SEI Investments Co (SEIC) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the SEI Investments Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session; instructions will be given at that time; if you should require assistance during the call press "" and then "0". As a reminder this conference is being recorded. Now I will turn the conference over to Chairman and CEO Mr. Al West, please go ahead.

Good afternoon everybody and welcome. All of our segment leaders are here on the call with me as well as Dennis McGonigle, SEI’s CFO; and Kathy Heilig, SEI's Controller. I am going to start today by recapping the second quarter 2003. I will then turn it over to each one of the business segment leaders to comment on the results of their segments and as usual we'll field questions at the end of each segment's report. Finally Kathy Heilig will give us some important company wide statistics.

So let me start with the second quarter, second quarter earnings fell 4% from a year ago on revenue shortfall of 3%. Even though our profits fell slightly, our diluted earnings per share of 32 cents grew. 32 cents represents a 3% growth over second quarter last year. I want to note that our profit was affected by our hedging activities and the write-offs of an investment we made in a startup technology company. Now despite these results, we have reasons for our guarded optimism. First revenues were up 2% over the first quarter of this year. It has been quite a while since we have experienced quarter-to-quarter revenue growth and we do appreciate it.

Now few in our revenue growth during the quarter, our assets under management grew from $76b to $85b. Now this growth imbalance was due to both new sales and rising capital markets. Because a good portion of our revenues is tied to the market, these larger balances contributed heavily to the increase in revenues. For instance, the portfolio invested 60-40 in equities and fixed income respectively, which is the typical portfolio we manage for our clients, rose by approximately 11.7% in the second quarter.

Now second, the revenue growth was broad based. All segments except investments in new businesses increased their revenues, and now the reason that segment did not grow revenues is because of timing and one-time revenue events in the first quarter; and third combined new business efforts across all segments created sales during the quarter of approximately $18m in annualized recurring revenue. Again stronger results than we've seen for a while.

Now while all these are very good indications of better times, I do want to remind you of first some profit delaying characteristics of our business model; and second, our need for some very important investments in our businesses, which we are making.

As I mentioned, on the market way down, our decline in profits was cushioned by a couple of factors. Now these same factors work in reverse on the way up. First, there is a difference in effect between ending asset balances and average asset balances for the quarter. We get paid on average -- on average balances, not ending balances. So, the timing of the increases and decreases during the quarter is very important. In the second quarter for instance, the increases in the capital markets happened early and were sustained during the quarter. So the average balances contributed about 70% of the revenue growth that the ending balances might have contributed. Another factor is that when we start selling as we have during the second quarter, sales compensation payments start to kick in, and they are highly front-end loaded. Now that's to say that we usually have the one-time expense of sales commissions well before we receive any revenue. Now don't get me wrong, we like paying sales compensation but when the payments induce for a start, they provide for some unfavorable expense comparison.

Now turning to investments, our philosophy is that we will not jeopardize them for sake of short-term profits. We feel strongly that the key investments we are making will have extremely high payoff in the future and to and to differ them to save some short-term cost would be [inaudible]. Now those of who that attended our investor conference last month learned of a new vision and strategy for the company. Now these new directions revolve around delivering financial wellness to our institutional and individual end markets as well as our bank and non-bank advisory intermediaries and our investment advisory markets. The investments required by these new directions create a single platform from which all of our services will emanate. Now this platform will provide us tremendous operational and developmental leverage as well as improved service comprehensiveness and quality.

Now we cover these investments at last month's investment conference in detail and I have mentioned them in previous quarterly reports. Essentially, these investments include what we call the desktop, which is a system platform to be used by in clients, advisors, and administrators to create the in customers' client experience. And these investments also include a global straight through processing platform designed to streamline investment processing to our clients as well as our own operations and now electronic trading as part of this platform.

Now in addition, we are investing a new investment products and strategies and new financial services to more completely fill out our offerings needed deliver individual financial wellness.

Now we believe these investments are critical and crucial to SEI's continued prosperity. We believe that we will -- they will form the under pendings of substantial growth in revenues and profits for years to come. And they are all multiple year investments and as I mentioned last quarter they are requiring us to accelerate our investment activities. Now, while we step up the investment expenses a small part of them will be capitalized according to our normal capitalization policy. In the second quarter we began to accelerate our investment spending and as part of that we capitalized $1.8m of expenses related to some of these investment projects. Now this compares to our historical capitalization rate of somewhere between 500,000-600,000 per quarter.

As we look to the future we are hopeful that business climate for our clients and our potential clients which are essentially investors or those in the investment business. We hope that there the business climate continues to improve. It will help us complete the investments we need to make to executive the company's new strategy and at the same -- while at the same time provide -- it will help us provide continuous improvement in shareholder value.

In the longer run we believe that the work we have done over the past two years and the work we are continued -- we are currently doing will pay enormous dividends. In every market we serve, our investments are helping us offer new expanded solutions for our clients in market and these solutions are designed to help distance us from our competitors and help us be a better business partner with our clients. And of course, it will help us grow revenues and profits.

We also remained bullish on our long-term outlook because of the fundamentals of our business. The recurring nature of our revenue, our strong cash flow, the strong market acceptance of our business solutions and the leverage in our operation as well as the portfolio businesses we are creating will continue to serve uswell.

That concludes my remarks in the beginning and I would like now to move to our segments. And I am going to start with Private Banking and Trust and I am going to turn it over to Bob Crudup to discuss the results in the segment. Bob.

Thanks, Al and good afternoon everyone. Comparing this quarter to the second quarter of 2002, revenue up 77.6m was up about 6%. Expense reductions of about 5m the same amount as loss revenue kept profits effectively flat at 33.4m, thus moving our gross margins up to 43%. Comparing the results of the second quarter of 2003 to the first quarter of 2003, revenues were up slightly at 77.6m. That's an increase of $700,000 or 1%. As expected, we did see an expense up-tick of affectively the same amount as the revenue increase, creating profits that were essentially flat quarter-to-quarter at 33.4m.

It's good news that investment processing provided a $2m revenue boost for the quarter, as we saw small improvements in all three investment processing revenue categories. This includes recurring revenue, electronic transaction processing, and one-time revenue; offsetting over half the investment processing increases were revenue losses in mutual fund services of over 1m, but more on that later.

Now, a few comments about the various product lines and then some good news about new business; first asset management revenues continue to be -- to remain effectively flat as they have for the last eight quarters, but non-liquidity asset balances are up about 1.1b versus this time last year now standing at 3.9b. I believe this growth in the assets over last year is the result of our invigorated sales and marketing effort in the regional and community bank market, as well as, growth in our stable asset fund. Obviously, the market helped us some in the second quarter. As I have stated before, I am pleased that asset management revenues have remained flat as we have transitioned out of higher fee product into lower fee product.

Now, moving onto the mutual fund services; the impact of the National City loss is fully reflected in our assets under administration balances. Most of these assets left at the first of June. Offsetting this loss, we had new funding of 1.3b, and the market impact added another 2.6b. With these ins and outs, you can expect the ongoing negative effect on revenue to be less than 1m per month with very little effect on profit.

