SEI Investments Co (SEIC) 2017 Q2 法說會逐字稿

Ladies and gentlemen, we do appreciate your patience, and welcome to the SEI Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chairman and CEO, Al West. Please go ahead, sir.

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

I'll start by recapping the second quarter 2017, 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 company-wide statistics.

Now as usual, we will field questions at the end of each report.

So let me start with the second quarter 2017. Second quarter earnings increased by 13% from a year ago. Diluted earnings per share for the second quarter of $0.57 represents a 16% increase from the $0.49 reported for the second quarter of 2016. We also reported an 8% increase in revenue from second quarter 2016 to second quarter 2017.

Also during the second quarter 2017, our noncash asset balances under management increased by $10.2 billion. SEI's assets grew by $6.1 billion and LSV's assets grew by $4.1 million.

Finally, during the second quarter 2017, we repurchased approximately 1.3 million shares of SEI stock at an average price of $51.38 per share. That translates to approximately $64.6 million of stock repurchases during the quarter.

Also during the second quarter, we capitalized approximately $16.4 million of SEI Wealth Platform development and amortized approximately $12.8 million of previously capitalized SWP's development.

Also in the second quarter, we capitalized $3.6 million of IMS development.

During the second quarter, our sales events, net of client losses, were $24.4 million, which will generate $14.5 million of recurring revenue. Each of the segment heads will address their second quarter sales activity.

And as you are aware, we have been increasing the investment we are making in SWP and its conversion and service infrastructure. Now these investments are primarily aimed at preparing the platform to accept the Regions and Wells Fargo operations.

It's vitally important that we successfully convert these 2 banks. These installations will signal for the market that the platform can handle large Platform-as-a Service clients and even larger Software-as-a-Service clients. Recent discussions with other jumbo wealth management firms make it clear to us that these accounts will lead to other large opportunities.

We're also investing in the migration of our investment advisory clients to SWP. The advisory unit had a successful April migration, bringing over an additional $5.5 billion in assets and over 230 firms. In September, we will be converting an additional $10 billion in assets and over 800 firms.

Now new investments in the IMS platform are being made to enhance our competitive position and to support the installation of large new clients. Now these clients are both those we recently signed and those that are in the late stages of a sale.

We also acquired Archway Technology Partners during the quarter who holds a leadership position in the family office and ultra-high net worth markets.

As we have mentioned to you at our recent investor conferences, we still cherish organic growth. But going forward, we will use acquisitions to enter new adjacent market segments or to create momentum in existing market segments.

Now in the Institutional Investors segment, we are investing in the foundation and the endowment market segment, in the defined contribution market segment as well as other global market segment opportunities that bucked the downward trend occurring with U.S. corporate defined benefit plans.

In summary, we are investing in each of our business lines as they transform themselves to meet the changes in their marketplaces. And now these changes, while challenging in the short run, are full of new opportunities in the intermediate and long run. And we look forward to capturing those opportunities.

Now that concludes my remarks, so I'll now ask Dennis to give you an update on LSV and the investment in new business segments. I'll then turn it over to the other business segments. Dennis?

Thanks, Al. Good afternoon, everyone. I'll cover the second quarter results for the investments in new business segment, discuss the results of LSV Asset Management and a couple of items of note for the company.

During the second quarter, the investments in new business segment continued its focus principally on 2 areas: the ultra-high net worth investor segment and the development of a web-based investment service advice offering, coupled with the use of mobile technologies.

During the quarter, the investments in new business segment incurred a loss of $3.4 million, which compares to a $3.9 million loss during the second quarter of 2016. There has been no material change in this segment.

Regarding LSV, our earnings from LSV represented approximate 39% ownership interest during the second quarter. LSV contributed $36.3 million in income to SEI during the quarter. This compares to a $30.3 million contribution for the second quarter 2016.

Asset growth was approximately $4.1 billion during the quarter from both market appreciation and net positive cash flow.

Revenue at LSV was approximately $119.3 million, of which about 3.5% was performance fee related.

