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spk07: Ladies and gentlemen, thank you for standing by and welcome to the SS&C Technologies Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be asked that you limit your questions to one question and one follow-up question. I would now like to hand the conference over to your speaker today, Justine Stone. Please go ahead.
spk08: Hi, everyone. Welcome and thank you for joining us for our Q3 2020 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 Pedanti, our chief financial officer. Before we get started, we need to review the safe harbor statement. Please note that various remarks we make today about future expectations, plans, and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Security Litigations 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 factor section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, October 28th. 2020. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today's call, we'll 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 relief, which is located in the investor relations section of our website at www.ssctech.com. I will now turn the call over to Bill.
spk02: thanks justine and thanks everyone for joining us today i hope you and yours are home safe and healthy i'll discuss our results for the quarter then walk through our assumptions for the remainder of the year as we continue to navigate the covet 19 world our results for the quarter are 1 billion 156 million dollars in adjusted revenue up a half a percent and dollar 10 and adjusted diluted earnings per share of 18.3 percent are adjusted Consolidated EBITDA was $463.3 million, $466.3 million, and our adjusted consolidated EBITDA margin increased to 40.3 percent. I think that was up 180 basis points. Our Q3 adjusted organic revenue was down 1.4 percent. And while we have seen some sales improvement, particularly within our recent businesses, we have continued weaknesses in our perpetual be rectified when we can get back in front of people. And we face some COVID-specific headwinds in our healthcare business. Obviously, people have not been able to fulfill as many prescriptions as they did prior to COVID. Alternative Fund Administration had a strong quarter with 4.3% organic growth, and the rebound in the M&A market helped drive Interlink's growth to 5.9%. Organic cash flow was $755 million for the nine months into September 30, 2020. Our secured net leverage is 2.52 times and total net leverage is 3.58 times. We bought back 3.1 million shares of common stock at an average price of $61.44 per share for $191.9 million. We still prioritize high-quality acquisitions and are evaluating a number of assets. In September, we brought on Frank Egan to be Managing Director of Mergers and Acquisitions. Frank has over 35 years of experience in investment banking and venture capital, and he will help us both source new deals and work with our business unit managers to evaluate different acquisition prospects. The pandemic has caused a lot of uncertainty in our global economy and major swings in the stock market. Despite this, SS&C has preserved our core DNA, our sales force is hungry, and our technology teams are innovative. Over the past couple of months, we have signed two of the largest deals ever in the retirement space. We believe retirement will continue to be a hot area for us, and we hope to build solid references at Nationwide and ICMA. The industry continues to adopt Edge Eclipse, and we signed a record 20 new clients in September. As you know, we sell Edge Eclipse on a term basis, so the revenue will be radically earned over the next few years. We have integrated Black Diamond and InterTrust, and we have begun to get some traction. Banks and trust companies are competing with warehouses and RIAs, and we anticipate this being an ongoing trend in 2021. Our alternatives business set a new record high for alternative assets under administration at $1.89 trillion, surpassing our previous record set last quarter. so much for the demise of the alternatives industry. We believe alternative asset managers are well positioned in these volatile markets. Our 2020 scenario analysis can be found on pages four and five of our earnings results slides. We continue to use 2021 scenario as our baseline with an incremental increase or decrease of about 25 million, dependent upon the state of the economy, which obviously is also dependent upon the global pandemic. We anticipate earnings per share to come in at about $4.21 as our baseline, up 11 cents from last quarter's estimate. I'll now turn the call over to Rahul to discuss the quarter in a little more detail.
spk03: Thanks, Bill. While the majority of our workforce is still remote, we have opened four international offices and are in the planning phase for several more. We are all anxious to return to normalcy, but the health and well-being of our employees is our first priority. We're monitoring guidelines from governments and health authorities around the world, including the CDC here in the United States, and will not open an office unless it's safe to do so. SSMC continues to innovate, and our employees continue to collaborate despite working from home. Within Interlink, we have enhanced our investor vision portal with expanded general partner capabilities, launched an interlink steel marketing and roadshow offering and integrated zoom web conferences integration between algorithmics and singularity brings embedded risk analytics to our singularity product we've already signed one client using this expanded functionality and our building momentum we've also rebranded our global transfer agency business to global investor and distribution solutions gids gids delivers transfer agency investor servicings powered by a single global servicing platform nick wright Previously leading financial services international has assumed the newly created role of head of GIDS to bring together SS&C's transfer agency capabilities around the world. Now I will mention some key deals for Q3. A $40 billion in assets hedge fund and current fund administration client licensed Geneva for their internal operations. A long-term Advent client upgraded their APX license to a cloud delivery solution, added Genesys for rebalancing capabilities, and BDLink as an investor portal. An existing large strategic client looking to consolidate vendors extended our transfer agency services to their European operations. A boutique superannuation fund based in Australia licensed our Blue Door solution for its ability to meet their complex requirements. An existing SSNC health client absorbing a number of acquisitions and the resulting increased membership required additional licenses and infrastructure to support their growth. A large hedge fund based in Boston expanded their fund administration services. A $4 billion in assets hedge fund shows SSNC's fund administration services, including middle office, regulatory reporting, and tax preparation, citing our reputation and commitment to implement on a tight timeframe. a European alternative investment manager converted to SS&C fund services from a competitor due to our expertise and ability to meet loan servicing requirements. A large DSD insurance client required a reporting solution and chose to license Vision. It was a successful cross-sell effort between DSD and our institutional investment management group. I will now turn it over to Patrick to run through the financials.
