SEI Investments Co (SEIC) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI third-quarter 2013 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

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

Welcome, everybody. All of our segment leaders except Joe Ujobai, who is traveling internationally, are on the call today, as well as Dennis McGonigle, SEI CFO and Kathy Heilig, SEI Controller.

Now I am going to start by recapping the third-quarter 2013 and then I will turn it over to Dennis to cover LSV and the Investment and New Business segment. He will also provide commentary on the Private Banking segment. After that, each of the other business segment units 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 third quarter of 2013. Third-quarter earnings increased by 32% from a year ago. Diluted earnings per share for the third quarter of $0.38 represents a 31% increase from the $0.29 reported for the third quarter of 2012. We also reported an 11% increase in revenue from third-quarter 2012 to third-quarter 2013.

In addition, during the third quarter, SEI's assets under management increased by approximately $8.5 billion due to market appreciation and new asset sales. LSV's assets under management grew by $5.7 billion during the quarter.

Finally during the third quarter, we repurchased 1.9 million shares of SEI stock at an average price of just under $31 per share. That translates to $58.6 million of stock repurchases during the quarter.

Now, turning to sales, our net new recurring revenue sales during the quarter were solid. Of the $20.7 million of net new sales events we generated, $18.3 million of it will be recurring revenues. Each of the segment heads will address their sales activity.

As you know, we are continuing our investment in GWP, now SWP, and its operational infrastructure. During the third quarter, we capitalized approximately $8.8 million of the SEI Wealth Platform development and amortized approximately $8.8 million of previously capitalized development.

Now, our development agenda for SWP is to continue to deliver US and UK functionality important to the larger advisors in banks in the US and UK markets, as well as further automate our operations.

Now turning to our business segments, in banking as with other units, our focus is to sell and convert larger banks in both the UK and US. Thus far we are encouraged with the progression in our sales agendas with larger prospects, and the revenue opportunities they represent. We are looking forward to signing and installing these larger prospects and they -- because they are who we have built the system for and we know their business will certainly improve our revenue and profit growth.

Fortunately, we have a portfolio of businesses and three business units are growing their profits nicely. In the Advisor segment, we have made solid progress in improving our asset gathering as well as in preparing for the roll-out of SWP to the US market. Both are important to accelerate our growth and profits to this business.

Now in the Institutional segment, our strong sales and profits globally are living proof of the strong market adoption of our differentiated solutions.

Finally, our Investment Manager Services segment continues its success in both selling and implementing new business. They are making progress selling to larger prospects and increasing the business we do with existing clients.

And behind all of our business units, I am encouraged by the feedback I received from clients and prospects across our Company's target markets. Our reputation for delivering, and doing what we say we will do, remains intact and has strengthened. Sales activities and events in all units confirm the positive feelings in our client basis.

Now, this concludes my remarks. So, I will ask Dennis to give you an update on LSV in the Investment and New Business segment. After that he will provide an update on Private Banking. I will then turn it over to the other business segments. Dennis?

Thanks, Al. Good afternoon, everyone. I will cover the third-quarter results for the Investments and New Business segment and discuss the results of LSV Asset Management.

During the third quarter, the Investments and New Business segment continued its focus on the ultra-high-net-worth investor and the further development of new Web-based investment services and the use of mobile technologies. During the quarter, the Investments and New Business segment incurred a loss of just under $3.1 million which compares to a $2.8 million loss during the third quarter of 2012.

I will report there has been no material change in this segment and we expect losses in the segment to continue in this range during the remainder of the year.

Regarding LSV, our earnings from LSV represent our approximate 39.3% ownership interest during the third quarter. LSV contributed approximately $31 million of income to SEI during the quarter. This compares to a $24.9 million contribution for the third quarter of 2012.

Asset balances grew by approximately $5.7 billion during the quarter, due to increased market valuation and positive cash flow. Revenue for LSV for the quarter was approximately $92.2 million and I would note that LSV had a strong quarter in terms of performance fees.

