SEI Investments Q3 2007 Earnings Call Transcript

SEI Investments Company (SEIC)

Q3 2007 Earnings Call

October 25, 2007 2:00 pm ET

Executives

Al West - Chairman and CEO

Dennis McGonigle - CFO

Joe Ujobai - EVP

Wayne Withrow - EVP

Ed Loughlin - EVP

Steve Meyer - EVP

Kathy Heilig - Controller

Analysts

Terry Babe - ThinkEquity Partners

Robert Lee - KBW

Tom McCrohan - Janney Montgomery

Presentation

Operator

Good day, ladies and gentlemen, and welcome to today's SEI Investments third quarter Earnings Call. (Operator Instructions). Now it is now my pleasure to announce your host Al West, Chairman and CEO.

Al West

Welcome, everybody, and good afternoon. All of our segment leaders are here on the call, as well as Dennis McGonigle, SEI's CFO and Kathy Heilig, SEI's Controller.

I will start by recapping the third quarter of 2007. I will then turn it over to Dennis first to cover LSV and the Investments in New Business segment and then cover a few financial matters.

After that, each of the business segment leaders will comment on the results of their segments. And then finally, Kathy Heilig will provide you with some important company-wide statistics. Then as usual, we will field questions at the end of each report.

So let me start with the third quarter. Third quarter earnings grew 21% from a year ago on a revenue growth of 17%. Diluted earnings per share for the second quarter of $0.37 represents growth of 23% over the $0.30 reported for the third quarter of 2006. Revenue growth for the quarter was a result of higher assets under management and fees from new clients across all of our major segments.

Our non-cash asset balances grew by $3 billion during the quarter. This growth was due to both cash flow and market appreciation.

During the quarter, SEI's assets under management grew by $4.9 billion and LSV's assets under management fell by $1.9 billion. And a global 60/40 portfolio was up 2.4% during the quarter. Also during the quarter we repurchased 2,285,000 shares of stock at an average price of just under $26 per share. And that translates to 59 million of stock repurchases.

As I've mentioned many times before, we're satisfied with these results, but we look at the results in light of a longer journey in transforming our company. The transformation is all underway, and each one of our segments has a reinvented business model that they are employing and receiving good market acceptance.

Now you hear in each of our segment reports about how this is translated into new business during the quarter. Now under-guarding the transformation are a number of interrelated investments. Three notable ones are; first, as part of our new solutions for each market, we're building new client processes in each one of the markets. And second, we are investing in the Global Wealth Platform, the technology that is behind many of our transformation efforts. And third, we're building the operational and service infrastructure necessary to handle clients all over the world on the new platform.

Now the status of our largest investment, the Global Wealth Platform, continues to be on track. During the second quarter, this year we capitalized $14.5 million of a Global Wealth Platform development, and we expect the quarterly capitalization to remain for awhile approximately in this range.

The operation of HSBC's London-based Private Bank, which we converted to the platform late in the second quarter, has gone as expected and serves as a proof statement to other UK and European Private Banks. Our market and sales activity in the UK and Europe continue to be brisk, and Joe Ujobai will speak to our pipeline.

US functionality will not be delivered until the second half of next year, but we're ramping up our marketing efforts in anticipation of being able to convert US banks to the platform. And we are pleased with the progress we have made throughout, and the early successes we have had with our platform bodes well for our UK and European private banking marketing efforts.

It gives us further confidence that our investments will help us transform our company given us even larger markets to grow within and providing exciting new solutions to deliver to our markets. Now rest assured, we will continue to work hard in the short run to control costs and to steadily grow revenues and profits. And in the longer run, we're firm in our belief that we are on the right path to more rapidly grow future revenues and profits.

Now this concludes my remarks, so I will now ask Dennis McGonigle to give you an update on LSV and the Investment in New Business segment and to cover some company financial issues.

And after that, I will turn it over to the other four business segment heads. Dennis?

Dennis McGonigle

Thanks Al. I will briefly cover the third quarter results for the Investments in New Business and LSV segments. As a reminder, efforts in the Investments in New Business segment are focused on direct to market to ultra and high net worth investors.