[Corporately], during the quarter, our tax rate was just over 32% compared to the 35% rate experienced during the second quarter of 2016. Similar to first quarter of 2017, the lower rate is due to the impact of the accounting change on recording the tax effect from stock option exercises. As we stated in April, this new rule will likely result in a more volatile tax rate quarter-to-quarter than we have previously experienced.

As you are aware, we completed the acquisition of Archway Technologies effective July 1, 2017. We've made available when we announced the transaction through an 8-K filing summary information covering the strategic rationale as well as financial highlights. Rather than going over those specifics, I will direct you to that 8-K. Steve will also cover questions about the business and the opportunities that presents for IMS and SEI when he presents.

I want to point out that we did borrow $40 million on our credit facility to fund the transaction, and that will show up on the balance sheet at the end of the third quarter. Our board's direction on the use of capital, however, has not changed.

I will now take any questions.

(Operator Instructions) And our first question will come from the line of Chris Shutler from William Blair.

Could you just quickly quantify the net flows for LSV and talk about their pipeline?

Sure. I mean, I can't really speak too much about their pipeline other than they -- it continues to be pretty solid. Their net cash flows are positive, just over $1 billion. That's a combination of new clients, new money from existing clients, offset by some lost assets. Then the rest is market appreciation.

Got you, okay. And then just more broadly on the investments in new business segment. At what point do you think we should -- I mean, when could we start modeling a revenue increase or expense decrease in that segment? Or is it just going to be 15 out the door per year for a while?

Yes. I mean, we try to really run that segment as an R&D arm, so we expect losses there. So I would keep kind of the modeling of that in the range it's in today. I wouldn't change that too much.

And next in queue, we'll go to the line of Robert Lee with KBW.

Just maybe back to LSV. Just curious, if I remember kind of in past cycles, they had gone through periods as they grew and strategies grew that they did start closing down some key strategies to capacity. Are there -- are they -- have they reached that point with any of their kind of big strategies? Or does it -- are there any kind of -- anything expected along those lines over the coming quarters?

No, they haven't -- I mean, their large cap strategies are open, and there's really not a capacity issue there. And they have had closed for a while some of their smaller cap, I'd say some of their more regional cap-limited products, but nothing -- there's nothing new there. And [we've heard] from them that there's anticipation of that happening in the future.

Okay. And I'm just kind of curious, is there -- maybe digging a little deeper on that, it'd just be interesting to get some sense of as their businesses evolve, kind of how much of their businesses may be coming from clients outside the U.S. I mean, kind of how global their own business has maybe gotten in the past couple of years?

Well, they've been pretty global for a while. In fact, in their early days, some of their early clients were actually non-U. S. institutional pension clients. So what I'd say, over the past 10 years, they've continued to diversify their client base globally in all regions, so Asia, Australia, North America, certainly in Europe. Now they've also diversified their product line from a global perspective. So while U.S. is still actually more dominant investment market for them, they have a good mix of regional products as well to complement that. It's pretty well diversified.

Great. And then maybe just one last one, if I can. Just kind of curious with the Archway, and my understanding debt is still super cheap. But given all the cash and liquidity you guys have, I'm just kind of curious about the thought to actually draw down on the line of credit to fund it when you have so much liquidity already.

Yes. That was really a combination of a couple of things: One, to make sure that folks, particularly on your side, knew that our capital utilization wasn't going to change. And two, on occasion, it actually is a healthy thing to use your facility from a, I'll say, relationship standpoint. So we see it as a -- we'll pay that down probably relatively quickly, but at least that's our plan. But I'd say a combination of making sure that we continue to do the things we've always done with capital but also helping our relationships in a way.

And next in queue, we'll go to the line of Chris Donat with Sandler O'Neill.

Might be stealing thunder from another segment presentation, but just looking at the consolidated income statement and the expense line for consulting, outsourcing, the professional fees up $5 million sequentially. Is there anything specific in there that we should be paying attention to, something that may be not recurring in nature or will last for a few quarters? Just since it also involves consulting stuff, it seems like it should be...

