SEI Investments Co (SEIC) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thanks for standing by, and welcome to the SEI Third Quarter 2017 Earnings Call. (Operator Instructions) And as a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Al West. Please go ahead, sir.

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

I'll start by recapping the third quarter of 2017. I'll then turn it over to Dennis to cover LSV and the investments 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 third quarter of 2017. Third quarter earnings increased by 17% from a year ago. Diluted earnings per share for the third quarter of $0.63 represents a 19% increase from the $0.53 reported for the third quarter of 2016. We also reported a 9% increase in revenue from third quarter 2016 to third quarter 2017. Plus, during the third quarter, our noncash asset balances under management increased by $13.5 billion. SEI's assets grew by $6.4 billion and LSV's assets grew by $7.1 billion. In addition, we repurchased approximately 1.2 million shares of SEI stock at an average price of $57.76 per share. That translates to approximately $68.2 million of stock repurchases during the quarter.

Finally, during the quarter, we capitalized approximately $12.6 million of the SEI Wealth Platform development and amortized approximately $12.8 million of previously capitalized SWP development. Plus, we capitalized $2.7 million of IMS development. Our sales events net of client losses were $24.2 million, which will generate $17.1 million of recurring revenues. Each of the segment heads will address their third quarter sales activity.

Three weekends ago, we converted Regions Bank to SWP and migrated a large tranche of advisers to SWP. Both projects went extremely well. We're proud of the work performed by the many SEI people involved in the success of the projects. We believe that Regions' installation is a signal to the market that the SWP platform can handle large Platform-as-a-Service clients. As a result, we expect increased activity in the bank market.

Now the adviser unit migrated from Trust 3000 to SWP an additional $12 billion in assets, 90,000 accounts and 920 firms. It's another great success. And the next migration is scheduled for March 2018.

We're also making investments in the IMS platform aimed to enhance our competitive position and to support the installation of large new clients. And as you know, at the beginning of the quarter, we concluded an acquisition of Archway Technology Partners, a leader in serving the single and multifamily offices and the institutions that provide services to family offices. This acquisition is helping us enter a large adjacent market and also provide new specialized technology to our existing businesses.

In the Institutional Investors segment, we are investing in the Foundation and Endowment market segment, defined contribution solutions as well as other global market segment opportunities that buck the downward trend occurring with U.S. corporate-defined benefit plans. While we are facing headwinds in the DB market, we continue to have success in the newer markets.

So in summary, we are investing and growing in each of our business lines as they transform themselves to meet the changes in their marketplaces. While these changes are challenging, they are also full of new opportunities in the intermediate and long term, and we look forward to capturing those opportunities.

And so this concludes my remarks. So I'll now ask Dennis to give you an update on LSV and the investment in New Business segment. I'll then turn it over to the other business segments. Dennis?

Thanks, Al. Good afternoon, everyone. I will cover the third quarter results for the investments in New Business segment, discuss the results of LSV Asset Management and talk about a few items of note for the company.

During the third quarter 2017, the investments in New Business segment continued its focus principally on 2 areas: the ultra high net worth Investors segment and the development of [LED-based] investment services advice offering, coupled with the use of mobile technologies. During the quarter, the investments in New Business segment incurred a loss of $3.3 million, which compares to a $3.8 million loss during the third quarter 2016. There has been no material change in this segment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the quarter. LSV contributed $39.3 million in income to SEI during the quarter. This compares to a $32.6 million contribution for the third quarter of 2016. Asset growth was approximately $7.1 billion during the quarter from both market appreciation and net positive cash flow. Revenue was approximately $126.7 million, of which about 3.5% was performance fee-related. Quarterly, during the quarter, our tax rate was just under 28% compared to the 33.8% rate experienced during the third quarter of 2016. Similar to first and second quarter 2017, the lower rate is principally due to the impact of the accounting change on recording the tax effect from stock option exercises. As we stated in the past, this new rule will likely result in a more volatile tax rate quarter-to-quarter than we have previously experienced.

As you're aware, we completed the acquisition of Archway Technologies effective July 3, 2017. This is the first quarter of consolidated financials including the Archway results. The net impact to earnings during the quarter from Archway was approximately a negative $500,000, all recorded in the Investment Managers segment. Steve Meyer will discuss the SEI-Archway as part of his segment report.