spk06: Thank you. Results for the third quarter of 2020 were GAAP revenues of $1,152.8 billion, GAAP net income of $159.4 million, and diluted earnings per share of 60 cents. Adjusted revenues were $1,156.2 million, including the impact of the adoption for the Revenue Standard 606 and for required deferred revenue adjustments for acquisitions. Adjusted revenue was up 0.5 percent. Adjusted operating income increased 5.5 percent, and adjusted EPS was $1.10, an 18.3 percent increase over Q3 2019. Adjusted revenue increased 5.4 percent over $5.4 million over Q3 2019. Our acquisitions contributed $29.8 million in the quarter. Foreign exchange had a favorable impact of $6.5 million, or 0.6% in the quarter. Organic revenue decline on a constant currency basis was 1.4%, driven by some weakness in the DSC asset management and healthcare businesses. These were offset by strength in the fund administration and the interlinks businesses. Adjusted operating income for the third quarter was $448.8 million, an increase of $23.2 million or 5.5% in the third quarter. Foreign exchange had a negative impact of $3.2 million on expenses in the quarter. Adjusted operating margins improved from 37 percent in the third quarter of 2019 to 38.8 percent in the third quarter of 2020, driven by lower personnel costs, lower costs related to independent contractors, lower out-of-pocket expenses, and lower travel expenses. Adjusted consolidated EBITDA, which was defined in Note 3, in the earnings release was $466.3 million, or 40.3 percent of adjusted revenue, an increase of $20.5 million, or 4.6 percent, over Q3 2019. Net interest expense for the third quarter was $54.7 million. It includes $3.4 million of non-cash, amortized financing costs and OID. The average interest rate in the quarter for our amended credit facility and the senior notes was 3.0% compared to 4.84% in the third quarter of 2019 and resulted in interest expense decrease of $43.8 million. We recorded a gap tax provision for the quarter of 58.6 million of 26.9% of pre-tax income. Adjusted net income, as defined in Note 4 of the earnings release, was $294.2 million, and adjusted diluted EPS was $1.10. And the effective tax rate used for adjusted net income was 26 percent. Diluted shares increased $266.7 million from $265.8 million in Q2. The impact of an increase in the average share price and option exercises was partially offset by share repurchases. On the balance sheet and cash flow, as of September, we had approximately $184 million of cash and cash equivalents and approximately $6.9 billion of gross debt for a net debt position of approximately $6.7 billion. Operating cash flow for the nine months ended September 2020 was $755.1 million. For the nine months, we had net debt payments of $330.3 million compared to $629.1 million in 2019. Treasury stock buybacks totaled $219.8 million for purchases of 3.6 million shares. at an average price of $61.07 per share compared to Treasury stock buybacks of 60.3 million or 1.3 million shares in 2019. In the nine months we declared and paid 99.9 million of common stock dividends as compared to 76 million in the same period last year, an increase of 31.4 percent. Year-to-date, we paid interest of $212.7 million compared to $294.6 million last year due to lower debt levels and lower average interest rates. In the nine months, we paid income taxes of $182.5 million compared to $180.3 million in the same period of 2019. Our accounts receivable DSO improved in the quarter. to 50.4 days compared to 53.3 days as of June 2020. Capital expenditures and capitalized software totaled 80 million or 2.3 percent of adjusted revenue compared to 99.1 million or 2.9 percent of adjusted revenue in the prior year. Spending was predominantly for capitalized software, IT infrastructure, and leasehold facilities, leasehold improvements. Option exercise increased this year to 129.6 million for proceeds and 4.2 million shares, compared to 74.5 million of proceeds and 2.7 million shares last year. On an LPM consolidated basis, EBITDA, which is used for covenant compliance, was $1,876,000,000 as of September. It includes $8 million of acquired EBITDA and cost savings related to our acquisition. Based on net debt of approximately $6.7 billion, our total leverage ratio was 3.58 times, and our secured ratio was 2.52 times. On outlook for the year, We've got basically these assumptions included in our outlook. We assume that markets continue to be volatile. Large-scale outsourcing deals and license sales are impacted. AUE levels remain flat, and fund launches are somewhat delayed. As we're focusing on client service, retention rates will continue to be in the range of our most recent results. Foreign currency exchange will be at current levels. Adjusted organic growth, revenue growth for the year will be in the range of negative 1 