SEI Investments Co (SEIC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Investments third-quarter earnings release conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to your host, Mr. Al West, Chairman and Chief Executive Officer. Please go ahead, sir.

Good afternoon and welcome to everybody. 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 will start by capping the third quarter of 2004. I will then turn it over to Dennis McGonigle and each of the business segment leaders to comment on the results of their segments. As usual we will field questions at the end of each segment's report. Finally, Kathy Heilig will give us the important companywide statistics.

So let me start with the third quarter. Third-quarter earnings grew 28 percent from a year ago on a revenue growth of 6 percent. Diluted earnings per share of 43 cents represents growth of 30 percent over the 33 cents reported for the third quarter of 2003. Our third-quarter profits were aided by approximately 3.7 million or 2 cents a share in one-time other income, primarily due to a sale of a small portion of our equity interest in LSV Asset Management.

Revenue growth was a result of higher assets under management. Our non-cash asset balances grew by $9 billion during the quarter. This growth was largely due to new assets since the 60/40 portfolio was up just 1 percent during the quarter. We repurchased over 700,000 shares of stock during the third quarter at on average price of slightly under $32. That translates to $22.9 million of stock repurchased in the quarter and $97.3 million worth of stock repurchased year-to-date.

Now you will hear from the segment heads that in virtually every market the acceptance of our new solutions are continuing to strengthen. Our backlogs are strong and growing and in time will show up in increased revenues and profits.

What I want to cover in the brief time I have this afternoon is the status and outlook of the investments we're making in our future. And the most important investment we are making is our Global Wealth platform, which is desktop and GIPP combined. The platform will be used by everyone facing the client. That includes investment advisors, bank administrators, as well as SEI's middle office personnel.

Now the platform will also account for all client investment portfolios and process all security transactions. This platform is our future. All segments of our business will use it to conduct business. It underlies all of our client processes and will be the means of delivering an unprecedented client experience to all our clients, as well as to the clients of our clients. The platform will help us outdistance our competition and will give us economies of scale and productivity improvement that we could not reach any other way.

The Global Wealth Platform is critical to all our markets. It allows us to enter the large European private bank market for BSP services. If you recall, BSP stands for Business Service Provider. The platform is also the means by which we will provide BSP services to the national bank market, thereby helping us capture new business as well as providing a new source of revenues from existing clients.

In addition, it will facilitate and make more efficient the delivery of BSP services to regional and community banks. Now the same platform will be delivered to registered investment advisors to be used by them to manage their practice and change it from one investment provider to a wealth advisor. It will also streamline the services we provide to RIAs, increasing the quality of the services and allowing us to provide them more efficiently.

Finally, the platform will be used by the Money Management segment as an integral part of their full back office outsourcing and by enterprise to manage and administer their clients. By having a single platform for our entire business, we anticipate achieving significant development and operational leverage, which should translate into higher margins and a high marginal return on new revenues. All we have to do is to build it and implement it with new as well as existing clients. That is a big job for sure. Obviously this will be a multiyear effort and certainly be a focus for us for some time to come.

We have been designing and building the platform for a few years now and our efforts have been balanced between design and build activities. Up to this point we have successfully delivered part of the platform internally and all testing has gone well. We are now entering a phase where the lion's share of the work is the completion of the build. We expect to deliver a complete platform next year that can be used to operate a European private bank. Thereafter, we will bring our Worldwide Advisor business onto the platform and will be in the position to convert our first U.S. bank to the new platform. We expect that by year-end 2005, we will have sold and will be into a conversion project with a European bank.

To date this year we have capitalized approximately 24 million of development. During the third quarter, we capitalized 9.5 million. Most of these capitalizations was for the Global platform. The catalyzed portion of our development expenditures on these projects runs between 75 and 80 percent of the expenditures, the remainder hitting our P&L; spread amongst our segments the majority going to BB&T.

We have previously related to you that we expect the expenditures to continue to ramp up during the third and fourth quarters of this year and then level off during 2005 and begin to decrease in the latter part of 2005. I would like to update that expectation.

We have moved our timetable up for getting prepared to deliver our European and U.S. banks based on a now higher level of confidence in selling and being ready to install both an international and U.S. national bank. To prepare to deliver we have to build more functionality earlier and to create the infrastructure to handle the Global platform. Our expectation at this time is that expenditures will ramp up during the fourth quarter 2004 and the first quarter of 2005, then level off and not start to turndown until 2006.

Being able to install a European bank also requires another expenditure/investment. We have to build an operational and service capability in Europe to handle client service, as well as the portion of operations that needs to be in the local market. This will commence prior to bringing the European bank onboard. These expenditures will be in advance of receiving revenue against the outlays, and we are in the process of planning this project and we will provide more details to you next quarter.

