SEI Investments Co (SEIC) 2007 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 on a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to transfer this conference to your host, Mr. Chairman and CEO, Al West. Please go ahead, sir.

Welcome, everybody, and good afternoon. All of our segment leaders are here on the call, as well as Kathy Heilig, SEI's Controller. Dennis McGonigle, SEI's CFO, is on vacation, and he will not be on the call.

I'll start by recapping the second quarter of 2007, and then I'll turn it over to each one of our business segment leaders to comment on the results of their segments. Finally, Kathy Heilig will provide you with some important companywide statistics. As usual, we will field questions at the end of each report. So let me start with the second quarter.

Second-quarter earnings grew 20% from a year ago on revenue growth of 20%. Diluted earnings per share for the second quarter of $0.34 represents growth of 17% over the $0.29 reported for the second quarter of 2006. These results reflect our two-to-one stock split announced during the second quarter.

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 $10.4 billion during the quarter. Of this growth, SEI's assets under management grew by $5.5 billion and LSV's growth accounted for $4.9 billion. Our global 60/40 portfolio was up 3.6% during the quarter.

Also during the quarter, we repurchased 2,682,000 shares of stock at an average price of just over $29 per share. That's adjusted for the split. That translates to $79 million of stock repurchases during the second quarter.

As I have mentioned many times before, we are satisfied with the results of the quarter, but we look at these results in light of the longer journey in transforming our company. The transformation is well under way, and each of our segments has a new business model that they are employing and receiving early market acceptance. You will hear more about this in each one of our segment reports.

Undergirding the transformation are three interrelated investments, and these investments are all well under way. First, as part of our new solutions for each market, we're building new client processes. Second, we are investing in the Global Wealth Platform, the technology behind many of our transformation efforts. Third, we are 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 development of the Global Wealth Platform, continues to be on track. During the second quarter this year, we capitalized $17.8 million of the Global Wealth Platform development. We expect the quarterly capitalization to be in this range throughout 2007.

Earlier this month, we delivered the platform for the second time. We converted HSBC's London-based Private Bank to the new platform. The conversion and subsequent operation of HSBC's Private Bank has gone very well, and has proven the many unique capabilities of our new platform. All told, the new platform is now operating in 12 countries, transacting in 19 currencies and trading on 12 exchanges, all using straight-through processing.

This installation of our platform stands as a proof case that the platform is now ready to accept other books of business. Our marketing and sales activity in the UK and Europe has been brisk, and our pipeline is very healthy. In the US, we will be delivering US functionality next year in anticipation of initiating the project to convert Centier, an existing US Bank client.

During the quarter, as part of preparing to operate the HSBC Private Bank, we established operating and service capabilities and infrastructure in the UK, and are ready to take on additional UK and European clients. We are pleased with this progress we have made, and the early success we have had with our platform bodes well for our UK and European private banking market entry. 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.

This concludes my remarks, but I will first fill in for Dennis McGonigle and cover some company financial issues and give you an update on LSV and Investments in New Business segment. After that, I will turn it over to the other four business segment heads.

So first, for the financial highlights, the year-over-year revenue growth of 20% and quarter-over-quarter growth of 6% came from all of our segments. Net income was positively impacted by the sale of our interest in our Mexican joint venture business as a result of a put exercise by our partner, Compass. This resulted in a one-time pre-tax gain of approximately $3 billion.

Also during the quarter, our tax rate for the second quarter was 38%, and this compares to a rate of 37.2% in the first quarter and 32% in the second quarter last year. Cash flow from our operating activities for the quarter was $78 million.

We also received agreement from Pricewaterhouse Coopers to amortize the GWP platform over 15 years, which will begin during the third quarter of this year. This will result in approximately $3.5 million to $4 million of additional costs per quarter, and we estimate the amortization expense for 2007 to be approximately $7 million.

I now want to cover the Investments in New Business segment. The focus in the Investments in New Business segment is on providing life and wealth services to high-net-worth and ultra-high-net-worth individuals directly and through SEI franchise advisors. The learnings we gain and the services we develop from our life and wealth process is then leveraged to other asset distribution companies -- units within the Company.

During the second quarter, the Investments in New Business segment produced a loss of $2.9 million compared to a loss of $3.4 million in the 2006 second quarter. As you know, SEI historically has used the Investments in New Business segment as an incubator for new initiatives. We view the losses in this segment as an investment in future market opportunities, and consequently you can expect losses in this segment to continue.

