SEI Investments Co (SEIC) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the SEI second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Mr. Al West. Please go ahead.

Thank you and welcome, everybody, and good afternoon. All of our segment leaders are on the call with me as well as Dennis McGonigle, SEI's CFO and Kathy Heilig, SEI's Controller.

I'm going to start by recapping the second quarter of 2006. After that, I will turn it over to each one of the business segment leaders to comment on the results of their segment. Finally, Kathy Heilig will provide you with some important Company-wide business. And as usual, we will field questions at the end of each report. So, let me start with the second quarter.

Second-quarter earnings grew 31% from a year ago on revenue growth of 50%. The consolidation of LSV added $69.7 million of revenue. And without the effects of this consolidation, the revenues would have grown by 13%. Diluted earnings per share of $0.57 represents growth of 33% over the $0.43 reported for the second quarter of 2005. Our revenue growth for the quarter, other than the increase in reported revenues from the LSV consolidation, was the result of higher assets under management as well as fees from new banking and Money Managers clients. Our non-cash asset balances grew by $1.5 billion during the quarter. This growth is due to new assets entirely from LSVs since the SEI 60/40 portfolio was down over 1% over the quarter, which neutralized our positive cash flow.

The reported results also include stock options expense of $3.4 million. In addition, we had onetime writeoffs of $3.4 million and a lower tax rate of 32% resulting from our state tax planning. And Kathy Heilig will provide tax rate information at the end of the call. During the quarter we repurchased 819,000 shares of stock at an average price of about $44.50 per share. That translates to 36.5 million of stock repurchases. While we're satisfied with the quarter's results, we look at them in light of the larger journey in transforming our Company.

And the transformation I speak of is underway. Each of our segments has a new business model they are beginning to employ, and each segment also is executing a transition strategy which provides a path for clients and prospects to gradually move from the current solutions and business models to our new solutions and new business models. The acceptance of our new solutions continues to grow, and we feel we're beginning to execute our transformation strategy. You'll hear more about this in each one of our segment reports.

Now under guarding the transformation are three interrelated investments, all aimed at giving us the capacity to deliver Global Wealth Services to all our intermediary and end investor clients and markets.

First, we're building a light in wealth client process, which is the basis for all of our new individual investor client processes. As we covered in our June conference, this includes reinventing our investment management processes. Second, we are investing in the Global Wealth Platform which will be used to automatic all of our client processes throughout the world. And finally, we will also be building the operational and service infrastructure necessary to handle clients on the new platform.

All segments of our business will use the Global Wealth Platform to conduct business. It makes possible our entry into the large European and UK private bank market and facilitates transitioning the U.S. national bank market to a larger business of providing Global Wealth Services.

In addition, the platform and the capabilities to provide Global Wealth services will help our resident investment advisor clients improve their practices and serve their individual clients in new and better ways. Now the status of the Global Wealth Platform and the Global Wealth Services development effort continues to be on track. During the second quarter this year we capitalized 17.6 million, and we expect the quarterly capitalization to be this level this year and trend down thereafter certainly as a percentage of revenue.

During the quarter we successfully began piloting the platform, and we have begun conversion of our first existing new case client, which we are planning to bring live in the fourth quarter of this year. Also we signed our first new UK client, HSBC's London-based private bank, which was made public last week, and we plan to convert this client late in the first half of 2007.

Meanwhile in the UK and Europe we are busy working the prospect pipeline that has recently been growing. And in the U.S. our plan is to launch marketing efforts next quarter and to begin building the U.S. pipeline prospects. Then we plan to convert some tier and existing U.S. bank client who we recently announced, as well as our first U.S. advisor both in 2007.

Now to make all this happen we will be establishing operating and service capabilities and infrastructure in Europe, as well as here in the U.S. over the next two years. We are certain that these investments we are making will transform our Company giving us larger markets to grow within and providing exciting new solutions to deliver to our clients.

Now meanwhile rest assured we will continue to work hard in the short run to control costs and 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 revenue and profits.

Now this concludes my remarks for the second quarter, so I would like now to turn it over to the business segment heads. And we will start with Private Banking and Trust, and I'm going to turn it over to Bob Crudup to discuss results in this segment. Bob?