Since I spoke in some detail about positive trends with investment processing revenues during my financial overview, let us move onto new business. You will remember from my June Investor Conference Presentation, we are focused on three core strategies; these are, building out a new business model for investment distributor banks; second, building out a new business model for investment manufacturing banks; third and finally, finishing the straight-through business processing platforms that Al discussed, for administrative and back office operations for large-scale banks.

While I am pleased that the second quarter represents the best new business quarter for PB&T in sometime, and we closed three new investment processing clients; I am more pleased that two of these new clients are executions of these new strategies.

Let me explain, first Citizens Bank in Flint Michigan is an early adopter of our investment distributor model, which we hope many banks will eventually embrace. As such they are a full service back office outsourcing or BSP client. But importantly Citizens has also selected us, as the outsource provider for their asset management programs. Meaning to a great extent, we expect them to adopt both our wealth advice solution and our institutional investment solutions. They intend to use our investment products to execute the private client investment programs as well as their foundations, endowments, and plant sponsor investment offerings. This unique new bank distributor business model is one of our core PB&T strategies. And by outsourcing investment operations and investment management, first Citizens will be able to focus on servicing their clients and growing their business.

Another important new client First Tennessee, a large regional bank, will join citizens being among our largest BSP customers further indicating the trend of back office outsourcing is moving-up market. By adopting many of our new straight-through processing services including use of our investment portfolio management platform, as well as, our mutual fund clearing solution, First Tennessee is an early adopter of our investment manufacturing solution.

Both citizens and First Tennessee bought because we had the new strategies and could demonstrate capability and commitment. This is gratifying for me and I think a true statement that we are on the right track to meet the emerging needs of the banking industry. The recurring revenue sold in the quarter well over $7m, but importantly these two new clients will continue buy additional services in the future that will allow them to move further into our new business models. Our new business pipeline is robust and, in fact, has improved since last quarter. We do have competition in every transaction, but as we continue to roll out our new solution, which we had been discussing with you for over a year, I believe the strength of our solutions will be obvious to our prospects. If you have questions, I will be happy to answer them. +++ q-and-a

Ladies and gentlemen if wish to ask a question please press "" and "1" on your touchtone phone to hear a tone indicating you've been placed in queue. You may remove yourself from queue anytime pressing the "" key. If you are using a speakerphone, please pick up the handsets before pressing the numbers. Once again if you have a question, please press "" "1" at this time and one moment please. First question is from the line of Glenn Greene of Think Equity Partners, please go ahead.

Hi Bob how are you.

Good afternoon Glenn.

This question is just want to clarify the upsets under administration drop off is that all due to National City this quarter or was there anything else going there.

Well there were some up-ticks in new funding and some up-tick with the market and there were no other lost clients that were built into that.

And then just to understand, sort of, the revenue impact going forward, you alluded to sort of 1m per month detriment related to Nat City and then you got if my recollection is right, we have got first Hawaiian coming on this quarter and then the two big wins with Citizen and First Tennessee, where my guess is they lag somewhat. We are just looking for a little color on how to think about the revenue going forward, all the ins and outs.

Yes. What I would like to say is that if you look at over this quarter with the new funding, some of which we have announced earlier, the increase due to the market and then the outflow from that city with the impact going forward from all of that as of this quarter will be less than $1m a month -- going forward.

And when do -- does thatinclude any contribution from Citizen or First Tennessee or is that probably six months from now?

No this is mutual fund services. At this point, the arrangements with those Citizen and First Tennessee are back office outsourcing and with the case of Citizens, a potential for asset management.

Right but I am just trying to understand the revenue contribution from them the timing of when that revenue contribution will?

Okay. Those conversions will be completed before the end of the year.

Okay thanks Bob.

We will see -- we will start to see a little revenue in the fourth quarter from both of those clients -- recurring revenue.

Okay thanks Bob.

Your question from Mayank Tandon with Janney Montgomery Scott.

Thanks. Hi, Bob. Just one question was you talked about the pick up in M&A activity in the banking world being a driver of your investment processing business. Did that play a part in the improved momentum this quarter? Could you speak to that may be even going forward as well, what do you see on that front?

Yeah for the last year and half the M&A activity in the bank market as you know, is been very-very low and has had a negative impact on our business, because generally we with our investment processing business will win in that arena. Going forward with mergers and acquisitions, I think I am going to let you tell me what you think is going to happen because I am not in the prognosticating business with regards to that.

Okay, but I guess we have seen a little bit of pickup in general or that hasn't really impacted your business yet, would you say?

No.

Okay, but that would be a driver going forward or something to watch?

If that activity picks up, it will be a business driver for us.

And what about the fund processing business, do we expect the impact to be the reverse in that area?

I think that's hard to say if you look at -- historically, we have done extremely well in the investment processing business with regards to merger activity and we have had less success in the mutual fund services business when that happened.

Okay. Great, thanks.

Sure.

You have a question from line of Tim Willi with A.G. Edwards.

Good afternoon Bob. Regarding the First Tennessee contract, if I remember correctly was that a former user of the Fidelity software system?

That's correct.

Okay, could you -- I guess, this has happened a little bit sooner than I would have thought, given the recent decision by Fidelity to stop supporting that, so I was wondering if you could talk or just any kind of color you could give on the other users of that system and sort of tying in that your pipeline comments, are you getting the sense that other users of the Fidelity system are looking to move in a fairly timely basis or are your pipeline comments pretty much exclusive of those fidelity customers?

I'd say that my pipeline comments were inclusive of those customers and our pipeline has improved since the last quarterly call.

Okay. Now would that be -- would that apply to both the ASP accounting as well as the business process outsourcing?

Yeah I think that's the good news is the fact that Citizens and First Tennessee are both on the larger end of our BSP service model, and I think that's a definite indication that we are moving the solution up market.

Okay. Thank you.

You are welcome.

We have a question from the line of Brad Moore with Putnam Lovell.

Hi, Bob. Couple of things just to go back to these two new wins, can you remind us what do you expect in terms of the profit margins on this new business sold; how they relate to your average margins for the segment?

It's absolutely will hold right in our business model. These margins will fall within the margins of our other clients.

Okay. And then, how much of the contract pricing was based on -- how much of it was volume based as opposed to asset based?

If you look at the BSP services that we offered to our bank clients, all of those services are contractually based. And the revenue number that I gave you for the quarter of $7m recurring is almost all contractual recurring revenue exclusive of -- for the most part, any asset-based fees?

And is that also exclusive of any volume based transaction, volume based fees, or execution based fees?

Yes, for the most part yes. And the comment in my presentation about one exciting thing about this new business model as early adaptors, both of them as early adaptors for the business model, puts us in the position to take them up that curve by adding new services that we intend to deliver through these business model -- through this business models over the next couple of years. For example, at Citizens the opportunity to provide asset management services to their wealth and institutional market.

Okay and the $7m that you cite that's the amount associated with just the two -- these two contracts sold, it doesn't include anybody else is that correct?

