SEI Investments Co (SEIC) 2017 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the SEI Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Mr. Al West. Please go ahead.

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

I'll start by recapping the fourth quarter and full year 2017. I'll then 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. And finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report.

So let me start with the fourth quarter and full year 2017. Fourth quarter earnings increased by 38% from a year ago. Diluted earnings per share for the fourth quarter of $0.75 represents a 36% increase from the $0.55 reported for the fourth quarter of 2016.

Now for the year 2017, earnings increased by 21% over 2016 earnings and diluted earnings per share for the full year of $2.49 is a 23% increase over the $2.03 reported in 2016.

We also reported an 11% increase in revenue from the fourth quarter 2016 to the fourth quarter 2017 and a 9% increase for the full year. Also during the fourth quarter of 2017, our noncash asset balances under management increased by $9.3 billion. SEI assets grew by $5.9 billion and LSV assets grew by $4.3 billion -- excuse me, $3.4 billion. For the year, assets under management grew by $42.5 billion. And finally, during the fourth quarter 2017, we repurchased approximately 865,000 shares of SEI stock at an average price of $69.21 per share. That translates to over 59,000 -- I'm sorry, $59.8 million of stock repurchases during the quarter. For the entire year, we repurchased approximately 4.4 million shares at an average price of $56.36 a share, representing just over $248 million of repurchases.

Now between our stock buybacks and cash dividends during 2017, we returned approximately $339 million in capital to shareholders. And also during the fourth quarter, we capitalized approximately $10.8 million of the SEI Wealth Platform development and amortized approximately $9.2 million of previously capitalized development. Also in the fourth quarter, we capitalized $1.7 million of IMS development.

Our fourth quarter 2017 sales events net of client losses totaled approximately $9 million and are expected to generate net annualized recurring revenues of approximately $355,000. Now these numbers include the loss of our only federal government plan who advised us they will not be renewing their Trust 3000 contract, which ends later this year. This will result in an approximately $17.8 million annual investment processing revenue loss, commencing no sooner than the fourth quarter 2018. Now excluding the loss of this unique client, we would have generated $26.8 million of sales events in our target markets, of which $18.2 million would have been annualized recurring revenues.

Now for the year ended 2017, excluding the fourth quarter loss of the government contract, sales events net of client losses totaled approximately $95.6 million and are expected to generate net annualized recurring revenues of approximately $66.9 million.

As we mentioned in our fourth quarter press release and in our investor conference in November, while our business has experienced some headwinds, our revenues and operating profits are growing and mainly because the tailwinds across our business are stronger. Important to our ultimate success, SWP continues to make important strides. Regions Bank was converted to SWP in the fourth quarter. And since that time, we've been helping them through their very complex business transformation.

The same is true in the advisory unit. During the fourth quarter, we migrated a large tranche of advisers to SWP and since then have been helping them through their particular transformation.

Now IMS continues to make investments in its core platform. These investments are aimed at building and integrating new services and entering new markets. Two new markets are the family office market and the market made up of institutions that provide services to family offices. The acquisition of Archway Technology is helping us enter these large adjacent markets.

Now in the Institutional Investors segment, we are concentrating our efforts on non-U.S. corporate DB plan sponsors. Plus, we are finding success in the foundation and endowment market, the defined contribution plan sponsor market as well as certain global market opportunities.

In summary, we are investing and growing in each one of our business lines as they transform themselves to meet their headwinds and capitalize on the tailwinds in their marketplaces. While the road ahead is challenging, it's also full of new large opportunities.

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

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

During the fourth quarter 2017, the investments in new business segment continued its focus principally on the ultrahigh net worth investors segment through our private wealth management group and the operational development and testing of a web-based digital advice offering. During the quarter, the investments in new business segment incurred a loss of $3.8 million compared to a loss of $3.3 million during the third quarter 2017. Losses in this segment were $13.8 million for the full year 2017 versus $15 million for the full year 2016. There has been no material change in this segment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership ventures during the fourth quarter. LSV contributed $43.3 million in income to SEI during the quarter. This compares to a $39.3 million contribution for the third quarter of 2017. Total year contribution was $152.5 million compared to $126.1 million in 2016. Assets grew approximately $3.4 billion for the quarter. LSV experienced slightly negative cash flow during the quarter, which was offset by market growth. Revenue with LSV was approximately $135.9 million, of which approximately 6% was performance fee related.

During the quarter, similar to fourth quarter 2016, we had a significant revenue item of note. Generally, we do not have performance fees on our SEI-sponsored investment products. We do have a product used in our Institutional Investors segment's comprehensive solution. During the quarter, we realized a 3 -- we realized revenue of $3.4 million related to our performance fee and a corresponding $1.7 million expense for subadvisory fees. This was all recorded in the Institutional Investors segment. Paul will discuss this when we get to his segment.

In addition to this revenue item, we also had a few expense items of note during the quarter. As you are aware, the remaining life of the SEI Wealth Platform is approximately 5 years. We continually reassess the useful life of this asset. In early October, 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 reassessed the remaining useful life of the platform, resulting in an adjustment to the useful life for certain components for an additional 5 years. This has a benefit of reducing amortization expense by approximately $3.8 million during the quarter, $2.9 million in the Private Banks segment and $900,000 in the Investment Advisors segment.

Regarding impact to the first quarter of 2018, we expect total company amortization expense to be approximately $10.9 million, reflecting both this change, offset by the beginning of amortization expense related to technology assets deployed in the Investment Manager Services segment.