First, I will review the results for the quarter and then wrap up with some perspective on the Global Wealth Services Solution.

Second-quarter revenues of 70.2 million increased about 2% in the first quarter with an increase of 4% versus the second quarter of last year. Profits of 24.4 million increased slightly compared to the first quarter and were down slightly versus last year. This slight reduction in profits from the previous year is attributed to option expenses, investments in the Global Wealth Platform and marketing expenses associated with the launch of the new Global Wealth Services Solution.

As for new business in the quarter, it was a quiet one. We brought on about a $.5 million in annual recurring revenue. This included one new back office customer. I think this is indicative of what our business will look like over the next few quarters. As we ramp up the U.S. launch of our Global Wealth Services Solution over the balance of the year, I expect the market and our prospects to take some time to digest the implications to their business and our offering.

Now let's turn our attention to the U.S. launch of our Global Wealth Services Solution. As you know these services will be powered by the investments in our new Global Wealth Platform. The quarter saw continued progress in the development of this platform, and we feel our effort and the installations remain on track.

As Al discussed, we're entering the execution phase of our endeavor to transform our business. We are making good progress. Recent growth of the BSP business with larger and larger clients is a strong indication of the market acceptance of our back office outsourcing solutions and banking's willingness to adopt a greater degree of outsourcing. As we mentioned last quarter, we intend to install Centier Bank, our first U.S. customer, on the new Global Wealth Platform late next year. All of these developments are confirming that the investments we are making in Global Wealth Services will give us a substantial competitive advantage in the U.S. and will in my view change the dynamics of the U.S. Private Banking marketplace.

Let me share my view of the effects Global Wealth Services will have on the U.S. market. It will give us a substantial competitive advantage. Along with this very strong position with which to win new clients, our new Global Wealth Services will provide a path for our ASP and BSP clients to gradually move to our new offering, thus generating important new revenue.

In summary, our investment in the Global Wealth Platform enabling the delivery of Global Wealth Services will position us for strong growth in the U.S. If you have questions, I would be happy to answer them.

(OPERATOR INSTRUCTIONS). Tom McCrohan, Janney Montgomery.

A quick question, Bob, on just the accounting for the new business as it does come online. For an international global bank like HSBC, which I believe you guys provide BSP services for, as they transition to the Global Wealth Platform, is that going to be recognized in your segment or in the international or investments in new business segment?

Yes, that will be recognized in the investment in new business segment.

And the existing business that you do with HSBC today, is that within your segment?

The assets management business that we do with HSBC is in the new business segment. In the U.S. segment we have a relationship -- we have a BSP relationship with HSBC that those revenues show up in the U.S. segment.

Okay. And then once HSBC goes live on the Global Wealth Platform, do all revenues related with that global relationship get housed in investments in new business, or do you kind of split it up between the segments?

At this point in time, we are splitting it up between the segments. I think Al has said on several occasions that as we (technical difficulty)-- globalize our business that these segments will come together at some point.

Jeff Hopson, A.G. Edwards.

Bob, it sounds like you would not expect much change in the revenue growth rate from here over the next few quarters. Any commentary on the direction of expenses? Our sense has been that platform expenses will level off here, but I'm curious about the sales and/or service expenses.

Yes, I think if you look at our expense margins in this business, they have been in the mid 30s for a while. And the pressure on those margins has come from the new expenses associated with platform and then the expenses associated with launching the new services in this country. And I think we will continue to see some pressure on those margins over the next few quarters.

Robert Lee, KBW.

I just have a question. As you go out and start to build a pipeline and looking ahead towards I guess the latter part of '07 or '08 in the U.S. assuming you sold the pipeline and you started having some conversions, how should we think of at least the conversion process impacting expenses? I mean if I remember correctly historically there is always you view some expansions around conversions or installations, as well as some ramp up in marketing expenses as you pay your salespeople as they come online. Even if we start to see a ramp in revenue from this in early '08, it may be a little bit of a lag before you actually see the margin improvement.

