SEI Investments Co (SEIC) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to SEI Investments' first-quarter earnings call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Chairman and Chief Executive Officer, Al West. Please go ahead, sir.

Good afternoon, everybody. All of our segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO, as well as Kathy Heilig, SEI's Controller. Now, I want to warn you that I am dialing in remote, and so if I do have a technical difficulty, Dennis McGonigle will pick up wherever I get cut off, and take it from there. I just wanted to alert everybody to that.

I'll start by recapping the first quarter of 2005. I will then turn it over to each of our business segment leaders to comment on the results of their segments. And then, as usual, we will field questions at the end of each segment's report. And finally, Kathy Heilig will give us some important companywide statistics.

So let me start with the first quarter. First-quarter earnings grew 11% from a year ago on a revenue growth of 11%. And diluted earnings per share of $0.42 represents a growth of 14% over the $0.37 that we reported for the first quarter of 2004. Now, revenue growth was a result of higher assets under management. Our non-cash asset balance grew by 3.5 billion during the quarter, and this growth was entirely due to new assets, since the 60/40 portfolio was actually down 1.1% during the quarter. Now, about one-third of the growth was generated by LSV, an unconsolidated affiliate of SEI.

We repurchased 1,277,000 shares of stock during the quarter, at an average price of just over $35 per share. That translates to 46.9 million of stock repurchases.

We are very proud of the quarter's results, although we look at them in light of a longer journey that we are taking, one which we started between three and four years ago. The goal of our journey is to entirely transform the Company, exciting new solutions to provide to our markets and also helping us deliver a new, highly valuable client experience to each and every client. Now, we expect that the results of all this will be higher growth rates of revenues and profits. And this transformation that I speak of is underway and has been for a little bit, in each one of our segments. So each segment is going through a transformation itself. They all have new business models that they are moving toward, and the results of this transformation are beginning to be seen in the revenue results in new business signings of each segment. The segment heads will speak to this phenomenon when discussing this quarter's results for their segment.

Supporting our transformation is a global investment platform or global wealth platform that we are creating to be used by all our clients throughout the world. We are also building an operational and service infrastructure to handle clients on the new platform, whether they be US or international clients. And third, we are improving our disaster recovery and business continuity capabilities in line with changing regulations and industry practices.

The platform is our future. All segments of our business will use it to conduct business. It underlines 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. And the platform will help us outdistance our competition. It will also give us tremendous operational leverage and give us economies of scale and productivity improvements we cannot reach any other way.

The global wealth platform is also critical to our entry into the large European private bank market and, as well, to moving the US national bank market to a higher and larger business of providing BSP services. The same platform will be delivered to registered investment advisors, to be used by them to change in their practice from one of an investment provider or financial planner to one which we call a life and wealth advisor. The status of this development effort is on track, and we will demo the platform at the spring investor conference that we are having next month.

Our goal is to prepare the platform to handle UK, European and US private banks and advisors, as well as supporting our life and wealth advice process. We expect to be in position late this year to begin converting a UK or European bank. We would then move to be in a position to handle our US clients.

During the first quarter, we capitalized $15.9 million, and we expect the level of this capitalization to continue throughout 2005 at about this rate. And as a reminder, the capitalized portion of our development expenditures on these projects runs at about 75% of the full expenditures, the remainder hitting our P&L, spread amongst our segments, the largest portion going to PB&T.

During the latter part of 2005, we will get prepared to deliver to UK and European banks by building an operational and service capability in the UK, and by locating a portion of our operations there. We will not make these investments without a commitment from a UK or European bank, and these investments would not commence until about six to eight months prior to converting a bank.

We are certain that these investments we are making well transform our company, giving us even larger markets to grow within and providing exciting new solutions to deliver to our markets. As you listen to the segment reports, the strong sales results, backlogs and pipelines are all proof that these investments are beginning to pay off. As I normally assure you, we will continue to work hard in the short run to control costs and to grow revenues and profits. And in the longer run, we are firm in our belief that we are on the right path to more rapidly growth future revenues and profits.

Thank you for your attention. I would like now to move to our segments, and we'll report in the normal order -- start with Private Banking and Trust and then move to Investment Advisors, Enterprises, Money Managers segment and then the Investments in New Business. So, we will now move to Private Bankiing 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 want to open today with some overarching color regarding this segment's outlook. As you know, we lost significant business last year, due to mergers affecting our investment processing business and competition in our fund services business. This began manifesting itself and lost revenues last summer at about $8 million per quarter. The fact that revenues have remained substantially flat indicates our ability to absorb these revenue losses due to growth in our (technical difficulty). Our recent sales success and pipeline give me confidence that revenues, with minor quarter-to-quarter volatility, will improve over the long-term.

With that said, I will move on to my normal comments. The first quarter's activities centered largely on conversion and implementation of customers sold over the last few quarters. I would like to give you an update on that progress. Before I get to that, let's briefly review the quarter's financials.

The first quarter's result confirms comments I made last summer. Namely, barring significant new losses, are revenues had bottomed out, and because of lost investment processing business at Fleet and funds processing business at SunTrust, revenues would trend rather flat for several quarters. As you know, we have closed significant new investment processing business over the last three quarters. As mentioned, these revenues are substantially replacing last year's losses, but I want to remind you that as we start to bring on these new clients, our expenses will grow faster than revenues, and that our revenues will continue to bounce around the bottom for a few more quarters.