Yes. It's pretty well spread across all the segments, other than maybe institutional in that line. There is some onetime costs, professional fees related to -- that we incurred in the second quarter related to the Archway transaction. So those wouldn't be, say, recurring. Some of it is kind of back end of the ramp-up that, hopefully, we'll see over time post the Regions event and then certainly Wells that will come out. But I wouldn't say there's anything unusual. And it's also pretty well spread. So I think each of the units have their own business requirements that are reflected in that number.

And next in queue, we'll go to the line of Tom McCrohan with Mizuho.

So the magnitude of the transaction that you did this quarter, if you could just give us a sense for the cadence of deals going forward and kind of the size of deals that you're comfortable with.

Sure. Tom, sorry, we missed the very beginning of your comment. But I think I get the gist of it. I don't think we're in like a cadence mode here. That was -- so I don't see us just being like every quarter frequently having these sort of events. So I wouldn't, I guess, get too worried around that, being our approach to this. And I think the second part was size?

Yes.

Yes. I think to the extent we do look at opportunities, we're on the small to midsize range of things. But again, I wouldn't go -- going back to cadence, I don't see a real cadence to this for us. This is very strategic. And the amount of thought we put into this particular transaction, I suggest, probably reflects the amount of thought we put into any future transaction.

Speakers, currently, there are no additional questions in queue for this segment. Please continue.

Thank you.

Thanks, Dennis. Now I'm going to turn it over to Joe Ujobai to discuss our private banking segment.

Great. Thanks, Al. I'll start with a financial update on the second quarter, followed by an update on new business activity.

Second quarter revenue of $116 million was up slightly from the first quarter. Revenue increase was driven by higher SWP-related recurring and onetime revenue and also higher asset management revenue.

Expenses were also up from the first quarter. Expense increase was due to SWP-related costs as we continue to install the backlog, increased sales and marketing costs as we advance sales agendas and higher direct costs based on asset management growth.

Operating profit of $3.8 million was about flat to the first quarter.

During the quarter, net sales events were $12.2 million, of which $3.1 million is recurring and $9.1 million is onetime professional services events largely attributed to SWP conversion and custom development activity. Included in the sales events are 2 Trust 3000 clients recently signed to SWP, TIAA and First Hawaiian; as well as a new named client, Moore Stephens in the U.K.

Sales and contracting conversations continue at an active pace with a good balance of prospect types, including current Trust 3000 clients, new books of business at current Trust 3000 clients and SWP clients as well as new names. During the quarter, we recontracted 7 Trust 3000 clients, securing $7 million in current annualized revenue.

Our goal with Trust 3000 recontracting is to protect our current revenue and maintain strong relationships until these clients are ready to convert to SWP. Overall, we are maintaining current revenue levels from recontracted clients.

Our asset management distribution business also showed growth with positive cash flow by adding $450 million of net new assets. The new flows are representative of key distributors in Asia, Europe and the U.S.

During the quarter, we installed 2 new SWP clients: WHIreland in the U.K. and Stifel Trust Company in the U.S. Our total signed but non-installed backlog for the SEI Wealth Platform is now $45 million in net new recurring revenue. We expect to install about $23 million in the next 18 months and the remaining to install in later years.

In conclusion, we're focused on the following: installing the current SWP backlog, which will help drive continuing momentum in the marketplace; and investing in the long-term growth of our business while we're mindful of expense.

Any questions?

(Operator Instructions) And our first question will come from the line of Glenn Greene, Oppenheimer.

Two quick questions. Could you just update us on the timing and status of the conversions, Regions and Wells? Is Regions still scheduled for a minor -- I know it's sort of late 3Q or early 4Q. And do you start to get the revenue lift in 4Q? And do you get some expense relief on that as well? And is Wells still scheduled for late 2018 or early 2019? And the follow-up question would be the $9 million professional services fees, just a little bit of color around that. That's very large -- larger than I recall you sort of saying. And how should we sort of read into that from a precursor of a bigger signing somewhere down the road?

