SEI Investments Co (SEIC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your SEI 2011 second quarter earnings call. At this time, all participants on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Al West, Chairman and CEO. Mr. West, you may begin.

Thank you. Good afternoon and welcome. All of our segment leaders are on the call today, as well as Dennis McGonigle, SEI's CFO and Kathy Heilig, SEI's Controller. I'm going to start by recapping second quarter 2011. I'll then turn it over to each of the business segment leaders to comment on the results of their segments and then Dennis will then cover a couple of items including LSV. 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 get started with the second quarter 2001 -- sorry, 2011. Second quarter earnings were essentially flat from earnings a year ago on a revenue increase of 4%. Diluted earnings per share for the second quarter of $0.29 compares to $0.28 reported for the second quarter of 2010.

Now, our earnings for the quarter were affected by a loss attributable to the SIVs on our balance sheet, which netted to a decrease to earnings of approximately $1.9 million. Now this compares to a $3.6 million increase to earnings due to SIVs in the second quarter 2010. This represents approximately a $0.02 per share swing. Also during the second quarter of 2011, our non-cash asset balances under management experienced little growth. SEI's assets under management grew by $1.9 million -- I'm sorry, $1.9 billion during the quarter, while LSV's assets under management fell by $1.8 billion. Market volatility continues to be a challenge. Now, in addition, during the second quarter we repurchased just under 2.5 million shares of stock at an average price of just over $22 per share.

That translates to over $55 million of stock repurchases during the quarter. New recurring revenue sales are still slower than we would like. The investment managers segment continued to experience strong sales activity and the institutional investor segment had a solid quarter, signing a number of institutional accounts. In addition the advisory segment added a number of new advisors to its rolls, while continuing the trend of improving net cash flows. Banking had a particularly slow sales quarter, primarily due to the timing of prospect decisions. They have a number of prospects in the latter stages of the sales process and are working hard to close them in the third quarter. Joe will provide pipeline update and each of the segment heads will address their sales events. We are continuing our investment in GWP and its operational infrastructure so critical to our future.

During the first quarter we capitalized approximately $9.9 million of the Global Wealth Platform development and amortized approximately $6.8 million of previously capitalized development. While we are increasingly encouraged with our long-term opportunities with the roll-out of GWP, we are disappointed with the profitability of our bank segment. Expenses related to the development of GWP and the build out of the infrastructure needed to successfully deliver GWP have been growing and will continue to trend up over the next few quarters. This is putting acute pressure on the banking segment's profitability in the short run. We're confident that sales followed by revenues will begin to improve the banking segment's profit picture in the not too distant future.

Nonetheless, we are placing increased emphasis on controlling costs. We will make sure that resources we are spending are aimed at the highest priority initiatives. We are launching GWP in the US this year and next. To accommodate the launch, as I mentioned last quarter, we are concentrating on building the functionality and infrastructure necessary to process US banks and advisors. We've recently delivered an extremely large release with major US functionality for infrastructure. And the next 3 releases contain a large number of US enhancements. These releases will complete the baseline functionality for the US, as well as significantly enhance the UK functionality and improve our operational efficiencies and scale. Now, we're firm in our belief that these investments will result in new sources of revenues and profits and will help our clients succeed. This concludes my remarks and I'm going to turn it over to Joe Ujobai to discuss our private banking segment. Joe.

Great. Thanks, Al. Today I would like to continue our discussion from the June investor conference by giving you an update on our activity and a review of the current financials for the private banking segment. Revenue for the quarter increased slightly to almost $88 million, while expenses increased by $3.9 million compared to the previous quarter. Net sales events for the quarter were nominal. Let me start by saying I am not satisfied with the results of the banking segment. As you all know, we have made a significant investment and incurred significant expense in building and delivering our Global Wealth Services solution. The timing of realized revenues has been slower than I expected. The continuing increase in expense to build for the US market and sell, operate and deliver in the UK market have significantly dampened our profits.

This is not satisfactory and although I am positively encouraged by our sales activity and the acceptance of our solution, we need to focus more acutely on profitability. Increased GWS related costs are driven by a number of factors. Although capitalization rates have generally declined, increased realized software development expenses have grown based on additional amortization as we release new functionality and the 100% expense recognition of maintenance and enhancements to our current services. More recently, expenses have grown as we begin to sell, implement and grow our GWS business. Expenses in this category include sales and marketing, implementation, and production expenses related to increased technology and operating costs.

