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Executives

Alfred P. West - Chairman and Chief Executive Officer

Dennis J. McGonigle - Chief Financial Officer and Executive Vice President

Joseph Paul Ujobai - Executive Vice President

Wayne Montgomery Withrow - Executive Vice President

Edward Doyle Loughlin - Executive Vice President, Head of Institutional Group and Director

Stephen G. Meyer - Executive Vice President

Kevin Patrick Barr - Head of Investment Management Unit and Executive Vice President

Kathy C. Heilig - Chief Accounting Officer and Controller

Analysts

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

SEI Investments (SEIC) Q4 2013 Earnings Call January 29, 2014 2:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Fourth Quarter 2013 Earnings Call. [Operator Instructions] And as a reminder, today's call is being recorded. I'll now turn the conference over to the chairman and CEO, Mr. Al West. Please go ahead.

Alfred P. West

Thank you, and welcome, everybody, all of our segment leaders that are on the call, as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller. Now I'm going to start by recapping the fourth quarter and the full year 2013. I'll then turn it over to Dennis to cover LSV and the Investment in New Business segment. Now after that, each of the business segment leaders will comment on the results of their segments. Then finally, Kathy Heilig will provide you with some important company-wide statistics. Now as usual, we'll field questions at the end of each report.

So let me start with the fourth quarter and full year 2013. Fourth quarter earnings increased by 16% from a year ago. Diluted earnings per share for the fourth quarter of $0.37 represents a 16% increase from the $0.32 reported for the fourth quarter of 2012. For the year 2013, our earnings increased by 39% over 2012 earnings. Diluted earnings per share for the full year, $1.64, is a 39% increase over the $1.18 reported in 2012. We also reported a 14% increase in revenue from fourth quarter 2012 to 2013 and a 13% increase for the full year from 2012 to 2013.

Now also during the fourth quarter 2013, our noncash asset balances under management increased by $10.7 billion. Of that, SEI's assets under management grew by $5.6 billion during the quarter, while LSV's assets under management grew by $5.1 billion.

Finally, during the fourth quarter 2013, we repurchased 1.9 million shares of SEI stock in an average price of just under $34 per share. That translates to over $64.7 million of stock repurchases during the quarter. For the entire year, the numbers are 6.8 million shares purchased at an average price of just under $31 a share, representing $210 million of repurchases.

Now turning to sales, our net new recurring revenue sales during the quarter were solid. Of the $21.1 million of net new sales events we generated, $17.3 million are recurring revenues. Each of the segment heads will address their sales activities.

Now, as you know, we are continuing our investment in SWP and its operational infrastructure. And during the fourth quarter, we capitalized approximately $8.5 million of the SEI Wealth Platform development and amortized approximately $9.1 million of previously capitalized development. Now our development agenda for SWP is to continue to deliver U.S. and U.K. functionality important to the large and medium-sized advisors and banks in the U.S. and U.K. markets, as well as further automate our operations.

Now turning to our business segments, in banking, our focus is to sell to and convert medium-sized and larger banks and wealth managers in both the U.K. and U.S. The progress in our sales agendas has been slower than we would like. Large organizations and by definition, larger revenue opportunities, have much longer sales cycles and challenges. While our engagement level has been high with the selected institutions, we're being met by the unique dynamics of large organizations. Their complexity and decision-making, contracting processes and organizational politics are a few examples.

We are working hard to overcome the obstacles we face and look forward to signing and installing larger projects. We remain encouraged by their expressed need for the functionality and service offering we have developed. At the same time, we are concentrating on improving the Banking segment's profitability. We need to do a better job of managing our expenses and proving the operational efficiencies of SWP. These efforts will help us in the short and long run.

Fortunately, we have a portfolio of businesses and the other 3 business units are growing their profits nicely. In the Advisor segment, we have made solid progress in improving our asset gathering, as well as in preparing for the rollout of SWP to the U.S. market. Both are important to accelerate our growth and profits for this business.

In the Institutional segment, our strong sales and profits globally are living proof of the strong market adoption of our differentiated solutions. Finally, our investment management services segment continues its success in both selling and implementing new business, while differentiating their solution. They are making progress selling to larger prospects and increasing the business we do with existing clients.

Now behind all of our business units, I am encouraged by the feedback I receive from clients and prospects across our company's target markets. Our reputation for delivery remains intact and has strengthened, and the sales activities and events in all units confirm the positive feelings at our client base.

Now this concludes my remarks, so I will now ask Dennis to give you an update on LSV and the Investments in New Business segment. I'll then turn it over to the other business segments. Dennis?

Dennis J. McGonigle

Thanks, Al. Good afternoon, everyone. I'll cover the fourth quarter results for the Investments in New Business segment and discuss the results of LSV Asset Management.

During the fourth quarter of 2013, the Investments in New Business segment continued its focus especially on 2 areas: The ultra-high net worth investor segment and the development of a web-based investment services/in place offering, coupled with the use of global technologies. During the quarter, the Investments in New Business segment incurred a loss of just under $3 million, which compares to a $3 million loss during the fourth quarter 2012. There has been no material change in this segment, and we expect losses in the segment to continue in this range during 2014.

