SEI Investments Co (SEIC) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Investments first-quarter earnings call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Al West, Chairman and Chief Executive Officer of SEI Investments. Please go ahead, sir.

Thank you. Good afternoon everybody, and welcome. All of our segment leaders are on the call, as well as Dennis McGonigle SEI's CFO, and Kathy Heilig, SEI's Controller.

I will start as usual by recapping the first quarter of 2004. I will then turn it over to each of the business segment leaders to comment on the results of their segments. And as usual, we will 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 first quarter. First-quarter earnings grew 12 percent from a year ago on a revenue growth of 9 percent. Due to our stock buyback program, our diluted earnings per share grew at a greater rate than earnings. Diluted earnings per share of 37 cents represents growth of 16 cents over the 32 cents reported for the first quarter of 2003.

We repurchased 948,000 shares of stock during the first quarter of 2004 at an average price of 33.5. That translates to 31.8 million of stock purchased so far in 2004.

Revenue growth was a result of higher levels of assets under management. The contributors to this growth were rising capital markets and new sales events. Our non-cash asset balances grew by $5.2 billion during the quarter, of which 2.1 billion was due to market appreciation and 3.1 billion was due to sales events.

We're very encouraged by the acceptance of our new strategies in our key markets. That growing momentum is evidenced in our sales backlogs and particularly in our sales pipeline. It's also reflected in the fact that four of our five segments showed increased revenues. Our fifth and largest segment, private banking, is demonstrating a strong pipeline and early indications of market acceptance of its BSP strategy. Now BSP stands for business services provider, and it refers to a company that provides a set of broad turnkey operational and technology services. This is in contrast to an ASP, or application services provider, who only provides technology services.

Now despite the underlying longer-term signs of strength, the private banking segment continues to experience short-term bumps in the road. In the first quarter, we lost a mutual fund processing client, FTI Classic Funds, a SunTrust subsidiary. As you know, over the last two or three years, the large bank mutual funds services business has been plagued with mergers and commoditization. This is why we have developed a new strategy for both banks and non-banks that treats mutual fund services as just one component of a full-, back-, and middle-office business service.

Now besides the mutual fund services loss, two mergers have taken place involving our bank processing clients. The first merger joined Banc One and J.P. Morgan Chase, and the second, Bank of America and Fleet have also merged. Now Bob Crudup will update you in detail on these occurrences.

Stepping back and look at the Company -- or the whole picture for the entire company, we have a lot of very promising developments going on. In the bank market, our pipeline with AmTrust clients is very strong. Also, as I mentioned earlier, our business services offering is generating strong interest in the national bank market. In addition, our full-service offering combining investment products along with back- and middle-office operational support similar to what we provide RIAs is receiving great interest in the community bank market. And the adviser market, the transformation of our RIA rough (ph) network to a more select one featuring closer relationships with SEI is progressing. So is our testing of the life wealth process that RIAs first and banks later will use to provide a broader set of integrated services to high-network end-clients.

Important enhancements to our hedge fund processing capabilities along with our new separate account management offerings should keep the money managers segment one of the fastest-growing businesses in SEI. And a broader retirement solution has been introduced in the corporate market and has helped us garner some new business, as well as strengthen existing client relationships. Finally, our global distribution strategy is working well with three distributors, and the enterprise business in the UK and Canada continues to grow rapidly. We're also poised to enter the private bank outsourcing business in the UK.

Now beneath the new strategies and the many new solutions we're taking to our markets are a number of investments. The largest investment is being made into our desktop platform and GIP, short for Global Investment Processing platform. These platforms and the other investments will provide significant future revenue opportunities as well as operational and developmental leverage.

Throughout 2004 and 2005, the investments we're making in transforming our business and adding to its infrastructure will add to our capitalized software and to our quarterly expenses. And as I have mentioned in the past, there is another drag on our profits when we start to grow. That drag is the fact that we sell recurring revenue, and therefore sales and incentive compensation expenses go up before new revenue is recognized. But when you net it all out, in the short run, we will continue to work hard to grow revenues and profits. To do so, we will have to overcome the losses in banking. In the longer run, we're receiving positive confirmation from our markets and believe that we are on the right path to grow future revenues and profits. Now to hear more about our progress on our strategy and the investments remaking, I invite you to attend our investor conference this June 1 and 2.

That concludes my remarks. And I'd like now to move to our segments. And we will report the segments in the following order -- Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and finally investments in new business. So we will now move to Private Banking and Trust. And I'm going to turn it over to Bob Crudup to discuss results in this segment. Bob?

Thank you, Al, and good afternoon, everyone. Today I will cover three topics -- first, an insight into private banking financial results; second, an update on market activity; and finally, brief comments updating our progress on new strategies.

During the first quarter, earnings were down 18 percent from a year ago, while revenues was off 5.7 percent. Comparing the fourth quarter to the first quarter, earnings declined 10.4 percent, with revenues off by 2.2 percent. Revenue losses are mostly attributed to fund processing and onetime investment processing. We continued to have growth in investment processing recurring revenues, which grew 7.4 percent over last year. This is the ninth consecutive quarter that investment processing recurring revenues have grown, demonstrating an underlying strength in this solution. Investment management revenues continue to reflect revenue losses due to the closure of a product last year.

