SS&C Technologies Holdings, Inc. (SSNC) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us today. I'm Surinder Thind, the senior analyst covering technology and information services here at Jefferies. So I'm excited to be joined by our guest, Patrick Pedonti, who needs no introduction. So Patrick has been the Chief Financial Officer of SS&C since 2002. So before we begin, I do have one quick housekeeping item for our viewers. I would like this fireside chat to be as interactive as possible. [Operator Instructions] So please ask early and often, and I'll try and incorporate as many questions as I can. So with that, let's get started. Patrick, thank you so much for joining us today.

Thank you. I appreciate being invited. I kind of missed being in London, but I've looked forward to this conference. And so far, we have a couple of good days. Thank you.

Well, we're very glad to have you here with us. With respect to our agenda, given that you and Rahul have been participating in a couple of other conferences the past few weeks, so I'm going to try and take a slightly different approach. So I'm going to maybe focus less on maybe the near-term impact of the current disruption of the business and maybe take a slightly more strategic focus, a longer-term view of the business. And maybe also dig a little bit deeper into half of the -- or roughly half of the business, which is the 3 acquisitions that you guys made in 2018. But -- so before we go there, I -- my first question is actually going to be about quarter-to-date trends just so that our audience is up to speed. So from a sales perspective, can you talk a little bit about what client sentiment is like today versus maybe 2 months ago when there was a lot more fear in the marketplace? And then how does this level of uncertainty compare to maybe 12 years ago during the financial crisis? And are there any lessons to draw upon of how maybe we should be thinking about demand now? And then how it may evolve over the next 6 months or 12 months?

Sure. I think -- so we're clearly seeing an improved environment compared to what we were seeing at the end of March and early April. The equity markets have essentially stabilized. We're seeing credit markets back open, which I think is really important to our customers, especially credit markets. I guess all that's -- thanks to the Fed, but I think it's helping our business prospects from where we thought we were a couple of months ago. But a key still to -- as you know, we've got a lot of recurring revenue, and that's been pretty stable in this environment. But the key is that our customers and our offices opened up again, at least maybe on a limited basis, on a locational basis or something, and we're able to travel. So I think we've made good progress with communicating with customers on video and phone calls and continuing to drive new business that way. But in the end, to sign new deals and for a customer to be able to complete diligence on our products, you typically need to travel to the customer and you need to be face-to-face to close a deal, especially large-scale deals. So I think that part is still a challenge. And when, I think, offices open up again and we get back to a little bit normal, we should see growth rates continue. And we've had -- a lot of our core businesses, last year, in the first quarter, grew about 6%, and some of our new acquisitions were performing well. And I think once we get back to a normal environment, that will continue. But we really need, I think, to see -- to be able to get face-to-face with customers to really close large deals.

That's helpful. And then maybe as a follow-on, given that your software, your solutions, they target critical client operations, so would it be fair -- to kind of maybe elaborate on your earlier comments, I mean should we assume that sales like new clients should be down materially in the current environment given that you aren't able to travel? And then also give me an idea that -- why would clients actually want us to consider switching systems or processes amidst kind of this level of uncertainty. But then I'm assuming the opposite would also be true, which is that you're -- you've historically had really high retention rates, but I'm assuming that they would have potentially moved even higher.

I think you're right. We've been running 96% retention rates on clients over the last 18 months or so, which is really on the high end of where we're running. And I think one question you asked previously about comparison to previous financial crisis. I mean one of the big differences is we're just not seeing businesses go out of business, right, which we were seeing in previous financial crises. So that's helping retention rates. And I think you're right. I mean I think that's a double-edged sword. Clients are not -- going to either want to slow down switching at this point or -- and that helps our retention rate, but also that helps our growth. So if you look at our growth, we're running 96% retention rates, and we need -- we've been growing 3% or 4%. We need to go out and find 8% growth for new business. And probably half of that comes from existing clients and half of that comes from new clients, new logos. I think the current market stabilization, financial market stabilization is helping the current clients. So I think -- I don't think they're slowing down implementations, but large-scale new businesses, clearly, we're -- you're right. I think people will either delay implementations or wait until we get back to a little bit normal before launching new implementations.