Regarding LSV, our earnings from LSV represent our 39.3% ownership interest during the fourth quarter. LSV contributed approximately $32 million in income to SEI during the quarter. This compares to a $25.1 million contribution for the fourth quarter of 2012. Asset balances grew by approximately $5.1 billion during the quarter due to increased market valuation, offset by net negative cash flows. Revenue at LSV for the quarter was $97.3 million and their expenses were impacted by a true-up of incentive compensation expense, which occurred during the fourth quarter.

I'll now take any questions you have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Just curious, at LSV, is it -- could you quantify kind of the negative cash flows and then note with the kind of rebound and the asset levels? Have they, I mean, maybe had some bit of an issue with having some modest outflows? But did they kind of move to shut -- to close any products going forward?

Dennis J. McGonigle

It's really the same it has been in the past. Their larger cap products are open and have been open and sure will continue to be open. They had had closed products and even entering the quarter or in small cap area or in some regional products around the globe. There's really not much change on that front. And they had a net negative cash flows, but half was principally due to rebalancing of clients and client -- and the clients' own portfolios, which would rebalance assets away from LSV, and then the other was they did have a few client losses but I said they were [indiscernible] into that kind of a revenue associated with those clients. They were lower fee type clients.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

And so I'm sorry, so the -- will the gross dollars of redemptions like $1,500,000,000, I mean, I don't know if...

Dennis J. McGonigle

A little over $1 billion.

Operator

[Operator Instructions] And to the presenters, there are no further questions in queue at the moment.

Alfred P. West

Thank you. Then, I'm going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?

Joseph Paul Ujobai

Thank you, Al. In the Private Banking business, we are making progress in the continued rollout of the SEI Wealth Platform. As an update on financials, quarterly revenue of $106 million was up 9% from the previous quarter, and annual revenue of $397 million was also up 9% from 2012.

For the quarter, Private Banking profit was $3.1 million compared to $1.8 million in Q3 2013. For the year, profit was $4.7 million compared to $7.8 million for 2012. For the quarter, profit was positively impacted by increased revenue. Revenue improvements were largely driven by higher recurring investment processing fees in the U.S. and the U.K. and also increased assets under management in our distribution business.

Despite the revenue growth, we were not satisfied by profitability growth as expenses outpaced new revenue. I recognize that we must manage expenses more carefully to improve our profitability, and we'll pay careful attention to expenses, especially those we anticipate incurring in advance of revenue recognition.

During 2013, expense increase was largely due to the continued development and rollout of the SEI Wealth Platform, direct costs associated with the growth of our asset management and brokerage business lines and increased stock option expenses due to accelerated vesting.

Turning to business development. Growth sales events for the quarter was $8.6 million, $4.7 million of which is recurring. Net sales events were $7.4 million, of which $3.6 million is recurring. As we have discussed, we have shifted our sales strategy to focus on larger prospects. We are learning that these larger revenue opportunities have longer sales cycles and very complex contracting processes.

Consequently, our focus on these larger firms pushes out signings and makes sales activity more difficult to predict. That said, we have positive feedback from the market that our solution is strong and aligns with the business issues our clients are trying to solve. For that reason, as well as the growth of current clients, I remain encouraged by our opportunity.

In the U.S., during the quarter, we progressed our step-in strategy with the conversion of Kanaly Trust. In the Private Banking segment, we now have 3 U.S. firms on the SEI Wealth Platform for the backlog of 6 additional firms. The step-in strategy has been designed to provide us with a calculated and deliberate entry into the U.S.

Our strategy is focused on growing our business in both scale, meaning size of firms, and scope, the extension and innovation of services. In 2013, we installed 2 firms extending our services from pure investment processing outsourcing to integrated processing and asset management, as well as the initial delivery our innovative finance services. Installations in 2014 will be focused on additional scale and the extension into more complex and global processing services for U.S. clients.

In the U.K., during the quarter, we added over $1 billion in net cash flow. In 2013, we grew platform assets under administration by over 30% to $29 million. Asset growth came largely from new asset flows from current clients. Also, as a sign of continued acceptance of the platform, we converted an additional book of business from our first client, HSBC. We have also seen strong asset management cash flow of almost $500 million from U.K.-based clients using the SEI Wealth Platform. Worldwide, we have 29 signed clients with 8 remaining to install, meaning a backlog of approximately $7 million in recurring revenue that should install over the next 18 months.

Finally, asset management contributed new asset balances of $1.2 billion for the quarter and $2.6 billion for the year, bringing our assets under management to almost $15.5 billion. We had positive growth in every region.

In conclusion, for 2013, we had strong revenue growth from our investment processing businesses both in the U.S. and the U.K., up 13%. We had strong assets under administration growth from the SEI Wealth Platform, up 30%. We began to successfully implement the U.S. step-in strategy, and we have a solid backlog to continue that strategy in 2014. And we had strong assets under management growth from across all regions, up 24%.

For 2014, we have learned that the sales cycle for larger prospects is more complex and longer than we expected. Given that, we will heighten our focus on expense control and profit improvement. Any questions?