As we continue to win new business, we will then stage for future growth. This quarter's results are a reflection of all these comments. Our revenue compared to the fourth quarter was flat at 72.4 million, with profits down 3.6% at 26.7 million. Compared to last year, both revenue and profits were off 3%. It's a good sign that our core investment processing business continued to show underlying strength, with growth of 6% or 3.3 million versus the first quarter last year.

Shifting to market activity, last year we made significant progress building our BSP business by consistently selling this solution to larger and larger clients (ph). We announced last quarter that one of our current clients, who we then described as a large global bank, was flipping from our ASP solution to our BSP solution. We are announcing today that this client is the US operations of HSBC Private Bank. We are now busy installing now (ph), as well as several other BSP customers. All seven customers will be installed by year end. This activity confirms market acceptance of the BSP solution.

Additionally, we have two ASP clients in the conversion process -- SunTrust, scheduled for the end of this month; and National City, who has just rescheduled their conversion for early 2006. We expect both of these large ASP clients to selectively outsource some key back-office operations.

The JPMorgan Chase project to merge the business running on SEI at Bank One and Chase was completed in mid-March. I'm also pleased to announce that we have signed an agreement extending our long-term relationship with JPMorgan Chase. Since we consolidated this business from two separate clients into one client, we will sustain a moderate reduction in both revenue and expense. We also signed a small fund services agreement this quarter, as well as a new small BSP bank. The pipeline for our business remains good, and I remain optimistic about our opportunities to continue our move into the large bank market. HSBC's move from ASP to BSP is an indicator of this trend.

In closing, 2005 will be filled with opportunities and challenges, as we continue to absorb the losses discussed in my opening comments, put a great deal of effort into installing new customers, pursue and close our pipeline and stand fast on investing in our new solutions and platforms. As I said, all of this will lead to expenses growing faster than revenues and put pressure on this segment's profit throughout this year.

I'll be happy to answer any questions you have.

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

In terms of HSBC, are those revenues in addition to what we would have been thinking about previously? That would be the first question. And then, in terms of the pipeline, has that -- you described it as good. Is there any change, positive or negative, in the pipeline versus, say, the last quarter?

The HSBC announcement that I made today is the same announcement that we made last quarter, when I referred to them as a large global bank. So you should have that in your outlook already. There has been no change in the pipeline; the pipeline remains very strong.

Tom McCrohan, Janney Montgomery Scott.

The two ASP clients, SunTrust and National City, that I believe you said were -- well, one was, I guess, scheduled to be converted shortly and National City later this year -- are they both former AmTrust clients?

The fund will convert at the end of the month this month, so in the next few days it will be coming live on our ASP solution. That was an AmTrust client. National City is scheduled to go early in 2006, and that was a SunGard client.

Can you give us update on those remaining AmTrust clients, and if you are still -- well, just give us an update as to if we can expect to see SEI potentially winning some more conversions of those banks still running on the now unsupported AmTrust platform?

There are four banks left on that platform. And Bank of America has announced that they are going to support that platform internally. The other three banks have not made a decision at this point, and we are obviously and aggressively pursuing that business.

And one last follow-up question. In the shift from ASP to BSP, how should we think about it, just from a modeling point of view, and how should it impact expenses and revenues?

What I have said in the past on that is that the average ASP client is a $100 to $150 per account per year for the end-client processing. In the BSP model, that is more in the 400 to 500 price range for the pertinent client, for full processing. We expect the margins to be similar in both those businesses.

In there any differences in kind of contractual terms, kind of an annuity-like nature that is more prevalent in the BSP model versus the ASP model? Or that's not relevant here?

They are very similar in that way.

Brad Moore, Sandler O'Neill.

I just wondered if you could comment on sales cycles now and, in particular, if under the current regulatory environment there has been any significant change in decision-making cycles?

Brad, you know we had a great quarter last quarter. But your question, I think, is insightful because the environment that we are in today has stretched out how long it takes to get one of these very large transactions done.

And could you quantify how much longer it is taking to move people from pipeline into contracted revenue or commitments?

I would say it's fair to say that it's 20% to 25% longer than it used to be. And we used to say that to close one of these larger transactions from ramp-up to end was 9 to 15 months. It's extended by 20% over that.

And then I think you said that other than the HSBC, you said you have seven other customers, seven other BSP customers that you expect installation by year end. Is that correct?

That's correct. And we have announced all those previously.

And could you remind me -- I know that Wells Fargo was an existing customer. They are ASP, is that correct?

Yes, they are.

Carla Cooper, Robert W. Baird.

I wondered if you could talk about the total return revenue that you signed in the quarter.

Yes, the recurring revenue this quarter was about 3 million.

And my second question is, what was behind the movement of National City from a conversion, I think sort of midyear, to you said now early '06?

Yes, we were looking to convert them toward the end of the year this year. And, because of system and programming requirements on their side, they elected to move that into early next year.

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

A real quick question. I'm just curious; to what -- Al talked about and you have talked about previously the need to, I guess, invest in your availability services, disaster recovery capabilities. To what extent is maybe not having that up to the level you need to or would like to have it impacting your ability to win additional large mandates? Do you sort of need that in place before you can actually see some large organizations decide to make a change?

Our current capabilities fully meet all the compliance and regulatory requirements today. So we have got a market-viable solution in place today. And Al is talking about an investment that we feel we need to put us out in front of that.

Glenn Greene, ThinkEquity Partners.

Just a couple of clarifications. Did you give us the timing for the HSBC starting to shift to the BSP, what the conversion timeframe is?

Yes, that's third quarter this year.

And then, just sort of thinking about SunTrust converting, I guess you said within the next month or so -- and my understanding is Fleet comes off this quarter? I just want to understand sort of the revenue and profit implications of those sort of two offsetting factors.