percent to negative 2 percent. Interest rates on our term loan facility will approximately be one month LIBOR plus the spread, which is currently at 175 bps. We will manage our expenses during this period by controlling variable expenses and staff hire. But we'll continue to invest in our business for the long term with capital expenditures of approximately 2.4 percent of revenue and R&D expenditures of approximately 400 million on a GAAP basis. We expect the tax rate to approximately be 26 percent on an adjusted basis. The first scenario assumes that the economic conditions start to improve in the fourth quarter of 2020. Under these assumptions, we expect approximately the following results. Adjusted revenue of $4 billion, $650 million, adjusted net income of $1 billion, $130 million, diluted shares of $267 million, and operating cash flow of $1 billion, $130 million. The second scenario assumes that the economic conditions continue the same as current conditions. And in this assumption, we expect the following results, adjusted revenue of $4,625,000,000, adjusted net income of $1,120,000,000, diluted shares of $266.3 million and operating cash flow of $1,115,000,000. The third assumption assumes that economic conditions don't start improving until later in 2021. Under this assumption, we expect possibly the following results. Adjusted revenue of $4,600,000. Adjusted net income of $1,110,000. Deluded shares of $265.5 million. And operating cash flow of $1,100,000. And now I'll turn it back over to Bill for final comments.
spk07: Mr. Stone, do you have any closing remarks?
spk02: Thanks, Patrick. In the past 34 years, we have put together a remarkably diverse portfolio of products and services supported by a diverse group of talented professionals. Each year has presented challenges, but perhaps no year more so than this year, an election year, a global pandemic, civil unrest. SS&C, like a fine timepiece, just keeps ticking away. Adjusted EPS up 18% for the quarter, and we suspect 2020 will be up 10% for the year. SS&C is a transaction processing and accounting engine. Grades, dividends, interest payments, pharmacy claims, tax returns, Medicare, Medicaid, compliance checks, mutual fund redemptions and subscriptions, and hundreds of other regulatory tax and commercial transactions. The world has more people generally doing more things. SS&C will continue to be a trusted partner to our clients, a strong and successful company for our employees, and an haven for value for our investors. And with that, we'll open it up to questions.
spk07: At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Please, we ask that you limit your questions to one question and one follow-up. Please hold while I compile the Q&A roster. Your first question comes from the line of Reena Kumar with Evercore. Please go ahead. Good evening. Thanks for taking my question.
spk09: It looks like the organic revenue in the quarter came in a lot better than what the streets is modeling. And if you can maybe talk a little bit about the drivers of that organic revenue. how much of that, you know, came from growth from the fund administration business, the EASE business and drawings and DST, that would be really helpful. And separately, if you can also talk about what the underlying organic revenue growth assumption is for the fourth quarter and the drivers for your baseline case.
spk02: Oh, you want to take that?
spk03: Bill, I can certainly start, and maybe Patrick can comment on the underlying assumptions. But I think that the businesses, we had pretty good performance across the board in Q3, but the businesses that the highlights are fund administration had really a pretty good quarter. And we also saw within Intralinks a bounce back or starting to build some momentum in the M&A business again. And so Intralinks had a pretty good quarter as well. And Patrick, if you'd comment on the guidance. or the scenarios, rather.
spk06: Michael Nutterman Sure. I think that the, you know, I'll talk about the midpoint of the scenario, of the scenarios. We expect adjusted organic growth to be negative about 5.5 percent. And the difficulty in the fourth quarter is that there's a very difficult cost compared to Q4. 2019 when revenue was $1,212,000,000. And we had very strong license sales in that quarter. But we expect, you know, our fund administration business, you know, growth to continue and be around 5% for the full year. And also our interlinks business and seeing some improvement in the DSG business.
spk09: Got it. That's very helpful. And if you can call out the actual growth rate for the fund administration business in the fourth and in the third quarter, and definitely if you can talk a little bit about the growth that you saw in DST and if it's possible to get back to at least a low single digit top line growth in 2021.