The second item of note for the fourth quarter 2017 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 are achieved. Based on our EPS results for the full year, adjusted for option expense, we changed our assessment of when certain tranches will vest. This resulted in an increase in option expense for the company in the fourth quarter compared to third quarter of approximately $9.7 million. This increase was spread across our segments and corporate overhead as follows: Private banking, $2.8 million; Investment Advisors, $1.4 million; Institutional Investors, $1.5 million; Investment Managers segment, $2.2 million; the investments in new business segment, approximately $200,000; and corporate overhead, $1.6 million. We expect stock option expense under our current assumption for 2018 to be approximately $21 million for the year. This compares to total 2017 expense of $36.4 million.

The third item related to expenses during the quarter occurred in our Investment Manager Services unit, which benefited from a $3.8 million adjustment to the contingent purchase price related to the acquisition of Archway. This was reflected in their total expenses for the quarter.

Finally, our effective tax rate for the quarter was 19.9%. On December 22, the President signed into law the Tax Cuts and Jobs Act. This resulted in a net tax benefit of approximately $12.4 million from the remeasurement of deferred tax assets and liabilities as well as an estimate of a tax expense related to the repatriation of previously undistributed foreign earnings and expense related to withholding in certain foreign jurisdictions. In addition, our tax rate benefited from the accounting rule change related to stock option expense, along with the expiration of certain statute of limitations on various credit items. We expect our 2018 tax rate, before any impact from accounting for options, to be in the 21.5% to 22% range.

That concludes my remarks. I will now take any questions.

(Operator Instructions) Our first question today comes from the line of William Shutler (sic) [Christopher Shutler], representing William Blair.

So let's see, LSV you said modest negative flows. Is that right?

Yes.

Okay. And any change in the pipeline there that you're hearing about the institutional pipeline?

No, they had positive cash flows from new clients and they've gotten new money from existing clients. They really got rebalanced. It's a main offset during the quarter, but they're still certainly adding new clients and new business.

And the operating loss of $3.8 million in the new business segment, is that a fair number to model going forward? It stepped up a little bit sequentially.

Probably a little bit lower because we had the option expense in there. That will step down a little bit. It will probably get back closer to third quarter.

Got it. And then let's see, the -- in the press release, it says that your expenses related to maintenance and enhancements not eligible for capitalization have increased in Private Banks and Investment Advisors. Can you just quantify the quarter-over-quarter change on expenses that, that had in Private Banks and advisors?

Yes. I don't have that in front of me, but it's really a reflection of the more code that's put into production, the more code that needs to be maintained. And also, with more clients, there's a little more maintenance -- specific client maintenance activity. I don't really have a number in front of me to quantify it. But part of it also reflects some of the development work we're doing we're not capitalizing any longer. So certain product enhancements, certain new feature -- we're adding new features to kind of an existing asset, generally expense that through now rather than capitalize it. So it's kind of a myriad of, let's say, little things. Does that help?

Our next question comes from the line of Robert Lee with KBW.

Dennis, just -- can you go back to -- you were updating us on the change in expense going forward for -- I can't talk today -- amortization expense, sorry. I think you mentioned it was $10.9 million for next year, but that was excluding some new -- you're going to start expensing some other things. Or was $10.9 million like the total?

That was the total. Yes. Because we didn't want you just to think fourth quarter because even though that rate will continue, we're adding a little bit more because of some of the things that are going into production in the Investment Manager Services segment.

Okay. Great. And then maybe this is a question for Steve later, but I'm just kind of curious, the contingent -- the valuation adjustment in IMS, I mean, kind of in your favor this quarter. I mean, you haven't owned it that long. So is it going to -- is that something we're going to see kind of bouncing around $3 million, $4 million one way or another a quarter? Or was there something specific that kind of made your contingent liability drop a reasonable amount in just one quarter?

Rob, this is Steve. So no, we do not expect that to bounce around. What that really was, it's part of the acquisition. As you remember, we acquired them in July. I term this kind of a -- we gave an opportunity in the acquisition for an earnup by setting some significant stretch goals and while some of the goals were made, not all of them. So this was really a reduction of that potential of additional purchase price for them, but I would not expect this to be an ongoing quarterly number.

Our next question comes from the line of Chris Donat with Sandler O'Neill.

Dennis, I wanted to ask a big-picture question, if I could, on expenses just because, in the past couple of years, there have been some elevated expenses related to onboarding large clients. And now I think we're mostly through that process and looking at 2017 expenses at about $1.1 billion, is that sort of the right starting point and adding in some inflation and growth to think about overall expenses in 2018 and then recognizing there are some puts and takes on stock-based comp and things like that, amortization?

Yes. I mean, it's almost like equalizing fourth quarter and kind of going from there. I'm a little -- last year, you guys were able to pin me down on $1.1 billion. When I started getting complaints that we were like $1.108 billion, now I'm hesitant to get locked down to another number. I don't know how exact I have to be. But I think we came in pretty close to that this year, what we had projected, when you back out Archway and really the impact of option expense. But I think -- I mean, I wouldn't necessarily start with the $1.1 billion as much as I would start with a fourth quarter adjusted based on the amortization of stock option expense, back that out in the fourth quarter, add back a little bit for -- maybe a couple [hits] here and there, but I think it's pretty consistent with the fourth quarter adjusted for options.

Okay. But thinking about it -- fourth quarter 2017, we are in sort of a normal territory here?

Yes, we don't have anything unusual on the horizon here.

(Operator Instructions) And we'll go to Glenn Greene's line with Oppenheimer.

A couple of questions. One, just directionally, could you help us think about the margin on the lost government business, the profit potential? It's a big revenue number but not clear. Often government contracts are lower margins, so it was a little unclear on that.

Yes, I'll let Joe address that. He has a comment in his script. I'll let him speak to that.

