SEI Investments Co (SEIC) 2010 Q2 法說會逐字稿

Welcome to the SEI second-quarter conference call. At the request of your host, 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). And as a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Al West, Chairman and CEO. Please go ahead, Mr. West.

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

I'm going to start by recapping the second quarter 2010. I will then turn it over to Dennis to cover LSV and the investment in new business segment. And after that, each of the business segment leaders will comment on their results. And then finally, Kathy Heilig will provide you with some important companywide statistics. And as usual, we will field questions at the end of each report.

So let me start with the second quarter 2010. Second-quarter earnings grew by 29% from a year ago while we reported a decrease of 9% in our revenues. Diluted earnings per share for the first quarter of $0.28 represents a 27% increase from the $0.22 reported for the second quarter of 2009.

Now, our 9% decrease in reported revenue was due to the deconsolidation LSV as we return to the equity accounting method in 2010. Now, second-quarter 2010 reported revenues did not include any LSV revenue, while second quarter 2009 included $49.1 million in LSV revenue.

So excluding LSV's revenue in 2009, second quarter 2010 revenues grew by 13% over second quarter 2009 revenues. Now this growth in revenues is primarily the result of higher capital markets.

Our earnings for the quarter were unaffected by the change in accounting treatment of LSV, but were affected by a gain attributable to the SIV or the SIVs on our balance sheet, which netted to an increase to earnings of approximately $3.9 million due to cash repayments from the SIVs.

Also during the second quarter, our non-cash asset balances under management decreased by $12.2 billion. And of that, SEI assets under management fell by approximately $5.8 billion during the quarter, while LSV's assets under management fell by approximately $6.4 billion.

In addition, during the second quarter, we repurchased 1.4 million shares of stock at an average price of just under $22 per share. That translates to just over $30 million of stock repurchases during the quarter.

While the capital markets rebounded over the last few quarters, they turned down again in the second quarter. Now this certainly had an affect on second quarter results. But without another rebound, the markets will have a larger negative effect in future quarters.

New business sales, while still slower than we would like, have picked up in all units. For the entire company, we recorded approximately $22 million of new recurring revenue sales events in the second quarter. Year to date, we have recorded approximately $40 million of new recurring revenue sales events.

While we are pleased with the sales results, much of the recurring revenue sold will be slow to realize because conversions take time. And recently, we have experienced slowness in converting sales into revenue.

Meanwhile, we're keeping our attention on cost control while continuing our investment in the Global Wealth Platform and its operational infrastructure so critical to our future. And during the second quarter, we capitalize approximately $9.2 million of the Global Wealth Platform development and amortize approximately $6 million of previously capitalized development.

As always, we will work hard to find ways to retain clients and grow new revenues. We'll also continue our efforts to control costs and improve productivity. In addition we will continue to invest in areas that promised to provide long-term growth.

Now we're firm in our belief we're helping our clients succeed while building a strong, growing company. So I'm going to conclude my remarks here. And I will ask Dennis to cover some Company financial issues, and give you an update on (technical difficulty) [LSV] Investments in New Business segment. And after that, I will turn it over to the heads of the other business segments.

Thanks, Al. Good afternoon, everyone. I will cover second-quarter results for the Investments in New Business segment, and make a few brief comments on LSV asset management and on our SIV holdings.

During the second quarter 2010 the Investments in New Business segment continued its focus on direct marketing and research activities directed to the ultra-high-net-worth investor market and the further development and distribution of our life and wealth services offering.

During the quarter, the Investments in New Business segment incurred a loss of $1.7 million. This compares to a similar loss during the first quarter of 2010. You can expect losses in this segment to continue.

Regarding LSV, we continue to own approximately 42% of LSV. LSV contributed approximately $23.5 million in income to SEI during the quarter. This compares to approximately $24 million in the first quarter of 2010. The slight reduction is due primarily to decreased revenues at LSV from lower asset balances.

Asset balances shrank approximately $6.4 billion during the quarter, primarily from market depreciation. Net cash flows at LSV were nominally positive.

During the quarter, we generated gains totaling $3.9 million from the SIV securities we hold on our balance sheet. These gains are the result of cash distributions we received during the quarter. As of today, we currently hold SIV securities with a market value of $102 million. I would also like to note that during the quarter, we made a $50 million payment on our outstanding debt.

