SEI Investments Co (SEIC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI second-quarter 2012 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Chairman and CEO, Mr. Al West. Go ahead, sir.

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

Now I will start by recapping the second-quarter 2012. I will then turn it over to Dennis to cover LSV and the investments in new business segment. After that, each business segment leader will comment on the results of their segments. Then finally, Kathy Heilig will provide you with some important Companywide statistics.

As usual, we will field questions at the end of each report. So let me start with the second-quarter 2012.

The second-quarter earnings decreased by 8% from a year ago, and diluted earnings-per-share for the second quarter of $0.28 represents a 3% decrease from the $0.29 reported for the second quarter of 2011. We also reported a 1% increase in revenue during the second quarter of 2012 versus second-quarter 2011. Now second-quarter revenues were also up 1% over first-quarter 2012 revenues.

During second-quarter 2012, the SIVs had little effect on earnings. In addition, during second-quarter 2012, our end of quarter non-cash asset balances under management decreased by $5.6 billion. Of that, SEI's assets under management increased slightly by $100 million during the quarter, while LSV's assets under management fell by $5.7 billion.

Now, finally, during the second-quarter 2012, we repurchased 2.3 million shares of SEI stock at an average price of just under $19 per share. Now that translates to over $42.2 million of stock repurchases during the quarter. The net new recurring revenue sales remain strong. We generated over $20.3 million of net new sales events, of which $15.7 million will be recurring revenues. All segments posted good sales quarters, and each of the segment heads will address their sales activity.

Now we are continuing our investment in GWP and its operational infrastructure that are so important to our future. Now, during the first quarter, we capitalized approximately $8.9 million of the Global Wealth Platform development and amortized approximately $7.4 million of previously capitalized development. While we are increasingly encouraged with our long-term prospects with the rollout of GWP, we are also working hard to improve the possibility of our bank segment. You will notice the cost control measures that we had implemented over the past few quarters are showing improvements in the level of many of our costs.

Our GWP efforts remain concentrated on capturing UK GWP markets, as well as launching GWP in the US. We recently passed an important milestone in our launch of GWP in the US. Just a few weeks ago, we released a large amount of US functionality, which permitted five of our larger advisor clients to convert to GWP. Now Wayne will provide some more detail on that.

In addition, I continue to be encouraged by the feedback I receive from our clients and our prospects, and it is confirmed by our sales events across all of our markets. Now our investments in the infrastructure and new service offerings are helping us differentiate ourselves from our competitors, and we certainly expect to capitalize on this even in these challenging markets. Our new service offerings, coupled with our financial strength, position us well for the long-term growth.

Now this concludes my remarks, so I will now ask Dennis McGonigle to give you an update on LSV and the investment in new business segment. And, after that, I will turn it over to the other business segments. Dennis?

Thanks, Al. Good afternoon, everyone. I will cover the second-quarter results for the investments in new business segment and discuss the results of LSV Asset Management.

During the second quarter of 2012, the investments in new business segment continued to focus on the ultra high net worth investors segment, the integration of our capabilities acquired in the NorthStar acquisition and the further development of new Web-based investment services.

During the quarter, the investments in new business segment incurred a loss of $2.7 million, which compares to a $2.8 million loss during the first quarter of 2012. There has been no material change in this segment, and we expect losses in the segment to continue in this range during 2012.

Regarding LSV, our earnings from LSV represent our approximate 40% ownership interest during the second quarter. LSV contributed approximately $22.7 million in income to SEI during the quarter. This compares to $27.3 million in the first quarter of 2012. The decrease in income is due to a few factors.

First, as discussed during the first quarter of 2012 earnings call, as a result of a distribution from an equity plan in the partnership, our ownership interest in LSV dropped by approximately 1% when compared with the first quarter. This resulted in a reduction in earnings of approximately $800,000.

In addition to this, revenues in LSV were impacted by lower average assets under management during the period, as well as a reduction in performance-related fees for the second quarter as compared to the first quarter of 2012.

On a macro level, value-based equity investment as a style had a very typical quarter. Deep value management as a sub-style within the value space had an even more difficult time. As a deep value manager, LSV was no exception. This difficult market period resulted in a decrease in ending asset balances by approximately $5.7 billion, approximately $4.1 billion from market depreciation and the remainder from net negative cash flows.