I will now pause to take any questions you may have before I move on to Private Banking.

(Operator Instructions). Chris Donat, Sandler O'Neill.

Good afternoon, Dennis. Just on the LSV contribution, I guess first if you can quantify the cash flows there that were behind the $5.7 billion increase because I understand the market is going to be part of that. Then, second question more tied to your revenue, well, I guess you just commented that it was good for fees there. But it looked like your fee captures, I calculate that as a percent of average AUM, that that increased.

Anyway, can you give a little color on that because it doesn't sound like your ownership changed. Your ownership stake changed.

Right. Right. On cash flows, across our client base, the new clients, lost clients and cash flows from existing clients, their net cash flows were just over $300 million. So the bulk of their asset growth was from market appreciation.

I would mention in there that about $700 million of negative cash flow resulted from client rebalancing. So our client portfolios with LSV got out of align with the rest of their portfolios and they rebalanced assets away. So it is kind of -- in a way it is the fruits of positive results, if you will.

Yes, the high-class problem.

Right. Now on the -- I wouldn't necessarily focus on the fee side, but they did have a good quarter of performance fees in terms of revenue generation. And third quarter generally is a pretty good quarter for performance fees, given the calendaring of different client contracts. And that probably makes the numb -- the fee calculation skewed a little bit. All right?

Okay.

All right.

Yes, I'm good with it. Thanks.

Tom McCrohan, Janney.

Can you quantify for us the total incremental expenses related to stock options this year related to the accelerated vesting?

You mean, just the incremental related to the accelerated vesting?

Yes. I know for the quarter, but how should we think about it for next quarter and how much more is on the comp there with that?

The next quarter should really be consistent with this quarter and second quarter, because it is an amortization event through the rest of the year. And then you'll see a drop in option expense in the next year quarter to quarter that will be offset a little bit by -- and I don't want to get ahead of our Board, but in the event our Board issues or grants additional options, in the fourth quarter, that would have some impact on expense, but you'll see we should get a positive -- and we will certainly get a positive delta on expense moving into the first quarter.

And Q2 was about $7 million as well?

Yes. What I would point you to, Tom, is -- and this is for everyone, really. We expect to file our Q later today and in the Q there is a disclosure on option expense and it lays all the numbers out not only for the Company, but also by segment.

And can you give us a run rate, something we can work with -- maybe it is in the Q and that is why you are pointing me to that, but kind of a run rate expectation for stock options for the next year?

Yes, next year -- if we do not issue any additional options, which is not a -- would not be probably a good assumption, but if we did not, it would be about $17 million. I'm sorry, about $4 million. $4 million for the year, a little over $4 million.

Okay. Thank you.

There are no other questions at this time.

Okay, moving on to banking. In the Private Banking business, progress continued in both the build and sales activity of the SEI Wealth Platform. [Top aid] to financials revenue of $97 million for the quarter was up 2% from the previous quarter and improved 6% or $5 million from the third quarter of last year. Revenue improvements were driven by higher recurring investment processing fees and increased assets under management in our distribution business.

Private Banking profits were $1.8 million compared to negative $2.6 million in the second quarter of 2013 and a positive $900,000 in Q3 2012. Profit was positively impacted by the increased revenue we saw quarter to quarter.

Further progress in our profitability will be made as we grow our revenue and scale our operational and technological -- technology delivery as we sell and convert larger bank clients or wealth managers.

Turning to business development. As we discussed, as the [bank market] unit has shifted its sell strategy in both the UK and the US to focus on larger prospects, these organizations have longer sell cycles and a complex contracting process. In addition, their conversion to the Wealth Platform involves multiple business segments within their respective institutions.

Consequently, our focus on these larger firms pushes out signings and makes quarter to quarter sales activity more difficult to predict. That said, I continue to be encouraged and I know Joe continues to be encouraged by our sales progress with current prospects and the overall pipeline.

