SEI Investments Co (SEIC) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the SEI Third Quarter 2018 Earnings Call (Operator Instructions) Also, as a reminder, today's conference is being recorded. I would now like to turn the conference over to your 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 third quarter 2018. 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. Then 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 third quarter 2018. Third quarter earnings increased by 26% from a year ago. Diluted earnings per share for the third quarter of $0.80 represents a 27% increase from the $0.63 reported for the third quarter of 2017. We also reported a 6% increase in revenue from third quarter 2017 to third quarter of 2018. Also during the third quarter 2018, our noncash asset balances under management increased by $3.6 billion. At the same time, LSV assets under management increased by $2.9 billion during the third quarter. These increases in assets under management were due to the market appreciation.

In addition, during the third quarter of 2018, we repurchased approximately 1.7 million shares of SEI stock at an average price of $61.55 per share. That translates to over $102 million of stock repurchases during the quarter.

Finally, in the third quarter, as part of the investments we make to create growth, we capitalized approximately $8.8 million to have the SWP development, and amortized approximately $11.4 million of previously capitalized SWP and IMS development. Third quarter 2018 sales events, net of client losses, totaled approximately $27.9 million and are expected to generate net annualized recurring revenues of approximately $22.5 million. Our sales results reflect the fact that activity is very high and our pipelines are large. Still, we are experiencing that larger sales events are particularly complex 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 segments' heads. Dennis?

Thanks, Al. Good afternoon, everyone. I'll cover the third quarter results for the investments in new business segment and discuss the results of LSV Asset Management. During the third quarter of 2018, the investments in new business segment continued its focus on our digital advice offering and on the ultra-high-net-worth investors segment through our private Wealth Management group. During the quarter, the investments in new business segment incurred a loss of $2.8 million, which compared to a loss of $3.3 million during the third quarter of 2017. This improvement reflects the growth of our private Wealth Management business.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $41.7 million in income to SEI during the third quarter. This compares to a contribution of $39.3 million in income during the third quarter of 2017. Assets grew approximately $2.9 billion for the quarter. LSV experienced net positive cash flow during the quarter of approximately $300 million. Revenue was approximately $133.9 million, of which, less than 1% was performance fee related. During the quarter, our effective tax rate was 18.6%. I'll now take any questions.

(Operator Instructions) And we do have a question from the line of Chris Shutler.

So a couple of questions. One was just on the tax rate, just -- what we should expect from here?

I think we'll probably be back certainly -- tax rate closer to what we were in second quarter.

Okay, got it. And then the corporate overhead expense was down a little quarter-over-quarter, I think it's usually up sequentially in Q3. So what happened in Q3 there? And how should we look at that line going forward?

We added a small -- or a benefit from -- we applied for a tax credit from the State of Pennsylvania, wouldn't flow-through of taxes or flow-through expenses because of our investment in our data center operations that we -- that came through in the third quarter. So that's helped a little bit. But I would say that, kind of, across the company, we had a concerted effort on expenses during the third quarter.

Okay. So going forward, it's probably not going to tick back up to the Q2 level, somewhere in between?

Yes, that's probably a good range.

We do have a question from the line of Robert Lee with KBW.

Just a quick question on LSV. I just -- I was curious, I mean, possible to get any color on -- do they have 1 or 2 specific maybe strategies that are, kind of, bucking the border industry trend and seeing -- generating their flows, just trying to get a sense of, kind of, drilling down a little bit on what may be driving this?

Yes, I mean, most of their -- I see more smaller cap, mid-cap regional products are close to new money. So their flows are still going into their more, I'd say, their bread and butter foundational products. Now the good news for them is that their distribution activities either asset was also coming globally. So they're not just from -- U.S. clients are coming from other geographies in the U.S. products. So it's still their bread-and-butter stuff that's helping them.

(Operator Instructions) And we will go back to the line of Chris Shutler with William Blair.

Dennis, sorry I had to ask another one here, but on LSV, could you give us any update on their performance in the third quarter or I guess so far in October. We had a great visibility into that except like through like June 30, and I know they had some challenges earlier this year, great long-term performance, but just want to get an update.

