SEI Investments Co (SEIC) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SEI first-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, today's call will be recorded. I would now like to turn the conference over to your host and facilitator, as well as your Chairman and CEO, Mr. Al West. Please go ahead, sir.

Thank you, and good afternoon, everybody, and welcome. All of our segment leaders are here with me 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 first quarter of 2014, and then I will turn it over to Dennis to cover LSV and the investment in the new business segment. 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 Company-wide statistics. As usual, we will field questions at the end of each report, so let me start with the first quarter of 2014.

First-quarter earnings increased by 4% from year ago. Diluted earnings of $0.43 represents a 5% increase from the $0.41 reported for the first quarter of 2013. We also reported an 11% increase in revenue from the first quarter of 2013 to the first quarter of 2014.

The earnings and revenue were enhanced in the first quarter of 2013 by a $22 million gain from the sale of our Korean subsidiary, and by a $5 million gain in the first quarter of 2014. Now, if these are excluded, our revenue growth has been 19% and our earnings growth per share, the growth has been 24%. Also, during the first quarter of 2014, our non-cash asset balances under management increased by $7.3 billion.

Of that, SEI's assets under management grew by $5.5 billion during the quarter, while LSV's assets under management grew by $1.8 billion. Finally, during the first quarter of 2014, we repurchased 2 million shares of SEI's stock at an average price of $33.70 per share. That translates to $69 million of stock repurchased during the quarter.

Turning to sales, our net new recurring revenue sales during the quarter were solid. Of the $23.1 million of net new sales events we generated, $21.9 million are recurring revenues. Each of these segments heads will address their sales activity.

As you know, the rollout of SWP continues. During the first quarter we capitalized approximately $9.4 million to the SEI World Platform development, and amortized approximately $9.2 of previously capitalized development. Our development agenda for SWP remains 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.

We are disappointed at how long it has taken to deliver the full platform. And in turn, we're disappointed at the time it has taken to gain our first large initiative for SWP.

We will discuss these items at our June 3 investor conference. While we are diligently working through the sales process with a few large potential clients, we have increased our attention on asset management distribution opportunities, and improving profitability in the private banking segment in 2014.

Turning to 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 of this business.

In the institutional segment, our strong sales and profits throughout the world are living proof of the strong market-led options of our differentiated fiduciary management solutions. Finally, our investment management services segment continues its success in both selling and implementing new business, while differentiating our solution. They're making progress selling to our 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 continuously receive from clients and prospects across our Company's target markets. Our reputation for delivery remains intact, and has strengthened, and the sales activities and events in all of our units confirm the positive feelings in our client base. This concludes my remarks.

I will now ask Dennis to give you an update on LSV, and the investments and new business segment. I will then turn it over to the other business segments. Dennis?

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

During the first quarter of 2014 the investments and new business segment continued its focus principally on two areas, the ultra-high net worth investor segment, and the development of a web-based investment services advice offering, coupled with the use of mobile technologies. During the quarter, the investments and new business segment incurred a loss of $3.1 million, which compares to a $2.8 million loss during the first quarter of 2013. There has been no material change in this segment and we expect losses in this segment to continue in this range during 2014.

Regarding LSV, our earnings from LSV represent our 39.3% ownership interest during the first quarter. As a reminder, our ownership interest during the first quarter of 2013 was 39.8%.

LSV contributed approximately $32 million of income to SEI during the quarter, this compares with $27.8 million contribution for the first quarter of 2013. Asset balances grew by approximately $1.8 billion during the quarter due to increased market valuation, offset by net negative cash flow. Revenue in LSV for the quarter was $95.8 million.

Finally, during the quarter, as Al mentioned, we recognized an additional gain of $5.6 million, related to the sale of SEI Asset Korea, which occurred in 2013. I refer you to our 10-K and to be filed 10-Q for additional information. I will now take any questions you have.

(Operator Instructions)

Tom McCrohan.

Question on the tax rate and stock options. Were there any incremental stock option expenses this quarter, based on acceleration of last year, or was that all captured in last year's number? And the tax rate, what would have the tax rate have been, if not for the expiration of the R&D tax credit? Thanks.