During the quarter, the Investments in New Business segment generated a loss of $3.1 million. This compares to a loss of $4.2 million for the third quarter of 2006.

The efforts in this segment continue to be centered on learning, developing and delivering our life and wealth services to the ultra and high net worth segment. The learning we gain and the services we develop from this process will then be leveraged if applicable to other asset distribution units in the company.

As you know, SEI historically has used the Investments in New Business segment as an incubator for new initiatives. We view the losses in this segment as an investment in future market opportunities and/or services. You can expect losses in this segment to continue.

I will now turn to LSV. We continue to own approximately 43% of LSV Asset Management. LSV given market volatility had a good quarter of financial performance. Earnings contribution to SEI from LSV was approximately $34.5 million in the third quarter of 2007. This compares to a contribution of $29.1 million in the third quarter of 2006. This year-over-year increase was due to growth in assets, primarily from market appreciation, which drove both revenue and profit growth.

As we have discussed in the past, most of LSV's funds are closed to new investors. This year-over-year growth has come within that framework.

During the third quarter, LSV's net assets shrank approximately $1.9 million compared to second quarter. This was primarily a result of market depreciation.

Revenues from LSV for the quarter were approximately $90.6 million. This compares to revenues of $75.1 million in the third quarter of 2006.

On SEI's balance sheet of our reported cash and short-term investments of approximately $297 million, $88 million is attributable to LSV at September 30, 2007. Of our reported receivables of $283 million, $98 million were attributable to LSV. Liabilities were affected by the debt associated with our guarantee to the LSV employee group. This is reflected in both current liabilities approximately $8 million and long-term debt of approximately $50 million.

In addition to the report on LSV and the Investments in New Business segment, I want to cover two other items. As mentioned earlier, we have gone live with our Global Wealth Platform at the end of the second quarter of 2007.

As a result, we have begun to amortize the two-date capitalized costs associated with its development. We are amortizing the cost over 15 years. The amortization expense increase for third quarter incurred by bringing the platform live was approximately $3.2 million.

In addition, our tax rate for the third quarter was approximately 34% compared to 32% for the year ago quarter and 38% for the second quarter of 2007.

Thanks for your attention. I will now answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). We do show one question coming from the phone from Terry Babe from ThinkEquity Partners.

Terry Babe - ThinkEquity Partners

Good afternoon, Dennis.

Dennis McGonigle

Hi, Terry. How are you?

Terry Babe - ThinkEquity Partners

Doing well. Just a question on LSV. Can you talk about the new product pipeline for LSV and any potential timing for new products?

Dennis McGonigle

Generally speaking I guess it is safe to say they are not -- I don't know if they have anything imminent in terms of new products come in to market. They do look at new ideas on how to expand their current capabilities across other market capitalizations or new market entry. But I can't say they have anything that is imminent coming to market.

Terry Babe - ThinkEquity Partners

Okay. That's all I had.

Dennis McGonigle

Okay.

Operator

Thank you once again. (Operator Instructions). And next question comes from Robert Lee from KBW.

Robert Lee - KBW

Thanks. Good afternoon Dennis.

Dennis McGonigle

Hi Rob.

Robert Lee - KBW

Two quick questions for you. The tax rate, should we -- is there something one-time in the quarter that made it dip down, or is this something we should be thinking of the go forward tax rate?

Dennis McGonigle

Future like fourth quarter rate we would expect to kick on the back in line with second quarter's rate, and that is somewhere around 37, 38%. The dip down this quarter is -- third quarter is a typically a statutory expiration quarter. So we do get occasionally some pickup when the statute runs down on different filing years. And also some of our tax planning we were able to pick up the benefit on some foreign losses.

Robert Lee - KBW

Okay. And second question is on actually share repurchases. You had a pretty healthy share repurchase in the quarter, and I guess it was yesterday or the day before, you upped your authorization, and it was a little bit larger than you normally do. Usually I guess you do it in $50 million chunks, and this time you did it in a $100 million chunk. I'm reading too much into it to think that maybe there's some kind of sign that you have reached the plateau or peak in terms of your capital needs and if you feel more comfortable stepping up your share buyback? Or am I reading too much into that?