Net sales events across the unit for the quarter were $4.3 million, of which $2.5 million was recurring. In the US, during the quarter, we signed one additional SEI Wealth Platform client, Barclays Wealth Trustees, a subsidiary of Barclays Bank headquartered in Wilmington, Delaware. Under this agreement, they will receive investment processing services in the US using the Wealth Platform.

During the quarter, we also re-contracted seven trust retails and clients. Approximately 80% of our trust retails on book is committed through 2015.

In the UK, we had a strong quarter converting the backlog, growing assets under administration, scaling the infrastructure and progressing large prospects in our sales pipeline. We had over $1.3 billion in net cash flow from current clients and increased our assets under administration to approximately $27 billion.

A portion of our cash flow came from HSBC Private Bank as a result of converting a sizable discretionary book of business that utilizes our enhanced client portfolio management functionality. In addition, we have a backlog of approximately $4.5 million in recurring revenue that is scheduled to install within the next 12 months.

Finally, our asset management distribution business continued to make positive progress. Assets under management balances grew $1.4 billion during the quarter, including $500 million from net new cash flow bring in our assets under management to almost $14.3 billion.

We continue to concentrate on the build out of our solution, the execution of our sales strategies in the US and the increase in our momentum in the UK, all with a focus on larger wealth managers. And although we are challenged with our financials, as we sign and convert larger new wealth managers, new revenue generation will lead to improved profitability.

And I will now take any questions related to Private Banking.

Tom McCrohan, Janney.

On the big deals that are in the pipeline, Dennis, can you talk a little bit more about that? I remember you talking about it at the Analyst Day, but maybe in number of big deals and maybe just put it in context in terms of maybe revenues or size, or just give us a sense of how big these prospects are.

Yes. First, I would give you a little definition. When we talk about larger prospects, we are talking about prospects that kind of in the initial phase of business we would receive for them would equate to about $5 million or more in recurring revenue. So that just gives you a -- kind of a definition.

It -- generally, these large prospects might start at that level or above, but then progress to become even larger clients over time. That is what we are seeing as we talk to these larger institutions. They have multiple books of business. There are certain books of business that are logical to start with and then as we continue to add to our solution set, progress across their entire book as we have success. And we have that frankly -- have had that with SEI over the years with even trust retails and clients as they have grown with us.

I talked to Joe about the pipeline in preparation for the call. Basically his comments were that for the pipeline numbers he talked about or that were talked about at the Investor Day, nothing has really fallen out of the pipeline. If anything, it has gotten better. But there has been good progress on certain names in those pipelines. And that is where we sit now.

And the Barclays business that you talked about, is that -- is it fair to say that is a launching pad for you to get other additional business from Barclays like in the UK?

I think it certainly has that potential. I would imagine that within the Barclays family of companies, it is a litmus test for a relationship with SEI and that if we handle it well -- it is not a gigantic book of business. It is a -- it really represents more a segment of their US side that, if we do well with that, they will give us a great reference point with any institution.

One last question and I will jump off. Are you seeing any evidence out there in the market of other firms trying to develop a similar technology platform as SWP? Or anything you can talk about regarding what you are seeing in the competitive landscape, in regards to that platform would be helpful. Thanks.

Yes. On the UK side it is still -- I would say the competition is predominantly the in-house applications or operational infrastructure, technological infrastructure that the larger institutions have built out over the years. There are certainly software providers that continue to sell into that market as an alternative to a full outsourced solution.

There are a couple -- there is one out -- another outsourced services provider, but I guess we would put them in a camp where their technological footprint is not as -- doesn't carry the breadth and depth of our technological footprint. But it is a developing market and I think we always view, at least I do, that as we have success and we have had success and as we engage firms in conversation, those larger firms are going to stir the market up around us and that will bear it out whether or not we see any competition that surfaces as a result.

In the US, it is really still the traditional players. We haven't seen an emerging player. I think on the lower end of the market you do start to see some of the advisory platforms, more scaled advisory platforms play a role. But generally speaking the competitive landscape is unchanged, I would say.

Robert Lee, KBW.