I think that is a pretty good assessment. As you know, we do garner some pretty substantial conversion fees. Those onetime fees usually come on immediately after we start implementation, but there are some upfront sales expenses that we see. We do believe that once we get our implementation process down that we will be able to convert clients a look bit more quickly to this platform. (technical difficulty)-- back off this conversion.

Okay, maybe one follow-up. Maybe I will assume this is a question for you, but as Al alluded to having to build out I guess the operational service platform both in the U.S. and in the UK to handle the new Global Wealth Platform? Is that sort of already -- should we think of that as an additional expense over and above what you are spending, or that is sort of already baked into your capital the way you are capitalizing for software, or should we think of that as sort of another layer that may be on there for another couple of quarters?

I think I'm going to pass that question off to Dennis.

Just I'm going to (inaudible).

I guess Al mentioned that as you build out the operational and service infrastructure to handle the new platform in the U.S. and the UK, my question was, should we think of that as an additional expense over and above what you are spending now and expect to spend to build the platform itself? There is some incremental expense we will see to get ready to roll this out. It is still the service infrastructure.

We will see some incremental expense as we go into production mode.

I'm sorry, can you repeat that? There has a bad echo on the phone.

There will be some incremental expense as we go into production and operational as we build off our operational capacity and as we put this technology into a live production environment.

Okay. Great.

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

Thank you. Our next segment is Investment Advisors. I'm going to turn it over to Wayne Withrow and he will cover this segment. Wayne?

Thanks, Al. I will briefly review second-quarter financial results for the advisor segment and then comment on the progress we have made on our strategy shift. Revenues for the second quarter increased 13% from the year ago period. This increase was driven primarily by an increase in average assets under management for the quarter to 34.6 billion compared with 30.8 billion in the year ago period. An increase in the average basis point earned on assets also contributed to our growth.

As I mentioned on last quarter's call, a one basis point increase in the expense ratio of our funds was a part of this overall increase. This one basis point increase went into effect early in the third quarter of 2005, so for year-over-year comparison purposes it is now fully reflected in the numbers.

With respect to cash flow for the quarter, we had gross cash flow of approximately $1.7 billion and redemptions of $1.6 billion yielding net cash flow of $100 million. Profits for the quarter declined 1.1 million or 4%. While we have increased revenues of $6.4 million, our expenses increased at a faster pace. Onetime expenses associated with the write-off of our intermediary suite totaled $3.4 million. The carrying expenses also increased with the segment's portion of the Global Wealth Platform expense, stock option expense, increased investment in our investment management area and increased sales and marketing expense being the largest contributors.

During the quarter we continued to implement changes required to more sharply focus this segment on our core advisory business. Our new advisor sales team is in place, and we are actively signing new advisors. Our proposal and case management team is in place, and our existing advisors are increasing the number of new prospect cases for which they call us for assistance.

Finally, we have almost completed construction of a team dedicated to advisors with smaller relationships with SEI, and the early signs are encouraging. During the quarter we also reviewed the rollout of our intermediary desktop, and in light of the impending availability of the Global Wealth Platform determined that SEI and our clients will be better served to stop the rollout and wait for the rollout of GWP in late 2007 and into 2008. This gave rise to onetime write-offs previously discussed.

In conclusion, I would like to point out that SEI's solution for the advisor market continues to be an industry leader with almost $35 billion in assets under management. Our renewed focus on the core advisory business, together with our scale and the breadth of our solution, leads me to believe that we are uniquely positioned to grow this business successfully.

I will now entertain any questions you may have.

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

A quick question. I'm just curious. As you look to roll out later in '07 the Global Wealth Platform and bringing more services to the RIA market, should we be thinking that the revenue mix is going to shift at all, that it is still going to be predominantly an asset-based fee or that we are going to start seeing more of a mix towards you getting paid for other processing services, and or is it really going to be more asset-based?

At this point we're still looking primarily at active-based fees, and what we feel the Global Wealth Platform will enable us to do and our advisors is to grow more rapidly. So the whole strategy is all around growing assets under management.

Great. I don't know if it is possible to get any little bit of color around just the sales trends or things that you have gone out and have tried to start to grow the number of advisors you do business with. Is it possible to get any sense of the traction you're seeing from that in terms of flows as you start to see some pickup in sales trends and more of it is coming from people you did not do business with a year ago type of thing? Or is it too early to tell still?