Expenses were up over last quarter as we continued to invest for future growth. Notable investments this quarter include sales and marketing. And as Al noted, we continue to invest in our straight-through processing global platforms. Further, in preparation for expected new business wins, we began ramping up our investment in system conversion tools. These tools will allow us to sustain our industry-leading reputation for conversions.

Moving on to market activity, with the sunsetting of the AmTrust platform, our pipeline in the large bank market remains robust. Of the three banks who have announced decisions, we won First Tennessee and SunTrust. As I've said before, due to the strength of our position in the market and the power of our new solutions, I expect to win our fair share of these AmTrust banks.

Now for a few comments on merger activity. As you know, two significant mergers occurred last year, B of A/Fleet and J.P. Morgan Chase/Bank One. Though neither has announced a decision regarding their investment processing platform, I do expect their decisions soon. And we want to give you some prospective color.

B of A has an in-house platform based on AmTrust technology. They have a long history of maintaining this platform and converting acquired banks onto their system. No formal decision has been announced, but I would expect them to continue their history of insourcing.

Regarding Chase/Bank One, between them, they have multiple platforms. Historically, both banks have been an outsourcer of trust processing. All of Bank One's business runs on our system as does a portion of Chase's. We are competing aggressively for this business, but the outcome is undetermined.

On another topic, I know you saw the announcement last week that the STI Classic Funds will be changing fund distributors. They are one of our long-time fund processing clients. Revenue-wise, this compares to the National City loss. The profit effect is approximately $1 million per quarter starting in September.

We have about a dozen other bank clients. The largest, Union Bank of California, is a client in excellent standing. Over the last three years, the fund processing business in the large bank market has seen substantial commoditization. This in turn has caused fee compression. All the while, appetite for services has increased. This commoditization has caused margin compression. As we move to our new BSP strategy, our straight-through processing platform will provide us a new competitive advantage. We are now talking to prospective clients about these new fund processing services.

Wrapping up market activity, we closed one small BSP client and flipped one ASP client to BSP this quarter. One of our large clients, a New York-based global bank, we contracted for ASP services, and as part of that transaction, they are implementing our straight-through processing and global capabilities.

Now I'll move on to progress with our strategies. We continue to focus on two new business strategies. First, let's talk about our broadened BSP investment manufacturing solution for banks that want to be asset managers. There's a lot of activity. We kicked off the SunTrust implementation this quarter, and expect the conversion to be completed April of '05. Other prospective large clients are confirming our strategy by showing great interest in BSP, global straight-through processing, and electronic trading. As we hoped, these banks see it as a way to streamline investment processing, thereby reducing risk and lowering operating cost. I believe our strategies and the critical investments we are making are paying off and will result in additional new business wins during 2004.

In the community bank market where we're building our new broadened Life wealth solution, we are leveraging the research and development of the adviser market to define and deploy a new model of outsourcing focused on redefining the end-clients' experience. During the first quarter, we had over 40 community bankers visit us here in Oaks, and we engaged our second data client, Pinnacle Trust, last month. As we execute this new strategy, community banks will outsource operations, investment management, and we will assist them with providing Life wealth advice. I expect to launch this complete offering before the end of the year. The markets are also confirming the soundness of this strategy.

I'll be happy to answer any questions.

(OPERATOR INSTRUCTIONS) Jeff Hobson, A.G. Edwards.

Bob, if you could just hit the Bank of America/Fleet again in terms of details? It sounds to me like you think that you will not pick up that business. And does that include losing Fleet? And if you could give us projected revenue items on Fleet -- or not projected, but the amount of revenue that you are getting from them right now?

Yes. If you go back to my comment, I've said that the decision hasn't been made. We haven't been notified of a decision. But my sense is that Bank of America is going to continue to do what they have done in the past, and that's in-source. I'd like to hold off on announcing revenue impact and those kinds of things until such formal notice is given to us. But you're correct; if we're not able to pick that business up, it will mean a loss of the Fleet business to us.

Okay. And in your discussions with them, any thoughts you could give us on why they're moving in that direction, do you think?

I think they have a history of in-sourcing, and I think it's a state of mind there. I will give you one comment about the impact. Regardless of their decision, I wouldn't expect revenue impact this year or next year. And there will be associated de-conversion fees should they decide to move on.

Okay. And then on the expense side, you mentioned ramping up for systems conversions. Can you give us any sense of how much of the expense this quarter -- the expense increase was that versus ongoing expenses from the new platform?

Yes, I think the investment this quarter was about $1 million.

For the new --?

Yes, for new implementations. And as I said in my comments, we're doing that based on our expectations.

Okay. And is that an ongoing expense do you think? Or --?

No, the investment infrastructure will be something that will get through over the next couple of quarters. And then we'll just have the underlying expense of actually doing the conversions.

Glenn Greene, ThinkEquity partners.

Just a couple of questions. I was wondering if you could give us a little bit of color on a loss of the trust account business? What was really sort of the driving factor there? Did it come down to price? Was it service, a combination -- just some color there?

