SEI Investments' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: SEI Investments (SEIC)

SEI Investments Company (NASDAQ:SEIC)

Q1 2014 Results Earnings Conference Call

April 23, 2014, 01:00 PM ET

Executives

Alfred P. West, Jr. - Chairman and Chief Executive Officer

Dennis J. McGonigle - Chief Financial Officer

Joseph P. Ujobai - Executive Vice President

Wayne M. Withrow - Executive Vice President, SEI Advisor Network

Edward D. Loughlin - Executive Vice President, Institutional Group

Stephen G. Meyer - Executive Vice President, Head of Investment Manager Services

Kathy C. Heilig - Controller

Analysts

Thomas C. McCrohan - Janney Montgomery Scott LLC

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

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

Glenn Greene - Oppenheimer & Co. Inc.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the SEI First Quarter 2014 Earnings Call. (Operator Instructions) And as a reminder today's call will be recorded.

I would now like to turn the conference over to your host and your facilitator as well as your Chairman and CEO, Mr. Al West. Please go ahead.

Alfred P. West, Jr.

Thank you and good afternoon everybody and welcome. All of our segment leaders are here with me 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 first quarter 2014. Then I'll turn it over to Dennis to cover LSV and the investment in new business segment. 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 first quarter of 2014. First quarter earnings increased by 4% from a year ago. Diluted earnings per share for the first quarter of $0.43 represents a 5% increase from the $0.41 reported for the first quarter of 2013. We also reported an 11% increase in revenues from the first quarter 2013 to the first quarter 2014.

The earnings and revenue were enhanced in the first quarter of 2013 by a $22 million gain from the sale of our Korean subsidiary and by a $5 million gain in the first quarter of 2014. After these are excluded our revenue growth has been 19% and our earnings growth per share has been 24%. Also during the first quarter of 2014 our non-cash asset balances under management increased by $7.3 billion. Of that SEI's assets under management grew by $5.5 billion during the quarter while LSV's assets under management grew by $1.8 billion.

Finally, during the first quarter of 2014 we repurchased 2 million shares of SEI's stock at an average price of $33.70 per share. That translates to $69 million of stock repurchases during the quarter.

Now turning to sales, our net new recurring revenue sales during the quarter were solid. Of the $23.1 million of net new sales events we generated $21.9 million are recurring revenues and each of these segments heads will address their sales activity.

As you know, the roll out of SWP continues. During the first quarter, we capitalized approximately $9.4 million through the SEI Wealth Platform development and amortized approximately $9.2 million of previously capitalized development. Our development agenda for SWP remains to deliver U.S. and UK functionality, important to a large and medium sized advisors and banks in the U.S. and UK markets as well as further automate our operations.

We are disappointed at how long it has taken to deliver the full platform and in turn we’re disappointed at the time it has taken to gain our first large initiative for SWP. We will discuss these items at our June 3rd investor conference. While we are diligently working through the sales process with a few large potential clients we have increased our attention on asset management distribution opportunities and improving profitability in the private banking segment in 2014.

Turning to 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 in this business. In the institutional segment our strong sales and profits throughout the world are leading through from the strong market adoptions of our differentiated fiduciary management solutions.

Finally, our investment management services segment continues to get success in both selling and implementing new business while differentiating our solutions. They are making progress selling to larger prospects and increasing the business we do with the existing clients. Now behind all of our business units I am encouraged by the feedback I continuously 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 our units confirm the –positive feelings in our client base.

That does concludes my remarks, so I will now ask Dennis to give you an update on LSV and the investment in new business segment. I’ll then turn it over to the other business segments.

Dennis J. McGonigle

Thanks Al. Good afternoon everyone. I’ll cover the first quarter results for the investments in new business segments and discuss the results of LSV Asset Management. During the first quarter 2014 the investments in new business segment continued its focus principally on two areas, the ultra-high net worth investor segment and the development of a web-based investor services advice offering coupled with the use of global technologies. During the quarter the investments in new business segment incurred a loss of $3.1 million which compares to a $2.8 million loss during the first quarter of 2013.

There’s been no material change in this segment and we expect losses in this segment to continue in this range during 2014. Regarding the LSV our earnings from LSV represent our 39.3% ownership interest during the first quarter. As a reminder, our ownership interest during the first quarter 2013 was 39.8%. LSV contributed approximately $32 million in income to SEI during the quarter. This compares to a $27.8 million contribution for the first quarter of 2013.

Asset balances grew by approximately $1.8 million during the quarter due to increased market valuation offset by net negative cash flow. Revenue at LSV for the quarter was $95.8 million. Finally during the quarter as Al mentioned we recognized an additional gain of $5.6 million related to the sale of SEI Asset Korea which occurred in 2013. I refer you to our 10-K and to be filed 10-Q for additional information. I’ll now take any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions). And we have a question from the line of Tom McCrohan. Please go ahead.

Thomas C. McCrohan - Janney Montgomery Scott LLC

Hi Dennis.

Dennis J. McGonigle

Hi Tom.

Thomas C. McCrohan - Janney Montgomery Scott LLC

Question on the tax rate on stock options, were there any incremental stock option expenses this quarter based on acceleration of last year? Was that all captured in last year's number and the tax rate, what would the tax rate have been if not for the expiration of the R&D tax credit, thanks.

Dennis J. McGonigle

Tax rate would have benefited by about 1%, 1 percentage point. So if the R&D tax credit gets reinstated this year we would have that even with catch up whenever that would occur. So on the option expense, generally the option expense if you go to our 10-K and our filing here in the projected expense for this year, it's pretty much on track with that. We did have one tranche of options that we just moved up a year in terms of expected targets being hit. But that was basically a fairly immaterial amount for the quarter and for the year.

Thomas C. McCrohan - Janney Montgomery Scott LLC

That's all I had. Thanks.

Dennis J. McGonigle

No problem, thank you.

Operator

(Operator Instructions). We have a question from the line of Mr. Robert Lee. Please go ahead.

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

Good afternoon. Hi, Dennis.

Dennis J. McGonigle

Hey Rob.

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

Just real simple question on LSV, I know that you mentioned you had negative flows but could you just kind of quantify that for us.

Dennis J. McGonigle

Sure. They had just over $1 billion of net negative cash flow as a result of rebalancing. So the pains of success I guess is the way they would put it. They also had net, between client losses and client gains and other, net down of about $400 million to $500 million.

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

All right. And I'm just curious as you know the market rallied and the assets have come back towards higher levels. Are they again to a point they know in the past they had, I believe that close some products here and there. Is there anything we should be thinking about that, as asset levels get bigger there they may even pull down out some products or just…?

Dennis J. McGonigle

Yeah, I think generally the products that they do have closed are not much there's too many more that they would close are really the smaller cap or smaller single global particular country type product. But there are larger cap products and they really haven't a cap side if you will. And that's I'd say their asset growth is coming predominantly in those product lines.

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

And maybe just one last question on the LSV. Just possibly just get a little bit more color on kind mean even the geographic breakdown, I mean in terms of are more of their products aren't skewed towards purely domestic, more global strategy. Just trying to get a little bit better feel for where they're seeing relatively more or less activity geographically.

Dennis J. McGonigle

Yeah I don't have breakdown in front of me. But predominantly their assets are U.S. based assets. Their client base however I'd say is still a majority of the U.S. based clients but they do have a very good client base in some of the European markets, particularly the Northern European markets. They have been able to grow their business in some of the Asian markets in Korea for example as well as in the Hong Kong and Australia. So they have a good client base in Canada. So they have some geographic diversification but I would say that the majority of their assets are U.S. based clients. And they are usually getting -- when they receive a mandate of a non-U.S. client generally in the U.S. [inaudible].

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

Great, thanks for taking my question.

Operator

There are no further questions in queue at this time.

Alfred P. West, Jr.

Thank you, Dan. I am going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?

Joseph P. Ujobai

Great, thanks Al. For private banking quarterly revenue of a $105 million was up 7% from the year-ago quarter. Revenue improvement over the year-ago quarter was largely driven by higher recurring investment processing fees and also increased assets under management in our distribution business. Flat revenue to the previous quarter was due to a decrease in one-time revenue.

Operating profit was $5 million, up 60% from the previous quarter and a 104% from the year-ago quarter. In the private banking segment we also reflected a $5.5 million gain on the sale of SEI Asset, Korea with overall segment profitability up $10.5 million. First quarter profit was positively impacted by revenue growth and lower expenses.

Turning to business developments while we don't have any new [inaudible] announcements in the quarter net sales events for the quarter were $5.8 million, $5.1 million of which is recurring. Sales events were largely due to our growth in our asset management distribution business.

In the U.S. during the quarter we made progress with the conversion of Washington Trust. In the private banking segment, we now have four U.S. firms on the SEI Wealth Platform with a backlog of five additional firms.

In the UK during the quarter we added over $1 billion in net cash flow bringing assets under administration to $30.7 billion. Also as a sign of continued acceptance of the platform our second UK client, Towry has re-contracted through 2021. We now have re-contracted our first two SWP clients. Finally, the focus on our asset management distribution business has yielded strong growth in the quarter, at $1 billion of net cash flow bringing our assets under management to almost $16.9 billion.

In conclusion worldwide we have 29 signed clients with a backlog of approximately $7 million in recurring revenue that should install over the next 18 months. So while we work on capturing the new SWP business with wealth managers we are growing our asset management business and are focused on improving our profitability.

First quarter results reflect our focus and you should expect that trend to continue through the year. Any questions?

Operator

(Operator Instructions). We have a question from the line of Chris Donat of Sandler. Please go ahead.

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

Hi Joe, how are you doing?

Joseph P. Ujobai

Good.

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

I wanted to ask a question about the effort that's been ongoing to sell to U.S. banks and the timing of it, and may be ask it from sort of a different question I know you get it all the time. But from where I sit at a firm that there is a lot of equity research on banks, one theme coming up over the last few months intensively has been banks being focused on more anti-money laundering, bank secrecy act issues and that sort of software. I am just wondering within your sales process and where the banks are focused if more infrastructure like products like SWP are being displaced by more regulatory-driven products just more a philosophical question then specific question but just wondering if that's a fact you're seeing out there.

Joseph P. Ujobai

So I would agree with you compliance and regulation is increasingly driving decisions that banks are making. I think that the platform has done a great job. As we built the platform we've done a great job integrating that, those types of systems into the platform. And so it's increasingly an important part of the sales process. But we do see certainly firms looking at individual packages across the board to solve those problems. But we are seeing big firms that want a much more robust integrated solution. And I think that's sort of a long sales cycle given the comprehensive nature of the solution.

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

Okay. Thank you.

Operator

Next question is a follow-up from the line of Thomas McCrohan. Please go ahead.

Thomas C. McCrohan - Janney Montgomery Scott LLC

How are you?

Joseph P. Ujobai

Hi, Tom.

Thomas C. McCrohan - Janney Montgomery Scott LLC

Any jumbo prospects falling out the pipeline and can you just kind of give us the size of the pipeline as it stands today? Thanks.

Joseph P. Ujobai

So the pipeline remains strong in the U.S. and UK. It's similar to the numbers that I've mentioned in the past. We really aren't seeing firms drop out, we are just seeing long decision cycles and I am going to get into some more details at the June investor conference so we can really step you through what we've learned and why this process is pretty complex.

Thomas C. McCrohan - Janney Montgomery Scott LLC

Thanks, that’s all I had.

Operator

You have a follow up from the line of Mr. Robert Lee. Please go ahead.

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

Hi, Joe, how are you?

Joseph P. Ujobai

Hey, Rob.

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

Couple of questions, first and I apologize if you mentioned this is just a simple one, where are the assets on platform [expected to be] [ph] at this point?

Joseph P. Ujobai

It's about $30.7 billion.

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

Okay. And when you mentioned we should expect more of the same in terms of I guess you had some incremental margin improvement, should we take that kind of the rush in of some of the continued moderate improvement as you invest -- that would, we should be thinking that, that's up from 2.9, 4.7 and that type of stair-step function from a margin perspective or trying to get a little more clarity on.

Joseph P. Ujobai

We’re working hard to show margin improvement every quarter. That could be some good - some positive impact for example when we start to install large banks, those things are expensive to install. So it will still be a little bit bumpy. We’re looking to show incremental improvement every quarter.

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

I'm just curious you mentioned the recontracting of Towry, just curious how that went I mean were there any substantive changes in terms, I know one of things you always want to do is try to make [inaudible] or just kind of curious how that went, you felt like pricing was stable, worse, better?

Joseph P. Ujobai

Yes, this has been an interesting property, I think it's interesting property because we have strong relationships with these long-term clients and the platform has progressed and we built a lot of more functionality over the time from when we actually installed these firms, to the recontract. So those are good conversations, most of our clients are growing so we’re seeing, given the business model asset base pricing we are seeing additional revenue from those clients as those clients grow. But they have been I think pretty solid conversations given the work we’ve done to build up the platform and to grow the business and to really ultimately drive some growth of these firms that we work with.

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

I guess [inaudible] that is I know in the U.S. 2,000 or 3,000 of your recontracted clients historically or at least maybe over the last several years have been some incremental kind of pricing pressure on kind of the core service so at this point, on the new platform expect you had some -- two recontractions, I guess you’re not seeing anything like that and kind of clients are always asking for more I guess but…

Joseph P. Ujobai

Yes, there’s always pricing pressure, people always want to pay less and there’s certainly in these firms, more complex procurement and contracts -- contracting procedures. But we are in a different situation than we are with trusts because of the significant investment and enhancements we’ve made since these clients came on. So yes there is always pressure. But people are looking to take more services and I think I’ve been happy with the outcome of our two re-contracts.

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

Great, thanks for taking my questions.

Joseph P. Ujobai

Thanks.

Operator

And we have a question in queue from the line of Glenn Greene of Oppenhiemer. Please go ahead.

Glenn Greene - Oppenheimer & Co. Inc.

Thanks, hi Joe how are you?

Joseph P. Ujobai

Hi, Glenn.

Glenn Greene - Oppenheimer & Co. Inc.

So on the sales side on the -- I don't know how to ask this but if you sort of go back to 2008, 2009 when you’re focused on the UK solely and all the big banks sort of like ceased making decisions for a while and you had to shift your sales focus to the IFA channel because they are always making big decisions, maybe sort of reading between the lines on some of your comments and maybe Al’s comments and am I sensing maybe a little bit of a shift in the sales focus now, you sort of alluded to more on the asset management side, or am I reading too much into that?

Joseph P. Ujobai

I think you’re reading obviously too much into that and we’ve got a really solid asset management solution and particularly where where we’ve bundled that with the platform or even the Trust 3000 in this segment we’re starting to see some strong growth there as I mentioned earlier there about a $1 billion of net new assets this quarter. Probably about 70% of that came from firms like HSBC and others that used the platform. So I think that gives us again strong support for what we built from a technology perspective, it bundles really well with an asset management solution. And then we’re working closely on sales opportunities at large firms, larger banks do seem to be back in the market, not yet making decisions but certainly looking at alternative and investigating what we have built pretty closely.

Glenn Greene - Oppenheimer & Co. Inc.

Any contrast between UK and U.S. in terms of decision making and why it’s taking long on both sides actually?

Joseph P. Ujobai

I think these firms have complex decisions and contracting processes and so we see similarities in both places.

Glenn Greene - Oppenheimer & Co. Inc.

Okay, all right, thanks Joe.

Operator

There are no further questions in the queue at this time.

Alfred P. West, Jr.

Thank you Joe. Our next segment is Investment Advisors and Wayne Withrow will cover this segment. Wayne?