I want to now talk about LSV. As a reminder, we continue to own approximately 43% of LSV Asset Management. LSV contributed $91.7 million of revenue and $35 million of earnings in the second quarter 2007. This is versus $70 million in revenues and $27 million of earnings in the second quarter 2006.

As I mentioned earlier, LSV grew by $4.9 billion during the second quarter, and all this growth was due to market appreciation. As we have discussed in the past, most of LSV's funds are closed to new investors.

On SEI' balance sheet as of June 30, LSV's portion of our reported cash and short-term investments of $246 million; their portion is $73 million. Of SEI's $273 million of receivables reported on June 30, $100 million are LSV's. Of our current liabilities and long-term debt, approximately $5 million and $54 million is the debt associated with our guarantee to the LSV Employee Group.

That concludes my remarks on LSV, and I will now open it for any questions.

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

I'm now going to start through the segments but turn it over to Joe Ujobai to discuss our Private Bank segment. Joe?

Great, thanks, Al. As Al mentioned, earlier this month we made significant progress towards the commercial expansion of our Global Wealth Services business in the UK and Europe with the conversion of HSBC's Private Bank in Great Britain to the Global Wealth Platform.

The new platform is now running two significant books of business. Late last year, as a beta client, we converted our Global Asset Management programs with HSBC Private Bank, called SIS and CIS. These mutual fund-based programs operate in three currencies for clients in over 12 booking centers around the world.

Our most recent conversion to the Global Wealth Platform is HSBC's UK Onshore Private Bank. In addition to the multiple currencies and markets, the platform and our services are compliant with UK financial services regulation as well as the UK tax code.

We will continue to add functionality. For example, this fall we will release services to comply with new European-wide regulation MiFID, or the Markets and Financial Instruments Directive.

As a financial update for the Private Banking segment, revenue of just over $100 million grew by 10% from the year-ago quarter. The majority of the revenue growth during the quarter was due to a net increase in assets under management from distribution partners in non-US markets. Average assets under management and longer-term investment solutions now total approximately $19.6 billion, an increase of 34% from the year-ago quarter. Revenue growth was also positively impacted by cross-sales in the US investment processing BSP business.

Profit declined from the year-ago quarter by approximately 13% to $19.2 million, due to a $12 million increase in expenses. Increased expenses versus the year-ago quarter were due primarily to direct costs associated with Asset Management, costs associated with the buildout and deployment of the Global Wealth Platform. 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.

Margin for the quarter was 19.2%. We expect to have continued pressure on margins in this segment as we launch Global Wealth Services in Europe and in the US. Long-term, we expect strong margins as we are making significant investments to grow and scale our Private Banking business.

Net new sales events for the quarter were approximately $10.5 million. The majority of new sales events for the quarter are associated with over $1.8 billion in net new assets under management from distribution partners in global markets. As a strategic update for the Private Banking segment, we are pleased with the launch of the Global Wealth Platform and our continued asset gathering through our distribution partners.

In Europe, we are building the Global Wealth Services pipeline, both with investment processing prospects as well as with banks interested in our Asset Management solutions. The conversion of our first external client is a significant milestone towards securing additional business. In the US, we are actively speaking with current clients and prospects about the benefits of Global Wealth Services and will continue with our transformation of our first US Bank, Centier, to the Global Wealth Platform.

In summary, SEI's Global Wealth Services solution will provide the strategic infrastructure to help private banks grow and keep pace with the rapidly changing wealth management industry. During the second quarter, we made great progress towards the launch of our new strategy.

Are there any questions?

Tom McCrohan.

Hi, Joe, and congratulations on getting HSBC up on the new platform. A quick question on the margin guidance. When you said that you expect continued pressure on margins, is that saying expected to go down from the 19 that we saw this quarter, or kind of stay where it's at for the balance of the year?

It could bounce around a little bit, and we don't really give guidance on that. But, again, we made some pretty significant investments and I would guess we were at the lower end of the margin for now. But this could certainly bounce around a little bit more over the next couple of quarters.

You talked about the $12 million of expenses increase year over year, some of which was due to the build of the platform, some of which was due, I guess, to costs associated with getting HSBC live. Are there other components of the HSBC relationship that are still yet to be implemented?