Excellent. And then when we take a step back and we think about how quickly the environment changed, but at the same time, you were also able to quickly adapt from a delivery perspective with more than 99% of your workforce able to work from home with little to no impact on client service here. So given this and given that SS&C has historically been one of the most efficiency-focused firms or businesses out there, is there a benefit to keeping much of your existing operating structure when things do get back to normal maybe other than, yes, just talk about sales traveling more? And then maybe how much of a benefit could you see in terms of cost potentially if you were to keep much of the current operating structure?

Yes. I think we're all taking a look at this, all companies. The -- our strategy typically has been to have large offices centralize in financial centers: London, New York, Singapore, Hong Kong. So yes, I think we're looking at kind of 2 options: one is maybe we rotate people through offices, and we have a certain amount of employees that don't necessarily need to be in the office to continue working at home. And two, maybe you kind of distribute the offices, right? So in the New York area, you have smaller office out in the suburbs, and that reduces commuting time for employees and makes it easier for them to get to work, and they're not having to travel mass transportation. So we're looking at both those areas. I mean we spend about $200 million a year on facilities. And clearly, we've been successful with having employees work remotely, and there is the potential we can reduce some of that floor space and save money over the long run. It will take a while to implement, but there's a potential there.

Understood. And now maybe switching topics, focusing a little bit more on the longer-term strategy. Back in 2018, you did make 3 large acquisitions: DST, Eze, Intralinks. And in the process, you guys more than doubled revenues. And I think from my perspective, that maybe perhaps changed the fundamentals of the company. So prior to that, if you were to maybe summarize what your top line strategy was, we could describe it as 5% to 10% organic growth and then 5% to 10% growth from acquisition activity. Now assuming that we do get back to a more normalized environment, now that you've had these 3 acquired companies for roughly about 2 years at this point, you've now put in your own management, your own structure, your own processes. So what is realistic from a growth perspective for SS&C as a whole? And why?

Sure. So I think you've got to look at our segments, right, and the product areas where we go after the market. So if you look at our core business, which includes -- for the most part, includes our fund administration outsourcing business and our software business for large-scale asset managers, that core business grew 6.3% last year combined. And in the first quarter, before we hit this crisis, it grew 6.6%. So our core business over the last 5 quarters has been performing really well. And then if you add to that, Eze and Intralinks, the acquisitions we completed towards the end of 2018, they clearly -- those are businesses that can clearly grow in the mid-single-digit rate. We're diversifying the product offering at Intralinks so they're not totally dependent on M&A, and then Eze is introducing some new products. So if you combine those, that's about 60% to 65% of our total revenue and should be growing -- some of it grows 6%, some of it grows 5%. The remaining area is DST, the financial services segment and the health care segment for the most part. And there are 3 things we've worked to accomplish there. One is improving technology and customer service. Two is improving retention rates from where they've been historically at DST. And I think we've been successful there. We've improved customer service. We're introducing new technology in that space. And as a result, our retention rates have been nice. Since we've owned DST, they've been running about 97%. So now we need to go after some growth at DST. I mean this whole crisis has kind of stalled that strategy, but we were definitely heading there. We've beefed up the sales force, spending more money on sales at DST. And if we can grow DST, get DST to a low single-digit growth -- and essentially, they were kind of flat last year, excluding termination -- terminated clients pre-acquisition, we can get the whole company to about 4% or 5% growth. So I think those are our targets. And then hopefully, over time, we get the DST health care business growing a little bit faster and the financial services business growing, and we can get to a 4% or 5% overall growth rate.

And then as a follow-on to that, how should we actually think about, excluding M&A, just operating leverage? I mean does a mid-single-digit growth rate then translate to a high single-digit earnings growth? Or maybe some color there on how we should think about the asset earnings power of the company over the long term?

Yes, we think so. I mean that -- if we can grow 4% or 5%, we can grow earnings in the high single digits as we continue to consolidate and leverage our cost structure from these acquisitions. And as we pay down debt and our interest expense comes down, we think we can grow high single digits on earnings. That's right.

Got it. And then under the assumption that M&A is maybe going to be a smaller contributor to your growth strategy on a go-forward basis, so is that a fair assumption? And so if so, what is the right capital structure for the company at this point? And is it may be fair to even assert that SS&C's earnings multiple has been maybe historically penalized because of the -- maybe the higher leverage that you've kind of chosen to run at?