I will now take any questions you may have.

Robert Lee, KBW.

Good afternoon, Dennis. Just a quick question. Can you quantify or give us some sense of the impact from the lower performance fee in the quarter? And maybe just in general, I guess I never thought of LSV as being a -- performance fees being a big driver and a big piece of that revenue, but maybe some sense of -- and I know it is hard to predict -- but maybe if you look like, say, last year, kind of proportionally how important performance fees are over the course of a year?

It is really not a big part of their overall revenue. Except in the first quarter of this year, it was actually -- less than 5% of their revenues were performance fee driven. It's just that 5% basically went to zero in the second quarter. And so that impacted our income ultimately by give or take about $1 million, $1.5 million.

So it is not a big percentage of the revenue overall generally. Just the first quarter, they had a little bit higher quarter-end. It does -- it bounces around. They have some quarters like first where they have a little bit more performance fees, but just because of the timing of client contracts and when the fees are calculated.

All right. Great. That was it. Thank you.

Glenn Greene, Oppenheimer.

Dennis, just back on the performance fees, is there any seasonality we should be aware of? Is it always more skewed to any particular quarter or anything we should be aware of for the future?

It is a little bit skewed to -- I believe it is really first and third.

Okay. And then the obligatory what was the revenue for LSV in the quarter?

Their revenues for the quarter was a little over $69 million.

Okay. All right. Thanks.

(Operator Instructions). There are no questions in the queue. Please go ahead, sir.

Thank you. I'm now going to turn it over -- thank you, Dennis. I'm now going to turn it over to Joe -- Joe Ujobai to discuss our private banking segment. Joe?

Great. Thanks, Al. Today I will give you an update on our activity and a review of the current financials for the private banking segment. I will focus on a comparison to the first quarter of 2012.

Revenue for the quarter was up slightly compared to the previous quarter at $88.3 million. Revenue growth was negatively impacted by market depreciation and lower transaction-based revenue. Expenses for the quarter decreased by approximately $2.6 million as cost-saving efforts begin to take affect. Global Wealth Services assets under administration at the end of the second quarter were up $700 million to $17.6 billion. We had approximately $680 million of new assets under administration due to net cash flow for business transition clients and another $670 million due to backlog conversion from infrastructure clients. Ending assets were negatively impacted by $665 million due to market depreciation and the strengthening US dollar.

We have an unfunded but committed backlog of $4.3 billion from conversion to our infrastructure clients sold during 2012. We expected this backlog to convert over the next 12 months. As a reminder, business transition clients convert over time, and infrastructure clients typically convert nine to 18 months after a signing.

Turning to new business, net sales events for the quarter was $7.1 million. Approximately 40% of this is recurring revenue. Net sales were negatively impacted by approximately $2 million due to the loss of two relatively small US TRUST 3000 clients, one who exited the trust business and the one who moved accounts to an in-house system. Both firms will deconvert by the end of this year.

In the UK we continue to experience market momentum, especially in the private client investment manager segment. I would like to mention three important events.

Last quarter I announced the signing of a large unnamed PCIM. That client is [Bruin Dawson]. They have engaged us to support their newly launched managed portfolio business. Bruin Dawson is one of the UK's largest private client managers, and this year marks their 250th anniversary.

Today I am also announcing that Jupiter Fund Management is the latest investment management firm to choose Global Wealth Services. Through GWS, Jupiter will -- SEI will provide Jupiter with investment processing and administration services toward private client business. Jupiter will be an infrastructure clients.

Finally, I am happy to announce that our first client for GWS, HSBC Private Bank UK, has signed an extension to their contract, cementing their relationship with SEI through June of 2015. The relationship which began in the summer of 2007 marked their first external contract for GWS. To date, in the UK we have 19 signed contracts and 14 clients who are now live.

Finally, we are seeing a continuous increase in the depth and quality of the UK pipeline. Regulation continues to be a key catalyst for change in the market.