Yes, I think if you step back and look at that one it was an inability on our part to have an agreement between us and them with the associated fees and the services that we deliver for those fees. And most of that conversation would have been around the marketing and distribution support services.

Related to the SunTrust deal that you announced -- I guess it was last quarter -- have you started recognizing revenue related to that? Or is it -- just shed some light on what has sort of been built into your numbers at this point.

Yes, the recurring revenue associated with SunTrust will start in the second quarter of '05 -- in May of '05.

Okay. And is there implantation revenue been recognized at this point, or really not much?

Very small implementation revenue recognized in Q1.

Carla Cooper, Robert W. Baird.

Bob, I'm going to have to ask you to just clarify what you said about the loss of STI -- I wrote down 1 million profit starting in September, but I don't understand the timeframe, and I want to clarify that that's operating income, not revenue?

Well, that is correct. And it begins in September of this year, and you know, would go for four quarters.

And was that 1 million a quarter?

It's 1 million per quarter.

And then I guess just trying to understand the balance of new revenues -- were there other new clients that you began recognizing revenue for this quarter?

The revenues for Citizens and First Tennessee kicked in last year.

Robert Lee, KBW.

Could you just give me a quick refresher on the AM -- how many -- about how many clients are left out there and if there's any color you can give on terms of how you expect sort of the -- do you have a sense that you may start seeing some additional -- some of that pipeline start to loosen over the next quarter or two? Or is it more that you think a lot of the remaining potential candidates may be later in the year or in '05? How do you think of the pipeline there?

Yes. If you look at sort of the information in the industry newspapers, you'll see that there are probably eight to ten AmTrust clients that Fidelity had. And I would expect most of those to make their decision over the next couple of years, because the implementations are going to take a year or so.

Mayek Tandon with Janney Montgomery Scott.

Question was how do you allocate the costs related to some of these new contract wins given the new accounting rule? So as an example, on the SunTrust account, when would you begin to expense your costs on the contract? And when would you expect to hit optimum margins again under the new accounting rule?

The EITF rule is, I think, the rule that you're talking about. What that requires is that we accrue both the revenues and expenses associated with implementations, but there was no effect on that in the first quarter.

Right. But you would not expect to recognize the bulk of the revenue until you said the second quarter of next year?

The recurring revenue forth for SunTrust will began in May of '05.

Okay and under the new accounting rule what would you expect or what is the time frame to hit your optimum margin levels relative to previous reporting?

I'm going to let Dennis answer that question.

The only thing that EITF effects, if anything, and we're doing this with PWC would be that the file of the onetime revenue and costs associated with implantation. So in terms run rate margins, if we had to defer those revenues and expense all that -- once the client went live we would spread the costs -- or bring back into the P&L both the revenue and expense over -- under the rule over the life of the client, which for us is pretty long. So the marginal impact will be very, very, very small. So full marginal profitability you can almost argue occurs the day we start to book recurring revenue on that account.

Okay. That makes sense.

As Bob said, would be next -- this time next year essentially.

Peter Heckmann of Stifel Nicolaus.

Could give us an idea of what the timing looks like for the outsourced investment management for Citizens and for Pennsylvania Trust? When do you expect those assets to fund? And could you give a rough estimate of each one? What do you think the first tranche of funding might be?

You know, our initial foray into both of those accounts will be to help them close new business and bring new clients on. So those kinds of those kinds of assets will grow as we help them grow their business. The transition of their current book of business over to our asset management program is something that we will have to work through with each of them over time. I would expect to see some assets move this year from Citizens.

Okay. And can you give a rough idea of what we might expect? Is it immaterial to modeling?

Yes, I would like to just let those assets come in and have you see them as they come in.

Okay. I stepped out for just a second. You know when you might find a final decision on (indiscernible) and JP Morgan Banc One are those still early summer and late summer, respectively?

Yes. I would expect no later than late summer.

You have no further questions at this time. Please continue.

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

Thanks, Al, and good afternoon everyone. We've gotten off to a pretty good start for 2004. I want to comment on the financial results for the first quarter and then briefly update you on our strategic process.

First the financial results. Revenues and profits for the first quarter were up 20 percent and 21.5 percent respectively from the year ago period. And revenues increased 6 percent sequentially from the fourth quarter. Now the revenue increase for the quarter was driven by an increase in assets under management to 28.7 billion. The good news here is that this increase was generated by positive net cash flow for the quarter of 340 million, our best quarterly net cash flow in two years.

Now as expected, margins decreased quarter over quarter to 55.2 percent. This was largely due to a $1 million onetime cost incurred in connection with the migration to a new platform for processing third-party mutual funds and an uptick in sales compensation. We had previously indicated that margins would decline somewhat if net sales, and therefore sales compensation increased, and as we continue to make key strategic investments.

We continue to reshape our adviser distribution force into a leaner more strategic distribution channel supported by SEI's business platforms. We're concentrating our efforts on assisting our advisers in growing their business and transitioning to becoming Life Wealth Advisers. We believe that the cash flow results of the first quarter is an early reflection of the positive impact of that refocusing.

We have begun the year with emphasis on the launch of our new Gold Link Investment strategies, an important element of Life Wealth approach, while continuing to beta test lead generation in our Life Wealth Advice process with advisers. Overall, we're encouraged by both the first quarter's financial results and our strategic progress. Thanks, and I will now take any questions you may have.