Yes, I mean it's too early. The pace of new advisors we are signing is picking up, and the assets we expect to receive from new advisors this year exceeds those from last year if that is your question. As to specific numbers, I'm really not prepared to get into that at this point.

Jeff Hopson, A.G. Edwards.

Did you explain again the write-off of 3.4 million, and does it affect your service capability out there right now?

We began rolling out what we called the intermediary suite, and as I looked at this rollout and the impending rollout of GWP in late 2008, it made sense to stop and wait until the full robustness of GWP was available rather than have an interim solution out to the marketplace. It does not impact our service capabilities, and in fact the one service capability that was available in the intermediary desktop as a result of the modular nature of the development, we were able to incorporate that into our existing platform.

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

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

Good afternoon, everyone. As usual, I will speak to the financial results for the second quarter of 2005 compared to the year ago period and also touch on worldwide institutional sales activity and results.

The financial results for the quarter show significant growth compared to the year ago period. Revenues for the quarter increased 21%, while profits for the quarter increased 19% compared to the second quarter of 2005. New client funding fueled the revenue and profit growth for this period. Margins for this segment of 32% were comparable to the year ago period.

Second-quarter revenues were flat compared to the first quarter of 2006 due to the weak capital markets. Quarter-end balances were $37.7 billion, reflecting an $8 billion increase compared to the second quarter of 2005. This increase is the result of strong client funding during the 12-month period. New clients funded during the second quarter of 2006 totaled $1.3 billion. The backlog of committed but unfunded sales was $650 million at the end of the quarter.

Now sales activity continues to be very active worldwide, and new clients sales through June 30 totaled $2.4 billion. Clients signed for the second quarter were $1.6 billion. The pipeline continues to be solid, and we are encouraged by the asset size and the number of prospects that we are actively pursuing. Worldwide pension funding and accounting reform make pensions management more complex and can negatively impact our clients' business results. SEI's pension and corporate finance modeling and advice capability has global applicability and helps plan sponsors better manage their pension finances. Market acceptance for our outsourcing plan management proposition in our seven selected global markets continues to grow. The integration of our global enterprise business into a single unit is going well, and we are busy customizing our PensionConnect 360 solution for the non U.S. market.

This concludes my prepared remarks, and I'm happy to entertain any questions you may have.

(OPERATOR INSTRUCTIONS). Glenn Greene, ThinkEquity.

The first question, I just want to clarify, the 2.4 billion was year-to-date sales?

Yes, through June.

Okay and 1.6 billion in the quarter?

Correct.

The second question would be the margin fall-off from the first quarter over 400 basis points sequentially?

Right. That was really -- there were some onetime issues that were in there and just some ongoing increased expenses as well.

What should we think about going forward? Is it more realistic to think about Q1 at the growing off level or --?

Yes, I think if you were to think of the second quarter growing from that I think that is probably more realistic. I think that the first quarter was probably the outlier.

Jeff Hopson, A.G. Edwards.

As you customize I guess the PensionConnect product for the overseas market, any thoughts on how that will affect your business activity over there and when would be the timing of that being ready?

Well, I think that the impact to the business will be positive. Our experience has certainly been that this is a worldwide problem manifesting itself the same way for anyone who has a plan that is a corporate responsibility. So it is causing volatility to their finances.

We have one of the models already ready. We were in London last week and showed that to some perspective clients, and we are getting pretty positive feedback. I think it would be premature to give you some sense as to when the sales may happen. I think, though, that we are encouraged by the receptivity that the plan sponsors have outside of the U.S. for this as a way for them to better manage their corporate responsibility. So we are pretty bullish on it.

Tom McCrohan, Janney Montgomery Scott.

The pipeline, is this the first time you're providing that pipeline? I just don't remember you talking about that specific of a pipeline before.

Well, I might want to repeat the sentence because I don't think I was more specific other than characterizing it as active and probably growing. So I did not really quantify it.

I'm referring to the 2.4 billion and the 1.6 billion for the second quarter.

Those were sales, okay? So the sales -- the clients that have committed to us through a sales agreement through June 30, the total assets there were 2.4 billion. (multiple speakers)

Total assets. Got you.

