SEI Investments Co (SEIC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the SEI third-quarter earnings conference call. At this time all, participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions). As reminder, this conference call is being recorded.

I would now like to introduce your host for today's call, Mr. Al West, Chairman and CEO. Sir, you may begin.

Good afternoon, everybody, and welcome. All the segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller. I'm going to start by recapping the third quarter of 2010. I will then turn it over to Dennis to cover LSV and the investment niche in the new business segment. After that, each of the business segment leaders will comment on the results of their segments. And then finally, Kathy Heilig will provide you with some important Company-wide statistics. Now, as usual, we will field questions at the end of each report.

So let me start with the third quarter of 2010. Third-quarter earnings grew by 7% from a year ago, while we reported a decrease of 20% in our revenues. Diluted earnings per share for the third quarter of $0.30 represents an 11% increase from the $0.27 reported for the third quarter of 2009. Now, our 20% decrease in reporting revenue was due to the deconsolidation of LSV as we returned to the equity accounting method in 2010. Third-quarter 2010 reported revenues -- the reported revenues in the third quarter of 2010 did not include any LSV revenue, while third quarter 2009 included $60 million in LSV revenue. Excluding LSV's revenues in 2009, third-quarter 2010 revenues grew by 2% over third-quarter 2009 revenues. This growth in revenues is primarily a 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 SIVs on our balance sheet, which netted to an increase of earnings of approximately $8.7 million, primarily due to the cash repayments from the SIVs. Now, this compares to the $14.7 million increase of earnings in the third quarter 2009, due to SIVs.

Also during the third quarter of 2010 our non-cash asset balance under management increased by $14.3 billion. Of that, SEI's assets under management grew by $7.6 billion during the quarter, while LSV's assets under management grew by $6.7 billion. In addition, during the third quarter we repurchased nearly 2 million shares of stock at an average price of approximately $19 per share. That translates to just under $38.6 million of stock repurchases during the quarter.

Now, the fact that the capital markets rebounded in the third quarter had a positive effect on third-quarter results, but because of the timing of the market rebound during the quarter, without a dip, the markets will have a larger positive effect in the fourth quarter. New business sales, while still slower than we would like, continue to pick up. For the entire Company, we generated approximately $16.7 million of new recurring revenue sales events in the traditionally slow third quarter. Year to date, we have generated approximately $56 million of new recurring revenue sales events.

Now, while we are keeping our attention on cost control while continuing our investment in the global wealth platform and its operational infrastructure -- those are so critical to our future -- during the third quarter, we capitalized approximately $10.5 million of the global wealth platform development and amortized approximately $6 million of previously capitalized development. And as always, we will work hard to find ways to retain clients and grow new revenues. We will also continue our efforts to control cost and improve productivity. In addition, we will continue to invest in areas that promised to provide long-term growth.

Now, we are firm in our belief that we're helping our clients succeed while building a strong, growing Company.

And that is the conclusion of my remarks, and I will now turn it over to Dennis McGonigle to cover some Company-wide issues and give you an update on LSV and the investment in new business segment. After that, I will turn it over to the heads of the other business segments. Dennis?

Good afternoon. I will cover the third quarter results for the investments in new business segment, make a few brief comments on LSV Asset Management and our SIV holdings and a couple of expense items.

During the third 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 and the further development of our service offering. During the quarter the INB segment incurred a loss of $3.1 million. This compares to a loss during the second quarter 2010 of $1.7 million. This increased loss was due principally to a one-time expense of approximately $900,000 resulting from a processing error in our operational area. We expect losses in this segment to continue in line with second quarter 2010.

Regarding LSV, we continue to own approximately 42% of LSV. LSV contributed approximately $25.2 million in income to SEI during the quarter. This compares to approximately $23.5 million in the second quarter of 2010. This increase is due primarily to increased revenues at LSV from higher asset balances. Asset balances grew approximately $6.7 billion during the quarter, primarily from market appreciation. Cash flows at LSV were positive by just over $200 million.