(OPERATOR INSTRUCTIONS). Jeff Hobson of A.G. Edwards.

I have two questions. Did you give sales and/or flows for the quarter? And then anything you could give us in regard to the beta testing that you have done, any initial kind of feedback you could give us?

The sales -- you mean the gross sales number, Jeff?

Yes.

Gross sales for the quarter is about 1.6 billion.

And then net flows were what?

The net was about 340 million.

340, okay.

In terms of the beta, we have been in a continuing process of beta testing with a select group of advisers the different elements of the comprehensive business platform that we're designing for Life Wealth Advisers, that includes extensive support and marketing and lead generation. We have an active lead generation process going on right now in northern California, as an example of that, as well as all aspects of the Comprehensive Life Wealth Advice process that we have designed.

Okay. Of that 340 or the 1.6, any unusual ins or outs that we should consider?

No.

Okay. So that is a normalized typical quarter as far as what the advisers are doing?

Yes, I mean I'm not going to comment on what expectations might be going forward, but there are no unusual items in that that I would point to.

Carla Cooper of Robert W. Baird.

In the transition to focus on the larger advisers are things with the smaller advisers to whom you indicated that you weren't going to essentially be focusing on have results from those advisers been as expected, or any change in the positive or change in the negative vis-a-vis what you were expecting?

Carla, I would say it has been fairly much what we expected. As indicated last time, there were some 2,100 advisers that we froze, that is we said, you can keep your existing accounts at SEI, but no longer actively market or sell new accounts for SEI. We have been tracking sort of results in terms of cash outflows in that group. That group has always been a group which has had higher than average redemption rates for us. That continues to be the case, but there is no no major change or shift in that.

And then just finally is there any direct exposure that SEI has to soft dollars in terms of being able to use soft dollars to spend on the funds? Any implication here where soft dollars could be eliminated? How it would impact the profitability or decisions that your (indiscernible) would have to make regarding research?

I guess when you talk soft dollars as far as -- well, we don't directly do soft dollars in the form of research. Is that what you hare talking about?

Right. I was thinking about soft dollars -- that soft dollars that currently have to keep the expense levels of the services that you provide lower. And if soft dollars were to be eliminated, expenses that would have to come on your P&L?

We're not doing (indiscernible) type soft dollar arrangements from the funds to cover SEI expenses.

Robert Lee of KBW.

Actually I'm not sure that this pertains specifically to your segments or not, but maybe this is actually a better question for Dennis, but I thought I would ask it now. I noticed when you look at the K there is 14 million or so of commission revenues that you generate. Does that -- as an introducing broker has that generated through some of your relationships here? I don't know if that relates to the Bank Trust business? I'm just trying to place it within the organization and get a better understanding of what that might be?

Robert, are you talking at a consolidated level?

Yes.

The one area where we are -- and we do (indiscernible) commission revenues is when we had this, I guess, larger event back in the third quarter of last year when we handled management -- manager transitions. And whether that is within our own funds or we were replacing subadvisers or in a business sense in the enterprise segment when we are doing client conversions. So when we are converting a client from some other provider to us, we will do a liquidation. We will manage a liquidation. And that will generate commission revenue. But is it is straight commission revenue, it is not soft dollar related.

Is not a recapture of ongoing commissions that have generated from the funds being sub advised or anything like that?

No, there is a small portion of that that is I would say -- what I would consider recurring in nature in that our subadvisers may trade through our broker-dealer, but that is the smaller portion.

Glenn Greene of ThinkEquity Partners.

This is just really a clarification. Carl, I thought you'd mentioned $1 million in sort of one time costs in the quarter. What was that for, and does that sort of suggest that normalized the operating margins of this sort of nature are probably reasonable for awhile?

The 1 million item does relate to a specific migration that we did to a new technology platform. This has to do with custodying (ph) of third party funds at SEI. I would not necessarily say that though that you could simply pluck that number out and assume that the run rate going forward of expenses will be less.

I think one of the things that we had indicated in the past is this build out of the comprehensive business platform that we're doing for Life Wealth will require strategic investments for us as we go. So in the first quarter it was this aspect relating to custody of third party funds. There are other continuing investments that we will make throughout the year, so this specific expense will not recur, but there are additional strategic investments we will be making as the year goes on.

Mayank Tandon with Janney Montgomery Securities.

Carl, just a quick question. I probably missed this upfront. Could you comment on the redemption rate in the quarter, and how that was relative to historical levels?

I think we continue to have redemption rates that are somewhat higher than historically what we have had. Now we have seen, I guess recently third quarter is that has dropped off a little bit. At the same time our gross sales are up little bit. That is what is accounting for the fact that we had a decent net for that quarter.

But I think you know we understand that we are going through a bit of a transition process in terms of our strategy, in terms of the Adviser Distribution Course. So we recognize that through this period we may continue to see some level of redemption activity as we are.

Can you give us a ballpark number on what it was in the past and what it is today?