Those happened at almost exactly the same time. And, as I said before, there is pretty much an offset there, fairly close to offsetting each other.

So the revenue base that we are at is a pretty reasonable level going forward?

With regards to those two clients, yes.

And we have no further questions at this time. Please continue.

Our second segment is the Advisors segment, and Carl Guarino will speak to that.

Thanks, Al, and good afternoon, everyone. I will briefly review with you the financial results and business activity for the Advisors segment for the first quarter. Revenues and profits for the first quarter increased 12.7% and 9.2%, respectively, from the year-ago period, as average assets under management for the quarter rose to 31.2 billion compared with 28.7 billion in the year-ago period.

Year-over-year comparative results are impacted by the adoption of the accounting rule we discussed with you previously, relating to fees paid to separate account managers and recordkeepers. This increased revenues and expenses by 2.6 million in the first quarter over the comparable period of last year. This adoption also negatively impacts year-over-year margin comparisons. Expenses also increased year over year, primarily due to technology expenditures for the global wealth platform.

Our net cash flows in the first quarter were flat. Inflows in the quarter of about 1.6 billion were offset by outflows of the same amount. This higher-than-normal redemption rate reflects both a weak capital market, as well as the impact of our strategic decision to concentrate focus on a smaller group of key advisors.

I previously indicated to you that these flat overall numbers obscure the fact that our top advisors continue to grow their business with SEI. In the first quarter, for example, our top 200 advisory firms produced approximately 275 million in net positive cash flow. While continuing to maintain focus on this top group, we are expanding our efforts in 2005 with the next tier of advisory firms.

We also continue to make progress in our efforts to position SEI and our advisory partners in the emerging wealth marketplace. Our innovative goals-based investment strategies have now accumulated over $1 billion in assets, and continue to receive good market acceptance. We are beginning a beta test of an early version of the SEI desktop technology to our select advisor base. This technology is a front-end component of the overall global wealth platform that Al has described to you.

We also continue our efforts to launch the SEI wealth network of franchise advisors. As we indicated previously, we have signed three advisors to this network, and are making progress toward our goal of 8 to 10 early adopters by year end.

I would be happy to take any questions that you may have.

(OPERATOR INSTRUCTIONS). Tom McCrohan, Janney Montgomery Scott.

In the past, I think it was the last year's investor day, you talked about potential using the SEI name as kind of a brand at this select group that registered investment advisors would kind of operate under. Can you just kind of give us an update on that, and let us know if that continues to be part of the strategy to kind of develop the SEI brand name and kind of brand awareness?

We do, Tom; that is what we refer to as the SEI wealth network, is the overall sort of brand umbrella for this franchise group of advisors. The advisors in the network continue to carry their own name, but indicate in a sort of co-branded way that they are a member of the SEI wealth network. And then we use that brand, the SEI wealth brand, as well, in our marketing and lead generation activities. Longer term, we certainly think it is important to have a sort of overarching brand consistently throughout the US that would be the umbrella for this effort.

Can you just give us an idea of what the brand will mean and how you are trying to shape the brand?

We are really trying to shape the brand around what we think is a pretty unique client experience that we have created that sort of merges this notion of wealth with the life needs of clients, that suggests that you really have to fundamentally drive everything off of the client life goals. And there is a consistent experience around that, how we approach the client from the first prospecting side through a discovery and assessment side that the brand really sort of symbolizes.

And lastly, can we expect to see some advertising campaign, maybe sometime this year, to support the brand awareness?

I think right now, any kind of sort of mass advertising is not really within the game plan for us in sort of building the brand. I think we want to really build it around the client experience. I think we are still early, in terms of the scope and range of the network. So most of our efforts, I think, will be around thought leadership, public relations and then targeted marketing lead generation activities.

Jeff Hopson, A.G. Edwards.

In terms of the outflows, it has seemed that that has continued. And yet, I guess our understanding was that there was a limited amount of assets controlled by those advisors that you're not focusing on. Any thoughts on when that number could start to come down?

And then, too, how many advisors are you targeting to recruit, in terms of the ongoing effort, not just the high-end but your higher-end advisors?

Let me clarify the outflow side. One should not walk away with the feeling that outflows are primarily coming from the advisors that we sort of previously froze relationships with. Outflows obviously, come across the entire base. There's a normal macrolevel for us, just because of the enormous resale activity. When we count every movement out of the fund as an outflow redemption, that includes advisors taking fees, that includes accounts paying taxes, that includes normal, even required distributions coming out of IRAs.

What we have seen over the last 18 months or longer is that the outflows are at a higher rate than would be the norm. If we averaged, if you will, more in the 15% or so in the past, we have seen it more around 20% plus over that period of time. And it's that incremental difference, if you will, that we attribute to a few things -- one, the general sort of state of the market; but, two, also I think the strategic changes we are making in terms of the shape of the advisory base. Some of that includes the advisors that have been frozen, but also reflects the fact that we have really concentrated efforts on a smaller subset of our advisors. So we have a number of advisors who have not been frozen in their activity with SEI, but not the sort of focus of our efforts right now in terms of growing the business. So I hope that puts a little bit of clarity on the redemption side.

You had a second question embedded there in terms of (multiple speakers)?

You have begun trying to, I guess, recruit more advisors. How many would you think you would be recruiting this year?

I think one of the things we are doing recruiting is still being very targeted in that regard, so it's not an initiative on our part to go out and sign as many advisors as we can. It's an initiative to be fairly selective in looking at advisors we think both have very strong growth prospects, but also sort of fit our model well -- that is, fit the model of a business partnering relationship, where they see this movement in the industry toward broader wealth orientation, and they would look at SEI as a strong strategic partner in attaining that.