I will now take any questions that you may have.

(Operator Instructions) [Tom MacFarland].

What was the quarterly revenues for LSV?

We don't report that now, Tom, since we deconsolidated.

I know; I was just wondering if you had it handy. Are you going to be disclosing that in the queue?

No. We will usually disclose that on an annual basis. But I will tell you that revenues for the quarter for LSV were about $65 million.

All right, so up from last year's $49 million.

Correct.

All right, and given the margins -- improvement on the expense side, were there any corporatewide initiatives on the cost savings side you can share with us?

Not this quarter; just continuing the -- keeping our eye on it. If you look at expenses year-over-year corporate wide -- just to give all of you a little bit of color on it, expenses are up. But mainly, they're up in the area of personnel costs. And they're up a little somewhat on salary and incentive compensation.

They are also up in the area of -- if you look at the six-months this year versus six-months last year, they're up in the area of sales compensation, because our sales activity is a lot stronger this year. And then there are some cost upticks in the consulting, use of consultants and some offshore consultants, as we have brought on some of this GWP business.

But across all the -- a lot of the cost initiatives we put into place last year, we continue to try to sustain (multiple speakers) I guess the good news is our costs are going up in areas that are really tied to new business activity.

Glenn Greene.

Following up on the cost line of questioning -- were there any unusual costs in the quarter, maybe specific to the $5 million sort of onetime buyout fee, or termination fee?

That kind of stood on its own. You could probably say there was some uptick in cost related to bringing on some of the new client conversion activity that -- I think some of that will start to decline.

Would you say -- let's say the $171 million all-in cost base -- is that a good sort of running base from quarterly going forward?

Other than some of these variable cost that would be tied to new business activity -- I would say that is probably a pretty good number. I think it will hop around here and there a little bit. But there's nothing on our horizon that's a new, significant cost coming at us.

Okay, thanks.

(Operator Instructions) Robert Lee.

This may be too early to answer this question. And Dennis, maybe I'm not sure if it's the right question for you, but I want to ask it anyway. I know this morning, the SEC put out some revised proposals around 12b-1 fees. And I assume you haven't had too much of a chance to look at it yet. But to the extent that anyone there has kind of glanced at it, any kind of impact you would expect on any of your -- I guess this may be is a question for the investment advisory business. But any kind of broad thoughts on how it may impact the broader business?

I specifically haven't looked at that, Rob. I guess we have other things we're trying get done today. But I think Wayne -- maybe he can address it when he has his comments.

Fair enough, just thought I'd ask.

(Operator Instructions) No more questions at this time. Please go ahead.

Thanks, Dennis. Now I'm going to turn it over to Joe Ujobai to discuss our private banking segment.

Thank you, Al. Today, I would like to give you an update on our sales activity and a review the financials for the private banking segment. As I mentioned on our last call, success this year will be defined by sales results, which will drive our future growth.

We will remain focused on three growth opportunities. First, client conversions and the sales of Global Wealth Services solution enabled by the global wealth platform. During the quarter, we converted the Towry acquisition of Edward Jones, and in July we converted the discretionary business of the PFP group. We are aggressively selling GWP in the UK.

We recently signed our fourth client this year and seventh client overall. Our newly signed clients is one of the largest UK IWAs, has a large advisory and discretionary business, and is a strong UK brand. We are not announcing the client name today because the signed agreement is subject to the restructuring of bank covenants with their private equity parent. We expect the new client will begin converting assets to GWP in the first quarter of 2011.

As I mentioned previously, I expect that realized recurring revenue from our first six GWP clients will reach at least $20 million in 2011. Additional clients signed this year will add to our 2011 recurring revenue opportunity. We're working diligently to close the current pipeline and convert the backlog.

In the US, as we prepare for the availability of GWP, we're focused on growing our revenue and retaining current clients. Areas of US revenue growth include selling community bank and independent trust companies on our Global Wealth Services solution, currently enabled by Trust 3000. During the second quarter, we sold one new client in this segment. The four deals closed so far this year have approximately annual recurring revenue of almost $3 million.

We've also increased our selling efforts in the regional and national bank segments. At the investor conference, we announced the signing of Wilmington Trust Company a large, competitively installed bank. We're working with Wilmington to finalize the conversion date.