There is a few cross sales in there that are recurring contractual revenues also.

Okay. And then finally can you get us up to speed on your investment spending plans for the balance down for the year relative to some of these new initiatives that were articulated in the June conference?

I think I will let Al address that with his wrap up comments, because as you know our leveraged investment model, we are now investing in a single platform for the entire company, and Private Banking and Trust is picking up that portion of those investments.

Okay. Can you say that -- has the timing at all changed with regard to the deliverables with respect to the PB&T segment?

No, not at all.

Okay.

We've seen an up-tick in investment in the PB&T expense line over the last two quarters

Okay, thank you.

You are welcome.

We have a question from the line of Pete Heckmann with Stifel Nicolaus.

Good afternoon Bob.

Hello Pete.

As regards to some of these renewals you are seeing on both the investment processing and fund administration side, how competitive would you say those are? What are the features that people are looking for? Is this becoming -- I guess, could you compare the relative competitive nature of the pricing on renewals between the two businesses, and then on the investment processing side, can you talk about who you are seeing more? It seems like [Sungaurd] is trying to make a bigger push in that area, but I am wondering about [Metavante] or others, it just doesn't seem like I hear of them in the marketplace quite as much?

Yes, pricing competitiveness in the investment processing in the back office operations business. I think that this is one of the good things about the new business model that the bank distribution model and the investment manufacturing model is, this is an opportunity for us to further differentiate ourselves from our competition, and I believe that it's going to take the price conversation that you always have with the bank to a different plane and put us in a more competitive position.

Even with our old business model the pricing in that piece of our business and the competitive [inaudible] pricing hasn't been as intense as it has been in the mutual funds services business. With regard to the competitors in the investment processing business you are right in that -- all those competitors are there. They are in most transactions and SunGaurd is the competitor that does at this point seem to be most active.

Okay and do you know at this point are they considering moving into the [BSP] world or are they content an out of stand ASP.

I believe that they will move into the [BSP] world and that's one reason we're going to our new business model.

Okay. Thank you.

Welcome

We have a question with Mayank Tandon with Janney Montgomery Scott.

Well I just had two follow ups. One could you give us a sense of what the sales cycles are on some of these deals you talked about on improving pipeline, how the sale cycles changed over the past couple of quarters. And second question was related to could you give us the break down of revenue growth of the current revenue and for your one time revenue. Thanks.

Sure the sales cycle for these very large decisions for banks. It's half-a-year to year-and-half from the beginning of the process to the end of the process. What we have seen over the last couple of years is that lengthening and being toward the longer end of that and in some cases even going past the year and half. We are seeing now in the markets more activity and I think there is an opportunity for the sales cycle to shorten over the next 12 months and I am hopeful of that. With regards to the percentage of revenue by product line, investment processing this quarter was 73%, fund processing was 14%, and investment management was 13%.

Could you give us the breakdown of revenue growth for recurring revenue and then one-time revenue like you have in the past?

I don't think I had done that in the past and I am not in a position to do that right now.

Okay. That's fine, thanks.

If there are any additional questions, please press "" "1" at this time.

You know, regarding that last question, I just now heard it, we are about 80-85% recurring, I am sorry.

And there are no further questions in queue.

Are there no more questions.

There are no further questions in queue.

Thank you. Our second segment is Investment Advisors and Carl Guarino will cover this segment.

Thanks Rob, good afternoon everyone. The positive stock market movement this past quarter helped improved result of the advisors segment on a sequential basis, but left us just shy of year ago results. On a sequential basis, revenues improved over 37m in the second quarter, up from 35.9m in the first quarter. You will recall that the first quarter revenue included about $1m on one-time items. Expenses increased modestly dropping margins from 5.6% in Q1 to 5.4%. We continued tight control over personnel and discretionary marketing expenses while making targeted investments in key strategic areas to support our growth. Compared to the corresponding period of last year, revenues were off 5.5% due to lower market evaluations. The profits were down only 1.3% due to strong expense control.

Now, we have 25.5b in average assets under management during the second quarter that compares with average assets of about 24.1b for the first quarter, reflecting almost entirely the positive movement in the stock market. This market up-tick has not yet resulted in positive net cash flows, as gross sales of about 1.3b were almost entirely offset by redemptions in the quarter. Now, I might note that redemptions in the second quarter were impacted by a decision we made to close our variable annuity fund as well as the normal tendency of investors to redeem in April to pay taxes. However, as we have noted previously, higher than normal redemption rates reflect not only unsettled market conditions, but also a conscious decision on our part to reshape our advisor network. As we discussed at the June investor conference, one of our major initiatives is to create a more selective and focused advisor network that will provide a strong platform for future growth. We expect to accelerate this process of reshaping as the year continues, which may result in redemption activity at these above-normal rates even if we continue to experience a more positive stock market.

We continue to make good progress in our strategic direction. The establishment of an SEI network of elite wealth advisors will offer affluent individuals an SEI designed wealth advice service. We recently initiated a data process with our first two advisory firms and we continue to build out both the wealth solution for the end client as well as an efficient and scalable business platform for the advisory firms. So we remain optimistic that our best growth years are ahead of us for this segment, but continue to be cautious in the near-term due to the uncertainties of the capital markets and our network transitions. Thank you and I will be happy to take any questions you may have.

Once again ladies and gentlemen, if you wish to ask a question, press "" "1" at this time. The first is from the line of Brad Moore with Putnam Lovell.

Hi Carl, a couple of things, first of all, can you update us on the advisor numbers as of the quarter -- at the end of the quarter?

In terms of number of advisors Brad?

Yes, and/or client firms?

Yeah, we have steered away from giving out numbers in terms of advisors and firms just because I feel it is a little bit of a misleading metric given our strategy and where we are headed. As we have indicated in the past, we have close to 8,000 advisory representatives that we have some form of selling agreement with, but about 2,000 of those are responsible for about 85% of our assets. So, the strategic direction for us has really been to concentrate on that, sort of smaller core group, if you will, that has a more substantial business with us.

Okay, can you comment -- apart from market movements, can you comment in terms of how you see the outlook playing out given your plan to move to this new model with regard to advisor numbers and/or advisor assets?

Yes, overall I guess that's pretty optimistic, I mean I think the reaction generally in the market has been positive. We are getting good reactions and as you might expect, particularly good reaction from advisory firms that really do accept the business platform notion that we put out there and have really dedicated their business to SEI. They would like nothing better than for SEI to really focus our efforts and not have a sort of a very broad and fragmented distribution.

You know my cautionary comments are that there is bound to be some transition and brakeage, if you will, among those smaller relationships that we have as we move down this path and that's something that is, you know, it's really hard to sort of quantify and to try to predict if you will how one may offset the other.

Okay are you willing to put forward quantification in terms of how much attrition you are likely to see as a result of this new effort?

No -- I am not going try to predict that.

Okay and then separately can you, just comment on the sources behind the expense, -- the expense controller, where did you hold the line? What items or what cuts was sustainable? And what -- how much of an increase are we likely to see going forward?