So I'm not giving you a very clear answer, in part because we don't approach it from the standpoint of sort of numeric goals at this point. I'm much more interested in the quality of who we are bringing in than numbers at this point.

Brad Moore, Sandler O'Neill.

I just wondered if you could speak to the investment performance of your funds during the quarter and, in particular, in the context of these outflows that you had mentioned.

I think the investment performance of our funds has been strong, and the funds really have been performing the way they have been designed and sort of meeting our expectations. So I don't see any connection between outflows and the relative performance of our fund. I always think in this side of the market that there is some correlation between outflows and simple, absolute performance, as well as -- and absolute performance, frankly, has impact on the inflows, as well. In choppy markets like this, frankly, the retail marketplace becomes a little more sort of stagnant, in terms of new inflows. But I think in terms of relative performance of our funds, I think performance has been pretty good. And that is certainly not -- the outflows do not correlate with that at all.

And I am just curious to know; have you considered that you may have to rethink your fees or fee structure in the context of the current environment, or in terms of what are planning to roll out here, in terms of your new technology platform? Have you given any consideration to your fees and fee structure?

You mean in terms of the model of our fees? I think one thing that certainly happens, as we move forward and position ourselves in the wealth marketplace, I think you will see some gradual sort of shifting in terms of source of revenue. So historically, all of our revenue has derived from asset-based fees. And everything we have provided to advisors around that was in the context of sort of a value add; there is no sort of costly advisor for the end client.

As we broaden the offering to the end client to be more than just investment management through the fund, and as we broaden our platform to advisors, I do see us broadening the sources of revenue that we get. Our offering to the end clients in the wealth area, for example, includes a retainer fee, as well as fees for other implementations like insurance. And as we move forward in our platforms for advisors, I do see room for additional fees -- we call them platform fees -- for the solution, or in the context of our network revenue sharing fees. So I think you'll see over time -- and this will be fairly gradual -- some shifting in terms of sources of revenue.

So then, on an absolute level, do you think that your fees will remain relatively constant, then? Or will those be incremental additions to your fees?

I think on the asset management side, I think our fees are pretty fairly positioned, in terms of the marketplace. There always is, you know, if you look just strictly at an asset solution, I think in the industry there's some fee pressure. I think we have always dealt with that by broadening out the solution and the value that we bring. So I certainly would hope to retain those at or very near the levels they are at, and then see additional revenue sources from the areas that we identified.

Robert Lee, KBW.

I had two quick questions for you. The first is, I'm just curious if it's possible to get a little bit of color, in terms of where you are seeing some of the new money flows or outflows. I'm just curious if you are seeing -- is there more money flowing into your separate account platform than money flowing out of sort of the mutual fund wrap platform? And if it's possible to get some context there, and then I have one follow-up question.

Probably consistently, I'd say, over the past couple of years we have always seen a little more growth on the separate account side. There's a little more net positive flow in that area. It's not huge for us; there's not a huge swing of assets to separate accounts rather than funds. But there has been a slight or sort of modest movement emphasis there probably over the last 18 months to two years.

And secondly, I'm just curious. As you go through building out your wealth and livestock platform and have the desktop coming online, do you see the need to expand your capabilities in any way, in terms of maybe putting in a more robust brokerage platform -- not to do stock trades per se, but so you can better custody third-party assets and whatnot? Do you see any needs along those lines?

I think the pure custody side of securities I think we've handled pretty well with the trust platform. Now, in terms of taking existing advisors into our wealth network, we have added the capabilities of a brokerage platform, largely, frankly, around an accommodation to their existing business -- securities they hold on brokerage platforms now, that are part of their book of business that they don't want to lose sight of. I think, in terms of where we're going in terms of the wealth solution, there may be need for sort of brokerage platform as an ancillary platform for portions of an individual's portfolio, but I don't see that being sort of core and centric to what we are doing.

And if I could have maybe just one more follow-up. A lot of what I will call larger, more traditional competitors, such as the Merrill Lynch's of the world and whatnot -- a lot of the business that they are seeing is coming from sort of the liability side of the balance sheet. They are doing a lot of lending. To the extent you model is to look at certain of a sort of lifestyle, wealth management -- do you see that as being a capability you are going to in some way, shape or form need to address, your ability to not just look after clients' investments and estate needs, but actually provide more credit type facilities?

I do see that. I do think that the way we look at sort of needs of individuals makes us look holistically at the whole of the balance sheet, if you will. It does create a need to provide solutions to an individual across that. We have started that process. We have introduced, on the advisor side as a whole, a program in conjunction with a financial institution that offers securities lending against their asset balances at SEI. We are also building out capabilities in terms of placements for individuals for their other credit needs. I don't see SEI headed, at least at this point, toward the space of actually being the direct source of the credit, but I certainly see us moving to a position where we are sourcing credit on behalf of our clients.

And we have not further questions at this time. Please continue.

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

Thanks, Al. Good afternoon, everyone. As usual, I'm going to focus my remarks on the financial results for the first quarter and also our continued business progress. On the financial side, strong new client funding of $1.3 billion and capital market appreciation over the past year has enabled revenues to grow 25% compared to the first quarter of 2004. Profits for the first quarter increased 20% to over $9 million, comparing favorably to the year-ago period and a modest increase over the fourth quarter. Both revenues and expenses for the quarter increased by $600,000 due to the adoption of the accounting rule that Carl had spoken about for his segment.