Turning to the US, our US investment processing pipeline is the largest it has been in recent years and is now exclusively GWS. We have significantly increased activity with existing SEI clients, new names and potential distribution or alliance partners. We believe that the value proposition that resonates well in the UK has direct relevance in the US to both banks and other wealth managers.

As I mentioned during the investor conference, we are engaged in the US with approximately 20 firms with a defined sales opportunity and at least another 65 firms in earlier stages of discussion. Activity in all targeted segments is strong and growing.

To date, in the US, we have two signed GWS contracts and expect our first bank to go live by the end of this year. During the quarter, we re-contracted six TRUST 3000 clients for $8.6 million. We have worked hard to secure our current business, and about 77% of our TRUST 3000 revenue is re-contracted until 2015 or longer.

Finally, as a review of our asset management distribution business, ending asset balances were largely flat as positive cash flow made up for market depreciation.

In conclusion, the investments we have made over the past several years are beginning to deliver positive sales results. We will remain focused on growing our existing clients, adding the right new clients and successfully launching GWS in the US. We are working to drive the revenue as quickly as possible and controlling costs while we build for scale.

I will now take any questions.

Chris Donat, Sandler O'Neill.

Good afternoon, Joe. On the expense side for the segment, I'm trying to understand if we are at maybe a new run-rate here. I know it is going to bounce around with sales events and other things. But even looking at the consolidated income statement, I saw a couple of lines where expenses had come down sequentially, and I wondered how much of that is -- I think -- talking about it's got to be private banks -- but anyway just trying to understand more on like the brokerage expense side -- or brokerage commissions and software royalties, just a couple of small items, and then also compensation, just how that should be moving with sales events going forward?

Okay. So, as you said, it is bumpy, and it will continue to bump around a bit as we increase sales. So we are really looking to certainly control or at least manage expense certainly on development costs, as well as operations costs. I would expect to have sales events increase. Obviously that will create greater spending around sales commissions, marketing and implementations. So the key is to keep our eye on that and continue to control it as tightly as possible.

The brokerage expense is, frankly, because brokerage revenue was down, and that's a pretty direct cost associated with the amount of revenue we get from our clients that trade through -- particularly our TRUST 3000 clients that trade using the infrastructure of TRUST 3000. So that expense will go up if revenue goes back up.

So the key is to try to control some of the infrastructure costs, but we will experience more spending around sales and incentive comp as we continue to show progress in the marketplace.

Got it. And just from an accounting perspective, you are not able to put any of the -- some of the amortization expenses associated with GWP on to any of the other segments at this point, are you?

We have an agreed to transfer price based on the ultimate utilization of GWP. So some of that is paid for by the other units, although the banking segment does take a majority of that.

Okay. Got it. Thanks.

And there is no change in that process or philosophy.

Jeff Hopson, Stifel Nicolaus.

Okay. Thanks a lot. Hi, Joe. So, I guess, Jupiter, a big name. Is it just their private client piece of their total AUM?

That is correct. Jupiter is a very well-known mutual fund company based in the UK. The bulk of their assets are delivered through retail funds and institutional funds that they sell in the marketplace. They do have a private client business that they have developed over the last five or six years with individuals that come directly -- generally come directly to them, and we will take over the processing of that business, which they currently run on an in-house system.

Okay. And the fact that only 40% is recurring of the sales, what does that reflect?

We had some -- well, so the net -- the $2 million I talked about net, that impacts the recurring number to an extent, and we had some good one-times from some of our new clients in the quarter, particularly as we work with some larger firms. We are now able to include as part of the pricing one-time upfront conversion fees.

Okay. And then in terms of HSBC, any change in the relationship as far as the assets or the pricing?

Really no significant change. No material change in the pricing or the relationship. We are excited that they have re-contracted with us through 2015, that we think that there is other opportunity for us, and we think that that is certainly a good sign in the marketplace that our first client is going to continue to work with us in Global Wealth Services.

Okay. And in terms of the pipeline that you have talked about, the actual number, any change in that?

No, the pipeline, as we talked about at the investor conference, hovers somewhere between $50 million and $60 million in the UK. I think we are successful in replenishing that pipeline as we close deals. And then as some opportunities do fall out, if some firms might select a competitor or in many cases maybe don't do anything if we don't close them, so that stays about the same. So I think we keep replenishing, and about a third of that is still infrastructure clients.