During the quarter we generated gains totaling $8.7 million from the SIV securities we hold on our balance sheet. These gains were primarily a result of cash distributions we received during the quarter. As of today, we currently hold SIV securities with a market value of $102 million.

During the quarter we also made adjustments to certain estimates on obtaining the vesting EPS targets on certain options previously granted. As mentioned in our earnings release, these changes resulted in a net $3.2 million reduction in expense related to stock-based compensation during the third quarter. In addition, these estimate changes will also result in a $3.1 million increase in fourth-quarter expenses related to stock-based compensation. Both the third quarter decrease and the fourth quarter increase in stock option expenses will be spread amongst the reporting segments.

Finally, during the third quarter we made a $30 million payment on our outstanding debt. Our current outstanding debt is $120 million.

I will now take any questions you may have.

(Operator instructions) Jeff Hopson, Stifel Nicolaus.

Dennis, it seems like you have become more aggressive on the share repurchase side. Any change in policy? Are you targeting a certain percentage of your ongoing earnings, I guess?

No, we are not really driving it by any specific model. It's more -- Jeff, as we have probably talked in the past, it's more just where the market behavior is, where -- certainly, we are believers in our long-term opportunities. And as the business has improved and our balance sheet strength continues to improve, buyback is a more attractive option, we believe, for shareholders long-term.

Okay, great, thanks.

Glenn Greene, Oppenheimer.

Just wanted to make sure I understand sort of conceptually how the stock-based compensation adjustments -- the theory or sort of what happened, just trying to understand the reversal of the 6.3 and then the going forward acceleration of the 3.1 sort of per quarter. I could make my own assumptions, but probably not a good idea to do that.

Yes, it's a wonderful accounting rule that we got a few years back. But essentially, as you know, our options generally are, when they are issued, they have two tranches to each option grant. And each of those individual tranches vest based on the attainment of certain earnings targets. So, during the quarter, we essentially from our -- as we look out over the next -- these things have, arguably, 10-year lives to them. We look out over the 10-year life of each option grant, we make certain estimates on when we think -- if and when we think the achievement of those earnings targets will be met. And we just made some adjustments to those assumptions in the third quarter, some of which pushed the achievement of those option grants out, and that enabled us to reverse some expense. But we moved up the achievement of one particular grant, tranche sooner, which created the acceleration of more expense.

So you see the one-time, on the ones we pushed out, offset by the increased expense of the on the one that we think is happening (multiple speakers).

Would it be fair to think that maybe the longer-term tranche maybe not be reached, but the nearer-term ones are more likely to be reached? Is that reasonable to think that way, or no?

Yes, in terms of -- yes, generally, that's -- whether they will be reached is one question, and then when, the timing of that. So it's really just based on estimates. So, the older option grants, there are some older option grants that were issued prior to the market decline.

Which are less likely to --

Which are probably less likely, because the earnings targets on those were based on a different market environment than we are in today.

But the $3.1 million sort of acceleration this quarter and into the fourth quarter is maybe more of the nearer-term target?

Nearer-term, correct, exactly.

That makes sense. And then, I don't know if you could disclose this. What was the gross revenue for LSV? I know you don't consolidate it, but --

Yes, we report it in the Q, so I can give it to you. It's about $69 million in the quarter.

Any reason why the implicit yield accelerated the way it did?

Excuse me?

Any reason the implicit yield on assets accelerated like it did?

Yield on assets? Maybe you can rephrase that, and I'll understand it.

If you look at their asset levels and then just apply a basis-point fee to that asset level to get to the revenue number, my math would suggest it had a nice sequential ramp.

Yes, I'm looking at that. I think it's actually pretty flat; it's probably more timing of assets than anything.

Okay, thanks.

(Operator instructions). I am showing no additional audio questions at this time.

Okay, thank you. Thanks, Dennis. I'm now going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?