I would now like to cover a few items that may have some future financial impact. As you are aware, remaining life of the platform is approximately 5 years. We continually reassess the useful life of this asset. In early October, as Al mentioned, we successfully installed Regions Bank on the Platform-as-a-Service solution. In addition, we successfully advanced the technical and business validation of our Software-as-a-Service offering that we'll launch with Wells Fargo Bank. Given this, we are currently reassessing the remaining useful life of certain components and functionality of the platform with an expectation that we may be extending the useful life for a portion of the asset. Based on our initial estimates, this would result in a reduction in amortization expense of between $3 million and $5 million per quarter starting in the fourth quarter.

A second item of note for the fourth quarter and 2018 is related to stock option expense. As you know, our equity options that are issued as part of our overall compensation program vest when specific annual EPS targets adjusted for option expense were achieved. Based on our EPS results year-to-date and our potential fourth quarter earnings, it is possible to serve tranches of options may vest sooner than currently modeled. If this occurred, this would lead to an acceleration of option expense into the fourth quarter of 2017 with a reduction in option expense in 2018.

Please refer to our soon-to-be-filed 10-Q for additional information on all these items.

I will now take any questions.

(Operator Instructions) And our first question comes from Glenn Greene from Oppenheimer.

Just a couple of questions. Just on the LSV, could you parse the $7.1 billion between the market appreciation and the positive flows?

Yes, they had about $1.5 billion in net positive flows, and the rest was market.

And then in terms of reassessing the useful life of the platform, I mean, how far out are you extending it? If it was 5 years, what are you thinking now?

Five years. And adding on an additional 5 years on certain components, not on the entire asset. And it's principally stuff related to the newer things we've built for Regions in that market segment as well as some of the work we've done related to the Software-as-a-Service delivery for Wells.

Okay. And the incremental stock option expense you're thinking about for 4Q?

I haven't really cited that completely. So I'd say tranche-dependent. But if at some level, I think it would probably be at least or around the range of reduction in amortization expense.

Okay, that's helpful.

So it's -- you wind up kind of with an offset, noncash items.

And our next question comes from Robert Lee from KBW.

Really just a follow-up to the last question. Well, just to clarify some of the stock options. I know -- it's assuming you have it this quarter -- it's really -- I think you mentioned it was just kind of pulling forward, what would've kind of come in over kind of next year...

Right. Yes, exactly. So it's really timing. And frankly, when you get something like that, you actually have a little bit lower expense than you would have incurred if it occurred later, the way the rule works.

Okay. Great. That was it. My other questions were asked and answered.

(Operator Instructions) And now to the line of Chris Shutler from William Blair.

Dennis, my questions have been answered.

And we have no one else in queue. Please continue.

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

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

Third quarter revenue of $118.5 million was up slightly from the second quarter. Revenue increase was driven by higher SWP-related recurring and onetime revenue and also higher asset management revenue. Expenses were also up slightly from the second quarter. In the investment processing business, the expense increase was due to SWP-related costs as we continue to install the backlog and increase sales and marketing costs as we advance sales agendas. About 1/3 of the expense increase was due to direct or investment seller adviser costs based on global asset management growth.

Operating profit of $2.7 million was down slightly from the second quarter. On October 2, we achieved a significant milestone by successfully converting the 30th of 40 signed SWP platform clients. This client is the private wealth asset management and institutional services businesses of Regions Bank. The bank converted from various other third-party systems to SWP because it provides a unified solution that is fully integrated across the adviser and client experience, including front office, trust and client accounting and securities processing services, all within a single infrastructure. The conversion is significant for several reasons. Regions Bank is a lead U.S. client with the SEI Wealth Platform in the Platform-as-a-Service market segment, a key target market and large opportunity for SEI. With Regions Bank, we are delivering significant functionality enhancements to the platform, especially to our integrated finance solution. Other clients and prospects will benefit from these enhancements. And also, the conversion of this large client will help us improve scale to our U.S. service operations and technology infrastructure. The conversion went very well, and we are looking forward to a long-term relationship with this new client partner.

During the quarter, net sales events were $11.7 million, of which $5.4 million is recurring and $6.4 million is onetime professional services events largely attributed to SWP conversion and custom development activity. Included in the sales events are 3 new SWP clients: Trustmark National Bank, a new client to SEI; and 2 long-standing Trust 3000 clients moving to SWP, Moody National Bank and City National Bank. The City National decision includes an additional book of business which is new to SEI. Sales and contracting conversations continue at an active pace with a good balance of prospect types, including current Trust 3000 clients, additional books of business at current clients as well as new names.

