SEI Investments Co (SEIC) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI First Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd like to turn the conference over to 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 our situation in first quarter 2020. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each business segment leader 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.

And before we cover the results for the first quarter, I will speak to the set of circumstances we face today. Around the globe, we are dealing with an unprecedented health event, namely COVID-19. Together, to defeat this foe, we are all involved. From beginning of this health crisis, our priority has been on the safety and health of our employees and their families along with the seamless delivery of service to our clients.

Over a 48-hour period, we transitioned 99% of our workforce into their homes, working remotely without compromising the robustness of our operation or the integrity of our services. We will continue to operate in this environment until we deem it safe and prudent for our employees to return to the workplace.

I cannot say strongly enough how incredibly grateful I am to our workforce for not only making the transition to work from home, but in the way they have supported our clients, each other and their communities. The strength of SEI shines best, it seems, when the challenges are extreme. At SEI, we have -- we take immense pride in managing our business for, and investing in, long-term growth.

We have proven business models that have been shaped over the past 50 years of experience. This is the bedrock of our ability to weather the uncertainties of today and emerge from the current crisis stronger and better positioned to take advantage of tomorrow's opportunities. Our secret to success is straightforward. We remain focused on keeping our workforce healthy and productive, invest in our best-in-class technology, innovate continuously and deliver world-class service and solutions to our clients.

We will also be relentless in executing on our strategic vision and launching the growth-generating initiatives we believe will be at the heart of our future successes. We look forward to sharing our progress with you. And while our accomplishments during the war with COVID-19 are impressive and we're proud of them, but the real heroes are those folks on the front lines, caring for others and saving lives. We honor and thank those who are making the true sacrifices.

So now let's turn our attention to the financial results for the first quarter of 2020. First quarter earnings decreased by 4% from a year ago. Diluted earnings per share for the first quarter of $0.72 is roughly flat with the $0.73 reported for the first quarter of 2019. We also reported a 3% increase in revenue from first quarter 2019 to first quarter of 2020. The first quarterly earnings results were adversely affected by the late quarter market turndown, and that was triggered by the late -- by the late in their arrival -- the quarter arrival of the COVID-19. The turndown in the capital markets was a major one. This caused our noncash asset balance under management to decrease $27.8 billion and LSV assets under management to decrease by $36.6 billion. The full effect of the downturn will be felt in the second quarter of 2020.

Also during the first quarter, we repurchased approximately 2.7 million shares of SEI stock at an average price of $52.37 per share. That translates to $127 million of stock repurchases during the quarter.

Also in the first quarter, we continued our investment into growth generating platforms. The newest effort is One SEI, which is a large part of our growth strategy. As you will recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets and all other markets -- I'm sorry, platforms. As a byproduct of the investments we made in the first quarter, we capitalized approximately $6.5 million of development and amortized approximately $12.1 million of previously capitalized development.

Turning to revenue production. First quarter sales events, net of client losses, totaled approximately $35.1 million and are expected to generate net annualized recurring revenues of approximately $32.5 million. Clearly, we are encouraged with this quarter's sales results. They reflect the fact that throughout the company, we have successful and entrepreneurial sales teams driving revenue. Our unit heads will speak to their specific sales results.

In addition, a key objective of our business, particularly in these times of uncertainty and volatility, is to deliver smooth operations. The transition of our workforce from centralized operations to remote interconnected nodes went seamlessly, which, again, is a credit to the work ethic and customer commitment of our personnel.

What we have learned about ourselves -- what I've learned about ourselves, undoubtedly, pay many dividends after the crisis subsides. We know that things will never be the same, and we will need to adapt to new mental models and realities.

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 new business segment. After that, all segment heads will update the results in their segments. Dennis?

Thanks, Al. Good afternoon, everyone. I will cover the first quarter results for the investments in new business segment and discuss the results of LSV asset management.

As Al mentioned, our primary concern working through this period of enormous disruption has been for our employees, their families and our clients' health and safety. The resiliency of our employee base, their preparation for and execution of the business continuity event of this scale and their ongoing commitment to our clients has been nothing short of spectacular. In addition to the shift in our operating environment, as you know, we experienced a significant downdraft in global markets. The size of the move was historic. In addition, the speed of the move was something we had not experienced before. This had a direct impact on our business, particularly LSV.

During the first quarter of 2020, the investments in new business segment continued its focus on the ultra-high net worth investor segment through our private wealth management group and additional business and research initiatives, including those related to our IT services business opportunity and the modularization of larger technology platforms into stand-alone components for the wealth management and investment processing space to deliver on our One SEI strategy.