You know it's hard because it fluctuates based on a number of factors, including how the market is doing, reactions to our strategy. There are some seasonal aspects to it. You do see redemption activity particularly a little bit higher in the March, mid-April timeframe as we are going three now because of tax season. So there isn't one number I would sort of latch on to.

You have no further questions. Please continue.

Our third segment is the Enterprise segment. I'm going to turn on over to Ed Loughlin to discuss this segment.

Good afternoon everyone. I'm going to focus my remarks on the financial results for the first quarter and also our continued progress towards our growth objectives. Starting with the financial side, new client funding and market appreciation enabled revenues to grow 16 percent compared to the first quarter of 2003.

Profits for the first quarter increased to $7.8 million comparing favorably to the year ago period and flat to the fourth quarter. Increased sales incentive compensation and enterprise unit -- enterprise unit investments in new services approaching $1 million are included in the first quarter results. Margins for the quarter were 48 percent, a slight decrease from the fourth quarter and moving closer to the expected margins for this segment.

Average asset balances increased to $18 billion, a $2 billion increase from the first quarter of 2003. Since the fourth quarter, average asset balances grew by $600 million, primarily due to market appreciation. New client funding during the quarter was offset by several client redemptions. The backlog of committed but unfunded sales increased by 20 percent to $1.2 billion. As we have talked about in the past we're continuing to work towards a July implementation date for a rather significant 401(k) plan, included in the backlog.

Now moving onto the sales side, contrary to popular opinion pension plans did not become healthier financially in 2003. The strong performance of pension plan assets driven by last year's bull market and significant contributions to the pension plans is not enough to overcome the growth in the pension obligation that is being fueled by lower interest rates.

Pension executives are concerned about the negative impact the plan can have on earnings, the balance sheet and also cash flows. SEI's Retirement Solution helps financial executives better understand and plan for the pension plans impact on corporate finance. Improving business conditions in our target markets has enabled financial executives to focus on changing how they manage their retirement and endowment assets, and as a result we continued to see increased receptivity to an outsourced solution.

The pace of sales activity continues to improve. During the quarter 14 new clients totaling $525 million in assets selected SEI. We're encouraged that the investments we have made in enhanced advise and administrative services are being well received by clients and prospects, and they also serve to differentiate our solutions. Our pipeline continues to grow and we continue to remain optimistic about the growth opportunities in the enterprise segment. Thank you and I'm happy to entertain any questions.

Jeff Hobson with A.G. Edwards.

Yes, I've got a few questions. Can you remind us how big the 401(k) customer is? Number two, in terms of the outflows that you saw, or loss of clients, any particular pattern there as to why they left? And then three, have you made any shifts in the lineup of asset management providers, I guess, or fund managers in your lineup of funds?

Okay. Jeff, let me start with the first one. As far as the size of the pension plan -- and when I talk about significant it is more than a half of the assets. Of the $1.2 billion, this one plan is more than half of the assets.

And just as a reminder, the reason that we're talking about this is typically with the defined benefit client, if we sell something one quarter it normally gets implemented the second quarter. What we're talking about here is a defined contribution plan and there is 15,000 participants. So the conversion timeframe is extended in a case like this. So that is why it is a little more noteworthy. But that is scheduled to happen July 1.

In so far as the losses there was a -- the bulk of the loss really came from one particular client who really -- there was a change of control, if you will, in so far as just our relationship person. And it is someone who had much more of a predetermined investment philosophy towards passive implementation. So they were looking for lower costs and really not taking any kind of market exposure other than just the participating in index types of products. And I think the third question was really about did we make any manager subadviser changes during the quarter, and we have not.

And then if I could follow up on margins, obviously your pipeline is strong so sales and marketing and other investment costs will continue. So anything else on the margins side that you can add?

No, I think that pretty much covers it.

You have no further questions from the phones. Please continue.

The fourth segment today is money management. I'm going to turn it over to Wayne Withrow to discuss this segment.

The headlines for the first quarter are that our record sales in the fourth quarter contributed to strong revenue and profitability growth in the first quarter. At the same time, new business closes slowed somewhat as we worked on implementing that business and focused more sales resources on building a pipeline for our newer strategies in the separately managed accounts and complete back office outsourcing areas.

For the first quarter revenues totaled $16.9 million, a 36 percent increase from the same quarter in 2003. Our quarterly profit of $2.9 million represents a 48 percent increase from the first quarter of 2003. Margins for the quarter were 17.3 percent, a slight improvement from our margins for last year. New business sales events for the quarter totaled an estimated $2 million in annualized revenue.

While I'm happy with the financial performance of this segment, I'm equally excited with the progress we have made in building our total operational outsourcing solution. Historically, we have offered outsourcing solutions in the mutual fund and alternative fund spaces. Our overall strategy is to offer BSP outsourcing solutions for all of the money managers' operational needs.

The fourth quarter launch of our Solution for separately managed accounts was a big step towards our objective. The build out of automated multi-custodian reconciliation platforms during the first quarter was further progress.

During 2004 we will continue to build out our total solution, while at the same time we will preserve the flexibility to continue to offer solutions in the mutual funds, alternative fund and separately managed accounts spaces.