Operator

[Operator Instructions] And we'll have Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Wanted to revisit the numbers that have come up in the last 7 or 8 months just on -- the U.S. pipeline, at one point, you're talking about it at about $100 million. In the U.K. pipeline, it's $50 million. Are those still useful numbers to think about?

Joseph Paul Ujobai

Yes. So in the U.K., it's about the same size, $50 million. And we still have all the prospects associated with the pipeline. One large prospect has slowed down but is still in the pipeline, and the timing -- so I think the timing of signing a large client in the U.K. has been pushed out. In the U.S., the size of the pipeline remains about the same, $100 million. Some names have dropped off and others have been added. We are absolutely progressing the sales process of many of the large names, although not progressing the prospects through the sales gates as quickly as we'd like. I mean, large organizations continue to express interest in outsourcing, and we're engaged with those firms.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And I think Al and his comments had used the phrase "still in active discussions with" like these processes take longer. But I imagine there's a lot of back-and-forth. Is that a fair way to characterize it, that it's -- that you get to a level that you're close to a signing, but it's more people you're talking to or different parts of the bureaucracies? Is that...

Joseph Paul Ujobai

Yes, there's -- so you were -- we're talking across a wide variety of segments within inside these large firms, which means a lot of executives and a lot of people. And certainly, the procurement or signing process has become increasingly more complex over recent years. So yes, there's a lot of activity across the board, but things are taking a lot more time than we would like.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then with the -- just sort of looking quarter-on-quarter on the information processing line, which I know it's in the consolidated income statement, but I believe a lot of it's private banks. Just in that quarter-on-quarter change, is that -- should I think about that as a conversion business that should be bringing recurring revenue later, or is it, it says in the release, a one-time item? I'm just trying to make sure I understand it.

Joseph Paul Ujobai

No, the increase in investment processing, really, it's across the board. It's come from growth of our U.S. Trust 3000 business recurring revenue there. As you know, we converted some clients from ASP to BSP, so that drove -- processing the revenue increase. We talked about some solid growth in the U.K. on the Wealth Platform from current clients that drove some increase in investment processing, as well as our mutual fund trading solution in the U.S. We saw some significant growth last quarter in that business, too.

Operator

Our next question is from Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Just sort of following up on the last question. Maybe could you just quantify what was the magnitude of the one-time revenue in the quarter?

Joseph Paul Ujobai

Let me check that. A couple million dollars. Yes, some [ph] million dollars.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

So the pretty strong sequential growth Q-to-Q from the third quarter to the fourth quarter, even x this sort of couple million dollars is -- I guess, it's the U.K. sort of picking up. Is there any seasonality in the mutual fund trading or any of the other businesses? I'm just trying to understand the nicer sequential ramp given that we probably didn't get a lot of lift from the Global Wealth Platform at this point.

Joseph Paul Ujobai

No, there really isn't seasonality, but we did -- again, as I mentioned earlier, we did see growth in our U.S. trust business. We did see some growth in the recurring business in the U.K. as our current clients continued to increase flows to the platform and as I mentioned also, in this process in the mutual fund business. We did mention last quarter that our first client on the platform, HSBC, did bring over a new book of business, which occurred towards the end of the third quarter and that impacted positive revenue growth in the fourth quarter.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And is that -- we still got a full quarter of benefit of that in the fourth quarter?

Joseph Paul Ujobai

Yes, pretty much. Yes, yes. I think they converted latter part of September.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

All right. And I'll ask you a question which I know you won't like, but I'll ask it anyway. The...

Joseph Paul Ujobai

Box it. Go ahead.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Well, I'm sure you're expecting this question. At the analyst event back in June, you were somewhat and your team sort of alluded to you would be disappointed if you didn't sort of get over the goal line of few large deals by the end of 2013. And then, I guess, that sort of like didn't happen. Is there sort of a new timeframe you're thinking about? Is it more realistic to be thinking by beginning and the back -- by the third quarter, or do you -- don't want to answer that at this point?

Joseph Paul Ujobai

Yes. Of course, we're disappointed that we didn't sign a couple of large clients in 2013. And I need to be careful not to make a similar mistake and give you specific timing. But as Al and I both said, we remain very engaged in the market and we continue to get affirmation that our solution is a good one and it meets the needs of the market. These things are just taking longer than any of us would like.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Is it a question of buy-in for the solution, is it a question of price or is it a question of competition or a question of people wanting to do more stuff in-house? I'm just trying to get my arms around the reason why it's taking so long to get over the goal line.

Joseph Paul Ujobai

It's largely -- these are large complex offerings. And so I think that the firm -- I know the firms that we're talking to are very enthusiastic about the solution, but it takes a lot to make decisions inside these large firms now, as I said, they're across multiple segments. The regulatory environment's changed, so if a large firm wants to outsource, where -- and many firms were talking to clearly see the benefit of outsourcing, but the regulators have -- built in the U.S. and U.K. have gotten much more prescriptive around outsourcing. And honesty, these are very, very big decisions that our clients haven't had to make ever or certainly, in a long time.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just one number question. Did you say the backlog of signed but not converted is about $7 million of recurring revenue?