These expenses haven't yet reached a base line for scale. We have always discussed not letting the long-term opportunity get side tracked by short-term decisions and this will continue to be our framework. I have initiated an evaluation of every area of cost and have expectations of making progress on this front over the next few quarters to improve our profit picture next year. Ultimately, our profit picture will improve by growing revenue, meaning implementing new clients and converting assets to GWP. As an update and on a positive note, today we are announcing the signing of our 11 GWP client in the UK, Amber Financial Investments. This is not included in the corporate sales results mentioned by Al, but is a third quarter event. Amber is a name of an entity that delivers services to the Prospective Financial Group and the Paradigm Group.

Prospective is a leading national IWA and Paradigm is an IFA support service business, what we call a platform. GWP will be the central administration infrastructure. With the signing of Amber we add our sixth national IWA and third platform client, furthering our sales strategy to grow market share in both the national IW segment and to expand into additional segments. Amber is a business transition client, meaning we'll open the firm for business later this year and convert assets to GWP over time. We now have 7 business transition clients that we expect to substantially grow over the coming years as the firms transfer their assets from multiple custody platforms to GWP as their centralized infrastructure. Successful asset transition at these business transition clients will drive revenue growth.

During the second quarter, our transition management programs resulted in net new cash flow to GWP of GBP380 million or approximately $600 million. This does not include some expected run-off of Towry's Edward Jones advisory business. In addition to the sale of Amber, we have made progress on our GWS pipeline, moving a number of opportunities to the later stage of the sales process. These prospects are heavily weighted towards the private client investment manager segment and are infrastructure clients that would have a traditional day 1 asset conversion resulting in more immediate revenue recognition once installed. Our pipeline progress supports our segment expansion strategy discussed at the June conference. I would also like to take a moment to discuss other areas of banking beyond GWS.

Our longest term business is investment processing in the US, which is enabled by Trust 3000, includes our liquidity for money market and transaction or brokerage solutions. Our business in the US is solid and has been enhanced by our proven commitment to the industry, with market interest in our strategy and investments in Global Wealth Services. During the quarter we closed 2 community bank clients, continuing our success in this segment. Similar to the UK GWS business, we have additional community banks in the later stage of the sales process. Our US investment processing pipeline is the largest it has been in recent years and includes both community and regional banks. Much of our current US pipeline is Trust 3000 oriented, but our prospects are comforted by the eventual path to GWP.

We are also executing our US GWS sales strategy and have increased our marketing efforts focused on segments with our national bank clients. During the quarter we recontracted 3 community banks and are on track for a good overall recontract year. Our other business is asset management distribution, which consists primarily of bank distribution partners outside of the US. During the quarter we continued the positive progress in our asset management business. Average quarterly assets grew 14% to $16.2 billion, with $420 million in net new cash flow and $1.6 billion in market appreciation and currency movement. In conclusion, we know current financial results are disappointing and that our short to midterm challenges will not easily go away. Despite this, I am encouraged by our strong pipeline and our ability to help our clients significantly grow their businesses. We will tighten up our expense control without impeding our long-term opportunity. At this point I'd like to take any questions.

(Operator Instructions) Tom McCrohan.

Hi, Joe. You're noticeably more negative on the margin profile. Understandably so, given the investments. But from a few weeks ago at the Analyst Day you characterized the margin trends as bumpy for the rest of the year. If I'm hearing you correctly, it sounds like the amount of spending that's recognized for the balance of the year is probably going to trend higher from this quarter. So, I'm wondering if you still believe the margin trends are bumpy or if it's going to continue to trend lower?

It's not easy to predict quarter by quarter, but I would suggest that we will continue to invest in GWP and that margin could certainly go lower.

Could margins go below -- can you have negative margins in that business, Joe?

Well, you look at the profit, we're at about $1 billion -- sorry, $1.6 million for the quarter, so that's not a lot of money. Yes, they could go negative.

And did anything change from a few weeks ago at the Analyst Day that makes you a little bit more cautious in the margin trends, cause you certainly didn't articulate that as crisply back in early June?