Well, HSBC is a large, global private bank, and we've just moved their UK business onto the platform. So we are hopeful that we have other opportunities within the Bank.

But as far as your engagement with them, have you -- my understanding -- I think what you've said in the past, Joe, was that the UK Private Bank was going to be operating on this new platform. So what you implemented so far -- was that what you have already contracted to do, or are there other pieces around the world that maybe I missed before that you've also contracted (multiple speakers)?

There's a little bit more within HSBC in the UK, but we have pretty much implemented what we have contracted for at HSBC Private Bank in the UK. There's a little bit more within the Private Bank that we will convert a little bit later.

Jeff Hopson.

Joe, recognizing that this is a multiple-year process to get business in the door, is there any change in the nature and/or tone of discussions now that HSBC is done?

Then, in the US, I think there was maybe a client at risk due to M&A activity. Anything new in that regard?

Well, as I've said a couple of times or several times to you and others, certainly the market has been looking closely at the HSBC transaction, and we're looking forward to a successful implementation. It's an important milestone to build out the pipeline and to move things forward. So I'm very positive that what we were able to do over the last couple of weeks will help us as we talk to additional clients.

Regarding the -- I think, actually, Bob announced a couple of quarters ago that there was some M&A activity that would lead to some business in the US moving away from us towards an in-house system. Again, that's still heading in that direction. But again, I think we commented that that probably wouldn't affect our financial statements or financials until sometime towards the end of 2008.

Robert Lee.

Just a couple quick questions. I just wanted to make sure I understand it correctly that you built out your infrastructure in the UK in advance of HSBC. Are you building that over and beyond what you need for HSBC, in order to accommodate future clients so there's a little bit of buildout well in advance of any perceivable revenue in the near term?

Well, we tried to build out an infrastructure to support the HSBC relationship, but to a certain extent, we're building a lot of things for the first time. So, for example -- I think I have mentioned this before -- we're putting together teams of people to manage the operation. We're typically hiring the senior people.

So we're putting in place an infrastructure that we think will ultimately support a much larger UK and European business in what we call a regional processing center in London. We also have built out some of the infrastructure in the US in what we call a central processing center. So certainly is some investment, but over time we believe that the platform is highly scalable, and that it certainly isn't going to be a one-for-one investment in infrastructure as we add more business.

The second thing is, I know when you first launched the new global platform, the intention was to try to price it on more of an asset basis, as opposed to some account or flat fee. I think you've mentioned that there's been ongoing discussions around that.

Can you maybe update us? If you look at it now, do you think, given your discussions with potential clients, that future pricing may not be as much asset-based as you had originally hoped? If that is the case, how does that make you feel about the long-term revenue growth potential from the business?

There really isn't much change or update. I think that we continue to talk to clients about what we would call a win-win pricing model. So we can help the banks grow their business and increase their relationship with their clients. The bank wins and we would also win, in an asset-based pricing model.

So we continue to talk to our clients and prospects about that pricing model. It's, in some ways, experimental; we have a client of one at this point. But again, I think that in general, the feeling is that asset-based pricing is certainly an important part of the equation, and over time there may be, for a larger bank, some sort of hybrid which would be asset-based and transaction or account-based. But again, ultimately, the goal is to create a win-win pricing relationship with the clients.

Terry Babe.

Just on the HSBC, a couple of questions here. One, did you recognize any revenue during the quarter from the implementation? Then, two, how should we think about the incremental step up in 3Q, if we'll get the full benefit there or if that should incrementally increase over the next few quarters?

Over the last couple of quarters, we have recognized some one-time implementation revenue, but we did not recognize any recurring revenue over the last two -- up until -- we will recognize some recurring revenue in the third quarter. Again, we don't disclose specific pricing associated with a specific -- or specific revenue associated with a specific client, but in the past have said that it's probably similar to the mid-sized BSP client for us in the US.

Then, just regarding the margin trends -- I know they are going to be volatile and bounce around somewhat. But as you begin to expense some of the capitalized costs, do you anticipate that the revenue growth for this year will more than offset some of those pressures from the capitalized expense in the second half?

Well, there are a number of revenue growth opportunities for us in Private Banking or our fast-growing Asset Management business, as well as some of the revenue we'll see from this HSBC relationship. So, again, we don't disclose specific financials related to any specific transaction. But I would expect that Private Banking would continue to grow from a revenue standpoint.