We view both the Wilmington win as well as the Wells/Wachovia conversion completed in June as milestone events in the US that will drive further growth.

As usual we're also involved in recontracting activity. So far this year, recontracting rates or net downs have improved.

During the second quarter, we sold net wealth processing events of almost $17 million, of which $14.5 million is recurring. Year to date, net wealth processing events totaled just over $25 million, of which $16.1 million is recurring. This number includes our UK and US businesses, and is calculated by determining expected fees at conversion or average annualized contract minimums.

Finally, we continue to support and grow our global asset management distribution partnerships. In the second quarter, we saw renewed evidence of cautious investor sentiment outside of the US. This has once again slowed down our net cash flows.

At the investor conference, we announced a strategic distribution relationship with Edward Jones in Canada. As a strategic partner, we will get premium positioning as their only mutual-fund based discretionary investment program. We continue to grow our distribution business through a combination of current and new partners.

As a financial update, I will focus my comments on a comparison to the first quarter of 2010 as well as share with you some of these challenges we face in growing our near-term revenue and profitability.

For the quarter, revenue of just over $90 million was up slightly compared to the prior quarter's revenue of $87.1 million. Profitability improved slightly to $11.5 million. Revenue in the second quarter included $5 million in a final one-time deconversion payment from a lost client announced in 2009.

Despite solid wealth processing sales events, revenue and profit will continue to be under pressure for at least the next 12 months due to the following reasons. Going forward, we will now have the full impact of previously announced lost US clients. This is an annual impact of over $23 million in recurring revenue.

The leadtime required to realize the current revenue from our wealth processing sales is long -- on average of 12 months -- and with business transition clients on GWP, the revenue opportunity is great, but the recognition timeframe is longer as we expect to convert assets over time, not all on day one. In other words, it will take time for new wealth processing business to flowthrough to realized revenue and profitability.

Also are our longer-term Asset Management business also faces headwinds due to both market appreciation and fragile individual investor sentiment.

Finally, some of our long-time cross-sell solutions, such as our money market funds and brokerage, have experienced continued declines over the past several quarters generally in line with the rest of the industry.

In this environment, we are working hard to control expenses and realize revenue as quickly as possible, though we face challenging quarters ahead as we transform our business. Current financial results and short- to mid-term challenges aside, I'm encouraged by our solid sales activity. We have growing pipelines in all of our wealth processing businesses, and we are experiencing momentum in our focus markets. We will grow this business by actively selling, focusing on the opportunities for change, while we continue to invest in our longer-term future and the broader rollout of global wealth services.

I will now entertain any questions.

(Operator Instructions) Jeff Hopson.

Thank you. So any change in kind of the pipeline versus what it was at the investor conference? And I think you may have given us, but the new UK client -- did you size that relative to some of the other customers?

So we continue to work really hard on closing the pipeline. So again, I think -- as I said before, I think momentum is a key driver. So the more momentum we have, the more we're going to close. So I feel pretty good about it. We're working to add additional names to the pipeline by going upmarket and talking to other firms in addition to larger IFAs.

I would also say that -- you want me to size this new client. It's a larger IWA. And so we talked about people like Towry being one of our top 10 clients. I think over time -- not at conversion, but over time, this new one has the potential to be a large client for us.

In the US, I think the Wilmington announcement as well as the good, solid conversion at Wells/Wachovia has certainly helped us on the new business culling efforts. So we're working pretty hard to start to grow that pipeline once again. And there's some good early progress.

And the $5 million one-time -- what type of cost would have been associated with that?

Not a heck of a lot of costs associated with that. (multiple speakers)

Okay, got it. Okay, thanks.

Tom McCrohan.

Just a couple of clarifications. So, this quarter's run rate -- the $90 million you posted in revenues -- does that fully bake kind of the client loss that you talked about? So we lapped all of that M&A kind of client loss activity?

No. We had some continued recurring revenue in this quarter from one of those large loss clients. So we will see the fully baked-in revenue in the third quarter.

And Wells/Wachovia -- was that in this quarter as revenue run rate, or is that going to start -- given you just converted in June, start seeing that in 3Q?

As I mentioned before -- I believe I mentioned this before, in some of these re-contracts and some of this M&A activity, we haven't because of some of the margin pressure -- some of the pricing pressure, we didn't expect to see significant revenue increase based on some of that new business. Now we did see some onetime increase, and we continue to build a strategic relationship with the firm. But I wouldn't expect to see significant revenue increase based on that conversion.