Wayne M. Withrow

Thank you, Al. During the first quarter we continued good cash flow momentum and had another solid quarter of new guy we recruited. Assets under management were $42.8 billion at March 31, an 18% improvement from year ago and a record second quarter end balance with the advisor units. During the quarter we had $900 million of positive net cash flow. Revenues for the quarter was $66.4 million. This compares to $55.2 million for the first quarter of last year. Expenses for the quarter increased from the first quarter of last year but dropped over $1 million from the fourth quarter due primarily to a decrease of stock option expense.

On the new business front, we signed 157 new advisors during the quarter. Our pipeline of prospects remains very strong. Moving on to the status of the SEI Wealth Platform we remain on track to convert an additional tranche of advisors during the second quarter. This will be the first conversions to contain advisors of all sizes and we will use this second quarter event to more finely tune our conversion process. Building on the learnings from this second quarter event, we expect to have an additional large conversion before the end of the year. This should set us up for new revenue opportunities in 2015.

In summary, net cash flow and new advisor recruiting were very positive for the quarter. Momentum remains strong and the SEI Wealth release is on the horizon. I welcome any questions you may have.

Operator

We have a question from the line of Glenn Greene. Please go ahead.

Glenn Greene - Oppenheimer & Co. Inc.

Hey Wayne. I understand the benefit of the margins sequentially. Some of it's the stock compensation. But are we at sort of sustainable margin percentage here, is there any reason that the margin shouldn't continue to increase as your assets increase and you ultimately build into that the revenue increases?

Wayne M. Withrow

I think there always some type of logical limit to where the markets go. I also think that we get large and larger and as we move up the sort of the food chain of advisors and like advisors we do start to see some pricing pressure from those guys. So I wouldn't say the margin aren't sustainable. I think there is some limit on the amount of growth we could have there.

Glenn Greene - Oppenheimer & Co. Inc.

Are there any mixed issues going forward as more and more of your converts sort of your advisors going past WP. Is that beneficial or a drag on margins?

Wayne M. Withrow

It's too soon to tell to be honest with you.

Glenn Greene - Oppenheimer & Co. Inc.

Okay, thanks.

Operator

And we have a question from the line of Robert Lee. Please go ahead.

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

Yes. Hi Wayne, how are you?

Wayne M. Withrow

Hi.

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

I was just curious -- is there, maybe this goes back to the mix question. But are you seeing from the advisors any change in the types of services that they're asking for compared to even a year or so ago or whether or what maybe other way to think of it is what are the types of kind of new services are you rolling out, based on you investments in your product that may or may not have some impact on fee level or margins going forward if at all?

Wayne M. Withrow

You were breaking up a little bit but I'll take a shy at I think what your question was. I think in advisor marketplace there is more and more technologies being integrated or introduced into the market. And with that rough platform strategy we're trying to taking advantage of that. So we'll lead into this at the Investor conference but we've integrated and have an asset integration policy with more front office tools like the -- tools, CRM tools and we'll be able to offer them out as a bundle.

Now they will pay for that separately to those technology providers. What we will provide is part of the SEI tools and the total integration into our customer platform. And we think that is a differentiator.

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

Great, that was it. Thanks.

Operator

There are no further questions in queue at this time.

Alfred P. West, Jr.

Thank you Wayne. Our next segment is the institutional investor segment. And I'm going to turn it over to Ed Laughlin to discuss the segment. Ed?

Edward D. Loughlin

Well thanks Al. Good afternoon everyone. I'm going to start with the financials for the quarter and then discuss sales activity. Revenues of $68 million for the first quarter increased 9% compared to the year ago period. New client funding and market appreciation during the period contributed to these increases. Quarterly profits of $34 million increased 9% compared to the first quarter of 2013, a decrease of over $1 million in stock option expense for the first quarter compared to the fourth quarter contributed favorably for the first quarter profit and margin increases.

Margins were 50% for the first quarter. Asset balances increased by $4.7 billion during the year approaching $71 billion on March 31st. Net new client assets funded during the quarter were $1.5 billion and the backlog of committed but unfunded assets at quarter end was $730 million.

First quarter sales totaled $1.9 billion. Our continued sales growth is consistent with the increasing market demand by outsourced investment providers who assume fiduciary responsibility as well as investment discretion on behalf of the clients.

