SEI Investments Co (SEIC) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Investments third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would would now like to turn the conference over to our host, Chairman and CEO, Al West. Please go ahead.

Good afternoon, everybody. With me today are all of our segment leaders except Carl Guarino, who is traveling right now. Dennis McGonigle, SEI's CFO, is here and he will speak for Carl. Also, Kathy Heilig, SEI's Controller, is on the call. I'll start by recapping the third quarter of 2005, and then I will turn it over to each of the business segment leaders to comment on the results of their segments. And as usual, we will field questions at the end of each segment's report. Finally, Kathy Heilig will give us some important company-wide statistics.

And so, let me start with the third quarter. Third-quarter earnings grew 8% from a year ago on a revenue growth of 12%. Diluted earnings per share of $0.48 represents growth of 12% over the $0.43 reported for the third quarter of 2004. Now, revenue growth was primarily a result of higher assets under management. Our non-cash asset balances grew by $7.5 billion during the quarter, even though we lost a $3 billion distribution client during the third quarter. Joe Ujobai has mentioned this situation before, and he is going to cover it in his remarks.

Now, this quarter's growth in assets was mostly due to market appreciation, but we also had new sales. For instance, a 60/40 portfolio was up 3.5% during the quarter and an LSV contributed $2.6 billion of new sales.

Now, we repurchased 1,124,000 shares of stock during the quarter at an average price of approximately 37.25 per share. Now, that translates to just under $42 million worth of stock that we repurchased during the third quarter completely. And for the first nine months of the year, we have repurchased 3,533,000 shares for 129 million.

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

Now, we're confident that these new solutions will eventually result in sustainable growth in revenues and profits. Now, the transformation I speak of is underway throughout our company. Each one of our segments has a new business model they are beginning to employ. And each segment also is executing a strategy which provides a path for clients and prospects to gradually move from the current solutions and business models to our new solutions and our new business models. And the acceptance of our new solutions and strategies is beginning to be validated in new business activities, and you will hear more about this in our segment reports.

Now, we are making three interrelated investments. First, we're building a life and wealth client process which is the basis for all of our individual investor client processes. Second, we're investing in the Global Wealth platform which undergirds all of our client processes throughout the world. And finally, we are also building an operational and service infrastructure to handle clients on the new platform. Now, this Global Wealth 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 it makes possible our entry into the large European private bank market and facilitates stepping the US national bank market from ASP to the larger business of providing BSP services. And finally, the platform will be used by all of our registered investment advisor clients.

Now, the status of this development effort continues to be on track. Now, during the first, second and third quarters of this year, we capitalized 15.9, 16.9 and $17.2 million, respectively. And we expect the level of this capitalization to level off by end of the year and eventually trend down, certainly as a percentage of revenue. And as a reminder, the capitalized portion of our development expenditures on these projects runs about 75% of the full expenditures. And the remainder hitting in our P&L, spread amongst our segments, the largest portions going to private banking, investment in new business and advisors.

We plan to implement the new platform next year to support global private banks that currently use our investment and BSP services. Meanwhile, we will work the UK and European prospect pipeline that has recently been growing. Then, hopefully, we will sell more global private banks later in 2006. Also in the second half of next year, we hope to convert a US Bank and start working through a US pipeline of prospects, as well.

Now, we are certain that these investments we are making will transform our company, giving us even larger markets to grow within and providing exciting new solutions delivered to all of our markets. But, in the meantime, rest assured we will continue to work hard in the short run to control costs and to continue to steadily grow revenues and profits. In the longer run, we are firm in our belief that we are on the right path to more rapidly grow future revenues and profits.

That concludes my remarks, and thank you for your attention. I would like now to move to our segments. And we will report our segments in the normal order. We'll start with Private Banking and Trust. We will then go to Investment Advisors, Enterprises, then Money Managers and we will finish with Investments in New Business.

And so, we will now move to Private Banking and Trust and Bob Crudup will discuss results in this segment.

Thanks, Al, and good afternoon, everyone. Late last summer, I told you that Private Banking revenues had most likely bottomed out. Further, that given the recent wins as well as losses sustained, we felt that revenues would continue to bounce around at that bottom for some time. The other important comment was that due to our investment in the new platform, expenses associated with the installation of new business and increased marketing expenses, that total expenses would likely grow faster than revenues. I would like to add one comment, in that as our ASP business continues to be very important to us, we will continue to invest in that platform also. Finally, as I pointed out last summer, all of the above will put considerable profit pressures on this segment.