Okay. Great. Thank you.

Robert Lee, KBW.

Thanks. Good afternoon, Joe. Just a quick question, I think you mentioned, if I have the numbers right, you have about unfunded commitments of roughly around $4.3 billion of AUA, assets under administration, you expect to convert over the next 12 months. From a revenue perspective, I mean it is my impression that revenues from -- are not necessarily all driven by assets. But is it -- should we think of it as a one-for-one relationship in that to bring an asset in there is a fee that is immediately attached to it, or are some of those assets come in and there is really kind of a fixed pricing to it? I'm just trying to get a sense of -- (multiple speakers)

The pricing structure is largely assets under administration based. So, as those assets come onto the platform, we will start to get assets under administration fees. There are other fee drivers or fee opportunities for us, so some of those fees are transaction-based. So, if the client trades actively, we have revenue associated with that. If the client produces statements or we do other transaction activity for them, there is revenue associated with that. But it is largely asset-based.

Okay. And this question on -- you mentioned the two signed DWS contracts in the US. Those are, I assume are existing clients who are converting. Are you able to charge in the US at least an upfront conversion fee? As you think of those relationships at least initially, are you -- are those conversions happening? It is not so much a revenue uptick in the short term and hopefully long-term, but it is kind of neutral on revenue in the short-term, if you convert a US client?

Yes, with our first couple of clients, we are not charging a transaction or a conversion fee, and part of that is where we are in the stage of market entry. But I do expect over time that clients will pay us more for Global Wealth Services than they do for TRUST 3000. Again, we are at the early stages, so the first couple of clients I would not expect a big uptick. We are basically converting the book of business on TRUST 3000 to GWP.

We have talked lots of times that one of the biggest opportunities for us inside these banks is to go beyond trust departments and to really have a -- be a single infrastructure across all their wealth management. So we would see with our current clients some uptick in the -- over time we would see some uptick from TRUST 3000 to GWP on those trust assets, but we also expect to get more business opportunities with inside those banks. I think from our current client that is where we see the significant revenue uptick.

All right. Great. Thanks for taking my question.

Leonard DeProspro, Janney Montgomery Scott.

Good afternoon and thank you for taking my question. Could you please briefly run through some of those numbers at the beginning? I was not able to capture them all. Isn't it new plan sales, as well as the assets under administration and the net cash flows?

Okay. So sales events for the quarter were $7.1 million, and those were net sales events. That number was negatively impacted by about $2 million in losses to relatively small US trust clients.

And then assets under administration on Global Wealth Services, assets at the end of the quarter were $17.6 billion, which was up about $700 million from the end of the first quarter. Underlying that, we had about $680 million of new assets coming from business transition clients as they converted their clients on to GWP, and another $670 million that came from the conversion of infrastructure clients in the backlog. Unfortunately the ending assets were negatively impacted by about $665 million, and that was largely due to market depreciation and the strengthening US dollar. And the final number is that our unfunded but committed backlog is about $4.3 billion of assets.

Thanks.

Glenn Greene, Oppenheimer.

Joe, just one quick question on the $2.6 million expense decrease, which obviously drove the margin uptick Q to Q. It sounded like some of the benefit there was the sluggish brokerage activity, but I know you have also been doing cost efforts as well.

So a couple of questions. We have a full run-rate on the cost side. Is it -- if I annualize that $2.6 million, I get close to $10 million of annual cost take-out, but I realize some of that is brokerage. Maybe you could help us think about the annualized impact from the cost efforts.

Yes, as I said earlier I think to a question, responded earlier to a question, yes, this will bounce a little bit. So a lot of our cost reduction, our cost management efforts have been around what I call infrastructure. So the technology build, as well as primarily the amount of operations, as well as an operation in some of the third-party expenses that we pay to brokerage firms and other people that provide services to our Global Wealth Services clients through the solution. So we focus very heavily on trying to manage those costs as we grow the business.