So yes, we are on track for conversions. As you mentioned, Regions Bank will go late third quarter, early fourth quarter. Things are going well there, and we're looking forward to that conversion. They're certainly a key client for us in that segment. And Regions -- or sorry, Wells Fargo continues to move along nicely. We're in testing mode of the relationship and the new software, so that is also sort of really towards the end of next year into '19. We had a strong nonrecurring revenue quarter. And again, that is generally tied to signed clients that are in the backlog. And it's both conversion fees as well as some custom development work that we're doing for those clients. And again, I think we're -- we would expect that the pipeline -- or sorry, the backlog grows, that we would look to continue to grow our revenue in that space.

Yes. I don't know if you're answering my question on the $9 million of certain nonrecurring sales. That's what I was sort of getting at.

Yes. It's really tied to clients that have signed. And as we continue to implement them and also do some custom development work for them, we had a strong quarter with some of those clients that we added additional work, and it's part of the custom development and conversion process.

We'll go to the line of Robert Lee with KBW.

Just kind of curious, I guess, as it relates to TIAA and maybe First Hawaiian or some of the existing clients who have -- Trust 3000 who are converting to SWP. I'm just -- should we be thinking that in both of those cases, there's been a -- as a move over, that there's an immediate kind of net revenue pickup? And I assume that's partially baked into some of that $3 million. Or how -- maybe another way of thinking is also how much of that $3 million of new sales event is being driven by the asset management business versus, say, SWP?

So it's -- so yes, there would be net increases above the Trust -- the current Trust 3000 revenue for clients when they move to SWP. It also does include some growth in the $3 million in the asset management of distribution business. We did have a few Trust 3000 losses in the quarter. So that's a net number that we'll give you as far as recurring. And we evaluate the losses. In a couple of cases, we've seen at smaller firms really changing their business model, where they're looking more towards third parties providing custody, particularly in some of the smaller community banks. And we saw sort of a unique situation also in the quarter, which seems to buck the trend where sort of a large community bank has looked -- is moving towards a point-to-point type of decision versus an integrated solution. And that really does buck the trend of what we've been seeing in most of the -- of our prospects and clients.

Okay. And I guess, I'm just also curious about kind of how you think of the competitive landscape for SWP. I mean, it's hard to see anyone who has maybe done something precisely so much what you've done. But when you go into prospects, existing client or not, and you're talking about positioning SWP, what's kind of the typical -- besides them doing it themselves and maybe not seeing the need for changes, what's kind of the typical alternative that they're thinking about or looking at as opposed to switching over to SWP, outside kind of doing the same?

So at the smaller end of the market, I think there's sort of a couple different observations. At the smaller end of the market, we have seen some of our legacy competitors price very aggressively. Not so much with these -- the ones that we lost this quarter, but we've seen some very aggressive pricing at this moment. And what we've seen, they're essentially changing their business model and moving towards providing less services to their clients or to having the clients actually pay for the underlying processing inside the client accounts. At the larger end of the market, it's really mostly us. You have a high-growth firm that wants to focus on wealth management space versus continued sort of bandaiding of the legacy solutions. So I think where a larger firm, a mid-sized firm, meaning regional bank, or a larger firm really has a growth strategy, we're a very significant option. We're really the only option if they want to update their -- modernize their technology.

And next in queue, we'll go to the line of Patrick O'Shaughnessy with Raymond James.

So the Trust 3000 recontracting that you spoke to, is that a shift in your strategy for customer retention? Or is that just something you're starting to call out?

I'm really just starting to call it out. So some Trust 3000 clients are looking to move to SWP now, and we're involved in active sales agenda there. Others would want to extend their contracts a few years, generally. And so we're actively having -- in dialogue with those clients. I think we've had a successful recontracting. And while we did see for a few years some downward pressure as we -- from a revenue standpoint as we recontracted clients, the last couple of quarters, we haven't really seen that. And it's really a situation where clients are saying, "I'd like to be on Trust 3000 for a few more years and my intention's over time to move to the SEI Wealth Platform."

Got it. That's helpful. And then if you could provide the net cash flow into AMD.

Yes, I think I said that was $450 million net new cash flow.

And next in queue, we'll go to the line of Chris Shutler, William Blair.