Finally, there is one other investment that is completely necessary for both our clients and us. We must enhance our disaster recovery and business continuity capabilities to meet new regulatory guidance by the end of 2005 concerning recovery time of both computing and operational services. We will also provide more details on this project next quarter.

I mentioned these investments and expenditures first in the interests of keeping you up-to-date and second to underscore how important we feel these investments are for our future. We feel that these investments will take SEI to the next level. It will give us even larger markets to grow within, and it will provide new solutions to deliver to our existing markets. We will continue to work hard in the short run to control costs and to grow revenues and profits. In the longer run, we are firm in our belief that we are on the right path to more rapidly grow future revenues and profits.

That concludes my remarks and I thank you for your attention.

I would like now to move to our segments. We will report in our segments in the following order. Private banking and trust, investment advisors, enterprises, Money Managers, and investments in new businesses. But first I would like to turn it over to Dennis McGonigle to discuss a couple of items related to our results. Dennis?

Thank you. Before I move into the segment reports, I wanted to address a few items. The first is to inform you that during the third quarter the Company adopted EITF Rule #99-19. This rule requires us to book on a gross basis revenue and expense associated with principle versus agent activities.

We have three product components that fall under this technical rule. They are 401(k) recordkeeping services, our separate accounts program, and our transition management service. The segments affected by this rule of adoption are primarily the investment advisor and enterprise segments. As a result of this rule adoption, the investment advisors segment's revenues and expenses increased by approximately $2.6 million with no net impact on earnings. As a result of this adoption, the enterprise segment's revenues and expenses were higher by $900,000 with no net income impact. This treatment is consistent with how we account for Asset Management revenues in our Global business.

I also want to remind you that in the third quarter of 2003 the investment advisor segment's results included 2.8 million of one-time brokerage revenue, while the enterprise segments results for that period included 2.8 million of onetime brokerage revenue as well. Carl and Ed will remind you of this when they make their presentations.

The last item is to reiterate that during the quarter we realized one-time other income of $3.7 million. The majority, 3.1 million, reflects a gain on our previously disclosed sale of a 3 percent interest in LSV Asset Management. This equates to approximately 2 cents a share.

With that, I will turn it back to Al.

Thank you, Dennis. So now we will move to private banking and trust. And I'm going to turn it over to Bob Crudup to discuss the results in this segment.

Thank you, Al, and good afternoon, everyone. I will review our financial performance and then talk about encouraging market activities. While the segment's profit at 29.6 million increased about 6 percent over the same quarter last year, revenue fell 6.7 million to 69.3 million. The effect during the quarter of previously reported losses of fund processing clients represented 3.8 million of the loss. A reduction in one-time investment processing fees and transaction-based fees represented most of the rest of the lost.

The profit improvement is attributed to a nonrepeatable $1.8 million reduction in expenses associated with the support of the fund processing business. Absent that earnings would have been substantially flat.

On a positive note, we continue to improve the investment processing recurring revenues, growing 5.1 percent over last year, demonstrating the underlying strength in the investment processing business. More about that later.

To update trends and activities in the market, I will cover three topics. The AM Trust client base, the soft dollar brokerage business, and wrap up with sales activity.

First, let's discuss the AM Trust situation. With nine clients the announcement from Fidelity that the AM Trust platform would no longer be supported presents a significant opportunity for us to gain large net investment processing clients. We are making good progress. Over the last year, four of the nine have announced decisions.

Bank of America has committed to running the system in-house and is consolidating the fleet book of business onto that platform. Operating an in-house system is a significant endeavor that we feel few banks will pursue. SEI has announced deals with First Tennessee and SunTrust. The fourth bank selected a third-party competitor.

We believe the remaining five banks will likely announce their decision by the end of next year. One of these five is unlikely to select SEI. But with the other four we are positioned to compete for the business. I feel we have several advantages. Namely our strength in the large bank market, our track record of successful conversions, and most importantly, the market acceptance of our new strategy. The fact that National City, a former SunGard customer, selected us this quarter as their investment processing solution bodes well for us. Importantly, our new strategy was the key reason for our selection.

On another note, I am pleased to announce that we came to an agreement and started the Bank One J.P. Morgan integration project this month to consolidate the two SEI platforms currently in place at Chase and Bank One. Consolidation of this business will result in a small net down in revenue as they begin in April to operate under the current Bank One long-term agreement, which at this point has not yet been extended.

Now regarding soft dollar brokerage. We deliver a straight through processing brokerage execution that most of our clients used to execute small and midsize trades. With this offering, we generally provide soft dollar services. A few of our clients have told us that they are moving to execution only brokerage and discontinuing soft dollars. This will negatively affect our revenue, but will have no impact on profits. In fact, over time the strength of our straight through processing execution service may become more attractive.