Those are new clients, okay? And the clients that signed of that 2.4 billion during the second quarter was the 1.6 billion.

Okay. And you try to estimate what type of revenue run-rate can come from those assets just looking at your historical fee realization rate add. But have you quantified these incremental sales, how -- over what time period do you think you will start seeing them hit the numbers?

Sure. Typically what happens is if we sell something one quarter within another quarter or four months after the close, the formal close, we get the assets converted and we turn them into revenue.

Robert Lee, KBW.

Just to clarify the 650 million of unfunded backlog, that is essentially the piece of the 2.4 that had been funded, right?

Correct.

Okay. I guess the second question I have is, as you have talked about having about seven target countries where you're rolling out or have this business, I mean how much -- how does that make it challenging to try to scale it because I have got to assume a lot of these countries whether it is the Netherlands or the UK or Italy or South Africa or wherever it may be, they will have sort of their own pension regimes and have their own little specialties. Does it make it tougher to actually scale your platform because of how you would have to sort of customize everything for the different markets, or is that not that big an issue?

You know I don't think that is it really the big issue at this particular point in time. We have selected these markets because the markets are large enough from an opportunity standpoint that if we have a differentiated product offering it can make an impact to our business. So that is why we're in those markets. We have people on the ground, and now it is just a matter of supplementing that with some of this modeling capability and the advice capability.

Ones you get one model built, it is not that difficult to then take the local regulation, the local accounting standards even though more and more it is getting to be international accounting standards, so that is kind of getting a little bit easier. So it is not that big of a deal.

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

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

Thank you, Al. Good afternoon, everyone. I'm pleased to report that the second quarter for the Money Managers segment was marked with continued execution of our financial and strategic goals, as well as continued market acceptance of our solutions.

Second-quarter revenues totaled $29 million, a 14.9% increase over the same quarter in 2005. Our quarterly profit of $6.5 million was up approximately 60% from the same quarter in 2005. This profit reflects our continued focus on improving margins for this segment as mentioned on the previous two quarterly calls. While we are encouraged by this continued margin contribution, it is worthwhile to note that we will continue to reinvest in this business, and on a year-over-year basis, we expect to increase margins, although there may be some fluctuations on margins on a quarterly basis.

Asset balances at the end of the second quarter of 2006 were $153.4 billion or 1.7 billion higher than in March 31, 2006. Approximately 1.3 billion of this increase is attributable to additional client net funding, and the remainder is due to market appreciation.

In the second quarter, we continue to see strong acceptance of our current solutions marked by new business sales events for the quarter of $6.6 million in annualized revenue. These events included new business from our hedge fund, mutual fund and separately managed account solutions.

From a strategic viewpoint, we remain on track. While we are continuing to grow our business based on our current solutions, we're engaged with two beta clients who are employing our total operational outsourcing solution, which if you recall is a comprehensive solution that provides an investment manager with a complete operational platform covering components of their front, middle and backoffice business for all the investment products that they manage.

In summary, we continue to grow our business. Our pipeline remains active, and we continue to focus on and execute on our strategy.

With that, I will now entertain any questions that you might have.

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

I'm just curious does the total outsourcing solution to the two beta clients, I understand that you're not trying to do sort of a lift-out. But as you roll this out, is it usually -- do you have to sort of take onto your own books some employees from these asset managers to sort of help run the infrastructure, or is this just something literally you put it on the existing platform and don't really have to hire any additional people? How should we be thinking of that?

Well, I think that the two betas we have there is no lift-out involved, and that is certainly not the model we are looking at. We believe we have built and put together a platform that is scalable, that will help these investment managers to provide the infrastructure they need. So really we're not looking at it as a lift-out opportunity.

At this time we have no more questions.

Thank you, Steve. Our fifth 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 consists primarily of our Private Banking and asset management distribution relationships outside of the U.S. and our wealth activities worldwide, including our franchise efforts. As usual, I'm going to focus my remarks on the global banking business within this segment.

Revenue of almost $22.4 million grew by 34% from the year ago quarter, and the operating loss decreased by $5.6 million also from the year ago quarter. We expect to continue to incur operating losses in this segment as we launch Global Wealth Services and enter new markets.

