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SEI Investments Company (NASDAQ:SEIC)

Q4 FY07 Earnings Call

January 31, 2008, 02:00 PM ET

Executives

Alfred P. West Jr. - Chairman of the Board, CEO

Dennis J. McGonigle - CFO, EVP

Joseph P. Ujobai - EVP

Wayne M. Withrow - EVP

Edward D. Loughlin - EVP

Stephen G. Meyer - EVP

Kathy C. Heilig - Chief Accounting Officer, Controller

Analysts

Tom McCrohan - Janney Montgomery Scott

Robert Lee - Keefe Bruyette & Woods

Jeff Hopson - Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a remainder this conference may be recorded.

I would now like to turn the conference over to our host, Mr. Al West, Chairman and CEO. Sir, please go ahead.

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

Thank you and welcome everybody. With me, all of our segment leaders, as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller. And I'll will start by recapping the fourth quarter and full-year 2007. I am then going to turn it over to Dennis, first, to expand on a few financial matters, as well as to cover LSV and the investments in new business segments.

After that, each of the business segment leaders will comment on 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 the fourth quarter and full year 2007.

Fourth-quarter earnings fell 16% from year ago, on revenue growth of 12%. For the year, earnings grew 9% over 2006 earnings and revenue grew 16% over 2006 revenues. Diluted earnings per share for the fourth quarter of $0.27 represents a 13% drop from the $0.31 reported for the fourth quarter of 2006. Earnings per share of $1.28 for the year grew by 9%, over the $1.17 reported in 2006.

Now earnings for the quarter and the year were adversely affected by fourth quarter charge to earnings of $25 million or approximately $0.08 per share. This was due to a drop in the market price for the commercial paper of certain structured investment vehicles, or SIVs held in three of our money funds. This is the SIV situation we spoke of in our third quarter 10-Q, in a special investor call we had at that time. Dennis will speak to the SIV situation in more detail in a few minutes.

Our growth in revenue for the quarter was a result of fees from our clients across all of our segments, and our non-cash asset balances fell by $4.5 billion during the quarter. This contraction was due to lower equity markets, which more than offset relatively strong cash flows during the quarter. SEI's assets under management felt by $700 million during the quarter, while LSV's assets under management fell by $3.8 billion.

Our global 60/40 portfolio was down 0.57% during the quarter. Also during the quarter, we repurchased 706,000 shares of stock at an average price of nearly $30 per share. Now, that translates to 21 million of stock repurchases. And during all of 2007, we repurchased 7.2 million shares at an average price of $28.6, which translates into $205 million of stock repurchases.

Except for the SIV issue, we are satisfied with the results for the quarter and the year. We continue to make progress in transforming our company by providing more innovative and relevant solutions to our clients and building strong relationships with them. Now, undergirding the transformation are a number of interrelated investments, and three notable ones are. First, we are building and implementing new client processes in each of our markets. Second, we are continuing to invest on the Global Wealth Platform, the technology 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 investment in the Global Wealth Platform continues to be on track. During the fourth quarter this year we capitalized $11.1 million of the Global Wealth Platform development. At the same time as additional functionalities rolled out, maintenance costs for the platform growth and so do the cost of establishing operations throughout the world as we've ready ourselves to bring on more and more clients.

The operation of HSBC's private bank continues to go well and served as a proof statement to other UK and European private banks. The marketing and sales activity in the UK and Europe continued strong and Joe Ujobai would speak to these activities. And our US functionality will be delivered during the second half of next year. In anticipation of that delivery, we recently signed our second US client. Joe will elaborate on that as well.

We continue to be pleased with the progress we are making throughout the company. We know the early success we've had with our platform bodes well for our UK and European private banking marketing efforts. And we are pleased; we have started to build our US client base. Our business is serving institutional investors and investment managers, both showed significant progress in all aspects of their businesses and have very strong fourth quarter and full-year 2007 results.

In our Advisory business segment, we have made great strides and engaged in our advisors and strengthening our relationships with them. This should pay off long -term dividends to them and to us. As we enter 2008 with the back drop of troubled equity markets and the fall out from sub-prime debt markets. We will work hard to control costs as we continue to transform our business. We are firm in our belief that we are on the right path to build a stronger, faster growing company.

And this concludes my remarks. So I would now ask Dennis McGonigle to cover some company issues and give you an update on LSV and the investment in new business segment. And after that I'll turn it over to the heads of the other business segment. Thank you. Dennis?

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

Thanks Al. I will provide an update on the capital support agreements that we discussed when we filed our third quarter 10-Q and their impact on our earnings. I will then briefly cover the fourth quarter results for investments in new business and LSV segments. As you are aware, from our third quarter 10-Q and the conference call we had at the time of its filing SEI entered into capital support agreements with three SEI money market mutual funds.

Among other money market instruments the funds hold senior notes issued by structured investment vehicles or SIVs, some of which have either seized making payments or potentially may seize making payments on its outstanding notes on the scheduled maturity dates. As you will recall from our third quarter filling in October 2007, S&P advised SEI that it would place any mutual fund that had a AAA rating around certain SIVs on credit watch with negative implications unless the fund was provided credit support having an A1 short-term rating by S&P.

