SS&C Technologies Holdings Inc (SSNC) Q2 2020 Earnings Call Transcript

Hi, everyone. Welcome and thank you for joining us for our Q2 2020 earnings call. I'm Justine Stone, Investor Relations for SS&C. 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 purposes of the safe harbor provisions under Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, July 28, 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 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.

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 and then talk through our assumptions for the remainder of the year as we continue to navigate in a COVID-19 world. Our results for the second quarter were $1.1408 billion in adjusted revenue, down 1.3%; and $1.04 in adjusted diluted earnings per share, up 14.3%. Our adjusted consolidated EBITDA was $448.4 million, and adjusted consolidated EBITDA margin remained constant at 39.3%. Our Q2 adjusted organic revenue was down 1.4%. Many perpetual license software and complex outsourcing deals have been pushed, as well as delayed fund launches, but firms are now adjusting to the new environment. We continue to see strength in the alternative funds administration and Eze businesses with 4.6% and 3.6% organic growth, respectively. We were encouraged by Intralinks' solid performance of 3% organic growth. DST in our perpetual license businesses saw a bit more Q2 weakness, but we are encouraged by our large deal pipeline and initial Q3 acceptances of our bids. Operating cash flow was $555.7 million for the first 6 months ended June 30, 2020, a 33.4% increase from the $416.6 million for the prior 6 months. Our secured net leverage ratio was 2.53x, and our total net leverage ratio was 3.6x. With our secured leverage levels well below 3x, we will consider other uses of free cash flow, including stock buybacks, which you have seen we renewed and increased our authorized buyback program to $750 million. In Q2, we bought back 0.5 million shares of common stock at an average price of $58.62 per share or $27.9 million. Despite the challenges of COVID-19 and the global economic shutdown, SS&C has maintained a high level of service to our customers and has continued to win mandates. One of our largest strategic partners has transitioned all technology operations in Canada and Europe to SS&C's international potential services business. This equates to tens of millions of dollars in revenue annually, and we started to recognize a portion of this in Q2. We also have set a high alternative assets under administration, the high-level mark, of $1.81 trillion. This was driven by lower-than-average fund closures in Q2, new mandates won, and a big rebound in organic assets under administration growth. We believe alternative asset management is well positioned in these volatile markets. Black Diamond continues to grow nicely and had its best-ever sales quarter in Q2, including a contract with the wealth management division of a top 10 U.S. bank. We have updated our 2020 scenario analysis, which can be found on Pages 4 and 5 of our earnings result slides. We are now using the 2021 scenario as our baseline with an incremental increase or decrease in revenue of about $40 million, dependent upon the state of the economy for the rest of 2020. We anticipate earnings per share to come in at $4.10 as our baseline. This is up $0.27 from our original 2021 scenario. We are also excited about changes to our senior management team. Dan DelMastro is assuming the reins of SS&C Health. And as previously announced in Q2, Karen Geiger and Steve Leivent are leading our Advent business. I'll now turn it over to Rahul to discuss the quarter in more detail.

Thanks, Bill. Our operations are well settled into remote working conditions as a result of COVID, and our clients have complimented us on the quality of our delivery. We have maintained revenue retention rates and continue to grow in some of our key markets. We saw growth in alternative fund services, Eze, and Intralinks in Q2. Drivers included competitive takeaways in alternatives, heightened trading volumes in Eze, and a large payment protection plan win for Intralinks, offsetting a reduction in M&A volumes. As expected, we saw a slowdown in perpetual license sales in our institutional and investment management and other software license businesses. DST revenue was impacted by reduced volumes and activity in both financial services and health care, as well as a reduction in interest revenues due to the interest rate decline. Our pipeline remains strong, and we are optimistic about being able to win large mandates at DST and elsewhere in our business over the next few quarters. The products and services we provide are mission-critical to our client base, and we have seen a significant increase in login and usage activity on our web and mobile client portals and applications. We have increased inbound interest for cloud hosting and outsourced services as firms in this remote working environment look to us to provide access to production systems and augment their staff and processing capability. We're making investments in our business to innovate and support our clients. Black Diamond's new timeline feature, which allows for personalized digital communication at scale, was adopted by over 60 clients in Q2. In SS&C Health, we're developing dashboards that are updated in real-time related to COVID-19 product utilization and trends. We're using the Vidado technology to help state and local governments scan handwritten medical documents and forms. Algorithmics continues to perform well, and we have several ongoing projects to incorporate the technology into our existing solutions. Now I will mention some key deals for Q2. A large fund administration client using Geneva upgraded to our cloud delivery solution, giving them our application and IT infrastructure in one solution. A U.S. bank bought our Black Diamond solution to help them attract registered investment advisers. An independent money manager with over $100 billion in assets bought a suite of SS&C products, including the Global Wealth Platform. They needed a comprehensive end-to-end solution with scalability to handle high volumes. An existing health care client added our Drug Discount Wrap to their suite of services. A large Brazilian asset manager chose SS&C GlobeOp's fund services suite, citing our team's expertise and technology. A commercial real estate company chose Precision LM for their loan origination and servicing. A $20 billion U.K.-based investment manager looking to consolidate vendors moved an additional fund from a competitor to SS&C GlobeOp. A $28 billion alternative manager upgraded to Eze Eclipse. They were impressed with the interface and anywhere, anytime functionality. I will now turn it over to Patrick to run through the financials.

