DST Systems' (DST) CEO Steve Hooley Discusses Q4 2015 Results - Earnings Call Transcript

| About: DST Systems (DST)

DST Systems Inc. (NYSE:DST)

Q4 2015 Results Earnings Conference Call

January 28, 2016, 08:30 AM ET


Steve Hooley - Chairman, President and Chief Executive Officer

Gregg Givens - Chief Financial Officer


Anthony Cyganovich - Evercore ISI

David Ridley-Lane - Bank of America/Merrill Lynch

David Koning - Baird

Peter Heckmann - Avondale


Good morning and welcome to the DST Systems’ Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all lines have been placed on a listen-only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions].

In the course of this conference call today, forward-looking statements may be made regarding DST and its businesses. Such statements are based on the Company’s views as of today and actual results could differ materially from the forward-looking statements. There are a number of factors that could affect the Company’s future results, including those risk factors set forth in DST’s latest annual and quarterly reports filed with the SEC. All such factors should be considered in evaluating any forward-looking statements that may be made.

Now, I would like to turn the conference over to our host, Mr. Steve Hooley, Chairman, President and Chief Executive Officer of DST. Please go ahead.

Steve Hooley

Great, thank you very much. Well good morning and thank you for joining DST Systems’ fourth quarter 2015 earnings call. With me today is our Chief Financial Officer, Gregg Givens. I’m going to start by going through some of the highlights for the quarter and then we’ll turn the call over to Greg for additional detail on our financial results.

Overall we are pleased with our fourth quarter and full year 2015 operating results which included significant new client wins in our Financial Services area as well as renewals from two of our largest healthcare customers. We migrated significant volume on to our UK wealth platform and are preparing for the next phases of development.

In Customer Communications we substantially completed the conversion of a significant client and reached double-digit operating margins. We are excited to have positive momentum as we head into 2016.

Looking at the fourth quarter, consolidated net income attributable to DST was $67.8 million or $1.94 per diluted share. On a non-GAAP basis, consolidated net income attributable to DST was $58.4 million, or $1.67 per diluted share compared to $66.4 million or $1.73 per diluted share in the fourth quarter of 2014. On a full-year basis, non-GAAP diluted earnings per share totaled $5.94 per diluted share in 2015 as compared to $5.55 per diluted share in 2014 an increase of 7%.

We continue to successfully execute on our strategic objectives and we remain on a steady path forward in that regard. Our fourth quarter results reflect the continued impact of revenue growth from new and existing clients as well as growth through our recently completed acquisitions. As expected, our results continue to reflect the impact of a number of items we have been discussing over recent quarters including the sale of DST Global Solutions in the fourth quarter of 2014, negative foreign currency movements and higher costs related to our ongoing investments and continued focus on security, regulatory compliance and other essential infrastructure.

Going forward we expect these investments to remain near current levels. While these items have impacted operating margins, we are confident in the long-term outlook for our business and the opportunities available to help mitigate the impact of these investments by leveraging the value across all of our segments.

Before moving into the results, I want to review a few highlights from the quarter and the year. During the fourth quarter, our Financial Services signed a significant new client who will utilize both our subaccounting solution and our mutual fund servicing solution. The initial contracts for these services in both instances is 10 years and based on current volumes this new client is expected to convert approximately 10 million subaccounts on to our platform by the end of 2016 and approximately 2.3 million registered accounts by the end of 2017. Implementation efforts will result in increased cost as we convert the client onto our platform over the course of 2016 and 2017.

IFDS UK successfully migrated a significant portion of accounts onto our wealth management platform during the fourth quarter which represents a significant milestone in the multiyear implementation efforts to convert the previously announced new clients.

During the year we also made several important acquisitions including our pending acquisition of Kaufman Rossin Fund Services. This acquisition fits well into our vision to opportunistically add complimentary business, products and strengths to our existing portfolio. In addition, the operations when combined with our ELSA operations are expected to enable us to expand our service offering into some of the fastest growing segments of alternative investment administration and it will make us the top-20 provider in the hedge fund administration business.

Our other 2015 acquisitions, kasina LLC, Red Rocks Capital LLC, and Wealth Management Systems continue to be integrated into our existing operations and we expect them to further expand our capabilities and contribute to our financial results in 2016 and beyond.