Finally, I'm very positive about the long-term direction of our business. The market is embracing our new strategy. The National City win is a strong confirmation.

As Al discussed, we will remain very committed to our important investments and our new strategy. As a result, we are confident and expect to win more new business. We are headlong into conversions at SunTrust and National City. Processing and transaction-based revenues will start in May and October of 2005 respectively.

Let me point out that absorbing the previously announced SEI funds loss and the Fleet loss will dampen revenue growth next year. In the meantime, new client startup expenses will ramp up prior to revenue recognition. And as Al said, expenses associated with our investments will be increasing. As a result, it is likely that expenses will outrun revenue growth next year for this segment.

On the other hand, I'm confident in our future growth. This confidence is based on the competitive strength of our solutions, our significant investments, our recent sales success, and our very strong sales pipeline. I firmly believe we're building a solid underpinning for the future growth of our investment processing business.

I would be happy to answer any questions you have.

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

Two questions. One, when considering the acceleration of investments, it sounds like there is more than just National City potentially in the pipeline in regard to national banks. And then two, just so I understand the Bank One, you kept the Bank One business and are you picking up additional business from J.P. Morgan?

Yes, the pipeline for the national bank market remains very strong. As I said, we believe that there will be four more banks -- there will be five more banks making decisions this year, and we feel we are in a position to compete for four of those.

To clarify the Bank One J.P. Morgan Chase situation, they operate several platforms internally in the banks. We have a substantial piece of business at Bank One, and we also have a substantial piece of business at Chase. Those two pieces of business will be consolidated onto one database and one contract. We did not pick up any incremental business there yet.

I do feel like it was good news that we were able to consolidate their operations in one place with a very substantial portion of the accounts that they have at the bank.

If I could follow up, SunGard has been in the news recently regarding a potential split up of their Company. Does that have any implications for you from a competitive standpoint?

I don't believe that it does.

Pete Heckmann, Stifel Nicolaus.

Good afternoon. A lot of information came through, and I just want to work on the timeline if I could. Bob, it looks like in the first quarter of '05 we probably won't see a horrible ton of activity except for continued reinvestment, and then in the second quarter, you will look to consolidate the Bank One and the Chase business. And I think you had said there would be just a slight reduction in the overall revenue related to that relationship?

That is correct.

That is correct? Okay, and when do you think -- are they agreeing on a renewal date or a bid date where they would talk about the whole piece of the business going up for bid?

I think the fact that we have got a substantial portion of their business running on our platform now puts us in a position to compete for all of their business over the next year. I believe at some point they will want to consolidate most of their business to one platform.

Okay, great. Then so in May we will have the SunTrust conversion. In October we will have the National City conversion. And then do you assume a fourth quarter '05 for the beginning of the deconversion of Fleet?

The deconversion of Fleet is underway right now, and we expect that revenue to leave in April of '05.

Okay. In terms of how you are marketing to the AM Trust clients, are you talking to them about Trust 3000, or are you talking to them about the new platform? I'm just wondering from the perspective of a bank that may have been on AM Trust for 15 years, a bank like Comerica or someone, how are you marketing to them? Are you saying if you come on and go onto Trust 3000 we would look to keep you on Trust 3000 for five years? Or if you come on in the next two years, we will be looking to put you on the new platform? How are you dealing with that issue?

If you look at our investment processing platform piece that we have been talking to you about for a couple of years, it is highly modular. In fact, in the first quarter of next year, we will roll out a new asset maintenance capability into that platform. I don't really differentiate between the components of the platform, and we will bring new clients onto the entire platform which Trust 3000 will remain and it is a very important component thereafter.

That is helpful. Thank you.

Robert Lee, KBW.

Thank you. Just a quick question. The SunTrust -- sorry, the SunTrust Fund Processing business, did that leave -- I'm just trying to get my numbers and timing down also -- did that business leave sort of at the beginning of the quarter, or should we expect that there may be a little bit more if we look just sequentially next quarter that Fund Processing fees could come down some more just sort of from a timing perspective of when the business left?

Yes, we recognized about 70 percent of the loss last quarter. It could be converted in stages around the end of July. So I would expect another sequential quarter to quarter decrease from that loss of about $1 million.

Great.

It did not feel great.

It is great that I understand it better I guess. The other question I had is I am looking at the operating and development expenses. Understanding that you have taken expenses out related to the loss of assets and the Fund Processing business, is that -- I am a little bit surprised that if I compare it to the first quarter it has pretty much declined pretty sharply sequentially even though you're making all these investments. Is that decline really solely because of the take out of expenses in the Fund Processing business, or is there anything else going on in that? I was just surprised by the magnitude of the decline.

I'm going to ask you to ask me that question again. I did not quite get the gist of it.