Operating expenses for the quarter also reflect continued investments for the Enterprise segment and also the corporate allocations for the global wealth platform. Margins for the quarter were 46%, a slight decrease from the first quarter of 2004, but comparable to the fourth quarter of 2004.

Asset balances increased $4 billion from the first quarter of 2004, ending the quarter at $21.7 billion. And the backlog of committed but unfunded sales was $320 million at the end of the quarter.

Today, pensions and retirement plans have become newsworthy and center stage. Financial executives understand the volatility the pension plans have had on corporate earnings and cash flows, and they are actively seeking solutions to better manage this emerging corporate finance problem. SEI has been a leader in developing new business solutions to help clients align pension strategy and management with corporate financial goals.

The Pension Benefit Guaranty Corporation has recognized SEI's unique expertise and capabilities to integrate assets, liabilities, corporate finance and plan design features into a unified strategy, and we are proud to have been selected by the PBGC to support their role in pension reform.

During the quarter, eight new clients, totaling $1.3 billion in assets, selected SEI. We're encouraged by the expanding market opportunities into larger, billion-dollar-plus plans and also multinational corporations that our new business model has enabled us to pursue. Institutional investors continue to evaluate their current practices and are making change decisions. Our pipeline continues to grow and reflect the market interest in our solution, and we remain optimistic about the growth prospects for the Enterprise segment.

Thank you, and I'm happy to entertain any questions.

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

In terms of the timing on the new business, when would that occur? And then, two, I believe it was Merrill Lynch Asset Management recently was, I guess, outsourced a significant amount of liabilities from a European Corporation, I believe, pension liabilities. I'm curious if you know what I'm talking about, and if it has any relevance to what you all are trying to do.

Jeff, insofar as your question about the timing, typically what happens is clients that we contracted one quarter we typically, by the next quarter, that revenue is on the books and starting to benefit our financials. So we get them converted or we get them funded in quarter's worth of time. Is that what you were trying to get to?

Yes, exactly.

Insofar as that announcement, I think Joe Ujobai maybe could add a little bit more to that. But I guess it's our understanding that it was a Dutch pension plan, I believe, that had an internal pension management group. And they outsourced that entire operation, I guess, and Merrill Lynch is really buying that bigger operation. I'll let Joe talk a little bit more about that specifically, but I think that the concept of outsourcing this whole management of these pension plans, in fact, has gotten more complex and sophisticated. I think we have seen, in both the business here and also in our Enterprise segment and the non-US part of our business that it's a growing trend, and one that has met with a lot of acceptance.

Over the past couple of years, or actually the past probably 5 to 10 years, we've seen a number of large plans look to outsource the management of their pension funds. It has happened in the UK with, I believe, the rail plan. And it has happened with, I think, the coal plan there, too. So it's not a new happening in Europe.

And if I can follow up, I know you have been moving up market. But would this be a strategy to go after this complete type of outsourcing of pension plans?

I would say that maybe eventually, but the up market that we are doing -- I think if you were to look at our business, Jeff, we were called (ph) on plans that probably had assets up to $1 to $2 billion prior to, say, the last 12 months. Any time we would get a partial piece of that, we would get $500 million, $600 million of that. I think what has happened is now we are seeing billion-dollar plans who are giving us all of their assets. And that has caused us to move up market, but we're still probably in the market that I would say is probably up to about $3 to $5 billion in assets.

Part of the dynamics of that market are they still do not have a lot of internal resources. I think, if I were to compare what happened with the Dutch pension plan to a US plan that had internal resources of that magnitude, I think there are about 50 people that were there. You are probably in the 15$ to $25 billion. And we are not actively calling on those particular plans. Selling outsourcing to them is something very, very differently. We can position outsourcing as a way to really get people, process and technology around something that a company can't focus on themselves. When you get into the displacement of people, that's a different type of a proposition. We really have not gone to that size plan here in the US. But I would anticipate that if we continue to see the business and the market acceptance in this particular direction, that over the next couple of years it will be someone in that category who starts to look for a different type of approach.

Glenn Greene, ThinkEquity.

Just trying to get, I guess, some color on some of your comments, trying to put it in context of sort of the business implications, specifically how much related to PBGC, if that is really something new, and what that is going to mean for your business in terms of perhaps accelerating business. And also your thoughts regarding -- you made the comment on targeting billion-dollar-plus plans. Is that something that you really hadn't been doing before? Or is there some kind of capability that you have with some of your recent investments that better position you in that market? Just a little bit more color there.

Insofar as the PBGC relationship, I think it's one that we're pretty proud of, because of the fact that they did recognize the impact and the importance of the work we have done over the last couple of years, insofar as really aligning these pension liabilities, the pension assets and corporate finance. And that's an important part of what they need to be able to do, in order to figure out the impact of pension reform. I wouldn't characterize it as a large revenue opportunity for us; I think it's more a situation where we have been singled out by them for being leading-edge in our capabilities and our expertise. I think that piece, though, is very much connected to why is it that larger plans would be attracted to SEI's solution at this particular point in time.

If you think about the status of pension plans being, to a large degree, many of these plans being underfunded, the larger plans, okay, the impact of that underfunded situation is much more material to the financials of that particular Corporation. And so, I think that that is what has prompted them to step back and take a look and say, okay, what could I get from an outsource partner like SEI? And I think once they see that we are unique in the industry, insofar as not bringing in a silo type of an answer to them, we are bringing in something that combines the actuarial kinds of insights, the asset insights, the liability, the plan design insights into this unified strategy and implementation, it's a pretty powerful solution for them. So I think that's why they get engaged in the evaluation process, and we have been successful at convincing some of them. So we're encouraged by that.

