SEI Investments Co (SEIC) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the SEI Investment second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later in today's conference we will conduct a question and answers session. (Operator Instructions).

As a reminder, this conference is being recorded today, Wednesday, July 20, 2005. I would now like to turn the call over to Mr. Al West, Chairman and CEO. Please go ahead, sir.

Good afternoon everybody and welcome. All of our segment leaders except Bob Crudup are on the call with me today. Bob's out of the country. Dennis McGonigle, SEIC's CFO, will fill in for Bob and he is here as well as Kathy Heilig, SEI's Controller. I will start by recapping the second quarter of 2005 and I will then turn it over to each of the business segment leaders to comment on the results of their statements. As usual, we will field questions at the end of each segment's report. Finally, Kathy Heilig will give us some important company-wide statistics. So let me start with the second quarter.

Second quarter earnings grew 7% from a year ago on revenue growth of 12%. Diluted earnings per share of $0.43 represents growth of 10% over the $0.39 reported for the second quarter of 2004. Revenue growth was a result of higher assets under management. Our non-cash assets balances grew by 6.8 billion during the quarter and this growth will partially due to new assets and partially due to market appreciation since a 60/40 portfolio was up 2.35% during the quarter.

Over half of the growth was generated by LSV, an (indiscernible) affiliate of SEI. During the quarter, we repurchased 1,132,000 shares of stock at an average price of approximately $30.50 per share. That translates to just over 40 million of stock repurchase during the quarter. And for the first six months of the year, we had repurchased 2,409,000 shares for $87 million worth of repurchases.

Now while we are satisfied with the quarter's results and we look at them in light of a longer journey in transforming our company. We have been and continue to be in an investment phase which involves creating new solutions for all of our markets, designing processes needed to do business in new ways and finally building the technology that enables these new solutions to be effectively delivered.

We are confident that these new solutions will eventually result in sustainable growth in revenues and profits. This transformation is underway throughout our company. Each of our segments has a new business model they are beginning to employ and each segment is also executing a transformation strategy which provides a path for clients and prospects to gradually move from the current solutions and business models to our new solutions and new business models.

(indiscernible) of our new solutions and transformation strategy is beginning to be validated by our markets. You will hear more about this in our segment report.

Now undergirding our company's broad-based transformation is a global wealth platform we are creating to be used by all our clients throughout the world. We will also be building the operational and service infrastructure to handle clients on the new platform. This platform is our future. All segments of our business will use it to conduct business. It enables us to serve our clients in new ways and provides the wherewithal for our intermediary clients to deliver broader and deeper services to their customers. And because the platform provides straight-through business processing from client acquisitions through the back office, it promises to make the provision of wealth services more effective and efficient for both our client and us.

In addition, the global wealth platform is essential for moving SEI to the next level. It makes possible our entry into the large European private bank market and facilitates stepping the U.S. national bank market from ASP to the larger business of providing BSP services. The same platform will be also be delivered to registered investment advisors to be used by them to change their practice from one of an investment provider or financial planner to what we call a life and wealth advisor.

Now this development effort continues to be on track. We provided a demo of a small portion of the platform at the Spring investor conference last month. The plan we are executing is to prepare the platform to first accommodate the needs of the UK and European private banks, then we move to complete the necessary enhancements to accommodate U.S. private banks and advisors. We still expect to be in a position in late this year to begin converting a UK private bank.

During the first and second quarters of this year, we capitalized 15.9 million and 16.9 million respectively. We expect the level of capital capitalization to rise slightly in the third quarter before leveling off thereafter. As a reminder, the capitalized portion of our development expenditures on these projects runs about 75% of the full expenditures. The remainder hitting our P&L spread among our segments, the largest portion is going to BB&T, investment in new business and advisors.

During the latter part of 2005 and early 2006, we plan to begin preparing to deliver to you that -- I'm sorry -- to UK and European banks by building an operational and service capability in the UK and by locating a portion of operations there. We will not make these investments without a commitment from a UK bank and these investments would commence about six to eight months prior to completing a conversion. Now we're certain that the investments we're making will transform our company. It will give us even larger markets to grow within and will provide exciting new solutions to deliver to our markets.

Now while we're doing this, rest assured 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're on the right path to more rapidly grow future revenues and profits.