Yes. I think -- well, 2 things there is -- typically, what we've done -- when we've done these large acquisitions, I think when we did Advent and when we did DST, we levered up to about 5x. But our goal when we did those was to delever to 4x as quick as possible. And we've made those commitments to investors, and we made those commitments to the rating agencies. So that's our goal. And once we get to 4x, we'd like to work to get to 3.5x as fast as possible. And I think in today's environment, 3.5x leverage is a lot different than 3.5x leverage 5 years ago when interest rates are so low today, right? So our company -- and I think it's misunderstood sometimes, I think we get grouped into with high-leverage companies. But even at 3.7x leverage, which is where we're at currently, we'll generate $1 billion of free cash flow. So we've got high margins. We've generated a lot of cash. And I think 3.5, 3.7x leverage is a lot different for us than a lot of other companies. And then we're in a historical low interest rate environment, so it's a lot different. But clearly, our goal is always to continue to delever and derisk the company.

And then given M&A has been an important part of the strategy in the past, how should we think about M&A as a contributor on a go-forward basis? And then maybe what are kind of the areas that you're thinking about at this point? Obviously, you've got a fairly robust set of solutions at this point that spans a wide spectrum.

Well, as you know, our M&A strategy is more opportunistic than anything else. We don't set goals to accomplish a certain amount of M&A each year. We think that if you do that, you end up buying the knock-off businesses or you end up overpaying for businesses. So our strategy is clearly to be opportunistic and to get fair value on acquisitions and buy good businesses that return value to shareholders. So we'll continue doing that. I suspect that if you look at our growth rates from M&A over the last 10 or 15 years, it's probably not going to be a heck of a lot difference over the next 10 or 15 years. It's going to be lumpy. There's going to be years where -- like 2018, where we do a bunch of acquisitions just because of really coincidence that we've found some good deals. And there'll be some years it'll be slower. But I don't think it's going to slow down. I mean our overall strategy is to become a bigger company, to have more products and services to offer our clients. And we're in a large market. The financial services software market is the biggest software market in the world, and I think there continues to be opportunity for us to do acquisitions in that space.

Got it. And then following up on the idea that you guys do throw off a significant amount of free cash. At what point does maybe a more predictable capital return policy begin to enter the discussions at the Board level? Right now, there's a modest dividend, and share repurchases have historically been kind of the last item on your list for uses of cash.

Yes. You're right. So our priorities on use of the cash have been acquisitions and pay down debt. I mean those have clearly been our priority over the last 5 years. And -- but now I think we're clearly entering a different environment where if you look at our term debt facility, we're -- right now, where our LIBOR is, we're paying about 2% on our debt, and we're generating a lot of cash. So it's probably going to make more sense for the Board to take a look at should we be allocating some portion of our free cash flow to stock buyback to eliminate some of the dilution that's been created from options. So that becomes much more likely at our leverage levels today and at the cost of our debt.

Got it. And then now maybe kind of focusing a little bit more on the 2018 acquisitions, starting with DST. I think this is perhaps where you've talked about you -- the goal, I think, is to get into a low single-digit growth, but I feel like when you kind of take a step back, this is maybe where there's maybe the greatest amount of debate in terms of the outlook for the business. So correct me if I'm wrong, Patrick, but DST accounts for roughly 45% or so of SS&C's overall revenues. And I think it's effectively 3 businesses in one, right? There's a U.S. financial services business, the European financial services business and then a health care management business. And so all 3 of those have actually tended to exhibit different growth characteristics as well. So I think my first question here, trying to take a big picture view of things is, while you've done a really good job of just bringing out the cost, you've more than doubled your initial cost synergy guide when you bought the business. But the concept of this being a low to mid-single-digit revenue grower, you've alluded to that now. Can you help us work through the thesis of why? And maybe as a follow-up, perhaps when we look over the last couple of years, the growth there has missed expectations. So we're perhaps too optimistic in terms of thinking how you would transform the business at that point, or can you help us walk through that disconnect?