The tax rate would have benefited by probably about 1%. 1 percentage point. So if the R&D tax rate gets reinstated this year, we would have that catch-up whenever that would occur.

On the option expense, generally the option expense, if you go to our 10-K and our filing there in the projected expense for this year, it's pretty much on track with that. We did have one tranche of options that we just moved up the year in terms of expected targets being hit, but that was basically a fairly immaterial amount for the quarter and for the year.

That's all I had. Thanks.

(Operator Instructions)

Robert Lee.

Just a real simple question, LSV, I know that you mentioned it had negative flows, but can you could just quantify that for us?

Sure. They had just over $1 billion of net negative cash flows, as a result of rebalancing. So, the pangs of success, I guess, is the way they would put it. They also had net, between client losses and client gains, and other net down of about $400 million to $500 million.

I'm just curious, as you know, the market has rallied and assets have gone back towards prior levels. Are they getting to a point, I know in the past, they had, I believe had closed the products here and there, is there anything we should be thinking about, just as asset levels get bigger, they may even close down some products or just --

I think generally the products that they do have closed, and I'm not sure there are too many more that they would close, the really the smaller cap or smaller single global, bigger country type product, but their larger cap products don't really have a cap size, if you will. That, I would say their asset growth is coming predominantly in those product lines.

And maybe just one last question on LSV. Just trying to get a little bit more color on even the geographic breakdown, in terms of are more of their products starting to skew towards purely domestic, more global strategies? Just trying to get a little bit better feel for where they're seeing relatively more or less activity geographically.

I don't have a breakdown -- predominantly their assets are US-based assets. Their client base, however, actually, still the majority would be US-based clients, but they do have a very good client base in some of the European markets, particularly the northern European markets.

They have been able to grow their business in some of the Asian markets, in Korea, for example, as well as in Hong Kong and Australia. They have a good client base in Canada.

They have some geographic diversification, but I would say the majority of their assets are US-based clients. And they are usually getting, when they received a mandate from the non-US clients, generally in US equities.

Thanks for taking my questions.

There are no further questions in queue at this time.

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

Thanks, Al. So private banking quarterly revenue of $105 million was up 7% from the year-ago quarter. Revenue improvement over the year-ago quarter was largely driven by higher recurring investment processing fees, and also increased assets under management in our distribution business.

Flat revenue to the previous quarter was due to a decrease in one-time revenue. Operating profit was $5 million, up 60% from the previous quarter, and 104% from the year-ago quarter.

In the private banking segment, we also reflected a $5.5 million gain on the sale of SEI Asset Korea for overall segment profitability of $10.5 million. First-quarter profit was positively impacted by revenue growth and lower expenses.

Turning to business development, while we don't have any new SWP announcements in the quarter, net sales events for the quarter were $5.8 million, $5.1 million of which is recurring. Sales events were largely due to our growth in our asset management distribution business.

In the US, during the quarter, we made progress with the conversion of Washington Trust. In the private banking segment, we now have four US farms on the Wealth Platform, with a backlog of five additional firms.

In the UK, during the quarter we added over $1 billion in net cash flow, bringing assets administration to $30.7 billion. Also we find with continued acceptance of the platform, our second UK client, Towry, has recontracted through 2021. We now have recontracted our first two SWP clients.

Finally, focus on our asset management distribution business has yielded strong growth in the quarter, with $1 billion of net cash growth, brining our assets under management to almost $16.9 billion. In conclusion, worldwide, we have 29 signed clients with a backlog of approximately $7 million in recurring revenue, that should install over the next 18 months.

While we work on capturing new SWP business with wealth managers, we are growing our asset management business, and are focused on improving our profitability. First quarter results reflect our focus, and you should expect that trend to continue through the year. Any questions?

(Operator Instructions)

Chris Donat, Sandler.

I wanted to ask a question about the effort that's been ongoing to sell to US banks, and the timing of it, and maybe ask it from a different sort of question that I get all of the time. But from where I sit at a firm that does a lot of equity research on banks, one theme coming up over the last few months intensively has been banks been focused on more anti-money-laundering, Bank Secrecy Act issues, and that sort of software. I'm just wondering if in your sales process, and where the banks are focused, if more infrastructure-like products like SWP are being displaced by more regulatory driven products, just more of a philosophical question than a specific question, but I just wonder if that's a factor you're seeing out there?