That concludes my remarks and I would like to now move to our segments. And we will report our segments in the normal order -- private banking and trusts first, followed by investment advisors and enterprises, money managers and finally, investments in new business.

So now I will turn it over to Private Banking and Trust, and as I mentioned, Bob Crudup is not here and Dennis McGonigle will take his place today and discuss the results in his segment. Dennis?

Thanks, Al. As Al mentioned, since Bob's out, I will deliver (ph) his comments for the second quarter. Let me start by reminding you of some of Bob's past comments on his segment's business.

During the third quarter call last year, Bob indicated that barring any significant losses, Private Banking and Trust revenues had lightly bottomed out at around $69 million for the quarter and would likely bounce around in that range for a while. We also said that due to platform investments, implementation of new business, the cost of new sales, our next expenses would likely grow faster than revenues. This has been the case. We will continue to experience both revenue and profit pressure on this segment the balance of 2005.

With that said, our recent sales success, implementation success and pipeline give us confidence that revenues with minor quarter to quarter volatility will improve over the mid to long-term. As you know, we have closed important new ASP and BSP business since this time last year. Updating the conversion of this new business, SunTrust did go live on April 30th. Harris and HSBC are scheduled for late Q3 and Nat City (ph) is scheduled for Q2 next year.

Regional and community bank conversions are also on schedule with Bardi (ph) & Trust, Citizens National Texas, Nova Savings and First Bank of Virginia having gone live in the first half of this year and South Carolina Bank & Trust on schedule for next month. Thus far, our sales revenue has substantially replaced the revenue gap due to business lost last year. As such, this quarter in (ph) revenues, which include a onetime revenue item associated with the Fleet D conversion of approximately $2 million, are down 1.2% versus last quarter and 3.6% versus last year.

As anticipated, expenses are up and profits versus last year are off by $3.7 million with 3.6 million coming from investments in our investment processing platform and trust company operations buildouts to support new business.

Moving on to market activity, while we do have two banks that have some (ph) beta clients experimenting with our life and wealth solution, we are announcing that Union National Bank is our first community bank to officially launch the franchise co-branded wealth network solution. At Union National, we are at full implementation of the life and wealth offering which Carl Guarino (ph) and Kevin Robbins (ph) talked about at the recent investors conference.

The segment sales pipeline remains healthy. One of you asked Bob a question last quarter about the difficulty of closing business in the post 9/11/Enron regulatory environment. The response that sales cycles were extended remains true. This is exacerbated by financial market conditions of profit pressures on our bank clients and prospects. In addition, longer sales cycles exacerbate the already complex nature of the transactions we're trying to enter into.

Sales we expected to have closed by now remain in our pipeline. As Bob discussed at the investor conference, with Harris and HSBC and our large-scale DSP strategy is on track and we are hopeful that other large banks would have closed by now.

So with that said, our sales cycle has extended but all the prospects we've had for the last several quarters are still in the pipeline and it remains healthy. I will now entertain any questions that you may have.

Tom McCrohan, Janney Montgomery Scott.

Just to get a better feel for your comments that you're going to experience or the segment will experience revenue and profit pressure, is that further revenue profit pressure from what you experienced this quarter, or expect -- does the message expect kind of the second half this year to be a current quarter run rate?

The expectation is similar to what we've experienced over the past few quarters, just a continuance to grind it out here as we (inaudible) some of the future bank conversions that come online.

Okay. And Harris and HSBC -- was one of those a conversion demand (ph) trust, the other being a transition to BSP, or were they both BSP mandate?

They were both ASP clients (indiscernible) at PSD (ph), or Harris was actually a straight up PSD. It was a conversion.

But Harris is new.

Harris is new.

Great, thank you.

Robert Lee, Keefe Bruyette & Woods.

Thank you, good afternoon. Dennis, could you give us a little bit of color maybe on since Union National bank is I guess as you said the first client you've won who's going to be converting to this life wealth platform in the bank market, can you give us some for a little bit of the economics? What are your thoughts in terms of revenue impact or margin? Should we think that this business, at least over the near-term, that it's dilutive to margins or that you sort of ramp it up? I'm just trying to get a sense that this is the first one, how you think of this from an economic perspective?