Dennis McGonigle

I guess you probably read a little bit too much into that. Certainly our share buyback over the past couple of years has been heavier than prior 10 or 15 years of the program. Part of it was the timing of Board meetings and authorization, and we just wanted to make sure that the market did present some opportunities for buyback. We had the authority to go ahead and do that.

Robert Lee - KBW

Okay. Great. That was it. Thank you.

Dennis McGonigle

Alright. You are welcome.

Operator

And we show another question coming from Tom McCrohan from Janney Montgomery.

Tom McCrohan - Janney Montgomery

Hi, Dennis. Can you mention the cash on your balance sheet that was LSV's portion of the $297 million? I missed that.

Dennis McGonigle

Sure. Tom, how are you anyway. It is $88 million.

Tom McCrohan - Janney Montgomery

$88 million. Thank you. Do you disclose or have any information on inflow, net inflows ex-market appreciation for LSV?

Dennis McGonigle

We haven't disclosed that specifically historically. But again, in terms of the -- given the fact that most of their products are closer to money, again most of their market -- most of their asset changes are typically due to market movement at this point.

Tom McCrohan - Janney Montgomery

You have mentioned in the past there is no leverage in that fund. Is it all equity, all pan-equity?

Dennis McGonigle

Long value equity.

Tom McCrohan - Janney Montgomery

It is all long value. There's no fixed-income stuff in LSV?

Dennis McGonigle

Not that I'm aware of.

Tom McCrohan - Janney Montgomery

Thanks.

Dennis McGonigle

Okay.

Operator

Thank you. I'm showing no further questions at this time.

Presentation

Al West

Thank you. I'm now going to turn it over to Joe Ujobai to discuss Private Banking segment.

Joe Ujobai

Thank you, Al. During the quarter, we continue to make good progress towards the commercial expansion of our Global Wealth Services solution. As a financial update, revenue of just over $104 million grew by 11% from the year ago quarter. Revenue growth was due to a net increase in assets under management from distribution partners primarily in non-US markets, as well as an increase in recurring fees in our investment processing business both in the US and the UK.

Profit declined from the year ago quarter by approximately 5% to $21.4 million due to an $11.3 million increase in expenses. Increased expenses were primarily due to direct costs associated with asset management and the costs associated with the continued build-out and deployment of the Global Wealth Platform. This segment accounts for the majority of the overall expense of the platform.

Margin for the quarter was 20.6%, a slight improvement from the previous quarter. As I had mentioned during recent calls, we expect to have continued pressure on margins in this segment as we launch global wealth services in Europe and in the US.

Longer-term we expect strong margins as we're making significant investments to grow and scale our private banking business.

Net new sales events for the quarter were approximately $6.2 million. With the successful conversion of our first external client to the Global Wealth Platform, we're ramping up sales activities for our Global Wealth Services solution. As a reminder, Global Wealth Services is the business solution designed to help our clients grow revenue, reduce cost and risks and redeploy their resources.

Underpinning the Global Wealth Services solution is our new investment processing platform and our multi-manager investment offering. On the investment processing side, we continue to build the pipeline and are engaged with wealth managers in the UK and now in the US. The market has closely watched our progress with the first client who are seeing increased interest in our solution.

We are focused on closing additional business in the UK and are confident about our worldwide market opportunity. Development continues on the platform. In fact, this week we have an important release designed to support compliance with the new European [miffed] regulation.

In US, I'm happy to report two significant transactions within the Investment Processing business. M&T Bank, a large ASP client since 2001, has signed a multiyear extension to our relationship. I'm also pleased to announce that we have retained the Mellon business and have begun the conversion of BoNY's personal trust clients to the Trust 3000 platform.

Although we will process both M&T and BoNY-Mellon on Trust 3000, these commitments from important US clients were based on SEI's strategic Global Wealth Services vision.

While we are building out the investment processing pipeline, we're making good progress with the growth of our worldwide investment management business. Average assets under management now totaled $21.6 billion, an increase of 46% from the year ago quarter.

Through the third quarter of this year, net new assets totaled approximately $3.8 billion with a total increase in assets under management of approximately $5 billion due to the new assets, market appreciation and currency movement. Investment management is an increasingly important revenue driver of the Private Banking business.