Alfred P. West

That's correct. Yes.

Operator

Next, go to Tom McCrohan with Janney.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Just a quick follow-up on the pipeline. Can you give us a sense of the gates? Remember, at the Analyst Day, you talked about a number of deals being in gate 3 out of a 5-category gating system. Have any of those gate 3s moved to gate 4?

Joseph Paul Ujobai

Things are moving in the pipeline much more slowly with these large firms. So yes, things are moving in the pipeline, but they're moving at a pretty slow pace, at a slower pace than we would like given the complex nature of the sale.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Okay. And in terms of the conversations like Glenn was trying to get to as well, I'm just kind of curious, on functionality, when you're getting feedback from the prospects you're talking to, are they okay with the functionality or are you're getting a sense that there's going to be some additional investments, significant investments in GWP to meet the kind of the functionality needs of the U.S. prospects you're talking to?

Joseph Paul Ujobai

So we've told you all along that we've developed from the back to the front, so the -- most of the development we're doing now -- or a lot of the development we're doing now is more around the front, meaning the advisor experience, the end client experience. What we hear from our prospects are really the integrated nature of the platform is of significant value. And again, there are still some core U.S. stuff where we continue to build as part of the step-in strategy, but people like the functionality, and they particularly like the fact that, that functionality is very integrated. It creates a straight-through environment, and that's what drives both, not only the cost savings that our clients would expect to achieve, but also the reduction of risk that they would expect to achieve as we -- as they would adopt the Wealth Platform.

Operator

And we'll go to Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

I just wanted to maybe follow-up a little bit on your comments as it relates to expense growth. I mean, how -- I guess, maybe just follow-up on Tom's question a little bit. But to what extent do you feel like the buildout of the platform in the U.S. once told you there's some more functionality to add? Is kind of absent signing a large client that had some specific need just kind of where needs to be for the most part? And until or unless you sign a large client in the U.S., you -- that would contribute to maybe some slowdown in the rate of expense growth? And I guess, as maybe a corollary to that, I mean, are you guys thinking that whether revenue growth ends up being 5%, 10%, 12%, whatever the number is, 14, that it's kind of the goal to keep expense growth at some lower rate, I don't know what the specific number in mind, so should we be -- is that how you're kind of thinking expenses heading into '14?

Joseph Paul Ujobai

So we're -- from a development standpoint, we're trying to tie additional expense associated with development to the step-in strategy. So as we have identified additional firms that are increasingly more complex, we would develop based on, again, on that well document -- will discuss step-in strategy around development. There are other things that drive expenses that we need to really keep our eye up -- on closely. I think I mentioned this before. Initial conversions in the U.S. have cost us a little more than we would like, so we're going to really follow that pretty closely. We've tried to reengineer a fair amount of effort around conversions in 2013 and should see the benefit of that in '14 with some of these next clients in the step-in strategy. We have a lot of complexity around these large sales we've mentioned several times, and that means we've applied a lot of technical sales resource against those sales efforts. We're certainly looking to use people internally that have been part of the development of the platform as part of that technical sales approach. And then the one area that we've talked about for a long time is really trying to determine what's the right investment around operational scale, so what makes sense for us to really fix or scale using continued technology development versus adding people. So we're really focused on the step-in strategy, as well as the experience we have with growth in the U.K. and now looking at development conversions, technical sales support and then operations and trying to focus on those 4 areas from an expense standpoint.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. I mean, maybe just following up, so the extent that you can't control -- you have expenses in the coming year, I mean, should we be thinking that it is just generally a goal to say, whatever revenue growth is, we just want to make sure that -- if it ends up being below our expectations, we're still going to kind of try to manage the expense growth to a lower rate?

Joseph Paul Ujobai

Yes, profitability improvement in the banking segment is of extreme importance for us in 2014, and we will stay close to the revenue growth and manage expenses based on that.

Operator

And at this point there are no additional questions.

Alfred P. West

Thanks, Joe. Our segment is Investment Advisors, and Wayne Withrow will cover this segment. Wayne?

Wayne Montgomery Withrow

Thanks, Al. In 2013, our momentum accelerated as we received $3.5 billion in net positive cash flow for the year, including $800 million in the fourth quarter.

Our net cash flow in 2013 represented the best we have had since the year 2000 and is almost double of what we received last year. Revenues were $241 million for the year, a 19% increase from 2012. Our fourth quarter revenues totaled $65 million and improved almost 7% sequentially from the third quarter. Profits for the year increased 30% from last year and our fourth quarter profits improved 8% from our third quarter results.

Revenue growth outpaced expense growth in the quarter, and our margins for the quarter improved to 45.4%. Assets under management were $41.4 billion at December 31, an increase of $2.4 billion from September 30. This increase was due to net positive cash flow and market appreciation. Year-over-year, our assets grew by $7.7 billion, driven almost equally by market appreciation and positive net cash flow. During the quarter, we recruited 138 new advisors, bringing our total for the year to 593. Our pipeline of new advisors remain strong.