Lastly, just on the sales activity, have you seen any notable change in the pace of sales discussions since the conversion?

We have been very active in the market now for some time, and as I said earlier, I think that the market was closely watching our successful implementation of the first external client. So, again, I expect our conversations to continue with a number of prospects.

Tom McCrohan.

A couple of follow-ups. Was there a press release issued with HSBC going live on the platform either here or in the UK?

No. It was mentioned, though, in today's earnings announcement. There was not a separate press release issued yet.

Can you talk a little bit about the demand environment and the pipeline? Like what exactly is it about the new platform that is raising the interest level on increasing demand? If you can just get a little more specific on that, because it's still little difficult from the outside looking in, trying to really get a feel for what is in this platform that's just driving demand. If you can talk about that, that would be really helpful.

I'll give you a couple of comments. I think, if you look particularly in the UK and Europe, that most private banks are currently being run on legacy platforms that are generally fairly old, anywhere from 10 to 30 years old. So there isn't a lot of efficiency in those current platforms. I think what has typically happened, as these private banks have grown over the last several years, the way they have solved a lot of their infrastructure problems are by hiring more people. We all know that's not a very scalable model.

I think, when they look at Global Services, they like the fact that, number one, it's straight-through processing. So the operation can become much more efficient. It's truly a global platform, and Al mentioned 19 currencies, 12 countries. I think a lot of these banks also are either creating new investment products, structure products, new asset types, new asset classes. The platform is very robust when it comes to the ability to administer and process all kinds of new alternative investments and the types of solutions that banks are moving towards.

The platform is also very much built around a discretionary account model versus an advisory model. Again, most of the world managers that we speak to -- not only in Europe, but also pretty much around the world -- are all wanting to move much more towards a discretionary relationship with their clients, and the platform allows for the banks to do that in a much more scalable way.

So I think that there is an element of efficiency and cost-cutting, but the real interest on the part of our prospects is is this an infrastructure that can help the banks really grow their business? Is this an infrastructure that will allow the banks or other wealth managers to recruit the top-level relationship managers to manage the lives and the wealth of very important, wealthy clients?

So if part of the value proposition, when you talk to HSBC and other clients, that this platform is going to help them grow their business, are there operating metrics that you guys are tracking or negotiate with your clients, where your compensation or part of it is tied to some kind of operating metric like if this platform is going to help you build your business, we believe that, so we're going to put our money where our mouth is and say, if you grow your assets by this, you pay us X? You know what I mean? Is there any type of operating metric (multiple speakers).

We're in early days, of rolling out the business model, and anecdotally we have a single client. But we've talked a lot on these calls, as well as at the investor days in Oaks over the last couple of years, that we believe a win-win model has a significant portion of the revenue asset-based. So it's pretty simple. If the bank or the wealth managers are able to growth their assets, we would hope to be able to grow our revenue.

Are there any specific metrics that HSBC is tracking to quantify how this platform is a success for them? Is it a cost-based type of approach they are taking, like they are looking at cost per transaction? Or is it simply, we believe this platform is going to help us grow assets? Or any (multiple speakers).

Again, I can't really comment on a specific relationship with a client. But again, in general, the prospects that we are talking with, the banks we are talking to, are really looking for an infrastructure to help them grow their business. I think that's certainly at the top of the list of why a bank would engage in a conversation with us.

We have no further questions at this time. Please continue.

Thanks, Joe. Our next segment is Investment Advisors, and Wayne Withrow will cover this segment. Wayne?

Thanks, Al. Revenues for the second quarter increased 18% from the year-ago period. This growth was driven primarily by an increase in average assets under management to $40.5 billion, compared with $34.8 billion in the year-ago period. Quarter-end assets under management increased $1.5 billion, with $347 million coming from net cash flow and the balance being attributable to market appreciation.

Cash receipts for the quarter totaled $2 billion and redemptions totaled slightly less than $1.7 billion. For the first six months of the year, net cash flow totaled almost $800 million, compared with $138 million in the first six months of 2006.

[Props] for the quarter increased 32% from the year-ago period. Strong revenue growth, aided by strong margin growth, was the primary drivers of this increase. As you will recall, 2006 was a year of increased sequential investment in this segment, while 2007 represents a return to investment levels more in line with our historic levels. This should continue to be true for the remainder of 2007, although we will see some expense from the amortization of the Global Wealth Platform beginning in the third quarter.