Sure. You're right. The DST business is essentially 3 different businesses. I mean on the financial services side, they generally both service large-scale institutional asset managers, wealth management and retirement accounts. Then there's a health care piece. So the health care piece at DST is about $400 million. That business has been struggling with some terminations that were announced prior to us buying DST and are continuing to affect the business as those clients get off the platform in 2020 and some in 2021. But we've been able to generally offset those terminations with new business at the health care segment. And I think once that's -- and we've had good retention rates since we bought them, and we've also been able to extend the contracts on a vast majority of the clients in that business. So -- and as a result, the business has been kind of flat over the last couple of years. So -- but our view is that it's a growth industry. We typically serve Medicaid and Medicare segment. That's a typical segment that we serve there. I think everybody would agree that's growing. So there's no reason that once we get that business stabilized, we improve technology that we can grow 5% or somewhere in that neighborhood of that business. The domestic financial -- the international is about $400 million, and the rest of it is the domestic financial services segment. The domestic financial services segment at DST has been performing well. It's been flat to up a little bit since we've owned it. And I think we're making good progress there. Where we have struggled is in the international segment of the DST business, and that business has seen much more competition in the U.K. I think it struggled a little bit with technology. We're working on improving that. We just announced a new acquisition, the Capita Group, that's going to strengthen our capability with all our major clients. So we're working hard to improve the international segment. And I think that's going to be the key for us to get to low single digits for that combined business, but we're working hard to accomplish that.

Okay. And then so maybe a little bit more color, and I'll just start with the domestic part of the financial services business. When we think about the outlook, obviously, this is all -- these are all mature businesses here. How should we think about the ongoing headwinds from kind of the movement from active to passive? What action is the opportunity here in the long-term outlook? Is it a flat-to-positive growth? Maybe any color on how you get that. Is there a pricing component in there? Or how should we think about some of that?

On the DST, domestic…

I'm sorry, yes, the DST financial services business.

Yes. So I think there were -- there are 2 keys to that. And I think we've accomplished those, and then there's a further one. One is our view is DST, historically, prior to us acquiring them, had very poor client retention rates. And as a result of the poor client retention rates, they were doing a lot of price concessions. So I think those 2 were really deteriorating the business. So it was very difficult for them to win. And then number three, they were spending about 2% of revenue on sales and marketing, okay? You had poor client retention, you had -- you've given away pricing, and you were spending 2% of revenue on sales. And I don't think -- our view is nobody is going to grow spending 2% of revenue on sales and marketing. So I think we've improved their offering. We've improved the retention rates. We are no longer giving out price concessions. We're holding our pricing. That's one way to deteriorate the market very quickly. And so I think those 3 things have really helped the business, and now we're working hard to win new business with our new capability. And I think that's the next step we need to do. And granted, we were hoping that was going to happen in 2019. And we thought at the beginning of the year, it would happen in 2020, and then this COVID crisis kind of slowed things down. But I think the business is heading in the right direction, and we've done the right things to stabilize it, so we can get some growth.

And then just to your earlier comment about holding firm on pricing, BlackRock recently announced that they did intend to maybe diversify away from the customers -- some of its ETF assets. Now that's obviously a different area, but is there may be a sign that things -- that there might be kind of a reemergence of some pricing competition or other competitive dynamics within the industry more broadly? How should we think about that? Because obviously, you alluded to the fact that you guys are kind of holding firm on pricing at this point.

Yes. I think BlackRock -- I mean our view is BlackRock is trying to diversify its custodians, right? So they're not linked to one custodian. I think -- we think this multi-custodian kind of model is pretty traditional in asset manager, so not an unusual move by Blackstone (sic) [ BlackRock ]. We see a lot of our clients have multi-prime brokers to diversify their risk. I mean they might have one software provider or one fund administrator, but they try to diversify their risk with multi-prime brokers or multi-custodians. So I don't think it's directly relevant to our business.

Got it. And then maybe turning over to the financial services business in Europe. You talked about that's where primarily the challenges have been. Can you help us understand a little bit more about the competitive dynamics of what's going on in that marketplace? You just alluded to that it's just a highly competitive market, and that's maybe the source of some of the challenges. But it appears that you guys are experiencing negative growth there. So what actions have you taken to kind of address the challenges that you're seeing over in there?