-- we remain focused on three growth opportunities. First, in the UK, growing our global wealth services business by selling to clients, installing the backlog, converting assets to the platform and helping our clients grow their businesses.

Number one, selling new clients -- in July, we announced the signing of our seventh client. Today, we are announcing that client name, BestInvest. BestInvest is one of the UK's largest national IWA's, managing over GBP4 billion in assets. Earlier this year they acquired Haines Watts Financial Services to build out a national distribution footprint. They're partnering with SEI to power their full wealth management proposition, including discretionary advisory and dealing services. We expect that BestInvest will begin converting assets to DWP in the first quarter of 2011.

Although we are not announcing any new GWS clients today, sales and market activity is strong, especially in the large and national IWA segment. As UK wealth managers recover from the financial crisis and prepare for a new regulatory environment, GWS is a compelling solution to drive profitability and growth.

Number two, installing the backlog -- during the quarter, we installed the Cavanagh Group, a large IWA. Cavanagh, as described in previous calls, is a business transformation client, meaning we typically install GWP with a small day-one conversion followed by programs to convert end clients and assets to the platform over time. We expect to install UK wealth management, a previously announced win, later in the fourth quarter.

Number three, converting end clients and assets to the platform. Today, we are running almost 10,000 accounts on GWP with -- I'm sorry -- almost 100,000 accounts on GWP with approximately $14 billion in assets under administration. We have strong programs in place with all of our clients to aggressively convert more of their current business to the platform.

And number four, helping our clients grow their businesses -- another business transformation client, Tennant Financial Services, a GWS client since December of 2009, had made two subsequent acquisitions, RSM and Vantis, which will significantly increase our opportunity. The new firm, RSM Tennant, is the UK's largest accountancy-based IWA and is becoming an important national firm powered by Global Wealth Services.

In conclusion, we are gaining momentum in the market and are working to maximize revenue as quickly as possible. All of our clients have strong growth strategies enabled by their partnership with SEI. We are on target to recognize realized revenue of $20 million in 2011, as mentioned on previous calls.

Second, in the US, as we prepare for availability of GWP, we are focused on growing our revenue and re-contracting current clients. Areas of US revenue growth include selling community banks and trust companies our Global Wealth Services solution, currently enabled by Trust 3000, as well as recently increased sales activity in the regional bank segment. As the financial markets stabilize and prospects are evaluating the viability of their current infrastructure, we are seeing increased sales activity. SEI's strategy and our investment in GWS is a powerful message.

As usual, we are also involved in re-contracting current clients. During the quarter, we re-contracted four clients for almost $13 million, including one of our larger customers, SunTrust. Re-contracting rates or net-downs continue to improve over previous years. During the quarter, we sold net wealth processing events of over $3 million. Year to date, net wealth processing events total approximately $28 million, of which $17 million is recurring revenue. This number represents 10 new clients, includes our UK and US businesses and is calculated by determining expected fees at conversion for average annualized contract minimums.

The third quarter was a slower event signing period for us than the first half of the year. I do not (technical difficulty) represents a slowdown in opportunity; rather, just timing of events as we restart growth in this segment.

Finally, we continue to support and grow our global asset management distribution partnerships. In the third quarter, we saw continued evidence of cautious investor sentiment. But ending balances improved by almost 10% to $12.9 billion, primarily driven by market appreciation.

As a financial update, I will focus my comments on a comparison to the second quarter of 2010 as well as remind you of some of the challenges we face in growing our near-term revenue and profitability. For the quarter revenue of $83.5 million was down to the prior quarter revenue of $90 million. As a reminder, we had strong one-time revenue in the second quarter, including the $5 million in a final one-time reconversion payment from a lost client. Profitability for the quarter was just over $10 million.