Thank you. The results for the second quarter were GAAP revenues of $1.1381 billion, GAAP net income of $169.5 million, and diluted EPS of $0.64. Adjusted revenue was $1.1408 billion, excluding the impact of the adoption of revenue standard 606 and for acquired deferred revenue adjustments for the acquisition. Adjusted revenue was down 1.3%. Adjusted operating income increased 0.9%, and adjusted EPS was $1.04, a 14.3% increase over Q2 2019. Adjusted revenue decreased $15 million or 1.3% over Q2 2019. The acquisitions contributed $25.1 million. Foreign exchange had an unfavorable impact of $7.2 million or 0.6% in the quarter. An organic decline on a constant currency basis was 1.4% driven by weakness in the health care transfer agency and Advent Software products due to the current environment. These were offset by strength in fund administration, the Eze business, Intralinks, and institutional products. Adjusted operating income for the second quarter of 2020 was $430.1 million, an increase of $3.9 million or 0.9% over the second quarter of 2019. Foreign exchange had a positive impact of $8.3 million in expenses in the quarter. Adjusted operating margins improved from 36.9% in 2019 to 37.7% in the second quarter of 2020 driven by lower personnel costs, lower third-party service expenses, lower out-of-pocket expenses, and lower travel expenses. Adjusted consolidated EBITDA defined in Note 3 of the earnings release was $448.4 million or 39.3% of adjusted revenue, a slight increase of $0.2 million over Q2 '19. Interest expense for the second quarter was $60.5 million and includes $3.5 million of noncash amortized financing costs in OID. The average rate in the quarter for our credit facility and the senior notes was 3.19% compared to 4.96% in the second quarter of 2019, resulting in an interest expense decrease of $43.8 million. We recorded a GAAP tax provision of $29.5 million or 14.8% of pretax income. Adjusted net income as defined in Note 4 in the earnings release was $276.1 million, and adjusted EPS was $1.04. The effective tax rate used for adjusted net income was 26%. Diluted shares increased slightly to 265.8 million in the quarter. The impact of option exercises and share issuance was offset by a decrease in the average share price. On our balance sheet and cash flow, as of June 30, we had approximately $262 million of cash, cash equivalents and approximately $7 billion of gross debt for a net debt position of approximately $6.7 billion. Operating cash flow for the 6 months ended June 2020 was $555.7 million, a $139 million increase or 33.4% compared to the same period in 2019. For the first 6 months of this year, we paid off gross debt of $503.3 million, and we borrowed $246 million on our revolver in the first quarter. The $246 million revolver was paid off in the second quarter. We paid $133.1 million of cash interest compared to $169.9 million in the same period last year. We paid $34.7 million in cash taxes compared to $125.8 million in the same period last year as we deferred some tax payments into Q3 2020. Accounts receivable DSO was 53.3 days compared to 52.5 as of March and 49.7 as of December 2019. We used approximately $52 million of cash or 2.2% of adjusted revenue for capital expenditures and capitalized software mostly for IT as well as leasehold improvements. In the first 6 months, we declared and paid $64 million of common stock dividends compared to $50.6 million in the same period last year. We used $27.8 million in cash to buy back 0.5 million shares of treasury stock at an average price of $58.62. Our LTM consolidated EBITDA that we use for covenant compliance was $1,864 million as of June 2020 and includes $16.1 million of acquired EBITDA and cost savings related to our acquisitions. Based on net debt of $6.7 billion, our total leverage ratio was 3.6x and our secured leverage ratio was 2.53x as of June 30. On the remainder of the year, due to the current unpredictability of the market and economic conditions, we are providing 3 scenarios for the year depending on the timing of the recovery. These are the assumptions on these scenarios. Markets will continue to be volatile. Large-scale outsourcing deals and license deals are impacted. AUA levels remain flat, and fund launches are delayed. As we're focusing on client service, retention rates will continue to be in the range of our most recent results. We've assumed foreign currency exchange to be at current levels. Adjusted organic growth for the year will be in the range of negative 1% to negative 2.7%. Interest rates on our term loan facility will be approximately the 1-month LIBOR plus the spread, which is currently 175 bps. We will manage our expenses during this period by controlling variable expenses and staff hiring. We'll continue to invest in our business for the long term with capital expenditures of approximately 2.5% of revenues, and we'll continue to use a tax rate of approximately 26% on an adjusted basis. The first scenario assumes that economic conditions start improving in the fourth quarter of 2020. In this assumption, we expect approximately the following results: adjusted revenue of $4.640 billion; adjusted net income of $1.107 billion; diluted shares of 267.5 million; and operating cash flow of $1.1 billion. The second scenario assumes economic conditions start improving in the first quarter of 2021. In this assumption, we expect approximately the following results: adjusted revenue of $4.6 billion; adjusted net income of $1.0935 billion; diluted shares of 267 million; and operating cash flow of $1.090 billion. The third scenario assumes that economic conditions don't start improving until the second half of 2021. Under this assumption, we expect approximately the following results: adjusted revenue of $4.560 billion; adjusted net income of $1.080 billion; diluted shares of 266.5 million; and operating cash flow of $1.075 billion. And I'll turn it back over to Bill for closing comments.