Okay. And then lastly, you mentioned that the forward global wealth platform deals are closed this year had an annual revenue -- and I didn't capture what that number was.

What I said was that the [stick set] we have previously announced from HSBC through to UK wealth and PFP we believe will generate about $20 million of revenue in 2011. And then any additional clients we sign, like the one I just described and any more we sign this year, we would think would add to that $20 million revenue opportunity in '11.

Okay, thanks.

Robert Lee.

Two quick questions -- first, just curious on the margin front, and maybe some of the things you're doing to control expenses. In the UK, I mean as you rolled out -- been able to sign up clients, and obviously, it's probably kept staffing levels somewhat elevated -- how are you looking -- what's one of the ways you can kind of control costs there, given new business trends? Are you looking to kind of move office facilities to lower cost location, or -- I'm just curious how you can kind of actually control anything there in the short run, given the new business trends?

So the new business trends brings some increased expenses. Some of that is not so bad; for example, we're paying more out in sales commissions. But there is some investment to be made as we ramp up to take on more clients. We look to increase or to control expenses a number of ways. The platform becomes more efficient as we bring more clients onto the platform; as we use the platform more; as we understand what we developed and try to fine-tune the platform -- the goal is to make it as efficient as possible.

We have also I think actively used partnerships with the global sourcing providers. So we have offshored some of the operations work to not only manage costs but also to get these conversions to happen quickly.

And so our rent on Bruton Street in London really isn't -- substantial costs associated with the growth of this business. But we do look at again continually making the platform more efficient as it matures, and trying to identify the best ways to not substantially increase our operational expenditures by again offshoring or building more scalability into the platform, or more straight through processing to the platform.

Okay. And I'm just curious -- with the GWP, just to refresh my memory -- the expectation is that that will be US eligible I guess in 2011, correct?

We're working to initially launch part of Wayne's business in late 2011. And so we do have some US clients lined up. So we're working hard on finishing up US taxes, as well as sort of all of the connectivity to the Street. And as that evolves, we will continue to inform you and the marketplace. But we're doing our best to get it to the US as early as possible (multiple speakers) as possible.

So to the extent you are out there kind of trying to redouble your efforts, whether it is Wilmington or elsewhere, it's really -- the focus is -- how I think of that is, the focus is let's get them on Trust 3000, and then hopefully somewhere down the road, we can convert them. Or is it more like, let's get them to commit to GWP, but we'll just have to wait for the conversion and hurry up to make it US compliant?

It's a combination. It depends on how soon -- it depends on the bank situation. So I think we are certainly selling the GWS or the GWP strategy. And I think the market is beginning to take notice in what we have invested in, and the uniqueness and the quality of the service.

Some organizations may want to convert more quickly, and that might mean Trust makes sense for them. So we're sort of in an interesting timeframe for that. But Trust is certainly a very viable solution in the market. But certainly, our goal is to move all of these clients to GWP over time.

Glenn Greene.

Just a clarification -- if I heard you right, it sounded like there was a $23 million annual revenue impact from lost customers. I just wanted to understand what is sort of in the run rate, and what is still going to sort of -- has to rolloff going forward?

So, yes, we've talked about this for the last -- since late 2007, probably, that there were two large organizations as well as a handful of smaller that are roughly around $23 million of revenue. That revenue has been coming off since, I would say, sort of the fourth quarter of 2009 -- I'm sorry, the fourth quarter of '08 through the second quarter of '09.

So there's -- we're not giving a specific number, but there was a little bit of positive revenues in this past quarter, and we will see next quarter what the full impact is. But in most of it -- most of it was already in the first or the second quarter of this year. There is a little more that came out in the second quarter. And the third quarter which will be much more clean from a large (multiple speakers) --

So if we back out the termination fee, you're sort of at an $85 million run rate for the quarter. You're suggesting there's a slight decline sequentially into the third quarter?

Yes. There would be a little slight decline, yes.

From the $85 million?

Yes.

Okay, thanks.

In addition to some of these other things I mentioned around, we are seeing headwinds in our asset management business, and we are seeing some headwinds in our liquidity and brokerage business. So there is obviously some volatility in the market. So our goal is to realize this new revenue as soon as possible and (technical difficulty) expenses so that we can get this back to growth. But the next 12 months are going to be challenging.