Well the two big areas I think in terms of the control side Brad for us have been the personal side. That's both keeping a lid on headcount and very sort of selective target of reductions there, as well as the fact that in terms of sales and [seller] compensation, obviously, you know, until we get strong net positive cash flow you are not going to see much of an increase sort of in that area. The other big area from the control side or what we call discretionary market expenses, so promotional events [inaudible], I think where the investments are happening are in these major platforms areas that Al was talking about and Bob has alluded to that we are really doing on a much more sort of corporate wide basis, you know, particularly important to us are things like the SIE desktop and the processing platform that fits behind it, as well as the broader wealth solution that we're building out for end investors. But I won't try to sort of qualify that I guess anymore than the announcements Mark (ph.) did.

Okay and then finally do you happen to have any plans for further headcount reductions?

No, I mean, actually the headcount reductions for our group have been very modest in sort of selected areas. We haven't had major reductions, some minor reduction by attrition, and I don't see any major changes in that regard.

Great. Thank you.

And our next question comes from the line of Robert Lee with Keefe, Bruyette, and Woods. Please go ahead.

Thanks good afternoon. I just had actually two quick questions. First one is will this relates for the whole margin issue. In the past, I guess you spoke about how these sort of mid 50s margins all the time are not sustainable, but you still expect that the margins will migrate back towards the mid high 40s or do you actually believe that even during the transition period and when you get up and running with your new strategy that you can keep margin here. Where do you expect them to head?

Yes I think I will continue to say that the margins at existing levels reflect somewhat the fact that we are not yet in a high-growth mode if you will. So if you are not seeing much in the form of sales compensation and discretionary expenses in those numbers, and I think Al alluded this earlier as you start to ramp up and grow, you know, you have that impact of paying out sales comp. Now, that's a good thing and if the sub-margin reduction because of that, I think, we all would be pleased by that. I don't want to put out a particular, sort of, number or target for that. Obviously, that's going to be highly dependent on, you know, what the market does in terms of evaluations, the timing of any ramp up, terms of sales, as well as this -- these investments that we are making that Al has described.

And the last question is if I go back and look last couple of quarters, it seems like the revenue for asset and in one of the ways I guess I look at is after coming down from last year started -- no creeping back up. Is there anything, I don't know, [periodic] make shift or something else that could be sort of driving those revenue for asset a little higher in the segment?

There is a tiny bit of that and is a little bit you might expect in terms of some passage shifting. And understand for us the most part we are offering to advisors and they are offering to clients a strategic model. So there is not loss of sort of market timing going on, not major shifts that you might have -- going from cash to equity in the way. The things tend to be on the transition, we do have slightly higher margins on equity products as the equity market rose up that does have some marginal impact that is dampen by the fact that we periodically rebound the portfolios, so that really goes off we are actually rebalancing down to keep the model in balance. So you may get some minor variances like that you are seeing but typically not major impacts.

I' am sorry can I ask one last question?

Sure.

I understand that flows are relatively flat how -- sort of characterize say between the separate accounts and maybe the mutual fund wrap platform. If one is showing as the separate account platform showing better relative momentum or flows as the others so to get a feel for where business is coming from?

Yes. It is a little bit more on the separate account size, so that is a little bit positive in the fund size and it has been a little bit negative and that's what's sort of offsetting things. So it's not dramatic, but it is the case that where you do see some more positive flows, it is little more towards that side, and particularly given the fact that we rolled out earlier and enhanced what we call IMAP, Integrated Managed Account Program that we think is a pretty attractive tax advantage approach.

Great, thank you very much.

Thank you.

And our next question comes from the line of Carla Cooper with Robert W. Baird Company, please go ahead.

Hi good afternoon, I wondered if you can talk a little bit about your expectation now that we've seen a market rise, when you might think that flows might begin to pick up? And I guess maybe sketch a different, you know, couple of scenarios -- one is that we -- sustained level fear,could we still expect an up-tick; or you know conversely should the market continue to rise and guessing the uptick would be bigger, but maybe characterize those for us in terms of what you'd expect for closing to your business?

Yeah I guess it's tough for us because -- for us and I think my message here is partly that the market is one factor, but clearly not the only factor. So clearly unsettled markets hurt and if the market continues on this pace a little more settled even without huge increases, that's a positive rush, just the sort of settling of the market and the normalization I think is a positive and that helps. But as I alluded to we have got a couple of other things going on, the wind down of the variable annuity product, more importantly this reshaping of the advisor network that we are in the process of -- all which will impact redemption. So I don't want to, sort of, play the game of trying to predict what net cash flow is going to look like over the next couple of quarters.

Okay and are there other products slated to wind down besides the variable annuities?

No.

Okay. Thank you.

And our next question comes from the line of Gary Prestopino with Barrington Research. Please go ahead.

Yeah good afternoon. Hey, Carl, can you -- with just $1.3b of redemptions, you gave three reasons why taxes, variable annuity fund, reduced advisor network -- can you kind of breakout what percentage of each is attributed to these redemptions?

Well I can breakout couple for you and a lot of these things are not so easy to quantify. The variable annuity side is easier there’s about $50m in the quarter that came out because of our announcement to close the variable annuity fund. Now there is still another $175-200m that in all likelihood would we be redeemed out next quarter as a result of that decision. So tax is a little bit higher, I mean there is no way to sort of charter or quantify exactly when someone redeems out money, exactly what the use of that is. All we can do is just look at the monthly trends, recognize that April is pretty much a tax heavy month, and know that that spiked up. So that the order of magnitude of that is probably somewhere in the $75-100-125m but that's a bit of an estimate on my part. There is no way to sort of quantify that piece.

The rest is that which we would attribute either to the market -- everything from -- advisor loses the client, fees get paid to advisors, again that's not a huge amount but that impacts every quarter as well as quote this the changes that we are making on the advisory side. I frankly doubt that had enormous impact in the second quarter because we are just sort of moving into that, but you may see more impact in the third and fourth due to the advisory shaping.

And then two other questions, I mean what's the pulse of your advisor network in regard to their clients or trying to get their client more involved in equities? And the second part of that was I guess you may be starting to see a flip from fixed income, out of fixed income because of bonds, do have a dividend yield kind of fund that you could offer to these people to take advantage of the new tax bill?

Yeah, what we did -- I mean we are actually in the process of a design, and we launched this fall the whole new investment strategies approach, which is really built around the sort of financial goals of clients and that will take into account. We will add both some new asset classes, you know, hedge or REIT manager and take into account the new tax laws in terms of the relative advantages, if you will, of dividend.

I do want to caution you for the most part the advisor we have and what they are offering client is a more strategic model. There are not doing sort of heaving shifting. So they are not typically in the mode of having to move people from a heavy cash to a now much more heavy equity. They have sold people in general a model, and there is some tweaks and changes in things going on, but not huge shifts. And I think the base that we had of assets in terms of the equity fixed income, liquidity mix has been relatively stable throughout this period. There have not been enormous changes in that.

Thanks.

And now we have a question from the line of Tim Willi with A.G. Edwards. Please go ahead.

Good afternoon Carl.