Well, the legacy DST business in Europe is basically servicing asset managers, typically transfer agency, doing outsourcing for wealth managers and doing outsourcing for insurance company. So I think that the area we've seen some challenge is the transfer agency servicing area for -- typically, in the U.K., they're regulated funds. And we've clearly seen more competition in that area than DST has seen traditionally in the past. Even though -- we continue to remain the largest transfer agency in the U.K. as well as Ireland and Luxembourg, and I think what we've been working on is improving our competitive position with new products and improved servicing platform in addition to the new acquisition of Capita we announced, which basically services insurance companies. And we've had some -- we've been offsetting the declines with -- we've had some recent wins. We've had a large global asset manager that we won and a couple of other wealth managers, and we'll start seeing some revenue from those new clients in late 2020 and 2021. So I think our pipeline is improving. Our technology is improving. The client base is improving. I think we've strengthened our capability with our client base with the Capita acquisition, so I think it's starting ahead in the right direction. And we should see some wins in businesses and kind of stabilize that business.

And then maybe as we -- as for that business, if we look at the long term, should -- is it -- would you also describe it as a low single-digit grower? Or that's where you're trying to get to the European financial services business? How should we think about where it is coming and then where you ultimately see it maybe versus the U.S. business?

Yes. We think -- I mean, clearly, the U.S. domestic financial services business is the best in the world, right, as far as growth opportunities. There's no doubt about that. And so the opportunities are much better in the U.S. than they are in the U.K. There are some opportunities in the Far East, in Singapore and Hong Kong and Australia, but the U.S. is still a dominant market. So I think our goal is to get the international business to be flat in the near term over the next couple of years and then work hard maybe doing some other acquisitions to strengthen our capability and get some growth out of the U.K., Ireland, Luxembourg market. So -- and again, it's been a challenge, but it's really only about $400 million of our business.

Understood. And then just as a quick reminder to our audience, so please feel free to ask any questions. [Operator Instructions] And so Patrick, continuing on with kind of the third business within health care or within DST, which is the health care business. You alluded to potentially returning to or thinking about that business as a mid-single-digit grower. You kind of walked us through a little bit about some of the challenges that you had seen in terms of some of the account terminations early on. Where are we in that process? Or maybe quickly kind of revisit, walk us through. It sounds like you guys are moving in the right direction. Is kind of returning to a more normalized growth rate or opportunities, is that kind of 2021, assuming the COVID side? Or is there any impact there that we should think of? Because I would assume that, that business would probably have some COVID impact, but maybe not a lot there.

Well, I think you're right. The business has been impacted by terminations. We are seeing -- actually, we are seeing some declines due to COVID. Clearly, there's less doctor visits, there's less hospital visits, prescriptions seem to be down. So the business is -- initially when COVID hit, all volumes were up in medical because I think everybody was stuffing their cabinets with pharmacy, with prescriptions. But clearly, over the last couple of months, medical claims are down, and pharmacy claims are down as people have been hunkered at home and not going to doctors’ visits for elective surgeries. So that business is going to be impacted in 2020. But hospitals will open up again. Doctors' offices will open up again. And I think once we get around this COVID crisis, we'll be back to same normal volumes in that space. We've done a couple of things to stabilize the business. One is we brought in some new leadership. We've got Sean Hogan that came from IBM that is running that business. He's working hard. DST had 2 separate businesses, health care and pharmacy, and they really operated independently. He's organizing it into one group. He's also worked hard at stabilizing the customer base. He's re-signed about $180 million of annual run rate revenue of existing clients into longer-term contracts. So that's been a -- that's going to be a key for the future of stabilizing that growth. We're also working with -- in addition, we end up being probably one of the few left independent processors of medical claims. A lot of the big ones have been bought by health care companies. I think that's going to help us out because health care firms that don't have their own processing claim group are probably not going to want to get their business to Cigna or any other one of their competitors. So we think that puts us in a good advantage in the future to get some growth. But I think in summary, we stabilized the customer base. We've re-signed them for long-term contracts. We've got a new management team. We're going after new business. And I think we're improving the technology. So I think all of that will get us back into growth. But with this COVID situation and seeing lower volumes over the last couple of months, it's probably not going to be happening until later 2020 and 2021.