Despite continued wealth processing sales events, profit will continue to be under pressure due to the following reasons. For one last time, I will remind you that we now have the full impact of previously announced lost US clients. This is an annual impact of over $23 million in recurring revenue. The lead time required to realize recurring revenue from our wealth processing sales is long, on average 12 months, and with business transformation clients on GWP, revenue opportunity is great, but the recognition time frame 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 flow through to realize revenue and profitability. Our longer-term asset management business also faces headwinds due to the market uncertainty and cautious investment sentiment.

Finally, some of our long-time cross-sale 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. Current financial results and short- to mid-term challenges aside, I'm encouraged by our sales activity and our ability to help our clients significantly grow their businesses. Our win-win GWS financial model assures that as our clients grow, we will too.

Any questions?

Jeff Hopson, Stifel Nicolaus.

So the pipeline of potential new business for GWP -- any change in that number, and, I guess, timing potentially of that coming out?

I think the pipeline is still strong. We talked about, at the investor conference, about 18 firms that represented annual or recurring revenue potential, about $40 million. We are working hard to close those deals, and I think Best is another great name for us in the market. We think of them sort of like a [Towry], building a national franchise through acquisition and through organic growth. So we are pleased with the firms that we are closing, and we continue to work the pipeline. Names are not falling out of the pipeline, we are just taking some time to get them closed.

And as those discussions have gone on, any sense of hang ups, any change in -- is the environment, I guess, causing people to move more slowly, or is it just a typical ongoing process here?

I think it's a typical ongoing process. If anything, the more success we have, the more opportunity we have. But we've got to get some of these closed. We've got to get them converted. We've got to help them move their assets, and then we're going to help them grow. But we feel good about the pipeline.

Aaron Teitelbaum, KBW.

I was just curious. I know it's early days, but maybe you could talk a little bit just how you guys are integrating the global wealth powered service offering into your US conversations now. I know, obviously, the solution is going to be powered by Trust 3000 for awhile. But just curious how you guys are pitching it to your clients and certainly, actually more specifically, if the recent Wilmington Trust signing has helped at all.

We've definitely started to see more activity in the regional bank space, and I certainly believe the Wilmington Trust win, coupled with conversion of the Wachovia assets at Wells, have certainly given us some renewed credibility in the market. That being -- all that, I think, is significantly enhanced by the vision of Global Wealth Services, the investment that we've made in the future of the industry. And so I think our re-contracting rates are improved because people buy our vision and they appreciate the investment we've made. And we -- which is an important part of our ongoing conversations with US clients, as well as prospects in the marketplace.

Glenn Greene, Oppenheimer.

The first one, just on the Tennant, the two acquisitions -- any way to size that in terms of assets we should be thinking about?

It's hard to do that, but I tell you what. Tennant is a large accountancy firm. It's, I think, the seventh or eighth largest accountant in the UK. And they have made a very strong commitment about building out their financial services capabilities. And so it's difficult for me to comment on the specific client, but it certainly positions them as the largest accountancy-based IWA in the market. And we -- so they are clearly signaling their intent to be serious in financial services. And again, we think that it gives us a potential opportunity, and they become a real national firm with a pretty significant presence.

So we are in early days of digesting that opportunity, but it clearly marks them as a growing and leading provider in the industry.

Okay, and Wilmington deal -- this is a tough question, but are there other Wilmington-like deals out there that might be viable prospects?

Yes. There are probably about 40 regional banks that don't use SEI's services, that either have an in-house solution or some sort of competitively installed product, and so we view that as our opportunity. Now, I think I mentioned on the last call that we hadn't seen a decision made on the trust accounting system that hadn't been impacted by an M&A event in several years. Wilmington will be the first one in a long time. So it certainly opens up the market for us, and I think as these firms to start to recover from the downturn in the market and start to evaluate their infrastructure, that gives us opportunities. And clearly, that tied with our investment in Global Wealth Platform is certainly beginning to create more conversations for us in the market.

And then, just finally, with revenue most likely stable from here, given that the client losses have fully factored in, would you say margins are stable from here?