Although we were not obligated to provide the credit support required by S&P. In order to avoid a credit watch by S&P on one of our funds and to address the needs of customers who require an S&P AAA rating on our fund, SEI entered into the capital support agreement to satisfy S&P's requirement. We entered into similar agreements with two other funds.

To keep the AAA S&P rating on one of our funds and to support our clients who have invested in these funds, we entered into the capital support agreements in which we generally commit to provide up to an aggregate of $130.5 million of capital into the funds, if the funds realize a loss on their holdings of SIVs, so that the net asset value per share of the fund will be less than 0.995 or in the case of one fund 0.9975. We provided detail about this arrangement in our third quarter 10-Q filing, and we encourage you to review that disclosure for more detail on the SIV issue in the capital support agreements.

I would like to remind you few things we said on our prior call. First, in the event that SEI is required to… under the capital support agreements to commit capital to any fund, we will be required to pay the required capital contribution to the fund and will not receive any consideration from the fund in the form of shares of the fund or any other form for the contributed capital. Second, if the mark-to-market value of SIV as detailed in our filings is less than it amortized cost and if the aggregate net asset value of the fund is less than 0.995 or in the case of one fund 0.9975, then even though the loss has not been realized through the sale or other disposition of the security, SEI will be obligated to reflect its obligation under the support agreements to commit the required amount of capital so that the funds net asset value is at least 0.995 or in the case of one fund, 0.9975.

However, we're not required to pay the required capital contribution to the funds unless a loss is realized by the funds. With that as background, as of December 31, 2007, SEI is obligated to recognize a non-cash expense for its obligations to the funds for $25.1 million. We recorded this charge to earnings in the net gain loss from investments line of our income statement.

At year-end, the principal contributor to the amount accrued for SEI's obligations under the support agreement was holdings of securities issued by Cheney finance. However in our early 2008, another SIV Holding, Victoria Finance suffered a technical default triggering ratings downgrades from the principle rating agencies. As a result the carrying value of these securities in the SEI money market funds was reduced as well. In addition, SMP has required the posting of additional capital support with the fund rated AAA by SMP as a result of the Victoria situation.

Consequently, SEI intends to increase the funding limit under the capital support agreements to $156 million from the $130.5 million. Currently, this is as of yesterday. The amount which would be accrued for SEI's contribution, obligations under the capital support agreements based on yesterday's market prices was approximately $30.4 million, which reflects the current carrying value of all SIVs with the greatest impact from Cheney and Victoria. If the yesterday's values held through the quarter, SEI would incur an additional loss of $5.3 million in the first quarter of 2008.

In the next few days, we expect to file an 8-K discussing the update to our capital support agreements. I encourage you to review that filing for further information. Ultimately, we believe that both of these securities, Cheney and Victoria, will be successfully restructured, although we cannot predict the timing of this and/or the net impact this will have on the ultimately realized value of these holdings. We also note that excluding Cheney and Victoria, more than 97% of the remaining SIV holdings of our three supported money market funds, continue to have a AAA or A1 rating from a major credit rating agency.

Future accruals for our obligations under the capital support agreement will depend upon prevailing conditions in the credit markets as they impact the value of money market instruments including SIVs, on the credit worthiness of the SIV securities and upon the assets under management in the funds. For additional information, we publish the month end holdings of our money market funds after the 15th day of the following month at www.seic.com/holdings_home.asp. And I'll be happy to repeat that during the Q&A.

I would also like to remind everyone all things being equal, that improvement in the value of these securities above their current pricing would reduce the current recorded loss. I hope this gives you some perspective, on our overall exposure and the potential impact on future earnings.

Before I move on to the segments, I would like to reiterate a few points we made on our last call. First, SEI does not own its principal, any structured investment vehicles, unlike others, who had reported significant losses from these holdings. Second, although we were not contractually obligated to provide the credit support levels required by S&P, we entered into the support agreements to ensure that the fund maintains AAA rating by S&P that a number of our clients investing in those funds require. As you may have seen, others in our industry have taken similar action.

Third, the amount of the capital support agreement should not in any way be considered to be our estimate of the actual loss that may be incurred on the funds holdings, which are covered by the support agreements. The total amount of the support agreements is primarily the amount necessary to maintain S&Ps AAA rating.

Fourth, the impact to our earnings in the fourth quarter 2007, of $25.1 million the estimated loss position as of yesterday of $30.4 million an incremental $5.3 million is subject to increase or decrease as discussed above. I'll now break there and take any questions on this topic that you may have.

Question and Answer

Operator

Thank you Sir. [Operator Instructions]. Our first question is from Tom McCrohan with Janney Montgomery Scott. Go ahead please.

Thomas Mccrohan - Janney Montgomery Scott

Hi Dennis. How are you?

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

Good Tom. How are you doing?

Thomas Mccrohan - Janney Montgomery Scott

All right. Just a follow-up. The collateral associated with the SIV particularly Cheney and I guess the other one you mentioned Victoria. Could you just give us a sense of kind of the current valuations, which have declined are more of function of just like a liquidity and as opposed to collateral valuations coming down just I'm talking about the performance of the underlying collateral?