Got it. And then you kind of already kind of answered a little bit of what was going to be my next question, which was about being able to compete with the big 3 in terms of an offering. So is the key here really the fact that you guys are independent, and that's the business you're kind of going to go after, and you feel like there's going to be a meaningful amount at this point in terms of just others not wanting to be part of the big 3? I mean I just want to better understand that part of the strategy. What the bigger opportunity here is in terms of how to think about that business?

Yes, you're right. I think that's how we view it, is that midsized and larger-sized health care firms are not going to want to give their back office claim processing to one of the other big -- one of their other big competitors. So if you look at those -- and that's a big market that when you take out the 2 or 3 big guys, the midsized market is a pretty big market. And I think that's where we have the opportunity. And as I said also is we're generally in that Medicaid and Medicare space, that's our strength. That's a growing area. So our view is we're well positioned. Now we bought DST, and the health care business came along with it. And we think it sits well with our business because it's still processing transactions. So it works well with our technology capability and our data center capability, and we think it has good prospects. And if it ends up having good prospects, we'll continue to maybe try to expand into that market in the future.

Understood. And then maybe just taking a separate -- now that we've kind of walked a bit through DST. If we were to -- and this is actually a question from one of our clients here. Can you maybe tie together what we're seeing currently in terms of your scenario? So think about it in terms of we've obviously seen an improvement from the March, April lows to where we are currently, but M&A isn't quite there yet. Obviously, we're seeing some near-term challenges in the health care business, but there's this longer term -- how should we think about where you guys are trending versus the 3 scenarios that you've laid out at this point?

Well, I think we really need to see how Q2 turns out. One of the keys to where we're going to be in this scenario is how successful we are in signing new business. I think as everybody knows, most clients wait to sign new business until the end of the quarter. And I think we've done well so far in this quarter, but we've got some deals to get signed before quarter end and how successful we are at accomplishing those. I think it's going to be important to where we're at in the scenarios. But I think as I've said before, markets have improved, equity markets have improved, and debt markets have improved. It's really important to our clients. And I think that those 2 improvements, and if that continues through the summer, we're likely not in the low case scenario.

Understood. That's actually really helpful. And then moving beyond DST, so just maybe a question on Eze there, that's your front-end trading platform solution. Only about 25% of those revenues from Eze, I believe, are kind of transaction or volume-based. Can you maybe continue to grow this business at a mid-single-digit pace at this point over the long term? And -- or how should we be able to think about trading -- your ability to maintain pricing within like the trading technology and stuff? Any update there and then maybe even some of the cost synergies that you're seeing in that business.

Sure. Well, I think as you know, the Eze business is mainly focused on hedge funds. That's generally been its market for its capability, it has technology. It has -- one of the keys to that business to get to growth is to broaden the customer base into like traditional asset managers and be able to sell fund and trading system at traditional asset managers. We introduced a product called Eclipse, which has that capability back a year or 2 ago. And we've seen good traction with that product, where I think, last year, it was probably averaging about $400,000 of revenue a quarter. In the first quarter, it was at about a $2 million revenue run rate, the Eclipse product. So I think that's going to be a key to our growth, is expanding out of hedge funds and getting Eclipse successful. And then like you said, 25% of the revenue is from trading volume, and last year was a pretty low trading volume environment. And so far this year, it's been a pretty good trading volume environment. So that's helping us out. So we need that trading volume to stabilize a little bit, and we need to be successful with Eclipse, which I think so far we've proven that we're successful. And that will help them broaden the market and be able to get growth out of the Eze business. As far as margins, Eze is already running -- last year, it already ran at about 40% EBITDA margins. It's a pretty profitable business. Our view is pricing is fairly stable. And then when we saw the big upswing in trading volume in Q1, it didn't affect the cost structure, and margins went up to 50%. So it's a business that has the capability of being at 50% EBITDA margins, and we need to start seeing some growth, some better trading volumes.

That's helpful. And then kind of turning towards the third acquisition here, Intralinks. You talked a little bit about maybe expanding the opportunity there. I mean that's your cloud platform for virtual rooms. Primarily, the focus historically has been on M&A. So how sensitive is that business to a downturn such as the current one when activities obviously does take a fairly significant pause? Any update there? And then maybe some -- also again, some color on where maybe you're -- where you are in terms of your cost synergies?