I think there was a question earlier around expenses and how we should think about those trending post-Regions. So not sure you gave an answer to that. Could you just elaborate?

Sure. So I think as we've talked a about a lot last year that we did ramp up some of our development expense associated with delivering a large regional bank, BSP model as well as delivering the Software-as-a-Service or ASP model to Wells. We believe that from a development standpoint, that's generally peaked and it's now plateauing. And our goal would be as things like -- as clients like Regions settle in, that some of that would start to come down post the installation of Regions and then certainly an even bigger step-down post the installation of Wells Fargo. There are some other costs to that. And so we have -- we moved from a $45 million backlog to a $90 million backlog. There'll be some costs associated with that and certainly with sales costs. So yes, there's lots of different sort of expense categories. But it really comes to development and I would say the underlying infrastructure, we would start to see some trend down post the -- post-Regions and then certainly post-Wells.

Okay. And then Al in his upfront remarks made some positive comments about recent discussions with jumbo prospects and wanting to see you take Regions live. Maybe just elaborate on that a little bit.

Yes. I think the market is following both Regions Bank and Wells Fargo conversions very, very closely. Sometimes, it surprises me how much of some of our prospects know that's going on inside of those firms. It doesn't prevent us from, I think, having conversations and closing it -- closing some deals in the process. But I think once those things are installed, it makes the sales process, I think, more interesting for us because we will have then improving case studies. I would say, though, that our current client base is increasingly very satisfied. And I think that the recommendations we get about the conversion process from people like Regions and Wells Fargo are often very, very good. In the U.K., we've recontracted everybody in the U.K. and we've got some really good case studies. Some of these firms have been on the platform now for a while, and we're able to show the benefit that the platform has given to their businesses. So I think we're making good progress and momentum there, but certainly getting Regions Bank and Wells Fargo will be very important milestones with bigger firms, but having lots of good conversations.

Speakers, currently, we have no additional questions in queue for this segment. Please continue.

Thank you, Joe. Our next segment is investment advisers, and Wayne Withrow will cover this segment.

Thanks, Al. During the second quarter, we posted good growth in our traditional business. At the same time, we made significant progress in transformation of that business onto one supported by the SEI Wealth Platform.

Assets under management reached almost $60 billion at June 30, an 11.4% increase from June 30 of last year. During the quarter, we had $560 million of positive net cash flow.

Revenues for the quarter were $92.7 million. This compares to $81.9 million during last year's second quarter, a 13% increase. Contributing to this increase were net positive cash flow and positive market returns.

Expenses for the quarter were up roughly 10% compared to the second quarter of 2016. The biggest component of this increase was an increase in expenses associated with the SEI Wealth Platform. An increase in direct costs tied to that growth was also a driver of this increase.

On the new business front, we signed 135 new advisers. This is over a 10% increase from the first quarter, and our pipeline of prospects remains strong.

Moving on to the status of the SEI Wealth Platform. We had our largest migration to date on April 30, and now have over $20 billion on the platform. We expect to be over $30 billion after our next migration on September 30.

Significantly, after the September migration, we will have more accounts and AUM on the SEI Wealth Platform than we have on our legacy Trust 3000 platform. The migration should be complete by the first half of 2019.

In summary, we continue to recruit new advisers and gather net positive cash flow. While these activities are critical to our near-term financial success, in the broader view, 2017 and 2018 will be all about our transformation to the SEI Wealth Platform and the business model flexibility and growth opportunities it holds for us in the future.

I welcome any questions you have.

(Operator Instructions) We'll go back to the line of Robert Lee with KBW.

Maybe first question I have is in thinking about demand -- obviously, flows are very good, signing of new advisers. But can you talk a little bit about what kind of demand you're seeing? I know you have some kind of ETF model portfolios. And how is -- and I don't think you include those in your AUM assets there. But can you maybe talk a little bit about if you're seeing that at the margin kind of for lack of better way of putting it I'd say cannibalize your core business? Or how should we think about that as it kind of flows through and demand there?