Yes, I mean, their -- again, on their more traditional strategies, their performance is okay. Value has been a tough segment of the market, as you are probably aware. And that's continued to play out during the third quarter maybe the market cycle we're kind of getting into now, that will change a little bit. Some of their other strategies -- their performance is actually pretty good. But you can see it in their performance fees number, coming down a little bit. Last year and this year or even first and second -- or second and third quarter is down a little bit. So, yes, performance is a little but tougher.

We have no further questions. Please continue.

Thank you.

Thank you, Dennis. I'm now going to turn it over to Joe Ujobai to discuss our private banking segment. Joe?

Great. Thank you, Al. I'll start with the financial update on the third quarter followed by an update on new business activity. Third quarter revenue of $118.5 million was down slightly from the second quarter, primarily due to a decline in mutual fund trading revenue. For the quarter, operating profit of $2 million was also down from the second quarter due to the lower revenue and slightly higher expenses largely tied to the SEI Wealth Platform.

During the quarter, we signed 1 new SWP agreement, Cornerstone Advisors. It's a new client to SEI. Year-to-date, we have signed 7 new SWP clients. In Q3, we also signed $3.5 million of professional services fees related to SWP clients and prospects.

In U.K., we continue to cross sell and gather solid net cash flow from current SWP clients. Net cash flow for the third quarter from U.K. SWP clients was $1.4 billion. Sales activity in the U.S. and U.K. with current clients and new prospects is strong.

As I mentioned, some of the larger decisions are very complex, and frankly, can be political with inside of larger organizations. For example, at one U.K. client, we are negotiating a new SWP agreement to administer a large book of private client accounts. Through some organizational and strategy change of the client, we would expect to deconvert some assets from SWP, while we begin to convert new books of business to the platform. We expect this to be a net positive growth event for SEI, and this opportunity is still under negotiation.

Regarding Trust 3000, during the quarter, we recontracted 4 clients for a total of $3.8 million. Included in the recontract numbers is a Trust 3000 client that gave us a termination notice in Q4 2017 that they have since rescinded, and they have extended their SEI relationship. Year-to-date, we have recontracted 16 Trust 3000 clients for $42 million of annualized revenue. There were no Trust 3000 client losses during the quarter.

Our asset management distribution business experienced approximately $55 million in net negative cash flows, mainly from non-U. S.-based distributors. Overall, net sales events for the private banking segment were approximately $5 million of which $1.5 million is recurring annual revenue and $3.5 million is onetime or professional services revenue. I did want to make a quick correction. Cornerstone Advisors is actually a new client for banking, they were not a Trust 3000 client, but they are a client of SEI's in the IMS space.

Overall -- sorry, as an update on client conversions, we converted a U.K. client to the SEI Wealth Platform during the quarter. This brings the total to 37 clients currently processing on SWP. Our total signed but not installed backlog for SWP is approximately $29 million in net new recurring revenue.

As I mentioned on previous calls, we are tracking a metric to illustrate our continued momentum with SWP. The total annual recurring revenue value of our SWP backlog. This number includes the recontracted value of Trust 3000 relationship plus the net new recurring revenue is greater than $72 million. And as the average contract term in our backlog is greater than 6 years, the uninstalled clients represent more than $450 million in contracted revenue to SEI.

We continue to actively work with Wells Fargo on the conversion to SWP, but have not yet set a new conversion date. Overall conversion activity is robust with 40% of the backlog expected to convert by the end of 2019 and the remaining to convert after that time.

In conclusion, we remain focused on the following: capitalizing on our momentum to grow the SWP business; installing the backlog to matriculate the revenue; and improving profitability of the banking segment to return the unit to its historical profit margins. Any questions, please?

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

I was just curious, can you update us, as we look at the backlog and the client you're signing up for SWP. I mean, I know the original intent of the platform was to make it much more asset-based so, obviously, you get that asset growth over time, notwithstanding short-term volatility like we have now. But can you maybe give us a sense of -- on these new relationships or even existing ones, kind of, how the mix is shaking up between the proportion of maybe asset-based versus maybe account based or flat fee. Just trying to get a sense of how we should think of...