Well, it's always hard to predict that. As I mentioned, the margins are bumpy as we build out GWP and build out the infrastructure to support that. We still are seeing pressure in some of our other cross-sell businesses, so it's hard for me to predict that for sure.

Aaron Teitelbaum, KBW.

Just a quick one -- is there anyway you could give us an idea of how much fee waivers you guys are waiving on your money funds?

I don't have that in front of me, but maybe we could try to get it to you by the end of the call.

I am showing no additional audio questions at this time.

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

Thanks, Al. All in all, we held our own during the turbulent third quarter, and the quarter-end rally in the financial markets is a positive for us going forward. Quarter-end assets under management increased from $28.4 billion at June 30 to $30.4 billion at September 30. This increase was driven by the market's rally at the end of September.

Despite the volatility we experienced during the first two months of the quarter, we managed to remain neutral from a cash flow perspective with both receipts and disbursements coming in at around $1.1 billion. This neutral quarter, on the heels of the $86 million we had in positive flows during the second quarter, means we were only $66 million net negative year to date.

Average assets under management, the metric on which we earn revenues, were down when compared to the second quarter because the market rally occurred at the back end of the quarter. As such, the rally did not significantly impact third quarter revenues, but should positively impact revenues going forward.

Revenues for the quarter declined $3 million for the second quarter. The two biggest factors driving this decline were the aforementioned decrease in our average asset balances and a decline in brokerage revenues earned from our mutual funds. As I mentioned on our prior call, the second quarter contains higher-than-normal brokerage revenues, and we returned to more normal levels during the third quarter.

Profits for the quarter reflected our decreased revenues, but they were also impacted by two expense items. The segment recorded a $500,000 benefit related to a decrease in option expense that Dennis mentioned earlier, and we also incurred a $1 million expense due to a processing error. Excluding these items, while our profits were down quarter over quarter, our margins actually improved slightly.

In terms of new business development, we recruited 111 new advisors during the quarter, matching the 111 we recruited during the second quarter. Year to date, we have recruited 303 advisors, which exceeds our total for all of 2009. Recruiting new advisors continues to be a focus area for us.

In summary, our revenues, cash flows and financial results reflected the turbulent and generally negative market for the third quarter, but the quarter-end rally should provide some momentum for this segment going forward.

I now welcome any questions you may have.

Jeff Hopson.

Thanks a lot. Hi, Wayne. In terms of what you're seeing in October, would you say you are cautious about flows kind of ongoing? Did the equity market rebound affect psychology in any meaningful way at this point, would you say?

I think we are cautiously optimistic, but I don't think there's a tidal wave of change.

Okay, great, thanks.

Aaron Teitelbaum, KBW.

I was just curious maybe to get a bigger picture thought in terms of the competitive landscape. I'm thinking you've had a major competitor go public recently, and it seems like some of the wire house brokerages may be somewhat blowing smoke, but emphasizing more fee-based type account structure. So I'm just really curious to hear your thoughts, if you are seeing any incremental competition on recruiting new advisors, or any thoughts you might have.

Yes, I think we are seeing competition out there. And you talk about InvestNet, which just went public, and I think that's good and bad. I think that they have been sort of in a venture capital invest and grow revenue phase, and now as a public company they are going to be much more -- I would assume they will be more profitability focused. But you can talk to them about that.

But all in all, what I'd say is we feel that we have the best turnkey product available out there. So for the advisor that really wants to outsource as much as possible and focus on client acquisition and client servicing, we feel we're the best solution out there. When you look at some of the other competitors, you talk about InvestNet -- InvestNet is still more of a do-it-yourself type of platform. So it's for the advisor that wants to spend their time picking investments and doing other processes.

We are competing at the philosophical level here with -- for the advisors.

I'm showing no additional audio questions at this time.

Thanks, Wayne. Our next segment is the Institutional Investors segment. I'm going to turn it over to Ed Loughlin to discuss this segment.