It sounds like you're a lot more cautious than you were sort of a month-and-a-half or so ago at the investor day. Has the environment really changed in the last five or six weeks?

At investor day, we try to be pretty positive around our future strategy versus our some of the more day-to-day or the quarter-to-quarter events. But you all are asking for more specific information, so we're trying to share that with you.

Okay, thanks.

(Operator Instructions) No other questions at this time. Please go ahead.

Great, Joe. And our next segment (technical difficulty) investment advisors (technical difficulty) Wayne Withrow (technical difficulty) this segment.

Thanks, Al. We continue to see improvement in our financial results during the second quarter, although recent market weakness does present its challenges.

Quarter end [active under] management decreased from $30.2 billion at March 31st to $28.4 billion at June 30th. This decrease was primarily driven by market depreciation.

On the bright side, we did have $86 million in net positive cash flow. While not close to levels of cash flow we expect from this business, it is significant from a symbolic perspective in that it is the first-quarter of net positive cash flow since 2007.

Average assets to management, the metric on which we earn revenues, were essentially flat when compared to the first quarter because the recent market retreat occurred at the back end of the quarter. This recent market retreat will be a headwind for us for two reasons. The direct impact on asset balances and revenues, and the indirect impact on and end investor sentiment. We're watching the indirect effect closely, since the end investor has been slowly returning to the market, and we're unsure of exactly how this latest market decline will impact that return.

Revenues for the quarter exceeded those in the first quarter by $900,000 or 2%. This was driven by higher-than-normal brokerage revenues earned from the funds. Profits for the quarter were $18.3 million, an increase of 2% from the $17.9 million earned in the first quarter. This increase simply reflected the net impact of our increased revenues.

In terms of new business development, we recruited 111 new advisors during the quarter. This compares to 81 new advisors in the first quarter of 2010. This brings our total number of new advisors to 192 for 2010, which is twice our production from the first half of last year. As I discussed at our recent investor conference, increasing the number of new advisors is a strategic imperative for this segment.

In summary, our revenues and financial results in general benefited from higher asset values early in the quarter, but recent market declines are a headwind going into the third quarter. However, new advisory recruiting efforts are strong, and we did see a modest return to positive net cash flow.

I will now welcome any questions.

(Operator Instructions) Mr. Lee.

Just curious -- I can probably guess at the answer. But is there any kind of color you can provide on kind of the pattern of business trends through the quarter? Should I just assume that started out pretty strong, and just kind of tapered off as things got worse? Or was it kind of more spread out -- how would you define that?

Let me take a shot at that. I think during the quarter, we saw the business progressively improve. And now, over the past four to six weeks, we see some deterioration in the market. So I'm not ready to extrapolate that out into the future.

Okay. And maybe with the number of advisors that you have signed up -- well, obviously you signed up that 190 or so, so far this year. Could you maybe refresh us on the total number of advisors right now that you have got kind of signed up? And I'm assuming it's the old 80/20 rule that still applies?

Yes, it is the 80/20 rule. And I would say that if you look at our overall advisors, we are in sort of the 5,500 to 6,000 range, maybe. But it's really about 1,000 advisors that really count.

All right, great. That was it. Thank you.

And I'll caution you -- when we sign new advisors, we try to be somewhat selective, and we try to pick the ones that we think can grow. But we're not always right. So whether we sign a new one, and they ultimately go into the 1,000 bucket, or ultimately go into the 6,000 advisor bucket, it is hard to say day one. We obviously do our best to make sure they fall into the advisors that count bucket.

Great, thank you.

(Operator Instructions) That was our last question for this segment. Please go ahead.

Thank you, Wayne. Our next segment is the Institutional Investor segment. I'm going to turn it over to Ed Laughlin to discuss this segment.

Thanks, Al. Good afternoon, everyone. I'm going to focus the majority of my comments on the financial results and the progress we've made during the second quarter compared to the first quarter of 2010. Second quarter revenues of $51 million increased 2% during the quarter due to higher-than-normal brokerage fees earned by the funds.

Similar to the advisors segment, average assets under management drive revenues. And average assets under management were flat to the first quarter because of the capital markets' performance at the end of the quarter. Lower quarter-end asset balances and continued market depreciation will challenge revenue and profit growth.