Yes, it's still largely asset-based. Although the pricing we have evolved the pricing of over the history of SWP. And in the U.K., the mix of clients are, generally it's higher growth, fairly high growth wealth manager advisory clients. So we're seeing not only growth from the market appreciation but those businesses have a tendency -- have been growing -- many of our clients have been growing organically and through acquisition but also organically. And that certainly helped, we've seen good revenue growth from that.

In the U.S, the clients have slightly different, sort of, backgrounds. Some of them have been our Trust 3000 clients, which again, we're largely an asset-based solution, but we have added more pricing mechanisms around accounts and fees depending on the nature of the underlying functionality. But still, overall, it's still very much an asset-based -- majority of the pricing is asset-based.

Okay. And then, maybe just a quick update on the Trust 3000 that you did resign. Can you maybe just update us on, kind of, what type of, if any, kind of, pricing concessions you're seeing? And then, maybe any sense of, if we look forward over the coming quarters, is there a lot of -- are you pretty much through, kind of, repricing or resigning?

Yes. Well, I'll make a couple of comments. One is, there are some net downs but they're single-digit net downs. And in some cases, it's been where a bank may not have as many accounts on the platform, on Trust 3000 as they would have had in the past. We had a pretty solid year on recontracting, and we only have -- most of our important clients are either recontacted or well on their way to recontract. But also, we're talking, engaging those clients with their eventual move to SWP. So we typically have a pretty long-term strategic conversation with them. Some will choose to recontract for 2 to 3 years, or so more years on Trust. But in all those conversations, we're talking about the eventual move to SWP.

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

Want to ask one question about something you've been disclosing in press releases when you announce SWP wins, which is the number of clients and implementation, and it's been, sort of, around the 8, 9 number. Does that represent something of your maximum implementation number? Or is that really a function of things, not just number of clients but really accounts or assets or something else?

No, that's not our -- that's not a maximum for us. We think we can handle considerably more than that. That's more of a reflection as we -- I'm not selling this thing fast enough. But we could certainly have more than 8 or 9 clients in the backlog.

Okay. And then just on the $3.5 million of professional services signed this quarter. Is that something we should expect in the next couple of quarters as it flows in?

Yes, some of that has already flowed in. So in some cases, that's usually -- it matriculates more quickly. And so some of that is tied to the conversions that we're doing, and some of that is tied to projects that are more in, we call the discovery or the sales space. But yes, we recognize that revenue generally fairly quickly.

Okay. But to confirm, some is in the sales phase or the discovery?

That's correct, that's correct.

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

So I just want to dig into the couple of examples that you gave. So the U.K. client, just -- if you could reiterate what you said there, maybe talk about that a little bit more. And then, I think you said that one client, they originally gave a termination notice in last year is now on board. So just what, kind of, changed there?

So I'll take that one first. So with the client, that -- with the long-term Trust 3000 client, smaller, more of a community bank type client. They were acquired by another bank that was on another system. The plan was to move off of Trust onto the competitive system that the acquirer had. After reconsideration and moving towards conversion, they came back to us and said that they did not want to move on to the other system and that they wanted to recontract on Trust 3000 for a couple of years. And they wanted to consider SWP for the larger merged entity. So that's, I think, is what we've seen. I think we've talked about it in some other calls, where there have been firms that have been interested in some of our competitive systems, whether it'd be for price or maybe for convenience in this case, with a merger. And ultimately, our -- come back to us. So we are happy about that and we like to see more of that with some of the losses we've experienced over, really, last year -- well, last -- most of that -- those losses happened last year in 2017 or sooner than that.

And then, in the UK, I just want to, sort of, give an example that we're having good conversations with large firms, both prospects and clients. And we have a situation with a client there, and we believe that we have an opportunity to grow our business there. But the mix of the underlying accounts might change. So because of some changes with inside of that firm and the strategy inside of that firm. So I think the point there I wanted to make is that these are complex and -- but we're working with these large firms to identify what's our best opportunity and where SWP fits and making some progress there. But in the meantime, they may change around the mix of underlying accounts.

Okay. And then, I think, also, Joe, you mentioned that the main reason for that decline in revenue quarter-over-quarter was mutual fund trading revenue. Can you just give us a little bit more detail on which one?