This quarter's performance is a reflection of those comments. Comparing results to the same quarter last year, third-quarter revenue is relatively flat, off 2%. Profit for the quarter is down about 20%. Over two-thirds of the expenses causing this decrease in profit can be attributed to the new platform investment and the cost of bringing on new business. Dennis, speaking for me last quarter, noted that SunTrust, as well as several community banks, converted successfully in the first half of the year. I am pleased to report that both Harris Bank and HSBC were successfully implemented this quarter. And National City is now set to convert in the spring of 2006.

Regarding market activity during the third quarter, we garnered recurring revenue sales of 2.1 million. This represents a Community Bank transaction and new selective BSP services sold to National City. Our pipeline remains strong, although sizable decisions are still made very slowly.

In closing, our strategy is on track. We're confident when we begin to enter the US bank market with our new solutions, based on the Global Wealth platform, that it will lend a real momentum to our BSP success. We look forward to creating the positive momentum that we know is possible with these new offerings.

If you have any questions, I'm happy to answer them at this time.

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

I'm just trying to get some sense for how should we be thinking of the revenue this quarter? You talked about it sort of bouncing around, I guess, a bottom here. Should I be thinking that -- is the bottom 68 million, 72 million? When do you -- just generally, that's sort of the range you expect it's going to bounce around in? And to the best of your ability, how long do you think -- when do you expect it to sort of break out of that range?

Well, I think you have the range correct. And I would expect that to continue for at least the next two quarters.

I saw investment processing fees were down sequentially, probably about 3.5 million or so. Was there any particular things that drove that? Was that a client loss? Was that just lower volumes or activity levels?

Part of that, a substantial portion of that, was the nonrecurring one-time that Dennis alluded to in the last quarterly call.

The 2 million? Was that it?

Yes.

And lastly, in looking at assets under administration, there was a -- even though the markups are reasonably favorable, there was about a 15% sequential decline, down to about just under 29 billion. Was that just timing of a lost client, or was there something specific that drove that?

Yes. There's one transaction in there, and it was a fund accounting only agreement that we had with one of our clients where it was a non-40-Act fund, and we simply did fund accounting for a large asset pool -- very small revenue, like annualized, like $0.5 million a year annualized revenue.

Jeff Hopson, A.G. Edwards.

In terms of your commentary regarding the pace of decisions on large business blocks being slow, can you give us any insight as to the feedback you're getting from clients as to why that is, in general? Are there issues that they are especially concerned about, et cetera?

Yes. I think there's a couple of things. The sort of post-9/11 business environment that we're doing business in makes the timing to get agreements completed stretch out, it seems like, almost forever.

The second thing is, if you think about it, these businesses are in the asset management business. And they are struggling with revenues and profits now, so these decisions that require investments are difficult to get made in large institutions.

But nothing has changed between this quarter and two quarters ago, in terms of additional issues out there?

No, and none of our prospects have fallen off the board.

Carla Cooper, Robert W. Baird.

Bob, could I just ask you to clarify -- did you say that two-thirds of the profit decline was related to the new investment in the platform?

To that and to the cost of bringing on new business.

And would you expect those -- I guess, to separate those out, would you expect that the investment in new business would go down in sort of the '06 timeframe, sort of in line with kind of the general guidance for the Company?

Yes.

In terms of number of accounts and dollars of revenue per account, I wonder if you have those metrics for us for this quarter?

That 2.1 million in new business was substantially around incremental BSP services at National City.

All right. Well, I think I can do the math, then. Just finally, on the sales and marketing line item, I just want to make sure I am thinking about this correctly, because that was down to the lowest levels that you have seen in some time, if I've got the numbers plugged in right. Is that really a factor of -- at the same time you are in a fairly -- you are pitching new business. Should we look at that as belt tightening, or is there another way to view that number?

You could look at a little bit of it as belt tightening, but most of it is timing of sales compensation.

Glenn Greene, ThinkEquity Partners.

I'm just thinking you just completed the conversions of Harris and HSBC, I assume, right at the end of the quarter. How should we be thinking about the sequential impact, in terms of revenue? And I'm not asking you to quantify for a specific client, but should we be thinking about a sequential uptick in revenue here, attributable to those clients?

Harris converted at the very end of the third quarter. HSBC converted in mid-August, so we saw a portion of the incremental revenue from them this quarter. The balance of that incremental revenue would show up in the fourth quarter.