You remember Bob's presentation at this investor conference, Rob. (indiscernible) when he talked about the different bubbles at the franchise level that revenue per account that we've expect over time until we see some franchise relationship. We would expect certainly that, although these are not large banks, they will be nice quality revenue generators for us.

And then in terms of absorbing the cost associated with these types of banks, in terms of operational costs, that's certainly scalable and leverageable because they just fit right into our BSP operation. On the front-end side of helping them get going from a marketing lead generation new client acquisition standpoint early on, there are some costs that we would invest in the client to help them grow. But over time, we would expect to get a good return on that spend.

Okay, and just to clarify, if I understood correctly, Union National Bank was not one of the two beta test banks?

No, they were not. They were not one of the two original (technical difficulty) banks.

And the two beta test banks, how do you -- I guess is there -- what's sort of holding up, or what do you think the slowdown is in terms of converting them to sort of adopt the whole program?

That's probably a question Bob is better suited to answer. I would say that those banks are a little bit larger in size, a little bit more of an aggregated decision for them to convert their entire business to us. And they were more in that BSP plus category that Bob talked about where they did adopt our full operational outsourcing solution and then some of our financial product offering.

Over time, and certainly our goal and hope would be that they would continue to migrate more and more to our total wealth solution, but that's -- the characteristic of those banks are a little bit different.

Okay, great. Thank you so much.

Peter Heckmann, Stifel Nicolaus.

Good afternoon. I'm trying to confirm on some of the conversions -- did you say Harris and HSBC -- was that a third-quarter item or fourth-quarter?

It's late third quarter.

Late third quarter. Okay, and then National City sounds like it may have been postponed a little bit. Is anything changed there in terms of early implementation schedules or is it just -- is there a reason -- I guess we had originally had it for fourth quarter of '05, now it's second quarter of '06. Is it a significant reason on the delay?

No, they really had to do it more internal to Nat City rather than (indiscernible) our conversion plans. And Bob, I know, had discussed this back after the first-quarter call, or during the first-quarter call.

And then with regards to Fleet, you said you had about $2 million of onetime contract termination fees in the quarter. Is that correct?

Yes.

And we would expect that to roll off the system still this year?

Fleet has deconverted.

It is fully deconverted?

Yes. They went off in the second quarter.

Okay. And are there any other material deconversions in the pipeline?

No, not that I am aware of.

Okay, thanks a lot.

Carla Cooper, Robert Baird.

Good afternoon. I wonder if you could -- you named a lot of clients that are scheduled to come online and I think some of them we have a general sense of size. But I wondered if you could give us sort of the aggregate recurring revenue that was signed, that those clients that are yet to roll on represent?

Well, those would be -- I guess the three that I mentioned that haven't rolled on yet -- Harris, HSBC -- actually four -- Nat City and South Carolina Bank & Trust -- those four. I'm not sure I have an aggregate number for those four off the top of my head. That is something I would have to (inaudible).

Okay. And then the other question I had was -- were there significant costs against the 2 million in deconversion fees that you collected from Fleet?

No, this is our normal cost of doing a deconversion.

All right, thanks a lot.

Glenn Greene, Think Equity Partners.

Thanks. A couple of questions. Dennis, if you look at the BB&T sequential revenue excluding the 2 million termination fee, it dropped almost 3 million or so sequentially. Is that a function of -- what really drove that? I know that Fleet came off, but SunTrust came on and I thought they were supposed to offset?

Yes, if you were to back out the one times at both quarter side (ph), it's about flat.

What do you mean (multiple speakers)?

Well you're saying, if you take out the deconversion fee in the second quarter, which is a onetime item, I would argue that (indiscernible) should take out some of the onetimes in the first quarter to get you back to apples to apples, and it's essentially flat if you did that.

Okay. And then in terms of the sales cycles, it's sort of being somewhat extended. What is sort of driving that? Is it taking a long time for your clients to make decisions, or are there some things internal going on there, or are you looking at alternatives? Just a little bit more color on what's happening with the sales cycle.

Generally, it's more of your first suggested reason. It's taking a long time for clients to make decisions. As I mentioned in the comments, these are very -- as you know, they are very complex transactions and prospects are just taking a longer time working through them.

Is it a question of competitive RFP bids out there that firms are looking at?

No, I guess I would caption it more around the complex business decision we're looking for the banks to make. (multiple speakers) (indiscernible).

