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SEI Investments Company (NASDAQ:SEIC)

Q2 2014 Results Earnings Conference Call

July 23, 2014 02:00 PM ET

Executives

Al West - Chairman and CEO

Dennis McGonigle - Chief Financial Officer

Kathy Heilig - Controller

Wayne Withrow - EVP, SEI Advisor Network

Joe Ujobai - Executive Vice President

Ed Loughlin - EVP Institutional Group

Steve Meyer - EVP, Head of Investment Manager Services

Analysts

Robert Lee - KBW

Chris Donat - Sandler O'Neill

Glenn Greene - Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by and welcome to the SEI Second Quarter 2014 Earnings Conference Call. At this all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). And as a reminder this conference is being recorded.

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

Al West

Thank you and welcome everybody. All of our segment leaders are here on the call with me, as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller.

I will start by recapping the second quarter 2014 then I am going to turn it over to Dennis to cover LSV and the investment in new business segment. And 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 will field questions at the end of each report.

So let me start with second quarter 2014. Second quarter earnings decreased by 1% from a year ago, diluted earnings per share for the second quarter of $0.48 represents a 2% increase from the 47% reported for the second quarter of 2013. We also reported an 16% increase in revenues from second quarter 2013 to 2014.

And then the earnings per share in the second quarter 2013 included a pretax gain of $0.16 per share from litigation settlement payment related to a SIV investment. Now this is excluded our earnings per share growth in the second quarter 2013 to 2014 has been 55%. Also during the second quarter of 2014 our non-cash asset balances under management increased by $10 billion. And of that SEI's assets under management grew by $6 billion during the quarter while LSV's assets under management grew by $4 billion.

Finally, during the second quarter of 2014 we repurchased 2.2 million shares of SEI's stock at an average price of $32.34 per share. That translates to $71.6 million of stock repurchases during the quarter.

Now turning to sales, our net new recurring revenue sales during the quarter was good. Of the $23 million of net new sales events we generated $17 million are recurring revenues and each of these segments heads will address their sales activity.

Now as you know, the roll out of SWP continues and during the second quarter, we capitalized approximately $8.9 million of the SEI Wealth Platform development and amortized approximately $9.6 million of previously capitalized development. Our development agenda for SWP remains to deliver U.S. and UK functionality, important to large and medium sized advisors and banks in the U.S. and UK markets as well as further automate our operations. As we discussed at our annual investment conference, we are disappointed that how long it has taken to deliver the full platform and in-turn we are disappointed at the time it is taking to getting our first large initiative for SWP.

While we are diligently working through the sales process with large potential clients, we have increased our attention on asset management distribution opportunities and improving profitability in the private banking segment in 2014. Signs of this focus are evident in second quarter results for banking.

Now turning to the advisory segment, we have made solid progress in improving our asset gathering as well as preparing for the rollout of SWP to the U.S. market. Both are important to accelerate our growth and process of this business.

In the institutional segment, our strong sales and process throughout the world are living proof of the strong market adoption by differentiated fiduciary management solutions.

Finally our investment management services segment continues its success in both selling and implementing new business while differentiating our solutions. They are making progress selling to large prospects and increasing the business we do with existing clients.

And behind all of our business units I am encouraged by the feedback I received from clients and prospects across our company's target markets. Our reputation for delivery remains intact and has strengthened. The sales activity and wins in all units confirm the positive feeling in our client basis.

Now this concludes my remarks. So I would now ask Dennis to give you an update on LSV and the investment in new business segment. I’ll then turn it over to other business segments. Dennis?

Dennis McGonigle

Thanks Al. Good afternoon everyone. I’ll cover the second quarter results for the investments in new business segment and discuss the results of LSV Asset Management. 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 investment services advice offering coupled with the use of noble technologies. During the quarter the investments in new business segment incurred a loss of $3.3 million which compares to a $2.9 million loss during the second quarter of 2013.

There has been no material change in this segment and we expect losses in the segment to continue in this range for the remainder of the year. Regarding LSV, our earnings from LSV represent our 39.3% ownership interest during the second quarter. LSV contributed approximately $34.5 million of income to SEI during the quarter. This compares to a $27.8 million contribution for the second quarter of 2013.

Asset balances grew by approximately $4.1 billion during the quarter due to increased market valuation and net positive cash flow. Revenue for LSV for the quarter was $105.9 million. Finally, as Al mentioned, during the second quarter of 2013 SEI recognized income of $43.4 million or approximately $0.16 per share from a settlement of litigation related to SIV security. I refer you to the 10-K and our soon to be filed 10-Q for additional information.

I will now take any questions you have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question, we’ll go to Robert Lee with KBW. Please go ahead.

Robert Lee - KBW

Thanks. How are you doing Dennis?

Dennis McGonigle

Hey Rob. How are you?

Robert Lee - KBW

Good, thanks. Two questions actually, first one just kind of maybe bring final point analysis flows if you could quantify that?

Dennis McGonigle

Sure. They had net flows, positive flows just over $1 billion. And it's really from a new clients and some additional assets from existing clients offset by some lost assets ending from rebalancing I've said. So it’s a good quarter for them.

Robert Lee - KBW

Alright, great. And then secondly maybe more broadly into some address in all the segment comments. But on the expense side, I mean is it pretty flat sequentially and was it actually I guess down particularly in the private banks segment. Was there a big picture at the corporate level or otherwise any onetime kind of I don't know if there are accrual adjustments or anything that or truly we think kind of broadly that we're at a kind of, this is kind of the right runrate to work through, is this kind of anything unusual pm kind of the expense side to make us think that this shouldn't be kind of a base going forward?

Dennis McGonigle

There was really nothing unusual in the quarter expense wise. They are finally listening to me Rob, I think in a while traction but we're making progress.

Robert Lee - KBW

Alright, great. Thanks.

Dennis McGonigle

Nothing unusual.

Robert Lee - KBW

Thank you.

Operator

(Operator Instructions). And there are no questions in queue. Please continue.

Al West

Thank you. And now I'm going to start over to Joe Ujobai to discus our Private Banking segment. Joe?

Joe Ujobai

Thank you, Al. For Private Banking quarterly revenue of $114 million was up 20% from the year ago quarter and 9% from the previous quarter. Revenue improvement was largely driven across three areas.

Number one, one time professional services revenue related to SWP discovery at a large bank prospect. As I mentioned at the June investor conference, the larger sales opportunities we may enter into professional service contracts during the sales process, the work we provide during the discovery process is valuable to our prospects and it may or may not lead to an SWP contract. During the second quarter, we recognized $6 million of revenue in this area. Overtime I expected to perform more of this work but I will not expect to repeat it in event of this size in the near future.

Second, increased assets under management in our distribution business. We had $900 million of net cash flow bring our assets under management to almost $18.8 billion. Third higher recurring investment processing and mutual fund trading revenue. In UK we added over $900 million in net cash flow to the platform bringing UK assets under administration to $33 billion. In the U.S., we converted our 5th client to the platform IEB introducing many of our global processing capabilities to the U.S. market.

Operating profit was $15 million as revenue increased and we continue control over expense. As mentioned, the profit for the quarter was enhanced by a large one time event that we do expect to repeat in future quarters.

Turning to business development, we continue to execute the SWP sales strategy discussed at the investor conference in June. Sales activity with our platform and our asset management distribution prospects remained strong.

Net sales events for the quarter were $9.7 million, $4 million of which is recurring. Recurring sales events were largely due to our growth in asset management distribution business.

Worldwide, we have 29 signed clients with a backlog of approximately $4.4 million in recurring revenue that should install over the next 18 months. So while we work on capturing a large early adopter SWP client, we are growing our asset management distribution business, growing current clients on the platform and improving our profitability.

Second quarter results reflect our focus and was improved by the recognition of one time professional service fees. Any questions?

Operator

(Operator Instructions). And we go to Chris Donat with Sandler O'Neill. Please go ahead.

Joe Ujobai

Hi Chris.

Chris Donat - Sandler O'Neill

Hi Joe. How you doing?

Joe Ujobai

Good. Thanks.

Chris Donat - Sandler O'Neill

So, I just want to make sure, I am understanding the accounting on this, $6 million of professional services. Is it something where you have been accruing the expenses over the prior few quarters and then the revenue all hit with the delivery of some tangible product or can you explain to us how the flows and revenue and expenses have been?

Joe Ujobai

Yes, we have been accruing the expense for those obviously three quarters on this. We are largely using people that, that are already part of our organization. And then we had some delivery and some mechanisms that we used to actually then recognize the revenue this quarter.

Chris Donat - Sandler O'Neill

Okay. And is this the time sorts of professional services you made the comment that you expect more of this type of work but not the same magnitude, will it show up in sales events?

Joe Ujobai

Yes, it will show up. And we report the event as recurring and one time. Yes it would show up events going forward, yes. So this was I think with an exception of the large projects. so again as I mentioned we're trying to -- we've enhanced the commercial model and there is good work to be done and there is discovery process. And so we would point out this in the future at one time those events when we would contract to do this work and then we would -- it will be recognized as revenue and profit basis get on the specifics of the contract.

Chris Donat - Sandler O'Neill

Okay. Thank you.

Operator

And we'll go to line of Glenn Greene with Oppenheimer. Please go head.

Glenn Greene - Oppenheimer

Hey Joe, how are you?

Joe Ujobai

I am good, Glenn.

Glenn Greene - Oppenheimer

So shifting aside the $6 million one time projects, it had been very, very high incremental margin which you just explained the core private banking in terms of segment, it looks like it was 9% operating margin sort of at a normalized basis. First off, would confirm that sort of how you looked at it, and then second what's your role and more importantly if it's sustainable?

Joe Ujobai

So we had a good margin quarter. As I mentioned earlier our asset management distribution business continues to grow and the recurring revenue on our investment processing business continues to grow. So we are focused on modest profit improvement as we continue to focus on selling large banks early adopter. So we'll continue to work on profit as we go forward.

Glenn Greene - Oppenheimer

Or do you think this is good base level and margin shift continue to step forward from this 9% level?

Joe Ujobai

We're doing our best to keep profit, improving marginally.

Glenn Greene - Oppenheimer

Okay. And then, after you have given the fact that you recognized the $6 million in revenue I guess that big one time project is now complete, which I am sensing handicapping the potential of that potential big prospect getting over the goal line?

Joe Ujobai

Yes, I really can’t comment on near the pipeline and like we continue to work hard to close the first larger adapter.

Glenn Greene - Oppenheimer

Okay thanks.

Operator

And we’ll go to line of Robert Lee with KBW. Please go ahead.

Robert Lee - KBW

Hey, Joe how are you?

Joe Ujobai

Good, Rob.

Robert Lee - KBW

Just curious in talking about and targeting large mid-sized clients I think at least for me, it would helpful if you can possibly bring sense how do you think of that, I mean if you think of a large client obviously besides just kind of maybe total assets. How do you think of that from a revenue that you’ve characterized that the large client is being $10 million plus of annualized revenue, 5 to 10, I mean how should we think about when you’re talking about going after the way all, so to speak that how do you think that from a revenue perspective?

Joe Ujobai

Yes, we’ve talked about before and we’ve said generally that from that would drive $5 million or more in net recurring revenue to us. That’s a processing revenue.

Robert Lee - KBW

Great. Now also as you, I understand the goal is to continue to marginally improve margins I guess from here. It’s just I think about the absolute dollars of expenses, is there anything as you rollout more capabilities you have maybe newer versions of the platform coming out that, should we be expecting that if we look at the quarters ahead as any kind of new initiatives or rollouts that would of course some kind of step up in kind of gross dollars or should we just assume that there is just the natural growth there? Just trying to get a sense of the progression.

Joe Ujobai

So, we continue to invest in the development as a platform. We’ve talked about investing around U.S. functionally; we’ve talked about investing more on the front-end as we finish up the backend. We also invest in enhancing the platform and we look to capitalize less and expense more because much of it is capitalizable. And so that also be as we -- when we secure some of these large clients, we also continue to build out on scale. So they're still fair amounts of investments to be made on the platform. So I think other expenses would be paying large sales commissions when we close some of these big deals, so that would also impact our expense going forward.

Robert Lee - KBW

Okay. Thanks for taking my questions.

Joe Ujobai

Thanks.

Operator

(Operator Instructions). And there are no questions in queue. Please continue.

Al West

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

Wayne Withrow

Thanks Al. During the second quarter, we continued good cash flow momentum and had another solid quarter of new advisor recruiting. Assets under management were $44.8 million at June 30th, a 23% improvement from a year ago and a record setting quarter and balance for the advisory unit.

During the quarter, we had $900 million of positive net cash flow. Revenues for the quarter were $70 million, this compares to $59.3 million for the second quarter of last year. Expenses for the quarter increased from the second quarter of last year, primarily due to an increase in direct cost associated with our asset growth and increased expenses associated with the SEI Wealth Platform. These same items were the primary driver of increased expenses from the first quarter of this year.

On the new business front, we signed 154 new advisors during the quarter. Our pipeline of prospects remains very strong. Moving on to the status of the SEI Wealth Platform, we completed planned May 31st conversion of additional advisors on to the platform. Overall, the conversion went well and we have uncovered a few focused areas where we will get better.

We expect one additional conversion of similar size before the end of this year with a goal of getting to large conversions and 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 Wealth Platform release is on the horizon. I welcome any questions you have.

Operator

(Operator Instructions). And we will go to Glenn Greene with Oppenheimer. Please go ahead.

Glenn Greene - Oppenheimer

Hey Wayne how are you?

Wayne Withrow

Good, Glenn. How are you?

Glenn Greene - Oppenheimer

Good. So I guess maybe sort of best guess in terms time line of when you think SWP will be start contributing to sort of your asset flows to your business?

Wayne Withrow

I think we will start to see increased revenues beginning sometime next year.

Glenn Greene - Oppenheimer

So sort of like middle 2015 perhaps or latter part?

Wayne Withrow

Yes, latter part I would say.

Glenn Greene - Oppenheimer

Okay. And…

Wayne Withrow

I mean it’s what we have to build; I mean it’s not going to be big hit. And I won’t lose sight of the fact and I think I’ve mentioned this in prior calls. With the big release of that on the horizon, this has really helped us with our existing advisors as they stayed (inaudible) platforms, and just [firstly] low and also helps us recruiting new advisors, because they want to kind of jump on board now because they see the future in the wealth platform.

So, it's not new sources of the revenue, but it's helping us in our traditional business, because it's coming down the cycle.

Glenn Greene - Oppenheimer

Understood. And the $900 million of positive flows, which you've been pretty consistent I think it’s six quarters or something now, roughly in that range. Was that pretty steady throughout the quarter and you continue to see similar in July?

Wayne Withrow

It was pretty steady in the quarter and there is no real change in July.

Glenn Greene - Oppenheimer

Okay, great. Thanks Wayne.

Operator

And we'll go to the line of Chris Donat with Sandler O'Neill. Please go ahead.

Chris Donat - Sandler O'Neill

Hey Wayne, just wanted to ask one question about the 154 new advisors as we think about you are bringing on new advisors. Is that a step function in cash flows or once you sign an advisor, do they kind of gradually bring on assets? I'm just trying to think about how it flows over time?

Wayne Withrow

Yes, I would -- they gradually bring on assets.

Chris Donat - Sandler O'Neill

Okay.

Wayne Withrow

The majority of them.

Chris Donat - Sandler O'Neill

Right, okay. So it's there will be a tail though as you add hopefully hundreds of advisors a quarter, the growth from that takes quarters and years to develop, it's not -- it does take a while right?

Wayne Withrow

Yes. The way to look at is the newer the advisor, the more productive the advisor is for us.

Chris Donat - Sandler O'Neill

Okay, got it. Thanks Wayne.

Operator

(Operator Instructions). And there are no questions in queue.

Al West

Thank you Wayne. Our next segment is the Institutional Investors segment. I am going to turn it over to Ed Loughlin to discuss this segment.

Ed Loughlin

Thanks, Al. good afternoon everyone. Let me start with the financials for the quarter and then discuss sales activity. Revenues were $71 million for the second quarter, increased 11% compared to the year ago period. New client funding and market appreciation during the period contributed to the increases. Quarterly profits of $36 million increased 17% compared with second quarter of 2013.

Margins approaching 51% for the period increased 2.5%. And the asset balances of $74 billion on June 30th increased 14%. Net new client assets funded during the quarter were $1.6 billion and the backlog of committed but unfunded assets at quarter end was $329 million. New client sales closed during the quarter were $2.1 billion and totaled $4.1 billion year-to-date through June.

SEI has a long track record serving clients as a discretionary fiduciary manager and we have consistently enhanced our solutions to support increasing client needs. We are well positioned to differentiate our offering from increased competition to enjoy a strong pipeline and remain optimistic about the growth opportunities for this segment.

Thank you very much. I am happy to entertain any questions you have.

Operator

(Operator Instructions). At this time there are no questions in queue.

Al West

Thank you Everybody. Our final segment today is Investment Managers. I'm going to turn it over to Steve Meyer to discuss this segment.