Is there any way to frame how meaningful it is?

Well, if you look at my previous comments around the value of a BSP client, and both of these are BSP, you can figure it out from that.

And another question -- and I'm not sure if it's more appropriate for you or for Wayne, and I think this was asked last quarter. But one of your peers' competitors had an SEC investigation under way related to sort of marketing of mutual funds and actually set aside about $25 million for it. I was wondering if you could -- you're sort of in a similar business or the same business. Wondering if you could give some color and commentary around that and your potential exposure?

Yes, I'm going to let Wayne answer that question.

I guess the short answer is nothing has changed since our response last quarter. And that response was basically, as we disclose in our periodic SEC filings, our subsidiaries receive requests for information from the regulators on various topics, and we cooperate fully with those requests. And that's an ongoing process.

I guess the follow-up is, so you're not contemplating any kind of exposure anywhere near that, of what your competitor has alluded to?

We're continuing to cooperate. When we have an event that requires us to make a disclosure, we will. But we are just cooperating fully; we don't know what they have in mind at this point.

Linda Farquarra (ph), Fries Associates (ph).

I'm just wondering about those big banks that were with Fidelity, and Fidelity was going to stop supporting that trust system. Are any of those banks still up for grabs, or has all that been sort of sorted out?

There were initially 11 banks that fell into that category, and three or four of them have not yet made a decision as to what they are going to do.

Is there a timeline by which they would make a decision?

I think the straightforward answer to that is no. As I understand it, Fidelity has agreed to provide support to that platform through the end of their current contracts, those banks' current contracts. But at least one bank, Bank of America, has decided to support the application in-house.

So there's still three or four that you could have a shot at?

Yes.

Tom McCrohan, Janney Montgomery Scott.

Given that the revenues in the private banking was a little bit below your prior guidance, at what level would the quarterly run rate need to be at before you will attack the expense base maybe a little more aggressively, i.e., maybe realigning expenses to better meet a lower kind of revenue run rate?

Could you say that again? I'm having a little bit of a difficult time understanding the question.

Sure. Quarterly run rate and revenues for the private peer (ph) segment was a little bit lower than, I think, prior guidance that you provided. So at what level does the revenue need to drop to before you attack expenses a little more aggressively?

We are aggressive about expenses 24/7. And we expect revenue in the mid-term to start to grow again.

Robert Lee, KBW.

I guess this is probably more of a suggestion of a request, maybe. Bob, I know you often talk about the ASP/BSP in the context of revenue per account. Would it be possible to start getting what the account base is quarter to quarter, so that may be a handy way for us to track your progress in migrating people to a BSP platform?

I'll check into that. I think that we probably can do that.

There are no further questions at this time. Please continue.

Our second segment is Investment Advisors. Dennis McGonigle will cover this section.

Thanks, Al. Hello, everyone. I will briefly review the financial results and business activities for the Advisors segment for the third quarter. Revenues and profits for the third quarter increased 15.5% and 16%, respectively, from the year-ago period. These increases were primarily driven by an increase in the average assets under management for the quarter to 32.5 billion compared with 28.9 billion in the year-ago period, an increase driven largely by market appreciation. Margins also improved slightly year-to-year.

Net asset flows for the quarter showed a slight uptick, with approximately 1.5 billion of inflows outweighing 1.4 billion in outflows. As is typically the case, our top 200 advisory firms were the most productive segment of Advisors with approximately 300 million in positive net asset flows in the quarter. We continue to focus on improving net asset flows by concentrating on reducing redemption rates during these difficult capital market conditions. We are also progressing in our efforts to position SEI and our advisory partners and are developing wealth industries. We continue to be on track with respect to our target of having 8 to 10 early adopters of our franchise SEI wealth network offerings by year end, and things are progressing well with the trial by 10 advisors of our new system partnership model, which we expect to roll out before year end.

We also continued during the third quarter a series of initiatives aimed at repositioning our advisors as more comprehensive wealth advisors. As part of these efforts, we are continuing the phase rollout of our SEI Advisor desktop technology. This technology is an early version of the front end of the Global Wealth platform and includes third-party data aggregation. We expect that all of our select advisors and the next segment of key advisors will be on this system by year end. We are progressing in our efforts to act carefully in selecting new advisors to our distribution network and have a growing pipeline in this regard.

And with that, I will take any questions you might have.