For 2014, we will concentrate on 3 main areas. First, we are focused on the rollout of the SEI Wealth Platform. In 2013, we improved our platform by incorporating feedback received from our early adopter clients. In 2014, we expect to convert 2 additional tranches of clients, with the first tranche going live in the second quarter. We expect to use this second quarter event to more finely tune our conversion process.

While we do not expect SWP to be a significant source of direct revenue in 2014, it does help us by shoring up our relationships with existing clients and improving our current cash flow from them. Our progress in SWP during this year should set us up for new revenue growth in 2015.

Second, we will continue to focus on new advisor recruiting. Third, we will work to continue to improve upon the segment's rate of net cash flow growth. To this end, we have added a few additional sales resources for 2014.

In summary, 2013 reflected the momentum we have been building. Our goal in 2014 is to improve upon this momentum in our core business, while at the same time, continuing the rollout of SWP with an eye towards revenue contribution in 2015.

I now welcome any questions you may have.

Operator

[Operator Instructions] And then we'll go to Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Just curious, you mean, as you pointed out, you had pretty healthy margin expansion kind of year-over-year, full year or for the quarter. And I know you've been spending money on the Wealth Platform and whatnot, so how should -- was some of these additional hires and whatnot -- I mean, how should we be thinking of margin compression from here? I mean, do you think this is really just kind of steady march back to the 50% margins you had kind of post -- , pre-crisis era, or do you feel like maybe it kind of plateaus for a while as you kind of get the platform rolled out and hire some additional distribution resources?

Wayne Montgomery Withrow

Yes. I mean, Robert, I'm always trying to grow the revenue and I'm always trying to grow the profits. And so that means I'm trying to pull my expense by growing revenues. So I'm not willing to give up on anything just yet.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And maybe a question, and maybe this isn't the best way of looking at it, but if I look at kind of the fee realization rate, it's been also kind of ticking upwards, I'd say, for the last several years. Is that really just simply kind of the rebound in equity assets or the mix is changing? Or is there anything else kind of happening beneath the surface that's kind of putting some upward lift to kind of the revenue per asset?

Wayne Montgomery Withrow

I think when you look at the revenue recognition rate, that is because there is scale inherent in the mutual fund product we use. So this business has scale in the revenue recognition rate, as you pointed out, and also scale in the operation of the business itself. So it has kind of double-scale build into it.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Is that because the -- well, I mean, I don't know...

Wayne Montgomery Withrow

Size, scale due to size.

Operator

And we'll go to Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Do you have sort of a timeline for -- to have all your advisors converted to SWP? Or what's sort of the plan of thinking there?

Wayne Montgomery Withrow

I think I'd probably like to defer a comment like that to when we have the Investor Conference. We do have sort of internal goals that we're working on right now, but I really haven't shared that with all my clients yet. So I want to -- I'd hold off on that.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then you sort of suggested you're going to add some salespeople, and I thought I heard you say a goal of having even stronger flows in 2014. Maybe a little bit more color around that? And did I hear that right?

Wayne Montgomery Withrow

I think you heard it right, and I think you probably have all the color there is. I mean, it would not be wise of me to tell [indiscernible] the growth.

Operator

And we have no further questions on queue.

Alfred P. West

Thank you, Wayne. And our next segment is the Institutional Investors segment. I'm going to turn it over to Ed Loughlin to discuss the segment.

Edward Doyle Loughlin

Thanks, Al. Good afternoon, everyone. To focus my remarks on the financial results for the fourth quarter [indiscernible] the entire year approaching $68 million, increased 6% compared to the third quarter. Full-year revenues of $257 million increased 13% compared to 2012. New client fundings and market appreciation drove revenue growth during both periods. Operating profits of $31 million increased 4% compared to the third quarter and increased 12% for the year, totaling $124 million. Fourth quarter margins were 47%. Margins for the year were 48%. Both time periods realized a 1% decline due to accelerated stock option expense, increased Defined Contribution solution cost and additional alternative investment resources to support our client base. Quarter-end asset balances of $69 billion reflect a $1.6 billion increase compared to the third quarter of 2013, a 4.1 -- I'm sorry, $4.5 billion increase for the calendar year.

New client funding for the quarter totaled $688 million, and the unfunded client backlog was $652 million at year-end. Client signings for the fourth quarter were $1.2 billion and totaled $6.7 billion for the year. As we discussed previously, new competitors have entered the outsourcing space, making each deal more competitive, but overall, generating more sales opportunities. SEI's fiduciary management program has a proven track record of adding value for clients and competes very favorably in the outsourcing space.

Our focus for 2014 is in 3 areas: first, to continue to build a global diversified institutional client base with a continued emphasis on larger investors; second, continue to provide clients with value-added advice and discretionary services; and third, place increased emphasis on Defined Contribution investment-only sales opportunities. We want to be able to capitalize on emerging favorable trends towards engaging our fiduciary partner to manage their Defined Contribution plan like a defined benefit plan.

Our pipeline remains strong, and we're optimistic about the growth opportunities in the institutional space. I'm happy to entertain any questions you may have.