Yes. Rob, well, we do count the ETF business in outflows. We try to program the over-the-top of those. While we don't get investment management fees for the underlying ETFs, we do charge a program fee to assemble the models, do the tax loss harvesting. There's a lot of investment management functions we perform for those at the portfolio level. And while maybe it's not as completely profitable as the actual investment management, we have it in our results for the past couple of years and reflected in the margins you see. In terms of demand, I think in my business, demand for the ETF program assets together with demand for separately managed accounts are sort of the 2 leaders in that market.

Okay. And I'm just curious of the migration to SWP. I mean, when have you -- or when do you think it would be -- you'll start to more proactively start to try to sell those capabilities? You've talked in the past about being able to kind of custody and service a broader range of advisers, assets and earn fees for it. So has that process started in earnest? Or is it really kind of waiting until you get even more of the books converted before you start going down that path?

Yes. I think you phrased it well. I think it has started. I would not say it has started in earnest. And I would expect that to be more of an agenda for next year.

And we'll go back to the line of Chris Shutler with William Blair.

Just a quick question on fees in the business about -- in your business and across the SEI kind of fund complex. Anything you feel may need adjustment in the near term or do you feel pretty comfortable?

Well, I think if you're in the asset management business, you can't be entirely comfortable about your fees right now. I mean, there's no doubt that fee compression is part of this business. And as we look at it, we sort of match our response to fee compression to the profitability of the unit. And we don't try to look at one or the other. It's a balancing act. Now I would say that at the beginning of this year, we did reduce our investment management fees in a few of our mutual funds, and those reductions are reflected in the results that you see. And I would expect that going forward, we will see other fee reduction in some of our areas. But we're going to balance those reductions as a responsible response to fee compression and the profitability of the firm.

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

Thank you, Wayne. Our next segment is the institutional investor segment, and Paul Klauder will report on this segment.

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the second quarter of 2017.

Second quarter revenues of $78.1 million increased 5% compared to the second quarter of 2016. This was primarily due to market appreciation and positive client fundings.

Net fundings for the quarter were a positive $1.3 billion. Operating profit of $39.4 million increased 3% compared to the second quarter of 2016, primarily due to market appreciation and client fundings but was offset by higher compensation expenses and negative currency impact.

Quarter end asset balances of $88.5 billion reflect a $9.9 billion increase compared to the second quarter of 2016. This increase is driven by higher capital markets, positive client fundings and advised externally managed assets included in the asset base in 2017.

The unfunded client backlog at quarter end was $1.7 billion and was aided by client signings of $1 billion in the quarter. In our growth markets, new client signings included 4 U.S. foundations, 3 U.K. fiduciary management clients and 1 U.S. defined contribution clients.

Our sales pipeline is strong, and we will continue to focus on core markets and key growth markets in 2017.

Thank you very much, and I'm happy to answer any questions that you may have.

(Operator Instructions) We'll go directly to the line of Patrick O'Shaughnessy with Raymond James.

So I saw that you guys put out a survey the other day about U.K. pensions and how the FCA is potentially looking into the conflict of interest of investment consultants also being fiduciary managers as part of those pension plans. Where do you see that going in U.K.? And how big of an opportunity could that present for you guys?

Sure, Patrick. First off, you got me in a lot of trouble by putting $60 billion and 25% out there. It's certainly going to be something that's going be a positive for us, but it's way too premature to estimate what's going to happen in the marketplace. These firms that are both consultants and fiduciary managers will be under pressure. But you have to remember that the clients they're going to protect the most are their fiduciary management clients because that's where they make the most amount of money. So we think that the fact that we're exclusively focused on just OCIO and fiduciary management is a positive. It should be a tailwind for us. But we really are not at the point of sizing what the opportunity is. We've had some large transactions in 2016. We continue to upmarket with larger schemes in the U.K., which is really important for our growth. And hopefully, we capture some of this in the future. But again, it wouldn't be appropriate to put any sizing around that now.

Next, we'll go to the line of Robert Lee with KBW.

Just 2 quick questions. I mean, you mentioned signing a new DC client, and I know that's been a strategic priority, expanding into the DC market. Can you maybe talk a little bit about whether -- how much of the unfunded pipeline is related to that, but maybe more broadly, kind of current status of that if you feel like you've got a building pipeline of real new business coming out of that and just kind of where that -- what the status is?

