a little bit, but it doesn't really impact us that much on how much cash we generate or even how much earnings. Our adjusted earnings last year were $2.92. And I think, at the midpoint, our adjusted earnings are going to be $3.63. I mean I don't know. And I mean you guys have these great companies in your portfolios, I know, but I think that's 20%. I'd rather it was $4 instead of $3.63, but as far as a company that is very profitable, we think, in general, pretty well run. Perhaps we could forecast better and I wish we had, but we didn't. So it doesn't mean we've just started eating dumb though. We'll figure this out. We've figured it out all the time before. We'll figure it out this time, and we'll start rolling again. We always have before and we will now.

Yes. Hard to argue with your track record of execution.

Your next question comes from Ken Hill of Rosenblatt Securities.

So I had one question on one of the deals you mentioned in your prepared remarks, the Waddell & Reed deal outsourcing some functionality. I think that was some core transfer agency services. Can you outline the size of that type of deal? And maybe if kind of sawing away from specific numbers there, just kind of think through the market and the opportunity set for what else is kind of still out there, given, I think, you have 20 of your largest clients outsourcing to you guys right now, so just kind of trying to get a grasp on what's still left there.

Yes. I think one of the things to think about is, is that they're not outsourcing everything to us. So a lot of these places still have huge internal workforces that increasingly become expensive and getting the attention of the senior executives at the large fund companies and other financial institutions. So we still think there is an enormous opportunity.

Waddell & Reed is a great, great company. We got a nice deal with them. I think they -- it will be double-digit millions in revenue, but it's not going to be as much as some people are forecasting. It's not $30 million, $40 million a year. It's less than that. But it's still a very good deal and it will be profitable for us. And it's also a great name that we can really showcase a number of our products. So we're excited about that. But there's probably -- if you just take the top 50, there's probably several hundred million dollars worth of outsourcing opportunity in the top 50.

Okay. Appreciate the color on that one. One question then on a smaller piece. I know you kind of shied away from giving organic growth for some of the newer acquisitions, which I don't believe are included in your organic growth rate right now. But just on Eze specifically, I think you noted some headwinds there, but also noticed some good client sign-ups over the -- since the last quarter. Just wondering if you could talk about maybe the revenue growth trajectory for that business.

Yes. The Eze business has been basically flat, really. And -- but they've done a great job on managing their expenses. Their EBITDA margin is up. They have a big fixed business that they get paid. And when trading volumes drop off, so do the payments that they get. So -- but generally, things come back and we like the team we have. And we're optimistic. And as Eclipse, as we noted, just signed their 70th client, and so we're cautiously optimistic.

Your next question comes from Peter Heckmann of Davidson.

On the Eze side, when you think about lower trading volumes and how that moves around and then you look out a little bit further, is there an opportunity with -- I believe Bloomberg is going to sense that their order management system -- is there an opportunity to really break out to be more of the leader there when you combine it with Geneva and GlobeOp and really take some share? And is that business a business that you think can grow double digits organically over the next 3 years?

Yes. Pete, we would have the kind of the opposite. We don't think that Bloomberg is going to retire their system. In fact, we compete against them often. But I think to say double-digit growth on a $300 million business over the next 3 years, I think would be optimistic. But I do think we can get to mid-single digits. But we have a pretty good sales force and Jeff Shoreman is a pretty good leader. So I think we have a great opportunity to maximize what we can get out of the Eze acquisition.

Also, just to add to that, what they are doing successfully is going up market. So we had been able to get more traditional asset managers to buy in larger chunks than in the past, and we think that will continue.

Got it. Got it. And then, Patrick, did I hear you say there is a $25 million onetime gain in the quarter from an asset sale?

No. It's a noncash mark-to-market gain.

Mark-to-market, okay.

We adjusted it out of adjusted earnings.

Your next question comes from Chris Shutler of William Blair.

You called out the 1.8% organic in Q2 if you include the DST clients lost prior to the acquisition. Can you just give us the comparable number for Q3, Q4 and the full year under the -- that definition?

I think under that -- so at the midpoint, we're saying organic growth is about 1.7%, excluding those -- with the impact of those terminated clients. And those terminated clients are adjusting organic growth, compared to the previous way of accounting, by about 1.6%. So under the old method or if you excluded that, it would be about flat.

Okay. Got it. And then, Patrick, could you break out the revenue contribution in the quarter from -- due to the acquisitions, DST, Intralinks, et cetera?

Yes. DST, remember, is only half a month, right? It's only the half a month of...

Yes.

So DST is $91.8 million. Eze and Intralinks combined are $152.9 million -- $150.8 million, sorry, $150.8 million. And then CACEIS is $1.7 million. $91.8 million, $150.8 million and $1.7 million.