Moving to our segment results for the quarter, in our Financial Services segment, operating revenues for the fourth quarter of 2015 were flat compared to the fourth quarter of 2014. As I mentioned operating revenue declined as a result of the sale of global solutions in the fourth quarter of 2014. Excluding this and the negative foreign currency impacts during 2015 Financial Services operating revenues increased by $15.8 million or 5.8% in the fourth quarter of 2015 as compared to 2014, primarily driven from increased professional services revenues associated with our wealth management platform business as well as organic and new client growth within our Brokerage Solutions businesses.

In addition, the businesses acquired during 2015 contributed $5.5 million of operating revenue during this quarter. Despite the various gains we have been able to achieve, we continue to be negatively impacted by volatile market as certain of our fees are tied to the asset bases of our clients.

Total mutual fund shareowner accounts at December 31, 2015 were at $96.7 million a decrease of 700,000 accounts as compared to December 31, 2014. For the year ended December 31, 2015 2.9 million registered accounts have converted to subaccounts of which 1.8 million converted to DST's subaccounting platform which aligns with our estimates mentioned in the third quarter of 2015.

As we stated last quarter, we no longer intend to provide details of accounting guidance as the impacts of de-conversions continue to diminish. We do expect however, 2016 de-conversions to approximate to 2015 activity.

Moving to our Healthcare Services segment, operating revenues for the fourth quarter of 2015 decreased to $3.4 million or 3.3% to $98.4 million, primarily due to lower pharmacy claims processing revenues resulting from the previously announced partial client de-conversion and lower software license revenue. These decreases were partially offset by increased medical claims transaction volumes as well as higher business process outsourcing revenues.

Overall, we continue to view the healthcare market as a significant opportunity for DST. We are encouraged by the two significant client renewals that were completed during 2015 and believe they help evidence that we are on the right strategy with the investments we have made and continue to make in this business and feel this segment is well positioned for long-term success.

In our Customer Communications segment we achieved strong operating results and are pleased with the margin expansion during the quarter. Operating revenues for the fourth quarter of 2015 increased $4.1 million to $158.8 million compared to the fourth quarter of 2014. During the quarter, our continued conversion of previously announced new clients drove higher operating revenues that were partially offset by organic declines from certain existing customers and unfavorable foreign currency exchange rate movements.

We also completed the sale and leaseback of the company's four North American customer communication production facilities for pretax proceeds totaling approximately $129 million less closing costs and real estate commissions.

Our equity and unconsolidated affiliates decreased primarily from lower IFDS earnings. The decrease in IFDS earnings is predominately from lower revenues recognized related to the ongoing conversion activities coupled with higher operating costs as IFDS expands its infrastructure and associated service offerings.

In addition, our international joint ventures continue to be negatively impacted by foreign currency movements. Partially offsetting the decreased implementation revenues was organic growth at existing clients and new client processing revenue.

As previously mentioned, IFDS UK began processing on our Wealth Management System during the fourth quarter of 2015. As other ongoing conversion projects continue to be completed we expect that IFDS earnings will be lower due to the amortization of capitalized software costs coupled with the decline in implementation revenues.

IFDS continues to work closely with its clients to further define the additional enhancements and functionality of the wealth management platform. As these specifications are defined, the scope of effort and timeline for completion of the various requirements will continue to evolve.

As always we continue to evaluate our capital plan on an ongoing basis with the goal of proactively managing our resource needs to determine the most effective and productive use of our assets. As part of this plan, we have had a consistent and successful track record of monetizing the company's assets which has generated over $415 million in proceeds over the last year. While we expect our level of monetization to decline in 2016, we remain committed to investing in organic initiatives and acquisitive growth to drive value and we will continue to be opportunistic with regards to our ongoing share repurchases.

During the full year 2015, the company spent $400 million to repurchase 3.6 million shares of DST common stock and have $150 million remaining under the existing share repurchase plan as of December 31, 2015. Additionally, on January 27, 2016, the Board of Directors of DST declared a cash dividend of $0.33 per common share on its common stock a 10% increase over prior quarters.

We believe the progress we've made during 2015 across all of our business segments has positioned us well as we head into 2016. While we expect to be challenged with market volatility and a low growth environment, we are confident in the direction of our business and the strategy underway to continue creating long-term value.

With that, I'd now like to turn the call over to Gregg for a detailed discussion of our 2015 end of year financial results.