If I look at operating development expenses, to put it in perspective, they were 37.8 million in Q1 and 30.2 million in Q3, at least if my numbers are correct, and I understand you took some expenses out related to the Fund Processing business. But considering the investments you're making in new initiatives, I would have expected it to be a little flatter or maybe not come down quite to that degree. Is there anything else going --?

There is that $1.8 million non-recurring expense savings, and that was the result of a deconverting fund client.

Okay. So when you say non-recurring next quarter, I should think about just adding back the 1.8 billion, or is this the new run-rate?

Yes. You should think about that expense being back in next quarter.

Glenn Greene, ThinkEquity Partners.

A quick question on Fleet. It was my recollection that that was originally supposed to convert off I thought it was first, second quarter of '06. It sounds like the timeline is now first, second quarter of '05. If that is the case, is there an early termination fee?

No. If I said '06, I was misguided because it has always been '05. That, in fact, is when our contract with them is up.

Okay.

So there is no buyout fee.

(OPERATOR INSTRUCTIONS). Greg Mason, A.G. Edwards.

I want to talk about briefly the community and small regional bank section versus the national segment. I know that you had mentioned you had 40 community banks come into your office for a two day training a while back, and I just wanted to see what kind of feedback you were getting with them and if you're having any bites on the small regional bank segment?

Yes, we have been bringing community banks in and talking with them about our new offering that is our franchise-like offering that is very similar to the offering that Carl is putting into the advisor market. We intend to launch that offering sometime next year. The interest from those banks has been very high, and as we build out the infrastructure to support the offering, we will be launching it into the market. We actually have a couple of small banks in (inaudible) with that offering right now.

And if you look at the BSP services in the regional community bank market, the pipeline in that market is pretty good right now too for that set of services. So I feel that we have got traction in that market around new business right now.

Carla Cooper, Robert W. Baird.

Good morning. I heard some mention, I guess it was actually by Al now that I look back at my notes, about building out operations in Europe and new European clients. Bob, to the extent they are bank trust clients, would that fall in your division, or that would actually be new business?

Joe can talk with you about that.

Okay. So I will save that for him. And then I guess by other question just was, is there is specific expiration on the Bank One? If you said it, I missed it. I'm sorry.

Yes, there is a specific expiration, but we don't usually talk about those dates. They do not really allow us to do that.

Fair enough. So back to the comments that you made which is just that you would expect that within the next year so you might get to more substantial discussions with them about their broader use of your Trust platform?

I think we're definitely in a position to compete for all the business there at this point. It was a nice move for them to make to move to consolidate everything to our platform.

Right. Just to remind us, the other systems are in place there are in-house systems or are they competitive systems?

There's a couple of AM Trust platforms in place there, and then there is an in-house system that is an old SunGard system.

Great. And then finally, the assets in the private bank and trust took quite a move in the quarter, and I can think of several reasons for that. But could you just sketch out the move from the 74 to the 47?

Yes, that was the deconversion of the STI fund.

Okay. That is what I thought. Thanks a lot.

Christopher Arndt, Select Equity Group.

Hi, Bob. I just wanted to see if you could provide us with a sense of how large or the size of the Fleet business that you are losing relative to the size of the SunTrust and National City business that you are gaining?

We said that it is pretty comparable.

For those two things? And how about compare those I guess or either one of those with the four AM Trust clients that you believe are candidates that you're going after?

Yes, they are all in that general size range plus or minus 20 percent.

Okay. If I understand this correctly, then the Fleet -- let me make sure I understand the first part. The Fleet on its own would be as large as the SunTrust and National City combined?

No, no. What we have said in the past is that if you look at the Fleet and the SunTrust transactions, they are fairly equivalent in revenue.

Okay. So that National City would be fairly equivalent to Fleet and SunTrust as well. That would be an incremental gain?

Yes, as a rule of thumb, that would be a pretty good --

Okay. And they impact each of the four other AM Trust clients are equally as large give or minus 20 percent?

Yes, there might be one of them that is a little smaller than that.

Okay.

Of the four we feel we are competing for, one is a little smaller than that.

Thanks a lot.

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

Thank you. And our second segment is investment advisors. Carl Guarino will cover this segment.

Carl?

Thanks, Al, and good afternoon, everyone. The results for the advisor segment require some discussion because of the impact of the adoption of the accounting rule Dennis explained. But when you cut through this to the heart of the matter, the third quarter showed solid improvement over the year ago period, but revenues were up only slightly when compared to the prior quarter.

I will comment first on the financial results for Q3, and then briefly update you on some key business initiatives. Revenues and profits for the third quarter were up 8.5 percent and 14 percent respectively from the year ago period. Now revenues and expenses in this year's third quarter increased approximately 2.6 million because of the adoption of the accounting rule Dennis discussed relating to fees paid to separate account managers and recordkeepers. This rule adoption does not impact reported profits, but does affect quarterly revenue comparisons.