Operating profits approaching $25 million increased 4% for the quarter, reflect [in] increased revenues and flat expenses during the quarter. Margins increased slightly to 48% for the quarter. This compares favorably to the first quarter margins. Revenue volatility will cause margins to fluctuate.

Compared to the first quarter of 2010, quarter end asset balances of $46 billion reflect a $3 billion decrease due to the capital market appreciation that occurred during the quarter.

Net new client funding during the second quarter was $140 million. Backlog of committed but unfunded sales was $735 million at the end of the quarter. Client signings for the second quarter were $1.1 billion, and totaled $2.4 billion year to date through June.

We're encouraged by both the growth and quality of the pipeline. However, as we talked about at the analyst day, client decision-making continues to be delayed.

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

(Operator Instructions) Jeff Hopson.

Okay, Ed, so you mentioned on the pipeline the quality. Any change in the size or the nature of the clients in the pipeline?

No, it pretty much is diversified. I think the quality issue is more related to the fact that we believe that there is a little bit more urgency, if you will; there's a little more of a commitment to kind of go through due diligence. So that part is -- we think we'll be healthy.

And I guess -- funded positions around the world have worsened. So is that good for you or bad for you?

Well, it should be good for us. It ultimately is something we can help them to solve. So that should be a good trend.

Okay, thank you.

(Operator Instructions) Mr. Lee.

I have a question; I don't know if -- you could probably answer this in different ways. But one of the things I guess you're kind of hearing out there in the institutional market, and really in the corporate plans is that even though a lot are underfunded, is the general view is that a lot of corporations want to increase funding. And then when they get kind of back to some reasonable level, just kind of move to fixed income, and kind of just do some kind of LVI strategy or something and kind of -- in some ways, kind of just reduce overall risk.

Is that something you're seeing your clients talk about, or something you're recommending? I'm just kind of curious what changes in the landscape you are seeing or thinking about for your clients?

It clearly is something, number one, that we're seeing a lot of interest in. I think there's been a lot in the press over the last couple of years trying about that particular strategy, but there hasn't been as much implementation of that as you would expect.

We are actively advising clients to move in that direction, and many of our clients really have, because improving the funded status and taking some of the volatility out of their contribution commitment is really important to them. And we have had success in showing clients, especially during this period where the markets have been negative and active values have declined, we have some strategies in place that have helped them to improve their funded status over that period of time. The clients, I think, are very happy with the fact that we have been able to do that for them.

So we do see that and we do implement that with clients.

Okay. And maybe just a strategic question -- obviously, there's -- with a lot of stress on pensions, I guess there should be a fair amount of opportunity for you guys for new business over time. But by the same token, it's hard to argue that there are too many new defined benefit plans being created, and that arguably the ones that are there are going to be slowly over many years unwound.

Have you thought about, or is there a way that you can adopt your business more to see any opportunity to actually try to penetrate in someone way more of the DC business, which is not a place I guess you guys have been as big traditionally? Or is that kind of just too far out of the wheelhouse?

It's not too far out of the wheelhouse. We do have defined contribution clients. We have had an effort in that part of our business for quite some time.

We typically will try to cross-sell our current defined benefit clients, and we've had success in doing that. We recently within the last year put two salespeople who are just specifically calling on defined contribution, because with open architecture, I think that that has opened up an opportunity for us to be able to provide some of our investment-only solutions out in the marketplace. And that is really the focus of our efforts.

We also can put together some either proprietary or participate in a glide path for an age-based or a target date fund type of implementation. So those are kind of the strategies.

I would say to you though that I think our sweet spot continues to be the defined benefit, because there is probably more pain in that area out in the marketplace. And that is where the bulk of our focus is.

Great, thank you very much.

Tom from Janney Montgomery.

The net new client funding -- I just want to make sure I heard you right -- is $140 million. I just want to make sure that compares to last quarter's 725?

Yes, 140 is for this quarter, yes.

And last quarter -- do I have it in my notes correctly -- 725? Does that sound right?

Yes, that is probably right. I don't have it in front of me, but --

So quarter-to-quarter fluctuations are not to be concerned with as long as you are seeing growth in the backlog. Is that kind of why you're giving us the backlog number every quarter of committed unfunded, just because of those fluctuations?