Sure, no problem. So of the $1.7 billion in the unfunded pipeline, that's 3 new names that should all come in by 9/30, and that represents $550 million of the $1.7 billion. And we continue to see interest in this marketplace. The sales process is longer in selling DC, as I've talked about in past calls, because we have to sell to the committee and the committee has to sell to their participants. And then you have to have a certain period, whether it's a quarter end or an annual period, where they're going to do a map over to a new investment process and a re-enrollment. But we do have the captive audience of our corporate defined benefit clients. We're spending a lot of time with them and expressing the same investment process they enjoyed on the DB plan, trying to apply that to the DC plan. And then the other benefit of our DC strategy is it doesn't have to be the whole portfolio. So we can go into some of these mega-investors and it might just be a component part of the portfolio, like the core plus or international equity or small cap or something along those lines. So that also gives us an ability of getting some of the kind of mega-plans that are out there.

So I guess, it's actually both the DCIO kind of strategy as well as kind of -- more all-encompassing strategy like you're doing in the DB market?

Yes. I mean, clearly, our ideal relationship is where we would have the whole menu, where we would have the core funds and the target date funds. The second ideal relationship would be just the target date and then the third would be these mega-plans where we would just start with one of the component investment strategies but still do that through the manager implementation that we've always brought to the table.

And are -- have most of your DC clients to date been preexisting DB clients or something? Has it been kind of more greenfield relationships?

Of the 8 that we've closed over the last 1 year, I would say 4 of them have been cross-sells against existing DB and 4 are new names.

Great. And then one -- just one last question. I appreciate your patience. In talking about consultants getting into your business and notwithstanding what's going on in the U.K., I mean, clearly, you've been doing it in the U.S., could you update us on kind of the pricing dynamic around that? I mean, I know a lot of them have been more than happy to underprice. I know you and your peers have been doing this a long time. So can you maybe update us on the kind of market conditions and what you're seeing today?

Yes. It continues to be a headwind. Consultants that have entered it have priced it more like a consultant than a money manager. So it again has to tie back to the overall value proposition that you bring and the track record that you've been able to bring to the clients. So one of the leverage points that we have that maybe some of the newer consultants don't have is the leverage we have with managers, so the cost of goods sold that we bring to the managers. So we're going to have fee compression. We've seen that. But it doesn't mean that we have to match the consultant fee. We just have to be kind of near the consultant fee or higher, which, in many cases, we are. We have to just show that incremental value proposition.

I mean, do you have much capacity to, if you're getting pricing compression from your clients, to pass it on to the managers? Or is it pretty much you have to absorb most of that?

No, I think that's a great question. I mean, to Wayne's earlier comments, there's margin compression across the whole continuum of asset management. So that impacts us, but it also gives us leverage with our money managers and what we're paying them for comparable services and, say, fixed income or small cap or international. So there's certainly some fee savings that we can garner from that standpoint.

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

Thanks, Paul. Our final segment today is IMS. I'm going to turn it over to Steve Meyer to discuss the segment. Steve?

Thanks, Al. Good afternoon, everyone.

For the second quarter of 2017, revenues for the segment totaled $83.6 million, which was $12.7 million or 17.9% higher as compared to our revenues in the second quarter of 2016. This increase in revenue was primarily due to new client fundings during this time period.

Our quarterly profit for the segment of $29.8 million was $5.8 million or 24.2% higher than the second quarter of 2016.

Third-party asset balances at the end of the second quarter of 2017 were $476.5 billion, approximately $57.4 billion or 13.7% higher as compared to asset balances at the end of the second quarter 2016. The increase in assets was primarily due to net new client fundings of $40.6 billion, combined with market appreciation of $16.8 billion.

And turning to market activity. During the second quarter of 2017, we had a solid sales quarter. Net new business sales events totaled $8 million on an annualized revenue. These sales were comprised of new name business as well as an expansion of existing business with current clients across all of our segments and included a competitive win of a large private equity manager who's moving their business from an insource model to an outsource solution, a competitive win of an SMA processing mandate from a well-established traditional investment manager and a new non-U. S.-based global processing client.