Good afternoon. Couple of questions. First is, could you maybe give us some color on the recontracting, just what you are seeing pricing wise, was it the debt? Is there any kind of pricing concessions? Are you being able to get a little bit of increase or stable? Any color on that would be helpful.

I would say on a general note, we generally have slight net downs in these recontracts on an apples to apples basis. There are occasions where the client will buy an additional service that results in neutralizing that net down.

But generally we are trading off these longer terms in these contracts, extending the life of the relationship to line it up with the Wealth Platform rollout. And there is a little give on the revenue side associated with that.

Great, and maybe talking a little bit about the backlog, if I had it right, I think you mentioned there is about $4.5 million revenue backlog to install over the coming year on the platform. But can you maybe update us in size, the total revenue backlog that is contractually obligated to install over the next couple of years?

Yes, I don't know if I have that number right in front of me. I would say that, based on where we are with our client base, we are still on track for that $45 million revenue commitment from the installed client base that we had talked about in the past. And I would say that the $4.5 million really represents the newer clients we signed in this year. Some of those are on the US side of the ledger that are -- we will convert over the course of the next 12 months. So that would be additives.

All right, great. And the last question is I am just curious what Joe is going to owe you for taking his spot for -- (laughter).

That is one thing that will not show up in any of our regulatory filings.

(laughter). Thanks for taking my questions. Thank you.

Thanks for making that point. That was well received by everyone here at the table.

Glenn Greene, Oppenheimer.

I guess the question is what is the pushback you are getting from the larger prospects at this point? What is it going to take to get over the goal line? And if I recall back from the Analyst Day in June, I think the presentations were pretty optimistic you would have some large signings by the end of the year. I don't know if that is still on the table.

I would say we are equally optimistic about our opportunities. Timing is always a challenge. But the pushback is not so much around our -- and really not around our service offering and the value we can deliver to the clients in the sales process. The pushback, we just get caught up in the bureaucracy of these larger institutions. The level of signoff on these types of transactions, which are fairly sizable for many of the institutions we are talking to. Outsourcing particularly in this particular area of the institution is new, hasn't been done before even though it might have been done in other parts of the bank, so the bureaucracy to get people bought into not only working with SEI, but the notion of outsourcing to anyone, let alone SEI.

And then third, these larger institutions, I would say has really been driven more by the risk management cultures that have grown up over the years, particular driven by the regulatory landscape around vendor management, the purchasing department having to be involved, the contracting process just taking a long time. So there is just a lot of lot more layers to it than a smaller more nimble -- I will call it say more entrepreneurial type institution that we have run up. That we actually ran up with in the IWA segment in the UK, for example, where we didn't see this complexity in the deal, pulling the deal together process.

That is how I would characterize it. And that is also true of US institutions as well. The larger you get, the larger the institution, it is just the more layers that you have to peel off to get to a final conclusion.

Is that the same? It sounds like that may make some sense for new prospects that haven't been SEI clients before, but how about thinking about existing Trust 3000 clients that ideally you would like to convert over?

Yes, that we would certainly expect to move quicker, but also remember that part of our strategy with existing trust resales and clients, particularly the larger ones, we are trying to sell the books of business we don't have versus the book of business we do have. And that involves new players, other parts of the bank and leads to just a little bit of an extension in time horizon. (multiple speakers) selling larger [time] clients, that is the other.

Okay, have you -- are you still -- is your pricing strategy as it revolves around SWP consistent? Any changes there or is that any part of the issue from a client perspective?

That is pretty consistent market to market. As much as we try to convince the US clients that we are well-established, US banks do look at us as -- the first one looks at us as the first one, particularly the larger ones, so they might negotiate more for a first-mover. But that will play itself out as we make progress. But the pricing model, if you will, holds up.

All right. Thanks.

There are no other questions at this time. Please continue.

Thank you, Dennis. And our next segment is Investment Advisors and Wayne Withrow will provide us with (technical difficulty).