We're executing against our strategy of growing our business in the UK and entering into the US. The best way for us to fix the margin, the profitability of this business, is to continue to sell more clients, convert them as quickly as possible and continue to transition assets to GWP. We will continue to invest in this business, especially to deliver in the segments where we are today. We will do our absolute best to control expenses, as I said earlier and as your earlier question, things could go down slightly, but we will do our best to control that.

And as a follow-up on LSV. Is there anything seasonal there where you had a sequential decline in assets this quarter and if my model's correct, looks like it's a seasonal -- not seasonal, sorry, sequential decline last year second quarter. So, I'm wondering if there's anything about the second quarter that's different?

Tom, Dennis is going to talk about LSV when he'll give an update, so can we hold that question until that point?

Sure.

Thanks.

Jeff Hopson.

So, I guess I'm still not clear on how much of the costs are accelerated upfront to get the platform ready for the US, with the assumption that some of those would fall off once those enhancements have been made versus ongoing costs.

I talked about 2 buckets of costs earlier. 1 is really what we initially got started on and that's the development of the software, the technology to build out GWP. As I mentioned, some of those costs are going up as we move from capitalization toward amortization and as we have to expense 100% of those costs, when we enhance or provide maintenance to the software. So, we are realizing additional expenses there, but I think we've been building this platform for a while. So, we have a fair amount of understanding over our efficiency as we deliver additional services from a software development cost. What has been a little bit less predictable for us is how we actually bring GWP to the market. So, the build out of sales and marketing teams, the build out of additional operations capabilities, the cost to implement, so we haven't really scaled those costs or those parts of our business yet. And so, that's where it's a little less predictable for us. And that's where some of the costs tend to be increasing at somewhat higher rates.

So, as you kind of look at this whole issue and try to re-evaluate, so to speak, any initial thoughts on where the cutting or controlling would come?

Yes. There's a lot of -- we have a lot of ideas and things we've been working on for some time now. So, as we develop the platform, we have people that have worked, say, on core infrastructure and maybe those people, some of those resources shift to help us sell and install. So, we make some sort of natural progression. We're getting a lot more efficient. We continue to get more efficient at designing the services, so we try to bring -- to find savings in those areas.

Again, as we release additional software, we also are much more straight through and start to control more operating costs. So, we have a number of key initiatives. There's perfect examples, when we first launched GWP we had a lot of people we called application support. So, training people on the platform, if there were stability issues, controlling those things. We have a lot less people doing that now because the platform has matured and is increasingly more stable. So, there are areas of us that we can ramp down, as the platform matures and as the operation matures and the operation scales.

Okay. Thank you.

Robert Lee.

I apologize if you mentioned this before, but with Amber Investments, understanding that that's business transition client. But can you size what the potential is for that, at least in terms of assets that could migrate over, at least where they are now.

We don't typically size an individual client, but the firms that make up Amber, Paradigm and Perspective are well known entities in the UK IFA space, both as sort of a national consolidation -- consolidating ISA or IWA, as we call it, as well as a platform. It's got a very strong and well known management team. So, we believe that this opportunity is a good 1 for us and is similar to some of the bigger names that we've announced in the last couple of years.

And just a quick question. If I look at your revenue breakdown in the private banks business, the asset management and related fees have grown pretty much in line with your AUM and certainly the revenue pressure's been from mainly, I guess, from investment processing. I'm assuming that's mainly the -- partially, at least, the flow-through of some of the pressure you've seen on recontracting over the last couple years, kind of flowing through that line item. Maybe if you could update us on some of the recontracting, what you're seeing now from a price point perspective.

Sure. So yes, the -- in general, the revenue around investment processing certainly took some hits as we lost some fairly large accounts that we talked about on calls for some time now. We are starting to win some business. We talked about Wilmington Trust. Now that, obviously, that revenue hasn't flowed through yet. We have some -- we've had some progress in the community bank space.

We do experience traditionally some net-downs, as I've said before, when we recontract clients. Those net-downs have generally improved in the last year or so, but we do experience some net-downs. There is heavy competitive pressure from a couple of the US providers that drive some of that net-down pressure. I think the investment in GWP has certainly helped us improve that, but it certainly happens. From time to time, clients do decide not to recontract with us and that does happen over the normal course of business. But in general, I feel good about the recontracting rate and it's definitely improved in past -- over the past couple years.