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

Generally speaking the issue is really one of the liquidity that is the primary driver of kind of market valuations on these SIVs as far we can tell. The credit quality so to speak with, specifically the Cheney and Victoria. On Cheney for example 96% of the collateral is rated AA or better. This is as of… just over a week ago with 67% of it AAA. On Victoria, about 76% of the collateral is still... is rated AAA about 50% is rated AA. So the credit value or quality of the underlying collateral still remains strong.

Also the input we have gotten from Columbia Management on the performing... performance of the underlying collateral certainly suggested that all the collateral continues to perform. So we really do believe this is more a function of liquidity. It doesn't mean that there aren't potentially some impaired pieces of collateral embedded in the SIV that would trend you from getting all the way back to 100%. But we feel like from what we are hearing the underlying collateral is still pretty solid.

Thomas Mccrohan - Janney Montgomery Scott

Okay. And could you update us on... I think you disclosed in the past that the funds that SEI held about $250 million of Cheney paper?

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

Correct.

Thomas Mccrohan - Janney Montgomery Scott

And can you update us on what those had been mark down to and what's the investment in this other SIV that you're talking about today Victoria?

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

Yeah I know on the last call, I think that same kind of question was asked and we really weren't... and aren't in a position to answer that. But I guess I would just comment that the marks we have on these securities we believe again looking at really taking into account in some respects liquidity but also the market in general are... we are comfortable with.

Thomas Mccrohan - Janney Montgomery Scott

So if we... when I first read press release and saw that the $25 million reserve, it's not... it should... I shouldn't read into that and say oh! okay those securities were marked down in 250, 10%, 25 million. Its really that reserve, it is not related to the marks up as… you know what I'm trying to get to, I mean you can't... it's not linear, you can't say well you took a $25 million charge. Therefore the Cheney notes were marked down 10%.

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

No you can't... you can't look at it that way because of the... it really takes into account the capital pricing of the overall money market portfolios. But I will… just I guess reiterate that we feel we have pricing kind of given current market conditions and given our ability to get deeper on these securities. We feel pretty good... we feel like we are pretty conservatively priced.

Thomas Mccrohan - Janney Montgomery Scott

Okay. Thanks for taking my questions, Dennis.

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

You are welcome Tom.

Operator

Thank you. [Operator Instructions]. Our next question is from Robert Lee with KBW. Go ahead please.

Robert Lee - Keefe Bruyette & Woods

Thanks. Good afternoon Dennis.

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

Hi, Rob.

Robert Lee - Keefe Bruyette & Woods

I'm just curious, I mean since I guess this came to like is it... any guess of backdrop of there being kind of record setting flows within the industry and to money funds. How have your money funds held up and how this... how to take these actions even though it's meant to support the funds acquired just don't suffer any loses but has it any kind of fallout on the client activity?

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

Yeah I guess I'm pleased to report that, look across our entire money market fund complex, flows have been relatively flat throughout this. If you ask me any point in time and date there is always some activity in the funds but most of the activity, typically is unrelated to this.

Robert Lee - Keefe Bruyette & Woods

Okay. And also just a follow up on may be --.

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

I guess I just commented. What's going on in the industry as a whole? We have different type of client-base generally than what the industry's statistics would reflect and we don't have a lot of retail customers going to cash if you will.

Robert Lee - Keefe Bruyette & Woods

All right. Okay. Is it possible to get beyond the two issues just to get some color on the overall exposure within the… specific exposure from the complex I mean to… have you seen it... I would expect by now would have declined somewhat overall even as more paper get starts to roll off and probably get some to size the overall exposure and maybe where is now versus where it was?

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

Yes, I guess just one over the top comment. Other than the Cheney and Victoria Securities, the remaining SIV sits in our money market funds, we have… are rated… 97% of those rated AAA or A1. So, the credit quality of those is good. The one of the big drivers of that is the fact that in many of these SIVs, the organizations that issue these SIVs are brought to the market has stepped up to back and the most of that is done by through banks, so that was another shift from our last call to this call on how the market has reacted.

In addition, you'll have those schedules that we attached to our capital support agreements when we filed the 10-Q and in subsequent 8-K back in November. And on those schedules, we have had try to aggregate it for you somewhere around $250 million of maturities that were paid over that time frame. And for example, we have one of those maturities actually was Stanfield Victoria that pay… that was due in December. So, we have seen better performance if you will or we've cleared the air on some of that uncertainty if you will during the November, December timeframe. And again, most of the securities we still hold in terms of… again 97% being AAA, we feel pretty good about their ability to perform.

Robert Lee - Keefe Bruyette & Woods

All right, great. Thanks a lot Dennis.

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

You're welcome.

Operator

Thank you. I'm showing no further questions at this time, sir, you may proceed.