What is less predictable, though, would be increasing expense related to sales, marketing and implementations. And I think that is good news for us that we continue to grow the sales efforts, we will start to see some higher payouts or higher expense in that area. And so it is not easy to say that this is the exact cost. And also that sales commission and incentive comp is often due to the mix of what we sell, how we sell it, how much upfront we get versus recurring. So it is not easy to bank on that as savings at this point given the early nature of our business. But rest assured we are doing everything we can to manage these costs and to make as much of the new revenue impact the bottom line.

So it is not as if there is like a specific dollar amount of sort of cost efforts, it is just sort of ongoing management? Is that the right way to think about it?

Yes, one of the things we focused on in the first couple of quarters this year was again managing some costs that are associated with third parties. We will continue to do that, and those cost savings then will stay with us for a while. But there is a lot of moving pieces here, and it's not easy to give you a final number.

Okay. Thanks.

And there are no more questions in the queue. Please go ahead.

Thank you. And our next segment is investment advisors. Wayne Withrow will cover this segment.

Thanks, Al. During the second quarter, we had good net cash flow in our equity and fixed income products, which was offset by negative markets in general and negative flows from the SEI stable asset fund, which is being closed.

Assets under management was $31.7 billion at June 30, a 2.5% decline from March 31. Our quarter-end AUM reflects $398 million of positive net cash flow, exclusive of the impact of the upcoming closure of the SEI Stable Assets Fund. With respect to Stable Assets Fund, on May 1 we announced that we were closing the fund on November 30, 2012, and its assets are now being redeemed by the shareholders. In the second quarter, we had $500 million in redemptions, and as of June 30, approximately $700 million remain in the fund, all of which will be redeemed by November 30.

This is a low margin product for us, and while the impact on cash flow is significant, the impact on profit is far less significant.

Revenues for the quarter were $49.4 million, essentially flat from the first quarter. We did see a slight improvement in margins. On the new business front, we signed 115 new advisors during the quarter. As discussed last year, we are being more selective in the advisors we recruit. Our pipeline of new advisors remains very strong.

Moving away from the financials, the biggest news for the quarter and the future of the segment is that we successfully converted our five early adopter clients on to GWP on June 30. Unlike the 85 small beta clients we converted in 2011, the early adopters are among our largest, most complex clients. The conversion went well, and we are very excited about this milestone. We are scheduled to convert a second group of early adopters by the end of 2012 and expect to be getting more generalized rollout of GWP beginning in 2013.

In summary, net cash flow and new advisor recruiting were positive for the quarter, but the more significant news is the successful completion of the early adopter milestone and the upcoming rollout of GWP in the US advisor market.

I welcome any questions you may have.

(Operator Instructions). Jeff Hopson, Stifel Nicolaus.

Okay. Thanks. So, Wayne, so cash flow is remaining strong, despite choppy markets. So it seems like would you say the new advisors are still providing the flows and existing clients and/or advisors any change in cash flows or investor behavior that you can detect?

Yes, Jeff, in this quarter, we saw improving net cash flow from both new advisors and existing advisors.

Okay. In terms of those cash flows, anything unique in where they are going? Perhaps that is different equity fixed income, etc.?

We had a slight increase in liquidity products, but not significantly so.

Okay. Thank you.

Chris Donat, Sandler O'Neill.

Good afternoon, Wayne. I'm just wondering if I can get a little color on the 115 new advisors, if they -- since you said you are being selective, I would imagine they are not people who have just set up shingles after leaving wire houses, but were they users of in-house systems or where did they come from? If you could make any general comments, I would appreciate it.

I think that we generally don't go after the wire house guys. Our advisors come from three major sources. Number one, we get about a third from competitors. Secondly, we get about a third from people that have a commission-based business that want to convert more to a fee-based business, which is our sweet spot. And then we get some advisors that maybe are fee-based but have hit what we call a growth wall.

So they've insourced a lot of activities. They focus too much on those inside activities, and they cannot find a way to focus on their existing clients and prospects, and it interferes with their growth. So they come to a outsource solution such as us so they can grow.

Okay. Thanks. That helps me understand what is going on.

I have no more questions in queue. Please go ahead.

Thanks a lot, Wayne. Our final segment today is investment -- I'm sorry, is the institutional investor segment, which is not our final, and I'm going to turn it over to Ed Loughlin to discuss this segment. You had enthralled me, Wayne, with your --

Thanks, Al. (multiple speakers). Thanks, Al. Good afternoon, everyone. I'm going to start with the financials for the second quarter compared to the first one and then discuss sales activity.