Okay. And the tax reform benefits, the effective tax rate you called out for '18, very consistent with what we were thinking. But the question, and we've heard it from a lot of companies is, is there going to be incremental investments to offset some of that? Or is that largely just going to flow through to the bottom line?

Yes. I've gotten asked this question a few times since December. I think our -- well, I know our generally answer is if we had a good idea to invest in, we weren't going to hold back based on some tax bill or some regulatory change or -- I mean, that's always been our thinking that if we think it's a good idea for the long-term health of the company and to advance our success strategically, we're going to do it. So I wouldn't say we had anything kind of on the shelf we were holding back in anticipation of, in this case, a tax rate change. And so I think we'll...

Okay. And just one housekeeping thing. If we adjust for all the, I don't know, sort of like accounting items related to the tax reform of the tax allowances and whatnot, what would have sort of been the normalized effective tax rate in the quarter?

I can't tell you that. I think it would have been around -- just bear with me. It would have been around 27%, 28%. That really is just backing out the repatriation, offset by the deferred asset, deferred liability adjustment.

No questions queued up at this time.

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

Thank you, Al. I'll start with the financial update on the fourth quarter and a review of full year 2017 for the Private Banking segment. Fourth quarter revenue of $127 million was up 7% or $8.5 million, largely due to SWP revenue growth, including the successful conversion of Regions Bank. For the year, revenue grew to $474 million, up 3.6%, largely due to SWP revenue and asset management growth. SWP revenue growth included the conversion of 5 clients worldwide and net assets under administration growth of approximately 20% across the SWP client base.

Profit. For the quarter, operating profit of $8.5 million was up almost $6 million from the third quarter. Profit for the full year was down due to increased SWP investment. As we discussed on the previous calls and at the meeting in November, increased investment has been triggered by sales and conversions to larger firms. During the year, we delivered significant SWP capabilities, and I'd like to highlight the 5 -- highlight 5 areas. We launched our front-office solution anchored by our portfolio management tool integrated to product research, proposal generation, account open and user experience. We launched our new end client experience, including web and mobile apps, enabling flexibility for both our clients and end users. We made substantial progress in extending SWP from a business processing-as-a-service model to a Software-as-a-Service model for Wells Fargo and other very large clients and prospects. In U.K., we delivered significant tools to support new regulatory requirements known as MiFID II.

In addition to the substantial development efforts, we continued to invest in infrastructure such as system performance, quality assurance and data security. All of these investments expand SWP's target market of very large prospects and enhance the scalability of our own processing operations.

Now on to client recontracting and new business sales. Trust 3000 recontacting. In the fourth quarter, we recontracted 6 Trust 3000 clients, securing 2 point -- sorry, $26.7 million in annualized revenue. For the full year, we secured 27 Trust 3000 relationships, representing over $77 million in recurring revenues at an average term of 3.5 years. 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.

Unfortunately, during the fourth quarter, we realized some Trust 3000 losses. Late in the quarter, we were advised by our only federal government client that they would not be renewing their Trust 3000 contract, which ends later this year. The client, the Department of the Interior, uses a narrow set of Trust accounting functionality to process beneficial income to individual account holders. We expect the DOI, which represents approximately $17.8 million of annual revenue, to deconvert later this year. Although the loss of this client was disappointing, they did not represent a strategic target market for the SEI Wealth Platform, and this does not impact SWP market momentum.

The fourth quarter also included approximately $4 million of additional Trust 3000 negative sales events. This revenue loss represents 3 lost clients. Client losses were driven by a variety of factors and client situations.

Excluding the Department of Interior, net sales events for the quarter were $4.4 million, of which negative $2.4 million is recurring due to the Trust 3000 losses and positive $6.8 million was in professional services. For the year, net sales events were $34.9 million, of which $10.5 million is recurring and $24.4 million is professional services. Although there were no new name SWP sales events during the quarter, we are progressing several sales and contracting conversations with a good balance of prospect types, including current Trust 3000 clients, additional books of business at current SWP clients as well as new names.

While the pipeline remains strong, internal prospect approvals and the contract negotiation and signing process remains complex and elongated. For the year, we sold 9 SWP clients with total recurring sales events of $11.5 million, bringing total SWP clients to 41 worldwide. Our total signed but not installed backlog for SWP is approximately $30 million in net new recurring revenue, encompassing 7 uninstalled clients. We expect to install approximately $10 million this year, and the remaining to install later. Our asset management distribution business showed strong growth in the fourth quarter, with positive net cash flows of $737 million of new assets, bringing us to approximately $1.8 billion for the year. The new flows were representative of key distributors in Asia, Europe and in the U.S.

In conclusion, as we told you in November, we are focused on the following: capitalizing on our momentum to grow the backlog by contracting events and progressing the rest of the prospects through the sales process, installing that backlog and improving profitability of the banking segment to return the unit to historical profit margins.

I'd be happy to answer any questions at this point.

(Operator Instructions) We'll go to Tom McCrohan's line with Mizuho.

Have you noticed any change in tone from your bank prospects given that the operating environment for banks has improved somewhat?

Yes. We -- I've been on the road the last couple of weeks, and the banks are -- most of the banks are all very enthusiastic about the tax cuts. And they're all obviously very publicly talking about things like raising teller salaries. And they believe that some of that tax cut will come and help them with capital expenditures. So I would say that there's certainly some optimism inside of banks around more money to invest in their future, and that would be technology. We'll see how that progresses in the coming year. But in general, we see, from a spending standpoint, some opportunity there. But certainly, from a regulatory standpoint, things are slower than we would like. And certainly, many of our prospects are as frustrated by the timing and the process as we are, but we are diligently working with them to get some of these opportunities signed and converted.

So that kind of ties into your comment about sales cycles being complex. Can you give us some more insight into what's going on, on the regulatory side? Is that the last kind of hurdle to get these deals signed?