As Dennis reminded you, however, last year's third quarter had 2.8 million in one-time revenues and 1.5 million in one-time profits that should be factored into any year-over-year comparison. The adoption of this same accounting rule also impacts the revenue comparisons of Q3 to Q2. Without this change, revenues would have increased only slightly on a sequential basis.

Operating margins continue to be strong and would have been higher than the prior period but for the impact of the adoption of this accounting rule.

Our cash flows continue the trends of being flat in a weak market. Inflows and a quarter of about 1.3 billion were slightly exceeded by outflows of about 1.45 billion. Average assets for the quarter were 28.8 billion, up over 9 percent from the year ago period but up only modestly from the second quarter.

Now there are two bright spots underneath the reported results, which give us some indication that we are headed in the right direction. First, we continue to see good results from our top tier advisors, underscoring our focus on reshaping our advisor distribution force. The top 200 advisors working with SEI are on a year-to-date basis up over $1 billion in net cash flow.

Second, year-to-date we have brought in almost $.5 billion in assets into our new goals-based investment strategies, and our analysis shows that approximately 70 percent of these assets are new to SEI, rather than conversions of existing SEI accounts.

We have undertaken several initiatives to increase growth in the face of continued market weakness. First, we are placing renewed emphasis on signing additional advisors with a clear focus on the type of strategic partnership we are seeking. We should start to see some impact of this effort next year.

Second, we continue to drive (inaudible) investment strategies throughout our existing advisor network. As I have noted previously, this requires some process change on the part of advisors, but early results are encouraging.

Finally, we will begin to roll out early next year in partnership with a banking institution a lending component for our investment accounts. Although SEI's direct revenue from lending activity is expected to be modest, this feature is designed to allow investors a source of liquidity which we hope can address at least one cause of investor redemptions.

On a longer-term prospective, we continue to make progress in developing our new wealth network, a franchise of the lead advisors providing SEI's total Life-Wealth offering. We have now registered this franchise offering in over 40 states. Our focus will now be on signing and converting a small number of carefully selected early adopters over the next six months.

I would be happy to address any questions you might have.

(OPERATOR INSTRUCTIONS). You have no questions, sir. Please continue. I'm sorry we do have a question from Carla Cooper, Robert W. Baird.

Can you just discuss how the technology upgrade is preceding with respect to your unit and how that is helping you get these new clients and advisors into testing in betas of the new products?

Technology? Is that your question?

Right.

Well, Al talked about the Global Wealth platform. The biggest component of that that impacts the advisor segment is what we call the desktop, which a sort of the front end to the middle office side of that. We expect to start rolling out some functionality from desktop beginning next year, and we will continue that sort of phased in approach of that technology platform throughout 2005 and in fact into 2006.

It is a platform which has a lot of interest on the part of our advisors and also one which we think has some potentially significant impact in terms of streamlining our operations. So it is clearly something that has I will say great potential for us in the market.

Jeff Hobson, A.G. Edwards.

Just a quick question on the outflows. If there has been any change in the level of outflows from the bottom group -- the 2000 that have been frozen I guess?

I'm sorry, Jeff. I'm not sure if I caught all of your question. I think it related to the sort of level of outflows that we're seeing, and actually the level of outflows have been fairly steady. Our net cash flow took a little dip this quarter, and that was primarily a function really of the sort of gross sales rather than any spike or increase in terms of outflow. It is probably fairly consistent as a general rule.

So amongst the advisors that have been frozen, there has been no change in the outflows?

Well, it continues. I think we have noted before that the frozen advisors have an outflow rate or redemption rate which is substantially greater than those of our, I will say typical advisors, and certainly much more than those of our top tier advisors. That is something that has always been the case. In fact, it was the case even before the advisors were frozen by us, and we knew that in taking that action that that outflow rate from then would continue at at least the same level, if not slightly increase. No dramatic change there I would say.

Does that answer your question, sir?

Yes.

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

Thank you. Our third segment is the enterprise segment, and I'm going to turn it over to Ed Loughlin to discuss this segment.

Ed?

Thanks, Al. Good afternoon, everyone. My remarks as usual will focus on the financial results for the quarter and recent sales activity. Revenues increased modestly compared to the third quarter of 2003. The $400,000 favorable comparison reflects the net impact of positive net new client revenue, positive market appreciation during the period, and the newly adopted accounting treatment for our participant recordkeeping services.

The third quarter 2003 reflects the $2.8 million one-time revenue event, which was highlighted by Dennis, which caused profits to decline slightly year-over-year. Strong client funding activity enabled average balances for the quarter to increase by $1.9 billion compared to the third quarter of 2003.

Ending assets totaled $20.7 billion as of 9/30. New client funding for the quarter was $2 billion. The backlog of committed but unfunded sales was $220 million at the end of the quarter. Market acceptance of our PensionConnect 360 solution and sales momentum continue to build during the quarter with new client sales totaling $1.1 billion. The integrated corporate finance and pension finance solutions differentiate SEI and has been instrumental in our new business sales activity.

One of the new relationships represents over $900 million in assets, which shows the continuing growing interest on the part of larger pension plans to outsource this function. The sale and funding of this new large client was completed during the quarter.

A recent study by Credit Suisse First Boston reported that companies included in the S&P 500 ended 2003 with an underfunded position of $172 billion. The CS First Boston forecast was that defined benefit pension plans could get weaker this year potentially ending 2004 in even worse shape than in 2002. This industry backdrop has enabled us to continue to build a strong sales pipeline and provide a catalyst for continued market acceptance of our pension solution.

Thank you very much, and I am happy to entertain any questions you may have.

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

I am curious if the revenue and margin assumptions are any different on the larger clients? I am assuming that you are now targeting larger clients as we move forward a little more. Is that fair to say?

I think what is fair to say, Jeff, is that we are targeting large clients and still the midsize corporate clients as well. And your question about the revenue, the overall revenue as you would imagine is going to be large because of the asset size. But the fees that we would charge a client like this would be at the lower end of the fee scale because that is the buying power that they get with that asset size.

And the margin on that fee then I would assume to be roughly equal to a historical type of numbers?

Yes.

Robert Lee, KBW.

Two quick questions for you. First in looking at sales and marketing expenses, given the strong sales volume in the quarter, I guess I may have thought that would have bumped up a little bit more than it did. Should we expect commissions and sales costs are going to come through in the next quarter as pretty much everything associated with those sales in Q3?

Yes, they would go up a little bit because again we would expense the sales expense when the client is funded. So some of this was -- we had strong funding, but some of the other sales would be funded next quarter.

Okay. And last, I'm just curious if you are seeing the usual competitors you've had in this marketplace -- I guess Russell and what not -- if you're saying any new entrants into the marketplace in the last couple of months or couple of quarters?

We have not really seen any in the last couple of quarters. I think that while we have seen certainly as we've gotten into this business at the smaller end, we are seeing now some insurance companies who are competing more in the mid-corporate market. They have some administrative services that they tacked on some money management in order to provide their version of this kind of a solution.

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

Our fourth segment today is Money Managers. I am going to turn it over to Wayne Withrow to discuss this segment.

Wayne?

During the third quarter, we continued to grow our recurring revenues across all product lines. For the quarter, revenues totaled $20.5 million, a 45 percent increase from the same quarter in 2003. Our quarterly profit of $3.6 million represents a 49 percent increase from 2003.

Third-quarter revenue included a 600,000 contract buyout. New business sales for the quarter totaled an estimated $3.1 million in annualized revenues. This total includes sales to current clients as well as sales to three new hedge fund clients and three new traditional Money Managers. We also went live with our second separately managed account client and closed our third client as we continued to see momentum build for this new solution.

Overall the market environment for the Money Managers segment remains relatively unchanged. Demand for our services in the hedge fund area remains strong, while the market for mutual fund services remains challenging. We now have three clients for our separately managed account solutions, and we remain optimistic about its future. All this translates into continued strength at our sales pipeline.

I will now entertain any questions.

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

Any comments on the size or visibility of the second and third clients that you have added for the SMA?

I'm sorry, Jeff. You were breaking up a little bit. Could you repeat that?

Can you comment at all on the size and/or visibility of the second and third clients that you have added on the SMA program?

Right. I think in the SMA program, I think the clients are getting -- I would say that we close additional clients that are somewhat larger and somewhat well-known, although we are not prepared to identify any of them at this point.

Glenn Greene, ThinkEquity Partners.

Just a quick question. Just looking at the sequential growth on the assets under administration, it went up about $10 billion. I was wondering if you could just give us some color there.

That is almost all new client assets. The market had relatively little impact there.

You have no further questions. Please continue.

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

Joe?

Thank you. Good afternoon. Today I will report on the investments in new business segment, but as usual I will focus on our global business.

Revenue within this business segment continues to grow. Revenue of $18.8 million in the quarter has grown by 47 percent from the year ago quarter. The bottom-line result has declined slightly to a loss of $4.7 million compared to the year ago quarter of a loss of 4.4 million as we continue to make investments in sales, marketing and infrastructure. Average assets under management have increased by $1.1 billion since the last quarter, and at third-quarter end, our committed but unfunded backlog is in additional $650 million.

In our Global Enterprise business, assets under management now total $5 billion. During the quarter, we opened an office in Amsterdam, we received a regulatory approval in Germany, and funded our first Hong Kong-based institutional client, the Hong Kong Jockey Club.