Hello Tim.

A question going back to the re-engineering of the advisor network. You mentioned, you know, roughly 2000 advisors drive the bulk of the business. I was curious the remaining 6000 or so. Is there a separate efforts to be a bit more assertive about getting those advisors to make a decision one way or the other. Are you pretty much just letting them move as they will sort of trying to see if there is any effort on your part to change behavior and potentially find out you are dealing with 2,500 or 3,000 very committed advisors 18 months from now rather than 2,000 you articulated?

That will be the plan. I think you are right. I mean the fact I think what we have done is just sort of dedicated focus our efforts on those advisors who were the more committed. Now we are going back in a little more conscious and active fashion, basically to sort of push the advice a little bit, with saying there is a choice here. Obviously, we would love to have some of that group of 6000 commit more SEI and we are going to actively sell sort of targeted portion of that where we think there is a real good fit.

I think for others, you know, we maybe in the process of ending basically the selling agreements and we'll take care to preserve as much as we can, existing relationships and take account for existing client accounts and not disrupt that. But, what we don't want is people just to have the ability if you will to write a ticket everyone once in a while or sale a fund everyone once in while, that is not what our proposition is about in the marketplace. And it dilutes us and hurts franking the efforts of the more committed advisors.

Yes. I guess that the follow up to that is you had mentioned in your comments that, you know, sort of the early stages of feedback are very positive, I got the impression that that was the feedback from the sort of targeted 2000, you know, advisors in that targeted group, do you have any feedback or have you approached the other 6,000 and what’s sort of the read there?

Yes, we had started to do that and this is complicated little bit Tim by the fact that you also have sort of networks that we deal with. So those advisors, some of them are parts of network either insurance networks or independent [BD] networks, some of them are totally independent, so we started the process we were really having conversations with some of the networks. And I've to say generally there that the conversation have been fairly positive that people get strategically what we are trying to do and think that this makes sense. So we are still in the process of having those conversations and sort of implementing that and then we will get more active with some of the smaller independents.

As you might expect, I think the reaction will be mixed in that group. I mean there are a bunch of folks who would just love to have the product if you will available to them on whatever basis they choose that's just not something that -- that we want to do going forward. I think there is some others who are going to see a real opportunity to commit to a much broader business proposition on the part of SEI and see that that's valuable to them.

Are you aware of any other -- of your competitors, they have decided to take sort of a more holistic approach to the platform or do you feel do you pretty much cut off fairly being jump on people and then you sort of vision of the advisor business?

I don't see any [inaudible]. I mean the folks that you've talked about bringing a broader [well] solution to the end market, you know, Merrill Lynch and others not necessarily in the same way that we are talking about doing in terms of the sort of independence and client centric way of it. I don't see anyone else is offering the kind of total platform that would enable advisors to do this the way SEI is. I think we really do have a leading position in that regard.

Great. Thank you.

And we have a follow-up question from the line Carla Cooper with Robert. W. Baird & Company. Please go ahead.

Bob, just Tim just kind of asked my question but may be little broader comment. If you could call on the competitive landscape you still feel that you are the only ones who give solutions, but anyone else, you know, encroaching or just any other comment?

Yes, I guess -- I’ll just reiterate I think we do have a strong lead in sort of that position in the market right now. I never sort of underestimate competition, I think if we, you know, our business has always been to sort of establish a new category, which means we get in the forefront. I think once you do that, there will always be people who follow on, that's essentially what's happened in the fee-based advisory space. So we are certainly sensitive to the fact that the competition is very real out there and that you continuously need to be in the position of distinguishing yourself. But I don't see anyone else right now sort of head-to-head with the kind of offering we are talking about.

And just finally, do you have a sense of when the conversion into the focus on the select advisors may be completed? You are thinking months or years?

Oh, you know, somewhere in between I guess. I think the most of the impact will probably over the next two or three quarters.

Thanks.

And there are no further questions at this time. Please continue.

Very good. Our third segment is the enterprise segment and I am going to turn it over to Ed Loughlin to discuss this segment. Hi, Ed.

Thanks Al, good afternoon everyone. Let me start by reviewing the overall financial results for the enterprise segment compared to the second quarter of 2002 and after that discuss the quarter's sales activities.

Revenues for the second quarter 2003 compared to a year ago were essentially flat. This is due to two things. First, there was a slight change in mix between treasury and retirement revenue and secondly the revenue impact due to utilizing average balances for revenue recognition compared to using quarter-end balances. Average asset balances, which we utilize for revenue recognition for the quarter, increased by 600m. Second quarter 2002 to second quarter 2003 ending balances increased by $2b. Operating profit for the period was $6.3m, a $500,000 increase compared to the second quarter of 2002. Operating margins also improved during the period and margins for the segment were 43% plus compared to 40% for the second quarter of last year. And finally, asset balances at the second quarter-end were $17.2b, a $2b increase from June 30 of 2002. Now, strong sales during the quarter totaled $1.9b in new assets. That breaks down to 1.4b in retirement sales and $500m in treasury sales. Year-to-date, new sales totaled $2.6b in assets. For the quarter, eight new clients selected SEI and we continue to initiate relationships with larger clients. Three of the new clients that we have won this quarter, each of them are awarding us over $500m in assets. While quarterly sales production varies, the second quarter 2003 does represent a significant increase from prior periods.

Client funding during the quarter totaled $700m in assets, $200m in retirement assets, and $500m in treasury assets. Unfunded client commitments at quarter-end are $1.4b in retirement assets. I would like to point out that of that $1.4b, 650m of the backlog will be funded at year-end and that's because it's a defined contribution plan and the funding needs to be done coincidently with the record keeping conversion, which is planned for year-end.

As I mentioned at the investors' conference, pension plans have become much more visible on the popular press and also within the corporate budgeting process. Many pension plans are no longer self-financed. The plan is competing for corporate cash flow that has historically been directed to other corporate activities; and as a result, we are now starting to see institutional investors make changed commitments and purchase decisions. Our pipeline and sales activity is strong and we remain optimistic that the pace of institutional decision-making will continue to increase. Institutions returning to the marketplace will enable the enterprise segment to continue to grow the top line. That pretty much concludes my comments. Thank you, and I would be glad to entertain any questions.

Ladies and gentlemen, if you wish to ask a question, please press "" "1" on your touchtone phone. Once again, ladies and gentlemen, if you have a question, press "" "1" at this time. Our first question is from the line of Tim Willi, A.G. Edwards.

Good afternoon Ed.

Hi Tim.

A question for you. have you seen or have any reason to believe that we will see additional funding come into plans to help shore them up, or did the market activity this quarter alleviate that pressure from plan sponsors to have to make additional cash contributions to the pension plans?

Yes, okay let me help you with that. This quarter the increase in the market is really not enough in order. to help these pension plans get from under-funded status to a healthier status where they wouldn't have to make contributions. Because on average, the pension plans over the last couple of years dropped to about a 70% funded status. So, we have not at this point seen a lot of cash flow, okay, from contribution. Now, that's not unusual. I mean typically what the pension plan has to do is they have to make that contribution by the end of September. So, typically the season for that would be next quarter where you would start to see these contributions coming in.