spk06: I'll give you that. So the alternatives plan administration business was up 4.3% on the quarter. And the DST business on an adjusted basis was down 3.8% in Q3.
spk13: Go ahead.
spk02: 2021, I think, you know, these deals that we have had press releases out on, are very large deals and the revenue really starts to kick in, you know, throughout the fourth quarter and then really kicks in in 2021. So, you know, we have some reason for optimism. We believe that we have a lot more prospects in the pipeline.
spk07: Your next question is from the line of Brad Zelnick with Credit Suisse. Please go ahead.
spk04: Hi, this is Marco on the line for Brad. Thanks for taking my question. I wanted to talk a bit about the hiring of Frank Egan. This is for you both. So what excites you about this hiring? Is there perhaps a shift in M&A strategy or is something changing in the environment? Thanks.
spk02: Well, I think, you know, Frank has been a pretty senior person at a number of different organizations. investment banks including ubs and then he founded something called lake bridge capital and ran that venture capital fund for a number of years he's very well connected in both fintech and in healthcare and so he brings a uh a network of of people and capabilities uh that that we didn't really have in the organization before and i think that you know he's helping our individual business units on how to frame how to make an offer and then how to, of course, close, you know, in a confident way where, you know, the target is comfortable with what we're going to do. So we're excited about it. He's been here a couple of months. I think, in general, all of us are pretty pleased with his performance.
spk04: Great, thank you. For my follow-up, Patrick, I wanted to ask about the transition of contractors to in-house employees that you spoke of. How much would you say that contributes to margins this quarter, and how should we think about the potential for savings going forward? Thanks.
spk06: I think, you know, most of the – I think all the contractors would transition to in-house employees in the quarter. And the savings was about $6 million and a quarter, somewhere in that neighborhood.
spk07: Your next question is from the line of Jackson Adair with JPMorgan. Please go ahead.
spk03: Hey, guys. Thanks for taking my question. Just a quick follow-up on some of those retirement services deals, Bill, that you talked about. Can you give us a sense how those contracts are priced? Are they based on dollars per account, similar to the mutual fund accounting business that CFP has, and then any particular revenue recognition oddities that we should be aware of in those retirement businesses? Sure.
spk02: I think in general, it's, you know, it's again, it's matrixed and it's, you know, the number of participants, the size of the assets and the number of transactions. So these are all large deals. And, you know, JP Morgan also came out with the everyday 401k or something along those lines that we're also going to administer that for you guys. And again, these are large scale deals. I mean, JP Ward is a startup, but, you know, you guys have a lot of market power. So there's, you know, great anticipation. And then, you know, Nationwide has a big business as to CMA. And so, you know, we're expecting, you know, tens of millions of revenue in 2021 and then an acceleration even after 2022.
spk14: Got it. Okay. Thank you. And then on the fund administration business, I think this is a
spk03: second quarter in a row that the AUM has actually outpaced the organic revenue growth.
spk13: And so I'm just curious, is this a signal of pricing pressure?
spk03: Is it a signal of maybe the types of assets that are flowing into your customers, maybe where, you know, if it's more plain vanilla, you're not able to get the same type of basis points on the assets under administration? Any comment you have there? Bill, I could take a shot at that. So, you know, I think what's happening is as our private equity and real assets businesses continue to grow quickly, some of the kinds of mandates we're getting in there are for things like limited partners and, you know, private capital and things like that that are very, very profitable but don't have the same yield in terms of basis points. So that's probably what you're seeing. Okay. That makes total sense. Thank you.
spk07: Your next question is from the line of Alex Crenn with UBS. Please go ahead.
spk01: Hey, good evening, everyone. Just a couple of quick ones. First on retention, notice that ticked down. I mean, 95.3 is still a very high number, but just curious if you would call out anything why that's come off a little bit. I mean, again, tough environment, but just curious, any particularities?
spk02: I just say that, you know, there's been a couple of accounts that we've withdrawn from, and that makes up the bulk of that.
spk01: Okay. And then maybe just on the guide, I guess, the updated guide, I know these are scenarios, but at the same time, we're, I guess, at the end of October with two months left in the year, So just curious, the $50 million range, what are the biggest swing factors with two months left to still have such a wide range? What could go right? What could go wrong still this year?
spk02: We could sign some large-scale licenses where we take a very large chunk of revenue into the fourth quarter, and we could not sign. some large scale licenses where we take very large chunk of revenue in the fourth quarter. I think that's just about it.
spk01: Okay. No, that's fair. Thanks.