I mean -- I think, I mean, the sales process is long and complex, but the opportunity is big. So as we've talked about on previous calls and certainly in November, we're talking to firms about consolidating their wealth management businesses on a single infrastructure, and we built SWP to be that infrastructure. So not just trust accounting, but certainly other books of business. Those are big opportunities across multiple businesses inside of a firm. There are often than many decision-makers in that process that may include decisions or approval by boards of directors, regulators, compliance people. So that process is certainly more complex and elongated than ever. We're working closely with those firms to build business cases. I think we've evolved our agreement to recognize the changing market environment. We've evolved our services by adding more -- or more services around debt recovery, data security. So I think I'm proud of how we've evolved the solution to meet these changing needs of the market, but it still takes a long time. So we've got great conversations, and we're looking forward to a strong year.

And one last question, I'll jump off. So you had to go through similar processes for regulatory approval with Regions and Wells Fargo and some of the other banks. Did anything change between when you went to the process with those banks and what's happening today?

It's actually getting tougher. I mean, the good news is we've got good clients. We've got a good client installed base. And those 2 important, elite clients and their segments, have been terrific with us when it comes to references around the process. But these are big opportunities and these are big changes inside of the firms, and the process is long and complex. But the good news is we have a terrific solution, and we're working closely with the people and our prospects to get these deals done.

And we will go to Chris Donat's line with Sandler O'Neill.

Since I'm fixated on expenses, just with the Department of Interior contract, are there any expenses that we should expect to go away as the $17.8 million of revenue goes away later this year?

Sure. I think that might be close to Glenn's question around margins. So first of all, we'll expect to have that client at least through the third quarter of next year, so we wouldn't see an expense takedown for some time. That client may stick around longer. Again, we're not sure of the exact conversion date. Conversion takes some time. But actually, this is really a part of a longer and a bigger strategy we have around the ultimate takedown of the Trust 3000 infrastructure. Not only -- we have lost -- natural attrition of some Trust 3000 clients, but our goal really is to move all of our clients from Trust 3000 onto the SEI Wealth Platform. So we have a very important project over time to take down Trust 3000 expenses. We'll factor this client into that process. It will probably change the timing around some stuff, so it's not easy to predict exact takedown of those expenses, so we factor this into that process. And we will look to take down as much expense as possible so that we can continue to focus on what's our real goal around margin, which is incremental profit improvement for the segment, getting us to -- back to this historical margin for the segment.

(Operator Instructions) We'll go to William Shutler's line with William Blair.

I'm just going to go by William for the rest of the day. Exactly. All right. So maybe on the Department of the Interior leaving. Anything more you can give us on the conversation there? It sounds like this maybe surprised you a bit. Is that fair? And -- or presumably, they're going with a competitor?

Well, so first of all, this is a government -- a federal government procurement process. So there isn't a whole lot of information that I have. And if I had it, I would share it with you, but I don't have a whole lot that I can share. And yes, I would say it is a surprise. They have been a client of ours for almost 20 years. They've been a good client of ours. We work very closely with them. We get involved with them about 20 years ago, where the history of this, there was a lawsuit against the federal government for Native Americans around trust that had been established. We worked with them to build custom solution using trust -- the base of Trust 3000. We've had a solid relationship with them. We, as you know, pride ourselves very much on excellent client service. Over those 20 years, there have been a handful of times where we were required by federal law to rebid on the contracts. That -- there was a natural rebid that occurred this year. So we went back, we made a formal proposal. We believed that we were in pretty good position. There was some change in the staff at the organization that occurred, I think, as sort of the natural change as the federal government changed with the new administration. We knew that there was some change occurring. And potentially, we found out certainly post the announcement that we -- or the notification that we hadn't received, we didn't win the bid. We have heard about some organizational change inside of the organization. I think things happened more quickly than we would have expected. So it was a surprise for us. Clearly, we're incredibly disappointed. We don't think that it went to one of our natural, well-known competitors. We do think that there has -- there may be some reorganization occurring there. Again, we submitted the bid. We were informed in a very formal process that we weren't successful. We pushed to meet with them in person, which we did in December. We were given a very tight response to our questions. And -- but of course, as we would in any new conversion, we will act very professionally. We will support that deconversion, and we will support them as long as we need to. We're very disappointed. We stand by to help them for as long as possible. And hopefully, we'll understand longer term what may have been the deficiency in our bid. But we've been a great provider of services, and we'll support them as long as we can.

Okay. And then just on the other Trust 3000 loss. It sounds like a variety of reasons. You don't need to go through each one. But as we think about the remainder of 2018, is there some way for you to quantify kind of the amount of business that still needs to be recontracted? Or help us think about kind of what's been secured versus what's at risk.

There's always some natural attrition. And again, there -- as I said in my comments, I don't see any trends that are worrisome for me. There's lots of different situations. There have been some acquisitions that we've been on the wrong side of, so I'm hoping that our luck changes on the acquisition side because, historically, we've been generally pretty good on the acquisition side. Those acquisitions have been the other way. I talked a couple of times on the calls where there have been some smaller firms that don't really have much of a very strategic plan going forward on trust or in Wealth Management that have gone to low-cost providers. We had a quirky one earlier this year, where a midsized firm has decided to go more to a point-to-point versus an integrated solution, which was really unlike everybody else we're talking with. In 2018, we have a smaller book coming up for recontract. We've already recontracted in the month of January about 1/3 of that book. But again, there's always some natural attrition, but we're talking to a lot of our clients about recontracts or more importantly about SWP. And the good news is, though, even with attrition, our revenue continues to grow. So we have been able to sell through that attrition, and we'll continue to do that. And the ultimate goal is to get as many of these important clients to SWP.