I would agree with you, compliance and regulation is increasingly driving decisions that banks are making. I think that the platform has done a great job, the platform has done a great job of integrating those types of systems into the platform. And so, it's increasingly an important part of the sales process.

But we do see, certainly firms looking at individual packages across the board to solve those problems, but we are seeing big firms that run a much more robust integrated solution. I think that adds to the long sales cycle, given the comprehensive nature of the solution.

Okay, thank you.

Tom McCrohan.

Have any jumbo prospects fallen out of the pipeline, and can you give us the size of the pipeline as it stands today? Thanks.

The pipeline remains strong in the US and the UK. It's similar to the numbers that I have mentioned in past. We really aren't seeing firms drop out, we're just seeing long decision cycles and I will get into some more detail at the June investor conference, so we can really step you through what we've learned, and why this process is pretty complex.

Thanks, that's all I had.

Robert Lee.

A couple questions. First, and I apologize if you mentioned it, just a simple one, what are the asset on the platform, SWP, at this point?

It's about $30.7 billion.

Okay, and when you mentioned, we should expect more of the same in terms of, I guess you had some incremental margin improvement and expense control, should we take that as the progression of some of the continued moderate improvement, as you continue to invest? Is that what we should be thinking, a step up from to 2.9% to 4.7%, and that type of stair step function from a margin perspective, or trying to get a little more clarity on --?

We are working hard to show margin improvement every quarter. There could be some positive impacts, for example, when we start to install a large bank, those are some things that are expected to install. They could still be a little bit bumpy, but we are really expecting to show incremental improvement every quarter.

I'm just curious, you mentioned the recontracting of Towry, I'm just curious how that went. Were there any the substantive changes in terms, I know one of the things you always want to do is try to make (technical difficulty) I'm just kind of curious how that went, and you felt like pricing was stable, worse, better?

So some interesting processes. Some interesting processes because we had strong relationships with these long-term clients.

The platform has progressed, and we have built a lot more functionality over the time from when we actually installed these firms to the recontract. Those are good conversations.

Most of our clients are growing. We are seeing, given the business model of asset based pricing, we are seeing additional revenues from those clients, as those clients grow. They have been pretty solid conversations, given the work we have done to build up the platform, to grow the business, and to really ultimately drive some growth of these firms that we work with.

Should I read that as, I know in the US, when Trust 3000, as you have recontracted clients, historically or at least maybe the last several years, there has some incremental pricing pressure on the core service. At this point, to the new platform, to the extent that you have had two recontracts, you're not seeing anything like that -- clients will always ask for more, I guess but --.

There's always pricing pressure. People always want to pay less. There is, certainly, these firms, more complex procurement and contracting procedures.

We're in a different situation than we are with the Trust, because of the significant investment and enhancements we have made since these clients came on. So yes, there's always pressure. People are looking to take more services, and I think I have been happy with the outcome of our two recontracts.

Great. Thanks for taking my questions.

Glenn Greene, Oppenheimer.

I guess on the sales side, on the SWP, I don't know how to ask this, but if you go back to 2008 and 2009, when you were focused on the UK solely, and all of the big banks ceased making decisions for a while, you had to shift your sales focus to the IFA channel because no one was making big decisions. Just sort of reading between the lines of some of your comments and maybe Al's comments, am I sensing maybe a little bit of shift in the sales focus now? You alluded more on the asset management side, or am I reading too much into that?

I think you're reading a little too much into that. We have a really solid asset management solution, particularly where we have bundled that with the platforms, or even the Trust 3000, in this segment, we're starting to see some strong growth there.

As I mentioned earlier, there's about $1 billion of net new assets this quarter. Probably about 70% that came from firms like HSBC, and others that use the platform. I think that gives us, again, strong support for what we've built from a the technology perspective, bundled very well with an asset management solution.

And then we're working closely on sales opportunities at large firms, larger banks do seem to be back in the market. Not yet making decisions, but certainly looking at alternatives, and investigating what we have built pretty closely.