During the quarter average assets under management were just over $13.2 billion versus 12.5 billion in the previous quarter and 11.8 billion in the year ago quarter. Despite the volatile investment markets, we continue to see strong asset gathering momentum for most of our distribution partners.

As Al mentioned, we recently announced the signing of our first external Global Wealth Services client, HSBC private bank within Great Britain. HSBC's (indiscernible) Private Banking business in the UK will be the first external client for Global Wealth Services, and we expect to convert this client late in the first half of 2007.

To summarize, we now have three separate and distinct relationships with HSBC -- a BSP service model with their private bank in the United States, a high network asset management program distributed by the private bank worldwide, and now a Global Wealth Services relationship with HSBC in Great Britain.

Prior to converting our first external client, we plan to convert current global asset management clients administrative in London on Trust 3000 to the Global Wealth Platform. The conversion of both our internal clients and the first external client are key events in the launch of Global Wealth Services in the UK and Europe. Global Wealth Services enabled by the Global Wealth Platform allow us to further grow our asset management businesses and enter the investment processing business in Europe and eventually in Asia.

Any questions?

(OPERATOR INSTRUCTIONS). Robert Lee, KBW.

I just wondered could you possibly help us size the HSBC contract? How big is the private bank business for HSBC in the UK? How should we think of this in terms of its impacts on you guys from a revenue perspective? Is it similar in size to a large win you get in the traditional ASP business in the U.S.? I'm just trying to get some sense as to how we should think about this.

I was not expecting anybody to ask this question. (multiple speakers) but I will do my best. Look, worldwide HSBC is a large and growing private bank. The specific terms of the agreement are, of course, subject to our confidentially arrangements. But to try to give you an indication of the size, the HSBC Great Britain transaction is similar in size to our current mid to large size BSP clients here in the U.S.

Okay.

Glenn Greene, ThinkEquity Partners.

I have a similar related question. I was wondering if there is any way you could frame for us the number of accounts that HSBC Great Britain has?

Yes, that is subject to confidentiality arrangements, but I would remind you that when we talked about the Global Services, particularly at the investor conference, that the platform and the Global Wealth Services Solution really is not based on accounts. It is really based on relationships. So the measurement of accounts becomes sort of less important going forward for us. And also we also talked about that our hope was to price this more from an assets under management as the primary driver of revenue for us. And the good news is that at least in the first transaction the marketplace seems to be accepting an assets under management net pricing model.

Any way to sort of give us some color or frame the pricing model?

Again, it is led primarily by asset-based pricing with some transaction pricing. But that is really the most information we can really share.

We have no more questions in queue at this time.

Thank you, Joe. And our final segment is LSV, and I am going to turn it over to Dennis McGonigle to discuss this segment.

Thanks, Al. Good afternoon, everyone. As a reminder, we continue to earn approximately 43% of the asset management (technical difficulty)--. LSV had another good quarter of financial performance. You will notice in our earnings release we reported contributions to SEI from LSV to equal approximately $26.8 million in the second quarter of 2006. This compares to contribution of 17.6 million in the second quarter of 2005. This increase was due to growth in assets from new and existing clients, as well as market appreciation which drove both revenue and profit growth.

Revenues from LSV for the quarter were approximately $69.7 million. This compares to revenues of 46.3 million in the second quarter of 2005. On SEI's balance sheet of our reported cash and short-term investments of approximately 177 million, 61 million is attributable to LSV at June 30, 2006. Of our reported receivables of 208 million, 72 million were attributable to LSV. Liabilities were affected by the debt associated with our guarantee to the LSV Employee Group. This is in reflected in both current liabilities of approximately 10 million and long-term debt approximately 69 million.

Thank you and I will answer any questions you might have.

Glenn Greene, ThinkEquity Partners.

Could you break down the incremental assets and LSV between fund flows in the market?

For the quarter?

Yes.

For the quarter they grew about 1.6 billion. That 1.3 billion was new assets -- from both existing clients and new clients.

And where are they in terms of which of their funds are open or closed, and where is it most of those new assets are coming from? Is it people continuing to invest in the closed funds, or how is that working?

Well, the new assets are coming really from a combination of both. Money is into the remaining open funds from new clients, as well as existing clients continuing to provide funding. Right now they have about three products that are open, and off the top of my head, I could not tell you specifically which of those they were.

Okay. And just real quickly just because I have trouble reconciling this from your press release, but excluding the minority interest number, what was the core operating expense for LSV in the quarter?

Their core -- their margins are roughly around 90%. So that will help you back into it.

I would just add it is pretty consistent with if you go back to the queue, where we break out their P&L it is consistent with that. Really nothing has changed.

Tom McCrohan, Janney Montgomery Scott.

What portion of LSV's clients are outside the United States? Can you give us any kind of geographic composition of their client base?

I don't think we have broken that out. I don't have that in front of me. I'm not sure we would break that out. But they do have a globally represented client base. I think their client base is very diverse, so one thing I would say is they don't have any concentrated clients.

But who are they using to distribute their product?

They have a direct sales force that sells then direct, as well as they get a lot of leverage through the consulting industry.

Jeff Hopson, A.G. Edwards.

Can you give us those cash flow numbers again? Was it 1.3 billion from new money?

Yes.

Okay. Any sense of the three products that are opened, whether those have pending capacity issues?

Not that I'm aware of, Jeff.

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

Thank you, Dennis. And I would now like to have Kathy Heilig give you a few companywide statistics.

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. Second-quarter cash flow from operations was $65.6 million or $0.65 per share. Second-quarter free cash flow was 33.9 million or $0.33 per share. Year-to-date cash flow from operations is 166 million, but if you exclude the cash flow that is going to be paid to these other LSV partners, year-to-date cash flow from operations would be 127 million.

Second-quarter capital expenditures were 9.8 million, which included 2.7 million for new facilities. Second-quarter depreciation was 4.2 million and second-quarter amortization was 1.3 million. Capital expenditures for the remainder of 2006, excluding capitalized software, are expected to be between 25 to 30 million, which includes expenses for our facility expansion of about 12 million. There will be, though, about 6 million of facility expenditures continuing into 2007.

Now the tax rate for the second quarter was 32.1%. Year-to-date our tax rate is around 34.5%. We would expect our annual tax rate to approximate this year-to-date tax rate; however, it will fluctuate quarter to quarter.

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 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 development. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

And now please feel free to ask any other questions that you may have.

Robert Lee, KBW.

Two questions. Could you tell us again why -- what drove the tax rate down from 36 and change to the 32 and sort of why you think it is going to be running now at around the 34% range?

Yes, because when you do your tax rate, it is becoming clearer that in taxes when you figure out your rate, you have to take in tax language what they call the three items, and it affects the tax rate in the quarter when the discrete item happens. The discrete items are things like legislation can change. It can be tax planning. Statutes could close, and basically you have to take the detriment or the benefit of those items in the quarter that they happen.

So that would explain it for this quarter. But was there something about how you did your tax planning that is making it lower going forward? What is driving that?

The thing about it is when we did the tax planning, you see that it is affects the whole year ultimately as time goes on. It is just that it has a bigger impact in the quarter than it happened, and then as time goes on and your income grows, it is a lesser impact in each quarter and on the annual rate. But that is generally the difference between what we talked about the annual rate being before and what we expect it to be now is the result of this tax planning.

Okay. And is this something that we would expect to carry into next year too or just sort of you reset the clock next year?

We will reevaluate it next year.

Okay. And the other thing is now that you are starting to convert clients at least in the UK to the new platform you have HSBC coming up, another UK client later in the year. Are you at about the point where you're going to start having to amortize some of this capitalized software, and have you come closer to finalizing how the period over which you expect that to be done on average?

Our approach there has always been that -- we talked I think even on the last earnings call that we are running through an internal piling, which is kind of our (indiscernible) if you will. The first client we put up, the internal client we shifted over. That is really we are doing that as our (indiscernible) because that will be our first time to really test the system as robustly as we will be able to given that type of book of business we're moving on. So we will view that as our beta. And then the first new client which we expect to come on in this first half, the latter or first half of next year, that would really be when -- when we go live with that client, that is when the amortization would begin. And we are meeting (technical difficulty)-- kind of landing on is the bulk of the system is its longevity will probably amortize over 15 years. (inaudible) amortization to kick in sometime in the second quarter of next year, and then the bulk of it will be over 15 years.