Yes, we have an outsource service where we execute mutual fund trades for our clients, and we are paid usually basis points to do that as an administrative fee. And we're finding that some clients are no longer participating. But we're still doing the trading, but the fees are coming down or they're deciding not to take administration fees from the funds, essentially. So I think that's sort of an industry pattern, it's still a big business for us, and we still have significant revenue associated with that. But some of those volumes have declined, either the clients are trading less in funds or they might be going directly to the funds and not participating in the service anymore.

Is it just 12b-1?

Yes, it's 12b-1's or other's administration fees that they share with us or give to us for the services that we provide. Some banks are just deciding not to invest in funds with those kinds of shareholder servicing fees.

And next, we'll go to line of Glenn Greene with Oppenheimer.

Just a couple of, sort of, just data points. Where are you in terms of how many Trust 3000 clients do you have left? And as you're recontracting them, you mentioned a few recontracting this quarter. What's the average duration of those -- of these recontracts?

I think the average duration is about 3 years or so, 3 or 4 years. And there's still a lot to recontract. So there's obviously some of the very large ones and there are still a decent number of -- we had about 90 or so clients, and we still have a decent amount of those too. I'm sorry, not to recontract but to move to SWP.

So what I'm trying to get at is, are you anywhere close to or where do you get to a tipping point where you get more aggressive with the existing Trust 3000 where you, sort of, disincent them to stay on Trust 3000, if you know what I mean or incent them to move to SWP?

Yes, I think, we're getting close to that. So the platform has very robust functionality for U.S. trust types -- U.S.-based trust departments. We have strong functionality there. We have more maturity of the platform. So I think in -- and almost every case with a recontract, we lead with the move to SWP, and sometimes that depends on what else the client is trying to accomplish from a technology standpoint outside of our area. But we're, I'd say, increasingly more aggressive about that.

Okay. And then just a final question, I don't know how you want to answer this. But given the Wells Fargo conversion delay, you obviously or presumably, have a hole in your, sort of, conversion backlog. What are you doing to, sort of, address that, if I'm correct on that thesis?

Well, we're still working and we're still getting paid by Wells Fargo to implement the conversion. The conversion is taking longer than we would have expected, so there are still significant amount of people working on that, and we're getting -- I guess, we're paid for that. And in the meantime, we're trying to sell to fill the rest of the pipeline. And so there are, I guess, I'd say, 8 or 9 accounts, one of those accounts is Wells. But the goal is to continue to sell more to utilize the resource that we have. But people are not sitting around waiting for work. Some of these conversions are more complex than some of the original conversions. So we're working to get those done as fast as possible. For example, we announced, I believe, in the first quarter a U.K. client for the platform, and we converted them fairly quickly in the third quarter. So part of this is also trying to get things, use the resource and experience we have to get things converted more quickly. Matriculate the revenue more fast -- more faster.

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

Joe, I guess, I had a question on really the asset management programs. I know a couple of years ago, that was pretty quickly growing, kind of, segment within the private -- within your overall segment. And notwithstanding some outflows, modest outflows this quarter, can you maybe update us on, kind of, where -- what's going on with that part of the business? I mean, (inaudible) slow down?

Yes, it's -- as we talked before, it's about a 30% of our business, and what we are -- we have some really solid distributors that have been good this year. The business is a little bit more non-U. S. than U.S, and we have strong teams now on the ground in the U.S., in Canada and in the U.K. We have a good solid pipeline there. We're looking for big deals that will drive assets. We've signed some deals this year but it does usually take a little bit of time for those assets to matriculate. So we signed, sort of, a deal with -- at a headquarters level. And then, we've got to go in and train and get the sales force there promoting the solution. So, I'd say, the pipeline is solid. We've got some deals signed that we would expect funding to start flow in. And then we would conclude those as events as the assets actually matriculate onto our -- into our funds.