During the quarter, the investments in new business segment incurred a loss of $7.5 million, which compared to a loss of $5.6 million during the fourth quarter of 2019. This increased loss reflects an increase in investments, particularly related to our One SEI strategy. Of our expenses in this segment, approximately $5.7 million is tied to that effort. This compares to approximately $3.4 million in the fourth quarter of 2019 and about $200,000 in the first quarter of 2019.

The One SEI strategy is a company-wide initiative to open business opportunity across our entire company as well as creating new business lines. We will continue to see investment in this area through the year.

Regarding LSV. Our earnings from LSV represent our approximate 39% ownership interest during the first quarter. LSV contributed $29.9 million in income to SEI during the first quarter of 2020. This compares to a contribution of $37.3 million in income during the first quarter of 2019. Assets during the first quarter shrank approximately $36.6 billion. LSV experienced net negative cash flow during the quarter of approximately $3.9 billion. The remainder of the contraction was market related. Revenue at LSV was approximately $100 million for the quarter with no performance fees. It is important to note that revenues at LSV are predominantly driven by end-of-period asset levels. The late-in-the-quarter market move had a significant impact on revenues.

Our effective tax rate for the quarter was 21.5%. During the quarter, we incurred an unrealized loss on investments of approximately $4 million related to investment seed capital and specific investment products. This compares to an unrealized gain of $1.3 million during the first quarter of 2019. As a company, we were able to keep overall expenses flat to down relative to fourth quarter 2019. We were operating normally until the coronavirus began to hit. We made an immediate shift to a work-from-home model with, as Al mentioned, 99% of our global workforce operating remotely. This effort was guided by 2 things: The health and safety of our employees; and our seamless delivery of service to our clients.

While operating expenses are always a focus of ours, it is safe to say we are in a mode of whatever it takes to meet the objectives stated earlier. SEI is proud of our long-term strategic orientation, our recurring revenue business model, the strategic client relationships we have, our solid balance sheet and our talented and experienced workforce. We lean on this, and as the world makes its way through this crisis, we believe we will be stronger as a company for it and have more market opportunity as a result.

Naturally, we will look at our spending as our revenues have been impacted, some of which will contract naturally with revenue. However, similar to crisis events in the past, we will lean into our clients, continue to invest in the future, and look to identify and capitalize on existing and new opportunities.

With that, I'll take any questions.

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

First, I just want to clarify your comment on LSV and the way that the revenue comes in there. Can you give us some sense of kind of what percentage of their revenue is based on prior quarter end and percentage based on any other, like daily or monthly metrics?

Yes, so roughly, the 60% to 70% is based on end-of-quarter assets, and the rest is based on average assets.

Okay. Got it. And then the only other one, just at a high level, I know you talked about expenses. Is there anything like quantitatively that you can say about expenses over the remainder of the year at a high level?

No, I mean I think we're -- there are certain expense categories that have contracted that are on our income statement. So things like sub adviser expenses will contract with the revenue. And other expenses are contracting just because of the situation we're in. So our travel budgets look really good right now. For example, in our client event, client event costs are down because we're not -- we didn't have our client meetings that we normally have in the first quarter and second quarter. So there are certain expense categories we'll get the benefit of in the situation we're in. But at the same time, we are looking at areas that make sense to invest in to enhance the technology that we have to communicate and deliver to clients and internally. And we also are paying attention to new approaches to prospecting and marketing that might take some investment. So we're not really looking at this from a standpoint of, yes, let's take advantage of this situation to try to drive costs down, rather, let's just be smart about how we operate the business and keep our eyes on growth because that's what this is all about. And all the unit leaders will get into kind of how that's taking shape within their businesses.

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

Just quick question on the new business expenses, understanding, investing in One SEI. So should we take that to think that kind of this is a reasonable run rate for the balance of the year as you go through some discrete spending, and then maybe this is too far in advance, the world is changing so fast. But eventually you would envision that to kind of moderate as you get through some spend on the initiative?

Yes. I think it will probably bounce around, at least for this year. And -- but the way I look at it, it's really a project-type related cost versus a run rate-related cost. And we feel pretty comfortable that by the time we get through this year, we'll probably have a little bleed over into next year, but the project will be pretty well big. Although, again, I never underestimate the innovation and genius of our solutions teams and our IT teams that come up with new ways to do new things. So I'll caveat with that.

(Operator Instructions) At this time, we do have 1 more question. It will be from the line of Crispin Love with Piper Sandler.

It's actually Chris Donat. I'm hijacking Crispin's line. Sorry, a little user error on the dial-in there, I guess, on my part. I have 2 questions for you, Dennis. First on LSV. Are you aware of any outflows or redemption notices after the quarter closed for LSV?