Thanks, Patrick. In closing, I'd like to thank the 23,300 people that work for SS&C for staying focused and delivering. We are blessed to have such a talented workforce. I'd also like to reiterate the confidence we have in our business model, its cash flow characteristics and resiliency. While we cannot control the macroeconomic headwinds of COVID-19, we can control the quality of our deliverables and our high-touch customer service. We have solid visibility into our earnings and cash flow generation for the remainder of the year, and we will continue to manage cost, track receivables, and support our sales force in winning new businesses. Our pipeline continues to grow with specific large opportunities within SS&C Health and Retirement Solutions. We believe we will come out of this current crisis as a stronger company. With that, I'll turn it over to questions.

Your first question comes from Surinder Thind with Jefferies.

Can you help me break down your expectations for the second half in terms of Eze growth or DST compared to the rest of the business? Also, please include Intralinks in that breakdown.

Overall, we believe the business is looking at growth between 1% and 2.7%. As mentioned earlier, we anticipate that fund administration, the Eze business, and Intralinks will likely grow at the lower end of our expectations from the beginning of the year, probably between 3% and 4.5%. We expect DST to be flat or possibly decline by 2%. While we have several large deals in DST that need to be signed and start generating revenue, we remain optimistic about DST for 2021. However, for 2020, they will face revenue challenges, though we will still generate significant cash flow and earnings.

And then as a follow-up, when I look at your margin guidance, obviously, versus the guidance that was provided in the last quarter, the expectation is sort of margins to be better, but it's also expected that margins will be relatively steady regardless of the revenue outcome. And so are you guys targeting margins at this point? Or how should we think about that aspect?

We typically aim for EBITDA margins around 40%. This target hasn't changed, and we expect it to fluctuate between 38% and 42%. At the onset of the COVID pandemic, we invested heavily in equipment and accounted for those expenses immediately. Consequently, there will be periods when our expenses are higher, while at other times, our revenue may exceed expectations. Overall, this is the general range we aim for in our consolidated EBITDA percentages.

Your next question comes from the line of Ken Hill with Rosenblatt.

Just wanted to ask one on kind of the capital allocation front. You guys have leverage. It seems like where you need it, you had the share repurchase authorization there. But I was hoping you could talk a little bit about M&A and how that fits into the picture and maybe what you're seeing as it relates to the ability to approach companies right now in the environment, evaluate transactions, and actually start implementing on them. That would be helpful.