Great. Thank you for taking my questions.

The real key from a processing standpoint will be to, as I said earlier, is to get these GWS clients sold, get them converted and the business transition clients really get those assets transitioned from the multiple custodians and we're putting a lot of very strong effort on that, on that activity.

Great, thank you.

Glenn Greene.

Just a question on the late stage PCIM prospects, maybe a little bit more color there. How many prospects are we talking about, maybe in aggregate you could talk about the asset size that you might be looking at, assuming you were to win them.

At the Investor Conference we talked about a pipeline that had about $45 million in it and I think about a third of that was private client investment managers. So, we're working really hard to try to close a fair amounts of that in the coming months and quarters. I think that the continued development of some of the portfolio management capabilities of GWP, which has been an important part of our recent releases and the next couple of releases, has made our solution a much more viable and interesting solution, our opportunity for that space. And so, I think a lot of these firms we've talked to for a while and they've been impressed by what we've built. It's what we told them we were going to build. They view it as a real competitive advantage to have an integrated solution and so that's why we're making progress in that segment in the market.

Again, I think like the IWA segment, we started out with a couple of fairly well known, I would say, industry leaders and we've been able to grow to bigger clients and prospects in that space. We're doing a similar thing in this segment. We're entering that segment with our increased capabilities. We're seeing some early adopters or market leaders in that segment very impressed by what we've built. I think, like we have done in the national IWA space, we have a terrific opportunity to take -- to win some significant business there. The key is to get a couple early adopters that like it, get them installed, get them successful, and then we'll start to see more progress in that segment.

What's sort of the major impediment to get over the goal line on a couple of these?

It's really finalizing the commercial terms and negotiating the contract.

So, you are sort of at that very, very late stage, it sounds like.

Yes, we're definitely at the late stage with some of the firms we talked about in the pipeline at the Investor Conference.

Would you say your pipeline's still roughly $45 million in aggregate.

Yes, I'd say so. A few things drop, a few things add. We're really looking to increase that. So, we've increased activity around lead generation. We are continuing to evolve and grow the sales force and the support associated with the sales force. Again, we've said all along this is a momentum business. So, I think the more we win and the more successful we are at helping our clients grow the business, the more we're going to win. So, I firmly believe that. And I think what we're sort of alluding to is that, we talked about at the Investor Conference scaling in the IWA, national IWA space, getting some more clients there. But entering these other segments and that's what we're about doing, right now.

Just, not to belabor this and you've had a lot of questions already but, the $3.9 million Q-to-Q expense ramp, obviously if you annualize that, $16 million or so. That's pretty significant. Is it predominantly consulting relating, sort of leveraging your offshore development team or maybe a little bit more color on the magnitude of the increase there.

It comes across the board as we are continuing to build out the service for the solution, global wealth services. So, as I mentioned earlier we're amortizing more because we're putting more software into actual use. We can't capitalize as much because -- or we don't want to capitalize as much because of enhancements that we continue to make to the services. But a lot of it also comes from the build out of the operation as we try to get that to scale. So, I think we will get the operation to scale. It's hard to predict exactly when that will happen. But we will get the operation to scale and so we won't continue to add at the same rate from an operation perspective.

We're also launching this with clients in the US and so we're building out the infrastructure in the US around technology and software to do that. So, it will -- it has grown. We will do our best to control those costs, as I've said. We can get a lot more -- we believe we can get more effective in the build out and the roll-out of this and it's certainly important to us and I think we've done that as we've rolled out the platform. You don't see it because sometimes we spend less money in 1 area and more money in another area, as this thing sort of is rolled out through the early stage life cycle of it. But we hear you and we understand that's a concern. It's a concern of ours and we will do our best to try to manage that going forward, continue to manage that going forward.

Thanks, Joe.

And I'm showing no questions at this time. You may continue.

Thanks, Joe. We'll go over to Wayne Withrow to cover Investment Advisor segment. Wayne?

