SEI Investments Co (SEIC) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to the Chairman and CEO, Al West. Please go ahead.

Thank you and 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 first quarter of 2018. I'll then turn it over to Dennis to cover LSV and investment in new business segment. After that, each of the business segment leaders will comment on results of their segments. And then finally, Kathy will tell you -- or provide you with some important company-wide statistics. And as usual, we will field questions at the end of each report.

So let me start with the first quarter of 2018. First quarter earnings increased by 58% from a year ago. Diluted earnings per share for the first quarter of $0.86 represents a 56% increase from the $0.55 reported for the first quarter of 2017. We also recorded a 13% increase in revenue from first quarter 2017 to first quarter 2018. Also during the first quarter of 2018, our noncash asset balances under management were essentially flat. Deposit flows we had were offset by drops in the market. In addition, during the first quarter of 2018, we repurchased approximately $1.1 million of -- I'm sorry, 1.1 million shares of SEI stock at an average price of $73 per share. That translates to over $82 million of stock repurchases during the quarter. Finally, in the first quarter, as part of the investments we make to create growth, we capitalized approximately $12 million of the SWP development and amortized approximately $9.7 million of previously capitalized development. Also in the fourth quarter, we capitalized $900,000 of IMS development and amortized $1.3 million of previously capitalized IMS (inaudible).

First quarter of 2018 sales events, net of client losses, totaled approximately $18.8 million and are expected to generate net annualized recurring revenues of approximately $11.6 million. Now we remain disappointed with our sales results. While activity is very high and our pipelines are significant, larger deals are more complex today and take longer to close. Each of our units will speak to their specific sales results.

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

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

During the first quarter 2018, the investments in new business segment continued its focus on the operational development and testing of a web-based digital advice offering and on the ultra-high-net-worth investor segment through our private wealth management group. During the quarter, this segment incurred a loss of $3.2 million, which compared to a loss of $3.8 million during the fourth number of 2017. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the first quarter. LSV contributed $40.6 million in income to SEI during the quarter. This compares to a $43.3 million contribution for the fourth quarter of 2017. Assets grew approximately $500 million for the quarter. LSV experienced positive cash flow during the quarter, which was offset by market depreciation. Revenue was approximately $131.7 million, of which approximately 1% was performance fee-related.

Our effective tax rate for the quarter was 11.9%. On December 22, the President signed into law the Tax Cuts and Jobs Act. This had the effect of lowering our overall tax rate. In addition, our tax rate benefited from the accounting rule change related to stock option expense, which we discussed last year.

Finally, during the quarter, we adopted ASU 2014-09. This new accounting rule relates to revenue recognition. The adoption of this new rule did not change the accounting treatment for the majority of SEI's revenue arrangements and did not have a material impact to our financial statements. One area of note, however, was on how we record the brokers' fees received and expenses incurred for research services provided in our Private Banking segment. Both revenue and expense were previously recorded on a gross basis but now are netted in revenue. This resulted in a reduction of $3.7 million of both revenue and expense in the segment -- in the banking segment in the first quarter. We did not adjust in prior periods. There was no impact to net income in the segment or company.

I direct you to our recently filed 10-K and soon-to-be-filed 10-Q for more information on this accounting change.

I will now take any questions.

(Operator Instructions) Our first question is from the line of Chris Shutler with William Blair.

So the $3.7 million item in Private Banks, I know that there's offsetting revenue and expenses, but just as we model going forward, should we think about that same kind of magnitude hitting the remaining quarters of the year?

Yes, I would say so.

Okay, okay.

Only if we just take first quarter forward.

Yes, yes, exactly. And then the flows for LSV, Dennis, you said that they were positive. Can you quantify it?

They were positive about just under $1.9 billion.

Okay. So a really good quarter then.

Yes, it was a good quarter, and it was mostly new clients.

Mostly new clients?

Yes.

Okay. And then lastly, the tax rate. Just how should we think about tax rate from here for the remaining quarters?

