SEI Investments Co (SEIC) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the SEI third-quarter earnings 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 call is being recorded today, Wednesday, October 18, 2006.

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

Thank you and good afternoon, everybody, and welcome.

All of our segment leaders are here on the call, as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller.

Now, I will start by recapping the third quarter of 2006, and then after that, I will turn it over to each of the business segment leaders to comment on the results of their segments. Finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report.

So let me start with the third quarter. Third-quarter earnings grew 23% from a year ago on a revenue growth of 54%. The consolidation of LSV added $75 million of revenue. Without the effects of this consolidation, the revenues would have grown by 15%.

Now, diluted earnings per share of $0.60 represents growth of 25% over the $0.48 reported for the third quarter of 2005. Now, revenue growth for the quarter, other than the increase in reported revenues from the LSV consolidation, was a result of higher assets under management, particularly in enterprise, and fees from new banking and money manager clients. Now, our non-cash assets balances grew by 6.9 billion during the quarter. This growth was due to market appreciation and new assets. Of the growth, LSV asset growth, including their market appreciation on those assets, accounted for $3.1 billion.

Now, during the quarter, our global 60/40 portfolio was up 4.3%.

Now, the reported results also include stock-option expenses of 7.1 million, which included an additional 3 million of expense related to options granted that will hit their vesting target earlier than anticipated. Now, as you recall, we tie our vesting schedule to EPS targets, and we expect these options to achieve their EPS targets during this year.

Now, on the other side of the ledger, our tax rate for the quarter was only 31.8%. Also during the quarter, we repurchased 250,000 shares, approximately 250,000 shares of stock at an average price of about $53 per share. Now, that translates to $13.2 million of stock repurchases.

Now, while we are satisfied with the quarter's results, we look at them in light of longer journey in transforming our company. The transformation I speak of is underway. Each of our segments has a new business model that 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 our new business models. The acceptance of our new solutions continues to grow, and we feel we are beginning to execute our transformation strategies. You'll hear more about this in each one of our segment reports.

Now, [undergurding] this transformation are three interrelated investments all aimed at giving us the capacity to deliver global wealth services to all of our intermediary and investor clients and markets. First, we're building a life and wealth client process which is the basis for all of our new individual investor client processes. Now, as we covered at our June conference, this includes reinventing our investment management processes. Second, we are investing in the global wealth platform which we use to automate all of our client processes throughout the world. Finally, we will also be building the operational and service infrastructure necessary to handle clients on the new platform.

Now, all segments of our business will eventually use the global wealth platform to conduct business. It makes possible our entry into the large European and UK private bank market and facilitates the transition of the U.S. national bank market to a larger business of providing global wealth services. In addition, the platform and the capability to provide global services will help our resident investment advisor clients prove their practices and serve their individual clients in new and better ways.

Now, the status of the global wealth platform and the related global wealth services development effort continues to be on track. During the third quarter this year, we capitalized $17 million and as I have said before, we expect the quarterly capitalization to be level this year and start to trend down in 2007, certainly as a percentage of revenue.

Now, during the quarter, we have continued to make progress on the development front as well as readying an existing UK client for conversion this quarter. We also believe we are on track to convert HSBC's London-based private bank, which was made public last quarter, and we expect to convert them around mid-year. Meanwhile, in the UK and Europe, we are busy working on a growing prospect pipeline. In the U.S., we are launching marketing efforts to build, to start building a U.S. pipeline of prospects as well. We plan to convert Centier, an existing U.S. bank client who we recently announced, as well as our first U.S. advisor during 2007.

Now, to make all of this happen, we are establishing operating and service capabilities and infrastructure in Europe, and we are certain that these investments we are making will transform our company, giving us even larger markets to grow within and providing exciting new solutions to deliver to our markets. So, rest assured, however, 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 revenues and profits.

Now, this includes my remarks for the third quarter, so I would like now to turn it over to first Dennis and then the business segment heads. I will start with Dennis, who will cover LSV and some corporate financial issues. Dennis?

Good afternoon, everyone.

As a reminder, we continue to own approximately 43% of LSV Asset Management. LSV had another good quarter of financial performance. You'll notice in our earnings release we reported a contribution to SEI from LSV equal approximately $29.1 million in the third quarter of 2006. This compares to contribution of $21 million in the third 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. As we've mentioned in the past, a number of LSV's funds are closed to new investors. This growth has come within that framework.

Revenues from LSV for the quarter were approximately 75.1 million. This compares to revenues of 55.1 million in the third quarter of 2005.

On SEI's balance sheet of our reported cash and short-term investments of approximately $231 million, 64 million is attributable to LSV at September 30, 2006. Of our reported receivables of 226 million, 79 million were attributable to LSV. Liabilities were affected by the debt associated with our guarantee to the LSV Employee Group. This is reflected in both current liabilities of approximately 10 million and long-term debt of approximately 65 million.

In addition to the report on LSV, I want to point out a couple of items that affected third-quarter results for the Company. On the revenue side, we recorded a one-time revenue event of $4.7 million in the Private Banking & Trust segment due to a buy-out payment on an acquired client. Bob will also mention this.

On the expense side during the quarter, we took an impairment charge of approximately $2 million to mark-to-market our thrifts investment in the SEI Ginnie Mae fund. During the quarter, we deemed that this investment was impaired and therefore took the write-down. In addition, we recorded an additional $3 million in stock option expense due to prior option grants whose vesting will occur one year earlier than previously estimated.

Finally, as we discussed during the second-quarter call, I want to remind everyone that our tax rate for the third quarter, which was 31.8%, is below our expected annual rate. We expect our tax rate to return to a more normalized level of approximately 36% in the fourth quarter.

Thank you for your attention. I will now answer any questions you may have.

(OPERATOR INSTRUCTIONS). Jeff Hopson.

Okay, thank you. Hi, Dennis. I'm curious about LSV. We continue to be surprised by the high level of flows, given that there doesn't appear to be much capacity I guess in terms of products open. So, can you comment on whether most of that flow activity is from new or existing clients?

In terms of their assets, they grew by about $3.1 billion during the quarter, and about 800 million was new assets from the clients and about 2.3 billion was market appreciation. So they are still seeing flows from investors.

Okay. Anything new, then, regarding existing clients? I mean, everything that's still open as of a quarter ago is still open. Is that accurate?

Yes, as far as I know, everything is still open.

Tom McCrohan.

Thanks for taking the call. I just had some questions on the tax rate, Dennis. Can you give us a sense on why the rate was below your expectations this quarter? Last quarter, you kind of guided people to about 34.5%. What happened this quarter? Why isn't it going to go back to 36?

Yes, I think last quarter, what we did was, I'm pretty sure we said that this quarter, the third quarter's rate was going to be similar to second quarter's and that the 34% rate was more how it would work out on an annual basis, so just to make sure that was clear.

But the reason you see more volatility in the tax rate is there's some new accounting rules that we are required to follow that whereas in the past prior to this year, you could effectively do your tax planning early in the year, determine what you expect your effective rate to be for the year, and then use that rate throughout the year.

The new accounting rules require us to adjust that rate as we determine there are adjustments to our tax situation. So, for example, you file a tax return and assuming the IRS doesn't notice you, that they are going to come in and take a look at it or that they are already taking a look at a particular tax return, after three years, the statute runs out on that. And if you had any reserves set aside associated with that return, you then would reverse those reserves in that quarter that the statute would expire. So they are the types of things that take place now that didn't take place prior to this year.

Okay, thanks.

[John Schaeffer].

My question is about LSV and whether you know about any plans that they may have to expand their product offering footprint, if you will, or essentially provide new products based on sort of the same quantitative strategy that they have been so successful in delivering on, on the current product set, so that they have ostensibly another leg of growth. Thanks.

Sure. So it probably hasn't been easy to follow their history, but over their history, they have taken their kind of core process and approach and have expanded it into new products, different market cap dimensions, different global markets. And so I would suspect, although we're not involved in the day-to-day running of LSV, we would expect that they will continue to look for ways to take that expertise and continue to diversify and add to their product line. But they have done that over their history, so.

Robert Lee.

Just a quick question on the, I was curious about the stock-option grants. Is it possible to get some color on what, I'm assuming there is an EPS trigger but what particular trigger was hit that as accelerating the vesting and are there other tranches of this that come in? You know, is it maybe next year? Is there anything that looks like it could be hitting in the next couple of quarters or?

We will have that same $3 million incremental charge in the fourth quarter as well this year to catch us up for the full year. The option grants that this relates to are the '02 and '03 option grants. If you look in those proxies for those years, the EPS targets I think or I know were presented in there. It's really the first-half vesting of those grants that we are talking about.

Okay, great. Thank you.

Glenn Greene.

Robert just asked my question. Thanks.

(indiscernible)

Good afternoon. I am just was wondering. Is that $6.2 million now in the options-related stuff going to come out of '07 expense versus what they otherwise would have been? Can you tell us which segment that options expense as well as the impairment would have been in? I'm assuming that's investment in your business. Is that right?

The option expense of 3 million this quarter and the 3 million next quarter, that's we are accelerating by year. That would come out of next year's expense, and that's really spread amongst all of our segments because (multiple speakers) expense follows the people.

I got you, yes.

On the Ginnie Mae write-down, that would show up in, that's not in a segment. That's on the income statement. I will give you the exact terminology. It's a net loss on investments, where that shows up.

I got you. Thank you.

We have no further questions at this time.

Thanks, Dennis. I'm now going to turn it over to the Bob Crudup to discuss results in the Private Banking & Trust segment. Bob?

Thanks, Al. First, I will review the results for the quarter and then provide an update on the launch of Global Wealth Services.

Third-quarter revenue of 73.2 million was influenced by an unusual, one-time revenue occurrence of 4.7 million. Absent this one-time event, revenues versus the third quarter last year still increased by 4.6 million or 7.2%. Also absent this one-time event, profits would be flat compared to Q3 of '05. This is because expenses for the quarter also increased 4.6 million, year-over-year. These new expenses can be completely attributed to three items, first an increase in development costs, including the investment in our new global wealth platform; second, an investment in our operations platform; and finally, we had substantial increases in option cost.

As for new business in the quarter, we brought on about 1.5 million in annual recurring revenue. This included two new back-office customers. As mentioned last quarter, this is indicative of what our new business will look like over the next few quarters. As we ramp-up the U.S. launch of Global Wealth Services, we expect the market and our prospects to take some time to digest the implications for their business.

Now, let's turn to the U.S. launch of Global Wealth Services. These services will be powered by the investment in our new Global Wealth platform. The quarter saw a continued progress in the development of this platform, and we feel our effort and the installations remain on track. As Al discussed, we are entering the execution phase of our endeavor to transform our business. We're making good progress. Recent growth of the BSP business with larger and larger clients is a strong indication of market acceptance and our clients' willingness to adopt a greater degree of outsourcing. As we mentioned before, our first U.S. customer will be on the new Global Wealth platform late next year.

All of these developments are confirmation that the investments we are making will give us a substantial competitive advantage, thus changing the competitive landscape of the U.S. private banking marketplace.

Our new Global Wealth service will combine SEI's two core capabilities, asset management and investment processing. As you know, we have had great success with our asset management offering within our global unit. We intend to leverage this successful experience into the U.S. This unique combination of services, investment management with many of our clients and investment processing delivered on the new Global Wealth platform, put us in a strong position to win large, new clients. Further, it will provide a path for our ASP and BSP clients to gradually move to our new offering, thus generating important new revenue.

In summary, we believe our investment in the Global Wealth platform, enabling the delivery of global wealth services, will position us for strong future growth in the U.S. marketplace.

If you have questions, I will be glad to answer them.

(OPERATOR INSTRUCTIONS). Robert Lee.

Hi, Bob. A couple of questions. First, the one-time payment, is it possible to get some color on that? Was there a client that, I don't know, maybe you lost in the quarter, that we should expect that it's going to be some modest revenue impact? Or what sort drove the one-time item I guess is my first question.

Yes, one of our very large clients bought a book of business from another one of our clients, which required the buyout of Client B, and this payment relates directly to that buyout. But we retained the book of business with the larger client, though we will see some decreased revenues coming in from that client. That will amount to a little over $3 million annually.

Okay. Secondly, just to make sure I understand, you know, with the implementation of the new platform, that, and I can't remember the name of the bank, the one bank in Indiana that you are converting.

It's here.

Right, that's, right now, that's the one domestic client that is signed up to convert and they are an existing BSP clients right now?

That is correct. Now, our strategy here was to go out and get a beta client, and we intended to do that this year and we've done that. We are now launching the solution into the rest of the market. We are just now launching it into the rest of the market.

Okay, so except for implementing it internally to use, the first external conversion is next year and right now, you're just looking to sign up new clients, I guess it is.

We are just now moving into markets, starting to talk to clients or prospects about the new platform.

Okay. That was it. Thank you.

Jeff Hopson.

Bob, is it too early to give us any feedback on the initial discussions that you are having? Then just so we kind of prepare our own minds for how you see things playing out, you know, how long of a leadtime do you expect to see in terms of when you are talking to people and when potentially they make decisions down the road?

Well, Jeff, as I said just this year, in fact just in the last few months, we began talking about Global Wealth Services, the new offering, to clients and a few prospects. We will have the official launch of the offering sometime between now and the end of the year, where we would go full-blown, a full-blown marketing launch of the offering sometime between now and the end of the year. We would expect, in late 2007 and early 2008, to start to win new clients onto the platform.

Okay.

You know, that beta client is a very important, that was a very important first up for us.

Okay. As you prepare for conversion, any surprises along the way here that give you greater or less confidence in your ability to convert this on-time and under-budget, etc.?

First, we are completely reengineering our conversion process. You will need to remember that these conversions will be where it will be converting into our back office, so the activities with the client will deal with converting their front and a portion of their middle office. So we expect the conversion timeline to be reduced substantially with this new service offering.

Okay, very good. Thank you.

Thank you, and we have no further questions at this time.

Thank you, Bob. Our next segment is Investment Advisors. Wayne Withrow will cover this segment. Wayne?

Thanks, Al. I will briefly review third-quarter financial results for the Advisor segment, and then comment on the progress we've made on our strategy.

Revenues for the third quarter increased 4.9% from the year-ago period. This increase was driven primarily by increase in average assets under management for the quarter to 34.9 billion, compared with 32.2 billion in the year-ago period.

With respect to cash flow for the quarter, we had gross cash flow of approximately $1.4 billion and redemptions in a slightly less amount, yielding net cash flow of $50 million.

Profits for the quarter declined $2.7 million or 9%. While we had increased revenues of $2.6 million, our expenses increased at a faster pace. The segment's portion of the Global Wealth platform expense, stock option expense, increased investment in our investment management and operations areas, and increased sales and marketing expense were the largest contributors to the year-over-year expense increase.

During the quarter, we continued to implement changes required to more sharply focus the segment on our strategy to help all of our advisors grow. During the third quarter, we held group presentations with advisors in nine cities to discuss our new strategy. During the fourth quarter, we will visit 17 more cities. Attendance at these meetings is increasing, and the message is being very well received. (indiscernible) new advisory sales team continues to grow, and we're beginning to enlist new advisors into our program at an increasing rate. Finally, we have essentially completed the design and implementation of an organizational infrastructure which is aligned with our new strategy.

In conclusion, I would like to point out that SEI's solution for the advisor market continues to be an industry leader with almost $36 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 questions.

(OPERATOR INSTRUCTIONS). Glenn Greene.

Could you talk about the partnership or alliance with Next Financial and what that kind of means or where that may be going? I mean, could we anticipate further deals that are similar?

Okay, I'll give you a background of why we did the deal first and what it means. Essentially, we provide three things to our advisors. We provide our investment management programs for them to distribute out to their end investors, we provide a business operations platform on which they can run their business; and then we provide consulting and help practice management consulting with them to help them grow their businesses.

In the Next deal, we still provide the first and third of those. The difference is the operations platform will be that that is supported by Next Financial. Now, the reason we did it is, number one, it is limited to the 850 advisors; access is limited to the 850 advisors in the Next system. But most importantly, we have an agreement with Next where we will be able to have complete transparency into the advisors and into the advisors' clients that are on the platform and accessing our program. What that will allow us to do is understand how we can help those advisors grow, be it on the Next platform or otherwise.

Then finally and perhaps most importantly, we also have an agreement that we can go directly to the Next advisors and especially those Next advisors where it will be much more advantageous to the advisors to have a direct relationship with SEI as opposed to on the Next operating platform. So we really see it as an opportunity to grow assets through their system but also an opportunity to help us identify advisors that might be appropriate for us.

Is this a prelude to similar type relationships at other firms?

At this point, this is a new initiative and we have no intent to do additional ones at this time.

Okay, thanks.

Tom McCrohan.

Can you give us some update on the calling of the investment advisor portfolio? I know when you kind of took over, this segment kind of, you were kind of rethinking through, kind of (indiscernible) segment the RAA and you are kind of freezing some accounts and the like. Can you just give us an update on where you are with that?

The [calling] of the advisor?

Well, there was, remember, a predecessor you had talked about I think really focusing on kind of the top RIAs and really trying to freeze some of the smaller registered investor advisor clients. Am I saying something that I'm not making sense, or?

Right. I got you. We embarked upon a strategy in the where we were attempting to focus most of our resource on growing our very largest advisors, and in connection with that, focusing the resource on advisors that had very large relationships with SEI. There was some hurdle rate, internal hurdle rate the advisors had to get to before we would include them within that group.

At this point, we were rethinking that and we're actually adopting multiple service models so we can help all of our advisors grow, even the smaller ones that perhaps don't have a major commitment to SEI, through a lower-cost service offering that would be Internet and phone-based as opposed to live people in the field. That's how the strategy has changed.

Do you think, just (indiscernible) yesterday that said there was like 29,000 RIAs out there. If I recall, Wayne, maybe you can tell us again how many RIA clients you have. I mean, does SEI pretty much have the number one market share in servicing RIAs out there?

We are the largest provider of turnkey asset management programs to the independent RIA channel, that is correct.

Can you just remind me how many RIAs you have as clients?

We have approximately 6000.

We have no further questions at this time.

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

Thanks, Al. Good afternoon, everyone.

As usual, I'm going to speak to the financial results for the third quarter of 2006, compared to the year-ago period, and also touch on worldwide institutional sales activity. The financial results for the quarter show significant growth compared to both the year-ago period and the June quarter.

For the quarter, revenues increased 25% and profits increased 40% compared to the third quarter of 2005. Profits for the third quarter, compared to the second quarter of '06, grew 20% with revenues increasing 9%. New client funding and capital market appreciation fueled the revenue and profit growth for both periods.

Margins for this segment approached 35%, representing a 3% increase over the year-ago period. Quarter-end balances were $39.9 billion, reflecting an $8 billion increase compared to the third quarter of 2005 and a $2.3 billion increase from the last quarter. The backlog of committed but unfunded sales was $560 million at the end of the quarter.

As of October 31, we will have deconverted a large, defined contribution client that will dampen revenue and profit growth for the fourth quarter. This client event had no impact on the third-quarter results. It will impact the fourth quarter. However, we believe the significant (technical difficulty) this year will enable us to grow through this event during the first quarter of 2007.

Sales activity worldwide was also strong with new client signings for the third quarter totaling $1.9 billion. We were successful in signing new clients in the U.S., Canada, the UK, Asia, and the South African markets. The clients are broadly diversified among corporations, hospitals, unions and endowments. We remain encouraged by the asset size and the number of prospects that we are actively pursuing globally.

Worldwide pension funding and accounting reform has made pension 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 and trustees carry out their fiduciary obligations. Market acceptance for delegating these responsibilities for plan management in our selected global markets continues to grow. The integration of our global business into a single unit is also going well, and we continue to customize our PensionConnect 360 solution for the non-U.S. markets.

This concludes my prepared remarks. I am happy to entertain any questions that you may have.

Jeff Hopson.

Ed, can you give us some background on the loss of the defined contribution client? Then in terms of the pension reform bill, clearly there is a lot there and I suspect that it will take awhile for you to see any reaction in the market. But what would you expect the reaction to be, in terms of impact to your business?

The first part of your question, Jeff, insofar as the defined contribution loss, this was a client that really hadn't been with us too long, just about two years, and they were looking for a less expensive administrative type of a solution. So we are not the low-cost provider in the marketplace and they have found one and they are going to be converting to that.

The second part of your question, insofar as the pension reform, I think that you're right insofar as it's maybe a little bit too early for us to totally assess what the market reaction will be. But I think, generally, it will continue to, it will certainly highlight the fact that companies that sponsor pension plans need to look at them somewhat differently. I think it's in that kind of light that it will open up a lot of doors for us to at least have conversations about trying to manage this differently and certainly preview the idea of delegating this to someone like SEI.

I think the recognition that we got during this reform process by PBGC here in the U.S. for being able to model pension finance and integrate pension finance and corporate finance and also to provide some advice as to how to best deal with that strategically, I think that also kind of gets us in a pretty good position to take advantage of the changing opportunities.

Okay, thanks.

Robert Lee.

Two questions. Is it possible to get some color on the relative growth of your new business? Is it coming mainly from outside the U.S., mainly within the U.S.? Is the global accelerating? I'm just trying to get some color on the 1.9 billion of new business, where that was weighted to.

Sure. Well, as I said in my remarks, we had a pretty broad distribution of clients pretty much around the world. The bulk of the assets and the bulk of the transactions, if you will, I mean the new clients, were still more U.S.-oriented. That also happens to be the largest single market that we operate in.

Okay. Secondly, I mean and speaking of pension reform, there's been all kinds of talk about the growth of, in Europe and I guess maybe eventually here, of liability-driven solutions, given pension reform around the world. Within your model, your manager of managers model, is that a solution that, if the marketplace may be heading in that direction, that you feel you are in a position to provide, or would you have to develop a new capability?

Well, we are providing that today, insofar as, I mean, we really have moved, probably 18 months to 24 months ago, to giving advice to clients as to how to best manage this pension liability and to have a different goal other than just beat the market, an investment-oriented goal. The implication of that was that we were able to really understand the liabilities, what drives them and use some of our current portfolios, which were duration-matched portfolios. We could get a pretty good match to the duration of their liabilities. So we have been doing that for two years.

Last year, or I should say this year, I'm sorry, we spent a fair amount of time developing another tool, another capability, which would be to use derivatives, so swaps, swaptions, to get even a better match. So again, I think that we are well-positioned to be able to provide that type of support to a client. I think probably more importantly to a client is that we have a lot of different implementations, so depending upon what they are trying to achieve, we can really align their goal with a portfolio implementation that's going to give them a high probability of achieving that. So we are really ready to go, and we're not trying to sell it just to sustain our own product. Again, it's more of a complete type of a solution and one that integrates the goal and the advice and the implementation. I think we are in pretty good shape.

Thanks. That's helpful.

Glenn Greene.

Ed, first question, the revenue growth in the quarter, at least compared to 2Q, was a lot faster on the asset growth. Or another way to say it is the asset, the yield per assets improved considerably, quarter-over-quarter. Was there anything unusual in the quarter, anything new with pricing, any one-time fees in the quarter or anything like that?

No, there was not.

Any way to explain that change in yield?

Well, the only thing that might be a little bit different is insofar as the different clients that we would be coming in at a different point in time. This year, we've had a pretty broad distribution of clients, probably in the 100 to $400 million range. So, there's a level of fee, based on our fee schedule, that you would get and revenue that you would get appropriate to that. If I were to compare that to, say, last year's book of business, we've got a couple of billion dollar clients so that would drive the fees down a little bit. But that's the only thing that would change, quarter-to-quarter.

Okay. Then on this, the client loss that you alluded to, any way to size that in terms of amount of assets, revenue, profits?

Yes, there is, but again, it's pretty specific to a particular client. I think that the best guidance that I could give you is that it will dampen revenue, probably revenue more than profit, for the next quarter.

Okay, thank you.

We have no further questions at this time.

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 third quarter, the Money Managers segment continued to execute on our primary goals, mainly growth in the market acceptance of our solutions, margin improvement for the segment, and progression on our strategic direction of total operational outsource.

For the third quarter, revenues totaled $29.8 million, a 12% increase over the same quarter in 2005. Our quarterly profit of $7.7 million was up approximately $3.8 million from the third quarter of 2005.

Asset balances at the end of the third quarter of 2006 were $161 billion, or 7.6 billion higher than at June 30 of this year. Approximately 6.1 billion of this increase is attributable to additional net client fundings; 1.5 billion is due to market appreciation.

As I pointed out at the beginning of this year, one of my imperatives for this segment was to improve our margins. I'm pleased to report that our quarterly margin percentage for this segment was 25.7%, almost double what it was the same quarter last year. This increase in margin contribution is attributable to two key factors. First, we are receiving the benefit of scale from both the investments we have and continue to make in our operating model, and also as this business grows, we benefit from the economies of that growth. Second, the timing of certain expenses and investments during the quarter provided for some margin improvement.

While we are pleased with this improvement in our operating model and margin growth, I would point out that margin in this segment will fluctuate from quarter to quarter due to our continued investment and development. The best way to gauge our margin going forward is on a year-over-year or annualized basis.

From a market standpoint, we continue to see momentum within our various solutions, as well as a continued push of outsourcing within the industry as a whole. In the third quarter, we continued to expand market acceptance of our solutions, marked by new business sales events for the quarter of $3.9 million in annualized revenue. These events include a new business from our hedge fund, mutual fund and separately managed account solutions. While we are pleased with the addition of these new deals, more importantly, we're focused on our strategic benefit as a part of our continued progression into providing a total operational platform for Money Managers.

From a strategic standpoint, we remain focused and continue to progress with the building out of our total operational outsourcing model with our beta clients, as well as targeted expansion of our strategy within the market.

In summary, we continue to move forward on our primary goals for this segment. We continue to see strong market acceptance of our solutions, and we continue to see strong market activity and acceptance of our strategic direction.

I will now turn it over for any questions that you might have.

(OPERATOR INSTRUCTIONS). Robert Lee.

Thanks. I have a question. Of the new revenue sales, is it possible to get some color on which specific business may be driving that? You talk about the total operational outsourcing. To some degree, I guess that's still in the beta test.

Yes, it is.

Is it fair to say that a lot of the new revenue growth is still coming from the alternative space?

Yes. Well, I would say that, in this quarter, we did get a pick-up from hedge and I think that led the charge, but we also had new business from mutual fund and SMA. I think past quarters, the second quarter included, we had actually SMA and mutual funds were more prominent than hedge. So the good news is I think we are seeing a very good diversified portfolio within our own solution set of what's driving the market acceptance.

Great, thank you.

I'm showing that we have no further questions at this time.

Thank you, Steve.

Actually, sir, I'm sorry, we just got a question from the line of Glenn Greene.

I just wanted to get a sense for the margins. I know you said they'd fluctuate quarter-to-quarter, but they've been surprisingly strong for the last few quarters. You know, it feels like you've kind of stepped up to a new level and being somewhat facetious here, I don't know if Wayne (indiscernible) set this up for you before he left to his new role, but what is kind of explaining what's going on beyond just sort of the scale benefits? Are we at a new level of profitability?

Well, you were doing good until that Wayne comment, but what I would say is this. If you remember, at the beginning of this year, I did say that we felt we were at a point in the business where margins had stabilized and we felt that we could accelerate the growth there. You know, this business right now has all the key ingredients of what we really look for in a business at SEI; it's scalable, has a very large market, and there's really a lot of leverage we feel we can drive from it. I think it will be early and premature for me to kind of through out margin targets, but what I would say is we are still in the middle of this. We are finding and being very encouraged by the opportunities we have to drive leverage and scale in our operating model. I think we will continue to look for ways and as this business grows, it will provide us more opportunity.

Okay. Good job, Steve.

Thank you.

Thank you. We have no further questions at this time.

Thank you, Steve. Our fifth segment is Investment in new business. I'm going to turn it over to Joe Ujobai to discuss this segment. Joe?

Yes, 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 relationship outside of the U.S. and our wealth network activities worldwide. As usual, I'm going to focus my remarks on the global banking business within this segment.

Revenue of almost $22.7 million grew by almost 33% from the year-ago quarter, and the operating loss increased to 9.5 million. Increase in the loss during this period was due to costs associated with the buildout of the infrastructure to support the launch of the Global Wealth Services in Europe, costs associated with the conversion of the first internal and external clients, an increase in sales and marketing expenses, as well as an increase in stock option expenses associated with this segment. 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 over $13.6 billion versus 13.2 billion in the previous quarter and 10.2 billion in the year-ago quarter. We are working to convert a current Global Asset Management client administered in London on TRUST 3000 to the Global Wealth platform prior to the conversion of our first external client, HSBC Private Bank Great Britain, which will convert next year. The conversion of our internal client and the first external client are key events in the launch of our Global Wealth Services solution in the UK and Europe. Global Wealth Services, enabled by the Global Wealth platform, will allow us to further grow our asset management businesses and enter the investment processing business in Europe and eventually Asia. As Al mentioned, we are speaking to many private banks within the UK and Europe, and we are pleased with our continued progress in launching Global Wealth Services in the UK and European markets.

Are there any questions?

(OPERATOR INSTRUCTIONS). Jeff Hopson.

Joe, curious, in terms of the pipeline in your discussions, would you say that, I mean, you indicate that they are progressing but are they kind of held up by the conversion of the existing and new client, would you say, or is there a wait-and-see attitude by clients?

I think that the market is certainly looking to see our success with the conversion of the internal as well as external client, so a lot of the banks are looking and want to see how that works. But that's really not stopping us from engaging prospects in serious dialogue.

Okay, great. Thanks.

Robert Lee.

I think you've probably said this in the past, but I just wanted to refresh my memory. The existing client that you are converting to the Global Wealth Platform, you don't anticipate, at least initially, that there's a revenue impact to that. It's essentially, the hope is I guess down the road it will be but right now, over the short-term, we should expect it sort of revenue-neutral?

That's correct. I mean, it's an asset management [led] client that we have a turnkey solution. It's about 1200 accounts that represent about $4.5 billion in assets. But again, we are converting them from TRUST 3000 to the new platform and we don't anticipate a revenue increase.

Okay. Just generally, if we look further out, I mean, you are spending some money to build servicing capability in Europe. But down the road, assuming successfully you get more, win more clients, should we assume that there's generally when you bring a client on, you will go through some kind of accelerated spend for some period of time, prior to bringing a new client on, even when (multiple speakers) new platform built?

I mean, there's sort of two sets of costs that I mentioned. There's the building up the infrastructure here so the operating model, here in (indiscernible). The operating model will be distributed, will do a lot of processing in the U.S. and some of the client-facing activities here. So right now, we're trying to build that up. Then there's actual expenses associated with conversion. Some of those expenses are defrayed by charging the clients one-time conversion and implementation fees. But yes, I think, for the first handful, I mean, we will see incremental costs as we increase the service center here.

Okay. Sorry, just one last question. If I remember correctly, the new client, HSBC, when it converts, is going to be on an asset-based revenue model, if I remember correctly.

That's correct.

Is the client you are converting, the existing client, are they going still be on an account or process-driven model, or are they also moving to an asset-based model?