Any contrast between the UK and the US in terms of decision-making and why it's taking long on both sides, actually?

I think the firms have complex decision and contracting processes. We see similarities in both places.

There are no further questions in queue at this time.

Thank you, Joe. Our next segment is investor advisors, and Wayne Withrow will cover this segment. Wayne?

Thanks, Al. During the first quarter we continued good tactical momentum, and had another solid quarter of new advisory recruiting. Assets under management were $42.8 billion at March 31, an 18% improvement from a year ago, and a record-setting quarter and balance for the advisory unit.

During the quarter, we had $900 million of positive net cash flow. Revenues for the quarter were $66.4 million. This compares to $55.2 million for the first quarter of last year.

Expenses for the quarter increased from the first quarter of last year, but dropped over $1 million from the fourth quarter, due primarily to a decrease in stock option expense. On the new business front, we signed 157 new advisors during the quarter, and our pipeline of prospects remains very strong.

Moving on to the status of the SEI Wealth Platform, we remain on track to convert an additional tranche of advisors during the second quarter. This will be the first conversion to contain advisors of all sizes, and we will use this second quarter event to more finely tune our conversion process.

Building on the learnings from this second quarter event, we expect to have an additional larger conversion before the end of the year. This should set us up for new revenue opportunities in 2015.

In summary, net cash flow and new advisor recruiting were very positive in the quarter. Momentum remains strong, and the SEI Wealth Platform release is on the horizon. I welcome any questions you may have.

Glenn Greene.

I understand the benefit of the margin sequentially, some of it is the stock compensation costs [QBQ]. But are we at a sustainable margin percentage here? Is there any reason that the margin shouldn't continue to increase as your assets increase, and you're ultimately related to that, the revenue increases?

I think there's always some type of logical limit to where the margins go. I also think that as we get larger and larger and as we move up the food chain of advisors, into larger advisors, we do start to see some pricing pressure from those guys. I wouldn't say the margins are unsustainable, I think there's some limit on the amount of growth we could have, though.

Are there any mix issues going forward as more and more of your -- you convert some of your advisors onto SWP. Is that beneficial or a drag on margins?

It's too soon to tell, to be honest with you.

Okay, thanks.

Robert Lee.

I'm just curious, maybe this goes back to the mix question, but are you seeing from the advisors any change in the types of services they're asking for, compared to even a year or so ago, or whether -- or maybe the way to think of it, what other types of new services are you rolling out, made on the investment side, or products that may or may not have some impact on fee levels or margins going forward, if at all?

Okay. You're breaking up a little bit I will take a shot of I think your question was. I think in the advisor marketplace, there is more and more technology being integrated or introduced into the market. With our Wealth Platform strategy, we're trying to take advantage of that.

We will get into this at the investor conference, some, but we have integrated to have an active integration policy with more front office tools like planning tools, CRM tools, and we will be able to offer them out, as a bundle. They will pay for them separately to those technology providers, but we will provide it as part of the SEI solution to total integration into our company platform. We think that is the differentiator.

That was it. Thanks.

There are no further questions in queue at this time.

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

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

Revenues of $68 million for the first 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 $34 million increased 9%, compared to the first quarter of 2013, a decrease of over $1 million in stock option expense for the first quarter, compared to the fourth quarter, contributed favorably to the first-quarter profit and margin increases. Margins were 50% for the first quarter.

Asset balances increased by $4.7 billion during the year, approaching $71 billion on March 31. Net new client assets funded during the quarter were $1.5 billion, and the backlog of committed but unfunded assets at quarter-end was $730 million. First-quarter sales totaled $1.9 billion.

Our continued sales growth is consistent with the increasing market demand for outsourced investment providers, who assume fiduciary responsibility, as well as investment discretion on behalf of their clients. SEI's 20-year track record, it's resource model, and large global base of fiduciary management relationships, positions us well to continue to grow our institutional business, and we're optimistic about the growth opportunities for this segment. Thank you very much, and I am happy to entertain any questions you have.

Robert Lee.