Aside from our record revenues and profits, the big news in the quarter is that there was no big news. We continued to operate against the strategic blueprint we put in place at the beginning of 2006. This has yielded strong cash flow from our existing advisors and our pipeline of high-quality new advisors is stronger than it has been in years. Both of these factors are evidence of the market acceptance of our strategy. We hope to continue more of the same for the balance of 2007.

I will now entertain any questions.

Robert Lee.

Within the product offering in the Investment Advisors, has there been much of a product shift? What I mean by that is, have you started to introduce more alternative strategies into the marketplace? Because to some degree, it looks like revenue has been growing a little bit faster than assets. So are you getting a favorable mix shift as that happens? Does that also help them at the margin [of the margin]?

What I would say is the phenomenon you describe is not really due to a shift in alternative strategy in this segment. While we have introduced those strategies, I would say that's not the phenomenon you see. What you see is primarily the effect of leveraging this business as we get larger.

But there's nothing really in the mix shift that's causing revenues to grow a little bit faster than assets or anything specific you could point to?

It's primarily the effect of leverage, and in terms of mix shift, there's a little bit of mix shift from more of a mutual fund into separate account strategies as we go towards larger clients, and the separate account strategies tend to yield higher basis points.

We have no further questions at this time. Please continue.

Thank you, Wayne. Our next segment is the Institutional Investors segment. 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 second quarter of 2007 compared to the year-ago period, and also touch on the 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 27% while profits for the quarter, approaching $19 million, increased 51% compared to the second quarter of 2006.

New client funding and capital market appreciation fueled both the revenue and the profit growth for the period. Margins for the segment of 38% compare favorably to the year-ago period of 32%.

Quarter-end asset balances were $45.8 billion, reflecting an $8 billion increase compared to the second quarter of 2006. Continued client funding has been the largest contributor to the increased asset balances.

Net new client funding during the second quarter of 2007 was $700 million. During the quarter, several large client redemptions totaling $1 billion negatively impacted new client fundings. These redemptions resulted from several factors -- namely, a large client withdrawal from an insurance client to pay an insurance claim, a socially responsible investment program being discontinued and a client who changed their strategy to move to passive management from active management. The backlog of committed but unfunded sales was $1 billion at the end of the quarter.

Sales activity continues to be very active worldwide, and new clients' sales through June 30th totaled $3.6 billion. Client signings for the second quarter were $2.3 billion. The pipeline continues to be solid and active.

Worldwide pension funding and accounting reform continue to make pension management more complex and can negatively impact clients' business results. SEI's pension and corporate finance modeling and advice capability has global applicability and helps plan sponsors better manage pension finances. Market acceptance for our outsourcing plan management in our global markets continues to grow. The integration of our Global Institutional business into a single unit is going well, and we are busy introducing our PensionConnect 360 solution to the international markets.

US hospital market continues to be an attractive growth opportunity for us, due to the size and the diversity of their asset pools and also their favorable reaction to our recently announced HealthcareConnect 360.

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

Robert Lee.

I just wanted to make sure I understood the remarks about the flows, because in asset growth sequentially was pretty flat despite pretty robust markets. I'm not sure I understood your comments around the flows. Was there net client funding of $700 million in the quarter, or --?

Yes, there was a gross client funding of $1.8 billion, but that was offset by $1.1 billion of what would be outflows, so clients who are leaving the program, assets that were leaving. So the net was $700 million.

I guess, considering that most equity indices, at least, were up so much in the quarter, it still seems odd that assets would be sort of flat from Q1 to Q2. Is there something else going on in there that may account for that?

There really isn't, because if you are to look at the revenue from quarter one to quarter two, the revenue was up $2.3 million. So --

I guess, related to that, similar question to what I asked Wayne -- is part of the -- because your revenues, both sequentially and year over year, grew at a pretty healthy rate, even faster than assets. Is there some kind of asset mix shift taking place within that business that's also having a positive impact on revenue growth?

There is. We have introduced alternative asset classes to many of these clients, as they have gone through the PensionConnect 360 advice process. The end result is we have about $1 billion, $1.1 billion in alternative assets, most of it being in hedge asset class. There are some additional revenue opportunities there. That would account for the difference.

I guess, given the trend towards alternatives, that's something you think could continue to happen for awhile, I presume?

Yes, I would suspect that that would be the case, because as you know, pension plans have not been, necessarily, early adopters to that asset class. It's been more the endowment and foundation space.