Thanks, Al, good afternoon, everyone. As I've done for the last several quarters, I'm going to focus the majority of my remarks on the financial results and the progress we've made during the third quarter compared to the second quarter of 2010.

Third quarter revenues of $51 million were pretty much flat compared to the second quarter. Operating profits of $25 million increased slightly for the quarter. Quarterly margins of 49% also increased slightly during the period. I would remind you, margins will continue to be sensitive to small changes in revenue and profits. For example, this quarter margins increased 80 basis points, based on a profit increase of $200,000.

Quarter-end asset balances approaching $52 billion reflect a $5 billion increase compared to the second quarter of 2010. Net new client funding during the quarter was $307 million, and the backlog of committed but unfunded sales was $399 million at the end of the quarter. Client signings for the third quarter were $696 million and totaled $3.1 billion year-to-date through September.

New client sales continues to be the important element for growth in the Institutional segment. Sales activity and new client wins continued to improve, but market activity is still subdued. We enjoy a healthy pipeline of globally diversified prospects and we continue to remain optimistic that as economic conditions improve, prospective clients will, again, return to a more normal decision-making time line and sales results should increase again. SEI is well-positioned to capitalize on the growing outsourcing trends.

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

Glenn Greene.

Just if the clients' appetites to make decisions -- obviously, the sales activity was slow. Any sense that as we exit the quarter the market is getting more friendly? Any loosening of decision-making that you can sense?

Historically, the summer time would be a slower decision-making time, so we're optimistic for the fourth quarter. I think we have a pipeline of deals that we would like to see close, but I don't know that there's any more of a commitment on the part of the buyers to finalize the due diligence in that time frame. There's nothing visible that I could say that we could point to that's a catalyst for change in that decision-making process.

Aaron Teitelbaum.

Just curious -- is there any difference geographically across where you guys are situated in terms of clients' ability to make these closed decisions. Or is it just across the board, you know, uncertainty?

Nothing pops in my mind that there would be a geographic difference. We've seen global deals close this quarter, and certainly this year we have seen US and North America deals. We've seen them in all the different segments that we operate in, both the retirement space as well as the not-for-profit space and the hospital space. So again, it seems to be pretty well diversified in the decisions that are being made, but it seems to be pretty slow in all those segments for, again, this commitment to make a decision in a specified time frame.

Great, thank you very much.

I am showing no additional audio questions at this time.

Thank you, Ed, and our final segment today is Investment Managers. 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 third quarter and then provide a brief update on the business.

For the third quarter of 2010 revenues for this segment totaled $40.5 million, which was $1.1 million or 2.8% higher than our revenues for the second quarter of 2010 and $5.3 million or 15.2% higher than our revenues for the third quarter of 2009. Our quarterly profit for the segment of $14.8 million was $900,000 higher than our profit for the second quarter of 2010 and $2.6 million higher than our profit for the third quarter of 2009.

The quarter-over-quarter increase in profit was attributable to our increase in our quarterly revenue, increase in certain employee expenses, as well as some one-time expense offsets, including the stock option expense Dennis mentioned. Our third-party asset balances at the end of the third quarter of 2010 were $227.8 billion, approximately $7.3 billion or 3.3% higher as compared to our asset balances at the end of the second quarter of 2010. Our asset balances increased due to market appreciation of $4.95 billion, as well as net positive cash flows of approximately $2.35 billion.

During the third quarter of 2010, the segment had a strong new business quarter with sales events totaling $11 million in annualized revenue. These events spanned all of our segments and solutions, and importantly we continue to gain new business from existing clients. We also recontracted over $12 million of our existing clients during the quarter. Market sentiment remains the same, as we've discussed previously, cautious and tentative. This results in protracted sales decisions and longer time to fund conversions. Despite this, we continue to see good demand for our solutions and continue to have a large and active pipeline.