Second-quarter revenues approaching $56 million increased 5% compared to the first quarter of 2012. Net new client funding of $2.2 billion during the quarter contributed to the increase and also offset the impact of capital market declines during the quarter. Profits of $27 million increased 8% for the quarter compared to the last quarter, and margins approaching 49% increased 1% for the quarter.

Quarter-end asset balances of $59 billion were basically flat to the previous quarter. Our backlog of committed but unfunded assets at quarter-end were $1.4 billion. Strong new sales -- strong new client sales closed during the second quarter totaled $2.7 billion, and that totaled $5.5 billion year-to-date through June. New clients were well diversified by market segment and geographic location. We are especially pleased with the acceptance of our discretionary management solution by larger $1 billion plus institutional investors.

As we discussed at the June investor meeting, the pace of institutional decision-making has increased during the first six months of the year. SEI has a long track record serving clients as a fiduciary manager, and we have consistently enhanced our solution to support our discretionary responsibility. We are well-positioned to differentiate our offering from the competition, enjoy a strong pipeline, and we are optimistic about the growth opportunities for the segment.

Thank you very much, and I'm happy to entertain any questions you may have.

Glenn Greene, Oppenheimer.

Good afternoon. Just one question. I know you have had an increased focus on getting bigger asset plans, and you have had two good quarters, real good quarters in a row of sales activity. Anyway you could give us a little bit more breakdown on the composition? Were there any big plans that drove the sales activity in the quarter?

Yes, there was one larger type of a plan, but that was one out of 12. So it is a still a pretty diversified kind of quarter, as I said, both in the segment's pension endowments operating, as well as geography. But one of those was a large $1 billion investor.

Great. Thanks.

(Operator Instructions). There are no more questions. Please go ahead.

Our final segment today -- thanks a lot, Ed -- our final segment today is investment managers, and I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Thanks, Al. Good afternoon, everyone. For the second quarter of 2012, revenues for the segment totaled $46.7 million, which was 1.1% higher than the first quarter of 2012, driven primarily by an increase in our alternative asset balances, as well as new client fundings, but largely offset by asset declines in our traditional business, combined with smaller levels of one-time revenues than recorded in the first quarter. We are optimistic that the pace of fundings from previously sold yet unfunded events should continue to increase during the rest of the year.

Our quarterly profit for the segment of $16.5 million was 4.8% higher than our profit for the first quarter of 2012. This profit was also 9.1% higher than our profit for the second quarter of 2011. The quarter-over-quarter increase in profit was largely due to an increase in our revenue for the quarter and a decrease in certain expenses. Third-party asset balances at the end of the second quarter of 2012 were $231.5 billion, approximately $3.2 billion or 1.4% higher as compared to our asset balances at the end of the first quarter of 2012. The increase in assets was primarily due to net positive cash flows of $4.3 billion, offset by market depreciation of $1.1 billion.

During the second quarter of 2012, we had net new business sales events totaling $7 million in annualized revenue. This represents another solid sales quarter. Of equal importance, these events cover both our alternative and traditional segments and represented a broad array of our solutions.

In looking at the market, we remain encouraged at the level of activity and opportunity. While the financial markets continue to provide a level of uncertainty, our optimism continues to gain steam as we see managers embracing the new norm of this uncertainty and push ahead on decisions. We continue to see growth opportunities from all of our market segments, as well as globally. Our solutions, market position and our unwavering commitment to our clients success allows us to remain well positioned for growth.

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

Robert Lee, KBW.

Thanks. Hi, Steve. How are you? Just a quick question. Earlier this year one large hedge fund admin competitor, I guess, [Lobop], you know, announced that they are selling themselves, I'm not sure if the transaction closed, and then yesterday you had Goldman selling their business to State Street. So it seems like there are some fairly decent-sized businesses that are moving around. And there has always been M&A activity in that part of the business, but are you seeing that -- what are you thinking in terms of how that -- maybe it is an opportunity, maybe not, I don't know, in terms of how you think it is going to shake out from maybe the pricing perspective if these guys feel like they need to price to hold on to business, or do you see it maybe shaking clients loose? Any kind of change in the competitive landscape there?