In our Global Advisor business, our assets under management now total $3 billion. During the quarter, we saw continued momentum in our Canadian advisor business.

In the Global Private Banking and Distribution business, our assets under management increased to $4 billion. During the quarter, we launched our global distribution relationship with Bank (inaudible). And as Al mentioned, we're focusing on capturing an early adopter of our new Global Wealth platform.

In anticipation of a late 2005 conversion, we have begun to build out our UK-based operational infrastructure. And we continue to grow our revenues in this segment and are committed to make the necessary investments in market entry and infrastructure to build a scalable and large global business, and we will continue to experience similar results.

Any questions?

(OPERATOR INSTRUCTIONS). Glenn Greene, ThinkEquity Partners.

Can you just give us a little bit more color on the big bank conversion that you have been referred to a couple of times, you know that is happening late in '05? And is the first of what you are hoping is many, and is this sort of a prototype deal?

Yes. We are actively talking to private banks in the European market, and we are encouraged by our progress towards capturing an early adopter. And again we think there is a significant opportunity for us in the UK and Europe, and we are hoping this is the first of many many large bank clients that we can secure over the coming years.

Is this a signed client at this point? I just want to get clarity on that.

No, we are still in conversations in the market.

Carla Cooper.

Just to a follow-up on Glenn's question, when you talk about a late 2005 conversion, do you have a specific client in mind there, or are you just thinking that one of the clients that you are in discussions with is likely to sign and thus would be a late 2000 conversion?

Just to clarify a couple of things. We are talking about starting a conversion in late 2005, and we are talking to a number of players here in the market.

That is helpful. Thank you. And then just on the cost of building out the operations in Europe, if Al talked about numbers, I did not catch them. Could you talk a little bit more about that, and if you can't provide specifics, maybe just provide sort of order of magnitude based on the size of the business that you hope to win?

Actually what Al mentioned was that we are really in the process of playing this project. So as we get closer to a client conversion, we will happily provide you with additional information.

Okay and maybe I will try one more question on this. Does this require opening a brand-new facility, or are these operations that you can put in an existing facility?

Our expectation is it will probably require opening up a new facility.

Thanks.

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

Thank you. That concludes the quarterly report for our segment. I would like now to turn it over to Kathy Heilig to give you a few companywide statistics.

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter.

The third-quarter cash flow from operations was 42 million or 40 cents per share. The third-quarter free cash flow was 31.8 million or 30 cents per share, and year-to-date cash flow from operations is 119.4 million.

Third-quarter capital expenditures were 2.8 million, Third-quarter depreciation 3.2 million, and third-quarter amortization 629,000. Additional capital expenditures for the fourth quarter for equipment will be approximately 3 to 4 million. And the Accounts Payable balance at September 30, 2004 was 3.4 million.

We also would 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.

Now we will be glad to take any further questions you may have.

Pete Heckmann, Stifel Nicolaus.

A lot of detail on the call and I hate to ask this, but can you go through some of the major onetime items again from the quarter and then also re clarify the accounting change? I did not catch that at the end of the call.

I can run through it with you, Pete. Essentially we adopted, I will give you the rule number, EITF Rule #99-19, which requires when you are offering, it is really a roll around printable versus agent activity. So for example in our 401(k) recordkeeping offering, we're not the recordkeeper. We outsource that to Wachovia, and we have a direct relationship with Wachovia. When we sign up a client, that client has a direct relationship with us.

So under this accounting rule, you are actually required to book the revenue you receive from the client gross and reflect the expense on the other side gross. Prior to this, we were netting those two. So there is really no impact on the bottom line. It is just a small gross up on the revenue side and on the expense side.

Okay, and what was that total number for the quarter?

It was about 3.5 million.

Okay, and you are not going to restate in prior periods for it?

No, you don't think it is necessary to do that. The dollar amounts are (inaudible).

Okay, great. And then what other one-time -- there are a couple of one-time items. $1.8 million cost benefit in PB&T and then a 600 -- there was one in rather Money Managers.

We had a buyout of existing contracts of 600,000 and Bob had an expense benefit of about 1.8 million.

Okay, great. And what was the total proceeds on the sale of 3 percent interest in LSV?

Just over 6 million.

Okay. Good deal. And could you just hit me with capitalized software one more time? Is it 9. --?

9.5.

9.5. Thanks much.

Glenn Greene, ThinkEquity Partners.

This is a question for either Al or Dennis, I'm not sure who. But, Al, you referred to sort of stepping up investment levels for the fourth quarter and the first quarter. Is there any way to frame that so we get an idea of how to think about the incremental investment spend? And a follow-up question relates to specific (inaudible) recovery, what your plans are there. Are you going to use a third-party provider, do-it-yourself and the order of magnitude of the investment spend for that initiative?

This is Dennis. In terms of the investment ramp-up, I think a couple of thanks. One, Al, talked about first make sure you read here that when we incur the capitalized expenses what typically hits the bottom line is 20 to 25 percent of that number.

I guess where we would see the ramp-up in the fourth quarter would be kind of a similar progression from second -- what you saw from first to second, second to third going forward. In terms of first quarter, there is a lot of planning going on given the acceleration of these projects. So we would rather give you a better indication of that in the first quarter.

I will say that R&D spending, which we always use that 10 to 12 percent number or we have for these current periods, and we mentioned we are planning on running at the high end of that range and we are. We would expect that just to go a little bit higher in the fourth quarter and into next year.

Disaster recovery initiatives?

Disaster recovery is also in the earlier stages of planning, and we are sizing that, and I think Al mentioned that that is something we will talk more about in the first quarter, our fourth-quarter call which will be sometime late January. You had mentioned the use of third party and our doing it ourselves. It will probably be a mixture of that just because of the nature of the time that you have to get up. So we are studying very diligently two or three alternatives, and those alternatives all have a mixture of some third party and some we do it ourselves.

And I guess I also want to emphasize is we already do have a fairly robust disaster recovery business continuity program in place, so we already have run-rate expenses associated with those activities. This is really a step up in terms of enhancement to that, as Al mentioned, to not only meet some guidance we've gotten from regulators, but also to provide more enhanced service to our clients.

Carla Cooper.

(inaudible) I think back to the $600,000 buyout came in the Money Managers division. Is that right?

That is right.

And would there have been little cost associated with that buyout fee?

Yes. More than little cost associated with the buyout fee.

Okay and then I guess my next question then is, at least by my calculation -- no I will stop there. I will follow-up with you if I have to.

Then I guess one clarification maybe from Al or Dennis, on the guidance that you have just given in terms of accelerating the timetable for some of these (inaudible) investments. It sounds to me from listening to you that the gross number that we were looking at SEI spending, say, over the next couple of years has just increased.

I guess my question is just is this purely an instance of a change in timing, or has the actual number that you're going to spend on these projects actually increased?

This is Al. I look at these projects as, quite frankly, kind of never-ending because it is a platform that we will run the business on, just very much like Trust 3000 has been, except on a broader scale than because it does more of our operation than just Trust 2000.

So I do look at what we're saying today is a move up in timing. So it is not really a case of increasing what functionality that we thought we were going to have to build or that that functionality was more expensive than we thought, it's just that we are getting it. We are trying to get it a lot faster.

But at the same time there will be other functionality beyond this that we will keep building this to fill out our complete vision. And so I'm trying to caution everybody around here that it is a four or five-year build project. So don't think just as soon as we deliver it to a couple of banks, we are through with this things. So I hope that answers your question in a roundabout way.

I think I catch it. Thanks.

Christopher Arndt, Select Equity Group.

I just wanted to ask a question about LSV asset management. The asset growth there has been tremendous at almost 27 billion. Has that product closed new assets, and/or is there a ceiling on how much they feel like they can comfortably manage? Are we close to that ceiling? Are we far away from that ceiling? I just wanted to get a sense of that.

Yes. LSV has closed to new clients a couple of their major funds or their small cap or the mid-cap I believe. They have new and other products, however, that are continuing to grow. So we do see them continuing to grow. They are, of course, riding a value wave in the market. But they have not totally closed their shop down.

Okay. Great. Thanks a lot.

You have no further questions. Please continue.

Well, thank you everybody for your attention today and we appreciate that. I would like to leave you with three things.

First, in the short run we are continuing to invest in our businesses we told you today and are encouraged by what we see. We do think we are going to move to take SEI to the next level of these investments, and we are firm in our belief that we are on the right path.

Secondly, as we look out a little bit longer, we are still optimistic and confident based on our fundamentals, our new strategy and solutions, as well as our recurring revenue model, our strong cash flow and our operational leverage, as well as the fact that we have a portfolio of large markets. We will service to support our goal of creating long-term sustainable growth in revenues and profits.

Finally, I would like to emphasize that we're in the business solutions business more than ever, and our clients do business with us because we're solving fundamental problems for them and making their business and their lifes better. This is a very high value-added proposition, and it does differentiate us from our competition, and we do believe it will serve us well in the future.

So with that, I say good afternoon to you and thanks again for joining us.

Ladies and gentlemen, this conference will be available for replay from 9:00 PM Eastern time tonight until midnight on December 19. You may reach this call by dialing 1-800-475-6701 using the access code of 747584. (Repeats numbers.) If you're dialing international, it would be 1 for country code 320-365-3844, and the access code again is 747584.

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