No, my -- so we don't really operate that way. So they're all open, the relationships.

Okay. Got it. And then on the -- sorry. I just want to make sure -- well, sorry, on the information processing line, and maybe we'll get into this later, but that's a lower number of your 2 revenue lines, lower than it's been in the last several quarters. Anything to call out there?

Well, I think it's reflective of -- and Steve will probably talk -- I know we'll talk about kind of -- which we've been talking about for the past few quarters is we have to overcome some of these client losses that have matriculated off, particularly the big 1 that matriculated late in the year, last year. So that is probably more a reflection of that than anything else.

And at this time, there are no further questions in the queue.

Great. Thank you. I will now turn it over to Steve, who will cover Private Banking and the Investment Manager Services segment. Steve?

Thank you, Dennis. Good afternoon, everyone. For the first quarter of 2020, revenues for the segment totaled $113.2 million, which was $5 million less or 4.2% down from the first quarter of 2019, primarily due to previously announced client losses. In our investment processing and technology business, we did see a decline in our asset-based revenues during the quarter as a result of the market depreciation caused by the pandemic. Though they were offset somewhat by an increase in some of our transaction-based revenues.

Our quarterly profit for the segment of $2.6 million was $4.7 million or 65% lower from the first quarter of 2019, which was primarily driven by previously announced client losses. As compared to the fourth quarter of 2019, the profit for the segment was $2.5 million or 49% lower due to market depreciation in our asset management business.

From an asset management standpoint, total assets under management ended the period at $21.2 billion, representing an 11% decrease from the fourth quarter. Our AUM decrease was due to market depreciation. Despite the decrease in assets, we continue to build a strong global pipeline in our AMD business.

In turning to sales activity for the quarter, we closed $19.5 million in net new recurring sales events. As mentioned on last quarter's call, we signed a large global private bank to SWP. And while we had intended to issue a press release during the quarter, we felt it was not appropriate to do so and celebrate this partnership due to the global COVID-19 pandemic. However, I am pleased to tell you that this new deal is with HSBC Private Bank, and it will support their global business. We are excited about this opportunity, and it is another affirmation of the global reach of our capabilities.

Additionally, there's another example of the application of our One SEI strategy, in this case, also utilizing our IMS platform to support the alternative asset classes of this client. We are currently working through the implementation planning of this project, and it is important to note, it will be a multiyear implementation.

Additionally, we are pleased to announce that we recently have expanded and extended our relationship with our longtime client, SunTrust Bank, which last year merged with BB&T to create Truist, the sixth largest bank in the U.S. This deal allows us to continue providing our current scope of technology and services to the new larger organization.

As I've mentioned before, our One SEI strategy allows us to bring all the assets and platforms across SEI globally to each of our financial intermediaries in a flexible and customizable way. This is another great example of this strategy in action.

In the first quarter, we successfully converted Bar Harbor Bank & Trust to the SEI Wealth platform. Bar Harbor acquired an existing TRUST 3000 client, Charter Trust Company. The conversion included the existing TRUST 3000 accounts and another book of business that Bar Harbor had previously been running on a competitor's platform. We are excited about the market acceptance we are seeing and the momentum these deals represent in our sales activity.

In addition to this SWP implementation, we recontracted 2 TRUST 3000 clients during the quarter.

As an update on our backlog, our total signed but not installed backlog is approximately $73.3 million in net new recurring revenue.

In touching upon the market environment and the current pandemic and the impact on our business, as Al mentioned, we have performed well to continue all our critical business functions, both for our clients and ourselves. This goes across all of our processing and technology businesses, including global banking, IMS and family office services. Our employees have risen to the challenge and performed in an impressive way. They have been nothing less than remarkable and continue to deliver a world-class experience to our clients in these unprecedented times, where we have seen transaction volumes increase by 300% to 400% in some areas. We have received very favorable feedback from our client base on how we have proactively planned and executed in this new normal.

Additionally, we see ways to improve how we do business, serve our clients and grow going forward. From our clients' perspectives, they are in this with us. They are dealing with the same circumstances and work-from-home environment. It is giving us opportunities to deepen our relationships and support our clients like never before across the board.

In a word, our clients, as a whole, are engaged with us. It is giving us opportunities to connect in more deeper and meaningful ways. All current implementations continue, all but in different means, and sales agendas continue virtually as well, although I would expect some delay in decisions and some delays in implementation dates as the pandemic continues. However, we believe these to be just delayed, not stoppages. Ironically, we believe the disruption caused by this pandemic will provide greater long-term opportunity for us as outsourcing will become even more imperative for our markets as a whole.