Having said that, we're seeing acceptance with both segments, on the pension side primarily because of the fact that, as we set them much more around a goal orientation of managing pension finances, it does show the need for some type of an absolute return type of a portfolio. The flip side in the endowment and foundation space, the space that we're going after, has historically -- unlike some of the large, visible endowment funds -- they haven't participated in this asset class. So we're giving them a nice opportunity to be able to do that.

We have no further questions at this time. Please continue.

Our final segment today is Investment Managers, and I'm going to turn it over to Steve Meyer to discuss this segment.

Thanks, Al. Good afternoon, everyone. The Investment Managers segment continued to grow in both revenue and profits for the second quarter of 2007. As I have done in the past, I will briefly review the financials for the business and then give a quick update on our strategic progress.

For the second quarter, revenues for the segment totaled $35.3 million, a $6.2 million or 21.5% increase compared to the second quarter of 2006. This growth was primarily due to net new client fundings and existing client growth.

Our quarterly profit of $11 million was up approximately 69% from the same quarter in 2006. In addition, revenue and profit for the quarter were also impacted by a one-time buyout of approximately $600,000 that we received for a mutual fund client who sold their fund family in the quarter. Our asset balances at the end of the second quarter of 2007 were $192.9 billion or $12.2 billion higher than at March 31, 2007. Approximately $7.4 billion of this increase is attributable to additional net client fundings, and $4.8 billion is due to market appreciation.

In the second quarter of 2007, we continued our strong sales momentum, with new business sales events of $7.4 million in annualized revenue. These events were almost evenly split across our alternative and mutual fund solutions, with mutual funds representing a slightly higher amount. Additionally, we are pleased that during the quarter, four of these events were from our European-based sales efforts, reflecting our strategic focus on growing our business globally long-term.

From a strategic update, as I mentioned to you during our first-quarter call, we are positioned well against the increasing marketplace needs of Investment Managers. I also mentioned to you in the first quarter that we had sold our third total operational outsourcing client.

I am pleased to tell you that during the second quarter we converted and have this client up and running. This client, as well as our two early adopters, continues to serve as our foundation and learning base for our strategic direction. While we will grow this solution in a measured fashion to ensure long-term success, this newest client to our TOO solution marks another step towards executing on our strategy.

In summary, as I look forward, I continue to remain encouraged by our growth and progression in this business. While we will have some challenges as we go through the year regarding recontracting some of our legacy business, the market opportunity and pipeline remain strong.

I will now answer any questions you may have.

Robert Lee.

I feel like I'm the only one asking questions today. A couple of questions -- a couple of your large competitors in the alternative space -- there's been a couple of large mergers and one of your competitors, I guess, also attempted to go public, and I guess that didn't happen. But are you seeing any positive fallout or any way, shape or form from some of the M&A and other activity in the industry?

Well, I think we talked about this on prior quarters, too. We certainly don't see mass disruption because of the mergers. I think, for some clients, our competitors' model either fits for them or it doesn't. Others -- I think, certainly, the merger activity has brought some question into play, and certainly they are assessing other options. While we have seen some activity from that, I wouldn't say that we've seen a wide-scale disruption.

Given a lot of the turmoil in different credit markets and, I guess, concern over pricing of assets, and I guess I'm focusing on the alternative business again -- part of what you do is try to price some assets for a lot of your clients. Do you -- any sense that maybe the liability that you incur in that process is somehow going up as people look for some kind of deep pockets in case something goes wrong?

Unlike some of our other competitors, we do not have an offer and we go out and we say, we will be a market assessor or market maker for certain prices of these derivatives. What we feel our process is or our role in this is, to make sure that there is a process for valuing, to make sure that there is an independent oversight of the process and the function of providing an NAV for these funds.

At the end of the day, I think we're very clear where we're focused on our role in this going forward. So I don't typically see that as increasing our liability.

I do think we also are very careful of the business we bring in. We know what we're very good at. We know that there's a lot of different types of security pools out there that managers invest in, and we tend to stray away from the securities or the more esoteric strategies in the hedge business that, quite frankly, we don't feel that we could add value to.

Terry Babe.

Just turning to the margins, margins were pretty robust in the quarter, and likely benefited from, I guess, the $600,000 buyout. But can maybe you talk a little bit about the margins and how we should think about that going forward? Because this is obviously a pretty big step-up from prior quarters.