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

I'm just curious. I mean, in looking at revenue growth comparing it to growth in assets, the last three quarters and, I think, actually for '04, revenue has been growing at a somewhat faster rate than assets under management. Can you talk a little bit about what may be driving that? If I calculate a fee realization rate, it looks like it has been trending up for more or less for the last five, six, seven quarters. Is there something else playing into the mix? Is there a change in the product mix? What may be responsible for that?

There is both a -- it's probably a little bit of a change in the product mix, which is garnering for us a little bit higher net fees out of our products but also which would include further expansion of our separate accounts program and growth there.

And the separate account program has a higher fee for you, relative to a fund platform?

Yes.

(OPERATOR INSTRUCTIONS). Joel Kanusku (ph), Janney Montgomery Scott.

I was just wondering if you had signed any additional advisors during the third quarter that you can tell us at this time? I'm sorry, to the wealth network program.

I've talked to Carl about that. The third quarter, we probably didn't sign too many new advisors, because we really were starting the first half of the year with a high focused look at our existing advisors and rebuilding not only are relationships with some of those folks but also getting them more productive. Third quarter, we did put more energy into new advisor generation, if you will. I think Carl would say that that's something that will continue going forward, and we would expect more new advisor signings. But, as he has said in the past, the number of advisors in total is really less important to us than the quality of advisors, so we will be a little more selective in that process.

And there are no 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. The advance (ph) results for the quarter continue to show significant growth compared to the year-ago period. Revenues increased 22% and profits increased 20% for the third quarter compared to the third quarter of 2004. New client funding and positive capital market appreciation fueled both revenue and profit growth. Margins for the segment of 44% were comparable to the year-ago period. Quarter-end balances approached $23 billion, reflecting a $2 billion increase compared to the third quarter of last year.

New client funding for the third quarter was offset by several client losses. However, asset balances did increase by $550 million during the quarter, due to market appreciation. We developed a solid backlog of committed but unfunded sales, totaling 1.5 billion at the end of the quarter.

Increasingly, financial executives are recognizing the importance of aligning corporate finance and pension finance. With PensionConnect 360, SEI has been recognized as a leader in delivering a complete pension management solution enabling plan sponsors to better understand and manage all aspects of their pension plan. Sales activity and client acceptance of our PensionConnect 360 outsourcing solution continues to grow. New client sales for the quarter totaled $1.5 billion. As we look ahead, the pipeline is solid and we're encouraged by both the asset size and the number of prospects that we are actively pursuing.

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

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

In terms of the client losses, naturally we are interested in anything unique there. And then, obviously, a lot of press about underfunded pensions, failing pensions, pressure on the guarantee fund, et cetera. I assume that those are all points of discretion for you all with clients, et cetera. Is that true?

Yes, it is true. The work that we have done over the last probably 18 months or two years in developing capabilities to understand the impact that pension finance is having on corporate finances and put strategies in place to manage that has been very effective for our clients. It's also very attractive for prospective clients. So I guess I would also jog your memory. It's that work that we did where we were recognized for having that expertise by PBGC. So they have looked to us to help them to really do some analysis of some potential legislative changes, regulatory changes.

And then the client losses in the quarter?

The client losses were really kind of minimal. It was $219 million -- there were a couple of clients that, when you talk about PBGC, there were a couple of companies that had been taken -- (indiscernible) gone bankrupt, and the plan had been taken over by PBGC. Once we get notification, that doesn't always happen right away; there's typically a delay. But they did come off the books during the quarter.

Robert Lee, KBW.

I'm just curious. I guess my one impression of the segment has been that, out of all the segments, it's probably the one that is the least involved in all the new business initiatives and platforms being built. So I am sort of curious why you have had operating and development expenses that are sort of growing at a pretty similar clip if you just look at margin year over year to revenues. Is there just more buildout in this business taking place? Is there an ability as you grow this to actually maybe scale it some more, or is margin pretty much as good as it's going to get?

If you were to look at our operating and development, there's a couple of things that do go on there. There are some operating expenses that are definitely -- there's a relationship between our sales success and those expenses going up. So the solicitor piece that we pay for referrals -- the more that we're successful in getting referrals, that has increased during this particular period of time. The commission costs, okay, have also increased during this particular period of time. And for some of our not-for-profit clients, we have social responsibility where we have brought on some new portfolios, and the separate account manager fees are also there. And so it's related to volume.

Now, I would not want you to -- I would also want you to understand that there is a portion of the overall corporate platform development expenses that we're incurring as well in this particular segment.