Typically, on this quarter's call, I give an update on our strategic focus for the year. Even though we are operating in this new normal, I believe it is still important to outline these strategic initiatives and focus, especially in light of the current COVID-19 reality. As we continue through 2020, our focus on growth and expansion still rings true, but adjusted to encompass the following priorities. First, our focus is to continue to support and care for our key stakeholders: Our workforce, their families, our clients, our clients' end clients, our shareholders, our partners and our community. Times like these let us show our true characters and organization. The care and well-being of our stakeholders remains paramount to us. Second, we will continue to focus and maintain our momentum and executing on our key growth agendas. Third, focus on expanding our markets and solutions, allowing us to extend our growth opportunity. Fourth, continuing our strategy of One SEI, which enables us to offer the full power of all of SEI's platforms and assets and enables us to address our clients' emerging needs and problems in ways no one else can. And finally, managing through the financial headwinds of the lost business we had previously announced, which will be in full effect for 2020.

While the current pandemic adds to this challenge, we will continue to manage our expenses judiciously as we continue our growth momentum. Our focus remains on managing through this financial challenge with an eye on establishing a sustainable and accelerating margin rate as we come out of the downward pressure of this lost business. While I am confident we will manage through this for the long term, I do expect a significant challenge in the second quarter as our revenue will have a full quarter of the pandemic impact, combined with the aforementioned losses.

In summary, while we entered this year with challenges such as lost business to absorb and we now have the added challenge of the COVID-19 pandemic to manage through, we also entered the year with momentum and great opportunities. Challenges give us the opportunity to think differently and expand our growth opportunities. I'm excited of the results we are seeing to date and optimistic of the growth path going forward. That concludes my prepared remarks, and I'll now turn it over for any questions you may ask.

(Operator Instructions) Our first question will be from the line of Glenn Greene with Oppenheimer.

So maybe just a little bit more -- first of all, congratulations, but a little bit more color on the SunTrust expansion. Is it sort of the BB&T side of the house? Or different asset classes within SunTrust? Just a little bit more on that.

So Glenn, it's basically, as you know, the 2 banks have merged, and it's basically the combined book of business that will initially be moving on to TRUST 3000, with SunTrust has been a long time user of. And then hopefully down the road after their merge is done, hopefully, down the road, we'll look at SWP. But for right now, it's TRUST 3000.

Okay. And maybe just a little bit more about the market environment. You talked about sort of delays in decision making, whatnot. I mean, how are you going out sort of prospecting and you're doing sort of like a lot of virtual conversations? Just a little bit more on what you might expect for the impact and how long this may last or what you're kind of thinking for the balance of the year in terms of the sales activity.

Yes, what I'd say, Glenn, is -- and I'll echo what Al said, we've got -- across the company, we have very good sales teams and very entrepreneurial-focused sales folks. And they have done a very great job, similar to the great job we've seen on the front line with the operations and production support. We've seen a great job by our sales and service professionals in adapting this new reality and this new normal. And certainly, our clients are adapting to it. And we're seeing sales agendas continue, existing sales agendas continue, although virtually. We're coming up with new ways to kind of test the market and go out and prospect, and that's being met with great receptance and/or acceptance. And while I see definitely a push and a significant push on the sales side, I just think that, as time goes, people are going to wait to make new decisions on sales until they kind of get a better hold or back in offices.

With that said, we were in flight with certain sales prospects, and those decisions continue. Those demonstrations, demos, conversations, going through kind of our deck of technology continues, and people are pushing for decisions. So I think things keep moving. I just think because of the environment when we'll see a little delay and just because of the slowdown of being worked from home from some of our clients, I just think we'll see a delay. I can't really quantify the impact. I just expect that to happen as we go through this.

Okay. Makes sense. One more quick one. The -- how much you sort of outsized benefit did you get from the incremental trading activity in the quarter to your top line?

Well, I won't quantify it for you. What I'll say to you is the trading and brokerage uptick helped to mute kind of the asset and market down increase on the assets or on the asset based fees. So it certainly helped negate some of that downward pressure. But it is a lower-margin business, keep in mind.

We'll go to the line of Chris Shutler with William Blair.

Let's see. So just a couple of questions. The $19.5 million of net new recurring sales, is that inclusive? I'm just thinking about HSBC. Is that inclusive of the HSBC component that's in IMS? Or is that 2 separate things?

It's 2 separate things.

Okay. Got it. And then let's see, the info processing line. Can you give us a sense how much of that line is kind of asset-based pricing today as opposed to more kind of account or subscription-based?

Yes. So I'd say, if you look at our revenues in this segment for the quarter, we're about 60% asset-based.

60% of the total segment's revenue?

Yes.

Okay. And then lastly, on expenses, just relative to where you sat in the first quarter, is there anything you can say about Q2 or beyond?

No, outside the fact that, obviously, with the pressure on revenue and the downward push from some of the losses we've mentioned, I'm sure you guys would say ad nauseam at this point. We are going to manage expenses. But with that said, I'm not going to be afraid to invest as One SEI is a big push for us and I see tremendous opportunity. So we will continue to invest where it makes sense. Obviously, we'll have some natural downward slope of expenses such as travel and entertainment. But I do expect some other expenses to uptick, but we'll try to manage through it through Q2 and the rest of the year as best we can.

Was there much incentive comp in Q1 related to like Truist or HSBC?

Well, keep in mind that if you pretty much have sales comp there and keeping sales comp [down] spread, it's kind of amortized. It's really not the big bang impact you would expect from before.

(Operator Instructions) Next, we have on the line Robert Lee with KBW.

Great. I'm just kind of curious, I mean, HSBC's been a long-time client, obviously, in IMS and, I guess, in the U.K. So is this kind of taking what you've been doing for them in the U.K. globally? Is that really the way to kind of think about the expansion of the overall HSBC relationship because they've been on the platform, I guess, well, since the beginning. So it's really kind of the global expansion you've been hoping for, for a long time in that?

Yes. So I'd say, HSBC has been a client primarily out of the U.K. from our AMD standpoint. And we did have a piece of processing business with them, if you remember, years ago, that did go away to another corporate tech competitor. And this business is one that we've been looking at on the processing side for a number of years. So I would say this is just, to me, a very good expansion with a great partner and an expansion that certainly highlights our global capabilities on our processing and technology side.

At this time, there are no further questions in the queue.

Great. Thank you. I'll now turn it over to the -- or turn to the Investment Manager segment.

For the first quarter of 2020, revenues for the segment totaled $116.6 million, which was $12 million or 11.4% higher as compared to our revenue in the first quarter of 2019, and $1.9 million or 1.6% higher as compared to our revenue in the fourth quarter of 2019. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion, while the quarter-over-quarter increase was due to client fundings offset by a market decrease.

Our quarterly profit for the segment of $42.3 million was $6.8 million or 19% higher as compared to the first quarter of 2019. Higher profits year-over-year were primarily driven by an increase in revenue, offset by a smaller increase in personnel expenses and investments.

Third-party asset balances at the end of the first quarter of 2020 were $610.8 billion, approximately $46.7 million lower than the asset balances at the end of the fourth quarter of 2019. This decrease was due to net new client fundings of $16.1 billion, offset by market depreciation of $62.8 billion, the majority of which was driven by the COVID-19 pandemic.

And turning to market activity. During the first quarter of 2020, we had a solid sales quarter with net new business events totaling $9.5 million in recurring revenues. Most importantly, these sales were diverse and included an equal split of both new name business and expansion of existing wallet share with current clients. These events include the following highlights. In our alternative market unit, we were selected by a $4 billion private equity shop who had, to date, in-sourced their operations. Their selection of SEI was their first move towards outsourcing. We see continued growth across the private equity business.

In our traditional market unit, in addition to having success in all product lines, we continue to see strong momentum with collective investment trust for new and existing clients.

In Europe, private credit and private equity continue to be main drivers of new names as well as cross-sells with existing clients.

And in the family office services unit, we won a multifamily office services client as well as a couple of single-family offices. Additionally, we have seen a significant pickup in activity and strong market demand amidst the COVID-19 pandemic.

And turning to market -- to the market environment. Consistent with the Private Banking segment, we have performed well and continue all our critical business functions for our clients and ourselves. Our teams have performed exceptionally. We have received very favorable feedback from our client base on how we have proactively planned and executed in this new normal. While this has negatively affected the existing assets under management of many of our clients, we also see our clients being optimistic about growth opportunities and new fund launches geared at new investment opportunities that have arisen from the market turmoil. We also see great opportunity as we manage through the crisis as we think outsourcing and managers freeing themselves with infrastructure investments like technology, operations and compliance, to name a few, will be even more necessary considerations as part of the new normal.

As we continue through 2020, although the second quarter will be a challenge, our focus on growth and expansion still rings true. And our main priorities will be as follows: First, our focus is to continue to support and care for our key stakeholders, our workforce, their families, our clients, our clients' end clients, our shareholders, our partners and our community; second, maintain our current market and client momentum; third, continuing our investment and platform push into the front office supporting our clients' end clients as a strategic differentiator for us; fourth, continued expansion into market adjacencies and new markets to drive long-term sustainable growth; finally, continued execution of our One SEI strategy, leveraging our platforms and solutions to support growth opportunities in other market segments and providing the power of all of SEI to our clients.