Prepared Text

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

Great. I would now like to cover the investments in new business segment and the LSV segment. Activities in the investments in new business segment are focused on direct marketing to all trend high new worth investors. During the quarter, investments in new business segment generated a loss of $3.2 million. This compares to a loss of $3.8 million for the fourth quarter of 2006. The efforts in this segment continue to be centered on learning, developing and delivering our life-involved services to the ultra and high-network segments. The learning we gain and the services we develop from this process will then be leveraged if applicable to other assets 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 the segment as an investment in future market opportunities and/or services and 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 challenging quarter of financial performance; earnings contribution to SEI from LSV was approximately $30.6 million in the fourth quarter 2007. This compares to a contribution of $31.4 million in the fourth quarter of 2006. This year-over-year decrease was due primarily to a loss of assets from market depreciation, offset partially by an increase in assets from positive cash flow and an up tick in expense of a one-time nature.

During the fourth quarter, LSV's net asset shrink approximately $3.7 billion. We expect LSV along with the other value managers to continue to be challenged by these volatile markets. However, their investment process is well tested and their long-term record is strong. This should help them recover when the market settle down.

Revenues from LSV for the quarter were approximately $82.2 million. This compares to revenues of $80.4 million in the fourth quarter of 2006 and $90.6 million in the third quarter of 2007. Revenues were impacted by asset declines as discussed earlier.

On SEI's balance sheet, of our reported cash and short-term investments of approximately $361 million, $82 million is attributable to LSV at December 31, 2007. Of our reported receivables of $275 million, $92 million were attributable to LSV. Liabilities are affected by the debt associated with our guarantee to the LSV employee group. This is reflected in both current liabilities approximately $7.5 million and long-term debt, approximately $44 million.

I will now take any questions you have on these two segments.

Question and Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Jeff Hopson from Stifel Nicolaus. Go ahead please.

Jeffrey Hopson - Stifel Nicolaus

Okay. Thanks. Dennis, are you aware of any thoughts that LSV would have in terms of potentially opening up our closed funds, and when you talk about the, potentially challenging environment for them, are you thinking that they will see outflows in the future or near future I guess?

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

Well, their growth was speculative in nature of those questions. I'll do my best here Jeff. I think that we are… just a break down; we had about $850 million of positive cash flows in the quarter. So I think to the extent that the markets give them capacity, they may use that capacity with new assets. They’ve always been open to new assets from existing clients. And I think that has continued expand their product line or expand the new client markets, they will be opened, I can't really comment on whether they are going to open the doors entirely on all their product lines.

In terms of client losses they, I think the positive cash flow number would certainly suggest that they are not losing clients from a cash flow standpoint, and I wouldn't expect and that they would pick me out, particularly with the short-term. I mean their long-term track record is still very, very strong. And I think clients, they been with them for a while and even those have come in the door recently are certainly going to lean more on the long-term record than in past couple of quarters.

Jeffrey Hopson - Stifel Nicolaus

Okay. Thanks.

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

You're welcome.

Operator

Thank you. Our next question is from Tom McCrohan with Janney Montgomery. Go ahead please.

Thomas Mccrohan - Janney Montgomery Scott

Yes. Hi, Dennis. I was certainly surprised that how resilient the margins were in LSV, despite the sequential decline in assets, I am just curious if there is anything unusual going on the expense side, because it looks like sequentially as well expenses went down by about $4 million bucks in LSVs, so I was wondering if you could just talk to that point little bit.

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

Tom, I think, actually their expenses were up a little bit. And, but it really not… really significantly unusual going on there. Their margins unless their revenues really were to take ahead, I think it is going to be all that effective.

Thomas Mccrohan - Janney Montgomery Scott

Okay. Thanks.

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

You're welcome.

Operator

Thanks. I am showing no further questions at this time, Sir you may proceed.

Prepared Text

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

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

Joseph P. Ujobai - Executive Vice President

Ok, thank you Al. Today, I'd like to review our financials and give you an update on our strategic progress and market activity. As a financial update, revenue of just over $111.8 million grew by 86% from the year ago quarter and by 12.6% for the full year. Revenue growth for both the quarter and the year was due to a net increase in asset 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 down in the UK.

One-time fees for the quarter associated with conversions in our US investment processing business totaled more than $7 million. This was an unusually high number. Profit increased from the year ago quarter by approximately 13.6% to $22.5 million. For the full-year, profit declined by 6.1% to approximately $83 million. Increased expenses were primarily due to direct costs associated with asset management and costs associated with the continued build out, maintenance and operational deployment of the global Global Wealth Platform. This segment accounts for the majority of the overall expense of the platform.

Margins for the quarter were 20.2%. As I mentioned during the 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 short… strong margins as we are making significant investments to grow and fuel [ph] our private banking business. Net sales events during the year totaled approximately $33.4 million in annualized revenue after deducting client losses and investment management sub advisory fees. As a strategic review of 2007, we made significant progress towards the transformation of our private banking business to our new Global Wealth Services solution. As a reminder, Global Wealth Services is a business solution designed to help our clients grow revenue, reduce costs and risk and redeploy resources.

Underpinning Global Wealth Services is our new investment processing platform and our multi-management investment offering. We also globalized this market segment by combining our U.S. private banking and trust business with our private banking distribution business based outside of the US. Globalization allows us to deploy resources to take advantage of our worldwide opportunity. At the end of June, we successfully converted our first external client, HSBC's Private Bank in the UK. Since the conversion, we continue to enhance the technology platform and have also brought efficiencies to our operating model. We're pleased with out progress.

Finally we expanded our worldwide investment management distribution business and as of December average assets under management totaled approximately $21.8 billion [ph], a year-over-year increase of 35%. I'd now like to update you on our market activity. On the investment processing side of Global Wealth Services, we continue to build a pipeline focusing on the UK and the US, both markets have closely been watched our progress with the first client and we are actively engaged in our discovery process with key prospects. Today, I am very pleased to announce another Global Wealth Platform client. Frost Bank a long-time ASP relationship will transition to our new platform in the second half of 2009. Earlier this month, we entered into a long-term Global Wealth Services contract with Frost. They will adopt our asset-based pricing model, which we believe provides a win-win business proposition for our partnership.

Frost has also agreed to work with us on the build out of the case studies as they recognize the benefits of Global Wealth Services. We look forward to working with Frost as we begin their transformation. Also in the fourth quarter, we signed a new long-term agreement with State Street Bank, which includes the merger of IBT, a current TRUST 3000 client. Although, State Street will continue to operate on TRUST 3000 renewed commitments from important US clients are based on SEI’s strategic Global Wealth Services division. While we are building the investment-processing pipeline, we are making progress with the growth of our worldwide investment management business, which is also supported in part by the Global Wealth Platform.

In the Middle East, we are in the process of opening a local office in Dubai to support distribution efforts in this region. We have recently entered into an agreement with one of the regions lean banks to provide a turnkey investment solution for their clients. We have significant activity across the region, which I expect to be an important new market for us in 2008. In summary, SEI's Global Wealth Services solution will provide a strategic infrastructure in our private bank's growth and keep pace with the rapidly changing wealth management industry. We have successfully launched our new solution and platform and we are focused on growing this business. At this point, I will take any questions.

Question and Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Jeff Hopson with Stifel Nicolaus. Go ahead please.

Jeffrey Hopson - Stifel Nicolaus

Okay, thank you. Joe, two questions. Some of your clients or potential clients obviously have had a challenging market share. Have you seen any change in their behavior, would you expect or be concerned that they will push things back? Or on the other side with problems like the French bank has had, could that potentially motivate them to move over, I guess back office and other services with you? What are your overall views on what's happening out there?

Joseph P. Ujobai - Executive Vice President

It's still pretty early to tell, because lot of these banks obviously are dealing with a more challenging environment. But I think our initial response is that our solution and the benefits of our solution resonate well both in boom markets and more challenging markets. And if anything, I think we are seeing increased interest in our ability to help them in variable price… or expense model with our asset-based business model. And again, I think as I mentioned earlier activity is strong and again time will tell, because there are obviously a lot of challenges out there. But overall, I think it's generally… we feel very positive about the direction, the solution and the markets heading in.

Jeffrey Hopson - Stifel Nicolaus

Okay. Great. Thank you

Operator

Thank you. Our next question is from Robert Lee with KBW. Go ahead please.

Robert Lee - Keefe Bruyette & Woods

Thanks. Good afternoon, Joe.

Joseph P. Ujobai - Executive Vice President

Hi, Rob.

Robert Lee - Keefe Bruyette & Woods

Couple of questions. I mean, on the two announcements. I guess, first on Frost Bank. Should we be thinking that at the outset it will be essentially no short-run revenue impact that's hopefully overtime as Frost Bank's assets grow that’s where you will see the improvement, or is there some… is that how we should view at least in the early stages?

Joseph P. Ujobai - Executive Vice President

Well, we don't comment on specific client situations but again as I mentioned earlier, we're pleased that Frost has adopted this asset-based model, pricing model, so, as we are able to Frost help grow their business we would benefit financially by that. So, I think that there is a significant upside to this business model and we're pleased that we continued to prove that out with this additional client announcement.

Robert Lee - Keefe Bruyette & Woods

Okay. Well. Similar question with State Street. If I remember correctly both IFIN [ph] and State Street were clients, should we be thinking this as a kind of one plus one equals two or 1.5 or 2.5, I mean how should we kind of figure this?

Joseph P. Ujobai - Executive Vice President

Again we don't comment on specific relationships with clients but --.

Robert Lee - Keefe Bruyette & Woods

You got to ask anyway.

Joseph P. Ujobai - Executive Vice President

I know. We have a… but I'll get you a little bit of information. We do have a long-term relationship with both of those to organizations. I think that there again they were the… we provided a good level of support to them over the years and helped them with their business and there are additional products that one bank may had… had some products, the other bank didn't. And that what we find simply we believe it long-term, it's a neutral financial situation for us by giving additional services and additional products to the combined organization.

Robert Lee - Keefe Bruyette & Woods

Okay, and just sort of a general question. If I think back to… this is focusing on the new platform in the US. With the first announcement… and I guess you announced around the same time, if not at the same time you originally announced the HSBC Private Bank in the UK, I think it was actually June of ‘06, if memory serves me. And at that point the expectation had been that is I think maybe even somewhere around now we'd actually be going through that initial conversion, obviously now we are talking about kind of the latter part of '09. What sort of transpired between… when you've signed on that first client and sort of the push back of the implementation. Was it decision to reallocate resources towards Europe or additional stumbling blocks in the build out, I mean just [inaudible]?

Joseph P. Ujobai - Executive Vice President

I think it was generally a strategic decision to allocate more resources towards UK and European opportunity.

Robert Lee - Keefe Bruyette & Woods

Okay. Thank you very much.

Joseph P. Ujobai - Executive Vice President

Thanks.

Operator

[Operator Instructions] I'm showing no further questions at this time. Sir you may proceed.

Prepared Text

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

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

Wayne M. Withrow - Executive Vice President

Thanks Al. I will briefly reviewed the fourth quarter financial results for the

Advisor segment and then provide some data to give you a sense to progress we have made on our strategy. Revenues for the fourth quarter increased 11% from the year-ago period. This growth was driven primarily by an increase in average assets on the management for the quarter to $41.3 billion, compared with $37.2 billion in the year-ago period. Profits increased 7.28%, driven primarily by increased revenue. Our margins dropped slightly due to investments in our Global Wealth Platform, investment management area, and sales and marketing. These financial results reflect progress in our efforts to improve net cash flow, recruiting new advisors and to continue the transformation of our business.

With respect to cash flow, during the fourth quarter we had gross cash flow of $1.9 billion and redemptions of $1.6 billion yielding a net cash flow of about $300 million. For the year, net cash flow was almost $1.4 billion, easily beating the $540 million we posted last year, and representing our best net cash flow year since 2001. Growth from our existing advisors, aided by cash flow from new advisors resulted in these flows. Speaking of new advisors, we recruited almost 200 of them in 2007. More importantly, we were selective in the advisors we recruited and targeted only advisors we felt had future growth potential. One component of the sustainable health of this business is growth from our installed base of advisors.

In addition to making progress with our financial results, we made progress in transforming our business. One example is the rollout of our distribution-focused strategies. On its face, this investment product appears to fit perfectly with the demographic trend of retiring baby boomers and it does. However, in this product, we charge an account level fee in addition to the fees embedded in the mutual fund expense ratios representing a modification of our existing business model and a source of additional revenue streams for the segment.

During 2007, we also made progress in transforming and strengthening our ability to help our advisors grow. The rollout of the proposal generation tool is just one example. As a metric, we helped advisors prepare over $5 billion in proposals in 2007. While we are satisfied with the results of the fourth quarter and all of 2007, we continue to look at ways to grow our business going forward.

New advisors, owing existing advisers and transformation of our business model are all part of the equation. We will continue to work hard in executing on these agendas.

I will now entertain questions.

Question and Answer

Operator

[Operator Instructions] Our first question is from Jeff Hopson with Stifel Nicolaus. Go ahead, please.

Jeff Hopson - Stifel Nicolaus

Hi, Wayne. Just not to focus too much on the markets around this year, but just wondering if there are any I guess challenges and/or opportunities, maybe thinking about opportunities that markets like this present to you, and in the very short-term should we calibrate down our expectations for flows, because clients… end clients tend to not to do a whole lot, what would be your thoughts there?

Wayne M. Withrow - Executive Vice President

Yes, it is kind of tough to answer that question given our limited history. What I'd say, if you look at the fourth quarter, the gross cash flow I think was our second highest we've had in the past 16 quarters. Now, it's kind of hard to drill down past that metric to say why, why not. I think the other way to look at it is, when you get into these turbulent times, it reinforces to the end investor the need to get some professional to help, and that is certainly a good trend for us.

Jeff Hopson - Stifel Nicolaus

Okay, very good. Thank you.

Operator

[Operator Instructions]. Our next question is from Tom McCrohan with Janney Scott Montgomery. Go ahead sir.

Tom McCrohan - Janney Scott Montgomery

Hi, Wayne, The pickup in liquidity funds this quarter, is that pretty much a function of the cash coming into the... the cash flows you are talking about, just kind of existing cash until it gets invested in equities or is that some reallocation decisions going on amongst the end clients or the registered investment advisors?

Wayne M. Withrow - Executive Vice President

Tom, I think it's a little bit of both. I think some new investors are perhaps... like I said, maybe seeking profession help or taking a little bit of a defensive position going in.

Tom McCrohan - Janney Scott Montgomery

Can you give us any sensitivity, Wayne, on your margins if people this year take a real... the end clients of the RAs, say individuals take a much more defensive posture instead of moving stuff into cash and fixed income, give us any sensitivity, if you have any, on what the impact could be on your margins up or down?

Wayne M. Withrow - Executive Vice President

I really don't look at it sort of moving one product to another. I look at how our products will respond to its position to the market and we have enhanced cash products, we have defensive strategies that lower [ph] part of our margins and we have invested in them all the time. If you look... if you want to say straight up, money market fund as opposed to in our strategies, it's a lower-margin product for us. But, we have other defensive... numerous defensive products as part of the product mix.

Tom McCrohan - Janney Scott Montgomery

Okay, it makes sense. Thanks Wayne.

Operator

Thank you. There are no further questions at this time sir.

Prepared Text

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

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

Edward D. Loughlin - Executive Vice President

Thanks, Al. Good afternoon, everyone. The Institutional Investor business segment enjoyed healthy growth in both revenues and profits during the fourth quarter of 2007 and also for the entire year. Revenues approaching $53 million for the fourth quarter increased 15% compared to the fourth quarter of 2006, and profits grew 20% versus the year-ago period. Continued strong new client funding was the predominant driver of revenue and profit growth for the period. During the year, margins improved... increased 2%, ending the year at 39%. Profits of $78 million for the entire year increased 34% due to the new client funding and also capital market appreciation. Asset balances increased by $7 billion during the year totaling $49 billion at year-end. And during the fourth quarter, net new client funding was $1.9 billion and our backlog of committed, but un-funded assets at year-end was $1.2 billion.

Strong sales momentum continued during 2007. New client sales of $6.9 billion for the entire year was an increase of 27% compared to 2006 annual sales. Sales for the fourth quarter were $900 million. A key driver for the Institutional sales growth is the continued global adoption of SEI's integrated pension and endowment solutions. There are six target markets. New clients were globally diversified by both geography and it also represented a healthy mix of retirement assets, endowed assets and healthcare operating pools. Changing regulations, complex investment products, and ongoing cost volatility are compelling institutional investors away from fragmented plan management models in favor of a more integrated and strategic approach to managing both pensions and endowments.

During 2007, we continue to experience success with corporations selecting a single provider for their global pension needs and also success with larger investment pools.

In closing, we enjoy a healthy and growing pipeline, but we will be watching closely the combined impact of market volatility and the depressed equity markets on our prospects decision-making process.

Thank you very much and I'm happy to entertain any questions.

Question and Answer

Operator

Thank you, sir. [Operator Instructions]. Our first question is from Tom McCrohan from Janney Montgomery Scott. Go ahead please.

Thomas McCrohan - Janney Montgomery Scott

Hi Ed, how are you?

Edward D. Loughlin - Executive Vice President

Good Tom, how about yourself?

Thomas McCrohan - Janney Montgomery Scott

Good, thanks. You had great operating leverage this year in your segment, you talked about the nice growth in operating profit this year, and I just was trying to get a sense for what you're thinking about in regards to growing revenue and expenses this year?

Edward D. Loughlin - Executive Vice President

Well, again, we don't kind of forecast those types of things, but I think generally we're seeing positive results as an impact of our globalization. So, the name as a gain for the segment has been for many years is to continue to grow the topline as fast as we possibly can. So that continues to be the strategy.

Thomas McCrohan - Janney Montgomery Scott

Was there anything this year that you think contributed that was unusual, that would allied to have… in the expansion you had margins this year that will not repeat itself in ‘08?

Edward D. Loughlin - Executive Vice President

No, I mean, I think that the strategy that we have -- we executed this year was really to offer the same solution on a worldwide type of a basis, but customizes the unique needs of the individual markets, and that's going to be the continued strategy next year or I'm sorry in 2008 this year. So, I think we’ll continue to see progress.

Thomas McCrohan - Janney Montgomery Scott

Okay. Thanks, Ed.

Edward D. Loughlin - Executive Vice President

Sure.

Operator

[Operator Instructions]. I'm showing no further questions at this time. Sir, you may proceed.

Prepared Text

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

Thank you, Ed. Final segment today is Investment Managers. I'm going to turn it over to Steve Meyer to discuss the segment. Steve?

Stephen G. Meyer - Executive Vice President

Thank you, Al. Good afternoon everyone. The Investment Managers segment continued to grow in both revenue and profit for the fourth quarter of 2007. Specifically for the fourth quarter, revenues for the segment totaled $38.2 million, a $5.4 million or 16.5% increase compared to the fourth quarter of 2006. This growth was due primarily to new net client funding and existing client growth.

Our quarterly profit of $11.5 million was up approximately 25% from the same quarter a year ago. Additionally, in looking at 2007 for the entire year, we had solid improvement in year-over-year margins. While I do think there is an opportunity to increase our margin going forward, it will not be as dramatic as we have seen to date, especially, as we continue to invest in our business and strategic direction. Also as you might be recall from the prior quarter's call, during 2007, we had some legacy client losses, which left at year-end. Although we expect to grow through these losses, it could affect our top and bottom line growth in the near term as we absorbed those losses and redeployed the fixed cost for the new business we are bringing in.

Third-party asset balances at the end of the fourth quarter of 2007 were $215.1 billion or $9.8 billion higher than at September 30th of 2007. This increase is comprised of approximately $11.9 billion in additional net client fundings and paid-in-capital, offset slightly by a decrease of approximately 2.1 billion in market depreciation.

In the fourth quarter of 2007, we had another strong new business development quarter with new business sales events totaling approximately $7.2 million in annualized revenue. This brings our total new business events to $35.1 million for the year, which represents a new record for the segment surpassing our previous annual record of $21 million, which we reached last year.

We are pleased with this accomplishment but more important to us is the continued market acceptance of our solutions and the support for our strategic direction that this represents. We are confident that we are heading in the right direction that serves the broader needs of the Investment Managers market and these record events provide validation for us.

In 2007, we were focused on several areas and themes. From a market standpoint, all new business we acquired we did so with an eye towards our strategy of providing total operational outsourcing and the ability to transition to that higher value proposition model.

Additionally, we started to push our solutions more globally by signing on several new European-based clients. Our growth continues to be driven by our clients’ emerging needs and assuring that we execute and deliver on these needs. As the market becomes more complex and Investment Managers strive to compete and improve their business, they are looking for more integrated solutions. To that end, we feel that we are well situated and 2007 marked the year of progress towards this goal.

As we look to 2008, we will continue our progression on what we have started. Our focus and direction remain the same and we’ll continue our emphasis on our three broad initiatives of total operational outsourcing, global expansion, and executing on demand for current solutions. I will now turn it over for any questions you may have.

Question and Answer

Operator

Thank you, sir. [Operator Instructions]. I am showing no questions at this time. Sir, you may proceed.

Prepared Text

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

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

Kathy C. Heilig - Chief Accounting Officer, Controller

Thanks, Al. Afternoon everyone, I have some additional corporate information about this quarter. The fourth quarter cash flow from operations was $95.6 million or $0.48 per share. The fourth quarter free cash flow was $67.3 million or $0.34 per share. And year-to-date cash flow from operations, $361.5 million. Fourth quarter capital expenditures excluding capitalized software was $10.6 million.

Capital expenditures for 2008, again excluding capitalized software, are expected to be between $25 million and $30 million. The tax rate for the fourth quarter was 36.7% and the annual rate was 36.6%. This compares with a fourth quarter 2006 tax rate of 35.1% and an annual 2006 tax rate of 34%. The expected tax rate for 2008 will be somewhere between 37% to 38% but will vary by quarter.

The accounts payable balance at 12/31 was $8.7 million. We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that’s the financial information presented in our release and on this call is unaudited.

Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements here in as a result of future development. You should refer to our periodic SEC filings for a description for various risks and uncertainties that could affect our future financial results and please feel free to ask any other questions that you may have.

Question and Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Robert Lee from KBW. Go ahead please.

Robert Lee - Keefe Bruyette & Woods

Thanks. Actually, I have two questions. First one is a quick one for Joe, I wanted to ask, when you talked about the one-time fees, was that $7 million for the quarter or for the year?

Joseph P. Ujobai - Executive Vice President

That was $7 million for the quarter.

Robert Lee - Keefe Bruyette & Woods

And just so we can sort of frame that is, is it possible generalized, what kind of a normal sort of quarter would look like, sort of be $2 million or $3 million of fee?

Joseph P. Ujobai - Executive Vice President

Yes. That's about right, $2 million to $3 million.

Robert Lee - Keefe Bruyette & Woods

Okay. And follow-up question is if I think back towards, I guess difficult markets back in '01, '02, company had a lot of leverage you were able to pull on the expense side to sort of offset some pressure on revenues of fund. Do you feel… and who knows if we are not, but if we were to enter into a tougher revenue environment because of difficult markets, they stay with way for a while, I mean do you have the same levers to pull? Could you give us a sense of where, to what extent, you think you can do that and also toward expenses having to continue invest in building out these new platforms maybe limit your stability to pull over levers?

Joseph P. Ujobai - Executive Vice President

And that question is for who?

Robert Lee - Keefe Bruyette & Woods

For everyone it is, Dennis, I guess, if he wants to answer it. You do the shots [inaudible]?

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

It’s Al. There is always some levers, but we don't have a tendency to bankrupt the short run, I mean the long run for the short run. So, we really are pushing very hard and it continues the transformation in our company. And but we do have some quite natural, I wouldn’t call them levers, but quite natural, but the things that dampen that and one is our comp structure because it's all based around goals that you make and if you don't make the goals, the comp goes down and our incentive comp is a very large portion of our overall comp. That’s certainly one of them. And then we've got a lot of outsourced providers and so, we really do everything possible not to have any layoffs or risks where we call them because it kills morale and it takes years to overcome those, but we do have an enormous number of outsource providers and we go there first. So, we do have levers, but it's… we hope it's not the sort of thing doesn’t continue for a very long time.

Robert Lee - Keefe Bruyette & Woods

All right. Great, thank you.

Operator

Thank you. [Operator Instruction]. I'm showing no further questions at this time. You may proceed.

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

Okay, so, thank you all, and despite some of the external uncertainties that we face, we feel our transformation has been steady and it will continue to be steady. And while we have a lot yet to accomplish, we do continue to make really important strides. And our new solutions are making our clients businesses and lives better. And we are encouraged by their interest in these new solutions. And so we remain very excited about what we're building. And we are executing our transformation, and we look forward to deliver in the potential that we believe is there. So, I'm going to conclude this now. And give you… open the floor for any other question might come to you while before we close off. So, take a minute and think about that, and then we'll say good afternoon.

Operator

Thank you, sir. [Operator Instruction]. I am showing no questions sir.

Alfred P. West Jr. - Chairman of the Board, Chief Executive Officer

Well, thank you all for your attendance today. And we appreciate that and have a good afternoon. Thank you.

Operator

Ladies and gentlemen, 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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Source: SEI Investments Co. Q4 2007 Earnings Call Transcript
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