And then maybe just one more follow-up, if I could. Just -- this is -- I mean, this goes back to, I guess, I'll call it, decommissioning Trust 3000 to an earlier question. I mean, assuming at some point, when you're going to have to announce that you're not going to support it past a certain date, and then assuming, not -- unfortunately, not everyone's going to go to SWP. So how much lead time do you think you need to give clients and you, kind of, make that decision? Is it 3 years? 2 years? How do you, kind of, think that and weigh that in the (inaudible)

I mean, we're -- it's not like some big event. We're talking to all of our clients about the eventual takedown of Trust 3000. They are all aware of what our plans are and certain clients would need more time than others based on the complexity of their business. I think we've said on multiple calls though, the firms that are interested have a strategy, a growth strategy, are very interested in eventually moving to SWP. There are some smaller clients or older clients that trust and the services that we have provided have been sort of a -- are now more of an accommodation to their client base as they've evolved their strategy over the years. So some of those clients we suspect might leave. We might want them to leave. But those are generally smaller ones that wouldn't take a long-term -- time to convert. But we're having these conversations with every client, understanding their situation, and ultimately, understanding -- talking about the benefits to move to SWP, and we expect that most will move. Most will want to.

And our next question comes from the line of Thomas McCrohan with Mizuho.

Joe, on the mutual fund trading revenue, can you quantify the impact this quarter. And what kind of margins are we getting on that business? It sounds like there is a low-margin business. I just want to confirm.

Yes, it is a lower margin business, and were probably down about 15%.

Okay. And then any thoughts on the trajectory of margins from here?

Well, obviously, we'd like to see sequentially better margins every quarter. But a quarter is a short period of time and different things happen in the quarter. But again, we're working hard to convert this backlog and to sell more and continue to build out the backlog, and the margins will improve as we get this backlog converted.

And our next question comes from the line of Patrick O'Shaughnessy with Raymond James.

So we're about a year into the Regions Bank install. Any key takeaways that you would say that you've learned over that year and maybe anything that's surprised you or it's been different than what you had expected?

So it's been a year, you're right. We've just, sort of, been talking about the year. So the year -- not celebration, but the year anniversary. I think that -- we think that some of the policy of the platform from front to bank -- from front to back is going to get the greatest benefit and value out of their relationship with SEI. We were able to provide a really solid solution there on the private client side. They are one of our -- well, they are our largest institutional Trust user. So we had to build out some more services for them on the institutional Trust side. And that includes some of -- some calculations and reporting on those kinds of things. I think we're very proud of our progress in the first year. They are a referencable client. In fact, we just had a prospect, and a very important prospect on the ground in Birmingham a week or so ago. And so we're excite about how they're using the platform. We're excited about the progress we've made. We're excited about how they've moved -- how they've evolved their business. And they are referenceable, and should be a help to us as we grow the business.

(Operator Instructions) And there are no further questions in queue. Please continue.

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

Thanks, Al. In the third quarter of 2018, we continued to grow our revenues and profits, while simultaneously making big strides in our migration to the SEI Wealth Platform. Third quarter revenues totaled almost $103 million. These revenues were $8 million better than the third quarter of last year. This increase was driven by market appreciation and positive net cash flow, offset in part by previously announced fee reductions in some of our investment products. Expenses were up in the third quarter versus last year. The year-over-year increase was due to increased direct cost and personnel expense tied to our growth. As compared to the second quarter, expenses were relatively flat.

The Q3 versus Q2 comparison benefited from there being some one-time expense items in the second quarter that did not repeat in the third quarter. Our profits grew $12.6 million from last year's third quarter and our margins improved 1.6%. Assets under management were $67.1 billion at September 30, an increase of $1.8 billion from June 30. The increase was driven by both market appreciation and positive net cash flow.

During the third quarter, our net cash flow was $324 million. During the quarter, we recruited 81 new advisers. Our pipeline of new advisers remains active. With respect to the SEI Wealth Platform, we continue to work on the migration of our advisers. At the end of September, we migrated over 100,000 accounts and over $12 billion in assets. We now have 47,000 accounts and $4.7 billion in assets remaining on Trust 3000, and continue on target to migrate these remaining assets on March 31 of next year. While the completion of the migration is targeted for March 31, we will continue, throughout 2019, to help our advisers benefit from the new features on the platform, especially its straight-through processing capabilities.

In summary, the third quarter reflected our continued financial growth and solid progress in our migration to the SEI Wealth Platform. These items give us confidence in the long-term opportunity in front of us. I now welcome any questions you have.

(Operator Instructions) And our first question comes from the line of Chris Donat with Sandler O'Neill.

So one thing that surprised me a little bit this quarter is we saw your fee rate, as we calculated, tick up to 62 basis points from 61 in the second quarter, and that's not something we see in a lot of places these days. So just wondering is there's something in your mix shift? Or as you migrate clients to SWP that the cause of little higher fee or something else going on? Just happy to see it, when it makes you understand why it's going on.

Yes, I can't tell you -- I have a really good explanation. We get -- we try to get a little platform fee, it's just a lot of little things. I can't tell you there's one factor driving it.

Okay. But no, like, no changes in your fees on a positive side but more small things.

No. No, I wish it were.

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

First, I'm just -- first question is really just, kind of, on the maybe investor behavior and environment. I mean, usually when you start getting to these kinds of environments, you start to see the risk of trade, so to speak, advisers, clients, kind of, try to take down the risk levels. Are you starting to see some of that or you're just kind of expecting as we kind of look ahead just a little bit of -- start to see some of that, kind of, filters through and if this, kind of -- if this environment kind of stays in place for a little while longer?

Yes, I don't know if we're seeing a lot of risk off. I mean, I think, if you look year-over-year, I think our liquidity balances are a higher percentage of our overall asset balances, and I think there is a small migration to that if you recall risk-off status. But I don't -- and I think there's just a little, maybe a little more apathy out there now because people don't know what direction to go. So I haven't seen a major change yet.

And without maybe reading too much into any one quarter's flows but it does -- last quarter or this quarter, you have seen some slowdown in inflows and, kind of, number of advisers while still obviously, growing maybe little slower pace than it's been in a while. Is there anything maybe around that related to just client preferences or just one of those quarters are slow, I'm just seeing if there's anything we should be thinking about, kind of, trend wise.

Yes, I guess, what I would say is, I think, at the end of March and at the end of September, we had the 2 biggest migrations to date. And when I look at the field force and service book both, we are focused on getting these clients migrated and it is a little bit of extraction.

And our next question comes from the line of Chris Shutler with William Blair.

My question's already answered. Thanks.

And currently there are no further questions in queue.

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

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the third quarter of 2018. Third quarter revenues of $83.5 million increased 4% compared to the third quarter of 2017. Third quarter operating profit of $43 million increased 6% compared to the third quarter of 2017. Both revenues and operating profits for the quarter were positively impacted by market appreciation, positive net client fundings and changes in asset class diversification by our client base. Quarter-end asset balances of $92 billion reflect a $1.2 billion decrease compared to the third quarter of 2017. This decrease is driven by lower low-fee liquidity balances, net client losses were offset by positive market depreciation. Net fundings for the quarter were a positive $450 million. The unfunded new client backlog at quart end was $450 million. New client signings for the quarter were $1 billion. This is primarily new clients in U.S. in endowments and foundations, U.S. hospitals and U.K. Fiduciary Management. Client events in revenue terms were strong due to the consumption of higher earning asset classes.

Our sales pipeline is solid and growing, and we continue to be aggressive in our pursuits of new business. We continue to believe that volatility in the financial markets would be a tailwind for new business, as it would be a catalyst for investors to evaluate their current investment program. Thank you very much, and I'm happy to entertain any questions you may have.

(Operator Instructions) And currently, there are no questions in queue. Please continue.

Thank you, Paul. And 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 third quarter of 2018, revenues for the segment totaled $101.3 million, which was $10.3 million or 11.3% higher as compared to our revenue in the third quarter of 2017. This year-over-year revenue increase was due to net new client fundings and market appreciation. Our quarterly profit for the segment of $36 million was $4.8 million or 15.4% higher as compared to the third quarter of 2017. Third-party asset balances at the end of the third quarter of 2018 were $552.4 billion, approximately $29.7 billion or 5.7% higher as compared to the asset balances at the end of the second quarter of 2018. This increase in assets was primarily due to net new client fundings of $22.7 billion and market appreciation of $7 billion.

And turning to market activity. During the third quarter of 2018, we had our strongest sales quarter this year, with net new business events totaling $15 million in recurring revenues as well as recontracts of $8.5 million from recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new name business and increased wallet share with current clients. These events included expansion of our business with several large enterprise clients, the win of a traditional manager and the servicing of their mutual fund family, which was one in a competitive process. And the win of a large new family office servicing mandate.

From a market standpoint, we continue to see the dynamics of the industry changing. From the demands of investors, the fee compression in the industry, the new evolving needs of Investment Managers globally, all create some level of disruption. We feel strongly that this disruption presents an opportunity for continued growth for us. Strategically, we continue to feel well positioned. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

(Operator Instructions) And we have a question from the line of Robert Lee with KBW.

I'm just curious. I mean, well, in the past when there was -- when there have been -- when there's been an M&A and transactions in the industry, you've generally viewed as an opportunity that gets you new clients. And State Street obviously just did a larger acquisition, I guess, of Charles River and then I know -- I mean, does that create any kind of potential disruption that you could benefit from? Or is it too early to tell? I mean, how do you think of that?

Well, I think that specific transaction and there was another purchase of a front office system, I think it's too early to say. But I'd say, any type of M&A activity, especially regards to, does it change the focus of the acquirer, present some disruption in the market, and that obviously presents opportunity for us.

Okay. And since I have to ask my typical question every quarter. Can you maybe just update us on, kind of, your backlog and how you think of that funding over the coming year or so?

Sure. So our backlog going into the quarter was $44.7 million. Our backlog coming out was $44.9 million. What you should take from that is, we sold 15 at the end of the day, we matriculated in around 15, so we had decent fundings this quarter from the backlog. When I look at the backlog, it's very diverse from our alternative business for additional, it might have a slight edge more on the alternative side. And I believe the majority of that will fund over the next 12 to 14 months.

And our next question comes from the line of Josh Schwartz with CJE Investment.

I'm looking at the, sort of, more rapid growth of this segment. And I'm just wondering, is this a market share win for the company or is the industry growing quicker?

Well, I think the industry is growing, Josh, but certainly, I think we're winning a good bit of the market right now, and we've been doing that for a decent period of time. But the industry is expanding, there are new managers starting, even though they are -- the industry is shrinking in some segments, but I think clearly from our standpoint, we're moving more upstream, we started to do that 2 years or so ago, and we continue to do that.

Okay. And what are the fee basis point looking like in the segment? Is there a compression or is it stabilizing?

Well, I think there is pressure from -- if you look at the pressures, which I mentioned in my write-up. And there's pressure at the manager level, in their products, and that certainly works their way down to their partners, including the areas we service. I think though we pride ourselves on having not a commoditized offering but a premium offering. And I think we've been able to battle that fee compression with increased service and, kind of, a premium service level. But it is something out there, there will be continued pressure. Again, I view it a little bit as a tailwind for us, because I think the more pressure on the managers in this segment, the Investment Managers, it's requiring them to relocate their business models and looking how they scale their internal business and operations. And that presents an opportunity for them to outsource more.

And there are no further questions in queue. Please continue.

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

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. Third quarter 2018 cash flow from operations was $155 million or $0.96 per share, bringing year-to-date cash flow from operations to $417.9 million or $2.58 per share. Our third quarter free cash flow was $137.3 million and year-to-date cash -- free cash flow was $362.9 million. The capital expenditures for the third quarter, excluding capitalized software were $9 million and that did include about $3 million of facility expansion year-to-date. Capital expenditures, again, excluding capitalized software, were $21.7 million, with about $5 million of facility expansion costs in there. We project the capital expenditures for the fourth quarter, excluding capitalized software, to be $15 million but -- and about $10 million of that does relate to the facility.

As we noted in the earnings release, the tax rate was 18.6%. That's due to a combination of the tax act and tax benefit option exercises and our tax rate could fluctuate as a result. 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. Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing and scope of client implementations, and our ability to capitalize on our strategies. Those -- and also market conditions that would create opportunities for us to grow our business.

Although, we believe the assumptions upon which we based our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in the risk factor section of our annual report, Form 10-K for the year ended December 31, 2017, which we have filed with the Securities and Exchange Commission. And now, please feel free to ask any further questions.

(Operator Instructions) And there are no questions in queue. Please continue.

Thank you, Kathie. So, ladies and gentlemen, I am encouraged by the direction our businesses are taking and the progress we are making. While we face short-term headwinds, we believe that the investments we are making will help us identify a benefit from all the changes taking place in our industry. Have a good day, and thank you for attending our call.

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