Despite the difficulties of what we are all going through with COVID-19, our focus on our clients and growth of our business remains the same. We remain optimistic on the long-term growth opportunities we have in front of us.

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

(Operator Instructions) First, we'll go to the line of Crispin Love with Piper Sandler.

Hey, it's Chris Donat again. I'm using Crispin's line. I know you just said that you're getting a mix of the revenue growth from existing and new customers. I'm just wondering if you can -- is it kind of 50-50 when we look at your 11% revenue growth year-on-year? Or is it -- which way does it tilt more to?

So what I'd say is for the quarter, it was actually 50-50, 50% existing clients, 50% new business. My expectation going forward for the year, it will tend -- it will trend higher for existing clients. And I think that's due to a couple of things. One, with the large alternative client base we have, especially in private equity, we fully expect those clients or seeing those clients gear up to call capital through new investment opportunity. And I think having those clients and the large diverse base of clients we have will allow us to grow. And as you know, a cross-sell and growing from an existing client typically takes less time and happens a little faster. I think we will still see our share of new business from new clients. But again, because of the pandemic, and I think just delaying in decisions, that will be pushed a little bit and be a little bit slower this year.

Okay. And sort of related to this, are you getting any notable traffic in inbound phone calls from anyone interested in outsourcing? You mentioned technology operations and compliance. Is that normal? Or is it too early to tell?

Yes, I think we're seeing -- what I'd say is across the board, I would say we're seeing good, steady activity still. We are seeing some highlights, one, with existing clients; two, we're still seeing sales activity within the alternative market continue even though it's virtually. And 1 kind of spot that's popping up is on the family office area. And the folks from ARCHWAY saw this during the 2008, 2009 crisis. We're seeing a notable increase in inbound traffic there. And I think it's -- during these times, folks have slowed down a little bit and are taking the opportunity to reassess their infrastructure and technology needs.

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

Actually, that was my question, too. So thank you.

Sure. Rob, I thought you're going to ask me about backlog. I purposely left it out so you could ask.

I figured you would just offer it up.

It's $38.9 million at the end of the quarter.

(Operator Instructions) Next we go to the line of Sam Hoffman with Lincoln Square.

Steve, can you explain a bit more the $20 million of additional expense on One SEI? What is it going to be spent on? When -- what will be the payback? What will the payback look like? And I guess, originally at Investor Day when it was announced, I thought One SEI was viewed more as a philosophy than an expense and revenue item. And so how has that changed since then? And how does it look going forward?

Thanks, Sam. First, I hope you're doing well. Second, I'm not sure I'm catching up on the math on the $20 million, but I'll look at that after this. But what I'd say on One SEI, it has not changed at all a while. One SEI has been a mindset and a strategy change. It's also -- a part of it is, and we've been very clear about defining it, is opening up our platforms to all of our platforms to all the markets. And in doing that, when you think about the platforms we have across the company, we do have to spend money to modularize platforms that have been integrated to open them up with new technologies, such as APIs, and there is obviously an expense behind that. So that is one that we see as a strategic imperative for us.

Two, we see a huge market opportunity across, not just the investment and processing businesses, but across all of SEI. And the payback that we'll get from this is increased sales opportunity, and we think increased growth opportunities with new markets and new solutions and opportunities with current clients.

And we -- if you look at the sales results, both in private banks and IMS this quarter, we're seeing that this -- we saw that this quarter, we saw it the quarter before, and we will continue to see it going forward.

Terrific. So just to clarify, the way I got the $20 million was Dennis in his opening remarks that in the first quarter of '19, the expense was $0.2 million and that rose gradually to $5.7 million in the first quarter, and that would be roughly level with some bouncing around this year. So I thought roughly $5 million higher than it was. Is that not correct?

No, that's correct. But we really got started on this initiative probably midyear last year. And so the run rate increase over fourth quarter is a couple million dollars. So that's what threw us about the $20 million.

Okay. Yes, I meant in total. That's okay.

Yes, I got you. Yes. Sorry. That's helpful to lay that out.

At this time, there are no further questions.

Great. Okay. Thank you, everyone. So I'll now turn it over to Wayne Withrow who will cover the Adviser segment. Wayne?