Well, I think we talked about this a little bit at the investor conference. We do see the competitive landscape. Obviously there are some transactions going on. I think the level of transactions have picked up in the size of them. I think any time there is a transaction like these acquisitions, there is always opportunity, there is always that unknown. So certainly us and I'm sure a number of my competitors are well geared for that opportunity that could come out of this.

Overall the impact on the market I believe this fundamentally is pointed to, over the next several years, this market will change. I think the real serious people that are committed to the outsourcing business as we are will continue to be the ones that stay and thrive. I think that will go through cycles where pricing will come under pressure. We do see some of our competitors, especially some of the smaller competitors, get more aggressive with pricing because that is the only way to compete. But that has never been the type of business we want to go after. That is not really where we try to entrench ourselves. And we feel that the best way to fight commoditized pricing is to continue our investment in innovation and deliver a better solution and that continues to be our hallmark going forward.

Great. Thanks for taking my question.

Jeff Hopson, Stifel Nicolaus.

Thank you. So your comment regarding optimism gaining steam, is that an incremental comment over the last quarter or so?

What I would say is it's a continuation of the quarter. I think when we look back -- if I look back over the past eight quarters, I would say that the optimism would get a little choppy. We would go through a quarter where we would see deals start to fund, people make decisions, and then we would have a step back. I'm encouraged by the fact that despite the markets continuing to be choppy and uncertain, the managers that we are talking to or clients that we are talking to are moving ahead on decisions. And I think that is a very good sign.

I'm not willing to say that we have arrived at an inflection point where it is all downhill and gravy from here. I think there is certainly hurdles in the way, especially around the markets, but I do believe managers are fundamentally looking at their business model and deciding we have to change. We have to look at different opportunities and new business models. And I think before there was a lot of talk, a lot of meetings. You go back to (technical difficulty) meetings. Now we see them making decisions and we see the level and activity before the decisions picking up. So while I would say it's not really an incremental from first quarter, I would say the positive news is it is a continuation of the first quarter.

Okay. Thank you. And in regard to making decisions, is there anything new they are overcoming in terms of pricing or anything else?

No, I would say I think a lot of them are -- that are making decisions are ones that have delayed the decision, and now they are in a spot where they know they have to upscale their operation, their infrastructure and they cannot wait any longer. And many of them have -- over the past 18 months, many managers have looked at their strategic plans going forward and where they want to be and where they want to expand to, and they realize that they need to do that by partnering with good partners and good firms that can provide a solid level of service and outsourcing.

Okay. Great. Thank you.

There are no more calls in queue. Go ahead, sir.

Thank you. We would like now to a have Kathy Heilig give you a few Companywide statistics. Kathy?

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. Second-quarter cash flow from operations was $35.9 million or $0.20 per share and year-to-date cash flow from operations $75.1 million, $0.42 per share. Second-quarter free cash flow was $22.7 million or $0.13 per share and the year-to-date free cash flow $40.5 million.

The second-quarter capital expenditures, excluding capitalized software, were $4.2 million. Year-to-date capital expenditure has been $16.3 million. The remaining capital expenditures for this year, excluding capitalized software, is projected to be about $10 million. The second-quarter tax rate was 36.6%, which compares to the first-quarter tax rate of 37.2%, and we still expect our tax rate to average about 37%, assuming that the R&D tax credit is not extended or reinstated. The Accounts Payable balance at June was $3.9 million.

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

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

(Operator Instructions). There are no questions in the queue. Please go ahead.

Thank you very much. So, everyone, in conclusion, while we are continuing to operate in a challenging environment, during that time we are concentrating our efforts on maintaining highly satisfied clients, growing new business events and controlling costs. I remain bullish about our longer-term business opportunity and the positive impact we make on the markets we serve. Our focus on the long-term growth in revenues and profits is unwavering.

That concludes our remarks today. I will give you one more shot at answering any questions?

There are no questions queuing up, sir.

Thank you very much, and thank you for your attendance today, and have a great afternoon.

That does conclude your conference call for today. Thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect.