SEI Investments Company (SEIC) Q1 2019 Earnings Call Transcript

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SEI Investments Company (NASDAQ: SEIC)
Q1 2019 Earnings Call
April 24, 2019 , 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

And ladies and gentlemen, we do appreciate your patience. And welcome to the SEI First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.

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

Alfred P. WestChairman and Chief Executive Officer

Thank you and welcome, everybody. 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’ll start by recapping the first quarter 2019, and then I’ll turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results of their segments. Then finally, Kathy Heilig will provide you with some important companywide statistics. As usual, we’ll feel questions at the end of each report.

And so let me start with the first quarter 2019. First quarter earnings decreased by 18% from a year ago. Diluted earnings per share for the first quarter of $0.73 represents a 15% drop from the $0.86 reported for the first quarter of 2018.

We also reported a 1% decrease in revenue from first quarter 2018 to first quarter 2019. These deficits in earnings and revenues from 2018 to 2019 are mostly due to the carryover effect of the downturn in the capital markets during the fourth quarter 2018. Also contributing to deficits is an increase in our tax rate from first quarter 2018 to first quarter 2019. Dennis will elaborate on these effects.

And also during the first quarter 2019, our non-cash asset balances under management increased by $12.7 billion. At the same time, LSV assets under management increased by $7 billion. These increases in AUM were primarily due to market appreciation and we’ll feel the effects of these increases next quarter.

In addition, during the first quarter 2019, we repurchased approximately 1.7 million shares of SEI stock at an average price of $51.47 per share. That translates to $88.8 million of stock repurchases during the quarter. Finally, in the first quarter, as part of the investments we make to create growth, we capitalized approximately $9.7 million of the SWP development and amortized approximately $11.7 million of previously capitalized SWP and IMS development.

First quarter 2019 sales events, net of client losses, totaled approximately $6.2 million and are expected to generate net annualized recurring revenues of approximately $1.2 million. Clearly, we are not satisfied with this quarter sales results, which were primarily affected by the continued rollover of institutional business away from US corporate DB plans.

As a company, we have very active sales teams and a lot of activity. We’re confident that with our current sales pipeline, we should regain our sales events throughout the rest of the year. Our unit heads will speak to their specific sales results.

Now, this concludes my formal remarks. So, I will turn it over to Dennis to give you an update on LSV and the investment in our new business segment. I’ll then turn it over to the other business segments. Thank you, Dennis.

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

Thanks, Al. Good afternoon, everyone. I’ll cover the first quarter results for the investments in new business segment and discuss the results of LSV Asset Management.

During the first quarter 2019, the investments in new business segment continued its focus on the ultrahigh net worth investors segment through our private wealth manager group and additional research initiatives, including the hosting area. During the quarter, the investments in new business segment incurred a loss of $2.9 million, which compared to a loss of $3.2 million during the first quarter 2018. This improvement reflects the growth of our private wealth management business, offset by other areas of investment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership ventures during the first quarter. LSV contributed $37.3 million in income to SEI during the quarter. This compares to a contribution of $40.6 million in income during the first quarter of 2018.

Assets during the fourth quarter totaled approximately $7 billion. LSV experienced net negative cash flow during the quarter of approximately $350 million, which was offset by market appreciation. Revenue for LSV was approximately $120.9 million and performance fees were minimal.

Our effective tax rate for the quarter was 22%. And as you recall, our tax rate last year for the first quarter was 11%. And for fourth quarter 2018 was 19%. So, that tax benefit we picked up is not carried over year-to-year now or quarter-to-quarter. An item of note for the company, during the quarter, we recorded severance expense of approximately $4 million. This is all reflected in corporate overhead.

I will now take any questions.

Questions and Answers:

Operator

(Operator Instructions) First question will come from the line of Chris Donat with Sandler O’Neill. Please go ahead.

Christopher DonatSandler O’Neill — Analyst

Hey. Good afternoon, Dennis.

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

Hey, Chris.

Christopher DonatSandler O’Neill — Analyst

Just one clarification question on your balance sheet. There’s a new line item here for operating lease right-of-use assets. Could you just give us a little explanation of what that is?

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

It’s a new accounting rule that went effect with January 1st, and really every company has to deal with this. Familiar — for a lot of companies, it will be a fairly complex rule. For us, it’s fairly straightforward. It represents the liabilities on our future lease agreements on our facilities that we rent. And so the new accounting rule requires you to put those liabilities and then the asset related to those liabilities on your balance sheet. That’s kind of a layman’s quick explanation.

Christopher DonatSandler O’Neill — Analyst

Okay.

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

So, we will file the Q tomorrow and there’ll be more information in the footnotes of the Q. But you’re going to see that across kind of all your clients or all your — all the firms you cover.

Christopher DonatSandler O’Neill — Analyst

Yeah. Understood. And then if I, at the risk of asking a forward-looking question on expenses, as we think about the — I will see what the answer is but I’ll ask the question.

Alfred P. WestChairman and Chief Executive Officer

He might have just got it.

Christopher DonatSandler O’Neill — Analyst

If I look at the $279 million — or $297 million of expenses for the quarter and back out $4 million of severance, is that a reasonable way to think of a quarterly run rate? Is there anything significant you’d expect positive or negative coming forward here?

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

No, I think — well, one thing, some of the severance we incurred this quarter, we really want to actually even start to feel the run rate of that expense benefit until late next quarter. And I’d say, really fully in the third quarter. So that’ll help us going forward a little bit on the expense side.

At the same time, we have new things we want to get moving on and continue to in some cases accelerate. So, some of that will get offset by some of the newer things we’re working on. I think as a baseline, this quarter’s, when you back out that severance numbers, it’s pretty good. We — I think that — yeah, I hate to pat ourselves on the back on occasion, but we did a pretty good job of kind of containing things coming out of fourth quarter in the first quarter. Those quarter-to-quarter comparisons are pretty good. And if you even go back to third quarter, before we — before any of us really foresaw what December was going to bring, even that comparison is pretty good. So, I feel like it’s a good run rate going forward. We are — but we’re certainly not going to not do something that we think is strategically valuable to us and is going to present future opportunities regardless of the expense impact.

Christopher DonatSandler O’Neill — Analyst

Okay. And then just lastly, as I think about comp though, with a low-level of sales events you’re not going to be accruing compensation for much on the sale side, right?

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

Correct. So I mean, one thing that we hope will have is expense pressure from sales compensation and we certainly expect to have that.

Christopher DonatSandler O’Neill — Analyst

Okay. That’s it for me.

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

That’s kind of the one variable. Thanks, Chris.

Operator

(Operator Instructions) And speakers currently we — one moment speaker. We will go directly to the line of Josh Schwartz. Please go ahead Josh.

Josh SchwartzCJE Investments — Analyst

Yeah. Hi. So the report says while our sales events for the quarter were down, there’s new sales like typically activities (Technical Difficulty) which are robust, not reflected in the quarter. Just wanted to know if you can talk about were these sales events are closed in April? Or it just seems to contradict a little bit what was said sort of later that Alfred West said that he said, it should translate. But then sort of this — the first paragraph mentions sort of this positive event that happened after the quarter end. So if sort of there’s some breakdown on what was — what you guys meant by that?

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

Yeah. I think that, I mean the macro comment on sales is that the sales event — the net sales numbers we published in our earnings release, that’s reflective of the first quarter’s sales activity. Al’s comment on the robustness is really about the — our pipelines are really strong. And the first quarter really is a reflective of the level of sales activity we’re engaged in, nor is it reflective of the size of the opportunities that we have available to us. So, we feel pretty good about how each of the unit heads will speak to their specific business lines around that topic. But that’s the kind of delineation between that, those two comments. Is that clarified to you?

Josh SchwartzCJE Investments — Analyst

Yeah, sure. That’s good.

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

All right. Great. Thanks.

Operator

(Operator Instructions) And speakers, no questions in queue at this point. Please do continue.

Alfred P. WestChairman and Chief Executive Officer

Thank you, Dennis. I’m now going to turn it over to Steve Meyer to discuss our private banking segment. Steve?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Thank you, Al. For the first quarter 2019, revenues for the segment totaled $118.3 million, which was down 3.2% as compared to our revenue in the first quarter of 2018. This year-over-year revenue decrease was due primarily to lower one-time revenues, revenue associated with lost clients, along with the decline in our asset management revenues. Our quarterly profit for the segment of $7.3 million decreased $2.7 million as compared to the first quarter 2018.

This decrease was mainly driven by our decline in asset management and estimated fee one-times. Our first quarter profit is flat as compared to our profit in the fourth quarter of 2018. And turning to sales activity for the quarter, we closed $1.2 million in gross processing recurring sales events and $3.2 million in one-time events. During the first quarter, we signed an SWP agreement with Hills Bank and Trust, an SEI client since 2013. Hill’s Bank and Trust is scheduled to migrate their existing book of business currently on Trust 3000 to the SEI Wealth Platform in the first half of 2020. While our sales results are not as robust as we would have liked in the quarter, we continue to see strong market activity and our pipeline is strong and growing. We feel optimistic about the growth opportunities we have ahead of us.

On April 1st, we achieved the significant milestone by successfully converting our 39 SEI Wealth Platform client, TIAA Bank, a longtime SEI client since 2001. TIAA migrated all of their business on Trust 3000 to the platform as part of the firm’s commitment to employ a cutting-edge technology infrastructure that meets present and future needs, and delivers a seamless client and employee wealth management experience.

This conversion is significant for SEI for a couple of reasons. First, TIAA becomes one of our largest clients processing on the SEI Wealth Platform. Second, the conversion of this large client will help us scale our US service operations and technology infrastructure even further. The conversion went very well, and we are looking forward to a long-term relationship with this valued client partner and the opportunity to expand our relationship with them.

Our asset management distribution business experienced slightly positive cash flows as of March 31st. During the quarter, our AMD business signed two new strategic partners in the US. While one of these partners will be consuming our managed account solutions, both of these relationships are new to our manager research platform. As an update on our wealth platform backlog, our total signed but not installed backlog for SWP is approximately $33.3 million in net new recurring revenue.

Now for the long awaited update on Wells Fargo. All of our conversion activity continues and we continue to work closely with Wells on this project. During this quarter, we worked with Wells to finalize dates for the SWP implementation. Wells has finalized the implementation dates and has divided the implementation into four tranches.

The plan is to install the initial phase of accounts targeted for May of 2021, followed by the next phase in November of 2021. This will represent approximately 25% of the accounts. The remainder of the business will be implemented in May of 2022 and October of 2022, so all accounts are targeted to be implemented under SWP by the end of 2022.

As we look to the rest of the year, as a reminder, our areas of focus for 2019 are, first, growing our business globally. Second, monetize our investment in SWP. Third, implement our backlog of sold yet to be installed clients. And fourth, expand our markets and solutions to provide further growth.

We will continue to focus on these main themes of growth while navigating the headwinds we mentioned on our last quarter’s earnings call , primarily the headwinds of previously announced lost business, which — the remainder of which will migrate out over the remainder of the year. We will manage our expenses judiciously as we continue to forge forward with our growth initiatives.

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

Operator

(Operator Instructions) We’ll go directly to the line of Glenn Greene with Oppenheimer. Please go ahead, sir.

Glenn GreeneOppenheimer & Co. — Analyst

Thanks. Good afternoon, Steve. How are you?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Good. How are you, Glenn?

Glenn GreeneOppenheimer & Co. — Analyst

Good. So just on the Wells Fargo. That’s helpful to get the timing and clarity on that. Is there any change in the scope of the work that you’re going to be doing with Wells, or is it kind of what you thought it would be from the get-go just now we’ve got clarity on the timing?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

I’d say it’s — as far as the book of business is, it’s what we believe and what we thought it was going to be. I think it’s just that it’s a little bit different in how the tranches will convert and obviously, the timing is finalized. The only other thing that might impact is, I think, everyone has probably seen that Wells is selling a part of their business, the retirement business. Those accounts are on our Trust 3000 system right now and obviously, Principal has bought them. So, there is a chance that they would come off. But we are engaged with Principal right now, talking about potentially extending with them but that’s early in the process.

Glenn GreeneOppenheimer & Co. — Analyst

Is Principal an existing client?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

They are not.

Glenn GreeneOppenheimer & Co. — Analyst

They’re not. And then the broad commentary at the beginning from Al and Dennis was asked the question as well about the sales activity and sort of being disappointed in the sales activity in the quarter but kind of robust activity. Is that sort of hold through for private banking and Trust as well and that we should start to see an improvement in sales activity over coming quarters?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Yeah. So, I would say we’re disappointed, the level activity does not measure the results. But in this game, the results matter. So, we’re disappointed at that. But I would say with the activity I see, I would expect a higher level of sales going forward.

Glenn GreeneOppenheimer & Co. — Analyst

And any meaningful client losses that impacted overall net sales results in the quarter?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

No.

Glenn GreeneOppenheimer & Co. — Analyst

Okay. Great. Thank you.

Operator

And next in queue we will go to the line of Robert Lee with KBW. Please go ahead.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Great. Thanks. Excuse me. Good afternoon, Steve.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Good afternoon, Rob. How are you?

Robert LeeKeefe, Bruyette, & Woods — Analyst

Good. Thank you. A couple of quick questions. First of all, I apologize, the new sales events was — did I have the numbers right? Is it $2.5 million in total, but $2.3 million of that is one-time?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

No. It’s — $1.2 million was gross.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Okay.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

$3.2 million was one-time. If you look at our net recurring, it’s relatively flat. And if you look at net recurring with the one-time, it would be around $2.93 million.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Okay. Great. Okay. I guess, the question I have is, maybe is more on the — well, related to HSBC. I mean, I guess earlier this month or so ago, it looked like they hired Aladdin for a bunch of their global, for some of their global wealth management platform. So, I’m just kind of curious how that does or doesn’t affect their relationship in the UK or some of the asset management programs you distribute through HSBC?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Thanks, Rob. It doesn’t affect at all. As a matter of fact, we were well aware of them looking at Aladdin. We utilized the Aladdin risk system in our own asset management area. We actually sat with HSBC and helped them through the process. This is a feature functionality product that they’re using for their risk side, which has no impact to us either on the asset management side or the processing side.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Great. And then maybe if I could one last question. In the quarter, I mean, looks like the expenses came down in a pretty decent amount from where they had been trending at least over the past year or so. Is there anything within the quarter? Maybe was just slower sales events. Anything in the quarter that we should be thinking that this is kind of the right run — right, the proper run rate to kind of set from here for expenses in the private bank segment? And then — or is there any kind of onetime-ish benefit?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

So, I’d say a couple things. One, to Dennis’s comment, I think we all did a pretty good job looking at the headwinds we had ahead of us in managing expenses across the company. And I think that’s most reflective of what you’re seeing.

Second, yes, obviously there is lower sales comp. But I would say, going to Dennis’s comment again, I’m hoping that number for sales comp increases dramatically for the rest of the year. That would be my hope.

Robert LeeKeefe, Bruyette, & Woods — Analyst

So, this is a good enough kind of setting a run rate type of number, the 1.10?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Yeah. I’d say so, Rob. Remember what I always say, I know you guys don’t like it. I don’t manage expenses quarter-to-quarter. We are looking at the headwinds, but obviously, as we grow this business and that is my primary focus, growing the business while we have to manage the expenses during headwinds. While my focus is on growth, if I see investment we have to do or an uptick expense to prepare us for growth, I will do that. So, what I’d say it’s a good run rate for now looking ahead. I would not be surprised that as we grow, when I see the need for an investment, I would make that an expense or add that expense.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Great. Thanks, Steve. Thanks for taking my questions.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Sure. No problem.

Operator

Next, we will go on the line of Chris Shutler with William Blair. Please go ahead.

Christopher ShutlerWilliam Blair & Company — Analyst

Hey, Steve. Good afternoon.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Hey, Chris. How are you?

Christopher ShutlerWilliam Blair & Company — Analyst

Good. So, Steve, you’ve had, I think at least a few months now at the helm of the private banks business. Just any kind of bigger picture updates on strategic direction where you go-to-market, et cetera versus how you’ve talked about historically?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Yeah, Chris. I don’t think there’s any — I’m not going to change the story yet. I’m still getting my arms around the business, while I’m certainly more up to speed than I was back in November. Our focus and I’ve been saying this, as we’ve had meetings along the way, continues to be on growth.

And I think we have a great team of people. We have a great technology and a great solution. I think we have a terrific client base and a terrific prospect base. And now we have to go execute on it. I am looking at everything across how we sell the messaging and I think we have a very good story and a good approach to the market.

I think there are ways we can make it easier for people to do business with us, whether that be componentizing the system in some regard or having more of a lean-in strategy. That could be part of it. But I think that will all start to unveil itself as we go through the year.

Chris ShutlerWilliam Blair — Analyst

Okay. On the Department of Interior contract, is that officially no longer with us yet?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

No, it’s still with us.

Chris ShutlerWilliam Blair — Analyst

It is still with you? Do you have a conversion date?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

We do. And I’d say that the initial thought is that this will come off during the remainder of the year. At least that’s what the current plan is.

Chris ShutlerWilliam Blair — Analyst

Okay. Let’s see. And then on the Trust 3000 side, in terms of attrition, anything to point out in terms of, not in the current quarter but future quarters, your clients at risk, that kind of thing that we should be aware of?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

No. Chris, what I would say is, obviously, if we had a loss or a termination, we would certainly as we have in the past, like we do with LSV. Let you know that it would be reflective in our sales events. But what I’d also say, as we go through this process over Trust 3000 and as we look to move those clients and sell them into SWP, while our intent and our hope is that we will move 100% of them over, as history has pointed out, that probably will not be the case, either due to a strategic fit or financial fit, SWP might not be the answer for them.

But what I would say with that is, none of the clients in that realm are in the double digit significant million dollar range. That would just be inaccurate to say that. I’d say that we are engaged with all of our clients and our hope is that the majority of them will move over to SWP.

Chris ShutlerWilliam Blair — Analyst

Okay. That’s helpful. And I guess, lastly on that, Steve, just any thoughts on kind of forcing the issue a little bit more around moving Trust 3000 clients to SWP, is that in discussion at this point?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Well, that’s one option but that’s not the primary option I’m looking at. What I’m looking at right now is how do we retain these clients and grow them. We, as I said before, we have a number of platforms across our wealth technology and processing businesses here that I think could satisfy the needs of many of these customers. While SWP, I think is the fit for most of our Trust 3000 clients, there could be other options for them. I think before we go to the point of, hey, we’re going to have a forced march, I think we would exhaust all our opportunities to service those clients.

And if you look back, it kind of relates a little bit to your previous question. We’ve actually had some Trust 3000 clients over the past several years, deconvert off only to come back. So, that system, while it’s not SWP, it still is very strong, mature and solid system in the industry. So, I think it would be very premature of us right now to say it’s a forced march time.

Chris ShutlerWilliam Blair — Analyst

Okay. Thanks a lot.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Sure.

Operator

Next, we will go to the line of Tom McCrohan with Mizuho. Please go ahead, Tom.

Thomas McCrohanMizuho Securities — Analyst

Hey, Steve. Just a quick question on the new — two new asset manager (sic) (management) distribution partners. Can you give us a little more color and background on them?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Well, Tom, we really don’t like to get into specific clients. There’s a possibility we might put out a press release on them, on their expansion. But needless to say, we’re happy that we’ve expanded our solutions set with them and very happy that we’ve expanded our manager research platform, which is one of our new platforms that we’ve identified as part of our future growth.

Thomas McCrohanMizuho Securities — Analyst

And have you disclosed how much revenues in the segment is from the asset management distribution?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Yes.

Thomas McCrohanMizuho Securities — Analyst

Okay. And can you give us an update on how that’s going to be trending in your expectations for next couple of years in terms of increasing as a portion of the mix and kind of growth rates?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Well, our hope is that the investment processing will continue to grow along with our asset management. As far as sitting and giving kind of a forward-looking view of how that will split, that’s — I’m not going to do that, Tom.

Thomas McCrohanMizuho Securities — Analyst

Okay. That’s all I had. Thank you very much.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Sure.

Operator

Next, we’ll go to Patrick O’Shaughnessy with Raymond James. Please go ahead.

Patrick O’ShaughnessyRaymond James — Analyst

Hey. Good afternoon, Steve. Curious if you can give us an update on — if there were any Trust 3000 recontracts during the quarter? And then more broadly, how is that competitive landscape looking like? Obviously, for a few quarters, there you had a low-cost alternate that was trying to come in and pick off some of those Trust 3000 clients and it seems like maybe that has ebbed a little bit here?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

So, there were no Trust 3000 recontracts during the quarter. That’s just — the only significance in buying that was there was just no recontracts during the quarter. There are probably less than 10 contracts that are up this year, but we are obviously engaged with them fully.

And as far as competitive landscape, the competitive landscape stays the same. I’d say, we’ve been more successful in floating back on the low-cost alternative, but that’s not to say they’ve gone away, they’re still there. So, there are still people out there that are trying to win business via price.

Patrick O’ShaughnessyRaymond James — Analyst

Great. Thank you.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Sure.

Operator

Sir, we currently have no additional questions in queue at this time. Please do continue.

Alfred P. WestChairman and Chief Executive Officer

Thank you, Steve. Our next segment is Investment Managers. And Steve will also discuss this segment. Steve?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Thanks, Al. For the first quarter 2019, revenues for the segment totaled $104.6 million, which was $7.8 million or 8% higher as compared to our revenue in the first quarter of 2018. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion.

Our quarterly profit for the segment of $35.6 million was $2.1 million, or 6.2% higher as compared to the first quarter of 2018. Third-party asset balances at the end of the first quarter of 2019 were $586 billion, or 6.4% higher as compared to the asset balances at the end of the fourth quarter 2018. This was due to an increase in assets due to net new client fundings of $18.1 billion, as well as market appreciation of $15.6 billion.

And turning to market activity. During the first quarter 2019, we had a strong sales quarter with net new business events totaling $10 million on recurring revenues, as well as recontracts of $4.8 million in recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new name business and expansion of existing wallet share with current clients.

These events include the following highlights. Successful wallet share expansion across existing alternative clients, with new events concentrated in private debt and credit business lines. In our traditional market unit, a significant Middle Office Service mandate with a $25 billion West Coast manager. This mandate was one in a competitive process in which all of our major competitors participated.

In Europe, we continue to win new mandates from both existing and new clients related to funds domiciled in Ireland and Luxembourg, particularly private equity and private credit strategies. We continue to make progress promoting our regulatory platform with existing clients, in particular, regulatory reporting and investor tax compliance.

We continue to see strong demand for our solutions in the market and continue to expand our markets and solutions to stay ahead of our clients’ emerging needs and to provide sustainable growth. Our pipeline remains strong and we are optimistic of our continued growth opportunities.

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

Operator

(Operator Instructions) And we will return back to line of Robert Lee with KBW. Please go ahead.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Thanks. And, Steve, I can’t let you go without the standard question of the one but not yet converted backlog.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Backlog?

Robert LeeKeefe, Bruyette, & Woods — Analyst

Yeah.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

So the backlog at 3/31/19 was $37 million. We actually had a good implementation quarter and actually it was a record as far as deals sold in Q1. 50% of them already converted during the quarter. I think one of the major reasons for that was, as I’ve mentioned, we had a pretty solid cross-selling and wallet share expansion and obviously that revenue comes in quicker, which is good news than new sales.

Robert LeeKeefe, Bruyette, & Woods — Analyst

And I’m just curious, I mean, if we think maybe not just this quarter but over, say the past year since you acquired the Family office business. I mean, is there any way to kind of give me some sense of scale of what that’s contributed to the — your new business sales? I mean if last year, your total new business was — I’m not sure what it was, I’ll say it was $50 million or so, that’s accounting for a quarter of it or half. Just trying to get a sense of the magnitude of the kind of contribution?

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

I’d say ongoing right now it’s in the 10% to 15% of our sales, but we’re obviously looking to grow that.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Great. Thank you very much.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Sure.

Operator

Next, we’ll go to Chris Shutler with William Blair. Please go ahead.

Chris ShutlerWilliam Blair — Analyst

Hey, Steve. My question was answered. Thanks.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Okay. Sure.

Operator

And speaker, currently we have no additional questions in queue at this time. Please do continue.

Alfred P. WestChairman and Chief Executive Officer

Thank you, Steve. Our next segment is Investment Advisors. Wayne Withrow will cover this segment.

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Thank you, Al. In the first quarter of 2019, we focused on rebuilding the momentum we lost in the December market correction and worked hard to control expenses in this revenue environment.

The first quarter, however, was significant and that it marks the completion of the migration of our advisors onto the SEI Wealth Platform. First quarter revenues totaled almost $95 million. These revenues were down slightly more than $4 million in the first quarter of last year.

This decrease was driven primarily by three factors. First, the 2019 balances reflected a significant shift in the money market products compared to last year’s first quarter.

The bright side of this shift is that we stand to benefit when the money market balances find their way back into equity and fixed income products, something we began to see in March. In addition, both our average assets under management and our average basis points earned on assets were down. This latter point was primarily due to higher money market balances and to a lesser degree, the growth of our lower fee ETF portfolios.

Expenses were essentially flat compared to the first quarter of last year, but were down over $1 million from the fourth quarter. Many factors contributed to this decrease, but a large portion of the savings arose from a decrease in technology spending.

Our profits declined a little over $4 million from last year’s first quarter, directly following our decreased revenue. Assets under management was $65.6 billion at March 31st, an increase of $1.1 billion from March 31, 2018. The increase was driven by market appreciation, offset in part by negative net cash flow

Of note is that while our point-to-point AUM increased, our average assets under management which is how we earn revenue actually decreased as compared to the first quarter of last year. This reflects lower starting valuations in the quarter following the market declines in last year’s fourth quarter.

During the first quarter, our net cash flow was a negative $448 million. Distractions caused by the migration and pressure from lower-cost passive products continued to put pressure on cash flow. We recruited 95 new advisors during the quarter, an increase over the 87 we recruited in the fourth quarter. Our pipeline of new advisors remains active.

With respect to the SEI Wealth Platform, we have completed the multi-year effort to migrate all of our clients onto the new platform. We now turn to helping advisors benefit from the new features of the platform and refocusing our sales force on attracting both SEI and non-SEI assets from our existing advisors. We also intend to step up our efforts to recruit new advisors to our best-of-breed platforms.

In summary, the first quarter reflected the hole we found ourselves in, following the market declines of the fourth quarter and the impact on sales focus caused by the migration. However, the bigger story is that our migration is complete and this sets up our future.

I welcome any questions you have.

Operator

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

Robert LeeKeefe, Bruyette, & Woods — Analyst

Hi, Wayne. How are you?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Hey, Rob.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Just kind of curious and I’m sure it’s hard to be too precise, but with the sales force being able to shift toward more advisor acquisition so to speak, what’s kind of the typical from — is there any kind of typical timeframe from when you first kind of engaged in this, call it serious discussions to when an advisor actually starts kind of taking on your products or moving to your platform? Is it typically like a six months process, a year? I’m just trying to get a sense of maybe with the refocus of the sales force, when we could start seeing that be reflected in, say, the advisor account?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Yeah. I would say, generally, the sales cycles is about three months to nine months. And I think it accelerates once we get an advisor on the platform. They might start off slowly, then they accelerate through the process.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Okay. And then, I guess maybe as a follow up. Now that you’ve got everyone on the platform and I’m assuming as part of the marketing was, you mentioned, now you can focus on getting non-SEI assets on the platform. Can you kind of give us a sense like, at least based on maybe preliminary discussions, kind of what’s involved?

It would seem to be a much more complex thing to get someone to move all their assets over maybe because they’ve got to shift books of business and get approvals and whatnot. So, how are you thinking about those assets kind of coming into the fall? Is that something we are going to — maybe we’ll see in 2020 or 2021? And because they just take so much lead time, what’s the right way to think of that?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Yeah. I think you are going to see it accelerate throughout this year to a point where it may be meaningful next year.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Okay. And I assume that, that would not show up in your AUM and say, obviously, decent revenue, we won’t be in the AUM number?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

It is not in the AUM number.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Right. Okay. That was it. Thank you.

Operator

Next, we will return back to line of Patrick O’Shaughnessy with Raymond James. Please go ahead, sir. Mr O’Shaughnessy, we do have a live line for you.

Patrick O’ShaughnessyRaymond James — Analyst

Apologies about that. I had myself on mute. So, Wayne, can you talk about some of the specific steps that you’re taking to reinvigorate your sales? So, is it as simple as maybe your sales people were spending 25% or 50% of their time, kind of handholding during the conversion. And now they can spend 100% of their time trying to get back out their (ph) closing sales?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Yeah. I think the combination of handholding during the conversion, and I think it’s also as the advisors migrate, it’s like with any new application, there’s a learning curve and disruption caused by that. And when the clients are disrupted, they call the — either their service person or their sales person and they say, I’m having this issue. Can you work with me on this? And then it may be — a lot of times, the training issue. Can you help me through how I’m supposed to do this? So instead of talking about, hey, do you have any cases we can go and gather new assets, we’re talking about, I don’t understand how online disbursements work, despite the fact that we train them as hard as we can.

Patrick O’ShaughnessyRaymond James — Analyst

Got it. Okay. That makes sense. And then kind of a bigger picture question. There has been a lot of M&A activity in the general space. Obviously, Orion has been pretty busy, investment has been pretty busy. How well do you feel like your solution set is stacking up against some of your competitors who have been pretty busy on M&A front?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Yeah. I think our solution stack up very well against them. And what makes us very different is we are an end-to-end solutions. So, we include all the aspects of the platform an advisor needs to run their business, integrated and in one place. And what’s significant is with a single point of accountability. So, no, you could you talk about Orion if you want, which is a great platform. And we integrate to Orion. But if you have a problem and you have an Orion in their client portal, do you call Schwab or do you call, Orion?

If you have problems with performance measurement, you call your performance measurement vendor. If you have a problem with your rebalancing software, do you call your rebalancing vendor or your fee vendor. How does that work? Well, all that is integrated into one place. And with us, you give us a call. And we can’t say it’s somebody else’s fault.

Patrick O’ShaughnessyRaymond James — Analyst

Got it. Okay. Thank you.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Can you call that one? Throat choked (ph).

Operator

And next in queue, we will go to the line of Chris Shutler with William Blair. Please go ahead, sir.

Chris ShutlerWilliam Blair — Analyst

Hi, Wayne. How are you?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

I’m great, Chris.

Chris ShutlerWilliam Blair — Analyst

Good. Just two questions. One is on the fee rate, which is down about 2.5 basis points over the last two quarters. Sounds like a lot of that is money market. So, should we expect to have a bounce back?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Yes.

Chris ShutlerWilliam Blair — Analyst

Okay. Yeah, that’s what I figured. Just want to be clear. And then the other one was just on the SWP, the fact that you’re through the conversion process. Is it fair to think that some of the resources which were used in your business in that conversion will be redeployed into private banks ?

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Well, if Steve had his way, yes. I think that we did have an externally talented and well-trained workforce and we’re one company here and we’re going to utilize those resources to promote what’s in the best interests of the company. So, I think that, that comment may be fair.

Chris ShutlerWilliam Blair — Analyst

Okay. Thank you.

Operator

And speaker, currently we have no additional questions in queue. Please do continue.