And maybe a quick follow-up, similar to my last question, I guess. You did have revenue grow at a somewhat faster clip than average assets or assets grew in the quarter. Was there anything in the revenue line item that we should think about as being sort of nonrecurring or one-time or maybe some changes? Are we seeing an upward movement in sort of the fee rate, if you will?

No, I would not say that we're seeing an upward rate in the overall fees. I think one of the things, though, that has occurred -- there's really been a transition of the assets from some of the shorter-term treasury point assets to the longer-term retirement assets. So the retirement assets during this period grew by $4 billion, and the treasury assets declined by 1 billion. So the net up was 3 billion. But the mix of those assets was different, so it was moving from a lower fee to a higher fee.

And we have no further questions in queue. Please continue.

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

Thanks, Al. In the third quarter, we exhibited strong revenue growth, continued the installation of the large volume of separately managed account business we sold in the first quarter, and continued to enjoy new business success. For the quarter, revenues totaled $22.7 million, an 11% increase from the same quarter in 2004 and a 7% increase from the second quarter of 2005. Our quarterly profit of $3.4 million was essentially flat from last quarter, but represented a 6% decline from the third quarter of 2004. As was the case last quarter, reinvestments were a major contributor to this decline.

New businesses sales events for the quarter totaled an estimated $3 million in annualized revenue. New business was split about 60/40 between our hedge funds and mutual fund solutions.

Now, one final comment I would like to make about the quarter concerns the quality of our grow. In and of itself, our revenue growth is rewarding. However, the bigger story is that we continue to make progress in our journey to change our business from one where we offer product-specific outsourcing solutions to a business offering total operational outsourcing to money management firms. This migration is built upon our historical capabilities in the mutual fund and hedge fund outsourcing businesses. We began the migration in 2003, when we built our separately managed account solutions and then went live with our first client in December of that year.

In this quarter, we have reached another milestone in that all of our current solutions, including our newest capability in separately managed accounts, made significant contributions to our revenue growth. In the future, we hope to continue to grow all three of these solutions and to integrate them into a broader total operational outsourcing solution.

In summary, we had a good sales quarter. Our pipeline remains strong, and we continue to make progress with our strategic vision.

I will now entertain questions.

Tom McCrohan, Janney Montgomery Scott.

Just a quick question on the topic we talked about in the past, the Money Managers segment, the segment you run seems to be a faster growing segment within the Company, but has lower profit margins because I believe you've said that it's kind of scale mode, where you're kind of building scale. Can you just give us some color on what are the dimensions of scale you're looking for? Is it assets under management that's going to drive scale in this business, or is it kind of the number of accounts? Or does it vary by the three kind of businesses that comprise your segment?

As with any of our businesses, we seek to be in solutions where we can achieve scale and meet the benefits of scale. So I would say in all these businesses we think are business that we can scale and grow. The scale dynamics of all three of these businesses are different. Now, that having been sad, I think that the third quarter probably represents a low point in margins for this business.

When do you think you'll reach the scale that you need for these three businesses?

I guess I have two answers to it. With (indiscernible) business, we are continuing -- we don't think we ever reach the scale we would like to achieve. We are currently trying to achieve greater and greater scale. And as I said previously, I think, starting from the third quarter and going forward, I would expect to see modest improvements in the scale of this business going forward.

Maybe I'll just ask it another way. Once you do achieve kind of more scale in this business, can we expect the margins to reach 30%, 40%, similar to margins that we see in the other business segments?

I don't think I'm going to give you a specific margin calculation. I will say I expect expansion in the margins of this business going forward from today.

Jeff Hopson, A.G. Edwards.

It sounds like in the quarter there were higher expenses related to conversion activity, as opposed to ongoing development. Is that fair? Just trying to get at the margin issue, I guess.

There were clearly some expenses associated with conversion, but a lot of the reinvestments were in new platforms and new operational infrastructures.

And some of that will continue to be invested upon in the future, as opposed to a bulge in this quarter?

This is not a bulge. It will bounce up and down from quarter to quarter.

Carla Cooper, Robert W. Baird.

I guess another way to come at the question -- could you comment on pricing?

We have not seen a dramatic change in pricing.

And then, does the 60/40 mix -- that was, I guess, 60/40, so 60% hedge, 40% mutual fund. My, I guess, suspicion is that that's got more mutual funds in it than maybe it did in the past. Is that right, or has that been kind of the mix that you've seen persist for the last several quarters?