Okay. Perfect. And then, sorry, just a bunch of different items that were mentioned pretty quickly. Could you run through the -- you talked about the different headwinds. Could you run through what you said for each of the businesses again? So you said Eze is trading volumes and $10 million. And just could you be clear on the time frame? So was it -- were all of the items mentioned relative to the prior guidance?

Yes. They're all relative to the prior guidance and its impact on full year guidance.

Okay. And the 4.2% that you mentioned earlier was the alts business in the quarter?

The alts business in the quarter was, I think, over 5%, 5.3%, and it was 4.8% organic.

The 4.2% would be Q3 organic that's in the guidance for alternatives.

For the back half?

Just Q3.

So Q3 of 4.2%, full year of 4.2%.

Your next question comes from Chris Donat of Sandler O'Neill.

Just wanted to follow-up on the last question and, Bill, the tail end of your prepared remarks on Eze and Intralinks. Can we expect that sort of volatility or variability in earnings out of them tied to trading volumes and M&A activity going forward? I mean -- and I know that what's taken away can sometimes be added back in a better environment. I'm just trying to get a sense on how much -- you have like incremental margins of like 80% or 90% or 70% or something on these businesses when times are good, but then sometimes times aren't as good.

Well, I don't think that -- they have both put in some reasonable expense controls given that they've had a little softness in revenue, but we don't look at it as particularly volatile. It is something where we're getting similar kind of statistics that we track that would say that we should be generating more revenue than we are, but I think that has to do with how many documents they put in a data room or how often they access it or how many people access it. And it's -- that has been a little bit soft. And so I think it's something where you need to stay at it and win more deals and make sure that the innovations that we bring to the market are well-accepted.

Okay. And then just thinking about the Eclipse products from Eze, is that something that -- like how should we think about the future revenue contribution from that? Is that something that is potentially going to cannibalize existing Eze revenue? Or is that really additive? It's a new product that will be an addition to existing Eze revenue.

Well, I mean, obviously you're going to have some transfers from the Eze -- old Eze to the Eclipse cloud platform, that's going to happen. But what it does, it gives you a longer life span with that client. It gives you opportunities to sell additional products into there. And as Rahul said earlier, when you get into an Eze client, they might want Geneva. And then once they have Geneva, they might decide, really, we ought to outsource these various functions to GlobeOp. So you can take an Eze Eclipse sale for $100,000 and turn it into $5 million of revenue. So the challenge is making sure that we're knitting those things in lots of different places so that our people know what we need to do in order to be able to drive more revenue.

Your next question comes from Ashish Sabadra of Deutsche Bank.

So maybe just a quick follow-up. Rahul, you mentioned that the sales pipeline may be taking slightly longer than what you originally anticipated. Just wanted to better understand, are these deals just pushed out? Are they lost? Or did the client decide not to go ahead with it? Any color on that front? And was this one or few deals -- 1 or 2 deals or there were a lot of them? And any particular reasons for the delay? Any color that you can give us just to get comfort around maybe these are just pushed out.

Sure. So I think the comment is specific is for DST, right? And we had some expectations and some assumptions on what would happen as we brought in these new sales leaders and they went out and started to generate pipeline. And I think as we look at it now, we're still very optimistic about the amount of pipeline that they have generated. So it's not as if those deals went away or were lost. They just haven't closed as fast as we would like. And they haven't -- I think what we're discovering is that we're working our way through their processes, and we're doing well. And we do expect the majority of those deals to close in the future, just likely not enough to have a significant impact in Q3 and Q4.

No, that's very helpful. And maybe, I don't know, have you taken a more conservative view now, just based on the experience, that you've taken a more conservative view and there could potentially be upside depending on the timing of the closing of these deals?

We sure hope so.

So that's helpful. And maybe, Bill, a question for you. You talked about how you've always done a great job of managing expense control. And how should we think about -- I think one of the questions that we get from investors is how should we think about earnings power in 2020 and beyond? And is there any way to think that, that could slow down going forward? Or do we continue to see this kind of a sustained earnings momentum going forward?

I mean, I don't think that we're treating our business model, and I think that we will execute. And then as we execute, then you will see the revenue growth and you'll also see that we'll manage expenses better and we'll have tremendous earnings and tremendous cash flow. So I mean I don't think this is not positive. I got it. And I can assure you, I like it less than you do. But nevertheless, we still have a good business. We have a lot of great people. We've got a lot of great products and services. We've got great customers. We're a global organization. It's just large and things that you could turn one dial and change the company pretty quickly, now there's multiple dials that need to be changed. And so we're going through that process, and I think we're making progress all over the place. But we hit a soft patch and we just got to plow through that and get back to the growth path.

Your next question comes from Mayank Tandon of Needham & Company.

Bill, just given the challenges that you've identified today with some of these acquisitions, does this, in some ways, maybe slow down the pace of future M&A as you digest these operations and try to address some of the challenges that you mentioned?