Gregg Givens

Well thanks, Steve. On a GAAP basis this quarter we reported consolidated net income of $67.8 million or $1.94 per diluted share. This compares to $255.1 million of net income or $6.65 per diluted share for the fourth quarter of 2014. The year-over-year decline is primarily due to lower realized gains on the sale of securities as a result of fewer sales of investments during the fourth quarter of 2015 as well as the gain recognized in the fourth quarter of 2014 for the sale of Global Solutions. On an adjusted basis, our non-GAAP earnings per share were $1.67 a decrease of $0.06 or 3.5% from fourth quarter 2014.

The remainder my comments will focus on our adjusted non-GAAP Results. Consolidated operating revenues for the quarter were $514.3 million. Excluding Global Solutions $11.7 million for quarter 2014 operating revenues and $7.9 million of negative foreign currency impacts consolidated operating revenues increased by $17.2 million or 3.4% in fourth quarter 2015 as compared to 2014.

Consolidated operating income though decreased 8.4% or $7.9 million to $85.6 million. $3.6 million of this decline is the result of the sale of Global Solutions. Operating income this quarter was also negatively impacted by a decrease in certain higher margin revenue items including a $1.7 million decrease of software license revenues, a decrease in mutual fund accounts process and the partial de-conversion of a health customer at the beginning of 2015.

Additionally, we had $3.2 million of increased costs due to the amortization of acquired intangibles and expenses associated with performance related contingent consideration resulting from the 2015 acquisitions. Consolidated operating margins were 16.6% in the quarter as compared to 18.1% in the fourth quarter of 2014.

Within the Financial Services segment, operating revenues were flat as compared to fourth quarter 2014. Excluding Global Solutions 2014 results and the negative foreign currency impacts, Financial Services operating revenues increased $15.8 million or 5.8% in the fourth quarter of 2015 as compared to the fourth quarter of 2014. This growth is primarily from increased professional services revenue associated with our wealth management platform and growth within Brokerage Solutions.

Also the businesses we acquired during 2015 contributed $5.5 million of operating revenues during the fourth quarter of 2015. The operating revenue increases continue to be partially offset by declines in mutual fund registered shareowner account processing due to lower registered accounts and at ALPS will also be negatively impacted by the volatility in the markets as it relates to our asset based revenue arrangements.

Financial Services income from operations decreased $7 million or 12% over the prior year quarter to $51.3 million. The primary drivers causing the decrease in operating income are the 2014 sale of Global Solutions which contributed income from operations of $3.6 million in the fourth quarter of 2014 as well as the $3.2 million of incremental expenses related to the amortization of acquired intangibles and the expenses for the performance based contingent consideration resulting from our 2015 acquisitions.

Additionally, operating income continued to decline from increase technology, security and regulatory compliance costs, as well as other costs incurred to enhance our network infrastructures.

Financial Services operating margin was 18.2% in the quarter which is a decrease from the 20.7% operating margin in the fourth quarter of 2014. Our Healthcare Services segment operating revenues were $98.4 million a decrease of $3.4 million or 3.3% from fourth quarter 2014. The decrease is primarily due to lower pharmacy claims processing revenues resulting from the previously announced partial client de-conversion at the beginning of 2015 and $2.5 million and lower perpetual software license revenues. The decrease was effectively offset by organic growth at existing clients as well as higher BPO revenues.

During the fourth quarter, Healthcare Services income from operations decreased by $7.2 million to $15.8 million. The decrease continues to be driven primarily by the changes in revenue mix. In 2015 we had lower pharmacy claims processing and lower software license revenues which tend to have higher operating margins, and we had higher medical claim BPO revenues which tend to have lower operating margins.

Operating margins were further pressured in 2015 by increased implementation cost associated with the conversion of new clients will begin processing on our platform in 2016. The combination of these factors have the effect of reducing operating margin for the quarter to 16.1% as compared to 22.6% in the fourth quarter of 2014.

In our Customer Communications segment, operating revenues increased year-over-year by $4.1 million to $158.8 million. Our North America operating revenues increased $5.5 million or 5.2% to $111.5 million in the fourth quarter from incremental volumes converting on to the platform from the previously announced new clients as well as higher professional services revenues. The increase was partially offset by an organic decline in volumes and $1.8 million of unfavorable Canadian foreign currency impacts.

Our U.K. operating revenues decreased $1.4 million or 2.9% to $47.3 million in the fourth quarter primarily from $2 million of unfavorable foreign currency impacts. This was partially offset by growth from new and existing U.K. clients. Overall Customer Communications operating income was $18.4 million, an increase of $5.7 million from fourth quarter 2014. Higher operating revenues coupled with the cost savings achieved from the 2014 closure of certain facilities in North America drove the increase in operating income.

The Customer Communications segment operating margin in fourth quarter 2015 was 11.6% as compared to 8.2% in 2014. DST's equity in earnings of unconsolidated affiliates decreased by $3.9 million to $6.3 million in the fourth quarter. IFDS earnings decreased by $4.5 million to $4.3 million in the fourth quarter.

The decrease was primarily from lower revenues recognized related to the ongoing conversion activities of the two Wealth Management clients, higher operating cost as IFDS expands its infrastructure to prepare for the addition of new clients and negative foreign currency impacts in both the U.K. and Canada.

As Steve mentioned, IFDS successfully migrated a portion of the accounts from their shareholding accounting platform to the new Wealth Management platform. Additionally during the quarter, the expected level of effort required to complete the remaining projects increased based upon additional scope requirements and various other factors. We continue to expect IFDS to experience earnings volatility throughout the implementation and conversion process as these multiyear projects continued to evolve.

Our income tax rate for the fourth quarter remained relatively flat at 33.5% compared to 33.3% for the same quarter last year. Our full year tax rate was 34.4% which benefited from fourth quarter tax law changes such as permanent extension of the research and development tax credit. We expect our income tax rate for 2016 to be approximately 36%.

During the quarter we received $50 million pretax cash proceeds from our monetization activities. $30.4 million came from the sale of marketable securities and $18.6 million came from private equity investment distributions. The remaining $1 million was from the sale of real estate assets.

We also received $129 million of pretax proceeds from the previously announced sale leaseback transactions of our four North America Customer Communications production facilities. During 2015 we had $113.9 million of capital expenditures which included approximately $18 million of expenditures for the completion of our new generator plant which went into service in the fourth quarter. We are currently estimating capital expenditures of 2016 to be approximately $100 million.

Also during the fourth quarter of 2015 we initiated our first seed capital investment with a $25 million investment into a newly launched open ended fund. Our seed money investments are designed to enable the funds to establish a proven track record and to attract sustainable client investments.

Turning to our share count, during the quarter the company spent $75 million to repurchase approximately 650,000 shares of DST common stock. Average diluted shares outstanding for the quarter were 35 million, a decrease of 8.9% from the fourth quarter of 2014. As of December 31, DST had $150 million remaining under our existing share repurchase plan.

We closed the fourth quarter with $89.6 million of cash and $562.1 million of debt. We continue to maintain a strong balance sheet and believe that our ongoing liquidity gives us the flexibility to be opportunistic in the marketplace.

I’ll now turn the call back to Steve for concluding remarks.

Steve Hooley

Great, thanks, Gregg. DST is continuing to take steps to perform and create value over the long-term and we are pleased with our performance to-date. We’re also confident we have the right strategy in place and the right team executing to deliver on our objectives.

At this point I will go ahead and open the call for questions. Operator?

Question-and-Answer Session


The floor is now open for your questions. [Operator Instructions] Your first question comes from David Togut of Evercore ISI.

Anthony Cyganovich

Good morning, this is Anthony Cyganovich on for David. So if you could help us think about the growth profile of IFDS in 2016 and kind of what you expect the magnitude of the decline to be in earnings?

Steve Hooley

Yes Anthony, we don’t give guidance on forward guidance on expectations for earnings or revenue. Here is what I would tell you is as Gregg and I both mentioned, these projects we did put the wealth platform into production in the fourth quarter and we did move a significant number of accounts on to it. With that, we are going to start to see the amortization of the capitalized software investments start to come through the financials and we are going to see lower implementation revenues.

And so we do expect a decline next year and we do expect Anthony that is going to continue. I know this isn’t necessarily helpful, but it is going to be lumpy quarter-to-quarter. So, if I had to peg a number, I mean I would expect the decline to be in the range of 20% to 30% next year.

Anthony Cyganovich

Okay, great that is helpful. And secondarily, how should we think about the margin profile of the healthcare services business in 2016 and what is the impact of the remaining de-conversion of the Cigna business?

Steve Hooley

So, we had talked about a significant client who had announced they were de-converting. We moved a significant amount, about 40% of their total volume, half of the platform on January 1 of 2015. In the last call we announced that that client had decided to remain with us for the remaining for their commercial business and so that one customer that we had talked about, the conversion is complete and it took place the beginning of this year, the first of this year.

So we had the impact of that all year long. So the result of that Anthony is that we expect to see some growth out of our healthcare business next year, both in the top line and I would expect that we are going to see some recovery of the profit margins there and as we have talked about we kind of have a target on that business of kind of mid teens profit margins.

Anthony Cyganovich

Great that is helpful and just finally, how much do you have left to sell in your investment portfolio?

Steve Hooley

Yes, so in the investment portfolio we continue to have 2.2 million shares of our State Street stock and we have other marketable securities of directionally $74 million. So at the end of the year that was valued at probably right at $220 million.

Anthony Cyganovich

Great, thanks a lot guys.

Steve Hooley

Thank you.


Your next question comes from David Ridley-Lane of Bank of America/Merrill Lynch.

David Ridley-Lane

Congrats on the big plan in Financial Services. Just for modeling purposes should we spread the gains throughout year for the subaccounting, was that more of a step function increase in, say the third or fourth quarter?

Steve Hooley

Yes, so well first of all thank you for your congratulations. Our teams did a great job in both the mutual fund and the subaccounting conversion. So the way you should think about that is, we will not see revenue until the accounts are converted and that will happen kind of in a big bang fashion over a weekend late in 2016. So what will happen there David is, we are incurring expense now as we begin to gear up for the conversion.

So we have operating teams, technology teams, conversion teams that are now working on this conversion and that will be true in both the mutual fund side of our business and in the broker side of our business and we'll incur that cost throughout 2016 and then we'll begin to see revenues in late 2016 or early 2017. So it will have a negative impact on our 2016 earnings, but a great win for our team. We are very excited. It is a great customer and again this is the kind of the nature of the business. And again the same thing will happen on the mutual fund side of the business. That conversion is not expected to happen until late in 2017.

David Ridley-Lane

Got it and then could you talk a little bit about the KRFS acquisition and how it helps you position among hedge funds? And I have the $26 million in revenue and breakeven to EPS in year one, what's the - wondering what the normalized operating margin is you expect over time?

Steve Hooley

Yes, so we don’t really talk about operating margins, but let me come back and talk about the business. So KRFS is a very good acquisition for us. It is a nicely sized business. It fits very well with the existing hedge fund administration business that we have at ALPS and it positions us in a few key markets.

The Southeastern United States, they have a nice footprint in Texas and a nice footprint in California. And so we think it opens us up to a number of markets where we think we have got – and we are pretty uniquely positioned from a service perspective to be able to really provide to the middle market hedge fund providers a customized solution.

So we are very excited about it. We think there is good synergies with the business that we already have and look, the acquisitions in total for us during 2014 should give us a nice revenue bump in 2015. So a way to think about that is, if you - all four of the acquisitions that we did, you should expect somewhere between a 2% and 2.5% kind of revenue jump in 2016 from those acquisitions. So KRFS was a great acquisition and we are very excited about it as well as the other acquisitions that we did during the year.

Gregg Givens

So David, I would like to just add to that, that once all these acquisitions get on to the books and they get into full swing, directionally the annual intangible amortization will be coming to the books. We haven’t finalized the purchase accounting of course on KRFS, but you should be thinking that it is going to be directionally somewhere around $8 million to $9 million a year which will be about $0.16 of drag on EPS from the amortization.

David Ridley-Lane

Got it, okay and then is the $50 million in monetization of non-core assets that you said you had here in the fourth quarter, good run rate to assume going forward?

Steve Hooley

Well so, I would say no and but let me give you a little more color right, as Gregg has been talking about the monetization has started to decline partly because we, I don’t want to say that we are running out of assets, but some of the assets that we have are not as liquid as others. And so I would expect that our run rate going forward will be certainly lower than it has been in the past and I don’t think you should take the fourth quarter and just annualize it.

David Ridley-Lane

Got it. And then last one from me, I think based on current FX rates maybe a 1% to 2% drag to revenue sort of a 2% to 3% drag to operating income in 2016, is that sort of in the ballpark?

Gregg Givens

Well, it is gets – it depends a little bit on your definition of current, because every time you go out and hit the Bloomberg that's where you say they change. But I think you are directionally thinking about that correct. I mean the effect on consolidated revenues our exposures are in Canada, the UK and Australia and then well first we have the exposure that comes through our equity earning line for IFDS as well. So I think you are directionally thinking about that correct.