During the quarter we announced a distribution agreement with Standard Life, a major UK headquartered financial services company. Standard Life will give us access to some of the largest private client managers in the UK.

In US, we have increased investment management sales activities, and we're seeing some early adoption of our investment solution.

In summary, SEI's Global Wealth Services solution will provide the strategic infrastructure to help private banks grow and keep pace with a rapidly changing wealth management industry. The Global Wealth Platform will enable us to significantly grow our business in the coming years. During the third quarter, we made good progress towards the launch of our strategy.

Any questions?

Question-and-Answer Session

Operator

(Operator Instructions). And I am showing our first question coming from Tom McCrohan from Janney Montgomery.

Tom McCrohan - Janney Montgomery

Hi, Joe. The Mellon business, was Mellon a legacy trust client and you converted the BoNY piece or vice versa?

Joe Ujobai

Mellon has been a client since I think about 2000, and they, as you know, were acquired by the Bank of New York. And so we're adding the BoNY accounts to the Trust 3000 platform.

Tom McCrohan - Janney Montgomery

And when is that going to start being evidenced in the numbers? When will that be converted?

Joe Ujobai

The recurring revenue would start during the third quarter of 2008, but we have begun the conversion.

Tom McCrohan - Janney Montgomery

Great. Congratulations on that win. Can you quantify that for us in revenue terms?

Joe Ujobai

No, we would never give you specific information about any one account. It would roughly be adding a small to mid-sized ASP client.

Tom McCrohan - Janney Montgomery

Okay. And when you disclosed the net new sales number for this quarter, the 6.2 million net new sales, so that metric pertains to the assets you gather through your third-party distributors?

Joe Ujobai

Yes, as well as additional revenue in the investment processing space.

Tom McCrohan - Janney Montgomery

Okay. So what was the net new AUM through the non US distributors for this quarter?

Joe Ujobai

It was about -- if you will hold on one second here. New business was about -- I think it was $800 million, and market movement was about $300 million, so for a total of $1.2 billion.

Tom McCrohan - Janney Montgomery

Great. Thank you Joe.

Joe Ujobai

Thanks.

Operator

Thank you sir. Our next question comes from Robert Lee from KBW.

Robert Lee - KBW

Hi. Good afternoon Joe.

Joe Ujobai

Hi Rob.

Robert Lee - KBW

Just have a follow-up question on the new business. I'm just curious with the M&T Bank, the multiyear extension, I mean is there a net revenue pickup in that or sort of same terms as before? But you obviously extended it a few more years.

Joe Ujobai

Yes, we did and we're hoping to add some additional products to that relationship. And so we're not expecting a significant change in revenue from the M&T relationship.

Robert Lee - KBW

Maybe a follow-up, and I guess you hinted at it a little bit, but the fact that M&T signed up again and you were converting BoNY, is there some understanding that somewhere down the road that they will ultimately convert to the new platform?

Joe Ujobai

I think the US market is very interested in what we have built and are making decisions based on our strategic vision in addition to the good quality service that we provide to them today.

Robert Lee - KBW

Okay. Thank you.

Joe Ujobai

Thanks.

Operator

Thank you. Our next question comes from Terry Babe from ThinkEquity Partners.

Terry Babe - ThinkEquity Partners

Good afternoon Joe. Just on the Global Wealth initiative in Europe, I know the pipelines are strong, and the timing is pretty long on these conversations. But any expectations of signing some new deals or announcing new deals before you are under or just anything around timing you can share?

Joe Ujobai

Yes, it is really hard to predict the timing of these things. As I said, the market looked very closely and watched very closely the conversion of our first client. As we've mentioned, that has gone as expected. And so we are seeing increased interest on the part of some of our prospects. You will be the first to know when we announce the new names.

Terry Babe - ThinkEquity Partners

Okay. And then on margins, margins appeared pretty strong. A nice uptick sequentially and better than I expected despite some of the amortized costs running through the P&L. I know they will bounce around and be variable, but any thoughts on near-term trends with those margins?

Joe Ujobai

Yes, I think the thoughts on the near-term trends are we will continue to bounce around over the coming quarters as we ramp up sales and marketing efforts and we install additional clients.