Jeff Hopson, A.G. Edwards.

Dennis, is the internal pilot, is that complete? How would you describe -- I think Al said it was successful, but can you give us any further thoughts on that?

I will stick with Al's word. (multiple speakers).

But I mean is it basically -- is the pilot program over with at this point, or is it an ongoing --?

There is still some functionality being tested, but it is (technical difficulty)-- for the most part it is going very well.

We will keep this pilot open as we continue to release code, and it will be used as a first test bed. And so -- but it is a live living bank. So it is a pretty good test bed and (indiscernible) and everything that we have thus far released has been successfully tested and what changes we didn't need to be made are being made.

So in terms of the new platform you will be converting clients here in the second part -- a client in the second half. Is the platform theoretically live at this point, or is there some date at which it is live?

(inaudible) -- theoretical or not, but we would consider it live when we go -- when we put the first new client on next year.

New client on? Okay.

Yes, the second -- (multiple speakers).

You mean this year -- (multiple speakers)

Technically, not so we would say it was live.

Okay, thanks.

If that is what you are getting at.

Tom McCrohan, Janney Montgomery Scott.

Dennis, do you anticipate having to make any changes to your revenue recognition policies in connection with the Global Wealth Platform due to maybe a longer upfront implementation schedule or maybe acceptance clauses and contracts? Or is there anything that would cause you to anticipate delaying the recognition of revenue from this new platform despite having so strong demand for the product?

No, not at all.

Robert Lee, KBW.

I could not let you all off the hook that quick. Just one follow-up, and it just relates to the HSBC contract. I'm just curious understanding that you cannot give specifics, but as you are pricing that more based on assets under administration or management, did you have to put in place sharp breakpoints? As assets grow, you give them fairly sharp break points as they get above certain levels, or should we think that it is close to a one-to-one relationship that as their assets grow you will benefit from that?

Yes. I mean we have one instance of -- it was anecdotally of one client, so I don't want to comment on the market at this point yet. But yes, we do believe that as a company our revenue will grow as our clients grow. There are breakpoints included, but again they are not sharp, and again we want to be one-on-one with our clients.

Chris Arndt, Select Equity Group.

This is a question for Bob. Bob, can you provide a little more detail on your outlook in the PB&T segment? Specifically does adding -- can you say one National City came on as a trust processing client what impact that might have on the revenue, whether it has been offset by something else going down? And then on the expense side, you mentioned continued pressure on margins. Do you expect -- is that additional pressure from what we saw in this current quarter you just reported, or is it about the same as the experience that we had in the quarter in terms of the margin level?

I think the pressure on margins is going to -- has been reflected, and I expect it to be substantially the same. National City came live on April 1. So their revenue is in this quarter.

Okay. Is there any going forward, or are there any contracts sloughing off that are of note?

Well, as you know, we had the fleet lost last year, and that is substantially recognized by the end of this quarter. We have not had substantial losses since then.

Okay. All right. Thanks. That is helpful.

Thank you and we have no more questions in queue. Please continue.

So, ladies and gentlemen, we continue to be excited about what we are building, and we feel we have moved into the execution phase of our transformation and look forward to delivering the potential that we believe is there.

I would like to leave you with three things. First, market acceptance of our new solutions continues to encourage us that our investments are on the right path. The progress on our transformation has been steady, and while we have had a lot -- we have a lot yet to accomplish, we are executing on schedule. Our new solutions and strategies, our recurring revenue model, our strong cash flow and our operational leverage, as well as our pull-through on the markets, all serve to support our goal of creating long-term sustainable growth in revenues and profits.

And finally, we're in the business -- solutions business. Our clients do business with us because we are solving fundamental problems for them and making their business and their lives better as a high-value add proposition and it differentiates us from competition, and we believe it will serve us well in the future.

So with that, I will bid you good afternoon, and thank you very much for your attention and focus. Thanks.

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