Thanks, Al. During the second quarter we continued to improve our profits, margins and cash flow. Assets under management were $31.6 billion at June 30, 2011, a slight improvement from March 31. Our AUM improvement was driven by $160 million in net positive cash flow. This positive cash flow is a continuation of the momentum we began to build during the first quarter and brings our total net flows for the year to almost $200 million. Gross cash receipts for the quarter were just over $1.4 billion. Revenues for the quarter were $49.8 million and almost $1.7 million improvement from the first quarter. Contributing to the increase was an increase in our average assets under management, an improvement in the basis points earned on assets and the fact that the second quarter included 1 more day than the first quarter. Margins also continued to improve, coming in at 44.3% as compared to 43.8% for the first quarter. Throughout 2010 and 2011, we have made a concerted effort to work more closely with the broker dealer community and I feel those efforts have positively contributed to our cash flow and new advisor recruiting.

With respect to this latter point, we recruited 127 new advisors in the second quarter, a 10% improvement from the first quarter. During this timeframe we have also worked hard to prepare for the US release of the Global Wealth Platform and are on target for our third quarter beta rollout. While this rollout will not be a revenue generator, it will allow us to gain valuable technical and operational experience in operating the US version of the platform in preparation for a more generalized rollout in 2012. We are now actively talking to our clients about the platform and the response to date has been very positive. In summary, our revenues, profits, and cash flow improved significantly during the second quarter and momentum continues to build. I am excited about the upcoming release of our Global Wealth Platform in the US and look forward to our beta rollout beginning the third quarter. I welcome any questions you may have.

(Operator Instructions) Jeff Hopson.

So, the improvement in the cash flows, I suspect, is being helped by the newer advisors that you've brought on. Any change in client engagement based upon choppy markets?

I think your observations are exactly right. I think that the client behavior remains about the same, clients are a little more positive than they have been even though the markets are choppy. But a lot of the improvement we're seeing in cash flow is driven by new advisors.

Okay. Great. Thanks.

(Operator Instructions) I'm showing no questions at this time, you may continue.

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

Thanks, Al. Good afternoon, everyone. I'm going to start with the financials for the second quarter compared to the first quarter and then discuss sales activity. Second quarter revenues approaching $55 million increased 3% compared to the first quarter of 2011. Capital market appreciation and annual client performance fees recognized during the quarter contributed to this increase. Profits of $27 million increased 4% for the quarter compared to last quarter. Margins increased slightly to 50% during the quarter. This compares favorably to the first quarter. Revenue volatility, though, will cause margins to fluctuate. Quarter end asset balances of $55 billion were flat to the previous quarter. And net new client assets funded during the quarter were $50 million. Our backlog of committed but unfunded assets at quarter end was $900 million. New client sales closed during the second quarter were $1.1 billion and that totals $2.4 billion in new sales year-to-date through June.

Institutional prospects continue to show a willingness to discuss outsourcing and thereby support a healthy pipeline for us. As we discussed at the June investor meeting, over the last several years we have seen numerous new entrants to the outsourcing market. And 1 of the reasons for the extended sales cycle is institutional investors need to perform due diligence on some additional providers. SEI has a long track record serving clients as a fiduciary manager. We've consistently invested to enhance our solution. Most recently, SEI was recognized at the European Pensions awards as the fiduciary firm of the year. We're well positioned to differentiate our offering from the competition and we're optimistic about the growth opportunities for this segment. Thank you very much and I'm happy to entertain any questions that you may have.

(Operator Instructions) And I'm showing no questions at this time. You may continue.

Thank you. Our final segment today, well, before Dennis, is Investment Managers. I'm going to turn it over to Steve Meyer to discuss the segment.

Thanks, Al. Good afternoon, everyone. I will briefly cover the financial results for the segment for the second quarter of 2011, including our new sales and an update on the market environment. For the second quarter of 2011, revenues for the segment totaled $44.5 million, which was $1 million or 2.3% higher than the first quarter of 2011. Also on a year-over-year basis, this represents an increase of $5 million or a 12.7% increase over our revenues for the second quarter of 2010. Our quarterly profit for this segment of $15.2 million was approximately $300,000 or 1.8% lower than our profit for the first quarter of 2011. It was also $1.3 million or 9.6% higher than our profit for the second quarter of 2010. The quarter-over-quarter decrease in profit was largely due to an increase in our investment and sales expense for the quarter.