Yes, and I would say, yes, the buyout and the timing of expenses certainly helped margin in the quarter. With that said, I've said this before. I think you can't look at this business and the margin in this business on a quarter-over-quarter basis. You really have to look at it on an annualized rolling basis.

What I'd say is last year I think we had a pretty significant, on an annualized basis, uptick in margins. I think that there is opportunity based on where we ended last year for an uptick in margin, but think that it will not be as dramatic as the uptick we had last year.

But again, and I think Joe said this about his business, I do believe margins will fluctuate quarter to quarter. But again, long-term, while there will be some improvement, I don't think as dramatic as last year.

Then coming out of last quarter, you flagged a client loss that was supposed to impact this quarter, and obviously you had pretty strong asset growth. Then you did put out an announcement during the quarter, I believe, about the Accessor win. Did that fully contribute to this quarter, or should we expect some incremental growth in 3Q as well?

Well, I believe there's two questions there. So one, the client loss -- we did lose that client that I had brought up. So those assets and revenue for the portion that deconverted during the quarter are out. Accessor did convert during the quarter, and you are seeing the benefit, although I don't think it was a full quarter's benefit, from that.

Tom McCrohan.

I have, also, a question on the margins. Did I hear you wrong back in June at the investor day? I thought you said, expect margins in your business to compress this year.

No, I think what I said was, I think both on the first quarter call and the investor day, one, I felt that there was opportunity to continue to grow margin in the segment, but not at the pace we did in 2006. Two, specific to the quarters, I did say in first quarter that, due to the client loss that we announced, that it could put -- I think the exact words I used were, it could put some slight pressure, downward pressure, on our margins in the business. What I think happened this quarter -- we were able to grow through that sooner than I thought, aided by some of the one-offs as well as some timing of expenses.

Jeff Hopson.

You mentioned that you are out, I guess, recontracting some of your clients. So my question is, what percentage of the legacy clients, I guess, what percentage of the businesses is this, and is this unusual activity, in any way? Is it more of a defensive posture? Or are you, obviously, trying to sell new services, I guess?

A couple things in there. So, as far as recontracts, we don't really go into the details, and we really haven't on re-contracts. That's basically because I look at re-contracts as a normal part of doing business. We have recontracts, really, every quarter, and I really only bring them up when it's either significant to the quarter, significant strategically or there's an abnormal volume of them, which I think is the case, and I'm looking out the rest of the year here.

But typically, we don't go into details, because I just think it's a normal part of business. But, for example, in Q2 we recontracted over $5 million of our existing base of business. That's just something that we don't feel is a beacon statistic, as it's part of business.

But the reason I bought it up here is, when I mention legacy business, obviously, we've been very clear where we're heading with our value proposition. We believe that our success and long-term strategy is focused on providing a higher value proposition to these investment managers. That's where, I think, we're seeing a lot of market acceptance.

When you look at some of our legacy business -- and the older the clients are, I'd say, the more they fit into this camp -- I think our value propositions are not completely aligned. I think, in some cases, many of them -- their value proposition or our value proposition is less differentiated with them. They're probably more focused on more of the commodity sides of the business.

I think, going forward, it would be a mistake for us to try to win something just on price and bifurcate our value proposition. So in our standpoint, it's certainly business we would like to keep, but I think that we really have to make sure it matches up, long-term, our value proposition with their value proposition.

So I guess you're saying that there is some business out there that theoretically could be at risk, but hopefully you are getting offsets on the other side?

Yes.

We have no further questions. Please continue.

Thanks, Steve. I would now like Kathy Heilig to give you a few companywide statistics. Kathy?

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

Second-quarter cash flow from operations, $74.7 million or $0.37 per share. Free cash flow for this quarter was $43.3 million or $0.21 per share. Year-to-date cash flow from operations is $133.5 million.

For the second quarter, capital expenditures were $6.8 million, which did include $2.2 million towards our new facility. Capital expenditures for the remainder of 2007, excluding capitalized software, are expected to be between $12 million to $15 million, which does include $2 million for the continued expansion of the facility.

The accounts payable balance at June 30th was $7 million. Stock-based compensation expense for the second quarter was $6.9 million, which compares to $6.5 million for the first quarter and $3.4 million for the second quarter of 2006. We expect stock-based compensation for 2007 to be about $27 million, which is approximately $2 million higher than 2006.