David Ridley-Lane

Thank you very much.

Steve Hooley

Thank you.


Your next question comes from Dave Koning of Baird.

David Koning

Yes, hey guys, and first of all you are so modest about the wins in some ways it is incredible what you've done in the subaccounting markets. Four years ago you had about 10 million accounts, you are going to exit this year with about 40. So the growth for your market share is pretty incredible, so congrats on that.

And then my main question Financial Services margin, I know this year it was under some pressure and I'm imagining that continues, but how do you kind of see it progressing from the 2015 level? You'll probably lose some registered accounts at least this year, you still have some of that higher compliance spend and then you made an acquisition I guess, just what are the puts and takes and should this shake out this year?

Steve Hooley

So first of all thank you for your comments and I would just – I would reiterate I think the teams have done a really nice job in our brokerage business and look we're excited about it. This win that we announced is a significant win. It is accounts that are coming off of a competitor platform and so we're excited about it.

The Financial Services, we saw a decline in margins from quarterly as well as annually from 2015 over 2014. As we think about the Financial Services margins into 2016 I think you should think about kind of flattish margins. Right? And that will require us to continue to focus on cost containment. It will require us to continue to be smart, because we are going to continue to invest in the business and as I mentioned we're going to have additional costs as we gear up for these conversions. But I think that's how we're thinking about it.

David Koning

Yes, now that makes a lot of sense. Then I guess secondly the ALPS business it seems like, you know we look at the fund and it has been down 30% plus I think year-over-year for a while, but it seems like you are still gathering assets and it is not – your revenue stream is not down nearly that much which is encouraging. We'll start to hit easier comps kind of probably in Q2. I know this quarter may be still Q1 will be down somewhat, but can that grow you think if oil prices are stable, can that grow or will that be down in 2016?

Steve Hooley

So David, let's split a little bit if we can the metrics that we gave on ALPS, so we give two different numbers. We give an AUA number and an AUM number right? So the AUA number is would be assets under administration and that’s effectively where we’re providing services, it might be accounting services or compliant services or fund accounting kinds of services. That number is down as you say about 30% so a bit of an anomaly there. We had a customer who had a significant amount of assets who effectively bought one product from us. They moved earlier, Gregg, was it third quarter?

Gregg Givens

Oh, it's actually January, first quarter of 2015.

Steve Hooley

So, they moved in the first quarter. We saw the AUA number go down, but you didn’t see the resulting impact on revenue because again they were buying a single product from us and it was a relatively low revenue value customer. Okay? So that’s kind of what you're seeing there. The AUM number is actually the assets under management number and that number is down and again the teams there have done a great job selling. Right?

So, we’ve talked on the last call about we not only track assets under management, but we also track units in the funds and actually the units in the funds continued to grow as our teams are out doing a nice job on the distribution side.

Gregg talked a little bit about the investment that we've made in the seed capital program which again should help with the distribution. And so as Gregg and the gentleman that runs that business and Ed Burke like to say, they feel like we're spring loaded from a actual sale of units perspective that when the markets turn around we should get some good leverage there, but it's challenged right now, not only the energy markets, but the commodity markets where we tend to have more exposure.

David Koning

Okay, so all in you know with the good selling efforts, good products, et cetera largely offset the decline and it could still decline hard to know given where oil kind of moves around day to day, but at least better than how much oil is down for sure.

Gregg Givens

Yes, so David if you look at ALPS assets under management, the piece that Steve talked about that gives – has a higher impact on the asset based revenues. We were at $14.1 billion of assets under management at the end of the third quarter and we are at $14.7 billion of assets under management at the end of the year. So we had a $600 million increase in those assets under management during the quarter. And we would tell you directionally that was from $900 million of net new flows an offset by $300 million of net depreciation in the underlying portfolios.

David Koning

Well, that's solid. And then just lastly, the healthcare market I know last year obviously the partial de-conversion, the three years before that it averaged like 11%, 12% growth. Anything different about those three years and what we're seeing going forward? Is it a more penetrated market that's harder to get back to double-digit growth and once you anniversary that is it just kind of like those prior three years?

Steve Hooley

So I would say a couple of things, we do expect to get back on a – from a top line on a growth trajectory next year because we won't have the drag of that de-conversion. I don’t know that we reached the levels of three years ago and I think that has more to do with the market than with our solution or our customers.

If you just kind of look at what's going on particularly in the pharmaceutical market and in the PBM market, there is a lot of disruption taking place right now and so, I think we will get back to growth. I think it will be high single, low double-digit kind of numbers. But I don’t expect we just rebound right back to where we were three years ago and I think a fair amount of that has to do with just the state of the market.

David Koning

Great thanks, and great job in a tough market.

Steve Hooley

Thank you.


Your final question comes from Peter Heckmann of Avondale.

Peter Heckmann

Good morning gentlemen, just a follow up on that last comment Steve, within healthcare, you saw the losses of volumes from that one client, but for the year pharmacy claims were still up and trying to drill in again to those numbers, but does that - how does that affect mix, should we see the mix within healthcare start to revert seeing a little bit more mix towards pharmacy claims given the growth rate or how do we think about that versus BPO because you also saw some pretty good growth in covered lives?

Steve Hooley

Yes so, well first of all, I think what the pharmacy claims numbers show you is that we have a real high quality client base. Right? So in a year where we did have the de-conversion we showed good growth and that is really all above our customers going out and doing a great job with their customers. So I would tell you Pete, underlying that pharmacy business is a really solid and high quality group of customers.

And as you mentioned, we had some nice growth in our BPO business and in fact have some more BPO revenue that will be coming on in 2016. So a little bit of the drag that we saw in the fourth quarter of 2015 was us gearing up and working on the conversions of this BPO revenue.

So as Gregg mentioned, one of the interesting things here is the BPO revenue tends to have a lower operating margin than the pharmacy claims revenues. And so we've got a little bit of a mix challenge going on, but I would say in general the team did a - our healthcare team across the board did a really good job in 2015 in absorbing what was a significant hit right out of the gate and quite honestly we’re pleased with where the year ended up there.

Peter Heckmann

Okay, great and then a follow up just on IFDS, could you remind us really what the primary offering there is? I mean I've read a little bit about it, it sounds like it’s really going to be very competitive compared to what the UK market currently has to offer and so could you refresh us as what you are doing there, how many clients do you have signed up as well as how many clients do you currently have live?

Steve Hooley

Sure, so historically Pete, what we've done in the UK market with IFDS, our joint venture with State Street has been collectives record-keeping. So you should think about that as very analogous to our U.S. mutual fund record keeping transfer agency kind of work. Okay? The new application that we've been talking about now for going on two, two and a half years is really a more holistic wealth management platform.

And so the basis of the technology for that platform is a technology that DST owns in Australia, a platform that we call Bluedoor. And what we've been doing for the last two, two and a half years is anglicizing that platform and introducing it into the UK marketplace. And so, we talked in prior calls about having a couple of clients, significant client that we're working with on that and on interestingly I don't have the number right in front of me, but you saw a decline in IFDS accounts I think $3.1 million decline in IFDS accounts.

And what happened there was, we talked about converting a significant portion of our clients' business onto the new wealth platform, what happened is those accounts moved from our historical collectives platform onto this new wealth management platform. But in addition there are other products that we will be bringing onto that platform.

So I don’t know if that's clear, but that's the solution that we're delivering and that's the underlying technology and so we see revenue and profit at both the IFDS level as well as at the DST level because of the underlying technology.

Peter Heckmann

Okay, okay, but is it fair to say that IFDS is an early mover in this market and from what I'm reading that seems to be the case that there may be other opportunities to grow this business with this holistic wealth offering, not unlike what's happened in the U.S with some of the providers in this half and the cloud based accounting space?

Steve Hooley

So yes, so it is interesting Pete, right. There are competitors in the market. There is a company, GBST, FNZ, Bravura are three names that you would hear in the European market. What's interesting about all those competitors is the genesis of all of them are either superannuation platforms that came out in New Zealand or Australia and again that's part of the reason that we're using our Australian platform to address the market.

So I would say it's really days in the market. There are other competitors that are established and have gained market share, but we do think it is a developing market and we do hope that on a forward basis we'll be able to attract new customers there and new opportunities.

Peter Heckmann

All right, thanks.

Steve Hooley

Sure, thank you.

This concludes the question-and-answer session of today's program. I would now like to turn the floor back over to Mr. Steve Hooley for closing remarks.

Steve Hooley

Great, well thank you all for joining us today and we look forward to speaking with you again next quarter. Thank you very much.


Thank you. This concludes your conference. You may now disconnect.

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