(Operator Instructions). Tom McCrohan.

I know it's a tough name. The amortization of the capitalized software, could you just give us a sense for how you define a working model? I guess the accounting rules require that to capitalize software, you have to have a working model. But I guess it's kind of a grey area. In your internal analysis, what do you consider a working model - when the customer has a data version of your software, or just to have a -- on the other end of the scale, just having a working design document on paper? Thanks.

(inaudible) different rules here and I think the one you're probably looking at is the one we're operating under. But generally, we would expect to begin to amortize the capitalized cost on these platforms when we bring them up into full production with live clients, and a beta situation would not -- would be kind of the step prior to that.

I guess maybe I should ask the question again. When the accounting rules say you need to have a working model for you to justify capitalizing the cost as opposed to you just having -- just doing an analysis stage, and some companies begin to capitalize or consider a working model once they have a -- the software being beta tested at a client site. So internally SVI (ph), what's -- how do you define a working model -- a beta testing site or just a design on paper?

Well, actually again there's a different rule -- there is a couple of rules that you operate under in terms of what you determine to capitalize and when you begin to -- and what costs are (indiscernible) in the projects cycle you can begin to capitalize. And really for us, we've begun to capitalize when we began to actually build versus researching the (indiscernible) in the beginning of the architecture work early on. Is really more of when we begin to buildings that we started to capitalize on.

And since the amortization starts when you have to deliver the software, an actual working software to a client, so what's the big delivery date that's going to trigger most of the amortization starting going through the P&L? Is that the first UK client, or what's kind of triggering that? The.

(indiscernible) the first client and whether that's for our own internal use with our operation or whether it's with a third-party client, that's what -- we're driving towards both of those endgames. So I think it's hard to ay which one will come first because they're both kind of moving together here.

Okay, thanks.

Robert Lee.

Thanks again. I'm just curious, Dennis, to the extent if we look at the large bank market that your ASP clients, I understand that the goal is to try to migrate people up to the BSP model. But to the extent you have clients who where your contractors are coming up for renewal or RFP, can you talk about a little bit about if you're seeing or any or what type of maybe pricing pressure you may see to renew a contract? Is that having a noticeable impact on revenue growth or do you see that as a minor issue?

I think the way Bob has addressed this in the past is that generally on the core services that we're delivering, generally in a REIT contract we might see some pricing pressure. But also during a (indiscernible) contract, we're also given the opportunity to sell some add-on services that can enhance the overall revenue in the relationship.

So there's two dynamics really that come into play in a REIT contract. One is what you're talking about and the second is the other side of it, which is we typically get banks to buy additional services to keep our revenue whole, if not better than whole.

Okay, thank you.

We do not have any questions of the time.

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

Thanks Al and good afternoon everyone. I will briefly review the financial results and business activity for the Advisor segment for the second quarter. Revenues and profits for the second quarter increased 14.5% and 10.3%, respectively, from the year-ago period as average assets under management for the quarter rose to 31.2 billion compared with 28.7 billion a year ago. Now year-over-year comparison results are impacted by the adoption of accounting rules discussed with you previously relating to fees paid to separate account managers and recordkeepers. This increased revenues and expenses by 2.8 million in the second quarter over the comparable period of last year. This option did not impact reported profits but negatively impacted year-over-year margin comparisons. You will be happy to know I think this is the last quarter that I have go through that with you.

Cash flows for the quarter continued to be flat with approximately 1.4 billion of inflows offset by slightly higher outflows. Redemptions continued to be negatively impacted by a weak capital market and our strategic decision to concentrate on key advisors. We also do typically see some spike-up in redemptions in the second quarter due to April tax season and this year was no exception in that regard.

Now our key advisors continue to produce positive cash flow. Our top 200 advisory firms produced approximately 210 million in positive net cash flow in the quarter. I also see progress in our efforts to position SEI and our advisory partners in the developing wealth industry. Our SEI wealth network of franchise advisors now have six signed members and a growing list of prospects. You will recall that we had targeted a goal of eight to 10 early adopters by year end. And we have just begun a trial of 10 advisors of our new system partnership model. This model delivers case support and other aspects of our franchise offering, but not the complete business platform. And we believe that these are signs of growing market acceptance of our new models.