Well, we constantly go after acquisition candidates, and we're methodical about it, and then we're also disciplined about what we're going to pay. Even in today's world, I mean there was a company that just sold today for somewhere around 30x EBITDA. And it's very difficult for us to do that and see how we ever make money with that. But we have plenty of firepower, and we have plenty of management bandwidth. So we're active. But right now, even in today's world, it's a pretty high price for good assets.

I have one question regarding the differences in guidance between the baseline scenario and the 2021 recovery piece. It appears that revenues increased by approximately $50 million. Can we assume that Innovest contributes to this? I believe you had previously targeted around $40 million in revenue, growing at a high single-digit rate. Additionally, do you have any insights on the impact on net income? Is the increased net income expected to come from the higher margin reflected in your latest guidance?

I think this is Rahul. The change in the scenario includes Innovest as part of it, probably about half. The rest is that we performed better in Q2, and we expect further improvement in Q3 and Q4 from the baseline 2021 scenario. Currently, we anticipate Innovest's margin to be about 20%, and we have plans to improve that moving forward.

Your next question comes from the line of Alex Kramm with UBS.

In terms of your scenarios, you are indicating an economic recovery, but can you explain what needs to happen for the business to reaccelerate in relation to the pandemic? It seems that your business heavily depends on visiting clients, completing installations, or utilizing on-premise consultants. Could you provide insights into how you believe this will progress, especially given that the financial services industry appears to be cautious about returning to offices and allowing access to our facilities? Additionally, how have you adapted your business model to navigate this situation, and to what extent can your operations be conducted off-premise or in the cloud?

Yes. So Alex, as you take a look at it, right, 99% of our people work from home, right? So we are either working on an individual client's account where the data reside in our data farms and the systems reside in our data farms, or we're working where the systems and data reside in their data farms, often which might be a third-party data farm. So the work, even the implementation work, is pretty similar. The difference is that you're doing it from your home rather than from your desk and you're not surrounded by other people doing the same thing. You're working from home. So in some ways, you get better productivity because you get the focus and there's not the interruption of the office. And in another way, there are challenges because you don't have access as readily to expertise right around you. But in general, the business operates the same once we secure a client and begin the implementation. What's more challenging a little bit is on large-scale sales opportunities. It's a lot of Zoom meetings and a lot of relationship building from a touch point, 'Hey, we know Alex Kramm at UBS,' or 'We know Surinder at Jefferies,' or 'We know somebody else,' right, and trying to connect all those dots to get whoever is in the buying position to be comfortable buying from us. And that becomes a little bit more challenging when it's done from a remote basis, and they can't look in the eye and ask you the really hard questions and see how you handle them and those kinds of things. So I would say that's the biggest difference. And Rahul, you can comment on that.

Bill, I agree with that. I would also like to point out that the large capital expenditures are significant, especially for those purchasing perpetual licenses or starting projects that involve a lengthy conversion period. They need to feel confident in our team and environment. We've observed some slowdown in this area this year. However, as Bill mentioned, we're beginning to see people becoming more comfortable in this remote work setting and making decisions. With this in mind, I believe that under the recovery or improvement scenarios we outlined, we will see continued progress, and people will resume making decisions on larger deals.

Okay. Fair enough. And then you said DST is still going to be fairly challenged this year but maybe more positive next year. So do you think it can actually grow next year? And any sort of ranges where you think next year can already be for that business?

Well, we've gotten some solid acceptances of our bids in Q3. I mean we haven't signed the contracts yet, but we're in the midst of contract negotiations on those, and we've been selected. And that totals upwards of $50 million, $60 million, and we have a full pipeline of other deals. And so we're getting some traction. And so we think that there's an opportunity that DST in 2021 could be positive in the 1% to 2% range.

Your next question comes from the line of Brad Zelnick with Crédit Suisse.

Congrats to everybody on the great quarter and especially with the performance on Intralinks. Can you talk about the puts and takes between M&A activity and corporate use cases? And how should we calibrate our expectations going forward for Intralinks coming off of this large PPP-related win and just the overall strength in the quarter?

Well, first, I think Ken Bisconti and Bob Petrocchi, who we put in charge of that business, I guess, about 8 or 9 months ago, have really done a great job, right? They're on top of it. They know their customers. They know their markets, and they're aggressive. And Intralinks also has a very good development organization, and they've been bringing out new products and services. And I think that even though M&A has been down, I think, 7% so far in the first 6 months, they've been able to use their data room capability for other things such as tracking this PPP program for one of the largest banks in the country and also for other things. And so I would just say that it's a pretty flexible business. It's a really bright workforce, and Ken and Bob are good leaders. Rahul may say something else.

Well, I would add that secure document exchange, right, is obviously a lot broader than just M&A. So we found some good use cases for it with the Payment Protection Program, but there are plenty of other use cases that I think Bob and Ken and their sales teams and development teams are working on.

Can I just follow up one for Patrick? Appreciate the very thorough disclosure, and I might have missed it, but can you just help to reconcile the really strong first half cash flow generation and the scenario guidance that actually ticks down on cash flow? Is that just the acquisitions or am I missing something else?

Well, the main difference is that we were able to defer about $50 million, $60 million of cash tax payments from Q2 to Q3 as per the legislation that Congress passed. So we have to make a tax payment of about $60 million in July 15. So essentially, we moved tax payments from Q2 to Q3. So that helped Q2 cash flow a little bit, but we also had strong collections and good revenues for the quarter that helped cash flow.

Your next question comes from the line of Andrew Schmidt with Citi.

Question on organic growth. I was wondering if you could talk a little bit about just thoughts on how organic growth should trend sequentially into the third quarter. It seems like the outlook suggests that there's a sequential decline in organic revenue. So I'm just trying to reconcile what's going on from quarter to quarter would be helpful.

We still see some decline in the DST business, which is creating a challenge for us. Additionally, we've faced difficulties in closing large perpetual license deals. For our larger outsourcing contracts, the revenue sometimes takes a couple of quarters to increase. These are the three reasons for a relatively flat organic revenue outlook between the second quarter and the fourth quarter. Rahul, do you have any thoughts on this?

No. In our baseline scenario, we are assuming that sales and sales activity will remain at current levels without significant improvement or decline, leading to a relatively stable outlook. If sales begin to improve, we anticipate a shift closer to our economic improvement scenario.

Your next question comes from the line of Ashish Sabadra with Deutsche Bank.

Congratulations on the strong results. I have a question regarding the DST deals that are currently in the pipeline. Can you provide any details on whether these are transfer agency deals? Additionally, on the health care side, I understand there are some near-term challenges since elective surgeries are being delayed. Could you discuss the momentum in that business and your ability to secure new deals in health care?

We have several significant deals in both our fund services and health care businesses, which look promising. Additionally, we've secured a few notable deals in financial services. Overall, there has been substantial effort from our team in responding to RFPs and engaging with potential clients. Currently, we estimate a pipeline of about 10 deals in the DST business, each expected to generate between $10 million and $30 million in revenue. As for your second question, I'm afraid I can't recall the specifics right now.

Yes. No, no. Just about health care and the deal flow on that front as well and just the near-term headwind that we are seeing on the health care side and just as you think about when do we start to see that normalize going forward.

At the start of the pandemic, many people quickly refilled their prescriptions, which was beneficial for us. However, once those prescriptions were filled, the need for continuous refills diminished, leading to a slowdown in that segment of our business. Additionally, we experienced significant business related to paying claims for elective surgeries in our health plan sector. With the decrease in elective surgeries, we are seeing a decline in prescriptions for pain management and antibiotics. We are currently awaiting the return of elective surgeries, but if hospitals are occupied by COVID patients, that recovery will be delayed. These considerations have influenced our strategy. Overall, I believe our plans are well thought out, and we see opportunities in healthcare. We are optimistic about achieving strong results in 2021 and finishing 2020 on a solid note.

That's very helpful. And maybe just a quick question on alternatives. Alternatives delivered a pretty strong growth in this quarter as well. And Rahul, you mentioned share gains there, competitive events on that front. I was just wondering if you could talk about both private equity as well as hedge funds. What are you seeing on both those fronts?

Yes, we've seen positive developments across the board. In our hedge business, new clients have launched funds, we've achieved some competitive victories, and there has been a natural recovery from the earlier decline this year. Our private equity and real assets segments continue to perform well, with strong wins and promising prospects, including several large deals in progress. Overall, alternatives have been performing quite well.

Your next question comes from the line of Peter Heckmann with Davidson.