Well, I think, Mayank, we've done this for almost 20 years as a public company and 33, 34 years in total. I don't think we will change. I mean, I think that both the Eze acquisition and the DST acquisition and the Intralinks acquisitions will all end up being very good acquisitions for us over the long haul. And our earnings, like I said, right, have gone from $0.62 last year's last quarter, second quarter of '18, to $0.91 in the second quarter of '19. And I know that's only $0.29, but it is close to 50%, 46%, I think. So I think it's -- Wall Street is a pretty tough place if you don't hit your forecast, and we've been pretty good forecasters. And now that the place is a little bit bigger, maybe we need to forecast a little better.

Right. Makes sense. Well, in that vein, would you consider, maybe in the short term, focusing on a stock buyback if your stock were to come under pressure, which it probably will given the downward revision to guidance, just maybe a broader pause on capital allocation going forward?

Well, I think that will certainly be a discussion at our next Board meeting. And again, you know how it goes, right? That pendulum swings and it always swings too far one way and it always swings too far the other way. And you try to do buybacks when you think your stock is really undervalued. Otherwise, we think that there's better uses for our cash flow.

Your next question comes from Jackson Ader of JPMorgan.

Bill, if we put the market-driven headwinds aside as we look at Eze and Intralinks, just in terms of maybe new logo wins or new logo deals, is there any kind of competitive pressures that you're feeling? Or do you feel like win rates in those businesses for new deals are still strong?

I think they're still strong. I mean, obviously, Eclipse hit 70 and we have good focus on there. And I think Mike Hutner does a good job, he runs that sales organization for Jeff. And Bob Petrocchi runs the sales organization for Leif O'Leary over at Intralinks, and I think Bob does a good job. I think it's an execution game and you got to execute all the time. And it's every day and it's a focus and it's also a close. And so I think we have a good team. We got smart people, and I think there's still good markets. And I think that this is just a patch that has come. I mean, obviously, we did okay in Q2, right? We hit our earnings number. We beat our revenue number. It's just we are looking out and we're going to tell you guys the truth. We're not going to sit there and sugarcoat it, and we'll take our medicine and execute.

Yes. Okay. Understood. A follow-up question would be on the Black Diamond strength. Double-digit growth, I believe you said that was double-digit organic growth at the beginning of your prepared remarks. Where is that coming from?

Well, the RIA market, right? RIA market, registered investment advisory market, is really what's driving most of financial services, right? It's not de novo banks and it's not new mutual fund complexes or new insurance companies, right? It's registered investment advisers, and in some ways, hedge funds still and private equity firms. Real assets is another bright spot, but RIAs are the big banks, the big broker-dealers. They consolidate power and then they splinter. And so it's -- I think it's in one of those splinter phases right now, although you're starting to see some companies like BB&T and SunTrust merge, and who knows if that's a new trend as well. But we win a lot of the spinouts of the various wire houses.

Your next question comes from Patrick O'Shaughnessy of Raymond James.

So what would your outlook be like for the general health of your financial services customer base going forward? Would you expect things to get worse before they get better at this point?

Patrick, I think you might know better than we know. But how we look at it is that -- like the last question was from JPMorgan. They got a $10 billion IT budget. And they're a big customer of ours, but we're not anywhere close to 10% of that. So there's opportunity. It's a question of making sure that you're building product and service that people want to buy. Now, same thing with Raymond James or same thing with Credit Suisse or same thing with Deutsche Bank or any of the rest of them. And so I think that, in general, you guys are well-capitalized. I think earnings are pretty good in the financial space, but let's see what happens. Are they going to cut interest rates a quarter or a half? And are they going to resolve China trade issues? And then you get more confident and more bullishness, and I think that tends to help us.

Got it. And then a question on the M&A competitive environment. It looks like the bidding for GBST was very competitive. What have you broadly seen out there in terms of interest in the assets that you are taking a look at yourselves?

Yes. I think, in general, there's way more money chasing way few quality assets. We like GBST. We like their management team. That bidding started out at AUD 2.50 and I think ended up at AUD 3.85. And we got to AUD 3.60, but we felt like we were stretching at AUD 3.50. So as much as we would have liked to have bought it at AUD 3.60, we're not really crying in our suit that we lost it at AUD 3.85. So we tend to be disciplined about what we do. And we were disciplined about Eze and we were disciplined about Intralinks, but that doesn't mean it always pans out exactly like we have it forecasted. So we have a little more work to do and we'll do it.

There are no further questions at this time. I would like to turn the call over to Bill Stone for closing remarks.

Well, I appreciate everybody coming on the call. And hopefully, you heard the straight talk that we're pretty well-known for. And we hit this quarter, but I know we disappointed as far as our guidance is concerned. And we're going to get back on the train and work hard for our shareholders. And we appreciate your interest. And hopefully, we will talk to all of you at the end of next quarter. Thanks.

This concludes today's conference call. You may now disconnect.