Operator

[Operator Instructions] And we'll go to the line of Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Ed, I wanted to ask first on your comment there about your first of the 3 priorities for '14 about focusing on larger opportunities. Are you starting to see more opportunities among the bigger players out there than you had before? Is there something that's changed in their behavior that makes them more likely to outsource a bigger pensioner endowment than they had before?

Edward Doyle Loughlin

Well, I think that we have been fortunate enough to be able to be an attractive alternative to larger players. It's a little bit more of a function of how many are in the marketplace at any one particular time. I think what we're seeing is with more competition, our competitors and ourselves are calling on these larger investors. And I think it's something we are very encouraged by all this competitive nature of the marketplace to really look into outsourcing. And so once they start to look, I think that there will be, hopefully, a good number that would say, yes, we want to move in that direction.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then just one question on sort of what the market dynamic's right now, particularly on the pension fund side. I'm seeing articles about, say, when in terms of large funds, large pension funds, something like 95% are fully funded. With the run-up in equity markets we've had in 2013, does that change anything for your business in terms of is it easier to make a sale to a fully funded or nearly fully funded pension fund? Or is that just a separate issue?

Edward Doyle Loughlin

I think it's really a separate issue. I think just the whole idea of a locking in a funded status so that these plans don't have to give anything back as the market conditions or the interest rate environment changes. So you see this glide-path orientation. That in itself is a reason for them to outsource to be able to have someone manage that. But as they get better funded, I don't think that that's a reason to outsource alone.

Operator

And we have no additional questions in queue.

Alfred P. West

Thanks, Ed. Our next and final segment today is Investment Managers, and I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Stephen G. Meyer

Thanks, Al. Good afternoon, everyone. For the fourth quarter of 2013, revenues for the segment totaled $59.5 million, which was $8.3 million or 16.1% higher than our revenues in the fourth quarter of last year, and $2.3 million or 4% higher than our revenue in the third quarter of 2013. New client fundings and increases in our asset balances drove this increase in revenue.

Our quarterly profit for the segment of $20 million was approximately $3.6 million or 21.6% higher than the fourth quarter of 2012 and 2.5% higher than the third quarter of 2013. Third-party asset balances at the end of the fourth quarter of 2013 were $312 billion, approximately $16 billion or 5.4% higher as compared to our asset balances at the end of the third quarter 2013. The increase in assets was primarily due to net positive cash flows of $12.2 billion enhanced by market appreciation of $3.9 billion.

Turning to market activity, during the fourth quarter of 2013, we had another strong sales quarter. Net new business sales events totaled $8.5 million in annualized revenue during the quarter. This brought our 2013 total net new sales to $34.3 million in annualized revenue. We continue to add new business across our entire solution set, as well as all of our different market segments. Additionally, client retention remains strong in 2013. And during the fourth quarter, we had client recontracts that totaled $13.3 million in annualized revenue. From a market environment standpoint, we continue to see a strong pace of activity, as well as increased competition. Investment managers are poised for growth and expansion, and their solution needs are increasing. We feel this will continue to fuel additional opportunity in this space and bode well for our future.

As we enter 2014, our continued focus will be on growth. Our priorities will be in the following broad areas: first, we will continue to build our market share and revenue, primarily driven by focusing on larger new name business, ongoing growth of our wallet share with current clients and continued geographic and new market expansion. Second, we will continue to invest in and develop our solutions and services so we can maintain our market differentiation. Our primary mission remains to help our clients succeed by delivering world-class services and solutions to meet their emerging needs. Third, we will continue to focus on the future and sustainable growth. This industry is continually evolving. New products and services are proliferating in the market, and we will continue to expand our solutions to take advantage of this trend.

In summary, 2013 was a strong year for our business. We are encouraged by the momentum we experienced during the year, and we look to build on that momentum in the year ahead. That concludes my prepared remarks, and I will now turn it over for any questions you have.

Operator

[Operator Instructions] And we'll go to Robert Lee, KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Steve, just maybe focusing on the margin again, margin question. This year is kind of, I guess, relatively flat year-over-year despite having a pretty good revenue growth. And I know you were going through some investment spend and whatnot. So how should we be thinking of this from here? This kind of feels like last bunch of years, margins kind of been in the 34, 35 range. Do you feel like that's kind of like kind of where it's going to kind of settle for the foreseeable future? Is there much opportunity to really expand the margin more from here if you get another year of good revenue growth or just between investment spend, breakpoints on new business, going after larger clients, wherever they maybe, this is kind of probably a natural level?

Stephen G. Meyer

Well, I'd say a couple of things, Rob. I would -- I think margin did fluctuate a little bit this years as we predicted primarily because of our uptick in investment and us front-loading expenses before conversion of business. I think that in the short term and near term, I would continue to say that it's going to continue at that trend, and the margin will probably be at the current level. With that said, we're always looking to increase our margin, and we're always looking to find ways to manage our expenses more effectively. While I will continue to invest in this business, and quite frankly, we see a tremendous opportunity for us to innovate our business and develop our solutions further, that does not hide the fact that we also feel that we become more efficient in our operations and our services we do day-to-day. So while we will continue the investment, while I look at margins kind of over the next year or so, to stay at the same or in the same level of rates where they are, we are rest assured looking for ways for us to increase it in the long term.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And maybe just one follow-up. I know in the last couple of years, there's been a concerted effort to try to expand your business outside the U.S. in this segment. Could we maybe get some color on when you look at some of the new business trends you've had, is it kind of evenly split U.S., non-U.S? Is it -- kind of any color on kind of how that initiative is progressing and kind of the current makeup of the new business, geographically?