Tom McCrohan, Janney Montgomery Scott.

I think you might have already answered my question. I was wondering if there was any other competitor out there that provides a similar solution, and if so, who might that be?

I guess there's a variety of different sets of competitors. But most of the competitors are more silo. So there is clearly -- actuaries can provide part of the answer, money managers can provide part of the answer, consultants can provide part of the answer. I would say SEI's uniqueness is way beyond some of our traditional manager space competitors. And the uniqueness is more in the integration of all of these services into one solution and a single strategy with a set of goals and implementation towards that, that is unique in the marketplace.

Typically, Ed, just as a quick follow-up, when you do displace people, how many people are you really talking about?

You may have misunderstood me. We're not typically displacing people in this segment that we are calling on. There really are not people who are typically full-time folks (ph) on pension in this particular marketplace. This is a part-time effort at best, from somebody in the treasury or corporate finance area.

When you get into the $15 to $25 billion plans, they would have an in-house staff that might be displaced. But we're not calling on that segment right now.

Carla Cooper, Robert W. Baird.

My question is I believe that in Q4, you talked about signing a couple of billion-dollar-plus clients. Check that I have that right, and then also check -- when you gave us the updated numbers for funded/unfunded, where did those fall in that? Have they come on already?

Yes. I think what we talked about in Q4 was looking at the whole year, and we had successfully funded several billion-dollar plans. There were two in particular that we had funded during that particular year. So as of the end of last year, beginning of this year, we had funded those two billion-dollar plans. Since then, we have pretty much sold in the first quarter $1.3 billion, and we funded almost all of it because we funded almost the exact amount of money, $1.3 billion.

So your very opening comment of your remarks was the 1.3 in new client funding -- that did refer specifically to the first quarter?

Correct.

Brad Moore, Sandler O'Neill.

I just wondered if you could comment on your pipeline, then. Just characterize it, and give us a sense at to where the pipeline clients or customers are, in terms of their decision-making. And then, does this 320 million backlog -- is that included in your pipeline?

The 320 million are clients that have committed to us. Those are sold clients; we just have not implemented those yet. So I would anticipate that the 320 million will be implemented, will be funded -- what we call funded -- this quarter, the second quarter.

I would characterize the pipeline as one that continues to grow and gives us reason to believe that we will continue to see good results, insofar as our success in closing that backlog and turning it into revenue.

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

Our fourth segment today is Money Managers, and I'm going to turn it over to Wayne Withrow to discuss the segment.

Thanks, Al. During the first quarter, we continued our strong sales momentum. We also made significant progress toward diversifying our revenue stream. For the quarter, revenues totaled $20.1 million, a 19% increase from the same quarter of 2004. Revenues were down slightly from the fourth quarter, due to the abnormally high level of client losses discussed during our fourth-quarter call. As expected, the level of losses in the first quarter were more in line with our historical averages.

Our quarterly profit of $3.1 million represents a 20% increase from the first quarter of 2004. Sequentially, profits declined $700,000, due in part to the impact of client losses and expenses associated with product reinvestment and new client implementations.

New business sales events for the quarter totaled an estimated $6.4 million in annualized revenue. While the sheer dollar amount of new business is great news and includes a sales of both our hedge fund and mutual fund products, the even better news is that the majority of this new business was for our new, separately managed account outsourcing solution. We installed our first client for this solution in December 2003, and had sold and installed about 3,500 accounts by December 2004.

Once we completely install the new business sold this quarter, which will occur in phases over the next five months, we should have about 50,000 accounts live on the platform. This evidences market acceptance of our newest solution, and moves us closer to her vision of establishing total operational outsourcing for money management firms.

In summary, we had a somewhat down quarter, from a purely financial perspective, but have a strong new sales quarter, which should be reflected in future quarters. Overall, we are executing against our long-term strategy while, at the same time, we are experiencing continued demand for our established solutions, and are seeing significant traction in our newest business.

I will now entertain questions.

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

Not that this wasn't a great quarter, but curious if the pipeline for the SMA business -- is that something that could continue to build into the future?

Our pipeline in that business remains strong. I think, near-term, we need to digest some of the business we just sold, but our pipeline remains strong in that business.

Robert Lee, KBW.

I have two questions for you. The first one is, one of your competitors, I guess, has had some issues in their mutual fund admin business with, I guess, the SEC looking at some practices around marketing and distribution arrangements they have with some clients. And I was just wondering if that is something that you have seen, as well, that you've had -- going through or had to go through. And then I had a follow-up question.

As we disclosed in our 10-K and our 10-Q's, our subsidiaries periodically receive requests for information from regulators with various topics and general inquiries addressed to companies in the financial services industry. One line where we receive these requests is our mutual fund administration and distribution business. In connection with that business, we are currently subject to an inquiry from the SEC that relates primarily to the payment by SEI of expenses related to the marketing and distribution of the shares of certain of our mutual fund clients. We have cooperated fully with the SEC in that inquiry.

I guess the follow-up to that -- the one competitor's talked about -- has basically ended those agreements or has stopped them. Is that something that you have had to do, as well? Maybe it's apples and oranges; I don't know. But have you had to make changes, or thought that you needed to make changes in those types of arrangements?

Well, I think we all know what we are talking about. What I say is we're not familiar with the specifics of their practices, and I really can't comment as to any similarities or differences between their theirs and ours. What I can say is we have not terminated any of our arrangements in response to the pending SEC inquiries into this matter.

And the other point I would make is these current arrangements -- to sort of size it up for you -- of the types being reviewed by the SEC, it is less than 1% of our revenue.