spk07: Your next question is from the line of Peter Heckman with DA Davidson. Please go ahead.
spk14: Hey, good afternoon. Thanks for taking my question. Patrick, did you comment on the closing of the unit of, I believe it was Capita, the timing of that in the quarter and what type of revenue that will require revenue that contributed?
spk06: Capita has not closed. Capita has not closed. It's still hung up with some regulatory approvals and some other approvals and And we're not sure at this point when it's going to close.
spk14: Okay. So there is no acquired revenue from Capita in your updated guidance ranges?
spk06: No. There's really no changes from our, you know, previous guidance. You know, our last acquisition I think was InnoVest in May.
spk14: Got it. Okay. All right. That's helpful. And then just the – I saw the recent U.K. win come across. It reminded me a little bit of the St. James contract. You know, is the replatforming of wealth managers still ongoing within the U.K.? And do you feel that you can use some of the successes to gain share there? I mean, is that an opportunity for the DST business?
spk02: Yeah, we wouldn't just say – we would say all of our – all of our money management businesses are participating in the capabilities that we are packaging together for, for Brooks McDonald and other, other large scale UK money managers. And, you know, actually throughout, you know, Ireland and Scotland. We also have opportunities in Australia and in the rest of Asia. So I think, you know, some of the, Some of the pandemic slowdown stuff is really that you don't get a chance to get in front of them and be able to cement deals faster. But Brooks McDonald is a first-class place, and we have a great opportunity to have a great partnership with them and then also leverage that for more business throughout the UK and Europe.
spk14: Got it, got it. And then you're breaking up there just a little bit just so you know, but just in health solutions, I guess you talked – you called out a couple wins there and maybe some opportunities. But, you know, is that a business that you think can grow high single digits over the next three or four quarters?
spk02: We have the pipeline for it to be able to – to close at higher rates even than that. I think, you know, we have some momentum. It's a question of, you know, locking down the contract and then making sure that the revenue streams are coming in. But we have some momentum in health care, and we're, you know, cautiously optimistic about what we can do.
spk14: Got it. All right. We'll look for an update on that next quarter. Thanks.
spk07: Your next question is from the line of Mayank Tandon with Needham. Please go ahead.
spk03: Thank you. Bill, just looking at the portfolio of offerings that you have, any noticeable shifts in competition, implications for pricing, and then how have your win rates been trending across the various segments of your portfolio?
spk02: Yeah, I think, you know, the – The strongest areas continue to be wealth management, where you see Black Diamond and then a few of the other add-in products that we've built around and acquired around Black Diamond, like Solentica and other products like that. Then you have real assets that have done a very nice job and continue to have a very full pipeline. We also have a lot of opportunity in private equity. We think that that continues, as Rahul had spoken about that prior, and that's a very full pipeline. And still, you know, Mayank, on a dollar's basis, still 70% of the dollars in private equity are still administered in-house. So there's a real opportunity for us to execute into that business even more so. And I think, you know, I think we believe retirement. is going to be a very nice sweet spot for us because the deals are large and the contracts are long, as are the tightness of the relationship. So, you know, that's really kind of the essence of the business. You know, by getting invest, we get no trust. You know, we have 16 diamond RIAs, and, you know, what they're finding as they get into business you know, high net worth individuals is a lot of them have trust, which means you need trust accounting. And no trust is a very, very powerful product. And we're excited about our opportunity to, you know, cross them and upsell into those 69 clients.
spk03: That's a helpful color. And then if I could just ask about 21, as we're trying to frame our models off the various scenarios you actually laid out, when you say A mid-2021 recovery or an early-21 recovery or if the recovery is back-end, weighted, what does that mean in terms of the organic growth and margin levels when we talk about these recovery levels for 21?
spk02: Yeah, I think, Mayak, again, the margin levels are really, you know, SS&C manages its business. So, you know, we can manage our expenses as we've built many times. You know, we have some flexibility in how much money we spend. So we're not as concerned about the margins. We're not as concerned about the earnings. You know, but we have a very good sales force. And the global pandemic, while it hasn't crippled us, you know, it certainly has not put wind in. We've hired a lot of new salespeople, and we're training them through Zoom, but they don't get the interaction and the ability to be able to bounce ideas on each other and be able to see what's working in the rest of the sales force. So that's been the biggest issue for us is to be able to close deals, People want to read up to you in the eyes and make sure X, Y, and Z. You know, whereas, you know, in these large-scale and medium-scale fund administration businesses, you know, we're such a colossus in these businesses that we really have lots and lots and lots of references. And we're doing the work. Right? Whereas if you buy a big license and you have to do the implementation, you get concerned that you're not going to have people on site for months. It adds to the trepidation. So that's the real challenge with the revenue side. Got it. Thanks, Bill.