Thanks, Al. During the third quarter, we continued good cash flow momentum and had another solid quarter of new advisory recruiting. Assets under management were $39 billion at September 30, a 17.8% improvement from a year ago. During the quarter, we had approximately $800 million of positive net cash flow, bringing our net cash flow for the year up to $2.7 billion. Roughly 2/3 of this cash flow is from advisors we have recruited during the last two years.

Revenues for the quarter were $61.4 million. This compares to $51.4 million for the third quarter of last year. Expenses increased during the quarter, primarily due to the increase in option expense we discussed in the second quarter call, an increase in direct costs tied to our revenue increase and the costs of increased sales and operational personnel hired to handle our new business.

Despite these expense increases, our margins still improved to 45%, which is a 50 basis point improvement from the second quarter of this year and a 360 basis point improvement from the third quarter of last year.

On the new business front, we signed 156 new advisors during the quarter, which is in line with the number we signed last quarter. Our pipeline of prospects remains very strong.

Moving on to the status of the SEI Wealth Platform, we continued to work with our early adopts to solicit valuable feedback which can be incorporated into the platform. An early result of this feedback was our new advisor desktop which had its first release go into production in the second quarter.

In the third quarter, a further the release on the desktop went into production and we have just gone into beta with the early version of our iPad application. The more general release of the platform to our client base remains on track for the first half of next year.

In summary, net cash flow and new advisory recruiting were very positive for the quarter, momentum remains strong and the wealth platform rollout is on the horizon.

I now welcome any questions you may have.

Chris Donat, Sandler O'Neill.

I wanted to ask one question on the competitive landscape, just given how long it has taken for SWP to be developed. I thought it was interesting this summer where you saw Bloomberg Black launch and then get pulled back and LPL had their [nest wise] initiatives that they also pulled back on.

I am sure you are not going to comment too much directly on those, but in general how do you feel about the competitive position with advisors and what alternatives they have out there? Do you think your moat is deep and getting deeper, or do you think that the competitors are closing in on you?

I guess the way I would answer the question is if you look at the component parts of the SEI Wealth Platform, so rebalancing, aggregation, advance customer reporting, core custody functionality, in each one of those silos there are competitors out there are competitors that may be have combined some of those components. But I really don't see anyone who has integrated the end-to-end insulation the way we have done.

So I think we really are differentiated and I think it is a pretty aggressive technology strategy which would be tough to attack from the get-go.

Then on the iPad that you put into beta. I am curious what your early adopters have said about iPad. Is that is a must-have or a nice to have? Where does it rank on the needs for advisors?

I guess I would answer the question is it is a great thing to have right now, but the question is where is it going to be in a year or two. And I just think it is coming at us like a train.

That's helpful.

There are no other questions at this time.

Thank you, Wayne. Our next segment is the Institutional Investors segment. I am going to turn it over to Ed Loughlin to discuss this segment. Ed?

Thanks, Al. Good afternoon, everyone. I am going to start with the financials for the quarter and then discuss sales activity.

Revenues of $63 million for the third quarter increased 9% compared to the year-ago period. New client funding and market appreciation during the period contributed to these increases. Quarterly profits of $30 million increased 7% compared to the third quarter of 2012. Margins were 48% for the period.

Ending asset balances approaching $68 billion on September 30 increased 4% for the quarter. Net new client assets funded during the quarter were $305 million and the backlog of committed but unfunded assets at quarter end was $1.3 billion. New client sales closed during the quarter were $1.4 billion and new client adoption continues to be well-diversified by both market segment and also geography.

We are especially pleased with the growing acceptance of our fiduciary management solution by the UK investment community -- institutional community. SEI has a long track record serving clients as a discretionary fiduciary manager. We've consistently enhanced our solution to support the increasing client needs.

We are well-positioned to differentiate our offering from increased competition. We enjoy a strong pipeline and remain optimistic about the growth opportunities for this segment.

Thank you very much and I am happy to entertain any questions you may have.

Robert Lee, KBW.

Good afternoon, Ed. Two questions. I apologize, I think I missed this when you said it upfront. The -- your net cash flows for the quarter.

$305 million.

305. And that was a $1.3 billion backlog?

Correct.

Okay. Great. Just curious. This business continues to grow at a steady clip and while the operating margin is very high running around 48%, it has been kind of, I guess we will use the word stagnant, so to speak, in that 48% range give or take high-end, low-end.

Do you see room to continue to scale this as you grow assets at a steady rate? How -- because if you can grow -- revenues grew about 9% year over year or something like that. So if you can grow this at a high single- or low double-digit rate, do you see additional ability to improve margins there? Or do you feel like they are topped out?

You seemed to break up on me when you said stagnant. (laughter).

Stable, how's that?

Yes. The answer to your question is we continue to really try to manage the business certainly from the perspective of we want to grow our client base. We want to get more revenue. So I think that that is really the driving factor. I mean, the margin just falls out of that. We do manage the expenses.

So, I think with a push towards larger clients like most of the other business units, we should see the unit sale, the revenue associated with that should be larger. So I think that that could certainly help to move us in a different direction than stagnated. Hopefully that answers your question.

It does. Thank you.

Chris Donat.

Ed, two questions on the expense side. First was there anything in the quarter from the options expense that also showed up in your segment? And then secondly, you announce at least two hires with press releases in defined contribution in healthcare. I am just wondering, too, if that is as you grow into new segments I am assuming these are new people, not replacements of people who left. But is that also a little bit of headwind on the expense side if you are expanding?

Yes, certainly. From the options standpoint, our business was impacted just like the other businesses during the quarter and also for the first three quarters of the year. So the option expense for the first three quarters was like $800,000. So it was pretty significant.

The two new hires, one would be something we discussed at the Analyst Day where we want to put an increased focus on the defined contribution area. So we have hired someone to head up that business. And I think that is a worthwhile investment. The expense is not that significant for this quarter because the person really just started and the same with the healthcare area.

Healthcare has been an interesting segment for us. We have a nice market share, but we want to stay ahead of client needs by having the right resources to support that market.

Okay. Thanks very much.

Glenn Greene, Oppenheimer.

Similar question, but is your increased investment, is it salesforce-driven outside of the two high-level hires? Have you sort of had to -- or you attempted to increase the sales force, is that part of the investment spending here? And is it a different focus as you go up to the larger prospects?

It is not salesforce-related. There is another expense which is more of an allocated expense. So we have continued to grow in the alternative investment area. That certainly is a big asset class for many of our clients. So we have a larger team in our investment unit and that expense is really passed through the marketing unit.

And you did mention the defined contribution opportunity, which I think you first highlighted back in June at the analyst event. Is it too early to talk about prospects or traction there?

Yes.

Okay. We will leave it at that. That was helpful. Thank you.

There are no other questions at this time.

Thank you, Ed. And our final segment today is Investment Managers and Steve Meyer will discuss the segment.

Thanks, Al. Good afternoon, everyone.

For the third quarter of 2013, revenues for the segment totaled $57.3 million which was $8 million or 16.1% higher than our revenue for the third quarter of 2012. Our quarterly profit for the segment of $19.5 million was approximately $2.3 million or 13.5% higher than the third quarter of 2012. This increase in profit was largely due to the increase in our revenue for the quarter, offset by an increase in our investment and ongoing operational expenses as well as the increase in stock option expense.

As mentioned previously, our expenses are trending higher as we continue to invest in our solutions as well as build out our infrastructure ahead of new business.

Third-party asset balances at the end of the third quarter of 2013 were $296 billion, approximately $6.2 billion or 2.1% higher as compared to our asset balances at the end of the prior quarter. The increase in assets was due to net positive cash flows of $1.6 billion enhanced by market appreciation of $4.6 billion.

New sales momentum continued into the third quarter of 2013. Net new business sales events totaled $8 million in annualized revenue during the quarter and were well-diversified among our solutions. And of equal importance the majority came from expanding relationships with existing clients.