Well, it will fluctuate. I mean, recognize it's a net number. So we do lose clients. So it's net of losses. And it does fluctuate.

Okay. Any update on municipalities? You talked about that being an opportunity in the past.

It continues to be an opportunity. We continue to focus on those six states primarily where there is an opportunity for us, we think. And that's about all that I would have to say. I mean, it does open up our prospect basis as far as number of additional accounts to potentially call on. So that is positive.

Thank you.

(Operator Instructions) No more questions at this time. Please go ahead.

Thank you, Ed. 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. I will briefly cover the financials of the segment for the second quarter of 2010, including our new sales and a brief update on the market. For the financials, I will compare our second-quarter results to the first quarter of 2010.

For the second quarter of 2010, revenues for the segment totaled $39.4 million, which was $1.8 million or 4.9% higher than our revenues for the first quarter of 2010. Our quarterly profit for the segment of $13.8 million was $800,000 higher than our profit for the first quarter.

The quarter-over-quarter increase in profit was mainly attributable to the increase of revenue offset by an increase in expense due to higher investments and sales comp in the second quarter. Our third-party asset balances at the end of the second quarter of 2010 were $225.5 billion, comparatively flat to our asset balances at the end of the first quarter of 2010.

While our asset balances increased due to market appreciation of $3 billion, this was offset by net negative tax flows of approximately $3.3 billion.

During the second quarter of 2010, the segment had new business sales events totaling approximately $9 million in annualized revenue. While this represents a strong sales quarter, even more important is the fact that our new sales had diversity across several of our solutions and segments, and more importantly, also included expansion of our existing clients' businesses and several new global mandates. As I mentioned at our investor day, these are two of our growth initiatives for the business.

In regards to the market environment, not much has changed from the first quarter. Despite the sales of this quarter, we still see manager's slow to make decisions or fund new products. While there continues to be strong interest and opportunity for outsourcing and our solutions, the process and timing of those decisions remain protracted.

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

(Operator Instructions) No questions at this time.

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

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

Second-quarter cash flow from operations was $47.6 million or $0.25 per share; year-to-date cash flow from operations, $65.7 million or $0.34 per share.

The second-quarter free cash flow was a negative $21.6 million, and that does reflect repayment of our debt of $50 million. Year-to-date free cash flow was a negative $49.8 million, which reflects debt repayments of $83 million.

Our capital expenditures for the second quarter, excluding capitalized software, were $9.8 million. And year-to-date capital expenditures are $14.3 million, again excluding capitalized software. And we expect, because of some of the work we're doing in our data center, for capital expenditures to be about $40 million for the rest of the year.

The tax rate for the second quarter was 37.8, which compares to 37.9 in the first quarter. And the Accounts Payable balance at June was $8.2 million.

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) Jeff Hopson.

Okay, sorry about this, but I missed it Steve's sales comments as far as this quarter's sales.

It was $9 million in annualized revenue for sales this quarter.

Okay. Can you remind me what the first quarter was.

If you force me to, I painfully will. 3.8.

Okay, great. Thanks.

(Operator Instructions) No additional questions at this time.

Thank you. Thanks, Kathy.

So, ladies and gentlemen, we continue to face challenging external conditions. And capital markets are extremely volatile, affecting our revenues directly, and having secondary effects on investor sentiment. This causes uncertainty with those in investment or wealth services business (technical difficulty) the bulk of our clients. And decisions are slow, both for adding new capabilities as well as installing the capabilities, once the initial decision is made.

Now fortunately, the strength of our Company has allowed us to stay the course of building new sources of growth, and we've made important strides. And while we definitely feel our efforts are starting to be rewarded, we do acknowledge the difficulty of today's investment climate. But we are consoled because times like what were going through now enhance the value of our business proposition.

So that concludes today's presentations. And I thank you very much for your participation and interest. I will give you one more chance to ask any questions that you might have.

(Operator Instructions) I don't think they want to take advantage of that opportunity. (laughter)

So thank you all, and have a great afternoon.

Ladies and gentlemen, this conference will be available for replay after today through Thursday, October 21, 2010 at midnight. You may access the AT&T Executive Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 165205. International participants please dial 320-365-3844. (Operator Instructions)

That concludes our conference for today. Thanks for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.