SEI's 20 year track record, rich resource model and large global base of fiduciary management relationships positions us well to continue to grow institutional business. And we're optimistic about the growth opportunities for this segment. Thank you very much and I am happy to entertain any questions you have.

Operator

We have a question from the line of Mr. Robert Lee.

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

Hi, Ed, how are you?

Edward D. Loughlin

I am well Rob. How about yourself?

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

Very good, thanks. Quick question on the margin popped up this quarter. I mean if I look back over the last several years, I mean you hit a 50% margin at least once each year and then a kind of pulled back period is there any reason to think that this is kind of a new level you can stay in the 50% or grow from here should we really be thinking that 48%, 49% of the last several years is really kind of the run rate to think about at this point?

Edward D. Loughlin

I can recall once a year was enough for guys but I guess apparently it's not. Well I think if you were to look at the financials, I mean $1 million swing one way or another really can just kind of move the profit margin. So each time it gets to that particular level I think there's a reason for this quarter is the stock option expense change.

I think the sustainability of the margins in this segment which I think is kind of your question is in the range that we've been kind of operating in high 40s. I think that's a safe range.

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

Fair enough and also in thinking kind of the fee rates going -- kind of revenue over average AUM. Now part of this may have been driven by the strong equity market past year but has -- or your client base has been skewing towards I believe kind of somewhat larger -- I guess I would expect to be some downward pressure on kind of fee rate calculation yet it's been pretty stable and may be even picking up a little bit is that really just kind of the equity tailwind kind of the mix shift within that or just trying to get a better feel for if this is sustainable level or how I should think about that migration going forward?

Edward D. Loughlin

Sure, I think as in all the businesses I think that you can see that clients are recognizing, that they have some leverage for fees. So we do get pressure on fees. I think as the mix of assets that really kind of help us and of course we do get paid more alternative assets than we do for public market types of assets. So that blend certainly has fallen. And I think that clients need more alternative assets to deal with some of the strategies that they have in place, especially in the long duration in the ABI type of space.

Having said that I think one of the things we do need to kind of talk about and we'll do more of this at the June conference is just this whole movement towards a separate advisory fee from the underlying investment managers fee. And we don’t have a lot of data points on that at this particular point in time but I think we might kind of share with you what we might be seeing as trends that occur there, and will spend some time on that in June.

Operator

There are no further questions in queue at this time.

Alfred P. West, Jr.

Thank you Ed. Our 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 first quarter 2014 revenues for the segment totaled $61 million which was $7.2 million or 13.4% higher than our revenue in the first quarter of last year. This year-over-year increase in revenue is primarily due to an increase in our asset balances driven primarily by new client fundings. Our quarterly profit for the segment of $21.8 million was approximately $3.2 million or 17% higher than the first quarter of 2013. This increase in profit was largely due to the increase in our quarterly revenue.

Third party asset balances at the end of the first quarter 2014 were $326.7 million, approximately $14.7 million or 4.7% higher as compared to our asset balances at the end of the fourth quarter 2013. The increase in assets was primarily due to net positive cash flows of $13.7 billion enhanced by market appreciation of $1 billion.

Turning to market activity during the first quarter of 2014 we had solid sales quarter, net new business sales events totaled $7.5 million in annualized revenue during the quarter. Approximately 70% of the total was from new client with 30% driven from extending our relationship with current clients. Equally important is the fact these events span all of our product segments with our traditional market leading the way with over 50% of total. Additionally these new sales represented good diversity among our solutions.

While we continue to see increased competition in the market we also continue to see steady activities specifically in the areas of middle office outsourcing exchange credit funds, collective trusts, regulatory risk management and compliance solutions. Both traditional and alternative segments of the market are representing us with current opportunities globally. We continue to feel well positioned to capture these opportunities by also building out innovative solutions to meet the emerging need or requirements.

That concludes my prepared remarks I will now turn it over for any questions you may have.

Operator

(Operator Instructions). And we have a question from the line of Chris Donat. Please go ahead.

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

Hi Steve, how are you doing?

