SEI Investments Co (SEIC) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to SEI Investments' fourth-quarter earnings conference call.

Now, during our meeting, we will have all phone lines muted or in a listen-only mode. However, we will pause several times throughout the presentation to take questions. (OPERATOR INSTRUCTIONS). As a reminder, today's conference call is being recorded.

I'd now like to introduce our host, CEO and Chairman for SEI Investments, Mr. Al West. Please go ahead, sir.

Thank you. Welcome, everybody, and good afternoon. With me today are all of our segment leaders, as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller.

Now, I'm going to start by recapping the fourth quarter of 2005 and then cover 2005 as a whole. I will then turn it over to each one of the business segment leaders to comment on the results for their segments, and then I will turn it over to Dennis to first bring you up-to-date with some segment reorganizations we are making which became effective 1-1-06, and second, to relate a change in our reporting of LSV, and I will remind you, that's our investment management affiliate. Third, Dennis will address the beginning of expensing stock options. Then finally, Kathy Heilig will provide you with some important company-wide statistics. Now, as usual, we will field questions at the end of each report.

So, let me start with the fourth quarter. Fourth-quarter earnings grew 19% from a year ago on revenue growth of 11%. Diluted earnings per share of $0.50 represents growth of 22% over the $0.41 reported for the fourth quarter of 2004.

Now, for the year 2005, earnings were up 11% on revenue growth of 12%. Our EPS of $1.83 was up 14% over the $1.60 reported in 2004. Revenue growth for the quarter was a result of higher Assets Under Management -- mostly as a result of higher Assets Under Management. Our non-cash asset balances grew by $9.1 billion during the quarter. Now, this growth was due to a combination of new assets and market appreciation. Most of the growth was due to new assets, because a 60/40 portfolio was only up 1.9% during the quarter. Now, of this, about 38% of our asset growth was generated by LSV, again our investment management affiliate.

One event did have a negative effect on profitability. We had one-time settlement of a dispute with a software vendor that caused the $4.25 million charge to earnings, and this event was previously reported to you.

Now, during the quarter, we repurchased close to 910,000 shares of stock at an average price of about $38.50 per share. For the year, we have repurchased over 4.4 million shares at an average price of just under $37 per share. In the fourth quarter, that translates to $35 million of stock repurchases and for the year, $164 million worth of stock repurchases.

While we are satisfied with the quarter's results, 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 transforming our company from one that is product-and-services based to one that is solution-based. 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 are confident that these 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're beginning to employ. 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 our new business model.

The acceptance of our new solutions and transformation strategy is beginning to be validated in new business activities, and you'll hear more about this in our segment reports. We are making three interrelated investments. First, we're building a life and wealth client process, which is the basis for all of our new individual investor client processes. Second, we are investing in the global wealth platform which undergirds all of our client processes throughout the world. Finally, we will also build the operational and service infrastructure to handle clients on the new platform. 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; it makes possible our entry into the large European private bank market; and it facilitates stepping the U.S. national bank market from ASP to the larger business of providing BSP services. Finally, the platform will be used by all our registered investment advisor clients. The status of this development effort continues to be on track.

Now, during the first, second, third and fourth quarters of this year, we capitalized 15.9, 16.9, 17.2, and $17.6 million respectively for a 2005 total of $67.6 million. Now, we expect the quarterly level of capitalization to level out now and eventually trend down, certainly as a percentage of revenue. As a reminder, the capitalized portion of our development expenditures on these projects runs around 75% of the full expenditures, the remainder hitting our P&L spread amongst our segments, the largest portions going to Private Banking & Trust, investment in new businesses, and advisor.

We plan to implement the new platform this 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 been growing. Also, in the second half of this year, we hope to convert a U.S. bank and begin to work through the U.S. pipeline of prospects as well.

We are certain that the investment we're making will transform our company. They will give us even larger markets to growth within and provide exciting new solutions to deliver to our market. At the same time, please 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.

Now, before I turn it over to our segment heads, I want to announce that our investor day will be the 21st of June with a dinner the night before on the 20th. We will share our strategy and update you on the progress of the transformation of our businesses and the investments we're making. And please save the dates.