spk07: Your next question is from the line of Ashish Shabadov from Deutsche Bank. Please go ahead.
spk12: Thanks for taking your question and a good quarter. Patrick, my question for you, for the fourth quarter organic guide, if we exclude that one-time difficult comps from license revenues in the prior year, what would the organic growth would have been excluding those difficult comps? Thanks.
spk06: I think the I think last year, yeah, that's about right. So that's about, you know, 3.5% impact or so. Okay, that's helpful. 3.5% impact.
spk12: That's helpful. And maybe a question for you, Bill, if you can size the DST prospect pipeline. You talked about $60 to $65 million pipeline last quarter. Obviously, you've had some really good large deal wins. And so both the prospect pipeline and as we think about, as you mentioned, as you close these prospect pipeline and the new deals, the follow-up question was how do we think about the DST growth next year? Can it get back into a growth mode or losing a legit growth next year? Thanks.
spk02: I think we have opportunities. You know, again, it's a very competitive business, but, you know, the wins at ICMA and at Nationwide and at J.P. Morgan, for that matter, indicate that we have a superior offering and we have to get out and get after it. Now, you know, we have a talented group of executives working in that business with Mike Slytholm and Kevin Rafferty and John Keely and a number of others. But those three guys are leading a very talented group of people that are in there selling and selling hard. And, you know, we put the financial services sales in North America under Rob Stone, who's also a very talented sales executive. And I think that, you know, we're getting some – we're getting focused, we're getting traction, and we're getting increased intensity. So I'm optimistic about where we're going with this. And I think the addition of things like algorithmic embedded analytics and embedded risk and things like InnoTrust, which gives you the ability to handle, you know, 1940 Trust Act portfolios and be able to answer for different states on their trust on a stage law. I think there's a lot of stuff like that that SS&C has gathered, like Vodato that does handwritten notes and being able to immediately convert it into a machine readable. I mean, there's a lot of things like that that gives our solution a superior look, a superior feel, and then superior productivity. And I think that's the optimist.
spk12: Bill, thanks for the color, and congrats once again on a good quarter.
spk07: Your next question is from the line of Andrew Smith with Citi. Please go ahead.
spk13: Hey, guys. Thanks for taking my questions. Just a question on buying behavior in the sales cycle. It seems like you guys pulled through some nice wins over the past quarter, and it seems like Obviously, there's still some pressure, but it sounds like the sales cycle and closing rates and things like that are starting to normalize. I guess just to get your perspective on that, and then, you know, if there is improvement, what have you seen into the fourth quarter from that perspective? Thanks.
spk02: Well, again, Andrew, I think, you know, Trying to be perspicacious about this, you know, I think is very difficult because, you know, everybody's crystal ball is a little cloudy, you know, and when you say things are coming back to normal, I would tell you 80 or 90% of our sales meetings are now through Zoom or WebEx or whatever Microsoft is, whomever, right? But some sort of collaboration software where people are in normal places And as are our preparation meetings. All of our preparation meetings are through Zoom and, you know, collaboration software. And so, you know, back to normal seems like a very difficult standard to define. You know, and the further we get away from, you know, February of 2020, the harder it is to remember what normal was. So, you know, traveling for business in an airplane, I have not done in six months, maybe. That hasn't happened in 30 years. So I just think that we need not to get precipitous, and we need to be able to, you know, work methodically, have data. I'm sure we're supporting our teams and our customers. And then, you know, when you see spots of lightness, pounce. So I think it's much more of a, you know, kind of a watchful waiting. You know, we're watchfully waiting, right? And, you know, like a hawk in a tree, you know, until they see movement on the ground, you know, they're not going to waste their energy. And so that's what we're trying to do. We're trying to be wise. And, you know, in October 2020, that's a difficult proposition.
spk13: Sure, no, that makes a lot of sense, I guess, in a virtual selling environment. Have you seen clients sort of adapt this sort of environment in terms of buying patterns? Or is it still very, you know, very much tenuous from from just a virtual sales engagement perspective?
spk02: Well, it's just longer, right? It just takes longer. And then, you know, then there's a contract, right? And then that's done virtually, too. Sure. So the length of those kinds of things all kind of stretch out. And, you know, I know Rahul has been, you know, in the midst of a number of them. And I think, you know, maybe, Rahul, you could kind of give your perspective.