Stephen G. Meyer

Sure. So I'd say a couple of things. So obviously, the growth still come the majority from the U.S. I think the positive trend we're seeing in the U.S., if you look at our business over the past 4, 5 years, the alternative segment of the business was really driving most of the growth. Encouragingly, the traditional side has picked up activity. And if you look, it was almost evenly split. There was a slight head on the alternative for the year, if I look at all the new events. But the traditional side certainly came up and contributed almost as much as the alternative. And looking at the global mix, global bid add was probably around 10%. It was a little less than we had hoped, but I think we're seeing a little bit of the headwinds and the josing [ph] as we're looking at larger institutions overseas, these are complex decisions and especially large organizations. So I'd say we've been -- while there's positive signs, we're facing a little bit of headwinds as the larger deals we talk to and the larger organizations, the more complex decision is just taking a little bit more time. But I'm still very encouraged, and we are not backing off, we are pushing ahead further with our expansion outside the U.S.

Operator

And we have a question from the line of Tom McCrohan with Janney.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Steve, can you talk about compliance? Is that a big driver of kind of new business in the pipeline? And the other driver I'm just kind of curious about is, I guess, hedge funds going multi-prime broker? Can you just talk about those 2 drivers?

Stephen G. Meyer

Sure. So the first, compliance, global compliance and regulation is a key concern. If you ask any CEO of an investment management firm, that's one of their top 1 or 2 concerns and issues. So that is driving a lot of the behavior of our clients. And quite frankly, we see an opportunity, and it's one of the solutions that we have spent building out in our business. And we see it as a driver and an attractor for new business. On the multi-prime broker, that's something that's been out there for years. More and more, to -- not just the hedge funds, but traditional managers are using multiple prime brokers, multiple custodians. And that, again, I do think it's a phenomena that's going to keep up. People are looking to spread the risk and their business across multi-custodians and prime brokers. And it's one of the areas that we think that drives business to an outsourcer such as us because we do the aggregation and really all the legwork between those various parties, counterparties.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

And something like this alternative investment fund managers directive in Europe, is that a big factor in your business in terms of what's going on in Europe?

Kevin Patrick Barr

Yes, yes, I would say that's one of the slivers of our regulatory and risk solution. And it's certainly one of the things that comes up in every discussion we're having with new prospects and current clients and the ability to handle that solution or those regulatory needs or importing needs for them. But it is a very big concern and a very big challenge for managers, one that we've looked to solve for them.

Operator

And no further questions in queue.

Alfred P. West

Thank you, Steve. And I'd like to turn it over now to Kathy Heilig to give you [indiscernible]

Kathy C. Heilig

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. The fourth quarter cash flow from operations was $110.9 million or $0.63 per share. The year-to-date cash flow from operations, $351 million or $2 per share. The fourth quarter free cash flow was $96.5 million or $0.55 per share. And year-to-date free cash flow was $295 million.

In the fourth quarter, capital expenditures, excluding capitalized software, were $5.9 million. Our year-to-date capital expenditures, excluding capitalized software, are $14.5 million. We expect that number to be larger next year, in part due to the cost of our new building and also some other infrastructure that we are doing in our technology area. So we expect the number to be about $35 million to $35 million.

The tax rate was 35.2% in the fourth quarter. If you remember, the tax rate in the third quarter was low. So our annual tax rate is 33.7%. However, we expect 2014 to be around 36%. The accounts payable balance at December was $16.2 million.

We also would like to remind you that many of our comments are forward-looking statements that are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited. Future events and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

And now please feel free to ask any other questions that you may have.

Operator

On the line is Chris Donat from Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Yes, two questions for me. First, thinking about stock-based compensation in 2014 because it was elevated in '13 with the sale of SEI Asset Korea and the SIV settlement. Anyway, is this something that should -- we should think about as going back to say 2012 levels of about $16 million? Or just any thoughts on how to think about the additional stock-based comp that had been there for 2013.

Alfred P. West

Chris, our estimates now are -- this year, it will be around $10 million for the year.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay, that's an easy answer. And then also looks like, just going through the income statement on the facilities line that, that ticked up 7 -- or ticked about $4 million quarter-on-quarter. I know it bounces around a little bit. Is any of that tied to the construction around your headquarters or is that something else going on? Or was it actually depressed in the third quarter?

Dennis J. McGonigle

It was really depressed in the third quarter. We had a -- we got the benefit of a tax rebate on real estate taxes in that line item. And just so we're clear, we affectionately call the new building, Myersville. So all future references of the building should include the name, Meyer, somewhere in there.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay, I'll keep that in mind.

Dennis J. McGonigle

I just say that because Steve's sitting right next to me and...