We also continued during the second quarter a series of initiatives aimed at improving cash flow and helping reposition our advisors into more comprehensive wealth advisors. We're progressing in our efforts to add carefully selected new advisors to our distribution network and have a growing pipeline in this regard. We are launching new alternative investment products and a lending program.

And we are proceeding with a phased rollout of our SEI Advisor Desktop technology. This technology is an early version of the front-end of the global wealth platform. We will be adding aggregation services to this platform in the fall and expect to complete the rollout of this front end to the great body of our advisors by the end of the year.

That concludes my remarks and I would be happy to take any questions you may have.

(Operator Instructions). There are no questions at this time. Carla Cooper.

Hi. I am struggling to get all of my numbers together quickly. I guess I wondered, Carl, if you could go back and give us your best sense on the reason for the asset increase which I think outpaced kind of what a balanced portfolio did in a period. You mentioned that 210 I think coming from the top 100 firms. Where else are you seeing the asset close (ph) that are that are driving that total number we're seeing?

Remember Carla that the actual cash flows for us were (indiscernible) in this quarter. And we had been relatively flat on a net basis on the cash flow side. So most of the -- the asset increase that you're seeing is really being driven by market factors.

Thank you.

There are no further questions. Please go ahead.

Our third segment is the Enterprise segment, and I'll turn it over to Ed Loughlin to discuss his segment. Ed?

Thanks Al, good afternoon everyone. As usual, I will stick to the financial results for the second quarter of 2005 compared to the year-ago period and also touch on sales activity and results.

The financial results for the quarter showed significant growth compared to the year-ago period. Revenues and profits increased 29% to the second quarter 2005 compared to the second quarter 2004. New client funding and positive capital market appreciation fueled this growth. Margins for the segments were 45%, and that was comparable to the year-ago period. Quarter end balances were $22.1 billion, reflecting a $4 billion increase compared to the second quarter of 2004. New client funding for the second quarter was offset by several client losses. However, asset balances did increase by $500 million during the second quarter due to market appreciation.

The backlog of committed but unfunded sales was $338 million at the end of the quarter. Sales activity continues to be very active and new client sales through June 30 totaled $1.7 billion. Sales commitment levels have historically varied from quarter to quarter and the second quarter was a relatively quiet sales quarter. Client signings for the period totaled $350 million.

The pipeline continues to be solid and we are encouraged by the active size and the number of prospects that we're actively pursuing. Market acceptance for the outsourcing solution continues to grow.

That concludes my remarks and I am happy to entertain any questions you may have.

Glenn Green, Think Equity Partners.

Just a clarification. You had mentioned a $1.7 billion figure and then a $350 million client signings figure. What was the 1.7 billion?

That was sales through June 30, so that was the 1.3 billion sales in the first quarter plus the 350 in the second.

Okay, so that's year-to-date. Alright got it. Thanks.

(Operator Instructions) Robert Lee.

Good afternoon. Just a quick question, Ed. Is it possible to characterize to the extent you have had I guess some clients leave the fold -- is there any one or two things that you can point to that may be caused that? Was it just sort of the luck of the draw that quarter? Is there anything consistent -- pattern among those that have chosen another provider?

I guess a couple of things, Bob. Some of these clients are Treasury Point (ph) clients and some of them are really have the small -- a singular dimension, which would really be just kind of money market funds. We also had some of the assets for this particular quarter. They were small clients, but they were clients that we had been -- they had gone into bankruptcy, PPGC took over their plan and it was just a matter of time as to when it was going to take over.

And then occasionally, you get client situations where for whatever reason there could be a change in someone on the committee that they decide that they want to be more involved and they what to have more control over this, so they might change the way that they're managing it from an outsource situation to them being more active. And we had a situation like that as well.

Okay, thank you.

There are no further questions at this time. Please go ahead.

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

Thank you, Al. The second quarter marked the return to sequential revenue growth after two quarters of flattish revenues. During the quarter, we also made significant progress in installation of new SMA business evidencing the marketing acceptance of new solution. For the quarter, revenues totaled $21.2 million, an 11% increase from the same quarter in 2004 and a 5% increase from the first quarter of 2005. Revenue growth was principally due to our hedge fund and SMA solutions.

Our quarterly profit of $3.4 million, while down only slightly from the first quarter, represents a 15% decrease from the second quarter of 2004. Product reinvestment, especially in connection with the buildout of our SMA operations, was a major contributor to this profit decline. In the near-term, I expect that this reinvestment will put market pressure on this segment.