We 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.

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

Terry Babe.

Just a quick question on the tax rate. Should we expect the 38% rate to continue, going forward?

The tax rate is going to fluctuate between 37% and 38% quarter to quarter, because what happens there is we do have items that are annual items. But then there's these other tax items that are called discrete items. So if a tax law changes or a court case comes up, something like that, it impacts just that quarter. So whenever we have any of these one-time kind of things happen, that will make the tax rate change a little. But it will be in that 37% to 38% every quarter.

Jeff Hopson.

If Wayne is still on the line -- I'm sorry, I couldn't get my question in -- in terms of the number of new advisors or advisors in the pipeline, can you put that into context as far as what type of growth that would be? I realize you're not seeking a growth target, but what type of growth in advisors might be conceivable, going forward?

I guess the way I would answer the question -- because I don't want to get into a numbers accounting quarter over quarter. It's something maybe I'd be more willing to do on a year-over-year basis. But what I would say is, if you wanted to look at it from a directional perspective, I think the number of what I'd call higher-quality new advisors we are signing is accelerating, as is the size of our pipeline of prospects.

At the margin, is there anything new as to why they are coming to you versus others?

I think what drives new advisors to us is the breadth of our offering, and it is the value to them as a total business solution. So it's not just an asset management product, it's not just a technology product, it's not just an operations product, it's not just a business consulting product. It's all that, integrated together.

When they integrate our product, it's, A, more efficient for them from an operational perspective, so it frees up more of their time to allow them to grow. Secondly, when you look at the robustness of our investment offering, it allows them to further differentiate themselves in the marketplace to not only give them the time to grow but to give them a differentiated product that allows them to be successful and to grow.

[Michael Lipper].

I had a question on the collective trust fund program, as distinct from the line above, of the equity/fixed income program. At this point, where the collective is below 10% of the total, does the collective have substantially different financial implications than the other investment line numbers?

Second, this number has been declining for some time. I presume that the reason for that is the various accounts that have been lost, rather than a shift from one type of relationship to another.

Well, let me see, Michael. I'm not sure we got the whole question here, but I think what you might be pointing out to is the balances within the collective trust fund program and maybe the differences over Q1 -- is that what you're looking at?

Well, yes, it is the balances or the -- it is the balances, but I'm looking at it for the five quarters as well.

Hold on a second, Michael; we're trying to get the --

I think if you're looking at the number that's on the bottom of page eight --

Correct.

So you can see the decline in those, the collective fund programs. I think there's two things that are going on. One is, your first question was, is there a revenue differential between that and the equity and fixed income programs? The answer is yes. There's no management here; we're not managing these assets. This is an administrative service, if you will, and custody service, a trust service that we provide to third-party distributors.

I think the second piece, insofar as the asset balances changing -- there has been some consolidation in that particular business, insofar as some firms have either merged or sold off their business. In that case, we may be the winner or potentially could go back to a parent company.

Then, in effect, the collective trust -- is that using your own trust operation or are you, in effect, providing support for other institutions?

We're providing support for other institutions. Other institutions, other money managers who would primarily have either a GIC type of a program that could be an equity program that they want to be able to put a collective fund wrapper around that. It's an accommodation service that we provide. We provide mutual fund accounting, mutual fund administration. If someone wants to move into a different kind of a pool vehicle, this is an offering. But it's got lower service levels, lower revenue, lower profit potential.

When you said lower profit potential, I'm interpreting that to be a lower margin?

Correct.

We have no further questions at this time. Please continue.

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

Now, 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. Second, our progress on our transformation has been steady, and while we have a lot yet to accomplish, the delivery of GWP to HSBC's London-based Private Bank was a big step in our journey to transform our business. Third, our new solutions and strategies -- along with 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 high value-added proposition, and it differentiates us from competition. As well, we believe it will serve us well in the future.

So, if there are -- one more shot at questions, if you have anything left.

We have no questions at this time.

Okay, great. Good afternoon and thank you very much for your attention and your attendance. Good day.

Ladies and gentlemen, this conference will be available for replay from July 25th at 9:00 PM through September 25th at midnight. You may access the AT&T executive playback service anytime by dialing 1-800-475-6701 and entering the access code 879867. International participants may dial 1-320-365-3844. (OPERATOR INSTRUCTIONS). That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.