Okay. And just one more, Joe. On the expenses, as you think about modeling the next couple of years, the -- ex all the onetimers in the quarter, is the Q4 number a decent jumping-off point? And then should we think about the -- I think that the prior commentary around $112 million, the software development work for Wells is more or less complete late this year that we will start to see a more meaningful decline in the absolute dollar of -- absolute dollars of total expenses in your business.

So as we talked about in all these calls, managing expenses is just slightly shy of my desire to sell a lot. And so when I think of developments, development really did peak in 2017. Dennis talked a little bit about the adjustment to amortization. That helps us a bit in -- from an expense standpoint, that helps us in 2018. Although as we do continue to build, probably capitalize it a little bit less because it's really more a bit of finishing up things that we probably wouldn't capitalize. So I will see development as an expense bucket. That will start to come down this year and certainly next year as we finish up Wells. There certainly are things that we want to build. There's certainly things we want to drive more efficiency around. We will probably see some other buckets of expense pop up like conversions. Hopefully, sales comps will pop up in expense. But again, our goal is to continue to show incremental improvement in profit and get this unit back to historical margins. So you have, obviously, my commitment to manage it as tightly as possible but to grow the top line while we keep our eye on that expense line.

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

Great. Just curious, the -- did all of this $6 million plus of professional services come through in the quarter? And I mean, without maybe reading too much into it, would some of that kind of clients in the pipeline as has happened in past, hiring you to kind of do some front-end legwork?

About 60% of the $6 million was realized as revenue in the quarter, but the rest will be realized in subsequent quarters. And most of it is associated with clients already in the backlog, but there is a bit of it that our clients that are in the pipeline, and we're doing some work for them that we're able to charge for in sort of statements of work. So again, it's clients that are probably fairly progressed in the pipeline. And we believe that the work we're doing is part of the process in getting contracts finalized, add value. And we're able to charge professional services fees for those with that work.

Okay, great. And maybe just as a follow-up. I mean, obviously bringing on entirely new -- or new clients to SWP is the bigger opportunity, but you've talked about it and always talked about bringing on additional books of business with existing clients as being kind of an incremental opportunity. And you keep saying you now have 40-ish clients on SWP. Some of them, particularly in U.K., have been there for a while. Can you maybe talk a little bit about kind of how you -- the process of getting existing clients to move over exist -- new books. I'm assuming that should be a much shorter process, but has that proven to be the case? Or if someone doesn't do that, what's kind of the -- generally the pushback or reason that they wouldn't move more over?

So it's a little different, U.S. to U.K. So in the U.K., a lot of our clients have made acquisitions. So we're focused that they've made acquisition. Sometimes they want to incorporate those acquisitions quickly, and they may not have done a system conversion. So in the U.K., we've gone back to some of those clients and said, "Make an acquisition. Rub those firms off your book that help you now put those all onto a single infrastructure," which would be SWP, and so the relationship management team, and to some extent, salespeople, are there. And we've got some big clients there where there are still books and business that are big opportunities for us. In the U.S. -- so that's the U.K. story. In the U.S., it's really identifying, in most cases, non-principal income or trust -- non-trust accounting opportunities that may be on brokerage platforms but not really be true self-directed, client-directed brokerage but are really generally some sort of managed accounts and so we're really going into those firms and pitching that the SEI platform as a really robust, modern managed account program. And certainly with some of the front end stuff that I talked about earlier that we built this year and now we've installed at Regions Bank, we're getting some traction that -- with that functionality on top of the core processing we've built would be very attractive in the non-trust space. And that is growing quickly in some of the midsized, larger banks. So we're in there talking about that. In some cases, it does mean changing some of the underlying regulatory oversight at some of the infrastructure that they've sold these accounts under, but there's definitely reception inside of these both management firms around a single infrastructure. And we are getting traction, but that is a -- it's certainly a slower sales process than (inaudible) from Trust 3000 or a competitive trust system on the SWP. But they're big, big opportunities for us, and I think that's really important to our growth of SWP.

And next, we'll go to -- well, actually, they took themselves out of queue. There are no other questions queued up at this time.

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

Thank you, Al. In 2017, we continued to grow our revenue and profits while simultaneously making big strides in the migration of our business to one supported by the SEI Wealth Platform. Fourth quarter revenues totaled over $98 million. These revenues were $11.3 million better than the fourth quarter of last year. This increase was driven by positive net cash flow and market appreciation, offset, in part, by fee reductions in some of our investment products.

Expenses were up in the fourth quarter versus last year's fourth quarter due to increased personnel expense associated with our wealth platform migration and an increase in development expense, net of capitalization. Increased direct costs and personnel costs caused by our asset growth and the impact of the increase in stock option expense discussed by Dennis were also significant contributors to the increase. When compared to the third quarter, stock option expense, migration expenses and SWP development expenses were the major factors behind the expense increase.

Our profits grew 6.2% from last year's fourth quarter but lagged our revenue growth rate. This was caused by 2 primary factors: first, the large increase in stock option expense; and second, our decision to use the opportunity presented by our strong revenue growth to increase our investment in the SEI Wealth Platform development and our migration to the platform.

Assets under management were $64.3 billion at December 31, an increase of $8.7 billion from December 31, 2016. The increase was driven by both net positive cash flow and market appreciation. During the fourth quarter, we had $650 million in net positive cash flow.

During the quarter, we recruited 149 new advisers, bringing our total for the year to 517. Our pipeline of new advisers remains strong.

For 2018, we will concentrate on 3 main areas. First, we are focused on the rollout of the SEI Wealth Platform. In 2017, we converted 1,200 clients and over $12 billion in assets. We now have over half of our AUM migrated onto the platform and should have all of our largest clients on the platform by the end of this year. One final migration at the end of March 2019 should complete the migration. We are on track for these goals. Second, as step 2 to the migration, we will be increasing our focus on having advisers adopt the new functionality in the SEI Wealth Platform, especially its straight-through processing capabilities. Third, we will continue to involve our investment offering in response to industry trends. As an example, throughout the year, we have lowered fees in some of our mutual funds, our SMA program and our ETF strategist program. As a further example, we have just incorporated a large cap passive fund as an option in our models. Now advisers who want active management in most asset classes but prefer passive for U.S. large cap equity can still select an SEI program. This is part of our ongoing response to the growing popularity of passive investments, which started with our introduction of ETF strategist portfolios in 2013. This program is very successful for us. And recently, Morningstar ranked us as the eighth largest ETF strategist in the United States.

In summary, 2017 reflected our continuing financial growth and solid progress in our migration to the SEI Wealth Platform. Our goal in 2018 is to accelerate both of these items. We remain confident in the long-term opportunity in front of us.

I welcome any questions you may have.

(Operator Instructions) And we'll go to Robert Lee's line with KBW.

Great. I have -- maybe a question on the competitive landscape. Some -- I know there are some other -- obviously a lot of competitors out there, but you see some competitors -- I mean, I guess there's firms like Jemstep or someone located near you, I guess AdvisorEngine, who talk about having kind of solutions for advisers and offering model portfolios and whatnot. Could you maybe give us a sense on how you view organizations like that as competitors or not and kind of maybe how the competitive landscape may be shifting and kind of where -- where kind of SWP sits versus kind of -- some of those solutions?

Yes. I think the sort of -- the firms that you've mentioned, I mean, one major difference for us is we're a completely integrated front-to-back solutions built around SWP. So it's -- when you think about it, you can talk about the technology providers, and SWP certainly fills the bill for us. But we also have our own custody platform. So they're not -- they're built on, for example, a Schwab or Fidelity, but we have custody integrated. We have our investment management program built on our own internal investment management. So we are a single point of accountability and an end-to-end solution, and I think that's what makes us different from most other competitors.

(Operator Instructions) We'll go to Glenn Greene with Oppenheimer.

Yes. Just could you talk a little bit about the pricing pressure, yield pressure that you talked about earlier in the year and you highlighted a little bit in your prepared comments? Maybe just sort of give an update on the environment. Has it changed at all? Or does it contrast for the last couple of quarters?

I think the environment is about the same. I mean, we constantly reassess the pricing of our products, and we sort of manage the fee reductions in response to the market and maintaining profitability of the unit in sort of a disciplined manner. So I would say it is not greater, but it's not less, either.

Okay. And then...

I think the real point here, though, is we reduced price on certain product lines periodically throughout 2017, and they are what's reflected in the financial results. So it's not like I would look at 2018 and say that there's some wall in front of us.

Okay. And then maybe just on the flows. It was nice to see the flows reaccelerate toward that $600 million or so level. Could you just sort of parse that a little bit? How much from existing advisers versus new advisers or any other dynamics on the flows that we should be aware of?

Yes. I think that we saw a little -- the flows definitely were better. I mean, in the fourth quarter, they were about 50% higher than the third quarter. And I think a lot of that improvement was driven by an increase from the existing advisers over the prior quarters.

I think Glenn's off, dropped off.

There are no other questions queued up.

Our next segment is the Institutional Investors segment, and I'll turn it over to Paul Klauder to report on his segment.

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the fourth quarter 2017 as well as the entire year. Fourth quarter 2017 revenues of $87 million were 2% lower than fourth quarter 2016 revenues due to an $8.9 million reduction of a performance-based fee for a specialty investment product. Market appreciation and net client fundings positively impacted revenue. Full year revenues of $322 million increased 3% compared to 2016.

Operating profits for the fourth quarter 2017 were $42.8 million, 4% lower than the fourth quarter 2016 operating profits. The decrease in the performance-based fee reduced operating profits by $4.5 million. Without this onetime item, operating profits would have increased $2.8 million or 7% Q4 2017 versus Q4 2016. 2017 full year profits were $160.8 million.

Operating margin for full year 2017 were 50%.

Net fundings for the quarter were negative $200 million. Gross findings were strong at $1.8 billion, but client losses totaled $2 billion. The client loss number was predominately due to one large North American corporate relationship that got acquired by a larger organization.

Quarter-end asset balances of $94.5 billion reflect a $15 billion increase versus fourth quarter 2016. This is due to market appreciation, positive year-to-date client fundings and $4.8 billion in advised externally managed assets included in the asset base in 2017.

New client signings were strong for the quarter at $1.9 billion, and the unfunded client backlog at quarter end was $500 million. These new clients included penetration across our growth markets of endowments and foundations, U.K. Fiduciary Management, U.S. defined contribution, U.S. Union plus a large U.S. corporate-defined benefit plan. Total new client signings for 2017 were $5.8 billion.

Our focus in 2018 will be to continue to diversify new business growth out of U.S-defined benefit and into endowments and foundations, defined contribution, healthcare, non-U.S. DB Fiduciary Management, government and unions and entering new global markets.

Thank you very much, and I will welcome any questions that you might have.

(Operator Instructions) Nobody is queuing up at this time.

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

Thanks, Al. Good afternoon, everyone. For the fourth quarter of 2017, revenues for the segment totaled $94.3 million, which was $16.5 million or 21.1% higher as compared to our revenue in the fourth quarter of 2016. This increase in revenue is 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, which represented $5.2 million of the above number. For the full year 2017, our revenue was $349.4 million, which was $55.1 million or 18.7% higher than the full year 2016.

Our fourth quarter profit for the segment of $33.6 million was $6 million or 21.7% higher than the fourth quarter of 2016. Our full year 2017 profit for the segment of $122.9 million was approximately $19.7 million or 19% higher than our annual profit of 2016, and that included approximately $2.5 million of profit for the partial year of Archway.

Third-party asset balances at the end of the fourth quarter of 2017 were $495.4 billion, approximately $46.7 billion or 10.4% higher as compared to asset balances at the end of the fourth quarter 2016. The increase in assets was primarily due to net new client fundings of $20.8 billion, combined with market appreciation of $25.9 billion.

And turning to market activity. During the fourth quarter of 2017, we had a strong sales quarter. Net new business sales events totaled $15.8 million in annualized revenue. These sales were comprised of new name 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 new name competitive wins in our hedge and private equity segments as well as the addition of several middle office and back-office outsourcing agendas with existing private equity clients. We also had several family office wins with Archway. And on the traditional business side, we've signed clients in every product class we offer, including the competitive win and launch of its significant collective investment trust fund from a Connecticut-based manager and several large ETF mandates from existing clients. And finally, we had key expansion of 2 key relationships in our global market.

Our total net new business sales events for the year were approximately $40.2 million, which was our second-largest sales year-to-date and very similar to our total events in 2016 of $40.5 million and continues to validate the market acceptance and strength of our strategy and solutions.

From a strategic perspective, in 2017, we accomplished many of our key goals that we discussed with you at the end of 2016, primarily the execution on our sales momentum and opportunity; implementation of new business and our backlog in 2017; expansion of our market segments further into private equity and family offices; and finally, the investment and growth of our solutions, including global regulatory and compliance, Middle Office and Front Office Services.

As we drive forward into 2018, our focus will be on continued execution of our strategy and expansion of our platforms. Our key goals will be centered on, one, continued execution of our sales momentum within our current markets; two, continued growth and expansion of our family office platform that we acquired this year; three, expansion of our platform into front office-focused services in support for our clients and investors; and four, expansion of our global regulatory compliance business and our data and analytics platform. We will continue to invest in our solutions and platforms to help us drive sustainable growth, and we're optimistic at the opportunities available to us.

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

(Operator Instructions) And we'll go to Robert Lee's line with KBW.

Great. Just curious, could you update us on kind of what your kind of backlog is of kind of one but not yet kind of converted businesses?

Rob, you disappoint me that you did not ask that question. So our backlog at the end of Q4 was $39.3 million of sold deals not implemented.

And just with that, do you have any kind of sense of what you would expect to roll on over the next 12 months or so?

Well, we've talked in the past, we have backlog. Especially these deals have gotten larger, it would take anywhere from 14 to 16 months. I think we're seeing that shorten a little bit. So I think our hope would be that $39.3 million backlog, we would see start to fund at various times during this year over the next 12 to 14 months I think is kind of the range we're looking at right now.

Okay, great. And then you highlighted a bunch of areas for '18 that you're focused on. And thinking about your margins have held up pretty well, kind of in the 34%, 35-ish kind of range. But can you maybe talk about with all the initiative you have and good new business wins, maybe that it's a good thing if pressures comp a little bit, but how you're thinking about kind of margin progression from here? And particularly, in the -- maybe this is even a broader question for Dennis and the firm that was following up to an early one, just kind of how you think about lower tax rate, maybe using that as an opportunity to spend some and accelerate kind of market position?

So I'd love to hand that whole thing over to Dennis, but what I'll do is I'll answer from my standpoint and let Dennis answer...

You just win the gold in negotiation.

Thank you, by the way. No. So here's how I look at it. I really have not changed my view on this. We continue to invest, and I think Dennis said it best. We're not scared to invest, really, at any time at the market or what the markets are doing for any type of tax change, even continually invest in our business when it's made sense and we see the right thing to do. I think the growth we've had in our business has really come from some of the investments we've made, and we've been out in front of those investments and building things for the emerging needs of our clients. We will continue to do that. I know you guys don't like this, but I do not look to manage the margins quarter-to-quarter. I think that would be a mistake. I think our business is still a strong business in the mid-30s. However, if we see the right opportunity to continue investment and increase investment that might drop back in short term to medium term, we would do that. But I think, right now, we're comfortable with the investment spend. We might see some areas this year that we look to increase spend to get things done a little quicker, but I think it will be relatively similar to what you see in the past 2 years.

Mr. Shutler, if you want to give me your correct first name, I'll get that for you.

It's Chris.

And we'll go to Chris Shutler with William Blair.

The net client fundings did you say was $2.6 billion in the quarter?

Net fundings. I didn't give -- I basically gave, I think, the fundings year-over-year with assets. So client fundings were $20.8 billion Q4 over Q4.

Can you just give us for the quarter what it was?

Yes. I don't have the exact, the Q4, but I can get that for you, Chris.

Okay. I can go back and look. And then the assets under administration number look like it was only up slightly sequentially. So given the market backdrop, just what happened there? Were there some client losses in the quarter?

Well, there was a number of things. Obviously, we had some growth in some of our clients. There was a little bit of mismatch between our revenue growth and asset growth. There was some growth in our kind of account-based businesses, which obviously wouldn't be reflected on assets. We also had several clients, one in our global business and a couple in our alternative business that had some significant drops, redemption-wise, in their business. And we did have 2 clients that we lost during the quarter on our traditional side, and they're really normal run-of-the-course reasons. But one was they have a change in the strategy, and they decided to go with an internal solution versus outsourced, and the other went to a lower-cost competitor. So -- and what I would say is those 2 clients, they were in our traditional side, but they were lower-fee, lower-profit clients that we really just couldn't compete with, the prices they were looking at. And it was probably better strategically that they went the way they did, and the business moved on.

Okay. And then the last one, Steve, just on the -- on Archway. Just give us an update versus the initial financials that you guys had laid out, I guess, over the summer, how they performed in 2017. I think in the Q3 10-Q it looked like they were, I mean, trailing a little bit versus what you had expected. So how did it end up? And how are you feeling about that business?

Yes. So I'd say, directionally, I think we -- they were in line with what we expected. I think, to my previous comment, we obviously had some stretch goals out there for them. I think the acquisition midyear, obviously put a little bit of headwinds for a number of reasons, but they still grew. They grew top line this year a little over 17%. They grew their margins by about 15%, and I think that will exceed that going forward this year. I think, directionally, this was in line and met our expectations. We would have loved to see them be a little bit higher than where they were, but I think there's good reasons why that did not happen. And like I said, I think, directionally, they're in where we want them to be.

(Operator Instructions) Nobody else is queuing up at this time.

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

Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. Fourth quarter cash flow from operations was $143.5 million or $0.88 per share; and year-to-date December cash flow from operations, $459.9 million or $2.83 per share. Our free cash flow for the fourth quarter was $125.9 million, and our free cash flow for the whole -- the entire year was $375.6 million.

Our capital expenditures, excluding capitalized software, were $5.2 million in the fourth quarter for a total for the year of $25.5 million. We would -- we are going to do some facility expansion next year, so we're projecting our 2018 capital expenditures, again, excluding the capitalized software, to be about $40 million.

We did note the tax rate in our earnings release as well as in conversation with Dennis, and it is due to the Tax Cut and Job Act, but it's also due to the adoption of the new accounting standards that we adopted earlier this year, which allows us to record the tax benefit of stock options exercises in our calculation of income tax expense. That accounting standard will continue into next year. And as a result, our effective tax rate will most likely fluctuate quarter-to-quarter.

Now 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, and we have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

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

(Operator Instructions) And we'll go to Chris Shutler with William Blair.

Dennis, just one more. As we think about the expenses for 2018, just -- I know you're not going to give a specific number, but -- and there's a lot of noise in the numbers. So if we were to back out stock comp and amortization or all the other kind of onetime-ish things that are changing year-over-year and assume sort of just a normal or consistent sales year, are we talking more like low single-digit expense growth, mid-single, upper single? Just trying to get a ballpark sense of what you think is reasonable.

So you want to know what the x is and the x times y equals z? Is that what -- I guess the way I'd point out, if you take fourth quarter and normalize it for the onetime -- I'll call it onetime but really the -- I gave -- we gave you a number for amortization for first quarter 2018 which will carry through the year, probably adjust a little bit as the year goes on with the option expenses for the year compared to fourth quarter. To take those 2 things and kind of net them out, I would say that yes, we're kind of in the mid-single-digit percentage increases year-over-year. There's nothing unusual that we expect to happen this year expense-wise. We expect to continue to do things we've always done. We certainly are in a competitive environment for talent, so we want to -- we'll make sure that we keep and attract talent we need to grow our business. So the -- as you can see in the market, there's probably a little more pressure on compensation as a result of that. We're in the Philadelphia market, technology talent, in particular, as well as financial services. Investment talent is -- it's a competitive market for that. There's really -- but there's really no, I'd say, big investment project we have that we're planning on 2018 that would change that number much. So that's what I'd be comfortable with. Now if anything changed during the course of the year, obviously we would tell you about it. I thought you we're going to ask if the Eagles we're going to win on Sunday because we're all waiting for that question. And the answer is yes.

We'll go to Robert Lee's line with KBW.

Great. Just a real quick tax question, which I'm sure is fun. The -- what was -- outside of the changes related to tax reform, I'm just kind of curious what the actual tax benefit -- the kind of stock-options-related tax benefits was in the quarter, just from -- trying to kind of normalize at least the tax rate for the quarter in a way.

Yes. The option expense change, the accounting change helped us by about 4 percentage points on the tax rate in the quarter. That's why Kathy talked about the -- the rate I gave you, the 21.5% to 22% range does not include any benefit like that from that accounting rule because frankly that accounting rule is unpredictable because it's driven by option exercises, which could change. They could go up or they could go down. And therefore, the rate wouldn't change much, could go the other way. It could add -- it could increase your rate, frankly.

And actually, maybe just one follow-up. I mean, you guys obviously are still -- use a lot of options and whatnot. But a lot of firms out there have kind of been migrating more towards restricted stock over the years. Can you just kind of maybe, philosophy-wise, why you kind of prefer going the options route versus more stock -- restricted stock?

I'll answer that. This is Al. As -- last time we looked at this when we calculated, if we felt that we could grow our earnings faster than 12%, options make a lot of difference. And that changes. And right now, I think it would be lower than that because the interest rates are much lower. So we could run that again. But we feel,-- that's #1. It's just -- it's less expensive way to put capital in the hands of your employees. And the second is what do they prefer? And we have a bunch of people that are more entrepreneurial, and they appreciate the options and the upside on our options better than they -- than the certainty of the stock options they get. The...

Shares, restricted shares.

Does that answer your question, Rob?

It does answer it.

Yes. Rob, just so you know, there's nothing in our equity plan that precludes us from doing other things. We added that a couple of years ago. So if we were to think that, that -- if our philosophy change on that, we have the flexibility to do so.

Okay. So ladies and gentlemen, I'm encouraged by the direction each of our business line is taking and the progress they're making, and I believe these investments we're making will help us benefit from all the changes taking place in our industry.

So that concludes our presentation. Have a great evening, and thank you for attending our call. And most importantly, go Eagles.

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