Thanks, Steve. The first quarter of 2020 started continuing to build the momentum we lost during our migration onto the SEI Wealth platform. Mother Nature gave us different priorities, and we adjusted accordingly. First quarter revenues totaled $102 million. These revenues were up over 8% from the first quarter of last year. Positive capital markets were a significant influence on these revenues. Another big factor was our Q1 2020 average asset balance had a larger percentage of higher fee products than in the comparable period of 2019. If you recall, there was a market decline during the fourth quarter of 2018, and the Q1 2019 balances reflected a shift to money market funds due to this market shock. We will be playing the same tune when we compare Q2 versus Q1 later this year.

Expenses were flat in Q1 of 2020 as compared to the first quarter of last year. The most noteworthy swings within this net neutral result were increases in expenses tied to AUM growth and decreases in expenses related to the Wealth Platform migration we completed last year. Sequentially, expenses were down $1.5 million compared to the fourth quarter.

One word of caution, however, is that this is not a 2008 redo. And while I will look at expenses in the context of the market, I will not hesitate to invest where the new normal creates opportunity.

Our profits increased 18% from last year's first quarter as our revenue increase dropped to the bottom line due to the expense line I previously discussed. Our assets under management at the end of the first quarter were $60.8 billion. Following steep market declines at the end of March, our quarter end balances are significantly below the average asset balance reflected in our Q1 revenue. Q1 ending balances will be the starting point for our average daily balance in the second quarter.

During the first quarter, our net cash flow onto the platform was a positive $400 million with $300 million of that being in assets under management and $100 million being in assets under administration. Overall, quarterly cash flow was negatively impacted by the current environment.

We recruited 65 new advisers during the quarter, a slight decrease from the fourth quarter. Our pipeline of new advisers remains active. We continue to invite new and existing advisers to benefit from using the SEI Wealth Platform and have focused the sales force on bringing both SEI managed and nonmanaged assets onto it.

Our first quarter financial results are important but are dwarfed by the coronavirus and our response. As Al mentioned, from an operational perspective, we have always had a strong business continuity program, and that is serving us well during this crisis. From day 1 of our decision to close our Oaks headquarters, we had 99% of our employees working effectively from home. While not without challenges, we have handled astronomical processing volumes and have proven our ability to work effectively from home. The volumes have retreated somewhat at this point.

Aside from processing, we needed to change our relationship management model from a face-to-face model to one digitally focused. Our adviser clients have the same exact challenge with their clients. Like most, we have transitioned to a digital model and are continually improving its effectiveness. Our advisers are doing the same with their clients but are obviously impacted by everyone's day-to-day focus on facing the challenges brought on by the pandemic.

Going forward, the Adviser unit, like all of SEI, will respond to challenges brought on by the health crisis facing us.

In summary, the first quarter reflected somewhat decent financial results and the building of momentum we lost during the migration. The real challenge, however, is ahead of us. Our scale and resilient infrastructure should allow us to make the best of this challenge.

I now welcome any questions you may have.

(Operator Instructions) Our first question will be from the line of Robert Lee with KBW.

Is it possible to get a sense of kind of the progression over the course of the quarter? I mean, the $300 million to $400 million of cash inflows in the quarter, all things considered, is pretty good. But can you just kind of maybe give us some color? You start out kind of really strong and March kind of took most of it -- you'd assume March took most of it away, but any kind of color around kind of the pattern? And then maybe, even though it's only 3 weeks, but maybe as markets come back a bit or at least markets stabilize, kind of have you seen any indications of changed behavior?

Yes. Well, I think you sort of summarized the pattern, right? We started off really strong. And I think, come the middle of March, things slowed down significantly. I think agendas that were underway continued. It's a little bit harder to get new agendas going. So I think activity slowed the end of March, and I think activity is slower in the beginning of April. But I would say I still think post migration, we're still seeing some positive momentum, but this is going to be challenged. And I think a lot of it is, unlike a lot of our other businesses, the impact to the end consumer really impacts our advisers, and we need to get some more stability in the population as a whole.

Right. And then just maybe 1 quick follow-up, and I apologize. I may have missed it. Did you mention the number of new advisers in the quarter?

I did, 65.

65. Great.

Next question will be from the line of Chris Shutler with William Blair.

One, just real quick one. The $300 million or $400 million of inflows, however you want to talk about it, I just want to make sure, could you give us the Q4 numbers and the comparable Q1 numbers? I just want to make sure I have those apples-to-apples.

Q4, if you looked at SEI assets, you feel the total assets is about $300 million. But in the SEI managed product, we were about negative $200 million.

Okay. So the negative $200 million...

I don't have the numbers right in front of me. We were negative. SEI managed assets about $200 million in the fourth quarter.