Alfred P. WestChairman and Chief Executive Officer

Thank you, Wayne. Our final segment today is the Institutional Investors segment. Paul Klauder will report on this segment. Paul?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Thanks, Al. Good afternoon, everyone. I’m going to discuss the financial results for the first quarter of 2019.

First quarter revenues of $80.1 million decreased 6%, compared to the first quarter 2018. First quarter operating profits of $41.4 million decreased 7% compared to the first quarter of 2018. Operating margin for the quarter was 51.6%.

Both revenues and operating profits were impacted by negative client fundings, currency translation, capital markets and one-time revenue recorded in Q1 2018. Quarter-end asset balances of $88.9 billion reflect a $3.7 billion decrease compared to the first quarter of 2018.

This decrease is driven by negative client fundings and currency translation. Net fundings were negative $3 billion for the quarter. This included approximately $3.6 billion in losses, which was primarily driven by two large defined benefit clients. The DB activity was the result of the continued turnover of this business across the industry through DB planned closures and terminations, as well as some clients that turned to passive management.

The unfunded new client backlog at quarter end was $350 million. New client signings for the quarter were $600 million. This was primarily diversified across new clients in endowment foundations and UK Fiduciary Management. Our new business focused on longer-term asset pools across all global market s are paying dividends for the business and our sales pipeline is strong.

Thank you very much. And I’m happy to answer any questions you may have.

Operator

(Operator Instructions) And we’ll go to line of Robert Lee, KBW. Please go ahead.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Great. Thanks. And how are you doing today?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Good, Robert.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Thanks. Just real quickly, I think you’ve all been mentioning that in this segment that I think you’ve suggested that maybe — and correct me if I’m wrong, over time you’re thinking that a high-40s margin is probably more sustainable. Am I thinking of that correctly? Or is — because you’ve been running 51 plus this quarter. Last year was around 51% for the year. Your expenses are down. So, how are you thinking about expenses and margins in this, given the top line pressure?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Yeah. Like all the other business leaders said, I think we did a very good job of managing expenses in Q1. One component of that is sales comp and I, like my colleagues, want to pay more sales comp going forward. So, that is directly tied to more revenue and so we’re optimistic that that’s going to happen in future quarters.

I think in fairness to the margins long term, yeah, they’re probably in the mid to high 40%, but that really kind of depends on our ability to continue to grow in not-for-profits and their ability to continue to consume alternative investments and continue to distinguish our offering, which is very distinguished in the marketplace.

The other thing we’ll look at is whether looking at properties or any other ways for us to get in an incremental market that we’re not in, whether that would be accretive to the business and that might have some margin impact. Nothing is on the table right now, but anything that kind of continues to differentiate our capabilities and our offerings, I think we’ll put on the table and evaluate that.

Robert LeeKeefe, Bruyette, & Woods — Analyst

And maybe as a follow-up. I mean, despite all the pricing pressures in the traditional business, I mean, at least fee raise remain pretty stable within a narrow band. And I know you’ve talked a bit in the past about how foundations endowments, some of the newer targeted segments have higher fees because they do more alternatives.

So if we think of this current quarter, you have three, some big withdrawals from large DB clients, maybe there was some — maybe some of that offset or from new foundations or other clients. How should we think of kind of the revenue trade-off between those? I mean, are you getting enough wins in the higher-fee clients to kind of at least offset as you think about the revenue attrition from the bigger clients?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Yeah. So the weighted average profitability of the 600 coming in is higher than the $3.6 billion going out from a percentage perspective, but the magnitude, obviously, with losing $3.6 billion is painful. And that was just kind of tied to two large investors that both are at the end of their life cycle and one European investor that decided to go to passive management.

So, I think that loss is definitely an exception as far as the magnitude. But what we see coming in the door, to the extent that it’s not-for-profit and their consumption rate is definitely equal to or higher than what is going out the door. Now, we do have a reality that we have some longer-term clients that might be at a five-year anniversary or a 10-year anniversary that might actually go out to bid pretty. We are pretty successful in retaining them when they go out to bid. But there might be some discussions that we have to do just because the competitive environment now is different than when we won them five or 10 years ago.

Robert LeeKeefe, Bruyette, & Woods — Analyst

And are there any kind of large known kind of mandate losses coming? Or is that, I’m assuming, that would be netted within your backlog? But I’m just kind of thinking if there’s anything large that we should be aware of over the next quarter or two?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Not that I’m aware of, and I’m good at knock on wood all day long.

Robert LeeKeefe, Bruyette, & Woods — Analyst

Okay. Thanks so much.

Operator

And next in queue, we will go line of Chris Shutler with William Blair. Please go ahead.

Chris ShutlerWilliam Blair — Analyst

Hey, Paul. Good afternoon.

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Hi, Chris.

Chris ShutlerWilliam Blair — Analyst

Just one quick one. Just the — can you just remind us how much of the AUM and/or revenue in your business comes from DB plans?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

AUM is probably about $38 billion and revenue is probably 42%, 43%, somewhere in that range. Not all the DB plans are on a path for termination. but if you just locked all the DB plans together, that’s what it would be.

Chris ShutlerWilliam Blair — Analyst

Thanks.

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Yeah.

Operator

Next in queue, we will go to line of Patrick O’Shaughnessy, Raymond James.

Patrick O’ShaughnessyRaymond James — Analyst

Hey. Thanks. So, building off of your previous comments, given some of the structural challenges that face this business and then presumably face some of your competitors as well. Do you think there is opportunity for industry consolidation here to kind of rationalize some economics and gain more scale? Or do you think it’s going to kind of stay with the current landscape?

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Yeah. I think there is definitely consolidation and that can come with just mergers and acquisitions. But also if you look at it right now, if you look at any directory, there’s 85 different firms that provide OCIO services. Some of those firms are not going to make it. They just are not going to be able to have the staying power for investment in people and technology and infrastructure to be able to make a profitable turn at this — in this concept. It’s easy to say you’re an OCIO firm. It’s hard to actually do it and operate it and operationalize it. So, we are one of the largest, as you know, and the investments we’ve made have been significant.

We think that when we have clients that go through a proper due diligence when we bring them to SEI, when we show them those capabilities vis-a-vis other firms, we really distinguish ourselves. So, I can’t imagine if we wake up 10 years from now because OCIO is going to grow. From a dollar cash flow perspective, they’ll still be 85 firms that are going to be in existence.

Patrick O’ShaughnessyRaymond James — Analyst

All right. Thank you.

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Yeah.

Operator

Speakers, currently, we have no additional questions in queue. Please do continue.

Alfred P. WestChairman and Chief Executive Officer

Thank you, Paul. I would now like Kathy Kathy to give you a few companywide statistics. Kathy?

Kathy HeiligChief Accounting Officer and Controller

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

First quarter cash flow from operations was $59.9 million, or $0.38 per share. And the first quarter free cash flow was $42.6 million. The capital expenditures for the quarter, excluding capitalized software were $7.2 million, which does include some of — about half of it is for expansion of our new facilities. And we project the remaining capital expenditures to be about $57 million, which does include $41 million related to the facility expansion. As noted in the release, the tax rate for the first quarter was 22.1%. The annual tax rate for 2018 was 17.6%. And our effective tax rate could fluctuate as a result of the timing of stock option exercises.

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 the financial information presented in our release and on this call is unaudited. In some cases, you can identify forward-looking information statements by terminologies such as may, will, expect, believe and continue or appear.

Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing of client migrations and implementations, the benefits we will derive from our investments in reorganizations, our ability to manage our expectations and scale our offerings, the demand for our products, the benefits we will derive as our clients shift investments among asset classes, the strength of our pipelines and growth opportunities, and our ability to execute on and the success of our strategic objectives.

You should not place undue reliance on our forward-looking statements as they are based upon the current beliefs and expectations of our management and subject to significant risks and uncertainties, many of which are beyond our control and are subject to change. Although we believe the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in our risk factors section of our Annual Report on Form 10-K for the year ended December 31, 2018, that was filed with the SEC.

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

Operator

(Operator Instructions) We’ll go to the line of Chris Donat with Sandler O’Neill. Please go ahead.

Christopher DonatSandler O’Neill — Analyst

Hi. Thanks for taking the follow up. Wanted to go back on one issue with Steve. And as we think about Wells Fargo and also TIAA and basically any client where you’re migrating from Trust 3000 to SWP, how should we think about the revenue progression? Because it seems like you will continue to generate revenue from the Trust 3000 component. I assume there’s also revenue tied to migration. And then once the migration ends, is there a drop-off as you convert to SWP? I mean, we know you converted 39 clients. So, I haven’t seen dramatic things in the revenue line so far. But just help us think about it.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

So, I’d say a couple things. As we’ve talked about in the past, typically the differential that we’ve looked at and targeted between Trust 3000 and SWP from recurring revenue is in the 20% to 30% range. Now, obviously, as we are going through the process, many of them have one times conversion implementation fees. That would drop-off, obviously, as they go to SWP, but then there would be that 20% to 30% target increase.

But also some of these have custom development and some projects that continue on, that would continue some of the one times. But I think maybe in general, what I’d say is think about it as Trust 3000 fee, plus implementation moving SWP with a 20% to 30% increase.

Christopher DonatSandler O’Neill — Analyst

Got it. Thanks, Steve.

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Sure.

Operator

And speaker, currently we have no additional questions in queue. Please do continue.

Alfred P. WestChairman and Chief Executive Officer

Thank you. So, ladies and gentlemen, while sales were below our standards in the first quarter, I remain encouraged by the direction our businesses are taking and the progress we’re making. While we face short-term headwinds, we believe that the recent changes we have made to our organization, along with the investments we’re making will help us benefit from all the changes taking place in our industry.

That concludes our presentation. Have a good day, and thank you very much for attending.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T teleconferencing center. You may now disconnect.

Duration: 57 minutes

Call participants:

Alfred P. WestChairman and Chief Executive Officer

Dennis J. McGonigleExecutive Vice President and Chief Financial Officer

Christopher DonatSandler O’Neill — Analyst

Josh SchwartzCJE Investments — Analyst

Steve MeyerExecutive Vice President and Head of Global Wealth Management Services

Glenn GreeneOppenheimer & Co. — Analyst

Robert LeeKeefe, Bruyette, & Woods — Analyst

Christopher ShutlerWilliam Blair & Company — Analyst

Chris ShutlerWilliam Blair — Analyst

Thomas McCrohanMizuho Securities — Analyst

Patrick O’ShaughnessyRaymond James — Analyst

Wayne M. WithrowExecutive Vice President and Head of Independent Advisor Solutions

Paul F. KlauderExecutive Vice President and Head of Institutional Group

Kathy HeiligChief Accounting Officer and Controller

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