Looking forward from our pipeline remains strong. And I would expect a pickup in new business activity in the second quarter. The second quarter should also be impacted by the continued implementation of business sold last year. I will now entertain any questions.

Jeff Hobson of A.G. Edwards.

Wayne, I think in the fourth quarter you indicated that you had one client I guess in conversion or beta testing on the new product for the managed accounts business. Any update you can give us as to how that is going and when you will move to a more aggressive expansion to other clients for that product?

Yes, Jeff. We converted a client in the fourth quarter last year, near the end of December. And we are currently marketing the solution out in the market. What I would say is there's a lot of activity and the pipeline remains strong. We have not closed a second transaction for that offering, although I would say if you look at all the providers out there everyone has seen a lot of activity, there hasn't been a lot of decisions. So is not like decisions are being made and we're being shut out. It is just that the market is just beginning to embrace outsourcing in this specific area. And I would expect -- my hope is that this will pickup throughout the year.

Okay. Is there a competitor or two that you are aware of that has a product that you think is very competitive with your newer product?

I don't know how to answer that question, Jeff.

Okay. Well, I mean I think you came to -- you're coming to the market with, I will say, a product that you think is well advanced versus the older generation of products. Are you aware of anybody else that has a product that you think is --?

What I would say, Jeff -- I think from a philosophical perspective at SEI we always try to any leapfrog where we think the competition is. And if we can't do it better than anyone else I don't think it is a business we want to be in.

Carla Cooper of Robert W. Baird.

My question is -- relates to the -- I am sorry come back to me. Thanks.

Any other questions.

Your line is open Ms. Cooper.

Sorry. I couldn't find it. It is percentage of business in the quarter that was related to hedge funds versus traditional mutual funds, could you talk about that?

I'm sorry, Carla, I couldn't hear the question, you broke up there.

That's okay. My question is historically hedge funds that included -- had accounted for a large portion at SEI's new business wins. Was that again true this quarter or is there -- could you give us an update?

That is still true this quarter. We had four alternative management and two traditional managers, although the alternative managers accounted for about 80 percent of the growth.

You have no further questions from the phones.

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

Today I will report on the Investments in New Business Segment where as usual I will focus on our global business. Revenue continues to grow at an encouraging rate in this business segment. Revenue of $16.2 million in the quarter has grown by 42 percent from the year ago quarter. We continue to make investments in this segment and the loss has marginally worsened from 4.5 million in the year ago quarter to $4.7 million.

Assets under management increased 1.2 billion from year-end 2003, of which 730 million is net new cash flows. At quarter end our committed but unfunded backlog is just over $1 billion. Our global enterprise business includes our initiatives with corporations in Canada, the UK, South Africa, and our distribution to small to midsized corporations through Commerzbank in Germany.

Our UK enterprise business continues to grow through all three of our distribution channels, including direct sales to corporations, business partnerships with Investment Advisors, and through traditional investment consultants. Our private client business, including Canada, initiatives through financial distributors and now also through registered Investment Advisors in the UK and (indiscernible) independent financial advisers, and worldwide initiatives to global project banks, such as HSBC.

The Canadian private client business has made great progress in Q1, and we see a significant increase of sales of which 39 percent have originated from registered Investment Advisors which had begun in the last 12 months.

In conclusion, as we continue to grow the revenue in this segment we will continue to make additional investments in new markets both geographically through our new enterprise initiatives in the Netherlands and Northern Europe, as well as new market segments such as private banking outsource in the UK with the launch of GIP, our global investment privatization (ph) platform. Any questions?

(OPERATOR INSTRUCTIONS) Glenn Greene of ThinkEquity Partners.

I wonder if you could just give us an update on your HSBC relationship and if you are sort of diving assets at this point? And then a follow-up question relates to margin trends going forward. You have sort of been running at a 4.5 million to 5 million aggregate loss per quarter. And I would wondering if that is a reasonable level or we may see that start to improve?

With regard to the HSBC relationship we are really quite pleased with our progress to date. We have been raising assets since late last year, with most of the funding coming from Asia and Europe. I think the bank is pleased in that it is a lot of new assets to the bank, so it is current clients but being new assets to the bank.

And going forward we will continue to expand our distribution. We launched Offshore for the Americas in the first quarter. And we're expecting to launch the Offshore business in the UK this quarter.

With regard to the margin question, first of all this segment includes not just the U.S. -- the non U.S. initiatives but also includes other strategic initiatives, for example building out some of the platforms for the Life Wealth offering that we will distribute through the advisers here in the U.S.

We really never managed this business segment to -- at a profit. We really use this as a segment to continue to make investments where we see opportunities. For example, recently we have actually accelerated some spending to enter this -- the UK -- sorry, the new European market based on our success in the UK, and also accelerate spending to enter the UK private banking outsource opportunity, as we compare to deploy GIP and the Desktop in the UK. And so we don't really give a lot of forward advice on these things. But again as we see opportunities, we will continue to make investments in this segment.

Are you close in any sort of -- I guess another way to ask it, are there any specific countries close to sort of breaking that out as a separate segment in terms of maybe in certain come countries you are profitable?

I will ask Dennis McGonigle to answer that question.