New business sales events for the quarter totaled an estimated $3.3 million in annualized revenue. This new business was split about 60/40 between our hedge funds and mutual fund solutions. Asset (indiscernible) administrative increased $12.6 billion. This increase reflects $1.1 billion in market appreciation and 11.5 billion in new client funding. This represents an almost 10% increase in assets from March 31. But as I have mentioned in the past, I would not recommend the use of asset balances as the sole method to model future revenue growth. Product mix, be it hedged, mutual funds or SMA, together with whether the growth is (indiscernible) assets has significant impact on revenues.

In summary, we had a good sales quarter, our pipeline remains strong and I am happy to report a return to sequential revenue growth for the segment. I will now entertain any questions.

(Operator Instructions) Peter Heckmann, Stifel.

Could you give us an update on some of the issues that are going on in the fund industry regarding investigations as to fund timing, market timing, late trading as well as distribution fees and update us on to what extent SEI is involved in some of those, and if so, if we are seeing a higher level of expenses impact the segment?

Well I guess the update piece is that the really isn't much of an update from last quarter. I think as we've disclosed our case in our Q's, our subsidiaries periodically (indiscernible) regulators with respect to various topics. We've received some requests on topics, as you've mentioned, and we continue to work through again with the SEC on this.

And is there a material amount of expenses to comply with request for information, or is it fairly immaterial?

I would say there is this obviously expense associated with responding to those inquiries. I think sequentially, there is not much impact at this point.

Okay. And then could you comment again on the -- was it the net flows in fund administration -- could you just state that number again, of the net increase in assets under administration?

The total increase was 12.6 billion, 1.1 was due to market and 11.5 was due to new client funding.

Okay, thank you.

(Operator Instructions). There are no further questions at this time. Please go ahead.

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

Great, thank you Al. Today, we will update you on the Investments in New Business segment with as usual, a focus on our global business. This segment also includes our investments associated with a bit of (ph) the Life and Wealth Solution and other new business efforts.

Revenue and assets within this segment continues to grow. Revenue of $27.3 million in the quarter has grown by 13% from the previous quarter and 62% from the year-ago quarter. During the quarter, average assets under management were $18.5 billion, up over 1.5 billion from the previous quarter with a backlog of committed but unfunded institutional sales of $320 million.

For the second quarter, the bottom-line improved from the previous quarter loss of 6.1 million to a loss of 4.7 million. In our Global Enterprise business, assets under management now total over $7 billion as this business begins to see a steady and more predictable growth pattern.

In our Global Advisor business, our assets under management now total $3.4 billion. In the UK, we've begun concept testing of our Life and Wealth offer and initial results are encouraging.

In the Global Private Banking and Distribution business, assets under management increased to over 5.6 billion with over $500 million raised through distribution partnerships. Our pipeline in new distribution relationships is strong worldwide.

At the beginning of the third quarter, we ended our relationship with Midialanone (ph), which represent a loss of approximately $3 billion in assets under management. Although the revenue impact is large, because we acted as an advisor to their proprietary product line, margin impact is low. Given the strong growth of our business, we expect to replace this business with higher margin, more strategic distribution relationships. We also continue to work towards securing the first UK private banking outsourced client for the global wealth platform.

In summary, our Enterprise and Private Banking Distribution businesses showed strong momentum worldwide as we continued to invest in significant new market opportunities where there's a (ph) launch of the private banking ESP (ph) business in the UK and Europe. Any questions?

(Operator Instructions). Peter Heckmann.

Hey Joe, is that 3 billion from Medialinum (ph), is that number one purely based in Italy and then number two, does that come out of your -- the bank distributed, the 5.6 billion?

Yes, it is purely distributed in Italy. It's generally a retail fund complex that they sponsored and yes, it would come out of the 5.6 billion in the Private Banking and Distribution segment.

Okay, thank you.

Glenn Greene.

What's the order of magnitude of the revenue loss related to debt loss?

Let me give you some color behind the situation. For the past six years, we acted as an advisor to Midiolanum's proprietary mutual fund family. They were not buying our (indiscernible) health funds. We were advising their find family.