spk03: Yeah, I think just to add to some of that, you know, there are signs that people are getting more comfortable. So I think people are adjusting to the – and like Bill said a little while ago, you know, some of the things that are – some of their challenges, those challenges do need to get solved, right? But at the same time, this is all about rate of buying behavior more than anything else. So we are seeing prospects. know make decisions and sign contracts and move forward and and maybe there's maybe the rate of that happening is a little better than it was three four months ago for sure but but it's not it's nowhere close to you know what it would be in that normalized environment and i think that's that's really what we're facing understood understood thank you for that perspective and then just uh question on capital allocation um you know we saw the the buyback this quarter
spk13: Should we expect consistent buybacks? And then I guess, you know, in terms of the M&A pipeline, just any update there in terms of prospects and things like that?
spk02: Well, you know, again, that's another wise, you know, discussion point, right? So we'll sit down and we'll talk. And, you know, we can buy back debt, but as Patrick pointed out earlier, Our debt is, you know, one-month LIBOR plus our spread. And one-month LIBOR right now is about $50 billion. So, our interest rate on our, you know, about, you know, $4.8 billion in term loan B debt is 1.9 percent. You know, last year, I think we generated $5 a share in cash, $5 per share in cash. So, you know, we want to be cognizant that, you know, if we have a quality acquisition that we can get at a fair price, then we want to make sure we have the wherewithal to do that. And then we're going to split the rest of our cash flow between paying down debt. And it looks like now we can buy some in the open market and then also buying back shares.
spk13: Okay. Thank you very much, guys. Appreciate the comments.
spk07: Your next question is from the line of Chris Shetler from William Blair. Please go ahead.
spk11: Good afternoon. Just looking at the fourth quarter implied net income range, I'm coming up with a range of $266 million, $286 million. You did $294 million in the third quarter. So I guess the question is, why would net income come down from Q3 to Q4?
spk06: Well, there's a little bit of decline in sequential revenue at the midpoint scenario, right? And the fourth quarter also typically has higher costs related to net income. employee reviews and raises that are effective on October 1st. So we're going to see that increase in compensation and a few other expenses go up sequentially in Q4 and then, you know, at the midpoint, revenues down a little bit.
spk00: Okay.
spk02: Yeah. We can raise it in October. So that began on October the 1st. And I think our raises for 2020, while more modest than they are generally, we're still in the $30 to $40 million range. So, you know, $8 to $10 million a quarter.
spk11: Okay. Got it. And then, Bill, I just want to come back to the hiring of Frank Egan one more time. You've obviously led the R&D effort for a long time at S&C and You've been a very large, acquisitive, growing company for years. So maybe just would you mind putting a finer point on why you're brought on, Frank? I guess I'm still not clear on it.
spk02: Well, Chris, I think, you know, SS&T is a way bigger place, right? We're $4.6 billion and we have upwards of 25,000 employees. We have 150 offices. We're in 35, 40 countries, right? There's opportunities all over the world. And And we've done a number of acquisitions where those management teams are used to buying stuff too. So incoming numbers of acquisitions and then the ability to really project, you know, how I think or Rahul thinks or Patrick thinks. We still have full-time jobs, right? I mean, we still try to manage the business. We try to help the sales force on call. We try to help the development people get the right people in and be able to really get high enough level people at our prospects and our clients to make sure that what we're building, people are going to buy, right? You know, you get as many developers as we have that have a lot of talent. You got to be careful you don't have a bunch of science projects, right? That's really cool, and you couldn't sell it to your mother. That's the business. That's the management of the business. We might have a... We do. We have opportunities to buy things in Germany, in France, all over the United States, in Asia, and in Mexico, and all over the place. I think Frank's job and so far in the first 60 days, is to help those business unit managers understand, you know, how you're going to go about negotiating this, how you're going to make that target feel well, feel good, how you're going to keep Patrick informed and Joe Frank informed for the finance and the legal, how we're going to have a cadence through this whole thing. So it's not like I'm getting out of it. I'm not, and there's a chance I might have some veto power, right? We need to be more disciplined when we're going to have so many opportunities around the world.
spk11: All right, understood. Thanks so much.
spk07: Your next question is from the line of Surrender Thin with Jeffries. Please go ahead.
spk05: Thank you. Just a clarification on the commentary around capital allocation. From my perspective, obviously, share purchases were a little bit larger than I was anticipating. But on a go-forward basis, as we think about the opportunity set that's out for you, can you help me understand why? the trade-off between share repurchases versus maybe just paying down debt. I understand that debt is effectively free at, you know, 1.9% at this point, but maybe that allowing yourself to increase flexibility in terms of maybe doing even a bigger deal or, you know, obviously one of the challenges with the firm from an outsider's perspective has been just leverage ratios and stuff.