As I mentioned at the Investor Day in June, we will continue to invest in our solutions, as we feel this will help differentiate us in the long-term and provide for continued growth. Third party asset balances at the end of the second quarter of 2011 were $247.9 billion, approximately $1.9 billion or 1% higher as compared to our asset balances at the end of the first quarter of 2011. The increase in assets was primarily due to net positive cash flows. During the second quarter of 2011, we had another strong sales quarter with net new business sales events totaling $8 million in annualized revenue. Although these sales will take time to matriculate into our quarterly revenue streams, they represent a strong acceptance of our solutions and a continued positive growth sign.

In addition to our new sales, we also had a strong client recontracting quarter with approximately $15 million of annualized revenue being recontracted with existing clients. Overall, we continue to experience the same market environment as we have discussed over the last several quarters. A mark to marked with cautious focus and prolonged decision timeframes. We also continue to see a market need for our solutions and we continue to win new business. Accordingly, we believe there continues to be a strong opportunity for growth. Thank you and I will now turn it over for any questions you may have. Operator?

(Operator Instructions) Jeff Hopson.

Your expenses jumped up, which is a little bit unusual for your line. Just curious if there's sales and marketing or what the reason was there.

It's 2-fold. There was sales and marketing expense, because our sales were higher than in first quarter, so obviously the sales compensation expense would go up. And 2, as I said in the Investor Day and I said for the past couple quarters, we're going to continue to invest in this business, because we believe that's right for the long-term. So, I really on a quarter-over-quarter basis wouldn't pay much gauge to the expense. Although we view it as important, I would really look at it more on an annual rolling basis and you will certainly see us continue to invest in the business and our solutions, especially to the point that we feel it helps differentiate us and drive long-term, sustainable growth.

Okay. Great. Thank you.

Sure.

Robert Lee.

Just a quick question on the complexion of your pipeline. Maybe just update a little bit on the complexion alternative versus traditional and I guess domestic versus global.

So, the pipeline remains very large. It's about the same level that I had mentioned at the Investor Conference. I would say right now it's probably split 50/50 alternative versus traditional products. So, it's a good mix and blend among the traditional alternative, but also among our solutions within each. And I would say it's having a stronger and stronger component from global. Certainly not the lion's share, but within the 20% range of our pipeline is global.

Great. Thank you.

Sure.

Glenn Greene.

Just a quick 1. Just want to be clear, the net fundings in the quarter were essentially flat? Is that the right way to think about it?

Well, we did have fundings and a little bit of market appreciation, but you won't see the fundings we had in the asset number because they came from our separately managed account business. So, our accounts went up. So, it was more of an account function than an asset. But we did have some fundings, but certainly not as large as in past quarters.

Thanks.

Sure.

(Operator Instructions) And I'm showing no questions at this time. You may continue.

Thank you, Steve. I will now ask Dennis to discuss LSV and the Investments and New Business segment. Dennis.

Thanks, Al. Good afternoon, everyone. I'll cover the second quarter results for the investments and new business segment and make a few brief comments on LSV and our SIV holdings. During the second quarter 2011 the investments and new business segment continued its focus on direct marketing and research activities directed towards the ultra high net worth investor. During the quarter, the investments and new business segment incurred a loss of $2 million, on par with the loss during the first quarter of 2011. There has been no significant change in this segment. We expect losses in this segment to continue in this range for the remainder of the year. Regarding LSV, our ownership in LSV is approximately 41%. LSV contributed approximately $29.5 million in income to SEI during the quarter. This compares to approximately $28.9 million in the first quarter of 2011.

This increase is due primarily to increased revenue at LSV from higher average asset balances. However, ending asset balances shrank approximately $1.8 billion during the quarter, primarily from net client outflows. Negative cash flows were a result of the net impact of client rebalancing and lost clients offset by some new client activity. During the quarter, we generated losses totaling $1.9 million from the SIV security we hold on our balance sheet. This loss was primarily a result of a decrease in the mark-to-market value of the collateral underlying the structure offset by cash distributions we received during the quarter. As of today our SIV holding carries a mark-to-market value of approximately $60 million. Finally, we made a $20 million payment on our outstanding debt. Our current outstanding debt is $40 million. This is down from an original debt level of $254 million just about 2 years ago, which we incurred to deal with the SIV issue. Operator, I will now take any questions the audience may have.

(Operator Instructions) Tom McCrohan.

Just reiterating the question I asked earlier. Was there any seasonal impact related to LSV regarding sequential decline, because we had the same sequential decline last year's second quarter. Thanks.