Great. And just a follow-up question on outsourcing, sort of generally. I sense there is a fair amount of confusion sometimes in the marketplace, in terms of what different organizations -- how they define outsourcing. And to what extent, when you think of it, are you thinking about more -- not just sort of back-office outsourcing, but middle-office, taking over more of the asset managers' operations, whether it's trade reconciliation or things of that nature? Is that part of your strategy? Is that not a direction you're looking to go in?

That's exactly right. And in fact, I would say it is our capabilities in the middle and front office, especially with the technology tools we have built out, which differentiate us from what is otherwise available in the market, and is what makes us a good selection for our target clients. When you're just in the back office, you're in the more commoditized businesses, and quite frankly some of the things they can do themselves. It's in the middle and front you really add a lot of value.

Now, is that also something you're looking at, not just in the fund world but in the hedge fund alternative world, as well?

We provide those services in a mutual fund, hedge fund, and it's actually the key value proposition in our separately managed account business. But in the broader vision, this is the underpinning of our whole total operational outsourcing strategy.

Tom McCrohan, Janney Montgomery Scott.

I just had a follow-up question on the hedge fund services you provide. Are you providing, as a firm, hedge fund administration services or just outsourcing some of the accounting aspects of what is required to manage a hedge fund?

We do administration services also.

Can you just give us a feel for what the revenue model is for hedge fund administration?

It's a basis point fee based upon assets under administration.

Glenn Greene, ThinkEquity.

I'm just trying to get a sense for if you have seen the full drag from the client losses in the fourth quarter. And with the 6 million or so of annual revenue that you had just signed that is going to come on over the next five months, are we to the point where your operating profitability is going to trend back upward sequentially?

Talking about revenue or profitability?

Profitability. And revenue, really.

So two different questions. What I would say is, in response to the drag question, I think we have pretty much absorbed that in the first quarter. However, because I do not expect to see meaningful bottom-line impact due to SMA revenues, an increase in these revenues with respect to 2005 may put some pressure on the margins in this segment.

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

Thank you, Wayne. Our fifth and final segment is Investments in New Business, and I'm going to turn it over to Joe Ujobai to discuss this segment.

Thank you, Al. Today, I will update you on the Investments in New Business segment, with the usual focus on our global business. The segment also includes investments associated with the buildout of the life and wealth solution and other new business efforts.

Revenue and assets within this segment continues to grow. Revenue of 24.2 million in the quarter has grown by 7% from the previous quarter and 49% from the year-ago quarter. During the first quarter, average assets under management were $17 billion, up over 2 billion from the previous quarter, with a backlog of committed but unfunded institutional sales of an additional $500 million.

For the first quarter, the bottom line improved modestly from the previous quarter to a loss of $6.1 million. In our global enterprise business, assets under management now total $6.5 billion. During the quarter, we funded over 650 million in new institutional assets in Canada, including two significant US-Canadian cross-border clients. We also funded our second institutional client in Asia, the Hong Kong Housing Society, and continued the globalization of our retirement vision by developing global business solutions to help clients align (indiscernible) strategy corporate financial goals.

In our global advisor business, our assets under management now total $3.35 billion. During the quarter, we continued to globalize our life and wealth offer and goals-based investment solutions, focusing primarily on distribution through independent financial advisors in Canada and the UK.

In the global private banking and distribution business, our assets under management increased to $5.2 billion. During the first quarter, we raised $600 million from private client bank distribution partnerships. We secured a significant relationship with a major family (ph) office in Italy and continued to work toward securing the first private banking outsource client with the global wealth management platform. As mentioned in previous calls, we expect to begin the conversion process of our first global client by fourth quarter of this year.

Are there any questions?

(OPERATOR INSTRUCTIONS). Carla Cooper, Robert W. Baird.

I wonder if you could talk about kind of visibility that you have at major clients that -- a lot seems to hinge on that, from a development and cost perspective as well as, obviously, looking out from a revenue perspective.

What do you mean by visibility, Carla? I'm not really sure.

How sure are you that you're going to sign this client in Q4?

As I have said in the previous calls, we are very enthusiastic about the market opportunity, particularly in the UK and Europe, where we have been talking to private banks for the last 6 to 12 months. So we are very enthusiastic, and we expect to be converting our first client by the fourth quarter.

And then, presuming that you find the client in the timeframe that you expect, then you'd expect the conversion or the ramp period to be -- is that roughly the six to eight months that I think Al mentioned previously?

That's correct.

(OPERATOR INSTRUCTIONS). And we have no further questions. Please continue.

Thank you, Joe. And now, that concludes the quarterly report from our segments, and I'm going 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. First-quarter cash flow from operations was 24.7 million or $0.24 per share. First-quarter free cash flow was a -2 million. First-quarter capital expenditures were $5 million. Depreciation in the first quarter was 3.5 million and amortization, 740,000. Additional capital expenditures expected this year, excluding the capitalized software, will be approximately $19 million. The accounts payable balance at March 31st was 5.9 million.

We also would like to remind you that many of our comments are forward-looking statements, and are based upon assumptions that involves risks, and that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

And now, we would be glad to answer any other questions that you may have.

(OPERATOR INSTRUCTIONS). Carla Cooper, Robert W. Baird.

Could you talk about your current thought on when you begin to see the bulk of the capitalized software going -- the assets related to that go into production, so when you'd expect to see that amortization rate really kick up?

We would expect that to begin on a similar timeframe as Joe talked about when we pulled in (ph) our first client.