In that -- I am assuming that's then not -- and when we talk about unfunded commitment. So that could potentially prevent a situation where you may see sort of funding or new cash coming into plans above you know, the 700m or so of that $1.4b backlog?

Correct. The unfunded commitments are sales commitments new client relationships that would be -- being brought online.

Okay.

That would have nothing to do with any potential contributions.

Do that 70% number eases throughout there, is that generally apply to your customer base or is that more of like a sort of domestic issue?

That's more of the domestic kind of average.

And what --, do you think client base is fairly close to that, or would it be distinctly different?

You know, I really couldn't answer that collectively, I really don't a number, so I'd rather not, you know, commit to one.

Okay. Thank you.

We have a question from line of Chris Arndt (ph.) Select Equity Group (ph.).

Yes thanks. Can you just describe the selling process in enterprises and how long does it take to bring on new clients and is that a gating factor in growing the business now, and what seems like a pretty good time to sell your product?

Okay and the sales process is one where go out to the marketplace on a direct basis. So, we approach prospective client in two ways, we have two programs, we have a direct telemarketing, you know, type of program in order to get into a client, we also have a referral program through our advisor network and both of those do provide us [entry] into the institutional marketplace.

After that, I would say that on average what we have seen is that probably the sale process is anywhere from 6-12 months. When we do get a referral, the process seems to move a lot quicker because of the fact that we are being introduced typically by a trusted advisor. So, that part is positive.

In so far, as the conversion piece of your question, typically if a client commits in one quarter, we would have that conversion, because it's not a real lengthy process that would be done by the next quarter. So, we will start to recognize some revenue. What's unusual about this one plan is that there is a record keeping conversion it's a defined contribution plan. Many of our client relationships are on the defined benefit side. So there really isn't a large administrative conversion at the plan participant level. The trust conversion in order to move from one custodian to our trust company that's relatively quick and painless and easily accomplished, so it's a little- - I pointed that out about the $650m because typically you would see what is unfunded in the backlog is going to start to be revenue recognition in the next quarter. And that's not the case with this one fairly significant deal.

Great, thanks a lot.

We've a question from the line of Carla Cooper with Robert W. Baird & Co.

First was there anything distinctive about the piece of wins throughout the quarter, and I guess some pointing towards did it actually pick up as the quarter went on, and how do you think the momentum is as you begin the next quarter?

Well I would say that this is clearly one of the strongest sales quarters that we have really had. I can't say that we can attribute that to, you know, did it was related to the market that's what you are talking about as the market started to come back and the declines start to come back and make decisions. I don't think there was any connection. I think that what we are starting to see is that the companies now are starting to understand the kind of the condition of the financial health and the financial wellness of these pension plans. I think that’s prompting the CFO to get more involved and more engaged and I think that is helping to get a committee to be focused to concluding the due diligence and making a decision. So, I guess where we are guardedly optimistic is that we are starting to see much more of a process in place for making a decision and that kind of activity, we think will bode well for us in the future.

Thanks Ed.

Sure.

We have question from the line of Robert Lee with Keefe, Bruyette & Woods

Thanks couple of questions actually. I guess I have a [inaudible] in margin question with margins running just around 44% shade under, I mean, where -- should we assume that there is still more operating leverage that can be had in the business as we grow asset -- I mean where do you the [shakes out], again we face situation where if this is unsustainably high over time and then I have follow-up questions sort of related to how these changed in the advisory segment exactly?

Okay. The first question as so far is the margins. I think I have shared with everyone before that I think at this particular level they are at the high end of the margin level. There is couple of reasons for that one would be that again as we talk about our new strategy at the client conference or some investments that we need to be able to make in order to continue to evolve the product.

Having said that I think that we do have scale in this business, I mean, we have the infrastructure is pretty much build and the leverage business model is one where -- we are not talking about significant investment dollars, but where I do think that we are talking about dollars and it has been referred to by Carl and certainly by Al is that the name of the game for this particular segment is going to top line, selling new clients, growing the revenue. In order to do that we do need to pay sales commission and we are happy to do that. So, we are anticipating of a planning paying additional sales comp this year than we did last year, because we would believe that we will have a better sales year. So that will ultimately help the business.

As you may or may not know the way that we do pay sales comp -- I mean do expense that and pay that in the year that the client is funded. There is no trail commissions. So, from a segment perspective, what you will see is the expenses front and loaded, but we do get the benefit of the revenue increases on an ongoing basis and it is unencumbered by any kind of additional sales compensations.

Okay and just follow up, you know, you do somewhat depend on the advisor segment for referral business and given the changes there that are taking place, reduction in the number of advisors, more focused approach, do you anticipate that there is going to be any positive, negative fall outs for your business here, you know, some advisors who chose not to go that rout there, any risks that -- are the source of referrals dries up or you lose some assets?

I don't think that we are necessarily at risk there because again as you may expect, I mean, the select advisors who were the ones that were more involved in the SEI programs and more supportive of the SEI programs and exactly are the ones that have really embraced the referral program. So I think that there is really a direct connection between who is interested and what we are doing in our wealth solution for the high net-worth and I think that they see that there is a pretty close correlation to what we are doing on institutional side. So I would not anticipate that having a negative impact. I think that quite the opposite could occur as I think that we see some advisors who are maybe not select advisors today who start to move in that category, we will certainly work to educate them under the opportunities that the institutional program could offer to the growth of their firm.

And just one last question, the competitive environment, I mean you still see running into, you know, [Frank Russell] or others like that and I am just curious the business you are winning, does any of it come from competitors trying to do the same thing or is it mainly [attempt] people to try to match themselves [not through] consultant?

I would say that probably the biggest competitor that we see and yet if you think about what we are trying to do, we are trying to help people. We want them to delegate this responsibility to us. So the largest model competitor would be the consultant community. So that's the other major option. We do see some others who are in the same space who are manager of managers. They are probably, from our perspective, not as inclusive, not as holistic, and I think that that's what a lot of times the client's perspective would be as well. But we again have kind of created a niche market here for this bundling of defined benefit and anytime you do that and you start to grow and create a business out of it, there’s others that enter the space.

Thank you very much.

Sure.

We have a question from line of Glenn Greene with Think Equity Partners.

Thanks. Ed, certainly one thing that struck me I guess is the size of some of the plans you won, the three north of 500m?

Right, right.

Wondering if you just sort of comment on that? What you are really seeing, and give a little color on your pipeline if there is more deals like that out there? And then I have a second question related to sort of the extent of sales commissions you recognized in the quarter, where does that happen in the third quarter?

Well, we are pretty much [accrued]. I can answer the first question -- the second question, I mean. We're pretty much accrue for the sales compensation on a monthly basis, and it's pretty well connected insofar -- there is direct connection to the asset production level.

Okay.

Insofar, as are there other opportunities out there, the good news about that is I don't think we have come to any conclusions as to what the upper end or plan that would be attracted to this type of an outsourced proposition. We are going after a target market. I think we have say $10m in assets to $3b in assets. We have other clients of that particular size, but we also have a very diversified group of clients. I would say what we see though is that there is a lot of interest in clients in the $100m, $200m portfolio range. So, I would say that our pipeline, you know, is pretty strong in that particular area, which, you know, those are some nice sized new opportunities.

And any thing that -- why your close rate was so good this quarter? Why the -- any central item why really picked up?

Skill.

You had skill in the first quarter too.

Not as much skill. We have more skill. Now, I mean the really -- there really isn't anything other than -- again I think I alluded to or as I said it to [Carla]. I think that there is much more of a commitment to really getting these decisions made and moving on. Pensions now are much more strategic because of the impact that they have to the corporate finance structure of a corporation. So I think that that's good news.

Okay thanks Ed.

Sure.

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

Thank you Ed. Our fourth segment today is Money Managers and I' am going to turn it over Wayne Withrow to discuss this segment.

Thank you Al. During the second quarter, the Money Managers segment recorded revenues of 13.1m, an increase of 21% over the first quarter of 2002. Profits of this segments totaled 2.3m, a 7% increase from last year's second quarter and a 15% increase from the first quarter of this year. With respect to the business, we had sales generating a projected $5m in annualized revenue, this included the sales to seven new alternative investment managers, three new traditional money managers, as well as sales to existing clients.

These results represent a new quarterly sales record for the segment. Client assets under administration at the end of June were 82.4b, an increase of 7.3b for the quarter. This increase reflects 2.1b in new funding and 5.6b in market appreciation, offset impart by 400m in closed funds. In reviewing the quarter, I would say it reflects strong new business sales, a good balance in sales to both alternative fund managers and traditional managers, and some realization of our effort to close larger transactions. With respect to this last point, note that the number of transactions sold was in line with our historical ranges even though the annualized dollar value of our new business set a record.

From a bottom line perspective, the quarter also benefited from some delay in new product investment and I expect investments to increase in the third quarter. Looking forward our pipeline remains strong and my outline for this segment remains positive. I will now entertain questions.

Ladies and gentlemen if you wish to ask a question press "" "1" at this time. First question is from the line of Brad Moore with Putnam Lovell.

Hi, just a quick one. Curious to know if what you are seeing in the way of attrition -- client attrition and what your expectations are, going forward?

We haven't seen much change in client attrition and do not expect to see much [turning to] the historical rates which is very small.

Okay great. Thank you.

The question from the line of Tim Willi with A.G. Edwards.

Good afternoon Wayne. Could you go back over to the numbers, you just gave on fundings in the quarter market appreciation and then the closed funds, I didn't get all those?

Okay. The increase was $7.3b and that's $2.1b in new fundings, $5.6b in market appreciation and $400m in closed funds.

Okay and just sort of I guess related to the previous question, is that $400m of that, that's fairly consistent with what you’ve seen over the last several quarters?

I'd say yes.

Okay, that's all I needed. Thank you.

that was client; I would say sometimes existing clients just closed down funds also.

If there are any additional questions, please press "" "1" at this time. We've question in line of Robert Lee with Keefe, Bruyette & Woods.

Thanks. Last quarter, if I remember correctly you, I think you made a comment about seeing some increased competition in, I guess, particularly the alternative manager states which I guess, the way, I think, the way it was characterizes meaning that you had to bring additional products and services there to, sort of, win incremental business – can you talk a little bit about the competitive landscape, and what's the traditional and alternative manager states that you are seeing, you know, competition seem to heat up or just sort of characterize it in some way?

Okay. Sort of comment, that I would say over the top that applies to both businesses is, when you are involved in, which is essentially a back office processing business, you need to continually improve your product offering because the market continually innovates in a product line and we see the need to do that and have done that historically in this segment.

With respect to the alternative managers, I believe, the comment you are referring to is over the past 18 months. Some of the larger fund processing firms have acquired [Boutique] providers in these areas so they could enter this market. By and large, at least to date, the people that have acquired these firms have left them as standalone units. So they haven't competed with us on much of a different basis than they have competed with us in the past, although we would expect to see some change to that in the future.

Okay thank you.

You have a question from the line of Mayank Tandon with Janney Montgomery Scott.

Thank you. Wayne, did you give us the number of client wins in the quarter, I am sorry I missed that if you did?

Seven alternative managers and three traditional managers.

Great thanks.

You have a question from the line of Carla Cooper from Robert W. Baird & Company.

Good afternoon Wayne. I also thought that there was an aspect that you discussed in first quarter regarding competition that there was the need for money managers to rollout some new products and services. I guess this goes back to Robert's question. Did I miss something there or could you talk a little bit about the new products that you got planned for this segment and still, you know, change your ability to compete?

Referring back to that comment, I think this was something we referred to in the Analyst meeting in June. Well, we need to expand the product offerings out of the different product lines that are offered by the money managers and then the larger example I would give you be in the area of separately managed accounts where if they want to enter some of these new product lines, they will need a back office processing solution in order to be able to compete, and we currently have a few of those areas under study.

Thanks.

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

Thank you Wayne. Our fifth and final segment is investment in new business. I am going to turn it over to Joe Ujobai to discuss this segment. Joe.

Thank you, Al. Good afternoon. The investment in new business segment reflects our global initiatives as well as other strategic longer-term investments. During the second quarter, average asset balances were $8.1b compared to 8.1b in the year ago period and 7.6b in the first quarter. Revenues for the new business segment for the first quarter were $11.3m, down 2% from the year ago period and essentially flat from the first quarter. Although we experienced significant asset growth, we did not see revenue growth due to one-time revenue events in prior periods.

The loss for the quarter is $5.1m, compared to 3.3m in the year ago quarter and 4.4m in the first quarter of 2003. The increased loss from the year ago period reflects continued investment in globalizing our business, including infrastructure expenses and increased expenditures in sales and marketing.

We continue to make significant progress in our global businesses, and today I would like to highlight our continued growth in the global enterprise segment and a significant step in our global wealth strategy.

Our global enterprise business focuses on direct distribution, the pension funds in Canada, the United Kingdom, and South Africa. We had four new mandate wins including a $140m mandate from a university and a $50m mandate from [Dow Corning] both in the U.K. Our total funded enterprise assets are now $2.8b; and going into the third quarter, we have an unfunded backlog of $525m.

We see increasing interest in our enterprise solutions worldwide, as companies impacted by their plan's under-funded status begin to reevaluate their pension strategies. Our global wealth business targets the [mass] affluent and high net-worth investor to independent advisors in Canada and the U.K. and to private banks on the European continent.

During the quarter, we experienced modest growth through our Canadian and U.K. independent advisors networks. On Tuesday, we announced a distribution relationship with HSBC Republic, a leading global private bank, to provide Mangers of Mangers managed account program [delivering] on an SEI private banking technology and operations platform. The program has launched and is now available to HSBC Republic offices in Geneva, Hong Kong, Singapore, and Zurich, all new markets for SEI. This is a significant validation of our global wealth strategy and is an important milestone as we open new markets on the European continent and in Asia.