That is approximately the same mix we had last quarter but is more heavily weighted towards mutual funds then it had been, prior to that quarter.

And we have no more questions in queue at this time. Please continue.

Our fifth and final segment is Investment in New Businesses. 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, as usual, a focus on our global business. Revenue and assets within the segment continue to grow. Revenue of $28 million in the quarter has grown by 3% from the previous quarter and 49% from the year-ago quarter. During the third quarter, average assets under management were $17.9 billion versus 18.6 billion in the second quarter, with a backlog of committed by unfunded institutional sales of approximately $300 million.

May I remind you that in July, we lost a large distributor client that accounted for approximately $3 billion in assets and $2 million in quarterly revenue but with a low impact on margin. For the second quarter, the bottom line improved by $600,000 to a loss of $4.1 million. In our global enterprise business, assets under management now total over $8.2 billion from over 140 clients, including our first institutional client in the Netherlands, Interpay, a $320 million defined benefit pensions plan.

Also during the quarter, we doubled our assets for the Hong Kong Jockey Club to approximately $300 million. In our global advisor business, our assets under management now total 3.7 billion. During the quarter, we lost a distribution relationship with Canada Life in Ireland, and we also signed our first UK Life and Wealth client.

In our global private banking business, assets under management now total over $3.4 billion. This accounts for the mentioned $3 billion loss, which has been partially offset by an increase of over $700 million to other distribution partnerships. Our pipeline of new distribution relationships is strong worldwide. The Global Wealth platform implementation plan that Al mentioned is a change from what we were most recently planning. We were working to convert a significant UK private bank as our first client, but we are no longer moving forward with that prospect. Instead, we will take our original less risky approach by converting our existing investment and program-specific BSP clients first, as we seek to build the pipeline and begin converting other UK and European private banks. We have recently received strong interest from a number of UK and European banks in our offering and feel good about our potential in the UK and European markets.

In summary, our global asset management business continues to gain momentum, as we invest in new market opportunities such as the launch of the wealth management business services solution in the UK and Europe.

Any questions?

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

Can you give us maybe a little bit more color on that change, where you talked about no longer speaking with the UK private bank? I just want to make sure I understand what -- was this a decision on your part that the business didn't make sense? Was it a mutual decision, decision on their part? And how does this impact expenses going forward? Is this sort of a good run rate? I'm just trying to get a feel for what happened and why the change of strategy.

We always planned to first implement the new platform in Europe first, and we initially expected to convert our current private banking clients that are currently running on Trust 3000 in Europe, followed by a few small to mid-sized UK/European private banks as the first new clients on the platform. But in the middle of 2004, we were approached by a large UK bank that was interested in outsourcing their private banking infrastructure to SEI on our new platform.

After several months of discussions, we are no longer proceeding with that opportunity, really based on a change of business strategy at the bank. So we've returned to our original plan of converting our current private client base while we seek to build the pipeline. And I would repeat that I am very optimistic about our potential in the UK and European markets.

With regard to your question about expenses, I think Al had mentioned and I had mentioned in previous calls that we would not anticipate ramping up the expenses associated with building out an operational infrastructure for something like six to nine months prior to an implementation of a bank here in Europe. And so, again, once we get closer to getting a large bank, then we would probably see an increase in expenses.

Carla Cooper, Robert W. Baird.

Rob asked my question. Thanks.

(OPERATOR INSTRUCTIONS). Glenn Greene, ThinkEquity Partners.

This may be a question for Dennis, but it relates to the capitalized software and when you're going to begin to start amortizing that software. And, given the fact that the change with the UK bank -- does it have any implications for the timing of when you would start to amortize that software or the fact that you're going to start to convert the US banks? Does that start this process?

We are still pretty consistent with where we were in the past, which is we would not expect to see too much in the form of amortization until the latter part of next year, as we start to bring these pieces of business onto the platform and get through what we would consider a pretty healthy beta process.

So would converting a US bank trigger that?

It could trigger for (indiscernible). This platform has been built in a very componentized manner. So it really would be -- what we would bring online in terms of amortization is those components that are already (ph) fully developed, operational and being used in our day-to-day business.

As we get closer to that, we will provide, I'd say, more specific information on that so you all can slot that in (ph).

Tom McCrohan, Janney Montgomery Scott.