Terry Babe - ThinkEquity Partners

Great. Thanks.

Joe Ujobai

Thanks.

Operator

I'm showing no further questions at this time.

Presentation

Al West

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

Wayne Withrow

Thanks Al. Revenues for the third quarter increased 19% from the year ago period. This growth was primarily driven by an increase in average assets under management to $40.6 billion compared with $35.1 billion in the year ago period. Quarter-end assets under management increased $1 billion with $300 million coming from net cash flow and the balance being attributable to market appreciation.

Cash receipts for the quarter totaled $1.8 billion, and redemptions totaled approximately $1.5 billion. For the first nine months of the year, net cash flow totaled $1.1 billion compared with $200 million in the first nine months of 2006.

Profits for the quarter increased 25% from the year ago period. Strong revenue growth offset in part by increased expenses associated with our Global Wealth Platform and our investment management function was the primary driver of this increase.

While the third quarter marked another record for revenues and profits, I am more excited about the progress we are making in the execution of our growth strategy. Growth cash flow from our existing advisors continues to grow as evidenced by our year-to-date gross cash flow receipts of $5.8 billion, which represents almost $1 billion improvement from last year.

Our pipeline of high quality new advisors also remained stronger than it has been in years. Perhaps more importantly, new product initiatives continue and should contribute to our momentum. For example, we have launched our new proposal tool and in the third quarter completed the rollout to over 1,000 advisors. This month we officially launched our new distribution focused investment solutions or DFS for short. We are currently in the middle of a 32-city roadshow discussing our complete product offering and featuring both DFS and the proposal tool.

Current market feedback for both of these solutions from these roadshows is very positive. If you remember, we offer a total business solution which includes both the operations infrastructure advisor's need for their internal operations, as well as world-class investment solutions for advisors to offer to their clients. These two new products represent progress on both fronts.

In summary, our financial results have been good, and we continue to build momentum for our future growth. I will now entertain any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And I am showing, we have another question coming from Tom McCrohan from Janney Montgomery.

Tom McCrohan - Janney Montgomery

Hi, Wayne. Can you talk to the number of registered investment advisors that are currently clients? And is growth going to be coming from selling new registered investment advisors, or are you looking more to kind of just penetrate the current base of clients that you have today?

Wayne Withrow

Tom, I think both of those strategies are critically important to this unit. To give you a metric, as I look at the unit this year throughout our planning process, we projected going into the year that about 20% to 25% of that growth would come from new advisors. But it is vitally important that we continue to grow our existing advisor base. And our focus when recruiting new advisors is recruit advisors that have the potential to grow. So, the focus is on both. But new recruiting efforts are focused on those that can continue to grow after we sign them in the initial year.

Tom McCrohan - Janney Montgomery

And can you talk a little bit about the competitive environment, particularly some of the larger firms out there. Fidelity this week announced some new platform called Wealth Central. I'm sure you are much more familiar with it than I am. But if you can just talk about the competitive environment. It seems like a lot of players are going after the space and where you guys are differentiated and what gives you conviction in your ability to meet your objectives this year.

Wayne Withrow

The big difference between us and Fidelity and us and Fidelity and Schwab and TD Waterhouse is they are an open architecture primarily custody provider, tool provider, giving them access, if you will, to kind of the world of investments. We're a total business solution. So, we take over the middle office operations for an advisor. They run on our technology platform. We build investment products that they add to our manager's program which they distribute. So, we're a total business solution. And that makes us really completely different from Fidelity. If you choose Fidelity, you are choosing a different way to do business than a total turnkey outsource solution, which is the SEI value proposition.

Tom McCrohan - Janney Montgomery

Okay. Fair enough. Thanks Wayne.

Operator

Thank you. I'm showing no further questions.

Presentation

Al West

Our next segment is the Institutional Investors segment, and I'm going to turn it over to Ed Loughlin to discuss this segment. Ed?

Ed Loughlin

Thanks, Al. Good afternoon, everyone. As usual, I will speak to the financial results for the third quarter of 2007 compared to the year ago period, and I'm also going to touch on worldwide institutional sales activity.