No, I don't -- there's really no seasonality to the asset flows, Tom. There's a little bit of quarter-to-quarter differences in terms of some revenues they might generate on performance fees just because of the timing of client contracts. They had a pretty good quarter of performance fees, but that -- I wouldn't call that necessarily seasonality as much as it is just contract timing.

Unrelated to LSV but kind of an accounting question. For every dollar of asset you spend of GWP, can you just ballpark what percentage you're capitalizing versus what you're recognizing. How that compared to, say, this time last year, because it seems like part of the higher expenses related to the lack of an ability to capitalize stuff. So, if you put it in those terms it might be easier to comprehend.

Yes, roughly the capitalization on GWP development in the second quarter was probably right around 50%. And I'd say this time last year, I don't have the numbers in front of me, but it was probably somewhere around 65% or so. And in the heyday of development, it was more in the 75%, 80% range.

So, there's definitely more expense related to technology development being borne by the businesses, particularly in banking, now than occurred a few years ago. And really that's because as we've got more experience in the market and we do enhancements to the platform versus significant new functionality builds, like we're doing for the US market entry. Those activities, whether it's Trust 3000 or whether it's GWP or any other technology we are doing development work for, we expense those through.

Great, thank you.

You're welcome.

(Operator Instructions) I'm showing no questions at this time. You may continue.

Thank you, Dennis, and now I'd like to turn it over to Kathy Heilig to give you a few Company-wide statistics. Kathy.

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. The second quarter cash flow from operations was $36.8 million or $0.20 per share. Year-to-date cash flow from operations is $92.8 million or $0.50 per share. Second quarter free cash flow was $7.2 million or $0.04 per share and this does reflect the debt repayment of $20 million this quarter. Year-to-date free cash flow is $10.1 million or $0.05 per share and that reflects year-to-date debt repayment of $55 million. The second quarter capital expenditures excluding capitalized software were $1.9 million and year-to-date capital expenditures were $7 million. Capital expenditures excluding the capitalized software are expected to be approximately $7 million for the remainder of 2011. The tax rate for the second quarter was 34.7%.

This was a reduction from prior quarter and it was due to a special software development production credit or deduction that we got, cost deduction really for producing the Global Wealth Platform software. Now I will point out that the second quarter rate does represent a catch-up of this deduction for the past couple years. We would expect a similar rate, tax rate in the third quarter and then in the fourth quarter we would expect our tax rate to be about 36%. So this tax deduction does have an element of 1-time in it for part of this year and then an ongoing kind of permanent benefit where, as we used to say in the past that our tax rate would be around 37%, we would now expect it going forward annually to be about 36%.

The accounts payable balance at June 30 was $2.9 million. We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risk and that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results. And now, please feel free to ask any other questions that you may have.

(Operator Instructions) And I'm showing no questions at this time. You may continue.

Thank you, Kathy. So, ladies and gentlemen, as a large shareholder, although I am disappointed in our current level of profitability particularly in the banking segment, I am bullish about our long-term business opportunity and the positive impact we will make on the markets we serve. We have always prided ourselves on being innovators in our markets and that's no more true than today. Our focus is unwavering. We must launch as quickly as possible in the US for both banking and advisor segments. Now this will continue to put pressure on expenses in the short run, but give us what we need to grow revenues and change our profit picture.

At the same time, we are working to control expenses and maximize the effectiveness of our resources. Now, looking back, we have made tremendous progress. We have proven the concept of enterprise wealth management system. We have successfully operated clients in the UK for a few years and we are confident we are ready to capture a large market share in the UK and enter the US with a highly successful offering to prospects and clients. We do know that this will lead to sustainable growth and EPS. Thank you very much. 1 more chance to ask any questions you might come to you.

(Operator Instructions)

Okay.

I'm showing no questions at this time.

Great. Thank you. Thank you everybody for your attendance. Have a great afternoon.

Ladies and gentlemen, this conference call will be available for replay after July 21, 2011 at 4.30 PM through October 21, 2011 at 11.59 PM. You may access the AT&T Teleconference Replay System at that time by dialing 1-800-475-6701 and entering the access code 210438. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6401 and 320-365-3844, access code 210438. This does conclude your conference call for today. Thank you for using the AT&T Executive Teleconference.