Last year, Midiolanum decided to act as the investment advisor to their funds, but we continued in that role until early this month. The revenue is significant. Now let me remind you that in the global business, we recognize growth asset management revenue and payout sub-advisor and distribution fees as an expense. But as our global distribution strategy progressed, this relationship which was one of our first became less strategic. And although it represents approximately $2 million a quarter in revenue, the impact to P&L is really not material to the Company.

Okay. It sounds like you're on track for the beginning of the conversion in the fourth quarter with the European private bank. Can you give us a sense of the pipeline beyond that client?

We -- just remember that we're entering a new market and with a new global platform. And we think Europe is going to be exciting for us and we expect our sales cycles that will last anywhere from 12 to 24 months. So we remain enthusiastic about the market opportunity and we are encouraged by the pipeline.

Thank you.

There are no further questions at this time. Please go ahead. Carla Cooper.

Good afternoon. Was that -- the loss of the Midiolanum business, was that for a full quarter in this period?

Yes. We lost those assets earlier this month, so it will not affect us until the third quarter.

Okay, so the 2 million number that you just gave an answer to Glenn's question, that really reflects revenue going forward, not revenue in Q2?

That is correct.

Okay, thank you for clarifying that. And I guess the same goes just to clarify the impact to that global private bank and trust number of 5.6 billion. Are we going to see that drop in the third quarter?

Yes, you will.

Okay, thank you, sorry if I missed that timing. And then finally, on the working to secure the UK bank for the rollout of the first global wealth platform new product, if you are working to secure the client now, can you talk about how you get through the contracting period quick enough to be able to get implementation in the fourth quarter? My question is really around timing.

It's hard for me to comment on the status of discussions with a prospective client until after formal agreements are entered into. We remain hopeful that we will begin conversion in the fourth quarter, but that is dependent upon the sales and contracting process with the prospective clients.

Okay, thank you.

There are no further questions at this time. Please go ahead.

Thank you. That includes the quarterly report from our segments. I would like to now 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.

Second quarter cash flow from operations was 41.3 million for $0.40 per share. The second quarter's free cash flow was 19 million. Year-to-date cash flows from operations 66.5 million. Second quarter capital expenditures excluding the capitalized (indiscernible) 3.9 million. Depreciation for the second quarter 3.6 million and amortization 740,000. Additional expected capital expenditures for 2005 against (indiscernible) capitalized software will be about 12 million for equipment. However, we also are expanding our facilities starting this fall, and that would be an additional $15 to $20 million of cost incurred, mostly next year. The accounts payable balance at June 30 was 5.7 million.

We would also like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that the financial information presented in our release and earnings call is not (indiscernible). 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. Please refer to our periodic SEC filing for a description of various risks and uncertainties that could affect our future financial results. And we would be glad to take any additional questions that you may have.

Peter Heckmann.

Hi, Kathy. Can you talk about what's behind the significant sequential increase in G&A second quarter over first?

In G&A, there are some onetime costs (indiscernible) are partially for compliance. As an example, ones you can find to be with Sarbanes-Oxley. There were also some other onetime corporate costs. However that being said, there is an element of cost in the G&A that I would say are not onetime, and they would be recurring. So I would say although this quarter's G&A is high looking forward, I would say that first quarter is lower than I would expect as the rest of the year progresses.

Okay. And then as regards LSV, can you talk about the breakdown of their assets under management by mandate, which mandates have closed to new money and where they are gathering additional money, and whether that may or may not put some pressure on their margins?

We don't normally -- normally, we really don't comment on LSV's business. We're, as you all know, a 43% partner in that firm. And that data is really part of that firm's data. That being said, it's apparent, given that just a look at the numbers that they are able to continue to grow that business. But since we don't play a direct role in the operation of that business, it's hard for us to really talk about it.

Okay. And how much role do you have in the management of that business? Do you have seats on a Board or an advisory committee?

There is a management committee on which we do have a presence, yes.

Would you consider monetizing that investment?

I'm sorry?

Would you consider selling your underlying investment in LSV and redeploying the cash proceeds, perhaps stock buyback?

I think that's something we probably would not want to comment on. That's too speculative.

Do you there any further questions?

No, not right now. Thanks.

Robert Lee.