Patrick, just a minutia, but was there a one-time gain from the sale of an asset in the quarter?

There was. You can see the adjustment in the cash flow statement.

I got that far, yes.

It's mark-to-market and a gain.

Got it. Got it.

The $16.5 million.

That's the gain, and $34 million was the total proceeds.

Right.

Okay. And then within your scenario guidance, have you assumed any level of buybacks?

We haven't assumed any level of buybacks in the scenarios and diluted shares count.

Okay. Great. Can you provide an approximate figure for the perpetual software license fees in the quarter?

Professional services revenue in the quarter?

I'm sorry. Total license fee revenue would be fine. Just trying to get a feel...

Perpetual licenses? It was $5.9 million.

Your next question comes from the line of Jackson Ader with JPMorgan.

The first question is about the 3.5% organic growth. I'm curious how much of that came from ranking the volumes you observed in the market versus new logo wins.

Go ahead, Rahul.

Yes. So I would say probably 60% of it was market volumes and volatility, and 40% of it was new sales both on Eze as well as the new Eclipse platform. So Mike Hutner and his team have been doing a pretty good job of both accelerating the development and innovation we have on that as well as getting the prospects to buy even in this environment. So pretty pleased about that. And I'd say 60-40.

And so just a quick follow-up on that. Is that about what you guys are kind of expecting in the long term? Or is that being impacted by the economic outlook as well just in terms of logo additions and, call it, non-volume-related growth with the Eze business?

I think we're expecting non-volume-related growth to continue to get better from here. Obviously, when you sell a deal, in the beginning, you don't get all the revenue. You get some kind of ramped down revenue during the implementation period. I think that's kind of where we are right now on the new clients that we have sold recently. And so we expect those clients to get up to full strength, and we expect to continue to sell more run rate revenue. So we do expect it to grow over time.

That's great. If I could ask one quick question about the DST headwinds, we've covered that pretty thoroughly. But from a different angle, is there anything surprising about the DST exposure or the ongoing mix in terms of how less resilient that business has been compared to your other businesses?

I don't think so. I believe this is a large and complex business undergoing a significant overhaul. During this process, we uncover various insights. When we acquired the business, it had 16,400 employees and generated around $420 million to $430 million in EBITDA. Now, it has fewer employees and is close to generating $800 million in EBITDA. We're striving to approach our initiatives thoughtfully. We see great opportunities and have valuable clients, and it's essential to offer them what they want to purchase. Our focus must be on creating products that meet market needs rather than those we simply want to develop. I believe we are making headway in this area, and ultimately, this will be our key to success. There’s no secret formula; it’s just a matter of hard work with large clients and substantial systems that require innovation and the introduction of new products.

Your next question comes from the line of Chris Shutler with William Blair.

Could you talk about the reasons for the management changes at both Advent and DST Health recently?

At Advent, Rob Roley, who had been leading the business for the past couple of years and has been with us for 19 years, received an offer to become an operating partner at a large private equity firm, and he chose to accept it. He is originally from California and was living in New York with us, so it is likely he will return to the West Coast. We think very highly of him and wish him well. Regarding Black Diamond, Steve had been in charge for an extended period, and Karen has served as Rob's second-in-command for several years. We are enthusiastic about the opportunities for both Karen and Steve. We also wish Robert well. Furthermore, we have been exploring the health care sector for over two years now. Danny DelMastro, who founded Aero-Med in Connecticut and successfully grew and sold it to Cardinal Health, and later served as a senior executive there for four years, joined us, and we have been impressed with his leadership and sales skills. We have decided to put him in charge, and we believe he has done an excellent job, building strong client relationships and exciting opportunities for us.

Okay, Bill. Looking at the scenarios, the baseline scenarios' revenue is slightly lower when we adjust for Innovest, but the profit has improved significantly compared to your original guidance. My question is, in which areas are you cutting costs much more aggressively than the original scenarios?

Well, I think a couple of things. I mean, obviously, we appreciate that the Federal Reserve has interest rates at 19 basis points or something. So interest costs are a lot less.

That helps.

Yes, that helps. We are transitioning from around 1,900 contractors and expect to have none by the end of August. This shift to employees will generate significant expense savings. Additionally, travel and entertainment expenses are mostly nonexistent, which has resulted in substantial savings. We also no longer have commute expenses, which further reduces costs. Overall, I believe our expenses will be significantly moderated.