Dennis, I have another question for you regarding stock options. You have disclosed in the 10-Q, obviously, that kind of the pro forma impact of stock options. I don't believe you expense them today. Has there been any changes to compensation programs or the outstanding vesting of -- or the vesting or acceleration of vesting of any outstanding options internally to reduce the impact of option expensing when the new rules require you to expense options?

I guess the quickest answer is no, there has not been any change in our thoughts on, frankly, compensation as a component of our compensation strategies (indiscernible), number one. Number two, FAS 123(R), as you know, becomes effective for us in the first quarter of next year. And we are looking at all of our different options leading up to that second piece. But there's no news to report there.

And are no further questions. Please continue.

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

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about the third quarter. The third quarter cash flow from operations was 76.5 million or $0.74 per share. Third-quarter free cash flow was 53.7 million or $0.52 per share. And the year-to-date cash flow from operations is 143 million.

Third-quarter capital expenditures, 3.8 million; and third-quarter depreciation, 4 million; third-quarter amortization, 740,000. Now, additional expected capital expenditures for 2005, which would exclude capitalized software, is about 4 million. We did start to expand our facilities, but the bulk of these expenditures will be next year. The accounts payable balance on 9/30 was 6.2 million.

We also would 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 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.

If you have any other questions, we would be glad to take them at this time.

(OPERATOR INSTRUCTIONS). Chris Arndt, Select Equity.

If I could follow up with a question to Joe on the international side, perhaps I missed it. But Joe, could you just explain or frame the opportunity now for selling the new system into potential European clients, now that you are not focusing on the large UK client that you had focused before?

Well, as I mentioned, we continue to build our pipeline, and we're talking to a number of institutions in the UK and Europe. I think I mentioned at the June analyst conference in Oaks that there are probably 2,000 European-based banks that we consider prospects. And so we are obviously talking to a number of those organizations, and we think that we have a unique and an interesting solution that over time many will be interested in.

And can you characterize the stage at which you are talking? Is this demonstrating product to them, or is this talking about what the product is? Can you provide any more detail on that?

It's in discussion with the services that we offer matching the needs of these organizations as they look to either reduce expenses in the back office or, a bit more importantly, really, install a new infrastructure to grow and build their businesses.

Jack Spears, Capstone.

I would like to understand what percent of software expense you're capitalizing? What is the gross number? Because you capitalize an awful lot right now. Is it like 70% of software expense, or what is it?

I had mentioned that 75% is what we capitalized. It was $17.2 million of capitalization in the third quarter.

And could you talk about your relationship with LSV? It has become such a big component to profitability. Where is it going to go from here? Are you at all concerned it's such a material part of profits and it's an unaffiliated subsidiary?

No, our relationship with LSV is very good and very tight, and we are very close to them. They are not part of our strategy, other than being one of our managers that we do use. And they have a wonderful track record and continue to see tremendous success in the marketplace. But I don't know what I can say, other than that. We have a very good relationship with them.

Would you possibly sell your interest, or would they possibly buy out your interest?

We have those discussions from time to time, and we foresee no change in either one of those big events of them buying us or us buying them in, certainly, the near future and even beyond.

Carla Cooper, Robert W. Baird.

Good afternoon. Back to Joe. Joe, could you just -- I'm not sure I understand how the expense ramp in the business may change, given the change in decision. Could you talk a little bit more about the sales expense that you'll incur, I guess, going after or migrating the number of clients that you have on Trust 3000 over versus what you were going to spend trying to migrate, convert the big UK client?

Sure. Again, I think that what our plan to do is to initially use the new platform in place of Trust 3000 in the current operation we have here in London to move some of our current clients over. So we're not talking about initially is the creation of a significant regional operating center in London or in Europe to support a large external bank with tens of thousands of accounts. So we would see a more iterative approach to move the business that we have today onto the new platform and then ultimately build out a larger operation as needed.

So the operating loss in the segment, New Business, has continually been stepping down, then it would be fair to look at that as a trend as opposed to a big change?

Well, there's a number of things that contribute to the P&L of the segment. It's not just our global business here. This also includes some of the initiatives we have in the life and wealth or the ultra high net worth or high net worth client space. And certainly there are other markets that over time we will enter. So I think what we have said in the past is that we would consider this to sort of be bumpy for a while, and we will continue to invest going forward.

Robert Lee, KBW.

I have a couple of questions, actually, for Joe. You had discussed in the past about the Swiss private banks, I think, being a potential market that you thought would be attractive for your offering. It's a market that has seen a fair amount of M&A activity, some consolidation, IPOs, IPO, some other things. Do you still view that as fertile ground, or is there too much other noise that makes you think that that's somewhere in the distant future? How does that, if at all, change your strategic plans in Europe?