Thank you. I just have a question this is (indiscernible) for Dennis or maybe Al. I'm just trying to think through, I mean if I look ahead and I think of all of the pressures on the operating margins to come, there is a significant amount of software that has been capitalized that has not started to amortize yet. You have the potential that if you get that UK client, that will be some expenses related to ramping that up or building that out in advance of revenues. Wayne talked about some investments in the SNA business, Kathy even talked about some additional expenses next year and some facility expansion.

What I'm trying to get a feel for is, as you do your own planning, when -- and excuse me, you have also talked in the past about if sales do accelerate, typically there is some front-end costs as sales, marketing costs, things like that. So when should we actually be thinking about the possibility that we could start seeing some of all of these investments pass through to margin improvement? I am not expecting much this year, but are we really thinking this is an '06 event, an '07 event? How do you think of it?

As we look at all of this, each one of our segments is on or is starting to provide new solutions to each one of the markets, and these new solutions do two things. They increase the size of our markets and they also increase per client what our revenues and profits would be. So that's kind of like the number one thing that we have to work out, to make sure that when we do get a win, it's a bigger win than we would today. And I think in every market, that is a substantial step-up in revenues and profits.

And I might hesitate on enterprise just because they're a little bit more mature and they are getting some very important stronger trends than outsourcing. And so that is what we've been waiting on. But just about everybody else is moving up into new models.

So that is number one. Number two, wins. We never really talk about exactly win because quite frankly we cannot answer that probably any better than you can. We might be a little closer, but we are receiving very strong, positive reactions from our marketplace so we know our solutions are being accepted and it is a matter of moving through and getting clients onto it. We will have -- as we do that, there will be a step-up in the capitalization, but most of the other build-out costs are not as significant I would say in terms of they're a little bit more gradual as we add clients on. There is some that of course always leads your revenue. So we're going to have a lag here for awhile. Does it happen in late '06, does it happen in '07? Your guess is as good as mine. Do we hope it happens in late '06 and '07? Absolutely. And are we working towards that? Yes.

Okay, I appreciate the response. Thank you.

Carla Cooper.

Maybe just a comment, Carl, as you work to change the -- to some extent, alter the marketplace that you serve to the investment advisors by targeting more wealthy individuals, can you talk about how your competitors have changed?

From our standpoint, the market is sort of changing driven by this next generation boomer (ph) underneath. Now there are a number of other folks in the marketplace like they see that who are trying to position themselves against that who are moving toward a broader-based wealth solution. And clearly, we think that's the challenge on the opportunity side for advisors. The challenge is that the end consumer is demanding in terms of the services and the competitors I think are lining up to do that, which puts pressure on advisors as smaller independent firms. And there's enormous opportunity for them there because they are viewed as trusted and client-centric. And I think equip, the way we can equip them, I think they can be very powerful competitors in that marketplace.

I think when we announced this two years ago, that was probably for a lot of advisors, that was maybe too far out there. They did not see it as much in their business. I think more and more now, they are seeing that market challenge and that market opportunity and seeing that we have a pretty powerful platform that we're bringing to bear to help advisors with that.

Great. Thank you. And just as a follow-up to Robert Lee's question on the margin expansion, I'm just trying to think back to earlier comments on when you start amortizing capitalized software and how significant that impact is. I guess Dennis, are you thinking about that in aggregate when you do your planning today?

I think what I have said what I've talked about in the past, let me get past the third-quarter call or when we are at that call, I think we'll have a little bit better picture. And we will share that with you either then or certainly by the end of the year.

Thank you.

There are no further questions at this time. Please go ahead.

Ladies and gentlemen, thank you very much. We are excited about what we're building, as you can tell, and look forward to delivering the potential we see.

I would also led to like to you as I normally do with three things. First, as you've heard, market acceptance of the new solutions is positive and this does encourage us that our investments are on the right path. And second as we look at it, we're also optimistic and confident for a number of other reasons. Our new solutions and strategies, our recurring revenue model, our strong cash flow, operational leverage as well as our portfolio of markets, will all serve to support our goal of creating long-term sustainable growth in revenues and profits.

And finally, we are in the business solutions business. Our clients do business with us because we are solving fundamental problems for them and making their businesses and their lives better. This is a high value-added proposition and it does differentiate us from our competition and we believe it will serve us well in the future. I thank you for your attendance today and your attention and have a good day. Thank you very much.

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