Stephen G. Meyer

Good how are you Chris?

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

Doing fine. Basically the same question that was asked earlier on your operating margins at 36% looks like there’s high as it been in the few years is this a sustainable level and I'm sure it also reflects a little bit of stock option being lower in 2014 and ’13 but anyway any comments on sustainability there?

Stephen G. Meyer

Ed's comments were to the point I don’t think I can add anything. With that said, I do think again as I said before quarter-over-quarter we’ll have things as Ed pointed out from the expense standpoint while stock options quarter-to-quarter was down our expenses year-over-year up and as a reminder that we continue to fund our own investment in developing new solutions to help grow this business in the long-term. So I say again the sustainability of the very comparable sustaining them in the level of mid 30s.

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

Okay, that’s helpful thank you.

Operator

(Operator Instructions). There are no further questions in the queue at this time.

Alfred P. West, Jr.

Thank you, Steve. I would now like to Kathy Heilig to give you a few company-wide statistics. Kathy?

Kathy C. Heilig

Thank you Al. Good afternoon everyone. I have some additional corporate information about this quarter. The first quarter cash flow from operations was $43.9 million or $0.25 per share. First quarter free cash flow was $26.8 million or $0.15 per share. Capital expenditures excluding capitalized software was $7.6 million and we would expect capitalized expenditures excluding the software for the rest of 2014 to be about 20 million and that does include some additional costs that we will have for an extension of our facility.

Accounts payable balance at March 31st was $8.4 million and we would also 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 calls are unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements here as a result of future development. You should refer our periodic SEC filings for descriptions of various risks and uncertainties that can affect future financial results.

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

Operator

(Operator Instructions). And we have another follow-up from the line of Glenn Greene. Please go ahead sir.

Glenn Greene - Oppenheimer & Co. Inc.

Yes, it was just for Dennis. A couple of questions, one on the stock option expense in the quarter which obviously was a theme throughout the call. I think we looked it was down about $8 million Q-to-Q which is something like 260 basis point margin benefit. But could you just help us sort of understand how to think about the trajectory going forward. Obviously it's kind such a big margin impact even across segments. So be helpful to sort of understand as we're sort of ready for same level or if there is any seasonality there.

Dennis J. McGonigle

That how we should expect going forward. Might be slight variation there based on some options we've retired or if we have small brands for whatever reason on the way but actually first quarter's number will really reflect quarter-to-quarter for rest of the year.

Glenn Greene - Oppenheimer & Co. Inc.

Okay. And then on the share repurchase, it looked like you picked up a pace a bit $2 million or $65 million repurchasing entire than sort of recent quarters as just kind of unreasonable sort of level to be thinking about. Is it sort of your step up as the cash flows go up?

Dennis J. McGonigle

Yes. I'd rather not get into projecting what it will be in the future, but I think that I am safe to say that our use of capital isn't going to change a whole lot in terms of reinvestment and return to shareholders. And as you know that's one of the principal ways we return to shareholders.

Glenn Greene - Oppenheimer & Co. Inc.

Okay, all right. Thanks.

Dennis J. McGonigle

Thanks Glenn.

Operator

There are no further questions in queue at this time.

Dennis J. McGonigle

I guess I will just so everyone's aware we do expect to file our Q today also. So as you kind of prepare your notes with that's a good possibility that we will be able to file today as well.

Alfred P. West, Jr.

Okay, thank you Dennis thank you guys. So ladies and gentlemen we continue to concentrate on maintaining highly satisfied clients. We're in new business and have been [growing] costs and investing in products could go to our future. Our focus on long term growth and revenues and profits is unwavering and I'm very bullish about our intermediate longer term business opportunities. We feel good about what we're doing in the short run.

So but before we go as a reminder, our Annual Investor Day is being held on Tuesday June 3rd, with the dinner the night before on Monday, June 2nd. And I look forward to seeing you there. If there is any other questions, please ask them now or we will say good afternoon. Okay, thank you very much and appreciate your attention.

Operator

Ladies and gentlemen this does conclude our conference call for the day. On behalf of today's panel I'd like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.

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