Steve Meyer

Thanks Al, good afternoon everyone. For the second quarter of 2014 revenues for the segment totaled $62.5 million which is $7 million or 12.6% higher than our revenue as compared to second of last year. This year-over-year increase in revenue is primarily due to an increase in our asset balances along with new client fundings across all our products. Our quarterly profit for the segment of $23 million was approximately $4 million or 21.4% higher than the second quarter of 2013.

Third party asset balances at the end of the second quarter of 2014 were $337.5 billion, approximately $10.7 billion or 3.3% higher as compared to our asset balances at the end of the first quarter 2014. The increase in assets was primarily due to net positive cash flows of $7 billion enhanced by market appreciation of $3.7 billion.

And turning to market activities, during the second quarter of 2014 we had solid sales quarter. Net new business sales events totaled $7 million in annualized revenue. These events were allocated across all our market segments and approximately three quarters of these sales came from new (inaudible) this quarter.

From a March perspective we had to fund by longer decision cycles and increased competition. At the same time market demand is increasing of a continued experience risk activity. All-in-all the investments we’re making to meet these new demands by enhancing our existing services, delivering new services as well as adding it to our capabilities gives us confidence in our continued growth opportunities.

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

Operator

(Operator Instructions). And we'll go to Robert Lee with KBW. Please go ahead.

Robert Lee - KBW

Hey Steve, how are you?

Steve Meyer

Good. How are you, Rob?

Robert Lee - KBW

Thanks. I guess a couple of questions all wrapped into one. I think in the margin in the quarter, I mean the 36 point is the highest margin you've never had in this segment. And I know in the past -- I think kind of we've talked a little bit about I guess they're being some pricing pressure within the industry just competitively and also maybe as you go up market a little bit. And that I guess I've been generally run operating under the impression that kind of mid-30s margin is probably about where this business should run at. So is there -- number one, do you think that’s the right way to think of it that maybe combination of some incremental pricing pressure and kind of competitive environment will make it hard to get margins much above this or is there something unusually high in this quarter, I am just trying to get a feel for that?

Steve Meyer

Well, I think as we've said in the past, the margins are we're comfortable, I'm comfortable from where they are kind of in that mid-30, with 30% range. With that said, we continually work on ways, we can improve the business, improve our efficiency, become more productivity and certainly as we move upstream we think there is opportunity to grow the business both top-line and bottom-line. We do however continue to invest in the business as I mentioned briefly and we do think those investments will continue and they are key to us growing the business and strategically really developing our business.

So I think the uptick in margin this quarter was due to a number of things. But as I said before quarter-over-quarter the margin can vary and fluctuate, especially if we decided to uptick our investments on quarter over another.

Robert Lee - KBW

And maybe just follow up I am curious if you can maybe provide some color on the mix of flows in terms of U.S. versus non-U.S. I mean how your initiatives in Dublin and elsewhere are going?

Steve Meyer

Well, I would the business kind of remains where it’s been the majority I would say 90% is non there is all U.S. based 10% being non-U.S. global the flows we are seeing are still heavier weighted on the U.S. side but we are seeing some hopeful signs and of course from the non-U.S. side as well.

Robert Lee - KBW

Great, thanks for taking my questions.

Operator

Thank you. (Operator Instructions). And there are no questions in queue please continue.

Al West

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

Kathy Heilig

Thanks Al, good afternoon everyone. I have some additional corporate information regarding this quarter. The second quarter 2014 cash flow from operations was $99.1 million or $0.57 per share. The year-to-date cash flow from operations 143 million, the second quarter free cash flow was 79.1 million or $0.46 per share and year-to-date free cash flow 106 million. In the second quarter we spend $11 million on capital expenditures that excludes capitalized software and year-to-date capital expenditures excluding capitalized software had been 18.6 million.

We would expect for the rest of the year capital expenditures to be around $10 million. The tax rate was 35.7 for the second quarter that compares to the first quarter 35.9 and we expect the tax rate to be right in that range for the rest of the year.

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 this call is unaudited. Future revenues 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

(Operator Instructions). And speakers, we have no questions in the queue.

Al West

Thank you very much. So ladies and gentlemen, we continue to concentrate on maintaining highly satisfied clients, growing new business wins, controlling costs, and investing in projects critical to our future. And our focus on long term growth and revenues and profits is unwavering and I'm very bullish about our intermediate and longer term business opportunities and feel good about our progress in the short run.

That concludes today's remarks. If there is any last minute questions now beat the time.

Operator

(Operator Instructions). We have no questions in queue.

Al West

Thank you. Thank you everybody for joining us today. And have good afternoon.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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