We continue to see strong activity in all areas of the market and feel well-positioned to continue to execute on these opportunities.

That concludes my prepared remarks and I will now turn it over for any questions you may have.

Tom McCrohan.

Hello, Steve. Can you remind us the average wallet share you have in your existing clients? It seems like expanding relationships with your basic clients is a big growth opportunity for you folks. Just trying to figure out how to track that.

It is and it is an average, Tom, so it is somewhat skewed. There are clients, we have 100% of their business, the smaller boutique. But when we look at it across our client base, it is now hovering around 26%, 27%, but that is up probably 4 or 5 percentage points over the past several years.

Your growth, your projected growth in your own internal budgets over the next couple of years, how -- what proportion of your growth is going to come from increasing wallet share? Half? More than half? Just trying to get a sense of that.

I would say a little more. What I would like to see is a little bit more than half. We have always talked about in the past we were in this mode of doing things the hard way where when I would announce new sales events, 90% of them were from new clients. Which, it is great to have new clients, but we have this captive group of clients that we have good relationships with and our plan has been to expand that percentage.

So over the past two years, this quarter in particular, 60%. So where I used to announce 90% was from new, 10% existing, this quarter 60% from existing, 40% new.

That probably bodes well for client retention and can you remind us what your retention rates are?

Our retention is in the high 90s.

Great. Thanks so much.

There are no other questions at this time.

Thank you, Steve. Now I would like to turn it over to Kathy Heilig to give you a few Companywide statistics. Kathy?

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

The third-quarter cash flow from operations was $117 million or $0.66 per share. Year-to-date cash flow from operations $240 million or $1.37 per share. Free cash flow for the quarter was $101 million or $0.57 per share. And the year-to-date free cash flow is $199 million or $1.13 per share.

Capital expenditures excluding capitalized software for the quarter were about $5 million. Year-to-date capital expenditures were $8.6 million. Capital expenditures for the next quarter expected to be about $6 million. That does exclude the capitalized software.

Now next year we expect an increase totaling around $25 million to $30 million because included in those expenditures is a new building at our campus. We expect that to be completed mid next year.

The tax rate for the third quarter was 28.5%. That was due to a Pennsylvania Tax Law change which reduced the apportionment of net income that we will have to attribute to Pennsylvania going forward. We had reserves built up on our balance sheet for Pennsylvania Taxes that we were then able to reverse in this quarter.

The tax rate although for the year is expected to be about 34% to 35% impacted by this change in Pennsylvania law, next year we would expect the tax rate to be around 36%. Accounts payable balance at September 30 was $7.3 million.

And we also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that 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 at this time, please feel free to ask any other additional questions that you may have.

Glenn Greene.

For Dennis, it is my new recurring question every quarter at this point. Reconciling the recurring sales of the $18 million, going through, I have got $8 million from Investment Managers, $2.5 million Private Banking and Trust and it is not always clear to me on the investment advisors and institutional side how I reconcile to that $18 million in total.

Yes, it is really taking their -- in Wayne's case, net cash flow that he generated during the quarter times his earnings rate on that cash flow. The basis points he earns on assets under management which is in that 50 to 53 range. And then Ed is similar. It is kind of his net sales times his earnings rate which he never tells us.

So simplistically, do you have those specific numbers that get me to that $18 million or no?

I do. If you will hold on one second.

Institutional, it is about $3 million and Advisors about $4.6 million; in Banking you have that number and Investment Managers you have that number.

Perfect. Thank you.

That's the [net] recurring.

Got it. Thanks.

There are no other questions at this time.

Thank you. So, ladies and gentlemen, we continue to focus our efforts on maintaining highly satisfied clients, growing our new business events, gaining operational scale and investing in projects critical to our future.

I am very pleased with our increased momentum in all of our markets and our goal of delivering consistently growing profits to our shareholders is unwavering.

That concludes today. If you want to take one more shot at a question, now would be a good time.

There are no questions queuing up.

Okay, thank you and thank you all for your attention and attendance. Have a great day.

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.