We are pleased with our progress in global markets but we expect to continue to invest in sales and marketing and the infrastructure such as the global profiting platform discussed at our June investor conference necessary to support sustainable global growth. Are there are any questions?

Once again ladies and gentlemen if you wish to ask a question, press "" and then "1" at this time. A question from the line of Glenn Greene with Think Equity Partners

Hi Joe. Just was looking for a little bit more color on the announcement with HSBC, just sort of trying to understand the nature of their relationship and the economic [inaudible], how this is really going to work?

Okay, the nature of relationship is that the HSBC Republic decided that they wanted to market independent manager or mangers-type solution as core investment product for their high net-worth clients. Minimum account size is $2m, and as I mentioned earlier we are marketing it through four of their major locations. It works very similar to our U.K and U.S advisory business or U.S advisory business in that we have [RCs] built into the funds and the bank charges an account level fee on top of the underlying fees that are built into the funds. And so the bank would have a pricing schedule depending on the size and the overall relationship of the client. They take their fees outside of the funds and we take the fees inside of the funds and pay the sub advisors.

So do you get somewhere in the neighborhood of 50 basis points that you net or--

It's a little bit less than that but it's similar to again the U.S advisory strategy.

Okay, thank you.

If there are any additional questions, please press "" and then "1" at this time. At this time there are no further questions in queue.

That concludes the quarter report from our segment. Now I would like to now turn it over to Kathy Heilig to give you a few company-wide statistics.

Thanks Al. Good afternoon everyone. I have some additional corporate information about this quarter. Second quarter cash flow from operations was 36.6m or 34 cents per share. Second quarter free cash flow 27.4m or 25 cents per share and the year-to-date cash flow from operation was 65m.

During the second quarter capital expenditures 1.2m for equipment and 4.6m for the expansion of our facilities. Expected capital expenditures for the rest of this year would be between $2.5-3m for equipment and $3.7m for our facility.

Our second quarter depreciation was $3.8m and second quarter amortization $434,000. The accounts payable balance at June 30th was $2.8m. We will also like to remind you that many of our responses are based upon assumptions that involve risk. Future revenues and income could differ from expected results. We have no obligations to publicly update any forward-looking statements and please feel free now to ask any other questions that you may have.

Once again ladies and gentlemen if you wish to ask a question, press "" and then "1" at this time. First question is from the line of Tim Willi with A.G. Edwards.

Thank you. Could -- I guess this will be for Dennis or Kathy. Al mentioned earlier in the call in his opening comments some I think losses probably minor associated with hedging strategies. Could you talk about that a bit more and maybe give some kind of sort of magnitude of the losses this quarter associated with that?

Yes, Tim, I mean if you looked in our quarterly financial statements or annual statements, we have news that we have discussed that we economically will hedge investments that we are in. However, sometimes the accounting rules make us treat the hedge gain or loss currently whereas the investment gain or loss happens when you actually liquidate the investment. So, because the market was so strong in the second quarter that hedge was about 2.4m.

And that's part of that $4m loss on investment that you reported in income statement?

Yes.

Okay. Now, so is that -- if markets remain strong would you continue to pose loses and hedge or is it tied to specific investments and try I get to understand what the exposure might be there?

If the market increases, as it did, then we would continue to pose these losses, however, some of those investments that we're in that that hedge was against, we got out of some of the [inaudible] already, but not all of them.

Okay so we can effectively work your way out of that hedge if you liquidate some of these investments?

Yes.

Okay.

But we only have the hedge because of the investment.

Okay. So, it's not tied to, like interest rates or anything like that?

No.

Okay. Thank you.

We have a question from Pete Heckmann with Stifel Nicolaus.

Hi, Kathy, following up on that if the hedging loss 2.4m, the remainder is that due to the write-down in the tech investment and then what's the 509 other income?

Yes. That-- the most of the remainder is due to the write-off of that equity investment that's 1.2m and then the rest is as I mentioned a few minutes ago, we liquidated some of those investments that we had a minor loss on their liquidation. The 500,000, we had is subsidiary in Switzerland that we liquidated and when we liquidated it, because of the difference in the currency, you know, they were operating in their currency; we were translating in to the U.S. dollar. Well there was an unrealized gain on that currency which once that subsidiary was looked [today] that we could then realize. That won't happen again.

Okay. So I'll end -- there were items below the line that added up to about penny and a half and negative impact EPS?

Right.

Okay thank you.

We have a question from the line of Robert Lee with Keefe Bruyette and Woods.

Thanks. Let's go back to may be talk about use of capitals. It's clearly been a lot of companies financial and otherwise that have had a significant dividend increases, I looked at your share repurchase in this quarter -- it seemed like it was down from where it has been running for the last four quarters running. Can you sort of update us on where your thoughts are with how you managing the significant free cash flow you generated -- you know what your thoughts are about a potential significant increase in the dividends going forward?

Sure, this is Dennis. Because the comment the slowing relative to the past few quarters of stock buyback in the second quarter, I think is we've talked about that in the past, we'll not have to -- if the stock is really running, we'll not have to chase it with our stock buyback program. And so when the stock started to move fairly significantly, we just got out -- we just get out of the way and let investors get to the stock. In terms of any change in our use of capital regarding stock buyback or any consideration around our dividend policy regarding the recent tax changes, we haven't made a decision to change our stock buyback program, nor have we made any decisions regarding dividends, but it is something that, you know, certainly we will be discussing here over the next couple of quarters.

And if I could just make one follow up and going back to the share repurchase, I mean how do you think about the alternative between dividend share repurchase or not doing something else in terms of -- I mean do you look at the -- the discipline that you have to return on investment we are going to get from buying back the stock here; or is it just simply you are going to -- if it's not running we are going to buy it to price or evaluation?

Well I don’t think we’d do anything regardless of, you know, any of these factors but, again the now that the tax change is coming down within the past 60 dayscertainly we will get [inaudible] -- thinking about the overall use of capital although we are still committed to our stock repurchase program at this point.

Thank you.

Sure.

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

So ladies and gentlemen, we are starting -- as you heard from everybody we are starting to see a little bit of light in the tunnel and we are very excited about what we are building and we look forward to deliver in the potential we see in what we are building. And I can stress enough with the longer run we are very optimistic and confident, current revenues, strong cash flow, market acceptance of business solutions, operational leverage as well as the portfolio we are putting together. We do believe we will continue the service in the future and help us create long-term sustainable growth in both revenues and profits.

Now, I might remind you as always they we are in the business solutions business and not in the product business and that’s more evident in our new directions. And our clients do business with us because we solve fundamental problems for them and we try very hard to make their businesses and their lives better. And it's a very high value-added proposition. It continues to differentiate us from competition and we do believe it will serve us well in the future. That concludes all our remarks today. If there is any question still lurking we will take that otherwise we will bid you good afternoon.

Once again ladies and gentlemen if you wish to ask a question press "" "1" at this time. And there are no questions in queue at this time.

Thank you very much and I appreciate your attendance and good afternoon.