During the quarter, we recontracted 6 Trust 3000 clients securing $2 million in current annualized revenue. Our goal of 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 $233 million of net new assets, bringing us slightly over $1 billion in net new assets for the year. The new flows are representative of key distributors in Asia, Europe and the U.S.

After the conversion of Regions Bank, our total signed but not installed backlog for the SEI Wealth Platform is now approximately $30 million in net new recurring revenue. We expect to install $7 million in the next 18 months and the remaining to install later.

In conclusion, we are focused on the following: capitalizing on our momentum to grow the backlog, installing that backlog and improving profitability in the Banking segment.

I'd now be happy to take any questions.

(Operator Instructions) And we go to the line of Robert Lee from KBW.

I'm just curious. The -- I think your last comment about the backlog to install, was that $7 million over the next 18 months? Do I have that correct? So kind of through, call it, the middle of '19?

Yes.

And that -- I assume that includes kind of the first tranche, so to speak, of Wells towards the end of next year?

No. It does not really, no. That really would be later in '19.

Later, okay. Just want to make sure I have my dates right. And I guess just kind of more a conceptual question, and -- I mean, obviously, you've built out the platform. You've had all this. And you do -- we do read a lot or see a lot about companies looking at new technologies, things like the blockchain or whatnot for processing, transaction processing. And I mean, is that kind of a capability that you've had to start kind of investigating, I assume, and investing in and how that would, I guess, over time, be adopted into the SWP platform, or...

Yes, we'll talk some more about that at the investor conference in November, but it's certainly an area that we're looking at around innovation. And in fact, we have 2 pilots, one in the U.K. and one in the U.S. that are SWP-related. And Steve also has a pilot that he could probably talk about -- he'll talk about in November at the conference. But yes, absolutely, we think that blockchain and other technologies, new technologies can be incorporated into the platforms we provide today.

Okay. And maybe just one last one on margins in the segment. So you put Regions on. It's up and running. I know -- I believe, originally, there was maybe some expense that would kind of flow away as Regions was converted. Should we expect that? Is there anything that we'd actually kind of see flow through the numbers or just kind of be absorbed in some other incremental...

Yes, it will take a little while to catch up, but here's sort of how I look at it. We've talked about one of our biggest expenses is development. And development, as we have discussed in recent calls, really peaked earlier this year. And that certainly will start to decline probably into next year sometime as we finish up some of these key agendas for this large bank Platform-as-a-Service or for the Regions Bank model as well as the Wells Fargo model for Software-as-a-Service. So we believe the development expense has peaked and that will start to decline. We hopefully will see some expenses increase on the sales, compensation and conversion expense side because we're hoping this momentum drive -- well, we believe this momentum will drive increased sales and conversions. The good news, though, is we're also -- with these big conversions, we're starting to see some more critical mass in the U.S. which will, over time, drive scale in the service model, the operating model and the technology infrastructure. So you may not see that big -- start to see the bounces or the incremental for a couple of quarters, but we are definitely focused on profitability.

And I know I lied when I -- I think I lied when I said one last question. Now, one last question. The -- now that you've got Regions on board, you've kind of been building out that SaaS platform. I mean, I know every potential client is different, but if today, you had another Regions-type client kind of sign up, how much faster do you think kind of the conversion process would...

We did Regions in about 18 months. That's pretty fast for a big organization like that. I think we probably shaved a quarter off that or so. But -- and we're doing the smaller community banks now in 6 to 9 months. I'd hope that we can do these larger regional banks in a year to 18 months. And then I think the larger Software-as-a-Service are probably 18 months to 24 months going forward. A lot of that depends on bank's priorities, what else they're working on at the time, but we definitely are seeing improvements in conversion times.

And now to the line of Chris Donat from Sandler O'Neill.

Just wanted to ask. You mentioned in your prepared remarks about having some onetime revenue in the quarter. I know you always have some level of it, but was this particular call-out -- and I'm just trying to figure out if there's something I should be thinking about it, either...

Now that you mention it, I mentioned onetime revenue really comes from sort of 3 things. There's very little onetime revenue associated with custom for Trust 3000. That's pretty much -- that had been important for us for a long time. That's pretty much gone by now. And so onetime revenue generally means 3 things: it's implementation project revenue; it's custom revenue for some software we might develop for clients, particularly around integration of SWP in their systems; and then it can be some upfront revenue that we're able to achieve at a sales and discovery process with large clients as we talk to them about potentially moving to the platform. So this quarter, that was sort of all 3 of those things were included in the onetime.

Okay. And all 3 of those are -- they're just lumpy, right? They're not easy to predict...

Extremely.

Okay. Okay. Just wanted to put that in some context.

And now to the line of Glenn Greene from Oppenheimer.

First question. Just on your comment on Wells. Has the conversion timeline been delayed? I mean, I thought it was scheduled for sort of early -- by early '19?

No, no. I said the latter part of '19.

Okay. So there's no change from your timeframe originally?

That's correct.

Okay. Any client losses within the net sales numbers? It's sort of been an issue you've called out for a few quarters. And you did not call it out this quarter.

No, no client losses this quarter.

Okay. And then the AMD -- happy -- nice to get the flows, and it sounds like that's trending well for the year. Could you give us a broad sense directionally of what the profitability of the AMD part of PBMT is?

Yes, let me take a quick look at that. Hold on a second. It's probably about 30%. Yes, it's probably about 30%, a little more than 30-plus-percent.

Okay. And then in terms of Regions, is it -- are we at a full quarter run rate going into the fourth quarter? Is that the way to think about it, given you did the conversion right at the end of the third quarter?

That's correct.

(Operator Instructions) And now, to the line of Chris Shutler from William Blair.

So I wanted to ask about the expenses, Joe. So our -- you said they may not come down for a couple of quarters. Is that because the software development expense is going to remain reasonably consistent for the next few quarters, and then that starts to fall off? Or is it that you're thinking there will be some sales events that generate additional comp?

There's still development related to Software-as-a-Service and Wells Fargo. That will continue into next year prior to that conversion. And again, we would expect momentum on the sales and the conversion side. So as some of the development we've done for Regions Bank and the Platform-as-a-Service comes off, that's probably going to pick up a little bit with sales and other conversion expense.

Okay, great. And then in the U.K., can you give us the assets under administration in the U.K. and talk about the flows there?

Yes. There were about $2 billion in flows in the U.K. And I think -- and with market appreciation, the AUA there is $53.5 billion.

Okay, great. And then lastly, on the professional services side or the onetime revenue, I'm not sure if you called this out. But how much of the revenue in the quarter was onetime in nature? And if you look at the sales events, the onetime sales events, how much of that actually came through in the quarter?

So sales -- onetime sales events were about $6.4 million, and we recognized in onetime revenue related to SWP about $5 million.

You recognized about $5 million in the quarter?

About $5 million, yes.

We have no more questions in queue. Please continue.

Thank you, Joe. Our next segment is Investment Advisors. Wayne Withrow will cover the segment.

Thanks, Al. During the third quarter, we posted good growth in our traditional business. At the same time, we made the most progress to date in the transformation of our business to one supported by the SEI Wealth Platform.

Assets under management reached almost $62 billion at September 30, a 12% increase from September 30 of last year. During the quarter, we had $430 million of positive net cash flow.

Revenues for the quarter were $94.3 million. This compares to $85.3 million during last year's third quarter, a 10.6% increase. Contributing to this increase were net positive cash flow and positive market returns.

Expenses for the quarter were up roughly 12% compared to the third quarter of 2016. SEI Wealth Platform expenses were the large part of this increase, as we ramped up both that development and migration efforts. And increasing direct costs and personnel expense tied to our growth was also a driver of this increase.

On the new business front, we signed 113 new advisers. While down slightly from last quarter, our pipeline of prospects remains strong.

Moving on to the status of the SEI Wealth Platform. We migrated $12 billion in assets on September 30. This was our largest migration to date, and we now have over $32 billion on the platform. Significantly, we now have more accounts and AUM on the SEI Wealth Platform than our legacy Trust 3000 platform.

We have 2 migrations planned for 2018 and the final migration planned for March 2019.

One final topic I would like to mention is fee compression. We are responding to this trend in order to keep our pricing aligned with the market. To this end, we reduced the expense ratios for a few of our funds on January 1 of this year. And then on July 1, we reduced fees on both our SMA and ETF product lines. All of these reductions are fully reflected in our third quarter results. These fee reductions are just examples of our ongoing commitment to deliver competitive value to enable business growth.

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, our current efforts are 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) And we have a question from Chris Shutler from William Blair.

So first, could you just restate the cash flow number? I missed it. Was it 340?

$430 million.

$430 million. Okay, got it. And then the fee reductions you talked about. Can you just go into a little more detail what the actual basis points went -- what was the old expenses, what's the new expense ratios and what the levels are?

It's a tiered fee structure across all those product lines, and it differs from product line to product line. What I would tell you is the impact on the third quarter of all those items were to reduce revenues and profits by about $1.9 million, but that's fully reflected in the quarter.

Okay. So a little less than $8 million annual?

$7.5 million, yes.

Yes, exactly. Okay. And then lastly, just thinking about the competitive landscape here, the broker-dealer landscape. Does the acquisition of NPH by LPL, does that have any impact on the way your cash flow should trend over the next few quarters?

That's a tough one to answer. I would say not significantly, because I think it presents both an opportunity and a threat to us. And we're actively looking at those advisers. But quite frankly, the way LPL did that transaction, they didn't physically acquire the advisers. They're -- right now, they're preoccupied with finding a new broker-dealer before they look to find a new investment product, if that makes sense.

Yes. No, for sure. Okay.

And now to the line of Chris Donat from Sandler O'Neill.

Just wanted to ask on the fee reductions on the funds and SMA and ETF, what motivates that? Is that something where you've got advisers who are leaning on you and threatening to go somewhere else? Or just seeing what else is going on in the marketplace with some ETFs cutting their fees. Just -- I'm curious to see what your thought process was to get there.

Well, we constantly monitor the markets across all of that class to see how our fees stack up. And we do also get feedback from our advisers. So it's a little bit of both. It's not purely pressure from the advisers. I mean, we're looking at how we can grow the business. And we engage in the fee reductions because we think it's going to contribute to our growth more than anything else.

Okay, that's helpful.

And now to the line of Robert Lee from KBW.

Quick question. Just -- I mean, on the ETFs, actually. I mean, I know you have a kind of ETF -- it looks like -- I guess, I'll call it a model portfolio product. And my sense is that demand for that has been increasing. But that's not captured in your AUM, or I believe your flow numbers. So could you maybe update us on kind of demand for that product and how we should think about that flowing through your results? Because I guess it kind of -- on an OpEx basis, will lift your fee rate because you don't have the AUM, but you have revenues from it. Is that the -- am I correct in that, or...

No, that is reflected in AUM because that is -- the way that program is organized comes through our SMA program. So you're going to see that in the SMA results. So we do include that AUM in that result, which is your first part of the question. The second part of the question is we see the demand for that product to continue to increase, which is what we see in the industry.

So I guess if we're thinking of your -- so then, you said it's included in your net cash flows, is it -- I mean, just trying to get a sense, is it becoming kind of a meaningful portion of your net cash flows each quarter? Is it still kind of relatively small but obviously growing? Just trying to give that as a driver of at least the flow growth.

No, it's a significant part of our cash flow.

Okay. Willing to size it at all?

No.

Okay. Had to ask. I guess the last question around SWP, the platform. Can you just update us on where you are with starting to roll out the greater capabilities and market that to maybe some of your mid or larger advisers or third-party advisers, kind of where you are with that initiative?

Yes, I mean, we are -- our #1 objective right now is to get the migration done. And we continue to roll that out to advisers. Like I said, we have 3 more migrations, and then we're going to be done, and we're on track for that. And we continue to roll out more and more capabilities, especially in the self-service area, client reporting area, areas that are very valuable to our clients. So I think once we get the migrations done, we'll be focused more on expanding capabilities outside of those clients.

And now to the line of Glenn Greene from Oppenheimer.

Wayne, just one question, back on the fee compression, so you sort of adjusted, I guess, January and July. Are we in sort of in a stage where we're going to have more frequent sort of adjustments to sort of the pricing model here? And we should sort of be thinking about once, twice a year of around the fee compression?

It's sort of hard for me to answer that question in theory because we're going to monitor the market, and we're going to do what we need to do to keep our products competitive. What I could tell you is we have nothing planned at this point.

We have no more questions in queue. Please continue.

Thank you, Wayne. And our next segment is Institutional Investors segment. And Paul Klauder will report on this segment. Paul?

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

Third quarter revenues of $80.4 million increased 5% compared to the third quarter of 2016. This was primarily due to market appreciation and positive client fundings. Net fundings for the quarter were a positive $1.2 billion. This was net of client losses principally due to DB corporate clients mergers and acquisitions.

Operating profits of $40.4 million increased 3% compared to the third quarter of 2016, primarily due to market appreciation and client fundings, but was offset in part by higher compensation and operating expenses.

Quarter-end asset balances of $93.2 billion reflect an $11.8 billion increase compared to the third quarter of 2016. This increase is driven by higher capital market, positive client fundings and advised externally managed assets included in the asset base in 2017.

New client signings for the quarter were $730 million, and the unfunded client backlog was $400 million at quarter-end. In our growth markets, new client signings included 4 U.S. foundations and endowments and a cross-sell of an existing corporate defined-benefit client. Our sales pipeline continues to build in expanding growth markets. The competitive landscape for OCIO or Fiduciary Management is increasing. And we continue to invest in our solution and people to distinguish ourselves.

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

(Operator Instructions) And we have a question from Robert Lee from KBW.

Just want to follow up to your last comment about kind of investing for growth. I mean, I noticed the margin came in a little bit this quarter from kind of the, let's call it the 51 and change. I mean, obviously, not far off, but the 51 and change you've been running at. So I mean, should we be thinking that just given some of the investment needs and then also some of that, I guess, incremental pressure from the competitive landscape that margins may be running a little bit lower in here for a while than maybe they had been more recently in that kind of low 50s range?

Yes, I think that's fair. I mean, I think you're going to see maybe just a little bit of a retrench in margin as we invest in both people, a little bit of technology. But also, we're going to be launching some new products. And those products are really continuing to diversify our suite of alternatives. And by doing that specifically for foundations and endowments that consume that at a high clip, we should be able to get that back with higher revenue products down the line. But these are investments we need to make we've made already this year. That are going to help us continue to exploit and grow in these markets that are going to be around for perpetuity.

Okay. And just kind of curious. I mean, it's not the first time you talked about the increased competition in the OCIO marketplace, but I'm just kind of interested to hear, is it -- how is the landscape between, say, competition there in the U.S. versus, say, outside the U.S., where you also have a pretty healthy-sized business. So trying to get a sense if there's a meaningful difference between the 2 kind of regions.

In the pension space, you see players like Aon Hewitt, Willis Towers Watson, Mercer. They're both here in the U.S. as well as the U.K. and around the globe, so they're pretty consistent competitors across the defined-benefit space. As you look at different markets, if you look at U.S. endowments and foundations, if you look at health care, if you look at Taft-Hartley or government, we're one of the few firms that cuts across all those markets, but in each of those respective markets are unique competitors. So there are people that are just, say, bespoke for colleges and universities or just health care or just Taft-Hartley. So we need to distinguish ourselves versus them. But what we are able to distinguish is the size and scope of our organization. $90-plus-billion in OCIOs is 480 clients. The fact that we've been doing this for 25 years, the fact that we don't have a separate consulting operation. When people value those components and those qualitative remarks and quantitative remarks, we're going to do very well. So we have distinguishing characteristics versus a lot of different competitors. And some of the ones that you mentioned -- or I mentioned, we do see globally, but also some we just see in a niche market here in the U.S.

And now to the line of Glenn Greene from Oppenheimer.

So the net fundings, the $1.2 billion, could you sort of gross that up for us. And what I'm trying to get at is the losses on the DB side.

Sure. $2.1 billion gross, $900 million in losses.

And that was all DB?

It was almost exclusively DB.

Okay. And then of the signings, just directionally, in terms of the growth markets, whether it's DC endowments, international, give us a flavor for the -- where the signings came from?

The signings were $600 million in foundations and endowments, and then the rest was a small DB in the U.K. and then an existing corporate DB client actually gave us their Aviva assets ,which is their medical plan. So that makes up the difference. We saw a little bit of slowdown in decisions in July and August, so our signings are down a little bit relative to other quarters, but we are comfortable that the pipeline has grown. And we see, even so far in October, first phase of decisions that are being made.

And now to the line of Chris Shutler from William Blair.

Glenn stole my questions, so I'm all good.

We have no one else in queue. Please continue.

Thank you, Paul. And our final segment today is Investment Managers. I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Thanks, Al. Good afternoon, everyone.

For the third quarter of 2017, revenues for the segment totaled $91 million, which was $15.3 million or 20.3% higher as compared to our revenue in the third quarter of 2016. This increase in revenue was primarily due to new client fundings and market appreciation during this time period as well as the addition of the revenue from our acquisition of Archway. Archway revenue included in the above number for the third quarter was $5 million, so ex Archway, our total revenue would've been $86 million, which was $10.3 million or 13.6% higher as compared to our revenue in the third quarter of 2016.

Our quarterly profit for this segment of $31.2 million was $4.1 million or 15.2% higher than the third quarter of 2016. This includes a slight drag on profit from the Archway acquisition in the amount of $500,000, which is primarily attributable to amortization charges.

The business results and impact of the Archway acquisition are consistent with our expectations.

Third party asset balances at the end of the third quarter of 2017 were $493.5 billion, approximately $42.3 billion or 9.4% higher as compared to asset balances at the end of the third quarter of 2016 and approximately $17 billion or 3.6% higher as compared to the asset balances at the end of the second quarter of 2017. The increase in assets year-over-year was due to net new client fundings of $20.8 billion combined with market appreciation of $21.5 billion.

Turning to market activity. During the third quarter of 2017, we had a strong sales quarter. Net new business sales events totaled $10.3 million in annualized revenue. These sales were comprised of new named business as well as an expansion of existing business with current clients across all our segments and included multiple business wins in our alternative market, including large, middle office and back-office outsourcing agendas with existing private equity clients; a large, traditional manager full outsourcing mandate; several family office wins; and finally, several new wins in our regulatory compliance business.

From a market perspective, we feel well-positioned. Demand across all our segments of the market remains strong, and the addition of Archway capabilities to our platform adds another new market for growth as well as an opportunity to grow market share with existing clients across multiple business units at SEI.

So in summary, we continue to execute on our growth strategy and continue to invest in our current solutions and platform. We remain optimistic on our short-term and long-term growth plans. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

(Operator Instructions) And now to the line of Chris Shutler from William Blair.

I'll just ask about backlog and retention.

So backlog is right around $35.3 million coming out of the quarter. And retention, we actually had a pretty strong recontract quarter at no losses this quarter.

(Operator Instructions) And we have no more questions in queue. Please continue.

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

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about the third quarter. Third quarter cash flow from operations was $131.5 million or $0.82 per share, bringing year-to-date cash flow from operations to $316.4 million. Free cash flow for the third quarter was $106.3 million, bringing year-to-date free cash flow to $247.7 million. In the third quarter, capital expenditures, excluding the capitalized software, were $10.1 million, and year-to-date capital expenditures have been $20.3 million. We project about another $10 million in capital expenditures in the fourth quarter.

We would also like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. We shall refer to our periodic SEC filings for a discussion 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.

And we go to the line of Chris Shutler from William Blair.

Just one more for Joe. Joe, I just wanted to confirm the 3 SWP wins that you talked about, one was Trustmark, City National, and what was the third?

Moody National.

Okay, got it.

Moody is in Texas, Trustmark is in Mississippi, and City National is in Los Angeles.

Okay. And with the City National, the additional book of business that you talked about, can you just talk about what that was? And what that additional book in the 5.4 of recurring sales events?

Yes. The recurring sales event's in net numbers, so it's the additional revenue we expect on top of what a client would pay us for Trust 3000 today. So yes, that book is included in the -- in that recurring net number. And it's another book of -- frankly, it's another book of trust business inside of City National that we didn't process in the past.

And now to the line of Glenn Greene from Oppenheimer.

This is for Steve. Just back on Archway, was any sales results, the $10.3 million, any of that from Archway? And just maybe just high-level color on what you've seen from Archway since you acquired it.

Sure. So yes, about 10% or just around $1 million was from Archway. We see that they had a strong pipeline. Preacquisition, we've seen that pipeline continue to be strong and grow. So expect more results going forward.

We have no more questions in queue.

Thanks, Kathy. And so ladies and gentlemen, we're bound to have -- we are proud -- excuse me, to have the largest advisory migration to date and the conversion of Regions Bank behind us. These projects will have a profound effect on our advisory and banking businesses. In addition, I'm encouraged by the strategic direction each of our business lines is taking and the progress they are making. I believe that our investments will help us benefit from the changes taking place in our industry.

So have a good day, everyone, and thank you for attending our call.

Oh, and there is -- we have an Investor Day on the -- starting -- with dinner on the 15th, on Wednesday night, November 15. And the presentations will be on the 16th, which is a Thursday. Thank you very much. Hope to see you there.

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