In summary, I remain very optimistic and encouraged at our long-term growth in our strategy. While the market and overall sentiment continues to create some headwinds, we continue to find ways to execute on the opportunities and continue to see needs for our solutions. Our focus continues to be on executing on those needs.

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

Glenn Greene, Oppenheimer.

So, $11 million sales activity in a tough environment -- that's pretty good. Could you give us some color on where you are seeing the traction, whether it's the alternatives, the money managers? I think you were expanding into Europe as well. Maybe just a little bit more color on where the sales activity is resonating.

Glenn, I'd say, this year the thing that I'm probably happiest about is, it's coming from all of our solutions and all of our segments. So, last quarter we announced in our announcements there were some global deals. This quarter, most of the traction has happened -- it's really been split between our alternative and traditional. But, also, I'm pretty happy to say that about 20% of the new business is from existing clients. And if you remember, back when we said what our priorities were this year and our strategy, it was to focus on expanding globally but also, more importantly, to grow our book of business with our current clients. And I think that is starting to resonate and we are starting to see some traction there, and I'm hopeful that will continue.

And how about outside the US? Any sense for how well you are doing there?

I think we are doing well. I think it's growing. I think it's going to be a slower pace, but this year compared to last year, much more activity and much more deal closed.

Okay, great, thanks.

(Operator instructions) I am showing no additional audio questions at this time.

Very good. Thanks, Steve. I would like now to have Kathy Heilig give you a few Company-wide statistics.

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

Third-quarter cash flow from operations was $55.2 million, or $0.29 per share. Year-to-date September, cash flow from operations is $120.8 million, or $0.63 per share. Third-quarter free cash flow was $17.2 million, and year-to-date September free cash flow was a negative $32.6 million. That really reflects $113 million of repayment of our outstanding debt. The third quarter capital expenditures excluding capitalized software were $2.6 million, and year-to-date capital expenditures, $16.9 million. Capital expenditures for the fourth quarter are expected to be about $3 million.

The tax rate was the same as the tax rate in the second quarter; was 37.8%, and the accounts payable balance at September 30 was $5.2 million.

We would also 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.

Glenn Greene.

-- it has to do with the overall expense level, which, if you adjust for all the one-time items in the quarter, we are looking at a $165 million-$166 million level, which is down $5 million sequentially. I realize the stock comp accrual, the $3 million, sort of goes back in going forward into the fourth quarter. But absent that, are we at a reasonable run rate? I guess where I am going with this -- I was surprised the expense level was as low as it was.

I'd say generally there's nothing really on the horizon, other than normal things, that would drive expense higher than where it is. Hopefully, we get across and have gotten across over time that we pay attention to expenses as far as we can all the time, which makes it sometimes a little more difficult to cut costs when we hit hard times. We will just continue to do what we can on the expense management side.

As we progress forward, I think we'll probably see a little more expense, could possibly see a little more expense in the compensation as we get closer to year end. We'll see how that plays out. But in terms of ongoing, it's --

Did you have a normal bonus accrual in the quarter?

Compared to prior quarters?

Yes.

Yes.

Any way to quantify what that was?

I would prefer not to.

Fair enough, thanks.

Jeff Hopson, Stifel Nicolaus.

Dennis, the gain on the SIVs, $8.7 million -- is that before tax, or is that netted?

That's pre-tax.

And a typical tax rate on that?

It's the same as our corporate tax rate.

Okay, very good, okay, thanks.

Yes, the federal government has not given corporations capital gains rates, unfortunately.

I'm showing no additional audio questions at this time, sir.

Thank you very much. Thank you, Kathy. So, ladies and gentlemen, while we continue to face challenging external conditions, the financial strength of our Company, the investments we've made creating unique solutions for our clients as well as the new strategies we have put in place for each of our business lines have positioned us for future growth in revenues and profits, and we look forward to executing our growth plans.

If there are no more questions, I will say good afternoon to you and thank you very much for your attention and your attendance.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect; thank you for using AT&T executive teleconference. Have a good day.