Bill, just to follow up on that, the move from contractors to employees. Like when did that process really begin in earnest? And it sounds like it's completing soon.

I think we notified Syntel about a year ago because that's what the contract said, and we started onboarding as employees probably in about March, and we were hoping to be done by the end of June, but COVID kind of bumped into that a little bit. So now we expect it to be done by the end of August. Is that pretty accurate, Rahul?

Yes. That's right, Bill.

Your next question comes from the line of James Faucette with Morgan Stanley.

This is Jonathan on for James. How has pricing held up? And is there any sort of appetite for further price increases in this environment?

Well, we certainly have appetite for it. I guess you're probably asking about one of our clients' appetite for it.

If I could add, it's held up pretty well in the sense that deals that we are winning, we're not seeing any trends that force us to revise pricing down or anything like that. And I think on the price increase process, we're pretty pleased with how that went at the end of the year. And we think most of our clients understand that we need to deliver more value. And in exchange, we would like a little bit of an uptick on a regular basis. So we do think that, that process is going to be good for us over the long term.

Understood. And it may be early days, but how are you thinking about the potential for cost takeouts for '21 versus the expense controls that you have in place for '20?

Yes, I wouldn't say that we have anything imminent. The leaders of our businesses are responsible for managing their budgets and ensuring meaningful work for everyone. We are a strong, profitable company, and we value our workforce and want to support them. The majority of our costs are related to employees, so we are very careful about how we approach this. We believe that integrating contractors into our operations will help, and many adjustments can be achieved through attrition if we choose to reduce our workforce. We are optimistic about maintaining great margins, high cash flow, and strong earnings.

Your next question comes from the line of Alex Kramm with UBS.

I want to revisit the topic of organic growth for a moment. I believe there might still be some confusion regarding what has shifted. Previously, your range was between 0 and negative 2%, and now it's between negative 1% and negative 2.7%. You mentioned several points during this call, but could you summarize what actually changed? I also think your performance in the second quarter may have exceeded your expectations.

Well, again, Alex, I think the organic revenue numbers are going to get tied to our ability to close new business and be able to drive that business into revenue in Q3 and Q4 and obviously in Q2 as well, but given that the real revenue pops you get in this business are when you do large-scale perpetual licenses because they close immediately. So given that, that has slowed down. I think that's kind of the biggest issue on organic revenue growth impact between Q2 and in the second half of the year.

Okay. And then just one quick one. You raised your buyback authorization significantly, but you really haven't shown much appetite to buy back. So it's nice to have the authorization. But with the stock basically trading at the lowest relative level it has in history, I think, relative to the S&P 500, I mean what does it take for you to actually do something with the authorization?

It requires courage to prioritize buying back our own stock over potential acquisitions. We carefully consider the implications of stock buybacks compared to reducing debt. Economically speaking, buying back stock is typically more beneficial than paying down debt, yet there remains a common belief that having no debt is preferable. This creates a challenging situation. We did not increase our buyback authorization lightly; we commit fully to our actions. In 2018, we invested $8.4 billion in acquisitions, and over the last decade or so, we've spent about $14 billion on companies. We are not hesitant to make significant decisions; it’s about timing. Perhaps we have been too focused on achieving perfection instead of seizing great opportunities, but we are proud of our track record.

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

I have one question, following up on the earlier topic about pricing. There were a few lawsuits filed in the past quarter that appear to be at least indirectly related to your pricing strategies. How much were those lawsuits and the resulting client disagreements exceptions in terms of resistance to your pricing changes? Or has there been a wider pushback against your attempts to adjust pricing?

I believe those incidents were outliers. It's not feasible to implement price increases. Additionally, there are some contractual matters at play in both situations that are unrelated to pricing. Therefore, I view them as outliers, and we maintain strong relationships with our clients, as shown by our 96.2% retention rate. I consider both cases to be outliers. Rahul, do you have a different perspective?

I agree with Bill. The significant issues in those items are mostly not related to this pricing initiative we've implemented.

There are no further questions at this time. I will turn the call back over to Bill Stone.

Well, again, thanks, everybody, for being on the call. We are focused on our business and excited about our opportunities, and we believe that we have great opportunities through the rest of this year and really set ourselves up for a great 2021. So thanks again, and we look forward to talking to you at the end of October. Thanks. Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.