spk02: Well, I think, hey, surrender, that's a really good question. And, you know, that's where you try to be wise. You know, that's why we spent $330 million on paying down debt and buying back debt. And we spent $191 million on buying back shares. Now, you know, we didn't offer $750 million to buy back shares. And, you know, we don't send out press releases on authorizations that we don't have any intention on acting upon. That doesn't mean we're going to buy $750 million worth of . I don't think we will. But at the same time, when you're generating $5 a share in cash, you know, that's a pretty compelling, you know, kind of analysis sense to . economically valuable to you, but your point is still well taken, right, that the market prefers that we have less debt, that we have less leverage, and that we pay down debt faster. But there aren't many places that pay down debt the way we do. And we're focused and we're disciplined and, you know, we're not, you know, we haven't changed our general philosophy that our target is good acquisitions. Second is we want lower leverage. You know, third is when our stock appears to be undervalued, which we believe it is. But, you know, we're not in charge of setting the value of our stock. The market's in charge of setting the value of our stock. We're generating lots of cash, winning big new deals. We've got a lot of great technology coming out. We've got a great workforce. You know, we're ambitious. We're disciplined. And I think, you know, you can go back to, 2015, we did a billion in revenue. 2010, when we went public, we did 329. You know, 2005, when we went private with Carlisle, we did 95. You know, we have a history of growing, and I believe we'll keep growing because that's what we do. It's in our DNA. It's who we are. You know, we have other entrepreneurs that would like to join us. Nina Wallace at Algo, and Schmidt at InnoVest, or, you know, all kinds of different people that are still with us that we have bought their companies. So I think that's a great, you know, diverse group of products and services and a diverse group of people. And, you know, we're just excited about where we sit and how we perform, you know, vis-a-vis our competitors independently.
spk05: That's very helpful, Bill. And as a quick follow on, in terms of just when we think about where you're seeing opportunity in terms of the mix, and there was an earlier question about how maybe the sales process has changed with time. How much of your new business that you're looking to win is maybe with existing clients versus trying to bring you from the door at this point. Um, and is it the new clients that are maybe hesitant to sign the bigger deals at this point or any color there would be appreciated if just it's one of those things where, you know, maybe not this quarter or now, but as we kind of get more comfortable with, you know, living with the coronavirus that sales just kind of ultimately gets back to a normalized place, regardless of what the environment might be like.
spk02: You know, as we get bigger, obviously, right, more and more people are our clients. I think we have upwards of 18,000 now. And so, you know, obviously our opportunity in the cross-sell upsell and our current client base continues to grow. Now, you know, at the same time, we're 4.6 billion in revenue and you know, my estimation of transaction processing in the financial technology space, there's $100 billion in the United States and another $100 billion outside the United States. And I would guess in healthcare, transaction processing is at least $100 billion in the United States, and I don't really know what it might be outside the United States. So, you know, if you take $4.6 billion and you divide it by $300 billion... You know, we represent, what, 1.5%. So there's plenty of opportunity. It's a question of being able to have the right products at the right time at the right place and then have a need, right? You know, Nationwide had a need, or ICMA had a need, or J.P. Morgan had a need, or, you know, you have to have a need, Brooks McDonald or other ones, right? You have to have a need, and then we have to meet it. and we have to meet it at the right price with the best solution. And I think in general, we do that, and we do that very well.
spk05: Thank you, Bill.
spk07: And your final question comes from the line of Cispen Love with Piper Sandler. Please go ahead.
spk10: Thanks for taking my questions. So the monthly redemption data seems to be mostly unaffected by the pandemic over the last several months. I was just wondering if there's anything interesting going on underneath the service in terms of the types of funds that are raising assets versus those that are seeing some outflows.
spk03: We'll continue to see, you know, as I mentioned earlier, we'll continue to see broad-based flows. So really all of the different parts of our business, whether it's hedge funds and different strategies within hedge funds, private equity, real assets, we're seeing fund flows into. The private equity and real assets have tended to raise some larger funds. And so maybe it's skewed a little bit in that direction. And within the hedge fund markets, the credit-focused funds continue to do pretty well, but it is pretty widespread.
spk14: Thank you. That's helpful.
spk07: And there are no further questions at this time. Mr. Stone, do you have any closing remarks?
spk02: I would just, again, appreciate everybody being on there. And, you know, as always, we work very hard for our shareholders, and we appreciate your interest in our company. Thank you. Stay safe. Bye.
spk07: Thank you. And this does conclude today's conference call. You may now disconnect.
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