Stephen G. Meyer

Much appreciated.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Well, I figured he posts in the mid-teens revenue growth year-on-year, isn't it time he gets his own building?

Dennis J. McGonigle

Thank you, Chris. You're a very smart man. Thank you.

Operator

And we have a question from Robert Lee, KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Just kind of a general question for maybe Al or whoever wants to answer this, but one common theme it seems like across every segment was targeting larger clients, and maybe you have historically, clearly, in the Private Bank, but it seems to be pretty common in each segment. So is it just a matter of, hey, you've gotten bigger and you can go after bigger fish or where are some of the maybe implications that we should be thinking of that, that may be going forward while when you sign the new client in any segment it will be bigger, but we could actually, maybe to some earlier points, see kind of new business trends become lumpier, so to speak, but maybe they were bigger when you sign them, but kind of maybe a little lumpier and uneven than they've historically been? Just trying to think through how to change evolved and what they may mean going forward?

Alfred P. West

Okay, this is Al. I'll try to answer it. The main reason that we're going to the larger clients, quite frankly, is we can now. They are embracing outsourcing more than they ever have in the past. The other thing we like about larger clients is not only larger amount of revenue at the beginning. They are, because of the complexity, there are a lot of different things we can do for them. So that -- so when you sign one and put the -- and get them to do business with us in one way, they are some -- they are almost a market in themselves, so that we then can get more business and more business and more business. And I think the problem with banking right now is we were just very immature. So it is really lumpy there. But Ed is getting larger clients to sign on. It makes us a little bit more lumpy. But like I say, he's got a future in -- as the Steve Meyer group, even with the new building, is increasing the business with -- on large clients that he signed. For the smaller client fee side, there's not much additional revenue downstream that we can do. And selling to current clients is a hell a lot easier than selling to new ones. So that's kind of the theory behind all that.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

And maybe as a follow-up to that, just, I mean, I understand the larger clients need more complexity, more cross-selling opportunity. And when I look at across kind of the pond, not the pond, but across the industry, it's using maybe some of the large -- trust banks. So you do compete against some different segments and they clearly have had an issue with dealing with the large clients and their complex needs of always getting kind of the scale out of those businesses that they would like because of maybe because of pricing power or the constant need for investments. So how do you guard against that as you kind of go upmarket a bit? I mean, do you -- how much can you kind of hold the line on pricing? And how do kind of go about trying to price those clients so that complexity doesn't become a burden, you actually can start to scale it?

Alfred P. West

Well, I think we have always scaled our larger clients. But in the Trust 3000, we had the issue -- we didn't follow through as much because it was a legacy system that we couldn't follow through by adding more and more services to it. And so we have a little bit of a slide over time in our pricing. But the way you make that not the case is if you continue to add new functionality that is packaged in such a way that they pay more. And then, of course, there are more books of business, like I said. And the way we're trying to go after these larger institutions are to get some foothold in. But sometimes, these projects get too large or in a hurry. So that's been hurting us a bit.

Operator

And we have a question from Dan Weldon [ph] with Numeras [ph].

Unknown Analyst

Just on LSV, if you look at the mutual fund performance on a relative basis, it seems to be top decile across the funds. Is that a good proxy for the franchise as a whole institutional side? And I guess, if that's the case, what's sort of needed to get that to positive flows?

Alfred P. West

Yes, I'd say generally, their performance across our product lines have been very solid. And, yes, the other thing, they've helped, will help them going forward as if that 5-year number, which pick on the institutional side, institutions pay a lot of attention to. We'll improve as the 2009 quarters roll off and really the late 2008 quarters roll off. So I mean, I think they feel pretty good about their opportunities to capture assets not only here in the U.S., but in other parts of the world. And yes, I think their performance on their mutual fund is a pretty good proxy for typically their larger cap products I think in lines or better with those products.

Operator

And we'll go to Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Yes, a question for Steve. Just obviously a good sales year, $34 million in a span of a few good years. Is there any notable change in the size of your pipeline? I think it was roughly $140 million at midyear? Or have you replenished it plus some?

Stephen G. Meyer

No, I would say it's right around that amount, Glenn. And obviously, some has come off, but other's gone on. And I think the only thing notable about the deals we've signed, as you remember, we've talked about trying to switch, and as Al just mentioned, getting more of our revenue, new revenue from existing clients. So if you look at this year in that $34.3 million, about 60% of it came from existing clients, which is a larger number than has been in the past.

Operator

And we have no additional questions in queue.

Alfred P. West

Well, thank you, Earl [ph]. So ladies and gentlemen, we're concentrating, continue to concentrate our efforts on maintaining highly satisfied clients, our growing new business events and controlling costs at the same time and of course, investing in projects that are critical to our future.

Now our focus on long-term profit growth is unwavering. And as our momentum grows, I am bullish about our intermediate and longer-term business opportunities and feel really good about what we've accomplished. So with that, if there's any other question that just came up, let us know. Otherwise, we'll bid you good afternoon.

Operator

And we have no additional questions coming in.

Alfred P. West

Well, thank you, all, very much for your attention, and thank you. Have a good afternoon.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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