SEI Investments Co (SEIC) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI fourth-quarter 2013 earnings call.

(Operator Instructions) As a reminder, today's call is being recorded. I will now turn the conference over to the Chairman and CEO, Mr. Al West. Please go ahead.

Thank you and welcome, everybody. All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller.

I'm going to start by recapping the fourth quarter and the full year 2013. I will then turn it over to Dennis to cover LSV and the investment in the new business segment. Now after that each of the business segment leaders will comment on the results of their segments. Then, finally, Kathy Heilig will provide you with some important companywide statistics.

Now, as usual, we will field questions at the end of each report, so let me start with the fourth quarter and full year 2013.

Fourth-quarter earnings increased by 16% from a year ago. Diluted earnings per share for the fourth quarter of $0.37 represent the 16% increase from the $0.32 reported for the fourth quarter of 2012.

For the year 2013, our earnings increased by 39% over 2012 earnings. Diluted earnings per share for the full year of $1.64 is a 39% increase over the $1.18 recorded in 2012. We also reported a 14% increase in revenue from fourth quarter 2012 to 2013 and a 13% increase for the full year from 2012 to 2013.

Also during the fourth quarter 2013, our non-cash asset balances under management increased by $10.7 billion. Of that, SEI's assets under management grew by $5.6 billion during the quarter while LSV's assets under management grew by $5.1 billion.

Finally, during the fourth quarter 2013 we repurchased 1.9 million shares of SEI stock at an average price of just under $34 per share. That translates to over $64.7 million of stock repurchases during the quarter. For the entire year, the numbers are 6.8 million shares purchased at an average price of just under $31 a share, representing $210 million of repurchases.

Now turning to sales, our net new recurring revenue sales during the quarter were solid. Of the $21.1 million of net new sales events we generated, $17.3 million are recurring revenues. Each of the segment heads will address their sales activities.

Now, as you know, we are continuing our investment in SWP and its operational infrastructure. And during the fourth quarter we capitalized approximately $8.5 million of the SEI Wealth Platform development and amortized approximately $9.1 million of previously capitalized development.

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

Now turning to our business segments, in Banking our focus is to sell to and convert medium-sized and larger banks and wealth managers in both the UK and US. The progress in our sales agendas has been slower than we would like. Larger organizations and, by definition, larger revenue opportunities have much longer sales cycles and challenges.

While our engagement level has been high with the selected institutions, we are being met by the unique dynamics of large organizations. Their complexity in decision making, contracting processes, and organizational politics are a few examples.

We are working hard to overcome the obstacles we face and look forward to signing and installing larger processes. We remain encouraged by their express need for the functionality and service offering we have developed. At the same time, we are concentrating on improving the Banking segment's profitability.

We need to do a better job of managing our expenses and improving the operational efficiencies of SWP. These efforts will help us in the short and long run. Fortunately, we have a portfolio of businesses and the other 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 rollout of SWP to the US market. Both are important to accelerate our growth and profits to this business.

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 Management Services segment continues its success in both selling and implementing new business while differentiating their solution. They are making progress selling to larger prospects and increasing the business we do with existing clients.

Now 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 delivery remains intact and has strengthened and the sales activity and events in all units confirm the positive feelings in our client base.

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

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

During the fourth quarter 2013, the Investments in New Business segment continued its focus principally on two areas: the ultra-high net worth investors segment and the development of a Web-based investment services/advice offering, coupled with the use of mobile technologies. During the quarter, the Investments in New Business segment incurred a loss of just under $3 million, which compares to a $3 million loss during the fourth quarter 2012. There has been no material change in this segment and we expect losses in the segment to continue in this range during 2014.

Regarding LSV, our earnings from LSV represent our 39.3% ownership interest during the fourth quarter. LSV contributed approximately $32 million in income to SEI during the quarter. This compares to a $25.1 million contribution for the fourth quarter of 2012.

Asset balances grew by approximately $5.1 billion during the quarter due to increased market valuation offset by net negative cash flows. Revenue at LSV for the quarter was $97.3 million and their expenses were impacted by a true-up of incentive compensation expense which occurred during the fourth quarter.

I will now take any questions you have.

(Operator Instructions) Robert Lee, KBW.

Good afternoon, everyone. Good afternoon, Dennis. Just curious, at LSV could you quantify kind of the negative cash flows?

And then a note; with the kind of rebound and asset levels, have they -- maybe it hasn't been an issue with having some modest outflows, but have they kind of moved to shut -- to close any products going forward?

It's really the same as it has been in the past. Their larger cap products are open and have been open and will continue to be open. They have had closed products even entering the quarter or in the small cap area or some regional products around the globe, but I would say really not much change on that front.

They had a net negative cash flows. About half was principally due to rebalancing of clients in the clients' own portfolios, which would rebalance assets away from LSV. And then the other was they did have a few client losses, but I would say they were that kind of the revenue associated with those clients who were lower fee type clients.

So I'm sorry; were the gross dollars of redemptions like $1.5 billion? I don't know if --.

A little over $1 billion.

A little -- okay, great. That was it, thanks.

(Operator Instructions) To the presenters, no further questions in queue at the moment.

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

Thank you, Al. In the Private Banking business we are making progress in the continued rollout of the SEI wealth platform. As an update on financials, quarterly revenue of $106 million was up 9% from the previous quarter and annual revenue of $397 million was also up 9% from 2012.

For the quarter, Private Banking profit was $3.1 million compared to $1.8 million in Q3 2013. For the year, profit was $4.7 million compared to $7.8 million for 2012.

For the quarter, profit was positively impacted by increased revenue. Revenue improvements were largely driven by higher recurring investment processing fees in the US and the UK, and also increased assets under management in our distribution business.

Despite the revenue growth, we were not satisfied by profitability growth as expenses outpaced new revenue. I recognize that we must manage expenses more carefully to improve our profitability and we will pay careful attention to expenses, especially those we anticipate incurring in advance of revenue recognition.

During 2013 expense increase was largely due to the continued development and rollout of the SEI wealth platform, direct costs associated with the growth of our asset management and brokerage business lines, and increased stock option expenses due to accelerated vesting.

Turning to business development, gross sales events for the quarter was $8.6 million, $4.7 million of which is recurring. Net sales events were $7.4 million, of which $3.6 million is recurring. As we have discussed, we have shifted our sales strategy to focus on larger prospects.

We are learning that these larger revenue opportunities have longer sales cycles and very complex contracting processes. Consequently, our focus on these larger firms pushes out signings and makes sales activity more difficult to predict.

That said, we have positive feedback from the market that our solution is strong and aligns with the business issues our clients are trying to solve. For that reason, as well as the growth of current clients, I remain encouraged by our opportunity.

In the US, during the quarter we progressed our step-in the strategy, the conversion of [Kinally] Trust. In the Private Banking segment we now have three US firms on the SEI Wealth platform with a backlog of six additional firms.

The step-in strategy has been designed to provide us with a calculated and deliberate entry into the US. Our strategy is focused on growing our business in both scale, meaning size of firms, and scope, the extension and innovation of services. In 2013 we installed two firms, extending our services from pure investment processing outsourcing to integrated processing and asset management, as well as the initial delivery of our innovative front-end services.

Installations in 2014 will be focused on additional scale and the extension into more complex and global processing services for US clients.

In the UK, during the quarter we added over $1 billion in net cash flow. In 2013 we grew platform assets under administration by over 30% to $29 million. Asset growth came largely from new asset flows from current clients. Also, as a sign of continued acceptance of the platform, we converted an additional book of business from our first client, HSBC.

We have also seen strong asset management and cash flow of almost $500 million in UK-based clients using the SEI Wealth platform. Worldwide we have 29 signed clients with eight remaining to install, meaning a backlog of approximately $7 million in recurring revenue that should install over the next 18 months.

Finally, after management contributed new asset balances of $1.2 billion for the quarter and $2.6 billion for the year, bringing our assets under management to almost $15.5 billion. We had positive growth in every region.

In conclusion, for 2013 we had strong revenue growth from our investment processing businesses both in the US and the UK, up 13%. We had strong assets under administration growth from the SEI Wealth platform, up 30%.

We began to successfully implement the US step-in strategy and we have a solid backlog to continue that strategy in 2014. And we had strong assets under management growth from across all regions up 24%.

For 2014 we have learned that the sales cycle for larger prospects is more complex and longer than we expected. Given that, we will heighten our focus on expense control and profit improvement.

Any questions?

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

Good afternoon, Joe. Wanted to revisit numbers that have come up in the last seven or eight months; just on the US pipeline at one point you were talking about it at about $100 million and the UK pipeline at $50 million. Are those still useful numbers to think about?

Yes. So in the UK it's about the same size, $50 million, and we still have all the prospects associated with the pipeline. One large prospect has slowed down, but is still in the pipeline and the timing -- so I think the timing of signing a large client in the UK has been pushed out.

In the US, the size of pipeline remains about the same, $100 million. Some names have dropped off and others have been added. We are absolutely progressing the sales process of many of the large names, although not progressing the prospects through the sales gates as quickly as we would like. Large organizations continue to express interest in outsourcing and we are engaged with those firms.

Okay. I think Al, in his comments, had used the phrase still in active discussions with -- like that these processes take longer, but I imagine there's a lot of back and forth. Is that a fair way to characterize it, that you get to a level that you are close to a signing but it's more people you are talking to or different parts of the bureaucracy? Is it that?

We're talking across a wide variety of segments with inside these large firms, which means a lot of executives and a lot of people, and certainly the procurement or signing process has become increasingly more complex over recent years. So, yes, there's a lot of activity across the board, but things are taking a lot more time than we would like.

Okay. Then with the -- just sort of looking quarter on quarter on the information processing line, which I know that's in the consolidated income statement, but I believe a lot of it's private banks. Just in that quarter-on-quarter change, is that -- should I think about that as a conversion business that should be bringing recurring revenue later or is it --? It says in the release a one-time item; I'm just trying to make sure I understand it.

No, the increase in investment processing really is across the board. It has come from growth of our US Trust 3000 business, recurring revenue there. As you know, we converted some clients from ASP to BSP, so that drove processing for revenue increase.

We talked about some solid growth in the UK on the wealth platform from current clients. That drove some increase in investment processing; as well as our mutual fund trading solution in the US, we saw some significant growth last quarter in that business, too.

Okay, got it. Thanks, Joe.

Glenn Greene, Oppenheimer.

Joe, just sort of following up on the last question. Maybe you could just quantify what was the magnitude of the one-time revenue in the quarter?

Let me check that -- couple million dollars. Yes, $2 million.

So pretty strong sequential growth Q-to-Q from the third quarter to the fourth quarter, even ex this sort of couple million dollars as -- I guess it's the UK sort of picking up. Is there any seasonality in the mutual fund trading or any of the other businesses? I'm just trying to understand the nice sort of sequential ramp, given that we probably didn't get a lot of lift from the global wealth platform at this point.

No, there really isn't seasonality but we did -- again, as I mentioned earlier, we did see growth in our US Trust business. We did see some growth in the recurring business in the UK as our current clients continue to increase flows to the platform and, as I mentioned also, in this process -- in the mutual fund business.

We did mention last quarter that our first client on the platform, HSBC, did bring over a new book of business, which occurred towards the end of the third quarter, and that impacted positive revenue growth in the fourth quarter.

So you got a full-quarter benefit of that in the fourth quarter?

Yes, pretty much, yes, yes. I think they converted latter part of September.

All right. And I will ask you a question which I know you won't like, but I will ask it anyway.

Watch it, Glenn. (laughter)

I'm sure you're expecting this question. At the analyst event back in June you, or someone on your team, sort of alluded to you would be disappointed if you didn't sort of get over the goal line a few large deals by the end of 2013. And then I guess that sort of didn't happen.

Is there sort of a new timeframe you're thinking about? Is it more realistic to be thinking by beginning in the back -- by the third quarter, or do you not want to answer that at this point?

Of course we are disappointed that we didn't sign a couple of large clients in 2013, and I need to be careful not to make a similar mistake and give you specific timing. But as Al and I both said, we remain very engaged in the market and we continue to get affirmation that our solution is a good one and it meets the needs of the market. These things are just taking longer than any of us would like.

Is it question of buy-in for the solution? Is it a question of price, or is it a question of competition, or a question of people wanting to do more stuff in-house? I'm just trying to get my arms around the reason why it has taken so long to get over the goal line.

It's largely these are large, complex offerings and so I think that -- I know the firms that we are talking to are very enthusiastic about the solution, but it takes a lot to make decisions inside these large firms now. As I said, there are across multiple segments.

The regulatory environment has changed, so if a large firm wants to outsource -- and many firms we're talking to clearly see the benefit of outsourcing -- but the regulators have, both in the US and UK, have gotten much more prescriptive around outsourcing. And, honestly, these are very, very big decisions that our clients haven't had to make ever or certainly in a long time.

Okay. And then just one number question. Did you say the backlog of signed but not converted is about $7 million of recurring revenue?

That's correct, yes.

Tom McCrohan, Janney.

Just a quick follow-up on the pipeline. Can you give us a sense of the gates? Remember at the analyst day you talked about a number of deals being in gate three out of the five-category gating system. Have any of those gate threes moved to gate four?

Things are moving in the pipeline much more slowly with these large firms so, yes, things are moving in the pipeline but they are moving at a pretty slow pace. At a slower pace than we would like given the complex nature of the sale.

Okay. In terms of the conversations, like Glenn was trying to get to as well, I am just kind of curious; on functionality, when you're getting feedback from the prospects you're talking to, are they okay with the functionality? Or are you getting a sense that there's going to be some additional investments, significant investments in GWP to meet kind of the functionality needs of the US prospects you are talking to?

We've told you all along that we've developed in the back to the front so that most of the development we are doing now or a lot of the development we are doing now is more around the front, meaning the advisor experience, the end client experience. What we hear from our prospects are really is the integrated nature of the platform is of significant value.

Again, there's still some core US stuff that we continue to build as part of a step-in strategy, but people like the functionality. And they particularly like the fact that that functionality is very integrated; it creates a straight-through environment. And that's what drives both not only the cost savings that our clients would expect to achieve, but also the reduction of risk that they would expect to achieve as they would adopt the wealth platform.

That's all I had. Thanks, Joe.

Robert Lee, KBW.

Good afternoon. I just wanted to maybe follow up a little bit on your comments as it relates to expense growth.

How -- I guess maybe this follows up on Tom's questions a little bit, but to what extent do you feel like the buildout of the platform in the US, while still there is some more functionality to add, is kind of -- absent signing a large client that has some specific needs-- where it needs to be for the most part? And until or unless you sign a large client in the US that would contribute to may be some slow down in the rate of expense growth.

And I guess as maybe a corollary to that, are you guys thinking that whether revenue growth ends up being 5, 10, 12, whatever the number is in 2014 that it's kind of the goal to keep expense growth at some lower rate? I don't know if you had a specific number in mind. So should we be -- is that how you are kind of thinking of heading into 2014?

From a development standpoint we are trying to tie additional expense associated with development to the step-in strategy. So as we have identified additional firms that are increasingly more complex, we would develop, based again on that well-documented, well-discussed step-in strategy around development.

There are other things that drive expenses that we need to really keep our eye on closely. I think I've mentioned this before; initial conversions in the US have cost us a little more than we would like so we are going to really follow that pretty closely. We have tried to reengineer a fair amount of effort around conversions in 2013 and should see the benefit of that in 2014 with some of these next clients in the step-in strategy.

There's a lot of complexity around these large sales that we've mentioned several times and that means we applied a lot of technical sales resource against those sales efforts. We're certainly looking to use people internally that have been part of the development of the platform as part of that technical sales approach.

And then the one area that we've talked about for a long time is really trying to determine what's the right investment around operational scale, so what makes sense for us to really fix or scale using continuing technology development versus adding people. So we are really focused on the step-in strategy as well as the experience we have with growth in the UK and are looking at development conversions, technical sales support, and then operations and trying to focus on those four areas from an expense standpoint.

Maybe just following up. To the extent that you can't control -- you have expenses in the coming year. Should we be thinking that it is just generally a goal to pay -- whatever revenue growth is we just want to make sure if it ends up being below our expectations, we are still going to try to manage the expense growth at a lower rate?

Yes, profitability improvement in the Banking segment is of extreme importance for us in 2014 and we will stay close to the revenue growth and manage expenses based on that.

Great, thanks for taking my questions.

At this point there are no additional questions.

Thanks, Joe. Our next segment is Investment Advisors and Wayne Withrow will cover this segment. Wayne?

Thanks, Al. In 2013, our momentum accelerated as we received $3.5 billion in net positive cash flow for the year, including $800 million in the fourth quarter. Our net cash flow in 2013 represented the best we have had since the year 2000 and is almost double of what we received last year.

Revenues were $241 million for the year, a 19% increase from 2012. Our fourth-quarter revenues totaled $65 million and improved almost 7% sequentially from the third quarter. Profits for the year increased 30% from last year and our fourth-quarter profits improved 8% from our third-quarter results. Revenue growth outpaced expense growth in the quarter and our margins for the quarter improved to 45.4%.

Assets under management were $41.4 billion at December 31, an increase of $2.4 billion from September 30. This increase was due to net positive cash flow and market appreciation. Year over year our assets grew by $7.7 billion, driven almost equally by market appreciation and positive net cash flow.

During the quarter we recruited 138 new advisors, bringing our total for the year to 593. Our pipeline of new advisors remains strong.

For 2014 we will concentrate on three main areas. First, we are focused on the rollout of the SEI Wealth Platform. In 2013, we improved that platform by incorporating feedback received from our early adopter clients. In 2014, we expect to convert two additional trenches of clients with the first tranche going live in the second quarter. We expect to use this second-quarter event to more finely tune our conversion process.

While I do not expect SWP to be a significant source of direct revenue in 2014, it does help us by shoring up our relationships with existing clients and improving our current cash flow from them. Our progress on SWP during this year should set us up for new revenue growth in 2015.

Second, we will continue to focus on new advisor recruiting. Third, we will work to continue to improve upon the segment's rate of net cash flow growth. To this end, we have added a few additional sales resources for 2014.

In summary, 2013 reflected the momentum we have been building. Our goal in 2014 is to improve upon this momentum in our core business, while at the same time continuing the rollout of SWP with an eye towards revenue contribution in 2015.

I now welcome any questions you may have.

(Operator Instructions) Robert Lee, KBW.

Just curious, as you pointed out, you had pretty healthy margin expansion kind of year over year full year and for the quarter. And I know you've been spending money on the Wealth Platform and whatnot, so with some of these additional hires and whatnot, how should we be thinking of margin progression from here?

Do you think this is really just kind of steady March back to the 50% margins you had kind of pre-crisis era? Or do you feel like maybe it kind of plateaus for a while as you kind of get the platform rolled out and hire some additional distribution resources?

Rob, I'm always trying to grow the revenue and I'm always trying to grow the profits, and so that means I'm trying to control my expenses as I grow the revenue. So I'm not willing to give up on anything just yet.

Okay. And maybe a question, and maybe this isn't the best way of looking at it, but if I look at kind of the fee realization rate, it has been also kind of ticking upwards I'd say for the last several years. Is that really just simply kind of the rebound in equity assets so the mix is changing? Or is there anything else kind of happening, the need for services kind of putting some upward lift to kind of the revenue per asset?

I think when you look at the revenue recognition rate, that's because there is scale inherent in the mutual fund products we use. So this business has scale in the revenue recognition rate, as you pointed out, and also scale in the operations of the business itself. So it has kind of double scale built into it.

Is that because the -- I don't know --

Size, scale due to size.

All right, that was it. Thanks.

Glenn Greene, Oppenheimer.

Do you have sort of a timeline to have all your advisors covered at SWP, or what is sort of the plan of thinking there?

I think I would probably like to defer a comment like that to when we have the investor conference. We do have sort of internal goals that we are working on right now, but I really haven't shared that with all my clients yet so I want to off on that.

Okay. Then you sort of suggested you're going to add some salespeople and I thought I heard you say a goal of having even stronger flows in 2014. Maybe a little bit more color around that; did I hear that right?

I think I heard it right and I think you probably have all the color there is.

All right, very helpful. Thanks, Wayne.

I'm not -- it would not be wise of me to tell Al I'm not going to grow.

Okay, that's good.

We have no further questions in queue.

Thank you, Wayne. Our next segment is our Institutional Investors segment. I'm going to turn it over to Ed Loughlin to discuss it.

Thanks, Al and everyone. I'm going to focus my remarks on the financial results for the fourth quarter. The entire year approaching $68 million, increased 6% compared to the third quarter. Full-year revenues of $257 million increased 13% compared to 2012. New client fundings and market appreciation drove revenue growth during both periods.

Operating profits of $31 million increased 4% compared to the third quarter and increased 12% for the year totaling $124 million. Fourth-quarter margins were 47%. Margins for the year were 48%. Both time periods realized a 1% decline due to accelerated stock option expense, increased defined contribution solution costs, and additional alternative investment resources to support our client base.

Quarter-end asset balances of $69 billion reflect a $1.6 billion increase compared to the third quarter of 2013 and a $4.5 billion increase for the calendar year. New client funding for the quarter totaled $688 million and the unfunded client backlog was $652 million at year-end.

Client signings for the fourth quarter were $1.2 billion and totaled $6.7 billion for the year. As we have discussed previously, new competitors have entered the outsourcing space, making each deal more competitive, but overall generating more sales opportunities. SEI's fiduciary management program has a proven track record of adding value for clients and competes very favorably in the outsourcing space.

Our focus for 2014 is in three areas: to continue to build a global, diversified institutional client base with a continued emphasis on larger investors; second, continue to provide clients with value-added advice and discretionary services; and, third, place increased emphasis on defined contribution investment-only sales opportunities. We want to be able to capitalize on emerging favorable trends towards engaging a fiduciary partner to manage their defined contribution plan like a defined benefit plan.

Our pipeline remains strong and we are optimistic about the growth opportunities in the institutional space. I am happy to entertain any questions you may have.

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

Good afternoon, Ed. Wanted to ask first on your comment there about your first of the three priorities for 2014 about focusing on larger opportunities.

Are you starting to see more opportunities among the bigger players out there than you had before? Is there something that's changed in their behavior that makes them more likely to outsource a bigger pension or endowment than they had before?

I think that we have been fortunate enough to be able to be an attractive alternative to larger players, a little bit more of a function of how many are in the market place at any one particular time. I think what we are seeing is with more competition our competitors and ourselves are calling on these larger investors. And I think it's something where they are encouraged by all this competitive nature of the marketplace to really look into outsourcing.

And so, once they start to look, I think that there will be hopefully a good number that would say, yes, we want to move in that direction.

Okay. Then just one question on sort of the market dynamics right now. Particularly on the pension fund side, I'm seeing articles about, in terms of large funds, large pension funds, something like 95% are fully funded.

With the run-up in equity markets we have had in 2013, does that change anything for your business in terms of is it easier to make a sale to a fully-funded or nearly fully-funded pension fund, or is that just a separate issue?

I think it's really a separate issue. I think just the whole idea of a locking in of funded status so these plans don't have to give anything back as the market conditions or the interest rate environment changes so you see this glide path orientation, that in itself is a reason for them to outsource to be able to have someone manage that. But as they get better funded I don't that but that's a reason to outsource alone.

Okay, thank you.

We have no additional questions in queue.

Thanks, Ed. Our next and 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 fourth quarter of 2013, revenues for this segment totaled $59.5 million, which was $8.3 million, or 16.1%, higher than our revenues in the fourth quarter of last year and $2.3 million, or 4%, higher than our revenue in the fourth quarter of 2013. New client fundings and increases in our asset balances drove this increase in revenue.

Our quarterly profit for the segment of $20 million was approximately $3.6 million, or 21.6%, higher than the fourth quarter of 2012 and 2.5% higher than the third quarter of 2013. Third-party asset balances at the end of the fourth quarter of 2013 were $312 billion, approximately $16 billion, or 5.4%, higher as compared to our asset balances at the end of the third quarter 2013. The increase in assets was primarily due to the net positive cash flows of $12.2 billion enhanced by market appreciation of $3.9 billion.

Turning to market activity, during the fourth quarter of 2013 we had another strong sales quarter. Net new business sales events totaled $8.5 million in annualized revenue during the quarter. This brought our 2013 total net new sales to $34.3 million in annualized revenue. We continue to add new business across our entire solution set, as well as all of our different market segments.

Additionally, client retention remains strong in 2013 and during the fourth quarter we had client re-contracts that totaled $13.3 million in annualized revenue.

From a market environment standpoint, we continue to see a strong pace of activity as well as increased competition. Investment managers are poised for growth and expansion and their solution needs are increasing. We feel this will continue to fuel additional opportunity in this space and bode well for our future.

As we enter 2014 our continued focus will be on growth. Our priorities will be in the following broad areas. First, we will continue to build our market share in revenue, primarily driven by focusing on larger new name business, ongoing growth of our wallet share with current clients, and continued geographic and new market expansion.

Second, we will continue to invest in and develop our solutions and services so we can maintain our market differentiation. Our primary mission remains to help our clients succeed by delivering world-class services and solutions to meet their emerging needs.

Third, we will continue to focus on the future and sustainable growth. This industry is continually evolving. New products and services are proliferating in the market and we will continue to expand our solutions to take advantage of this trend.

In summary, 2013 was a strong year for our business. We are encouraged by the momentum we experienced during the year and we look to build on that momentum in the year ahead.

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

(Operator Instructions) Robert Lee, KBW.

Good afternoon, Steve. Just maybe focusing on the margin again, age-old margin question. This year it's kind of I guess relatively flat year over year despite having pretty good revenue growth. And I know you were going through some investment spend and whatnot, so how should we be thinking of this from here?

It kind of feels like the last bunch of years margins have kind of been in this 34% to 35% range. Do you feel like that's kind of where it's going to kind of settle for the foreseeable future? Is there much opportunity to really expand the margin more from here if you get another year of good revenue growth, or just between investment spend, breakpoints on new business, going after larger clients, whatever it may be, this is kind of probably a natural level?

I will tell you a couple things, Rob. I think margin did fluctuate a little bit this year as we predicted, primarily because of our uptick in investment and us frontloading expenses before conversion of business. I think that in the short term and near term I would continue to say that it's going to continue at that trend and the margins will probably be at the current level.

With that said, we are always looking to increase our margin and we are always looking to find ways to manage our expenses more effectively. While I will continue to invest in this business and, quite frankly, we see a tremendous opportunity for us to innovate our business and develop our solutions further, that does not hide the fact that we also feel that we have become more efficient in our operations and our services we do day to day.

So while we will continue the investment, while I look at margins kind of over the next year or so to stay the same or in the same level or region where they are, we are, rest assured, looking for ways for us to increase it in the long term.

Okay, and maybe just one follow-up. I know in the last couple years there has been a concerted effort to try to expand your business outside the US in this segment. Could we maybe get some color on, when you look at some of the new business trends you've had, is it kind of evenly split US, non-US? Kind of any color on how that initiative is progressing and the current makeup of the new business geographically.

Sure. So would say a couple things. Obviously, the growth is still come -- the majority from the US. I think the positive trend we are seeing in the US, if you look at our business over the past four or five years, the alternative segment of the business was really driving most of the growth.

Encouragingly, the traditional side has picked up activity and, if you look, it was almost evenly split. There was a slight head on the alternative for the year if I look at all the new events, but the traditional side certainly came up and contributed almost as much as the alternative.

Looking at the global mix, global did add -- it was probably around 10%. It was a little less than we hoped, but I think we are seeing a little bit of the headwinds that Joe is seeing as we are looking at larger institutions overseas. These are complex decisions and -- especially the large organizations.

So I would say we have --- while there's positive signs, we will face a little bit of headwinds as the larger deals we had talked to and the large organizations, the more complex decision, it's just taking a little bit more time. But I'm still very encouraged and we are not backing off. We are actually pushing ahead further with our expansion outside the US.

Great, thanks for taking my question.

Tom McCrohan, Janney.

Steve, can you talk about compliance? Is that a big driver of kind of new business in the pipeline? And the other driver I was kind of curious about is I guess hedge funds going multi-prime broker. Can you talk about those two drivers?

Sure. So the first, compliance, global compliance and regulation is a key concern. If you ask any CEO of an investment management firm, that's one of their top one or two concerns and issues. So that is driving a lot of the behavior of our clients and, quite frankly, we see an opportunity, and it's one of the solutions that we have spent building out in our business, and we see it as a driver and an attractor for new business.

On the multi-prime broker, that's something that has been out there for years. More and more not just hedge funds, but traditional managers are using multiple prime brokers, multiple custodians. And that, again, I do think it's a phenomenon that's going to keep up.

People are looking to spread the risk and their business across multi-custodians and prime brokers. It's one of the areas that we think drives business to an outsourcer such as us, because we do the aggregation and really all the legwork between those various parties, counterparties.

Something like this alternative investment fund manager directive in Europe, is that a big factor in your business in terms of what's going on in Europe?

Yes, I would say that's one of the slivers of our regulatory and risk solution, and it's certainly one of the things that comes up in every discussion we are having with new prospects and current clients and the ability to handle that solution or those regulatory needs or reporting needs for them. But it is a very big concern and a very big challenge for managers, one that we have looked to solve for them.

Great, thanks very much.

No further questions in queue.

Thank you, Steve. I would like to turn it over now (technical difficulty)

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

The fourth-quarter cash flow from operations was $110.9 million or $0.63 per share. Year-to-date cash flow from operations $351 million or $2 per share. The fourth-quarter free cash flow was $96.5 million, or $0.55 per share, and year-to-date free cash flow was $295 million.

In the fourth quarter, capital expenditures, excluding capitalized software, were $5.9 million. Year-to-date capital expenditures, excluding capitalized software, of $14.5 million. We expect that number to be larger next year in part due to the cost of our rebuilding and also some other infrastructure that we are doing in our technology area. So we would expect the number to be about $30 million to $35 million(company corrected after the call).

The tax rate was 35.2% in the fourth quarter. If you remember, the tax rate in the third quarter was low. So our annual tax rate is 33.7%; however, we expect 2014 to be around 36%. The accounts payable balance at December was $16.2 million.

We also would like to remind you that many of our comments are forward-looking statements that are based upon assumptions that involve risk and that the financial information presented in our release and on this call is unaudited. Future events and income could differ from expected results.

We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

Now, please feel free to ask any other questions that you may have.

Chris Donat, Sandler O'Neill.

Yes, two questions from me. First, thinking about stock-based compensation in 2014, because it was elevated in 2013 with the sale of SEI asset (technical difficulty) and the SIV settlement. Anyway, is this something that we should think about as going back to, say, 2012 levels of about $16 million or --? Just any thoughts on how to think about the additional stock-based comp that had been there for 2013?

Our estimates now are this year it will be around $10 million for the year.

Okay, that's an easy answer. Then also looked like, just going through the income statement on the facilities line, that that ticked up about $4 million quarter on quarter. I know it bounces around a little bit.

Is any of that tied to the construction around your headquarters or is that something else going on? Or was it actually depressed in the third quarter?

It was really depressed in the third quarter. We got the benefit of a tax rebate on real estate taxes that hit that line item. And just so we are clear, we affectionately call the new building Meyerville, so all future references to the building should include the name Meyer somewhere in there.

Okay, I'll keep that in mind.

I am just saying that because Steve is sitting right next to me.

Much appreciated.

Well, I figure he's posting the mid-teens revenue growth year on year. Isn't it time he gets his own building? (multiple speakers)

Thank you, Chris. You are a very smart man, thank you.

I'm sorry I brought it up.

You're cutting up.

I think I'm done now.

Robert Lee, KBW.

Thanks. Just kind of a general question for maybe Al or whoever wants to answer this, but one common theme seems like across every segment was targeting larger clients than maybe it has historically. Clearly in the Private Bank, but it seems to be pretty common in each segment.

So is it just a matter of, hey, you've got bigger and you can go after bigger fish? Or what are some of the maybe implications that we should be thinking of that that maybe going forward, while -- when you sign a new client in any segment it will be bigger, but if we could actually, maybe to some earlier points, see kind of new business trends become lumpier, so to speak, than maybe they were. Bigger when you sign them but kind of maybe a little lumpier and uneven than they have historically been.

I'm just trying to think through how the change evolved and what that may mean going forward.

This is Al. I will try to answer it. The main reason that we are going to the larger clients, quite frankly, is that we can now. They are embracing outsourcing more than they ever have in the past.

The other thing we like about larger clients is not only the larger amount of revenue at the beginning. They are -- because of their complexity, there are a lot of different things we can do for them. So when you sign one and put the -- get them to do business with us in one way, they are some -- they are almost a market in themselves so that we then can get more business and more business and more business.

I think the problem with banking right now is we're just very immature, so it is really lumpy there. But Ed is getting larger clients signed on. It makes it a little bit more lumpy, but like I say, he's got a future in him.

And then Steve Meyer grew, even with the new building; is increasing the business with -- on large clients that he's signed. For the smaller clients he has signed there's not much additional revenue downstream that we can do. And selling to current clients is a hell of a lot easier than selling to new ones, so that's kind of the theory behind all that.

Maybe as a follow-up to that, I understand the larger clients need more complexity, more cross-selling opportunity. When I look at -- across kind of the pond -- not the pond, but across the industry, using maybe some of the large trust banks that you do compete against in different segments, they clearly have had an issue with dealing with large clients and their complex needs of always getting the scale out of those businesses that they would like because of pricing power, the constant need for investments.

So how do you guard against that as you kind of go upmarket a bit? Do you -- how much can you kind of hold the line on pricing? And how do you go about trying to price those clients so that that complexity doesn't become a burden and you actually can start to scale?

Well, I think we have always scaled our larger clients, but in the Trust 3000 we had the issue of we didn't follow through as much; because it was a legacy system that we couldn't follow through by adding more and more services to it. And so we had a little bit of a slide over time in our pricing.

But the way you make that not the case is that you continue to add new functionality that is packaged in such a way that they pay more. Then, of course, there are more books of business, like I said. And the way we are trying to go after the larger institutions are to get some foothold in, but sometimes these projects get to large in a hurry so that has been hurting us a bit.

All right, thanks for taking my question.

[Dan Welden, Numaris].

Just on LSV, if you look at the mutual fund performance on a relative basis, and it seems to be the top decile across the funds, is that a good proxy for the franchise as a whole on the institutional side? I guess if that's the case, what is sort of needed to get that deposit of flows?

I would say generally their performance across their product line has been very solid. And the other thing that will help them going forward is that that five-year number, which particularly on the institutional side institutions pay a lot of attention to, will improve as the 2009 quarters roll off and really the late 2008 quarters roll off.

So I think they feel pretty good about their opportunities to capture assets, not only here in the US but in other parts of the world. And I think their performance on their mutual fund is a pretty good proxy for particularly their larger cap products. I think it lines up better with those products.

All right, thank you.

Glenn Greene, Oppenheimer.

It's a question for Steve. Obviously, a good sales year, $34 million; it's been a few good years. Is there any notable change in the size of your pipeline? I think it was roughly $140 million at midyear. Or have you replenished it plus some?

No, I would say it's right around that amount, Glenn. Obviously some of it has come off, but other has gone on.

I think the only thing notable about the deals we have signed, as you remember we talked about trying to switch, and as Al just mentioned, selling -- getting more of our revenue, new revenue from existing clients. So if you look at this year and that $34.3 million, about 60% of it came from existing clients, which is a larger number than has been in the past.

Okay, thanks.

We have no additional questions in queue.

Thank you, all. So, ladies and gentlemen, we are concentrating -- continuing to concentrate our efforts on maintaining highly satisfied clients, growing new business events, and controlling costs at the same time. And of course, investing in projects that are critical to our future.

Now our focus on long-term profit growth is unwavering, and as our momentum grows, I am bullish about our intermediate and longer-term business opportunities and feel really good about what we are accomplishing [moving forward]. So with that, if there's any other question that just came up, let us know. Otherwise, I bid you good afternoon.

We have no additional questions coming in.

Well, thank you all very much for your attention. Appreciate it. Thank you, have a good afternoon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.