Really what we're looking at it is as we work through this year I would say we are -- I guess I may anticipated that when we look to prepare next year's 10-K we will work with Price Waterhouse and see whether it makes sense to break global out from the investments in new business segment as its own segment. Principally because the revenue side of the equation is certainly growing -- becoming more material, and as we expect certainly will continue to grow. So that is kind of our plan here. At the same time you'll continue to hear from Joe, so you'll get specific global information on a quarterly basis as we work through that.

Carla Cooper of Robert W. Baird.

Could you remind us on the implementation timeframe for GIP and I guess how expenses are likely to flow in the next several quarters forward?

I think we are already starting to implement certain components of GIP and we talked about that I think in the last call on the recon component that we initiated to benefit of the U.S. Money Managers' business. As far as expenses go, I think we announced last year that we look to invest something like 10 to 12 percent of our revenue in these types of platforms going forward, so that is probably the best direction I can give you at this point.

Can you talk any further, Joe, about the other elements of GIP and when they're likely to go live?

GIP is really important for us to scale our business globally as well as to enter the private banking outsource business. So we expect that we will have a critical mass of functionality by the early part of next year, so the first half of next year.

You have no one else on the phone at this time.

That concludes the quarterly reports from our segments. I would now like Kathy Heilig to give you a few company-wide statistics.

I have some additional corporate information about this quarter. First quarter cash flows from operations was 42.7 million, or 40 cents per share. First quarter free cash flow was 39.4 million or 37 cents per share. First quarter capital expenditures for equipment was 2.7 million. First quarter capitalized software, 6.6 million. First quarter depreciation was 3.5 million and first quarter amortization, 670,000. We would expect additional capital expenditures for equipment in 2004 to be approximately between 9 to 12 million. The Accounts Payable balance at the end of March was 8.1 million.

We would also like to remind you that many of our responses are based upon assumptions that involve risks. Future revenues and income could differ from expected results. We have no obligation to publicly update any forward-looking statements. And we would be glad to answer any other questions you may have.

Robert Lee of KBW.

Thank you. Could you comment a little bit about the 2.9 million net gain on investments? Is that a realized gain? Was that related somehow to that hedge you have in place in some of your seed investments?

That is actually a realized gain. We -- our money, we had put some money in some funds for our global business. We actually received that money back at a gain in the first quarter.

Do you still have that hedge of your seed money in place?

Not for that product.

I mean just generally, do you still have it in place?

We do have hedges on any investments available for sale that are subject to market fluctuation.

At the risk of beating a dead horse, I am still --.

But let me just say that the 2.9 million was almost entirely related to this investment.

Okay. Is there a loss on the hedging period?

No, there wasn't.

Again, just going back -- I am still trying --.

Yes, there was in prior periods but not in the first quarter.

Right. I am just still trying to understand the logic behind the hedge of your seed investments. Most of other firms that are in one shape or form the investment business that I am aware of don't really hedge their seed investments. If you're owning SEI common stock you are owning it because you obviously want exposure to the investment market to some extent. So I'm still trying to understand how you think that fits into your -- how that fits into your capital management strategy, because it creates more volatility in your earnings?

Rob, this is Dennis McGonigle. Our approach there is when we see products as new start up products, even though we have high anticipation that we will get asset growth from customer assets that will then allow us to redeem our seed capital that is uncertain. And in terms of managing our balance sheet in the long term, I would say long-term volatility of earnings, we just take what I would say is a more conservative approach, which is to hedge those seed investments that are subject to more longer-term volatility. And it is really just a way for us to both protect the balance sheet, which as you know we have a very strong balance sheet, and I want to maintain that, but as well over the long term not have volatility driven by the markets.

I'm sorry. I have an echo on the phone so it is hard to hear at times. On maybe a different subject, it seems likely that starting in '05 we will have to start expensing options. And some other firms are talking about changing their compensation next year maybe moving towards restricted stock. And understanding we were just entered the first quarter, but unfortunately for both those of us on the other end of the phone we get to model '05 now. But do you have any sense of how you may be changing your options or moving towards restricted stock in '05? Do you know if you have to start expensing options? What is your thinking at this point?

This is Al. We will probably keep very close to what we're doing now. We have studied it and studied it, and options are still for this Company the least expensive way of rewarding employees. So -- and we did look at restricted stock. And if you are a slower growing Company than restricted stock might make sense, but not at what we anticipate going forward for SEI.

Pete Heckmann of Stifel Nicolaus.

Kathy, on the $6.6 million capitalized in the quarter for software development, I guess the last few years you haven't capitalized a whole lot. It is primarily related to GIP? And if so, when do you expect the product to go live to the point where you are going to start amortizing it? And what is the total amount that we can anticipate seeing being capitalized? And then what period would we think it might be amortized over?

Pete, this is Dennis. Since I have the mike in front of me, I will try to handle that stream of questions. But as you have been following us for a long time, and I think you know that historically whenever we have significant strategic investments in platform technologies we have historically have capitalized those. So we didn't have any of those I would say significant in the early 2000's. And it was really, I would say the GIP project, desktop and really the online trading platforms would have met those criteria. Whereas we go back to '98, -- '97, '98, 99 the Y2K platform changes were significant, open architecture was significant. So we capitalized those back then.