Yes, Kathy will cover that in her comments, but I think the way we're looking at it, the way we plan for it is you have a statutory rate that's set. We can't really predict option exercising activity, which has its accounting impact. Also, we note we don't have that. There's going to be some -- the rates are going to go up a little bit as you kind of level set it for the year. So I would use -- I'm still using that 21% range as our kind of normalized rate in the way we model.

Yes, our expectation would be that the first quarter was extremely -- well, for a couple reasons, one, of course, it was the difference in the statutory rates. We had a lot of stock options vest and we had a lot of exercises. And we would not expect that level to repeat going forward. The other thing is to the impact of it on the first quarter is significant in terms of percentage because pretax income is only 1 quarter's worth.

So as you work through the year, it gets adjusted. So I would certainly be modeling a higher rate that will be experienced in the first quarter. We operate at the statutory rate in our model.

And there are no other questions. You may continue.

And then I'm going to -- thank you, Dennis. And then I'm going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?

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

First quarter revenue of $122 million was down 4%, mainly due to recent accounting changes mentioned by Dennis. For the quarter, operating profit of $10 million was up $1.4 million from the fourth quarter. Sales activity for SWP and asset management distribution is robust both with current clients and new name prospects. The decision in contracting process remains challenging and elongated. We're making progress, and the solution is gaining market acceptance.

During the quarter, we've signed and announced an important long-term SWP agreement with BMO Wealth Management. An SEI client since 2005, BMO will migrate their existing book of business currently on Trust 3000 to the SEI Wealth Platform in 2019. We also signed another Trust 3000 client, Bremer Trust, to a long-term SWP agreement expected to convert by the end of this year. In the U.K., we continue to cross-sell and gather solid net cash flow from current SWP clients. Net cash flow for the first quarter was $1.5 billion.

During the quarter, we received notification from 2 potentials that they will not renew their SWP contract when it expires at the end of the first quarter of 2019. CPS decided to run their business on an in-house homegrown system.

During the quarter, we had strong professional services or onetime revenue related to SWP sales agendas, conversions and other client activity.

Regarding Trust 3000. During the quarter, we recontracted 3 clients for a total of $4.5 million. There were some recontract net downs, mostly due to changes in client business models. There were no competitive losses during the quarter, but we did lose 2 smaller clients due to merger and acquisition activity. Our asset management distribution business ended the first quarter with positive cash flows of $333 million of net new assets. The new flows are representative of key distributors in Asia and in Europe.

During our investor conference last year, we discussed the launch of a new asset management platform delivering Manager Research. And in February, we announced our first client with this platform, Janney Montgomery Scott.

As an overall tally for SWP, Trust 3000 and AMD sales events, net of client losses, totaled approximately $3.6 million, of which negative $2.3 million is recurring revenue and $5.9 million is nonrecurring or professional services revenue.

Our total signed but not installed backlog for SWP is approximately $30 million in net new recurring revenue encompassing 8 uninstalled clients. As a new metric to illustrate our continued momentum with SWP, the total recurring revenue value of our SWP backlog, including the re-contracted value of the Trust 3000 relationships plus the net new recurring revenue, is greater than $70 million. As a reminder, the average SWP contract is greater than 6 years, so these relationships represent substantial revenue commitments to SEI.

Regarding the backlog. I'd like to give you an update on Wells Fargo. We continue to make great progress working in collaboration with Wells Fargo. To date, we've both met all our key milestones, including SWP development. But at this point, I expect the Wells Fargo conversion will push, and we are working closely with them to assess and reset the dates for conversion.

In conclusion, we remain 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 the backlog; and improving profitability of the banking segment to return the unit to historical profit margins.

Any questions?

(Operator Instructions) We go to the line of Chris Donat with Sandler O'Neill.

Joe, just on Wells Fargo getting pushed back, does that have any -- should we expect some revenue impact in 2019 from that? Or because they are already an existing account, nothing material? Or can you just help us (inaudible)?

Really nothing material. I mean, we still have a reasonable amount of onetime revenue, so we continue to work very actively on the conversion and the build-out of custom. There really isn't much impact to the revenue, though, in '18 or '19 though.

Okay. And well, I'll try asking it and see how you answer it. Is the getting pushed back you or them? Or can you say?

Yes, we're working really closely together, and these are very complex conversions. As I said earlier, we've -- both sides met all of our key deliverables. And I think as we get to a firmer date, we can explain more about the delays.

Next, we go to the line of Glenn Greene with Oppenheimer.

Joe, just following up on the last question. Do you have a reasonable sense of the timing when Wells is likely to convert at this point, or just too much up in the air?

Look, I think we -- both sides want to get this thing converted as soon as possible. They bought the SEI Wealth Platform because they believe it adds a lot of value to their business. So we're working really closely to figure out the best timing. And again, as soon as we get firm dates, I think you all probably know those before anybody. It seems you guys know everything before things go official. So we'll tell you as soon as possible. But we're working really closely with them to figure out the best dates.

And the 2 SWP clients that are not going to renew were -- just to be clear, were those U.K. clients? And just a little bit more color why they're not renewing and the order of magnitude of the dollar impact.

I mentioned there were 2 Trust 3000 clients that we did not re-contract because of competitive -- sorry, not competitive, M&A situations. And I also mentioned there was a client in the U.K. called True Potential that has decided to -- they were an early client of ours and they decided to take the platform in-house. They have a little bit of technology, then they build some front-end software. And their business is a fairly simple mutual fund managed account business, and they've decided to try to build that on their own.

What's the assets for True Potential? So it's just one SWP client that's not renewing. I misheard that.

Yes, that's what we talked about. That's what we -- that's what I announced today. We don't announce individual assets for the clients.

Okay. And then just a little bit more color. It sounds that you're enthused by the pipeline but still frustrated with getting deals over the goal line. But just maybe a little bit more color in terms of activity you're seeing.

So we think BMO Harris, BMO Wealth Management, as it's called now, is a terrific win for us. They're a very substantial BSP client of ours. And yes, they're a terrific book of business for us. They have lots more opportunity as a global organization. That's a big, big win for us. And again, these large wins are very complex sale situations. So that's another great one for us to get. That helps a lot as firms like that decide to move to SWP. That's helpful. But as I've said, and as Al has mentioned, these are complex contracting processes, and so we have a lot of activity. But it's -- getting the contracts inked is the hard part. But sales activity is very, very strong, and we are at it every day.

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

I'm just curious. Can you maybe update us? I mean, in the U.K., at least, obviously, you talked about strong net cash flows, and unfortunately, you had the one client who's leaving the SWP. But I'm just kind of curious about kind of sales and pipeline -- well, pipeline activity there for SWP with new U.K. or -- clients?

Yes, we've been disappointed that we haven't closed that many deals in the U.K. in the last couple of years, but we are actively engaged in some very robust sales agendas on the larger side of the market. We've got to move those agendas through the sales process. I think a lot of the market was really bogged down with some of the regulatory change with MiFID II and some of the other changes that were going on in the industry. Some vendors delivered MiFID II. We did a good job of that. Others didn't deliver so well. I think that's opened up some opportunities for us, and there I expect we'll continue to progress some agendas there this year. But it -- we're actively engaged. We have some of the U.K. team (inaudible) spend some time in the pipeline on there next week. And there's some interesting agendas there. But we're working hard to get some of their business (inaudible) because we're happy with the organic growth of the clients that we have on the platform there today. So if we can get some new names to add to that organic growth, then we think that continues to be an interesting opportunity for us.

Okay. And then maybe just a follow-up on the -- I mean, the one -- I guess it was about $5 million, call it, $6 million of onetime revenues. And I'm just kind of curious. Are those -- are most of those onetime revenues related to kind of clients who've already kind of signed on like Wells or others and you're just going through the process? Or are you still seeing a reasonable amount of onetime fees from people who haven't signed yet kind of in the pipeline, but you're kind of going through the exploratory process?

So there's a little bit of that. So there are some prospects that, again, are paying us as part of the process that haven't yet signed contracts, but the bulk of that revenue is related to conversions of clients that have already signed.

Next, we go to the line of Chris Shutler with William Blair.

Joe, so regarding the True Potential in the U.K., I just want to confirm, that is in the net sales events for Q1, correct?

Absolutely. Otherwise, we would not have had negative sales events. Yes, correct.

Okay. And are you -- is it the -- all revenue from True Potential that you will lose, including the asset management component?

No. It's just the invest -- it's sort of an average of what we had from (inaudible) investment processing revenue last year, but it's not the asset management revenue. We expect the asset management revenue to continue there. But as I said, they fashion themselves as a technology firm in addition to a financial services firm, and they've decided to try to build something and take it in-house.

Okay. And is the asset management revenue or the -- kind of the platform revenue a bigger component?

It's about 50-50 in the past. It's been about 50-50 in the past. So...

Okay. That helps. And then on Wells, I just want to make absolutely sure I'm clear on this. So you're basically saying no change to the revenue outlook around Wells, just kind of a pushout on the go-live date, right?

Yes. Certainly, in '18 and '19, there's no change and a pushout on the go-live date. Yes, absolutely, that's correct.

Okay. And I mean, do you think that you need Wells to go live to be able to sign other large ASP clients?

No, I think we're talking very actively with some of our other large clients as well as some other large global banks that would prefer an ASP over -- or a Software-as-a-Service model. And so our expectation had been for that Wells would be the first, but there are certainly other opportunities for us.

Next is the line of Tom McCrohan with Mizuho.

Joe, just 2 follow-ups on Wells. So has the Wells conversion come to a halt or until a new date is firmed up? Or is -- what's sort of being done?

Not at all. Not at all. We have the same team. We're very actively involved in the conversion. We're continuing to develop the technology that, again, is specific to ASP or Software-as-a-Service. They continue to have a substantial number of people in the project, and the conversion continues.

Great. And just in terms of magnitude of the delay, are we talking about quarters, years? I mean, if there's any way to think about that.

It's really hard to tell that. It's -- it will be delayed. Otherwise, we probably wouldn't be talking about it. But it's really hard for me to predict that at this point. And frankly, as soon as we have a better sense of it, I'm sure that, as I said earlier, you all will find out about it in the market. And I think Wells is committed to -- with us to talk more openly about it. But I don't want to give you information that is incorrect until we feel that we have a good understanding of it. We have a good relationship with Wells. Wells is very excited about SWP in the platform. We are very excited about Wells being a client of ours, and we're working very closely with them to make this a reality.

There are no further questions. You may continue.

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

Thanks, Al. In the first quarter of 2018, we continued to grow our revenues and profits while simultaneously making big strides in the migration of our business through the SEI Wealth Platform. First quarter revenues totaled over $99 million. These revenues were $11 million better than the first 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 first quarter versus last year's first quarter due to increased direct cost and personnel expense tied to our growth. SEI Wealth Platform migration expenses, together with increased development expense, net of capitalizations, also contributed to the increase.

Our profits grew 14.8% from last year's first quarter, and our margins grew slightly as many expense categories increased roughly in line with our revenue growth.

Assets under management was $64.6 billion at March 31, an increase of $6.6 billion from March 31, 2017. The increase was driven by positive net cash flow and market appreciation.

During the first quarter, our net cash flow was $935 million. This positive cash flow, partially offset by declining markets, was the cause of our AUM increase from the end of last year. During the quarter, we recruited 130 new advisers. Our pipeline of new advisers remains strong.

On March 31, we completed another migration of advisers onto the SEI Wealth Platform. This migration included roughly 86,000 accounts and over $11 billion in assets. We now have close to 80% of our assets migrated onto the SEI Wealth Platform. Another large migration is planned for the end of September. And a final smaller migration is planned for March 31, 2019. So in roughly 11 months, all adviser accounts will be on the SEI Wealth Platform.

As we complete these conversions, we will be simultaneously helping all of our advisers adopt the new features of the platform, especially its straight-through processing capabilities.

In summary, the first quarter reflected our continued financial growth and solid progress towards completion of our migration to the SEI Wealth Platform. These items give us confidence in the long-term opportunity in front of us.

I'd welcome any questions you have.

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

Sorry about that. Just on the fee reductions, were those -- because I know you've talked about this several times over the past year or so. Were these -- was this kind of the flow-through impact of prior reductions? Or were there some new reductions implemented, say, at the start of the year that saw the impacts? And maybe if you can kind of give us a sense of kind of where you see where that's happening. Is it more of a mix thing with the products or just seeing that you have to lower management fees on some products?

Well, early last year, we reduced the expense ratio of some of our mutual funds. I would say that was early last year. And then in the middle of last year, we reduced the expenses of our ETF portfolio strategies and our SMA strategies for our larger clients. And then at the very beginning of this year, we reduced the expense ratio of one of our larger mutual funds, U.S.-based mutual funds. And so basically, all of those numbers are reflected in the first quarter results.

Okay, great. And I'm just curious. I mean, your new adviser headcount has been pretty good quarter-over-quarter. And can you maybe update us on -- a little bit on the competitive environment you see out there? I mean, we do see and hear about different competitors coming up with different types of technology platforms. I think there's firms like AdvisorEngine and others who seem like they're trying to target the same kind of -- the same adviser segments. Can you maybe talk a little bit about what you're seeing in the competitive environment? Any new entrants or anything?

Yes. I would -- at the highest level, I would take some of these technology platforms like AdvisorEngine and I would look at them at the same way I would look at asset management firms. And what I mean by that is, they're appealing to the do-it-yourself adviser who wants to assemble a platform for their business that they can run themselves, so they can construct portfolios, pick the components of the portfolios, they can pick the custody platform, they can pick the surround technology, whether it be fee collection platform, aggregation platform, performance measurement. We're a complete bundled solution. So we're -- we appeal to the adviser that wants outsourced complete platform, be it investment or technology or operations, and wants to concentrate primarily on servicing their existing clients and selling new clients. So the value propositions are very different, and I think we go after advisers with different mindsets.

And there are no further questions. You may continue.

Thank you, Wayne. 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 first quarter of 2018. First quarter revenues of $85.5 million increased 11% compared to the first quarter of 2017. First quarter operating profit of $44.4 million increased 16% compared to the first quarter of 2017. Both revenues and operating profits were positively impacted by market appreciation, client fundings, positive currency translation and changes in asset class diversification by our client base. Approximately $2 million of the revenue and operating profit in the first quarter was onetime in nature due to retro private equity firms and specific client performance-based fees.

Quarter-end asset balances of $92.6 billion reflect a $7.6 billion increase compared to the first quarter of 2017. This increase was driven by higher capital markets and positive client fundings. Net fundings were flat for the quarter. This included approximately $850 million in losses, which was, as previously discussed, the continuation of partial curtailments of DB clients and a client merger. The unfunded new client backlog at quarter-end was $700 million but will be impacted by second quarter client losses. New client signings for the quarter were $1.1 billion. This was primarily diversified across new clients in endowments and foundations, U.S. health care and U.K. Fiduciary Management. Continued sales penetration in the not-for-profit segments will continue to yield a higher consumption rate of higher-fee alternative investment asset classes. Our sales pipeline is strong, and we will continue to focus on key growth markets in 2018.

And I welcome any questions that you might have.

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

Just, I guess, a quick follow-up. I -- you mentioned that, I guess, pipeline be impacted by client losses in subsequent quarters. Are there some sizable client redemptions you're anticipating as we look ahead to the current quarter?

There is a similar curtailment that we now know of in the second quarter that's probably somewhere in the magnitude of the gross backlog.

Okay, that's helpful. And then maybe, again, also talk a little bit about the competitive environment. I know it's talked in the past about new entrants in the OCIO marketplace and the consultants and others, and that has also put some pricing pressure, I guess, on the industry. And can you maybe just update us? And if you're -- are your -- based on your (inaudible) that you're losing some business here or there. Is it mainly to lower-priced competitors? Or how do you -- are you seeing them kind of impact your pipeline? Just kind of get a feel for that.

Yes. I think the beauty of our segueing into endowments and foundations is they are not low-priced buyers. They are high-quality buyers, and they want to find organizations that have scale, scope, resources, that can manage their endowment and foundation for the next 30-odd years. So unlike someone -- say, a DB plan was in the market right now that was only going to be around for 4, 5 years, they might be a low-cost buyer because they're not really going to be a going concern, so to speak. But the endowments and foundations, they're going to do a competitive process. They're going to make sure that your rates are competitive vis-à-vis others, but they're not going to just buy the cheapest provider. The other benefit that I mentioned in my remarks is that these types of investors consume alternative investments at a much higher clip. And our revenue model for alternatives is higher, just like it is with other competitors, and that will certainly be a direct benefit. And we saw some of that benefit in the first quarter.

And next, we go to the line of Chris Shutler with William Blair.

I just wanted to follow up on that last comment around alternatives. So just putting it all together, with increasing mix of alternatives, kind of fee pressure elsewhere, how should we think about kind of the blended revenue yield in your part of the business?

I mean, it's really stayed fairly flat, maybe gone down a little bit, Chris. We do have -- so we have 2 dimensions. We have historical DB accounts that we won 10 years ago that are curtailing or we're losing, where when we won them 10 years ago, we had a much higher OCIO fee or Fiduciary Management fees. We're now replacing that with endowments and foundations where the OCIO fee might be lower, but the net up we get from alternative investments is much higher because the DB plans did not have as much alternative investments. Consequently, it kind of levels out. As the DB runs off and we replace it with more of these endowments and foundations, we feel confident that the yield rate will actually increase over time, but I don't see that in the foreseeable future. My goal in the foreseeable future is to keep it levelized. One of the real benefits that we did over the last 6 months is we had our largest raise in private equity with our clients we've ever had. That's a tremendous asset class for the investors. It's very helpful for us. And investors that would put assets in private equity, they're making a commitment for 8 to 10 years, as you know. So that's a real good benefit we brought to them and also a commitment that they have for us as a OCIO firm.

There are no other questions. You may continue.

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

Thanks, Al. Good afternoon, everyone. For the first quarter of 2018, revenues for the segment totaled $96.9 million, which was $16.4 million or 20.3% higher as compared to our revenue in the first quarter of 2017. This year-over-year revenue increase was due to net new client fundings, market appreciation and the acquisition of Archway. Our quarterly profit for this segment of $33.5 million was $5.1 million or 17.9% higher as compared to the first quarter of 2017. Higher profits were primarily driven by an increase in revenue, offset by an increase in personnel and investment expense. Our increase in investment expense included amortization of our investment in the front-office portion of our platform and the amortization of Archway acquisition. We expect our increase in investment expense and related amortization to continue for the next several quarters. Third-party asset balances at the end of the first quarter of 2018 were $507.7 billion, approximately $50.3 billion or 11% higher as compared to the asset balances at the end of the first quarter of 2017. This increase in assets is primarily due to net new client fundings of $42.8 billion and market appreciation of $7.5 billion.

And turning to market activity. During the first quarter of 2018, we had a strong sales quarter, with net business events totaling $8.1 million. These sales are comprised of new name business as well as an expansion of existing business with current clients across all of our segments. These wins included a new middle office outsourcing mandate and a collective fund mandate with 2 prominent traditional managers, an ETF servicing mandate, and several private equity outsourcing deals won in a competitive process. Additionally, we've signed several new family office clients. The market continues to stay active, and we continue to see strong demand for our platforms as well as a market need for our new solutions, including our front-office platform, global regulatory and compliance and our hosting platform. We feel well positioned with the investments we have made, and we feel optimistic regarding our future growth opportunity.

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

(Operator Instructions) We go to the line of Chris Donat with Sandler O'Neill.

Just wanted to ask on the competitive environment. I mean, you guys did an acquisition last year for your business, but we've seen a lot of activity away from you with particularly the SS&C-DST merger and then some noise this past quarter around (inaudible), which I realize is kind of away for you. But I'm just wondering, when you have this sort of consolidation in the industry, does that create more competition for you? Does it create opportunities to call in new clients? Just wondering how it affects your sales process or business, or if it doesn't, really.

Well, I think anytime you have a transaction like this, anytime there's, what I would call, noise like that in the industry, there's always opportunities. I think it's something we've seen, will continue to see. We don't see huge inflection points from it, especially as these deals get larger, as people, as consolidation happens. It's tough for people. It's a big event for someone to move their business, especially the larger they become. However, what we do see is clients are still pushing as managers look to change their business model. As they're under increased complexity from regulation, from them looking at how to scale their business, expand their business, they are looking for capability. And whether acquisitions and consolidations provide that among certain providers or not, I think that's the driving force we see and we see the most opportunity with.

And there are no other questions. You may continue.

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

Thanks, Al, and good afternoon, everyone. I had some additional corporate information about this quarter. Our first quarter cash flow from operations was $104.2 million or $0.64 per share. First quarter free cash flow was $85.7 million. And first quarter capital expenditures, excluding the capitalized software, was $5.6 million. We're projecting capital expenditures, excluding capitalized software, to be about $37 million for the year because that does include money set aside for expansion of our facility.

As we talked about earlier, the tax rate was 11.9% and is due to the combination of the new tax act and the tax benefit of the first quarter stock option exercises. And as you're aware, our rate will fluctuate as a result of the timing of stock option exercise.

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

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

(Operator Instructions) We go to the line of Chris Shutler with William Blair.

Steve, I had a couple of follow-ups. I didn't get it in the queue quick enough.

No problem, Chris. No problem.

So one was just the fundings in the quarter. I know you gave a number. Can you just give us the number for the quarter?

Fundings for the quarter? Well, this is again -- this is -- the assets, it's year-over-year quarters, Chris. So it was $50.3 billion of assets going up. And out of that, net new client fundings are $42.8 billion. Again, Q1 2018 versus Q1 2017. If you're trying to look at where we are sequentially, which I think is where you typically go, quarter-over-quarter, Q4, we were about 2.5% up asset-wise quarter-over-quarter, Q4 to Q1.

And that was all from client funding? Or how much of that was markets versus fundings?

Actually, it was about -- net new client funding was about $27.3 billion, offset by depreciation of 15.1.

Okay.

So that's Q4 to Q1.

Got it. Okay. And then the backlog and retention, did you give those numbers -- or the backlog number at least?

Backlog is, at the end of the quarter, about 38.6.

38.6, okay. And then lastly, just general question. The amortization on the P&L, the 11.8 in Q1, is that a good run rate to use going forward?

I think for the next several quarters, that's probably in line, directionally correct. Imagine, there's 2 points to remember. There's the amortization of Archway, the acquisition and amortization of our capitalized investment expenses that we mentioned. And as I mentioned, where we're at, I think that's going to be pretty consistent over the next several quarters.

And there are no other questions. You may continue.

Thank you, Cass. So ladies and gentlemen, I am encouraged by the direction our businesses are taking and the progress they're making. While we face short-term headwinds, we believe that the investments we are making will help us benefit from all the changes taking place in our industry. And this concludes our call. And have a great day, and thank you for attending our call. Appreciate it.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.