No, they are already on an asset-based model, because that client really consumed us from an asset management perspective. As part of the turnkey solution, we administer it on the TRUST 3000 platform.

Great. Thank you very much.

Glenn Greene.

Joe, a couple of questions. The first is, looking into the assets under administration, they actually declined about 3.5 billion. Is there anything that happened there? Did you lose a client?

Yes, we did. We lost a money market client that we had administered a money market client here in Europe, and we did lose that. We sort of have been losing that over the last couple of quarters, but we lost most of the assets this quarter.

But is there a forward revenue profitability impact, or that's kind of reflected already?

Well, again, probably this quarter took the biggest impact, so we will see that over the next three quarters.

Okay. Then the step-up in expenses this quarter is pretty considerable, 4 million or so. You alluded to a few different things but you have kind of been in the process of building out infrastructure for a while and kind of building out the Global Services Solution. I'm just trying to wonder, just trying to figure out what happened this quarter that the expenses ramped so considerably.

Well, again, it's a couple of things. One is, you know, we've been planning to build out the local, what we call regional processing center. We're now starting to staff that and we also have had to step-up, for both of the conversions, the internal client as well as the external client. So we have been planning for that and building towards it but we are actually now spending the money and doing it.

Okay, so we are kind of at a sustainable level, at this expense level, for the foreseeable future until we get the revenues to sort of offset that and improve the profitability. Is that fair?

I would say that, you know, we don't give guidance on this but I would say that we are probably towards the higher part of spending.

Okay, thank you.

I'm showing we have no further questions at this time.

Thank you, Joe. I'd like to turn it over to Kathy Heilig to give you a few company-wide statistics now. Kathy?

Thanks, Al. Good afternoon, everyone. I just have some additional corporate information about this quarter.

Third-quarter cash flow from operations was 85.9 million or $0.84 per share. Third-quarter free cash flow was 56.9 million or $0.56 per share. Year-to-date cash flow from operations is 252 million, but that does include $31 million that will be distributed to the other partners in the LSV relationship. Third-quarter capital expenditures, 7.1 million, which included some expenditures towards our new facility. In the third quarter, depreciation was 4.4 million and amortization was 1.1 million.

Capital expenditures for the fourth quarter, excluding any capitalized software, are expected to be between 12 and 14 million. That does include expansion for our facility of approximately 5 million. Next year, we will have about 10 million of facility expansion as well.

The Accounts Payable balance at 9-30 was 8.2 million.

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

At this time, we will answer any other questions that you may have.

(OPERATOR INSTRUCTIONS). Robert Lee.

Thanks. A question on the capitalized software, I mean, I guess we are at a point where you are starting to implement it internally, convert clients to some pieces of the platform. Could you maybe update us on what we should expect in terms of starting to expense the capitalized software? Are we going to start seeing that in the Q4 and have you (indiscernible) better clarified over what timeframe you start to expense everything?

Rob, this is Dennis. Really, our plans, as they sit today, are amortization really wouldn't start until the HSBC client comes on next, midway through next year, because that's when the full, you know, (indiscernible) more complete functionality is really put into production. For the first client, the internal client, we will be using kind of limited functionality of the system so it really isn't a full-blown test, if you will. So we would expect it really third quarter, beginning of third quarter next year. Right now, we are still in that 10-to-15 year range in terms of useful life. We've gone through an analysis of the different subsystems associated with the platform, as I've talked about in the past, putting a useful life on each of those. On average, we're coming out in that 10 to 15 year range and now we are working with our auditors for them to review the work we've done. They have to do some additional analysis and when we get closure from them, then we will feel comfortable really putting a firm number out there.

So I guess it's fair to say that capitalized software will continue to grow at a pretty decent rate, even through to about the third quarter next year before you start to amortize?

The amortization part, as Al said in his comments, you know, we are at a kind of a leveling off point and that during the course of next year, we should start to see it start to come down.

Okay, thank you.

Thank you. I'm showing we have no further questions at this time.

Okay, thank you. And so ladies and gentlemen, in conclusion, we continue to be excited about what we're building and we feel we've moved into the execution phase of our transformation and look forward to delivering the potential that we believe is there.

I'd 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 and our progress on our transformation has been steady. While we have a lot yet to accomplish, we are executing on schedule. Third, our new solutions and strategies, our recurring revenue model, our strong cash flow, and our operational leverage, as well as our portfolio of markets, 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 helping them succeed by making their businesses and their lives better. This is a very high value-added proposition. It differentiates us from our competition, and we believe it will serve us well in the future. So I bid you good afternoon and thank you very much for your attention.

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