SEI Investments Co (SEIC) 2007 Q1 法說會逐字稿

Welcome to the SEI first-quarter earnings conference. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). And as a reminder, this conference is being recorded.

I'll now turn the conference over to our host, Al West, Chairman and CEO. Please go ahead, sir.

Welcome, everybody, and good afternoon. With me today are all of our segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's controller.

I will start by recapping the first quarter of 2007, and then I will turn it over to Dennis. First to expand on a few financial (technical difficulty), as well as to remind you of a segment (technical difficulty) reorganization we made which became effective this quarter, and lastly to cover LSV and the investment and new business (technical difficulty) segment. After that, each of the business segment leaders will comment on the results of their segment, and then Kathy Heilig will provide you with important companywide statistics. As usual we'll field questions at the end of each report.

So let me start with the first quarter. First-quarter earnings grew 15% from a year ago on revenue growth of 16%. And please note, this is the first quarter we have had an apples-to-apples revenue comparison. Both quarters in the comparison include the consolidated revenues of LSV.

Diluted earnings per share for the first quarter of $0.62 represents growth of 15% over the $0.54 reported for the first quarter of 2006. Revenue growth for the quarter was a result of higher assets under management and fees from new clients across all of our major segments.

Our non-cash asset balances grew by $8.5 billion during the quarter. This growth was due to market appreciation and new assets. Of the growth, SEI contributed $5.3 billion in assets and LSV accounted for $3.2 billion. Of the $5.3 billion contributed by SEI, $2.8 billion was new cash flow. This is the highest level of new asset cash flow we have had in years. And finally, I [always] mention that our global 60/40 portfolio was up 1.85% during the quarter.

Also during the quarter, we repurchased 743,000 shares of stock at an average price of just under $61 per share. That translates to $45 million of stock repurchases.

Now while we're satisfied with the results of the first quarter of 2007, we still look at them in light of a longer journey in transforming our Company. The transformation is well underway, and each one of our segments has a new business model that they are employing.

Now the market acceptance of our new solutions continues to grow, and we feel we are effectively executing our transformation strategies. And you'll hear more about this in each one of our segment reports.

Now undergirding the transformation are three interrelated investments. First, we're building new client processes for all of our businesses. Second, we are investing in a Global Wealth Platform. And third, we're building the operational and service infrastructure necessary to handle clients all over the world on the new platform.

The status of our largest investment, the Global Wealth Platform development effort, continues to be on track. During the first quarter of this year, we capitalized $17.8 million of the Global Wealth Platform development. And we expect this quarterly capitalization to be in this range throughout 2007.

Now during the fourth quarter of 2006, we delivered the Platform to HSBC's investment solution with SEI. The operation of the client's book business since that time has gone very well, and is a live example of the many unique capabilities of our new platform. And at the same time, a number of other efforts are underway. And the conversion of HSBC's London-based private bank midyear is well underway.

Sales activity in the UK and Europe has been brisk, and our pipeline is very healthy. And plus, in the U.S., we have initiated a project to convert Centier, an existing U.S. bank client. And as I mentioned earlier, to make all this happen, we have been establishing operating and service capabilities and infrastructure in the UK.

So we are pleased with the progress we have made to date. The early success we had with our platform bodes well for our UK and European private banking market entry. And it gives us further confidence that our investments will help us transform our Company, giving us even larger markets to grow within and providing exciting new solutions to deliver to our markets.

But at the same time, rest assured we will continue to work hard in the short run to control costs and to steadily grow revenues and profits. And 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 concludes my remarks. But before turn it over to Dennis and our segment heads, I want to remind you that SEI's investor day will be the 7th of June with a dinner the night before, on the 6th. We will share our strategy and update you on the progress of the transformation of our businesses and the investments we're making. Please save the dates, and we look forward to seeing you there.

I'm now going to turn it over to Dennis and the business segment heads. And as I mentioned, Dennis will cover some corporate financial issues, and as well as LSV, along with the Investments in New Business segment. Dennis?

Thanks, Al. Good afternoon, everyone. As you will recall from our fourth-quarter earnings call, we have consolidated the U.S. and non-U.S. banking businesses under the private bank segment starting January 1, 2007. Joe Ujobai will report on that segment.

I will report on the Investments in New Business segment. What remains in the Investments and New Business segment are other incubating businesses and market assessment efforts. Primarily, efforts in this segment are focused on direct to market and our SEI franchise adviser activities to high net worth investors.

During the quarter, the Investments in New Business segment produced a loss of $3.2 million. This compares to a loss of $3.9 million for the first quarter of 2006. The efforts in this segment are centered on learning, developing and delivering our life and wealth services to the high net worth segment. The learning we gain and the services we develop from this process will then deleveraged, if applicable, to other asset distribution units in the Company.

As you know, SEI historically has used the Investments in New Business segment (technical difficulty) [incubator] for new initiatives. We view the losses in (technical difficulty) investment in future market opportunities and/or services (technical difficulty) can expect losses in this segment to continue.

I will now turn to LSV. As a reminder, we continue to own approximate 43% of LSV Asset Management.

LSV had another good quarter of financial performance. Earnings contribution to SEI from LSV was approximately $31.3 million in the first quarter 2007. This compares to contribution of $25 million in the first quarter of 2006. This year-over-year 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 have discussed the past, most of LSV funds are closed to new investors. This year-over-year growth has come within the framework.

During the first quarter, LSV's net asset growth was approximately $3.2 billion. This came primarily from market appreciation.

Revenues from LSV from the quarter were approximately $81.2 million. This compares to revenues of $66.1 million in the first quarter of 2006.

On SEI's balance sheet, of our reported cash and short-term investments of approximately $271 million, $76 million is attributable to LSV at March 31, 2007. Of our reported receivables of $251 million, $88 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, approximately $9 million, and long-term debt, approximately $58 million.

In addition to the report on LSV and the Investments in New Business segment, I want to cover one other item. We still anticipate going live out of beta with our Global Wealth Platform during the second half of 2007. When we do, we will begin to amortize the capitalized cost associated with its development. We anticipate the useful life for the platform to approximate 12 to 15 years, and amortization expense for 2007 to be about 7 to $8 million. We continue to work through the useful life assessment with our auditors, so this is subject to change.

Thanks for your attention. I'll now take any questions you may have.

(OPERATOR INSTRUCTIONS) Robert Lee, KBW.

Quick question on -- well, two questions on LSV. Was there anything in the quarter -- I guess there was still some okay asset growth sequentially; operating income was sort of flat or down. Was there something in -- were they doing any kind of investment, or are there just some comp issues or something that sort of caused the operating income at LSV to flatten out?

They had some slight expense increase over fourth quarter, and that really did have to do compensation.

Okay, and now does that also relate to -- I guess I had been expecting the minority interest to be a bit higher than it was. Is there anything related -- did that drive that as well? Because I guess I thought that was a little on the low side.

It would not have affected that.

Okay. Was there anything else that may have caused that, or --?

No, I think -- just [to count] on their quarter. They had good market appreciation, but the impact of that from a revenue standpoint would be more felt in the second quarter.

[Jim Margard], [Rainier Investments].

Could you comment a little bit or elaborate a little bit on the expenses item at private banks and the margin? It looked like there was -- to what extent were there unusual expenses, and what should we look forward to?

I think the best thing we can do -- Joe is going to present next -- Ujobai. And I can let him answer that question (multiple speakers) business report.

Chris Arndt, Select Equity Group.

Can you comment on the capitalized software development expense? It's running at still a fairly meaningful rate. Once you get through this year, you go live on a portion of the platform into 2008 -- will that continue to run at the same sort of 70, $75 million run rate? Or do you expect that to trend down?

I would think in 2008, we should start to see it trend down, although we still have some -- particularly U.S. development activities that we'll be completing. We're kind of going through a process of looking at the development schedule, looking at the market entry schedule, and marrying those two up. But I think this year -- last year, I think we kind of got to the high end, and we will kind of work our way from there.

Could it be a meaningful increment down in 2008 such that we notice it? I know you're just working through it now. But I'm just trying to get --

I think we'll be in a better position at the end of the second quarter.

Tom McCrowen, Janney Montgomery Scott.

I had a question again on the investment spending -- just trying to parse out what's being capitalized, what's not. I guess you spent according to the K close to $140 million last year, about half of which, as you pointed out, was capitalized. The portion that is not being capitalized, 70 or so million -- can we expect that spending to kind of stay at that level? So the spending that is flowing through the P&L, is that going to stay at current run rates, or should that come down dramatically after HSBC goes live?

Well, I guess there's different levels of investment. First of all, on the capitalization, we typically capitalize about 75% of the spend (multiple speakers) so to kind of clarify that.

But we also have been making investments in [what we] call the infrastructure to support going live into production -- so operations, client conversion teams, client implentation and servicing, those sorts of things. That cost -- we'll probably continue to see some growth in that area as we add new clients and look to bring on new business.

So essentially, if you assume we don't add new clients, that cost is not going to change. To the extent we begin to have -- which we certainly hope and anticipate good growth in new client activity, you will see some growth in that cost. But the development cost isn't going to affect that.

I guess related to that, given that the other investments are going to probably see a little growth there, the 7, $8 million of amortization scheduled to possibly start this year, are there any offsetting factors to that dilution that we should be thinking about, or do you just expect general growth in the business will offset it?

The [ARPU] is all revenue.

Okay. And have you quantified at all what the HSBC numbers might be?

No, we don't talk about single client (inaudible) events anyways.

We have no further questions. Please continue.

Thank you, Dennis. And I'm going to turn it now over to Joe Ujobai to discuss the private bank segment.

Great, thank you all. As of January 1, we have integrated our non-US banking activities with private banking and trust segment, creating one unified business which delivers SEI's solutions to private banks worldwide. We have done this to better leverage our resources to support the worldwide opportunity.

Within the private banking business, we are focused on the development of our new solution, Global Wealth Services. Last December, we converted the beta client, our investment management program with HSBC Private Bank, to the Global Wealth Platform. We now have almost $6 billion in assets in three currencies -- U.S. dollar, Great British pounds, and euros -- processed on the platform in a 24-by-7 operating environment. We continue to prepare for the midyear transformation of our first external Global Wealth Services client, HSBC Private Bank Great Britain.

Today I will discuss both the financial and strategic update on our progress. For the financial update, revenue of $97.7 million grew by 11% from the restated year-ago quarter. The majority of revenue growth during the quarter was due to net increase in assets under management from distribution partners in global markets including Canada, Europe, Latin America and Asia. Average assets under management and longer-term investment solutions now total approximately $17.7 billion, an increase of 25% from the year-ago quarter.

Revenue growth was also positively impacted by net new revenue in the U.S. investment processing business, including new business converted in 2006 as well as cross-selling to current clients.

Profit declined from the year-ago quarter by approximately 17% to $19.7 million due to a $13.5 million increase in expenses. Increased expenses versus the year-ago quarter was primarily due to direct costs associated with the asset management activity; costs associated with the buildout and deployment of the Global Wealth Platform, which is key to the launch of our Global Wealth Services business -- this segment accounts for the majority of the overall expense of the platform; as well as costs associated with the transformation of our first external Global Wealth Services client in the UK.

New sales events for the quarter were approximately $11 million, with no material client losses. The majority of the new sales events for the quarter are associated with a $1.1 billion in net new assets under management from distribution partners from the global markets. The remaining sales events are associated with cross-sells in our U.S. investment processing business.

For the strategic update, worldwide, we continue to support our distribution clients in order to grow assets under management. In Europe, we're building the Global Wealth Services pipeline, both with the investment processing processing prospects, as well as banks primarily interested in our asset management solutions. The new platform will allow us to further innovate our asset management offering. We are pleased with the progress in building the pipeline.

In the U.S., we're beginning to speak with current clients and prospects about the benefits of Global Wealth Services. And we have become the transformation of our first U.S. bank, Centier, to the Global Wealth Platform. In Canada, Latin America and Asia, we're gathering substantial assets from our current bank distribution partners.

In summary, as I meet with the leaders of private banks around the world, I consistently hear that the greatest challenges they face are growing revenue, reducing cost and risk, and reallocating new resources toward client-facing activities. SEI's Global Wealth Services solution will provide the infrastructure to help meet these challenges and keep pace with the rapidly changing wealth management industry. I look forward to speaking with you in greater detail at our investor conference in June.

Any questions?

(OPERATOR INSTRUCTIONS). Tom McCrohan, Janney Montgomery Scott.

I had a quick question regarding the fees related to the 14, $15 billion worth of assets. I guess there are these global assets you manage that were previously reported under Investment in New Business. What were the total fees this quarter related to those assets? I think last quarter, it was like $22.5 million.

I don't have that number at the top -- I don't have that number with me. We'll have to get back to you with that number.

And then conceptually, what was -- generally looks like those asset-related fees that were previously recorded in Investment in New Businesses -- that those fees were actually trending up pretty nicely, corresponding to about a $3 billion increase in assets under management. What was driving last year -- maybe you're starting to see those trends this year -- growth in assets under management for these non-U.S. relationships?

We signed over the last couple of years a number of distribution relationships with private banks around the world. And we have a pretty robust program to support asset growth with our bank partners. And a lot of that is really going out there and spending time and helping the banks gather new clients and new assets.

Can you talk a little bit more about those relationships? Is that something that you guys are still focused on this year as far signing up new banks that distribute your funds?

Absolutely. We have mentioned over the last couple of years several of these relationships. We have a large partnership with HSBC Private Bank worldwide. We have relationships with [Bank Oyumi], with Commerzbank in Germany, and a significant relationship with Bank of Montreal in Canada. And yes, we will add support to those banks that are current clients, and will continue to build a pipeline to add new distribution partners around the world.

Joe, are those SEI-branded mutual funds that HSBC and the bank in Canada are distributing?

That's correct. We work with those organizations to customize programs based on the needs of the market segments. And those clients invest in SEI mutual funds.

I have got that information on your first question. I believe that you mentioned that asset management in the first quarter of 2006 was about -- I guess in 2006 it was about 18, $19 million in revenue. And that number has actually increased to about $25 million in revenue in the first quarter of 2007.

Jim Margard, Rainier Investments.

I just wondered if you could elaborate a little bit more on the first question I made about the expense item, and kind of what to anticipate forward in particular with -- as I assume revenues will ramp with regard to new implementations, and kind of what to anticipate going forward?

Well, as I mentioned, there are three things that are driving the increase in expenses. There are the direct costs associated by the raising of additional asset management -- assets, and that's things like the fees we pay out to the subadvisors in our manager management programs, or the fees we share back with our clients.

Then there's the development of the platform. And as I mentioned, this segment takes the majority of the costs associated with that. Dennis answered some of the questions around costs associated with the development of the platform.

And then there's the costs of actually deploying the platform, initially in the UK; the buildout of the operating center, both in the UK and back here in the States; as well as the costs associated with the conversion of the first client to the platform.

So I think there will continue to be pressure on margins in the segment. But long-term, we expect really strong margins in this business as we continue to add additional clients to Global Wealth Services.

Can you specify how large the development costs were and when you expect those to taper off or decline significantly?

I think Dennis mentioned that, and I would just refer back to Dennis if you wanted to comment again on that.

We looked at development costs, and we certainly see this year being a -- continuing to be a development year as we roll out in Europe, then we begin to work of some of the needs of the U.S. market. And that will carry over into 2008.

And I think as Al has always pointed out in the past that even though we're kind of fixated if you will, or fixed on the GWP platform, we will always be doing development to enhance our services and enhance the capabilities of our offering to meet the changing needs of the (technical difficulty) [market].

We have no further questions. Please continue.

Our next segment is Investment Advisors. And Wayne Withrow will cover this segment. Wayne?

Thank you, Al. Revenues for the first quarter increased 11% from the year-ago period. This growth was driven primarily by an increase in average assets under management for the quarter to $38.6 billion compared with $34.5 billion in the year-ago period.

Quarter-end assets under management increased $1.1 billion with $446 million coming from net cash flow and the balance being due to market appreciation. Cash receipts for the quarter totaled $1.9 billion, and redemptions totaled slightly less than $1.5 billion. Both of these figures represent improvement over last year.

Profit for the quarter increased 11% from the year-ago period. This increased profit was driven by strong revenue growth, offset in part by an increase in expenses when compared Q1 '06.

As I previously discussed, we made significant infrastructure investments in this business during 2006 as we redefined our strategy. You can see the impact of those investments in the Q1 2006 versus Q1 2007 comparisons.

The good news is that most of that increase is now absorbed into our runrate, as evidenced by the fact that expenses were essentially flat when compared to the fourth quarter of last year. Now, this is not to say that expenses will remain flat. I'm just making the point that increases will be at a more modest rate than last year.

Operationally, we continue to focus on enhancing our platform, preparing for the Global Wealth Platform, growing our existing advisors, and attracting new advisors. We are also continuing to enhance our investment offering with one example being our stability-focused portfolios, which are receiving good market acceptance. These strategies attempt to generate equity-like returns over long measurement periods with less volatility over shorter periods.

Later this year, we're planning to introduce our distribution-focused investment strategies. The strategies are structured to meet the unique needs of baby boomers that have entered retirement and are now in drawdown mode from their portfolio. We have high expectations for this program.

In summary, the quarter demonstrated positive results from the strategy changes and infrastructure investments we made last year. It is my belief that our new strategy, supported by the focus areas outlined above, should result in positive financial performance for this segment in the future.

I will now entertain questions.

Robert Lee, KBW.

Just a real quick question -- can update us on the progress of going back and expanding the number of advisors that you service in this segment? I don't know if you have any kind of increased headcount, but where you stand with that?

Is that a question on new advisor sales?

Well, yes -- I think my understanding is that one of the goals was you wanted to increase the number of advisors who are offering your products -- your platform.

Yes, we continue to add new advisors quarter over quarter. We have a salesforce dedicated to attracting new advisors.

Do have any kind of specific targets you would lay out for the coming year? Or are you seeing an increased productivity as you bring on new advisors?

Absolutely. I would say if you look at (inaudible) -- it's likely about 25% of the net cash flow is from new advisors -- if that gives you an idea of the metrics.

Jeffrey Hopson, A.G. Edwards.

Wayne, I was wondering if you are declaring victory in terms of the flows. And then can you give us some details on this new product -- I think you said distribution product -- in terms of what assets classes are behind that? And is it more of a fixed income product or a true drawdown type product over time?

Well, I don't think Al will ever let me declare victory. So we're not declaring victory. We're still working very hard to grow this segment.

In response to distribution-focused strategies, the concept is it allows an end investor to pick an anticipated distribution rate -- so percentage distribution out of the portfolio -- and a confidence level (technical difficulty) whatever that selection is, the portfolio is a combination of equity to fixed income investments. So it's meant to give a fixed-income-like income stream, but with equity-like -- with equities in the portfolio for long-term growth.

Okay. And is the current selection of managers any change to that for this product?

We intend to use most of our existing managers. And it's how the asset classes are structured in the portfolio that makes the major difference.

(OPERATOR INSTRUCTIONS) We have no further questions. Please continue.

Thank you, Wayne. And our next segments is the Institutional Investors segment. And I'm going to turn it over to Ed Loughlin to discuss this segment. Ed?

Thanks, Al. Good afternoon, everyone. As usual, I will speak to the financial results for the first quarter of 2007 compared to the year-ago period, and also touch on a worldwide institutional sales activities.

From the financial side, strong new client funding and capital market appreciation over the past year has enabled revenues to grow 21% compared to the first quarter of 2006. Profits for the first quarter increased 31% to over $18 million, comparing favorably to the year ago period and a 7% increase over the fourth quarter of 2006.

Margins for the quarter were 40% representing a 3% from the prior year first quarter. Worldwide institutional asset balances increased over $8 billion in the first quarter of 2006, ending the quarter approaching $46 billion. Net assets funded during the quarter were $653 million, and the backlog of committed but unfunded asset sales was $825 million at quarter end.

During the first quarter, new client sales totaled $1.3 billion. We continue to see a growing client base that's well diversified by country, by market segment and by solution type. The changing pension regulation and accounting standards, as well as a more complex investment environment, continue to be positive catalysts for both business growth and a healthy pipeline.

The globalized institutional business enables SEI to enhance the client experience for our multinational clients. It also provides for leverage as we build out our solutions.

We continue to be encouraged by the worldwide market acceptance of our retirement and not-for-profit solutions, and believe the institutional business will continue to provide growth opportunities for SEI.

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

(OPERATOR INSTRUCTIONS) Robert Lee, KBW.

A quick question -- this is on the competitive environment. I guess I saw the other day that Barclays said that this is -- there are some aspects of this business system that is something they are looking to enter, or plan on doing it shortly. Does that at all alter how you think about the competitive environment -- you know, whether from a pricing perspective, or are you seeing additional new market entrants, considering how good a business this has been for you and some others?

Sure. I guess insofar as the Barclays product, our understanding of what they are going to do is they're going to come in with their ETF funds. So it's not going to be as actively managed as our particular program.

I guess we're kind of encouraged that we see not only them entering, but we see some new entrants outside of the U.S. We are kind of encouraged that people are looking at these DB assets, and they're not thinking they're going away anytime soon if they're starting new businesses around them. So from that perspective, I think that that's fine.

We still seem to be able to get our fair share of the new activities. And I think as you think about the growth of our solution, we continue to invest in it, so we have a lot more capabilities that are integrated into the solution -- more than just investments. So I think it will be a while before some of the competitors are able to really get a robust solution like we have been able to develop pretty much around the world.

We have no further questions.

And our final segment today is Investment Management. I am going to turn it over to Steve Meyer to discuss this segment. Steve?

Thank you, Al. Good afternoon, everyone. For the first quarter, revenues totaled $34 million, a $6.7 million or 24.6% increase compared to the first quarter of 2006. This growth was primarily due to net new client fundings and existing client growth. Our quarterly profit of $9.1 million was up approximately 89% from the same quarter in 2006.

Asset balances at the end of the first quarter of 2007 were $177.6 billion or $7.2 billion higher than at December 31, 2006. Approximately $5.7 billion of this increase is attributable to additional net client fundings, and $1.5 billion is due to market appreciation.

As far as new business, our pipeline continues to remain strong, and in the first quarter of 2007, we had new business sales events of approximately $5.7 million in annualized revenue. These events include new business from our hedge fund, mutual fund, and separately managed account solutions. Additionally, we also added another client our total operational outsourcing platform, marking continued progression on our strategy and expansion in this area.

On a slightly down note, we did receive notice during the quarter that one of our hedge fund to fund clients would not be renewing their contract with us at the end of the first quarter of 2007. We expect to go through this loss, although it could put some downward pressure on our margin growth in the short-term as we fill the capacity in our operations caused by this loss.

From a market perspective, we continue to see the needs of investment managers rising. Market intelligence, market surveys, and feedback across the entire spectrum of investment managers' business point to the fact that investment managers need additional capabilities and solutions to help grow their business and to compete. We remain focused on this broader picture, and feel well-positioned to deliver against the emerging needs of the marketplace.

From an overall business standpoint, we continue to remain focused on growing our business at a sustained pace based on the market acceptance of our current solutions as well as strength and opportunity of our strategic direction of total operational outsourcing from investment managers.

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

(OPERATOR INSTRUCTIONS) Robert Lee, KBW.

I'm just curious what the account loss that is, I guess, coming up -- is it possible to get some color on what you think was behind it? Was it pricing; was it an acquisition that they were just merging providers -- is there anything that you can give us to make us feel that this is sort of one of those one-time things.

Well, I'd say a couple of things, Rob. As you know, we don't really speak to specific client issues. The normal business cycle of this business, obviously, is to bring new business in. And occasionally, unfortunately, you do have some client losses.

While I don't really want to go into specifics, what I would say with this is we have been pretty clear about our strategy going forward and that we're really trying to move to higher value proposition and more away from a lower-value commodity pricing. I think at the end of the day, strategically, this specific client and us are going in two different directions strategically.

Okay, maybe just one follow-up -- clearly, you have the State Street and IFIN transaction, which -- I would believe that State Street is doing in part because they want to get even bigger in servicing alternative managers. From where you sit, do you see that creating any dislocation in the market, that all of a sudden, you're getting more people knocking on your door, saying we're not sure we want to be part of a $300 billion hedge fund administrator?

Well, I think whenever you have a deal of that size, you certainly have some disruption. We're certainly not een seeing a mass exodus.

I think at the end of the day our feeling is bigger isn't always better. And we're more focused on the needs of our clients and the needs of the market, and especially their emerging needs. And I think that we still feel very bullish on the market based on where those emerging needs are and where we're situated against them.

(OPERATOR INSTRUCTIONS) [Marty Moser], [Mason Street Advisors].

Since you brought up the new client loss, can you quantify how much that is to grow over? Maybe if you could just talk about scale?

Sure -- well, again, we don't really want to talk, and we don't typically talk about client specifics. What I would say is this is going to be more of a downward tick in assets under administration versus revenue. And while I feel very confident we will grow through this loss, it could put a little bit of downward pressure on our margin over the next quarter or two.

You have no further questions.

Thank you, Steve. And now, I'd like to turn it over to to Kathy Heilig to give you a few companywide statistics. Kathy?

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. First-quarter cash flow from operations was $58.7 million or $0.57 per share. First-quarter free cash flow was $23.7 million or $0.23 per share. First-quarter capital expenditures are $8.4 million, which did include $5.2 million for our new facilities.

First-quarter depreciation was $4.7 million. And first-quarter amortization was $2.7 million, but that included $1.8 million of amortization related to intangibles of the LSV employee group. That amount gets eliminated the minority interest.

Capital expenditures for the remainder of 2007, excluding capitalized software, are expected to be between 20 and $25 million, which includes expenses for our facility expansion of approximately $5.5 million.

The accounts payable balance on March 31 was $10.9 million. Stock option expense in the first quarter was $6.5 million, and we estimate for 2007 that will be about $25 million, which is around the same as it was in 2006.

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

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

(OPERATOR INSTRUCTIONS) Robert Lee, KBW.

I actually have a question for Joe which -- I wasn't able to hit the button fast enough when he was speaking, I think.

Joe, in your segment, a lot of the things you have talked about in terms of the expenditures have been there for several quarters. And yet, there was still sort of this sequential decline in the operating margin. Should we think of -- were there somewhat a -- lack of a better way of putting it, I'll call temporary expenses maybe related to the buildout in London, or prepping for the HSBC conversion that may eventually run off? Or should we really think of the margin and expenses here that -- there was sort of another sort of stepup, and this may be a sort of a new kind of run rate for a while?

Yes, there really weren't a lot of temporary expenses. It's really stepping up and building out the infrastructure.

Okay. That's helpful; thank you. Just one follow-up -- and knowing that you don't intend to comment on client activity, but IFIN is a client. And I believe in IFIN's 10-K, they put the revenue at about 5 or $6 million annually, somewhere around there. Do you have any sense, given their pending acquisition, that this is a business you think you can keep or may go away?

Are you talking about IBT?

Yes.

Well, they were acquired -- or going to be acquired by State Street, who is also client of ours. So we are obviously in conversations with both of those organizations and the potential combined organization about our relationship.

[Terry Bade], ThinkEquity Partners.

Just back to the LSV. In terms of the revenue, it looks like the sequential ramp was a little bit slower than we expected given the solid asset flows. Can you comment on that? Was there anything unusual in there?

This is Dennis. Welcome aboard. Their revenue movement quarter to quarter, fourth to first, despite their market appreciation really has more to do with timing of that appreciation -- as ability to generate revenue. But the second quarter -- I would expect that's when that market appreciation will see some benefit from it.

Are there no more questions?

There are no more questions.

Thank you. Thanks a lot, Kathy.

So ladies and gentlemen, we continue to be excited about we're building. We are executing our transformation, and look forward to delivering the potential that we believe 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.

And second, our progress on our transformation has been steady. And while we have yet a lot to accomplish, the delivery of GWP to the first group of HSBC accounts was a big step. And we're now preparing for our next big step, the installation of GWP in HSBC's London-based private bank.

And I guess the third thing I want to remind you of is our new solutions and strategies, our recurring revenue model, our strong cash flow, 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.

And finally, we are in the business solutions business. And our clients do business with us because we're helping them succeed by making their businesses and their lives better. And this is a high value added proposition, and it does differentiate us from our competition. And we do believe that it will serve us well in the future.

So now, I'd like to open the floor to any questions of any kind that might have come to you.

Okay. If there's no questions, have a great afternoon. And thank you very much for attending.

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