So capitalized is really consistent with our long-term approach here, because we expect that these platforms will be with us for a long time, and we will (indiscernible) to our strategic success over that long period.

In terms of dollar amounts, I think we have talked in the past that we would reach kind of the high watermark and sustain that spending through '04. And I think you see in the first quarter the capitalization numbers at least reflecting that. And if the capitalization numbers reflect that then also what we're running through the P&L side also reflect that.

Last year -- I think if you looked at the 10-K for last year we had R&D spending of about 9 percent of revenues. As Joe mentioned and we had mentioned in the past, we expect that to go to 10 to 12 percent of revenues. We would see probably a similar percentage of that capitalized as well as expensed through the P&L in the same period.

In terms of the investments that are capitalized, when those would start to be amortized then is really a function of when components of those development projects go into full -- what we call full production in terms of client use and business use. Some of their early releases of those products haven't I would say reached the full production stage. We would expect some of these components to start to amortize in late this year, maybe late third quarter, but fourth quarter. And we finally get the full amortization on the full projects until '05, late '05 timeframe.

OK, so if we look at a $6 million quarterly run rate this year and then 10.5 million last year, we get to about 35 million that will begin amortization in late '04 and then have like a five year life?

I wouldn't go -- I wouldn't say that all (indiscernible) as I had mentioned, it is really component driven. Even though we talk about these as aggregate projects, GIP and Desktop as complete projects, there are components within those. And it is really the completion of those components that then drive -- and the release of those components and the production will drive amortization. So it is not as if the whole 35 million would hit at one time, or whatever number you threw out, but whatever number it is would hit all at one time. Ultimately it would, but we would begin amortization on some of these components sooner than others, because they won't all be in production at the same time.

Okay. Okay. That is helpful. And then another question on the net gain on investments, because the market was -- the equity markets were up modestly in the quarter. That is an amalgam of a couple of different things. You have actually a realized gain on investment in the global funds, but then on your hedges I assume you took a loss given that the equity markets were up a little bit, so that is a net effect, correct?

Across our entire investments available for sale -- across that entire portfolio, assuming all those assumptions were true, that would be the case. But the realized gains are really the aggregation of gains over the life of that investment versus the hedging impact is only that current period's impact.

Right. And I guess what I'm getting at is that the level of hedging did not decrease. It was just more than offset by the recognition of this gain?

The level of hedging --?

I mean in the absence of this realized gain --?

(indiscernible) we receive seed capital back. And then on the question of timing of amortization, I think you said five years. I just want don't want everyone to walk away with five years. It is probably more in the 7 to 10 year time frame when we get to amortization.

Carla Cooper with Robert W. Baird.

Going back to Money Managers, I guess I am unclear as to how we should think about the strong margins in this period? Going forward it seemed like there was a lot of leverage, but is there any comment you could make on that?

I guess part of what I have said is historically what I have said is we really didn't manage this business with an eye towards the margins. We managed it more towards trying to grow the revenues so it could become a more significant segment and could help contribute to profitability of the firm. I think this year there is a change in that in that I think segment has grown to a point where we do have to pay little more attention to margins in this business and I would expect to do so throughout the year.

You have no if further questions from the phone at this time, please continue.

So everybody we're really excited about where we're building, and do look forward to delivering the potential that we see. And today I would like to leave you with three things.

First, in the short run we're continuing to invest in our businesses and are encouraged with what we do see. While we are certainly a long way from hitting our stride, we do believe we are on the right path. The market acceptance has been positive. The pipelines and the backlogs are strong, and momentum is building.

Secondly, as we look out a little longer we're optimistic and confident. Our new strategies and solutions, our returning revenue model, our strong cash flow, and our operational leverage, as well as our portfolio of markets that we serve all support our goal of creating long-term sustainable growth in revenues and profits.

And finally, we are in the business solutions business. Our clients do business with us because we are solving fundamental problems for them and making their businesses and their lives better. And this is a high value added proposition. If differentiates us from our competition, and we believe it will serve us well in the future. And please don't forget to save the date for our strategic investment -- investor conference on the evening of June 1st and the day of June 2nd.

I will give you one more shot at questions if anything has come to your mind, otherwise we will say good afternoon.

Carla Cooper of Robert W. Baird.

I have got one last one, and that would be could you just run through the new business in each segment so I make sure I have those numbers correctly?

Okay.

Bob, I didn't have a number for Private Banking & Trust. Did you give one?

Yes, it is 1.4 million recurring.

Okay.

Carla, enterprise is $525 million in assets.

For Adviser it is probably the net number for the quarter (indiscernible) our report is 340 million net.

Money Managers was $2 million in annualized revenue.

And investments in new business it's a net $730 million in assets under management.

Thank you all and have a great afternoon.

Ladies and gentlemen, this conference will be available for replay from 9 PM Eastern time this evening until midnight on June 19th. You may reach this call by dialing 1-800-475-6701 using the access code of 727605. (Operator Instructions) For international participants the number would be 1-320-365-3844. Again, 1-320-365-3844 with the same access code of 727605.

That does conclude your conference for this afternoon, thank you very much for using AT&T Executive. You may now disconnect.