Finally, we announced the acquisition of Archway Technology Partners on July 5. We are excited to welcome the Archway team to the SEI family and the opportunities for growth that Archway provides us.

Founded in 2002, Archway has been a fast-growing leader in providing technologies and services to the family office industry as well as the institutions that serve the family office market.

This acquisition provides us several key benefits, including immediate expansion into a large and adjacent market; a complementary platform and solution set for us to leverage, expand and integrate; cross-sell opportunities spanning multiple markets across SEI; expansion of our technology and SaaS-based growth, which will help diversify and expand our business; and also addition of a talented group of people with deep domain expertise, which diversifies our talent pool.

It's important to note that Archway has a very collaborative and innovative culture, one that matches SEI's unique culture. This was a very important aspect of this acquisition and one we feel is a key ingredient for us now and in the future.

While the acquisition will put some downward pressure on our margins in the short term as we absorb the amortization of intangible assets, we believe our growth opportunities and expense synergies will help offset this towards the end of 2018. We will look forward to giving future updates on our growth and expanding capabilities that this transaction will help fuel.

So in summary, we were able to achieve strong growth in our business this quarter while continuing to expand our current solutions and platform.

Additionally, we feel we have made an important step in our growth strategy by completing the Archway acquisition. We remain optimistic and we'll continue to execute on our current business opportunities while building sustainable growth for the future.

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

(Operator Instructions) We'll go directly to the line of Chris Shutler, William Blair.

Can you just talk about backlog and then a little more on the pipeline and retention in the quarter?

You don't disappoint me, Chris, ever. So backlog is around $32 million. If you remember back, I announced that the last quarter was around $29 million. So if you add the sales, we've had fundings a little of in excess of $5 million during the quarter. Pipeline is strong and continues at the same level it was last quarter, and retention has been good. We did have some liquidations during the quarter, client liquidations. And we did have one client loss, mostly from a change in strategy in their direction.

(Operator Instructions) And we'll go directly to the line of Patrick O'Shaughnessy with Raymond James.

Steve, forgive my (inaudible). As I read a little bit about Archway, it seems very much like a technology company and maybe a little bit less like the combination technology and service business that the legacy Investment Managers segment is. Is my understanding of Archway correct? Or is there actually more to what they do?

Well, they started as a technology company, primarily providing a technology platform for family offices, single, multifamily offices and institutions that support that market. As time has grown, they have added services as you'll -- the family office market, a lot of the component of the solutions, not just providing the technology, but there are many family offices in that very large and growing market that want you to provide some of the outsourcing services that will be comparative to what we do. And they also have also an administration side, a smaller manager administration side, fund administration side that they've built up the technology. So I'd say the majority is a technology solution that we think expands our platform and expands and diversifies our business. There is a services component as well.

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

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

Thanks, Al, and good afternoon, everyone. I have some additional corporate information regarding this quarter.

Second quarter cash flow from operations was $111.8 million or $0.69 per share, bringing year-to-date cash flow from operations to $185 million. Second quarter free cash flow was $88.4 million, bringing year-to-date 2017 free cash flow to $141.4 million. In the second quarter, we had capital expenditures, excluding capitalized software, of $7 million, which brings year-to-date number to $10 million, and we project about an additional $16 million of capital expenditures this year.

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. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

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

(Operator Instructions) And speakers, currently, we have no questions queuing up at this time. Please do continue.

Thank you. Thanks, Kath. So ladies and gentlemen, our growth sales and our pipelines are healthy.

In addition, I'm encouraged about our strategic direction of our business lines and the progress they're making. I believe that our investments will help us benefit from all the changes taking place in our industry.

And before you go, please note that we are holding an investor conference on November 15 and 16 at our Oaks headquarter. Dinner will be on the 15, followed by the conference on the 16. Please save the date.

Thank you very much for your attendance, and have a good day.

And that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive TeleConference. You may now disconnect.