The financial results for the quarter continue to show significant growth compared to the year ago period. For the quarter revenues of $51 million increased 22% and profits of $20 million increased 36% compared to the third quarter of 2006. Revenue and profit growth for the period were fueled by strong new client funding and positive capital markets.

Margins for this segment were 40%, representing a 5 percentage point increase over the year ago period. Quarter-end balances approaching $49 billion reflect the $9 billion increase compared to the third quarter of 2006 and a $2.8 billion increase from the second quarter of 2007. Net new client funding for the quarter was $730 million. And the backlog of committed but unfunded sales grew to $2.7 billion at the end of the quarter. We would anticipate that the backlog will be funded by year-end.

Sales activity worldwide was also strong with new client signings for the third quarter totaling $2.4 billion. We remain encouraged by the asset size and also the number of prospects that we are actively pursuing globally. Worldwide pension funding and accounting reform has really made pension management more complex and can negatively impact client's business results.

SEI's pension and corporate finance modeling and advice capability has global applicability and enables plan sponsors and trustees to carry out their fiduciary obligations. SEI's PensionConnect also provides a consistent leverageable platform for global companies to simplify worldwide pension management with a single global partner.

This concludes my prepared remarks, and I'm happy to entertain any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). And I am showing one question coming from Robert Lee from KBW.

Robert Lee - KBW

Hi, Ed. How are you?

Ed Loughlin

Hey, Rob. How are you?

Robert Lee - KBW

Pretty good, thanks. I have a question on the margin. It's been in a fairly steadily marching upwards if I look at it sequentially year-over-year. How should I think about the ability to continue to expand margins here? And does this segment have the potential to reach margins similar to what Wayne has in the Investment Advisors business?

Ed Loughlin

I don't think I could ever reach what my colleague Wayne has achieved in this lifetime here. I think we have touched on this before, but I think the fact that we have globalized the business and we have put the business together. I think we see a lot of leverage in what we are offering to meet clients' needs around the world.

I think that really what you're seeing is that we're having a lot of market acceptance for that. So, the top-line revenue continues to grow. And that is what is really helping to fuel these margin increases. You know we don't really forecast things going forward. But we are always looking to see what we can do to improve the financials for the unit.

Robert Lee - KBW

So, I will take that as a yes, there is some potential.

Ed Loughlin

I think you should ask Wayne.

Robert Lee - KBW

Thanks.

Operator

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

Presentation

Al West

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

Steve Meyer

Thank you, Al. Good afternoon, everyone. As I usually do, I will first give an overview of the financial results for the quarter and then give a brief update on our strategic progress.

For the third quarter, the Investment Managers segment continued to grow in both revenue and profit. Specifically for the third quarter, revenues for this segment totaled $35.8 million, a $6 million or 20% increase compared to the third quarter of 2006. This growth was due primarily to new client fundings and existing client growth. Our quarterly profit of $10.4 million was up approximately 35.5% from the same quarter in 2006. Third-party asset balances at the end of the third quarter of 2007 were $205.3 billion compared to a $161 billion at the end of the third quarter of 2006. This also represents an increase of $12.4 billion in assets from the second quarter of this year. Quarter-over-quarter, approximately $10.9 billion of this increase is attributable to additional net client fundings, and $1.5 billion is due to market appreciation.

In the third quarter of 2007, we had an exceptionally strong new business development quarter with new business sales events totaling approximately $15 million in annualized revenue. While this is a new record for this segment, and we are pleased with this accomplishment, we are even more pleased with the continued market acceptance of our solutions that this represents.

Also of added importance is the fact that all of our solutions are represented in this number. While our hedge solution was the majority of the quarter's events, we also had events in all of our other solutions, as well as adding another total operational outsourcing client. Additionally four of these events were from our European-based sales efforts and marked continued progress on our plan to grow our business globally.

In addition to strong new business events for the quarter, we also had a strong recontracting quarter, in which we recontracted over $8 million of revenue from existing clients.

On a slight down note, we received notice from two of our clients that they would not be renewing their contract with us at the end of this year. If you recall from the second quarter earnings call, I mentioned that we felt we might have some challenges recontracting some of our legacy clients, whose focus was on a different value proposition than ours.