So a lot of the stuff like, for instance, the 15.9 million of Q1 capitalized software was really around the globalization of the platform and is related to kind of that set of clients?

Well, it's around all of our clients across all of our businesses. But the initial -- you asked when the bulk of it will go into production. That's about the same timeframe.

Tom McCrohan, Janney Montgomery Scott.

A question for you, Dennis. Can you just share with us again your philosophy for share repurchases? And should we anticipate and expect this quarter's share repurchases to continue for the remainder of this year?

Al, I guess I will answer that. Usually, you're the one who takes that one.

Well, go ahead, Dennis.

As many of you know, we have had a stock repurchase program in place for, at this point, probably 16 years. And we have been fairly consistent over time, although not at every moment in the market, but fairly consistent over time with buying stock back, and I would expect that to continue. We currently still have authorization available to us from the Board, and when that authorization expires or runs out, we will go back to the Board and have another discussion about stock buyback.

Glenn Greene, ThinkEquity.

Operating cash flow at $25 million, which is a lot lower than your operating profits, and your free cash flow being negative -- can you help me understand that?

Maybe I'll have Kathy do that, since she has all the data right in front of her.

In our first-quarter cash flow from operations, that would reflect our incentive compensation payments, which are first quarter every year. And the other thing that we're starting to see in our cash flow is we are having a little bit of a switch in the mix of our revenue, down -- as you know, we have lost proprietary bank clients. They were mutual funds. The cash flow from them is almost immediate to receive our revenue. That revenue is being replaced with other clients that are billing, so these are quarterly fees. And so we do see a little bit of drag on our cash flow, compared to how it used to be. Now, the free cash flow, the difference between that and the cash flow from operations really reflects we have debt repayments that are a little bit heavier-weighted in the first quarter, and it's also our capital expenditures and our capital software.

So you're backing out debt repayments from the -- okay.

Yes.

Do you have a free cash flow expectation for the year?

No, I don't.

We have one. It's not one we put out there.

(OPERATOR INSTRUCTIONS). Chris Arndt, Select Equity Group.

Dennis or Kathy, could you comment on what you expect total capitalized software to be in 2005? And then, as well, if you have any type of visibility on what capitalized software development would be in 2006, if it is coming down, by how much?

I guess I would refer you back to Al's opening comments, where I think he mentioned that capitalized software and our R&D spend will be approximately at this level through the year, and that we would expect it to come off a little bit next year, as we begin to move more into production nodes. We still have a fairly robust development agenda beyond this year.

But that would the -- in other words, if you are at a $60 million run rate now, in terms of capitalized items, that would not change that much in 2006?

At this point, I would say it wouldn't change that much. It would change, and the direction would be down, but we wouldn't go out there right now and say it would be down that much, particularly in the early part of the year.

Although eventually, is this something that is going to, once the -- you truly determine how long the program or the new platform takes, determined how long you will be spending, capitalizing this money?

Compared to how long the development project takes?

Yes.

The platform that we are building is actually -- it undergirds everything. And so there will be a period of time where we have some of our older systems and our newer systems simultaneously we are spending money on. And as we retire our older systems, then it will be just this one, and we will continue development just like we do. But you won't see the levels of capitalization go forward like we are going to see this year and next year, probably.

Robert Lee, KBW.

I just have sort of a financial reporting type of question. I'm just curious; the Investments in New Business segment, the revenue -- it's actually your third-largest segment by revenues, at least, at this point. Are we getting close to a point where maybe we start seeing a little more granularity, in terms of breaking out some businesses within that? Or is that something that is maybe dependent on winning this large European client later in the year?

It is something we are looking at, and there are specific rules you need to follow in breaking out a new segment, from a reporting standpoint. So that is something they we'll probably get around to digesting this year, and we will see where we are as we move through the year for next year's filing.

Is it possible just to get a little bit of color in terms of, within that segment, how you may think of the different pieces and what proportion of that business they may be? I know you have some of your domestic private wealth management initiatives in there and some other things.

That's something we can look to do in the future. I think Joe does it -- tries to break out from a (indiscernible) business, the three lines, sublines, within his global business to give you the information there.

And we have no further questions at this time.

So, ladies and gentlemen, we are very excited, as I think you could tell from the segment reports, about what we are building. And we look forward to delivering the potential that we all see.

And I would like to leave you with three things. First, as you have heard, market acceptance has been positive; the sales results, pipeline and backlogs are all strong. And these results do encourage us that our investments are on the right path. And second, as we look ahead, we are optimistic for some basic reasons. Our new strategies and solutions, our current revenue model, our strong cash flow and our operational leverage, as well as our portfolio markets, all serve to support our goal of creating long-term, sustainable growth in both revenues and profits. And finally, we're in the business solutions business. Our clients do business with us because we're solving fundamental problems for them, making their businesses and their lives better. This is a very high-value-added proposition, and it differentiate us from our competition, and we believe it will serve us well in the future.

So, I will give you one more shot at any questions that you might have thought of, before saying goodbye to you.

(OPERATOR INSTRUCTIONS). And we have no questions.

Before we sign off, I would like to remind you of our invitation to you to our investor day that starts with dinner on May 31st and the meeting on June 1st. And we will be covering, as we have in the last few years, our strategic direction. And, as I have mentioned to you during the quarters, we will give you a demo of the global wealth platform on the 1st. So I hope to see you there, and thank you very much for your attention and support today. Thanks a lot. Good afternoon.

Ladies and gentlemen, this conference will be available for replay after 9 PM Eastern time today through June 27th at midnight. You may access the AT&T replay system by dialing 1-800-475-6701 and entering the access code 778819. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.