Sure. You're right. The Intralinks business is highly dependent on the amount and size of M&A transactions and winning customers that we put on the platform. But today, one of our strategies -- I mean we thought Intralinks was a good business that had great virtual data room technology, and that's the reason we bought it. We understood that the M&A segment was kind of a risk. And so Intralinks was working hard at diversifying their business, and we've continued to do that. So today, we've diversified into securities, banking and the alternative space, providing virtual data rooms into those segments. And that represents about 35% of the revenue at Intralinks. So that helped stabilize that business during this environment. We're seeing the business hang in there pretty well so far. I think maybe the M&A slowdown had -- maybe has a lag effect on the revenue because people aren't necessary closing data rooms that might be continuing on their M&A. And if they keep their data rooms up longer, we get more revenue. So I think it's -- the key is going to be winning market share, holding customers and diversifying that business. And I think they've got great technology, and it will be a winning acquisition. As far as margins, Intralinks is running about low 40s to mid-40s. It's a very profitable business. We're really focused on growth, but we think those margins will expand over time.

Got it. And then just following up on the idea that -- so one of the potential benefits of owning Intralinks was, I think, the idea initially was that you'd be able to upsell some of your services. So how should we think about penetration now in that part of your thesis versus when you maybe acquired the business roughly 1.5 years ago? And is there a potential to materially change the target growth rate over the coming years? And what is a normalized growth rate for that business?

Yes. We think Intralinks was -- before we acquired them, had a strategy of focusing on providing virtual data rooms for securities firms and banking. We've expanded the penetration into hedge funds and private equity funds. So I think we're showing good growth there. It's a small base at this point, but we're showing good growth in providing virtual rooms for PE funds and hedge funds for their investors. And I think that they have a lot of confidence in Intralinks because they've got great technology and very good security. So I think those trends will continue, and we're clearly making more progress as the alternative space at the Intralinks business becomes a larger and larger percentage of the total revenue.

That's helpful. And then we have another question here from one of our clients. Can you talk a little bit about the operating leverage in the firm in terms of its sources? Is there -- is it simply trying to kind of keeping the existing cost structure in place? Or is there the ability to maybe take out more cost, maybe move more business offshore? How should we think about the drivers of operating leverage within the business?

Sure. So if you look at our cost structure, it's basically in 3 categories. Employee compensation is about 60% of our cost structure. And then the other 2 big parts are IT infrastructure and facilities. The rest of the expenses are pretty discretionary, marketing, travel and some other services. But those are the big categories. So I mean we're very focused on controlling costs at our company. And the key to expanding margins in the future is through reducing our personnel cost structure, and that can take a couple of forms. One is offshoring work, which works well for us because it gives us 24-hour capability to service clients when we have a service center in India and service center in the U.S. and Europe. So we have 24-hour capability, and we've got a much lower cost structure in India. The other one, which I think is even more significant, is using more technology, right? And that's what we've been focusing on over the last 10 years. As we've moved our firm from a software-only selling firm to an outsourcing firm, we've been able to maintain our 40% margin. And how we've done that is using more technology and improving employee productivity. And we'll continue working in that area to improve our margins.

Very helpful. And then we're right here at the end of our time, but we have one other quick question here from another client. Can you provide a little bit more color on what you think the right level of spend is on your sales activity? You alluded earlier to DST spending about 2% and that, that wasn't enough.

Yes. I think -- I mean, traditionally, I think software companies spend 20% of revenue on sales. But I mean we're a software technology company, but we mainly provide outsourcing. So we're spreading the sales and marketing costs over a much larger base of revenue than if we were a software company. So we think that we probably, as a firm, need to average about 7% to 9% of revenue in sales and marketing. And there's a definite mix difference there. If you look at Intralinks, they're probably running closer to 20%. If you look at some of our software companies, they're probably running closer to 15%. And if you look at our servicing company, they're probably running more around 4%. So there's definitely different levels of sales investment requirements depending on the business, but we should probably be somewhere around 8% or 9%.

Thank you for that, Patrick. So that's it for our time. We're actually over a couple of minutes over. So again, thank you so much for your time, Patrick.

Thanks for inviting us. We appreciate it. Thank you.

Thank you for your time.