We continue to think there's a significant opportunity for us in the UK and on the continent and including Switzerland. As you know, it's one of the largest private banking markets, if not the largest private banking market in the world. And the issues that those banks are facing are similar to the issues we see at other banks worldwide. So there are fairly extensive infrastructures to support those organizations, more demanding clients, continually more and more competition. And so we think that Switzerland is clearly an important market for us going forward.

Maybe this is really a follow-up to an earlier question. In the New Business segment, I have a little difficulty trying to get at specifically which businesses are really driving the strong revenue growth you have had there. And as you've said, you've got New Business initiatives in Europe, in the US, all kinds of things flowing through there. So possibly give a little bit more transparency into -- if you had to sort of broadly characterize two or three main drivers of revenue in that business the last year, what would they be? Which businesses would they be?

I have mentioned this a couple of times. I think that the businesses that we entered five or longer years ago, things like the enterprise business in Canada and/or the UK -- we are starting to see much more predictable growth in those businesses. And those businesses are clearly adding profit. I think that some of the distribution business with banks that we have secured over the last couple of years -- again, those businesses seem to be going very well, and they are contributing to money that we have spent in investing going forward to enter new markets.

And how about some of the new business? It's also your beta test there for, I believe, your high net worth business. Is that really inconsequential in the growth there? Is there actually more going on there then it would seem?

I think we are still with ultra high net worth or high net worth individuals who are still in very early stages of testing our strategies, and they are not really contributing to the growth.

Susan McGarry, Granahan Investments.

This is a question for Al. You mentioned a couple milestones in your introductory comments, but I was wondering if you could just review your milestones for the new system over the next 18 months in Europe and in the US, in terms of clients coming on the new platform.

Well, what I mentioned in my earlier remarks was that in the first half of next year, we would be converting the existing global clients that are already clients of ours in BSP and investments, and then we would start working that pipeline. And so European clients after that we would have to be selling and converting.

Then I also said that we were hopeful to, in the second half of the year, to select and move at least one of our banks, US banks, and then by that time have a pipeline of those that wanted to come onto this new platform, and we would start from there.

So call the US six to eight months behind Europe. We're building for Europe first and then building it for the US. As Joe mentioned, our ramp-up and operational ramp-up and infrastructure ramp-up, because we're not looking at that very large UK bank, is a lot smaller and much more incremental, and the whole operation is a lower risk at this point.

(OPERATOR INSTRUCTIONS). Glenn Greene, ThinkEquity Partners.

Back onto the UK bank that decided not to go with sort of the new platform (technical difficulty) question of price? They are going to a different platform? They want to stay in-house? I'm just trying to get a sense for a little bit more on what happened there.

It was a change in -- we don't like to comment too much on individual prospect or client situations, but it was really a change in strategy at the bank that was triggered by a change in management. But we are very confident that our solution is appropriate to the market, and we see a strong pipeline developing, and we believe that this is a great opportunity for us in the UK and Europe.

I might add that the decision was not due to our capabilities or our solutions.

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

So thank you all very much. Kind of in summary, our quarterly results this quarter were fairly strong, aided by a few things. Market appreciation certainly helped. So did the continued strong performance of LSV, as did our cost control efforts. And you also heard of our transforming efforts in many of our other segments. Now, the confluence of everything together doesn't mean that this is necessarily an indicator for fourth quarter or future results. As you also know, we are focused on the long run; we've got a big job to do there. And that's what we look at first. At the same time, in the short run, we are trying to save money, control our costs and continue to grow our revenues and profits. And we are very, very, very excited about what we are building, and we continue to get positive feedback from the market.

And I would like to leave you with the same three things that I like to leave you with. First, you have heard about our -- and don't hang up now -- you have heard of our market acceptance is very positive, and it does continue to encourage us that we are on the right path.

Second, as we look ahead, our new solutions and our strategies, our recurrent revenue model, our strong cash flow, our operational leverage as well as the portfolio of markets that we are dealing in 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. We have moved into that, and our clients, new clients, do business with us because we're solving fundamental business issues for them and making their businesses and, for individuals, their lives better. It's a very high value-added proposition, and it does differentiate us from our competition. And we believe it will serve us very well in the future.

So I thank you very much for your attention today, and good afternoon. Thank you very much.

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