While these two losses may put some downward pressure on top-line and bottom-line growth in early 2008, as we absorb the loss and convert in our new business, we feel that with our strong new business momentum and continued growth we have, in effect, replaced this revenue and feel confident that we will grow through these losses in 2008.

From a strategic view, we remain on track and make continued progress. From a market standpoint, all new business we acquire, we do so with an eye towards our strategy providing total operational outsourcing and the ability to transition to that higher value proposition model. Additionally, we now have several clients up and running on in our I/O solution set and continue to execute on this model as we build and invest for our future.

In summary, we continue to execute on our strategic direction, we continue to have strong market acceptance of our solutions, and we continue to focus on and execute on our clients' emerging needs.

The pipeline of new business remained strong, and I remained very encouraged on the future outlook of our business.

I will now turn it over for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). And I am showing another question coming from Robert Lee, from KBW.

Robert Lee - KBW

Thanks. Hi, Steve.

Steve Meyer

Hi, Rob.

Robert Lee - KBW

I promise I will save you from the margin question, so I will ask you something else. I'm just curious, you have had a couple -- there have been a couple of mergers among your competitors. Are you seeing any of the pickup in new business related to some fallout from those?

Steve Meyer

Yeah. And I think we've gone over this couple of times. We don't see a huge disruption because I do think it is still early in the process, although we are seeing certainly some people who are opting out of a new merged entity that they would rather not stay with. I think it comes more fundamentally down to what clients want. What is the value proposition they are looking for? Are they looking for something that's bigger, maybe more focused on the commodity end of the market or something that is driven more towards helping them grow and succeed?

Robert Lee - KBW

And I am just curious with the two clients that have announced that they are not going to be re-signing with you, when you talk about them not signing for your value proposition, was it that they are going somewhere else that was mainly price driven or cost driven?

Steve Meyer

I think, and we have talked about this before in previous quarters, specifically these two clients I think their focus is on really getting a level of service for the lowest price, and that's not really where our value proposition is. So, when you look at that, I think it is very tough to look at a long-term relationship when you know your value propositions don't match up. So, I think more than anything, we grew apart in these two relationships.

Operator

Okay, that was it. Thank you. (Operator Instructions). There are no further questions.

Presentation

Al West

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

Kathy Heilig

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter.

Third quarter cash flow from operations was $132.5 million or $0.66 per share. Third quarter free cash flow was $100 million or $0.50 per share, and year-to-date cash flow from operations $265.9 million. Third quarter capital expenditures, excluding capitalized software, $7.2 million, which did include $3.2 million for our new facility which is now completed. Capital expenditures for the fourth quarter we would expect to be between $5 million to $6 million. Again, that's excluding capitalized software.

The Accounts Payable balance at 9/30 was $12.6 million. Stock-based compensation for the third quarter was $7 million, and the stock-based compensation estimate for this year is around $27 million.

We would also like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that the financial information presented in our release and on this call is unaudited. Future revenues and incomes 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.

Question-and-Answer Session

Operator

(Operator Instructions). I show no questions at this time.

Presentation

Al West

Thank you, Kathy. So, ladies and gentlemen, we continue to be excited about what we're building. We are executing our transformation and look forward to delivering the potential that we believe is there. And I would like to leave you with three things.

First, market acceptance of our new solutions continues to encourage us that our strategies are on the right path.

Second, our progress on our transformation has been steady, and while we have a lot to do yet, we are making important strides in our journey to transform our businesses.

And third, our new solutions and strategies, our recurring revenue model, our strong cash flow and our operational leverage, as well as our portfolio of markets, all serve to support our goal of creating long-term sustainable growth in revenues and profits.

And finally, we are in the business solutions business. Our clients do business with us because we're helping them to succeed, by making their businesses and their lives better. That's a very high value-added proposition, and it differentiates us from our competition, and we believe it will serve us well in the future.

So, before we sign-off, we will give you one more chance to ask anything that might have come to you.

Question-and-Answer Session

Operator

(Operator Instructions). And I show no questions.

Al West

Thank you all very much for joining us and good afternoon.

Operator

Ladies and gentlemen, this does conclude your conference for today. As a reminder, this conference will be available for replay after 9:00 PM Eastern today through December 25, 2007. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 889135. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 889135.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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