And that negative $200 million is comparable to the positive $300 million?

Correct.

(Operator Instructions) At this time, we have no further questions in the queue.

That's great. Okay. I'd like to turn it over to Paul Klauder, who will talk about our Institutional segment.

Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the first quarter of 2020. First quarter revenues of $79.1 million decreased 1% compared to the first quarter of 2019. First quarter operating profit of $40.9 million decreased 1% compared to the first quarter of 2019. Operating margin for the quarter was 51.7%. Both revenues and operating profits were impacted by negative client fundings and currency translation. Quarter end asset balances of $79.6 billion reflect a $9.2 billion decrease compared to the first quarter of 2019. This decrease is driven by significant market depreciation in March, coupled with negative client fundings. This dramatic reduction in assets will have a negative financial impact on future quarters.

Net fundings were a positive $150 million for the quarter, which was comprised of gross sales of $700 million and client losses of $550 million. New signings included a U.S. municipality, U.K. DB fiduciary management and a new U.S. not-for-profit relationship. The unfunded new client backlog at quarter end was $430 million.

New sales momentum and activity has been impacted by this crisis as prospects have extended their time frames and delayed formal decision-making processes. With that said, our sales teams are working extensively on virtual interactions.

Also, in our long history of OCIO, our best sales years have been following crisis periods. On the client side, we have received very positive feedback on our proactive communications, materials, webinars and our employees' attentiveness. We believe scale, resources, technology and experience will be important criteria in selecting and retaining OCIOs going forward.

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

(Operator Instructions) At this time, there are no questions in the queue.

Okay. Thank you. I will now turn the call over to Kathy Heilig, SEI's Controller.

Thanks, Paul, and good afternoon, everyone. I have some additional corporate information about this quarter. First quarter 2020 cash flow from operations was $99 million or $0.65 per share. First quarter 2020 free cash flow was $71.8 million. First quarter 2020 capital expenditures, excluding capitalized software, was $20.7 million which included $10.2 million for facility expansion. Projected remaining capital expenditures for the year, excluding capitalized software, is $30 million, and that includes an estimate of $15 million related to the facility.

As noted in our earnings release, our tax rate for the first quarter was 21.5%. The annual tax rate for 2019 was 20.6%. And the fourth quarter tax rate was 19.5%. I just want to remind you that the major reason that we have changes in our tax rate is due to the tax benefit of stock options when they are exercised.

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 not audited. In some cases, you can identify forward-looking statements by terminology such as should, may, will, expect, believe, continue or appear. Our forward-looking statements include our expectations as to the long-term consequences of and potential opportunities resulting from the disruptions precipitated by the COVID-19 pandemic; the degree to which we will benefit from our scale, resources, technology and infrastructure; revenue that we believe will be generated by sales events that occurred during the quarter or when our unfunded backlog may fund; our resource allocations and technologies and platforms in which we will choose to invest; the strategic initiatives that we pursue; the benefits we will derive from our investments and our ability to monetize these investments; our ability to manage our expenses, scale our offerings and establish sustainable and accelerating margins; our ability to take advantage of opportunities to expand client relationships; the strength of our pipelines and growth opportunities; and our ability to execute on and the success of our strategic objectives.

You should not place undue reliance on forward-looking statements as they are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties, many of which are beyond our control or subject to change. Although we believe the assumptions upon which we base 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 our Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2019. This is on -- available on the Securities and Exchange Commission website and also on our website.

There may be additional risks that we do not presently know or that we currently believe are immaterial which could also cause actual results to differ from those contained in our forward-looking statements. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statement.

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

(Operator Instructions) We do have a question from the line of Glenn Greene with Oppenheimer.

Can you just go through the $4 million of investment losses in the quarter? And was that sort of a one-off thing that won't repeat going forward?

They were unrealized losses. We have to -- we have some products that we invest in really as seed money for the most part, and we have to mark them to market every quarter. And as the market went down at the end of the quarter, we had to mark those down. The market goes back up, we would mark them back up.

(Operator Instructions) At this time, there are no further questions in the queue.

Okay. Then I'd like to turn it back over to Al.

Thank you, Kathy. So ladies and gentlemen, we are fighting on 2 fronts. First, the COVID-19 disruption; and second, growing revenues and profits during the disruptive times. On the first front, we are very fortunate to have planned well and been able to keep our workforce healthy and productive. On the second front, we face short-term headwinds, but we believe that we will prevail, thanks, in large part, to our motivated and innovative workforce, on one hand, and the strategic investments we are making in our future on the other.

Please be safe and remain healthy. Have a great evening, and thank you for attending our call.

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