That concludes my remarks and I thank you for your attention. I'd like now to move to our segments, and we will report our segment in the following order -- Private Banking & Trust will be reported by Bob Crudup; Investment Advisors will be reported by Wayne Withrow. Carl Guarino, who previously reported on Investment Advisors is leaving the company, as we announced at the end of last year. Wayne, who previously ran our Money Managers segment, has taken over from Carl. Now, Carl is here with us and is available to answer your questions. Enterprises will be reported by Ed Loughlin, as usual; then Money Managers with be reported by Steve Meyer, who has taken over as head of the Money Managers segment from Wayne Withrow. Steve has been with the Company 13 years and has previously run sales and operations in the Money Managers segment and has been instrumental in their success over the last few years. Finally, investments in new businesses will be reported by Joe Ujobai, as usual.

So, we will now start with Private Banking & Trust. I'm going to turn it over to Bob Crudup to discuss results in this segment.

Thanks, Al, and good afternoon, everyone.

I will start by recapping in the year, then discuss the fourth quarter and finish with new business activity.

For Private Banking & Trust, 2005 was very rewarding as our new BSP solution met with great success and somewhat challenging as we absorb lost business. All in all, I am confident in our future, as we believe our strategy is very much on track. As you know, we won significant new investment processing business during 2004. The resulting new revenues for SunTrust, Harris, HSBC and several smaller banks all came online in 2005. Unfortunately, 2004 losses in fund services as well as revenue lost associated with the Fleet acquisition, kept revenues flat quarter-to-quarter for most of the year. The Harris and HSBC wins as well as selected outsourcing sales to SunTrust, National City, and others gave our new BSP solution a very strong market validation. We are extremely pleased to see large banks buy this solution.

Annualized recurring BSP revenue grew 39% when looking at it year-over-year on the fourth-quarter run-rate. As predicted, we increased investments in the TRUST 3000 ASP platform, as well as investments in the new global wealth platform, and expenses grew faster than revenues throughout 2005. As a result, in total, PB&T annual revenues were down 3% with profits lost just over 12. The quarterly results were very similar with revenues off 3% and profits down about 13. We intend to continue investing in these platforms during 2006. Our success in the market with the BSP solution and our BSP selected outsourcing, encourages us to do so.

Sales against this quarter slightly improved to about 3 million in annual recurring revenue. Some event highlights to note are a new name, large community client as well as SunTrust adding another significant BSP selected outsourcing service. All of this progress gives us confidence as the market continues to confirm our BSP strategy. In fact, larger and larger institutions are joining our BSP client list, which now totals about 95 banks. Our largest customers are embracing our selected outsourcing solutions. Among our 10 largest banks, they are consuming some 11 selected BSP outsource offerings. Their willingness to outsource bodes well for our long-term future.

Finally, as Al discussed, we look forward to the delivery of the new platform that will support our BSP business. Its scalability and the market-leading services it will allow us to provide will, I believe, give us very significant competitive advantage in the market and thus speed up the sales and adoption of our BSP solution.

If you have questions, I am happy to answer them.

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

Bob, a few questions here -- maybe since you're taking the lead in terms of the new platform, what's the timing as far as the delivery of your aspect of that? What type of discussions are you having right now in regard to the delivery of that platform? Any change in the competitive environment right now? Can you kind of tell us what is happening out there with competitors?

Okay, as you know, Jeff, for a couple of years now, we've been positioning our investment processing business here in the United States around BSP services. So when we are in the market today, we're talking about the services that we are offering, so we're not really speaking to the technology as much as we are speaking about the services.

What the new platform will allow us to do is to offer some significant improvement in the kinds of services we deliver to our clients and allow them to more effectively service their clients. We are in the market today with that story around services.

Competition seems to be sort of status quo. I don't think the competitive environment has changed very much in the last year and we certainly are the market leader in BSP services and are the provider in the market that is outfront talking about these services.

Jeff, this is Al West. You mentioned that Bob was taking or PB&T was taking the lead on the new platform. That's not the case. It is the global PB&T that's taking the lead. So, the first clients that we will put up will be global clients. If you recall, we are doing that because the platform or the components of the platform we brought were a more global platform than we have been [U.S.-tizing], if you will, as one of our big efforts. We will -- (technical difficulty) -- global up first.

If I could follow up with Bob on the SunTrust, can he describe what the additional piece that they are outsourcing to you?

Yes. Some fund accounting services for their common collective funds is what the piece of business that we won this past quarter was.

Okay, thank you.

They also use our mutual fund processing pullback office service.

Robert Lee, KBW.

Good afternoon, Bob. Two questions -- the first one is could you maybe give us a little bit more color on why you are so optimistic about the outlook going forward? I mean, the 3 million in recurring revenue in the quarter, while I guess an improvement from the last quarter or so, you still haven't signed any big -- didn't really sign any big clients this past year. It still seems like there is a little bit of an issue of getting reasonable-sized new clients to sign on. Are you seeing the people getting closer to making decisions than they were? Is it environmental? Then I just have one quick follow-up.

Yes, you know, Jeff, we define the pipeline as the number of banks that we are in an active sales process with, and that hasn't changed significantly, but as I said in the past, that the time to close business has extended quite a bit and as I said in my remarks, I believe the new services that we're going to be able to provide on the new platform will allow us to pick activities in the market up.

Okay. The last thing is really more of a request than it is I guess a question, but I mean, in your presentations, you know, you always talked about how if you migrate clients from an ASP to a BSP or a complete outsource solution, how the revenue I guess you always presented on a per-account basis and it goes up fairly dramatically. In order for us to maybe track that, is it at all possible to, either historically or going forward, to sort of get more sort of the number of accounts if that's the right metric that you service, so we can actually sort of track the progress over time? I think that would be real helpful.

Yes, we will do that for you when you are back here in June.

Glenn Greene, ThinkEquity Partners.

Bob, first question, I just wanted to make sure -- did you get a full-quarter benefit from Harris and HSBC in the quarter? Meaning they converted at the tail end of the third quarter, I thought.

Yes. If memory serves me, one of them we got full benefit for the quarter and the other one came in like mid-quarter.

You don't know which was which, do you?

Yes, HSBC came on first.

Okay. Just an update on the A.M. Trust pipeline?

Yes, you know, as we talked before, there's three large banks out there that we consider big prospects for our platform that are currently running on the A.M. Trust platform. None of those banks have made decisions, and we still consider them to be prospects.

Then finally, the operating margin on an operating profitability, the segment improved pretty significantly sequentially, even with absorbing I guess the 1.8 million litigation expense. You know, almost like it looked like the revenue ramp you had sequentially, all of it went to profitability. I was just wondering if you could help me understand the margin ramp this quarter and somewhat how to think about going forward your thoughts on '06.

Yes, you know, as I said in the past, we, over the near term, we expect this business to form around the mid-30s in margins but that, over time, as we continue to add clients, that scale should benefit us over the long term.

Okay, so no help on your thinking on how this may trend in '06? I mean, you've talked about before that revenue has hit a bottom and it looks like it has, and now you're profitability, at least for one quarter, has gone in a favorable direction. You know, should we continue to see a ramp in margins from here?

Well, I think I'm going to go back to what I said. You know, we expect this business to perform in the mid 30s, but that over time, scale will benefit us and we should see margin growth over the long term.

We have no further questions at this time.

Thank you. Our second segment is Investment Advisors, and Wayne Withrow will cover the segment. Wayne?

Thanks, Al. I will briefly review the fourth-quarter financial results for the Advisors segment and then comment on our Advisor business as a whole as we enter 2006.

Revenues and profits for the fourth quarter increased 13% and 12.5% respectively from the year-ago period. These increases were primarily driven by an increase in average assets under management for the quarter to 32.9 billion, compared with 30.3 billion in the year-ago period. Margins continue to be strong. Net cash flows for the quarter were essentially flat with gross sales of 1.4 billion in the quarter offset by comparable redemptions.

As we enter 2006, our growth strategy for the Advisor business has four key elements. First, our key advisor focus -- we've concentrated efforts on our largest advisory relationships. We are seeing positive results from this focus, as our top 200 advisory firms produced $200 million in positive net asset flow in the fourth quarter and almost $1 billion for all of 2005.

Reducing redemptions -- we continue to focus on improving net asset flows by concentrating on reducing redemption rates. Beginning in 2005, we launched several initiatives to address redemptions. We have stepped up communication to advisors and end-client around investments. We launched an account-backed lending program to allow investors to address their cash needs without having to redeem investments. We heightened SEI's touch with second and third-tier advisors by increasing the size our sales force and initiating broader-based communication efforts. We expect to continue and enhance these efforts in 2006.

Third, signing new advisors -- we renewed efforts in 2005 aimed at signing new advisory firms and expect to focus additional resources to this effort in 2006.

Fourth, comprehensive business platform -- our focus on broadening SEI's business platform to enable advisors to successfully meet the emerging needs of affluent baby boomers has taken two forms. First, our core adviser offering -- we made important strides in 2005 to introduce a broader set of capabilities throughout our advisor network. Our new goal-based investment strategies now have over $2.5 billion in assets under management. As described earlier, we introduced account-based lending through a partner bank. We began the phased roll-out of our SEI Advisor desktop technology. This technology is an early version of the front end of the global wealth platform and includes features such as electronic forms and data aggregation. Second, our [worth] network franchise -- our comprehensive franchise approach to high net worth boomers was introduced in late 2004 and achieved our initial milestone of eight early adopter advisors by year-end, 2005. Along with a network offering through a community bank and our own company-franchised store in Boston, we now have ten outlets in which to develop this new wealth business. Now that we have our initial outlet, our focus in 2006 will be on proving out our model with less emphasis on signing up additional network members in the near term.

Advisors on these two platforms choose to enter into fundamentally different business relationships with SEI. Those in the wealth network have a business deeply intertwined with SEI. They partner with SEI for many activities, including adoption of a single, uniform end-to-end client process and use of a common end-client solution set. They have also agreed to share revenue with SEI. Core advisors, on the other hand, enter into a more traditional relationship where there are separate fee structures and they have more discretion over the end client process and end client deliverables. Accordingly, these two groups seek different services from SEI. In order to achieve focus on each of these efforts and in recognition of their different needs, we are separating the wealth network franchise from the traditional advisor base in 2006. Going forward, our advisor base SEI wealth network business will be consolidated with other wealth initiatives and reported in our new business segment, while our core adviser business will continue to be reported in the Advisors segment.

I will now entertain questions.

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

Just a real fast question -- if I look at revenue growth in the segment for the full year, it seems like it's been running ahead of the growth in assets under management or average assets under management, if my numbers are correct. Is there some type of mix that's been taking place? Is it becoming a little less tied to asset levels? Is there more revenues flowing through there that are related to, I don't know, accounts or processes or something? How should we be connecting the two?

okay, Rob, the fees are still asset-based, but the margins on different programs can differ, so what you're seeing reflected there is a shift in some cases to some higher-fee programs.

Okay. That was it. Thanks.

We have no further questions at this time. Excuse me, we do have a question from the line of Jeff Hopson, A.G. Edwards.

Wayne, you mentioned increased communication with your second and third-tier advisors. Can you expand on that a little bit and maybe talk about the flows from those advisors versus what I think might be a fourth tier of those advisors that have been frozen over time?

Okay. Well, the overall communication, increasing communication with the advisors is primarily around programs that bring them into SEI so we can get our message out to them, increased outbound phone support for them, and other measures that we cost effectively deliver communication and services to what I would consider the second and third-tier advisors.

In terms of cash flow, the positive net flows are at the upper end of the advisor network, and the negative net cash flows are primarily concentrated in the bottom end of the market. Our efforts that we started -- you know, that Carl started in 2005 that we expect to continue in 2006 is to attempt to get positive net flows in all the segments.

On the bottom end, I guess I'm curious how much is left from those advisors that no longer fit with what you're trying to accomplish.

Well, Jeff, I don't have that exact number.

Okay, thanks.

No further questions.

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

Thanks, Al. Good afternoon, everyone.

The Enterprise business segment enjoyed healthy growth in both revenues and profits during the fourth quarter of 2005 and for the entire year. Revenues for the fourth quarter increased 29% compared to the fourth quarter of 2004. Profits grew 35% during the period. Strong client funding and positive capital markets throughout the year fueled revenue and profit growth for the period. Margins for the year were 46%, similar to the prior year.

Asset balances increased by $4 billion throughout the year, approaching $26 billion at year-end. During the fourth quarter, we successfully converted the entire client backlog totaling $2.1 billion. Sales momentum was strong throughout the year. New client sales for the year were $4.4 billion, an increase of $1.2 billion compared to the full year, 2004.

Pension plans continue to be a business challenge and a diversion of resources from the core business for plan sponsors. SEI's PensionConnect 360 solution linking corporate finance and pension finance enables plan sponsors to manage pension affordability and financial predictability. During 2005, we continued to see larger corporate plans, union plans and healthcare systems embrace our pension outsourcing solution.

In 2005, we developed a customized set of services appropriate for clients wishing to freeze their defined benefit plans. Frozen plans have unique disclosure and employee administration requirements and most importantly, an investment strategy that requires continual alignment to the corporate financial goal. Frozen and defined benefit plans are strategically less important to a plan sponsor as a benefit but do require expert plan management throughout the frozen cycle. Outsourcing is an attractive alternative to satisfy the plan management needs.

As we enter 2006, we are encouraged by the continuing opportunity to attract new clients. The pipeline is healthy, and the PensionConnect 360 outsourcing solution is being accepted by larger asset pools and multinational organizations. Pension outsourcing continues to gain momentum in the marketplace, which will continue to provide growth opportunities for the Enterprise business.

Thank you very much, and I'm happy to entertain your questions.

Jeff Hopson, A.G. Edwards.

A few questions here. Given that you converted the backlog, will it take a little while for new business to ramp up again? Two, given that you are dealing with kind of a closed pie, so to speak, any concerns about penetration? I know you're still very small, relative to the total, but can you talk about the penetration? Then competitors -- if people are still focusing on this business or if they've moved onto other segments?

Sure. I guess insofar as the issue about funding all the client backlog, the sales activity that we've seen so far this year continues to be what we had hoped, and I think that the funding may be a little bit lower but that will catch up. We had a pretty good year last year insofar that everything that we sold last year, we did get funded within the year. So I think, generally, we are able to get these plans funded pretty quickly, and that's when the revenue starts.

Insofar as the market share, you are correct. I mean, our market share and just in general the outsourcing market share for anyone is still relatively small compared to the opportunity. The competitors -- we haven't really seen any new competitors, other than I think on some of the larger plans we are now starting to see some investment bankers come in and talking about some asset liability matching strategies that they can offer. But the opportunity is probably more associated with someone capitalizing on some of these environmental issues, like the impact of reform or kind of the impact of the pension plans being underfunded, and the impact that that's having on corporate finances. Those are kind of more reasons for a plan sponsor the kind of step back and think about am I the appropriate one to manage this or should I think about hiring someone on the outside and outsourcing this particular function? So that's probably more of a catalyst that we see driving the market.

Just to reaffirm in my mind, even though some companies are moving away from defined benefit, the existing assets stay and that's where a lot of the opportunity is. Is that fair?

Yes. I think that what you see in the press is that many companies are thinking about how do I manage the volatility of this particular plan? One strategy would be to freeze the plan. That doesn't close the plan; it just really puts an upper limit on what the benefits are. It freezes those benefits as of today's calculation. Those plans continue to need to be managed and from an opportunity standpoint, I think that what we're seeing is that if a company makes that decision, they are pretty much saying this isn't strategic any more to us, and what we're saying is that if it's not strategic, it's probably a prime candidate for outsourcing. So, hopefully that's a catalyst for the business.

very good. Thank you.

We have no further questions.

Thank you, Ed. Our fourth segment today is Money Managers. I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Thank you, Al. Good afternoon, everyone.

In the fourth quarter, we had growth in both revenues and profits, continued strong new business growth, and made progress towards a new business model featuring total operational outsourcing. For the quarter, revenues totaled $23.5 million, a 15% increase from the same quarter in 2004 and a 4% increase from the third quarter of 2005. Our quarterly profit of $4.2 million was essentially flat from the fourth quarter of 2004 but represented a 26% increase from the third quarter of 2005. As we discussed going into the year, building and installing our new separately managed account solution yielded lower margins for the segment. We now feel that, on an annualized basis, our margins have stabilized.

Asset balances at the December 31 were approximately $20 billion lower than at September 30. Most of this decrease was due to the deconversion of a portion of our relationship with Charles Schwab. This relationship involved fund accounting services for a portion of their low-fee equity funds. A portion of this loss was absorbed in the fourth quarter and on a sequential basis, the balance will hit the first quarter of 2006.

New business sales events for the quarter were strong and totaled an estimated $3.6 million in annualized revenue. These events included new business for both our hedge fund and mutual fund offerings. Perhaps more significantly, we also converted a beta client to our total operational outsourcing solution. The conversion of this beta client will help us further define our offering in this area.

For the year, new business sales events totaled an estimated $16.3 million. This represents a new record for this segment and includes strong participation from our hedge fund, mutual fund, and separately managed account solutions. While these numbers point to growth in both revenues and profits, as well as strong sales momentum, we are equally pleased with the market acceptance of our newest solution, our SMA outsourcing platform. We expect to continue this momentum in 2006 with participation from all three of our current solution sets, as we continue to build out and further validate our strategic vision of total operational outsourcing for Money Managers.

In summary, this business continues to grow, we can continue to progress on our strategy, and we continue to keep our pipeline strong. I will now entertain any questions you might have.

Glenn Greene, ThinkEquity Partners.

Thank you. I was just wondering if you could give us some more color around the Charles Schwab situation. First of all, in terms of why did you lose it? I can understand that went to State Street, but a little bit of color around that. The amount of the asset fall-off this quarter and expected for next year, and just could you go through your margin comments? I might have missed that.

First, the loss of Schwab -- basically, Schwab had a change in their business model where they decided to go from a several outsourced-partner model to a single-outsourced model with price being really the only determinant in that decision. We didn't feel we could really do the business successfully or profitable with that determinant and ultimately were not able to prevail on the consolidation.

As far as the asset drop-off, the assets did drop off and that is the -- the majority of the assets, actually all of the assets related to this loss in Q4. It happened late in Q4 so part of the downward tick from the revenue side happened in Q4. The remainder will happen in Q1.

Any way to sort of size and give us a frame of reference with the order of magnitude of the revenue fall-off from it? I mean, Bob has previously said or in some of his cases, you may be $1 million per quarter, that kind of thing.

I would say we realized about 25% of the drop in Q4. The remainder, as I said, will hit in Q1.

Jeff Hopson, A.G. Edwards.

Yes, of the new business, any split that you could give us between types of customer, hedge versus SMA?

For the year, hedge was approximately 50% of the new business, mutual funds was about 20%, and SMA was about 30%.

Okay, thank you.

Robert Lee, KBW.

I'm just curious. In your total outsourcing solution -- and I mean there's a lot of, you know, competitors. Particularly I think of a lot of the bigger custodian banks who have gotten into I guess what they call middle-office outsourcing for investment management, different places, different sizes. I mean, do you view them as competitors? You know, how do you view competing against them? I mean, some of them have said that their view on outsourcing is that not so much are they going to make their margin on the outsourcing function but they can get all of these ancillary revenue streams; you know, custody deposits, foreign exchange, all that other stuff is how they intend to make their margin, in some regards, which implies pricing pressure for core outsourcing. Do you see that? Do you see them as competition for your segment of the market? I mean, how --?

Well, we obviously see them in the market, see them as competition. I think they approach it a little differently than we do. I think that certainly price is a major focus for them and they do look to make their revenue model out of the ancillary services. I think, from the segment of the market we focus on and when we talk about total operational outsourcing, it combines not only the middle office but also the front and back office of servicing an investment manager, combined with a technology platform that really gives them a deep look into not only just their back office, their business and really the ability to run their business with more powerful information at their fingertips. So I think we are coming and it really from a higher value proposition side of the market.

I mean, are you targeting a certain sized asset manager? I mean, sort of avoiding the big mega managers going after just sort of small and mid-sized (indiscernible)? What would be sort of your sweet spot in the marketplace?

Well, I think our sweet spot has been something we define as the core mid-market, and it certainly does not encompass the larger enterprise, but I wouldn't rule them out. You know, I think the market is in flux. Part of what we talk to our managers and our clients about are they have to look at doing business differently to compete in these new times. I think that doesn't really (indiscernible) yourself to one part of the market or another. But I think, for where we see the biggest need for total operational outsourcing, it is kind of in that core middle part of the market.

Okay, thank you.

We have no further questions.

Okay, our fifth and final segment is Investment in New Business, and I'm going to turn it over to Joe Ujobai to discuss this segment. Joe?

Thank you, Al.

Today I will update you on the Investments in New Business segment, which includes our global businesses as well as initiatives with affluent and high net worth individuals in the United States. Revenue and assets within this segment continues to grow. Revenue of $30.8 million in the quarter has grown by 36% from the year-ago quarter and annual revenue of over $110 million has grown by 48% year-over-year.

During the quarter, average assets under management were over $20 billion versus 17.9 billion in the third quarter and 15.8 billion in the year-ago quarter, which included approximately $3 billion in assets from the lost Italian distributor client.

We enter 2006 with a backlog of committed but unfunded institutional sales of approximately $250 million.

For the fourth quarter, the bottom-line decreased by approximately $600,000 from the previous quarter, primarily due to increased sales and marketing expenses as well as increased expenses associated with the development of the global wealth platform. For the year, the operating loss for the segment was just under $20 million, a slight improvement from the previous year.

In our global enterprise business, assets under management now total over $8.6 billion, as we see growing acceptance of our growing institutional solution worldwide. We now have approximately 65 institutional clients in the UK. In our global advisor business, our assets under management now total $3.9 billion, primarily from our distribution efforts in Canada. In our global private banking and distribution business, assets under management now total almost $3.8 billion. We have a strong pipeline for additional partners as we seek to expand our worldwide distribution network in 2006.

As I discussed during our last call, we are working to convert our existing investment and program-specific BSP clients to the global wealth platform, as we seek to build the pipeline and begin converting the UK and European private banks. We see increasing interest from the market in our solution.

In summary, we continue to make strong progress in the global business. Dennis McGonigle will discuss some changes to this segment based on our success.

I'm happy to entertain any questions at this point.

(OPERATOR INSTRUCTIONS). No questions. Please continue.

Thank you. That concludes the quarterly reports from our segment. I'd like now to turn it over to Dennis McGonigle, SEI's CFO. As I mentioned earlier, Dennis has three topics -- segment reporting changes, LSV reporting changes, and expensing those stock options. Dennis?

Thanks, Al.

In addition to the management changes Al discussed, we've also reviewed other areas of the Company and have made changes resulting from that review. Our strategic goal is to build and deliver world-class business solutions globally. As you know, our segments have been structured around our U.S.-based business and through the Investments in New Business segment, our non U.S. business initiative. As areas of our non U.S. business mature and our solutions prove themselves, we will consolidate this non U.S. activity under a single, globally-run segment. We have reached that point with our global institutional solution. Starting in 2006, we will begin to consolidate that business activity under Ed Loughlin, which means we will consolidate all revenue and costs associated with our global institutional business under a single segment reported on by Ed.

In addition to this change, we've decided to move the franchise activity out of the Investment Advisors segment and into the Investments in New Business segment, consistent with the focus strategy Wayne discussed in his remarks.

Joe Ujobai will continue to report on the Investments in New Business segment, which will include this franchise activity.

Finally, we've made a decision to consolidate all mutual-fund administration business, also known as fund services business, within the Money Managers segment. This enables us to deliver a consistent solution to all clients, leveraging our domain expertise more effectively. With this change, we will move the revenue and cost associated with this business activity from the Private Banking & Trust segment to the Money Managers segment, beginning in 2006. With our first-quarter reporting, we will provide a financial mapping to assist you in tracking the financial impact of these changes.

Finally, as it relates to financial reporting, we've recently filed a Form 8-K with the SEC disclosing a commitment we've made to provide an unsecured loan guaranty to certain partners of LSV Asset Management to help facilitate the purchase and transfer of partnership units from two existing partners to other key employees. Due to this transaction and other long-standing elements of our relationship, we concurrently conclude that will be required, under rule FIN 46, to begin to include LSV in our financial statements as a fully consolidated entity. We will therefore report LSV as a new segment, along with our existing five segment, starting in the first quarter of 2006. We continue to own approximately 43% of LSV. This consolidation will not impact bottom-line contribution from LSV but will affect our gross revenues and costs of operations. In the future, Al will speak for this segment.

On another topic, with the now effective FASB 123R, accounting for stock-based compensation, SEI will begin to record option expense in the first quarter. To assist you in your analysis of SEI, we expect option expense to approximate 4 to $4.5 million per quarter for 2006 and 16 to $17 million for the full year.

That's all I have. I thank you for at your attention. If you have any questions, I will take them now.

Jeff Hopson, A.G. Edwards.

Yes, just so we are clear, the LSV partners, they are not retiring, they are just liquidating, so to speak. Is that fair?

Correct, it's two of the partners, and they are not liquidating, no.

Okay. In regard to the amortization of capitalized costs, are there any new thoughts on the timing of that?

The timing on let's say the full (indiscernible) amortization, we are still looking at late this year or possibly the beginning of next year. You will see a small uptick in amortization costs in the first quarter specifically related to the technology implementation that Wayne discussed for his business, but that will run somewhere in the range of $700,000 a quarter.

Glenn Greene with ThinkEquity Partners.

Just a couple of things -- is it possible to get restated results on the new sort of segment reporting compared to the 1Q release so that we've got a clean model heading into the quarter? The second one, I just want to be clear. Are you going to be booking a minority interest for the 57% of LSV that you don't own?

I guess the first question, you're asking could we provide that earlier? Is that what you're saying?

Yes, yes.

For '05?

Well, I assume you're going to give us sort of a -- going back at least going back for '05, what the segments would look alike.

Correct. We will -- (indiscernible) '04, or '06 to '06?

I'm just suggesting, can we get the restated '05 numbers before you report the first quarter?

I'm not sure -- (multiple speakers) -- we will be able to do that, but if we can, you know, we will think through that and how we could do that.

Then on LSV, just to be clear, you're going to consolidate that in total, and I'm assuming back out a 57% minority interest?

Correct. So again, the net impact on us in terms of bottom-line is neutral.

I got it.

Is essentially how it would work out.

I got it. Okay, thanks.

Robert Lee, KBW.

Thanks, two questions. First, on LSV, maybe this is for Al. My understanding is that they've closed a lot of their products I guess effective year-end. Is that the case? I mean considering how big a contributor this has been to earnings growth the last several years, I mean should we be expecting that that growth rate could slow significantly, you know, it depend what the market does but at least in terms of net new flows? The second question just relates to cash and capital usage.

Okay. First of all, they have closed a number of their core portfolios to new clients, not existing clients, so they still will grow, and perhaps you can say not quite as quickly. They also have some new products, particularly global products, that are growing nicely. So, they will continue to grow those ways.

what was the second question second part of the question?

Well, my second question was I guess more probably for Dennis. I mean, you bought back a lot of stock this past year. If look at the balance sheet, cash and investments has declined sharply because you are also capitalizing a lot of software. Should we expect that, at least in '06, you are saying you continue to -- capitalization runs at a higher rate -- that is it reasonable to expect that the rate of share repurchases probably going to slow? Because there's a certain cash level you don't want to see, you know you don't want to run below?

I guess we wouldn't put an expectation out there for stock repurchase one way or the other. As our cash on the balance sheet, I guess I would say it really has no affect, no influence on that.

Okay, thank you.

Chris Arndt, Select Equity Group.

Yes, could you speak to how much capitalized software you anticipate having in the out years? You mentioned that, after 2006, it might start to decline, but will it decline at a rapid rate? You know, are we really at the end of a very discrete period of spending on software, or will that capitalized development spend always be fairly meaningful?

Chris, I think Al talked about this. Capitalization and the development spend -- you know, we're kind at this plateau here and that will start to come down during the course of this year, as we get closer and closer to the finished product. We will continue to have development activities next year. I don't expect it to be at the rate certainly that we're at now. But in later years, what you will start to see is a shift from development to maintenance. That would be in the '07, second half of '07 for sure time frame and then '08. But I don't think you're going to see a cliff event, if you will.

Okay, but that later spending will be expensed or that will also be capitalized?

It will depend on the nature of the spend itself. If it's actually building a new component, capitalization is probably going to happen. If it's to enhance a component we've already built, that would probably be more expense.

[Joe Canuso], Janney Montgomery Scott.

Good afternoon. My question relates to the global wealth advisor network. For 2005, you had the stated goal of eight advisors, which you did hit. I was wondering if you had a goal for 2006 in mind and more importantly, if you would share it with us.

Yes, this is Wayne. As I mentioned in my remarks, we now have our initial ten outlets, which include the eight that we sold, one community bank and our company store in Boston. We're going to have less emphasis on signing additional outlets in 2006 and we're going to work more on proving out our business model -- (technical difficulty) -- we already have.

We have no further questions. Please continue.

Thank you. I'd like now to have Kathy Heilig give you a few company-wide statistics. Kathy?

Thanks, Al. Good afternoon, everyone.

I have some additional corporate information about this quarter. The fourth-quarter cash flow from operations was 71.7 million or $0.70 per share. The fourth-quarter free cash flow was 49.6 million or $0.49 per share, and year-to-date cash flow from operations, 214 million. Fourth-quarter capital expenditures, which does not include the capitalized software, were 3 million. Fourth-quarter depreciation was 3.5 million, and fourth-quarter amortization was 700,000.

Now, for next year, capital expenditures, again excluding the capitalized software, are expected to be approximately 45 million, which includes the approximately 25 million for the expansion of our facilities. But for 2005, the tax rate was 36.2, and for 2006, we would expect the tax rate to fluctuate between 36 to 37%. The Accounts Payable balance at December 31 was 5 million.

Also, we would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risk, and that the financial information presented in our release and on this call are 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.

At this time, we would be happy to answer any other questions that you may have.

(OPERATOR INSTRUCTIONS). We have no questions at this time.

Thank you. So, ladies and gentlemen, we are interested and very, very excited about what we are building and look forward to delivering the potential that we see.

I would leave you with three things. First, as you've heard, our market acceptance of our new solutions is positive, and this continues to encourage us that our investments are in the right -- (technical difficulty). Second, as we look ahead, we are even more optimistic and confident that our new solutions and strategies, our recurring revenue model, our strong cash flow and our operational leverage as well as our portfolio of markets that we are dealing with all serve to support our goal of creating long-term, sustainable growth in revenues and profits. 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 differentiates us from our competition, and we believe it will serve us well in the long run.

Before I close, I would like to remind you that our investment conference is June 20 and 21, and I urge you to come. Thank you very much and good afternoon.

Ladies and gentlemen, today's conference will be available for replay beginning at 3 PM Eastern time today through February 8 at midnight. You may access the AT&T Executive Replay Service by dialing 1-800-475-6701 and entering the access code 817653. (Operator repeats numbers). That does conclude the conference for today. We do thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.