Quick question on the margin. It popped up this quarter. If I look back at the last several years, you have hit a 50% margin at least once each year, and then it pulled back a bit. Is there any reason to think that this is a new level, you can sustain the 50% growth from here, or should be fully thinking that 48% or 49% of the last several years is really the run rate to think about at this point?

I thought once a year was enough for you, but I guess apparently it's not.

Can we put you on mute for a minute, Rob? We want to kick this one around a little bit.

I think if you were to look at the financials, $1 million swing one way or another really can just move the profit margins. Each time it gets to that particular level, I think there's a reason for it. This quarter, the stock option expense changed. I think, though, the sustainability of the margins in this segment, which I think is your question, is in the range that we have been operating, the high 40s. I think that's a safe range.

Fair enough. Also, in thinking of kind of the fee rate and doing some simplistic revenue over average AUM, part of this may have been driven by the strong equity market the past year, but as more of your client basis has been skewing towards, I believe, some of the larger accounts, I guess part of me would have thought that maybe there would be some downward pressure on the simplistic fee rate calculation, yet it's been pretty stable and maybe even picking up a little bit. Is that really just the equity tailwinds in the mix shift within that? I'm just trying to get a better feel for if this is a sustainable level, or how I should think of that migration going forward.

Sure. I think as with all the businesses, I think that you can see that clients are recognizing that they have some leverage with fees. We do get pressure on fees.

I think it's a mix of assets, though, that really helps us out, insofar as we do get paid more for alternative assets than we do for public market types of assets. So that blend certainly has helped. I think that clients need more alternative assets to deal with some of the strategies that they have in place, especially in the long-duration, or in the LDI type of space.

But having said that, I think one of the things that we do need to talk about, and we will do more of this at the June conference, it's just this whole movement towards a separate advisory fee from the underlying investment managers fee. We don't have a lot of data points on that at this particular point in time, but I think we would like to share with you what we might be seeing as trends that occur there, and we will spend some time on that in June.

There are no further questions in queue at this time.

Thank you, 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 first quarter of 2014 revenues, for the segment totaled $61 million, which was $7.2 million or 13.4% higher than our revenue in the first quarter of last year. This year-over-year increase of revenue is primarily due to an increase our asset balances, driven primarily by new client fundings.

Our quarterly profit for the segment of $21.8 million was approximately $3.2 million or 17% higher than the first quarter of 2013. This increase in profit was largely due to the increase in our quarterly revenue.

Third-party asset balances at the end of the first quarter of 2014 were $326.7 billion, approximately $14.7 billion or 4.7% higher, as compared to our asset balances at the end of the fourth quarter of 2013. The increase in assets was primarily due to net positive cash flows of $13.7 billion, enhanced by market appreciation of $1 billion.

Turning to market activity, during the first quarter of 2014, we had a solid sales quarter. Net new business sales events totaled $7.5 million in annualized revenue during the quarter. Approximately 70% of the total was from new clients, with 30% driven from expanding our relationship with current clients.

Equally important is the fact that these events span all of our market segments, with our traditional market leading the way with over 50% of the total. Additionally, these new sales represented a good diversity among our solutions. While we continue to see increased competition in the market, we also continue to see steady activities, specifically in the areas of middle office outsourcing, Exchange Traded Funds, collective trusts, regulatory risk management and compliance solutions.

Both traditional and alternative segments of the market are presenting us with growth opportunities globally. We continue to feel well-positioned to capture these opportunities by also building out innovative solutions to meet the emerging needs of our clients. That concludes my prepared remarks, and I will now turn it over for any questions you may have.

(Operator Instructions)

Chris Donat.

Basically the same question that was asked of Ed here on your operating margins at 36%. It looks like they are as they have been in a few years. Is this a sustainable level? And I'm sure it also reflects a little bit of the stock option being lower in 2014 than 2013. But, anyway, any comments on sustainability there?

And comments were so eloquent I don't think I can add anything. With that said, I do think, again, as I said before, quarter-over-quarter will have things, as Ed pointed out, from an expense standpoint, while stock option expense quarter-over-quarter was down, our expenses year-over-year were up, and as a reminder, we continue to fund our own investment in developing new solutions to help grow this business in the long-term. So, I would say, again, to the sustainability, I feel very comfortable sustaining them in the level of the mid-30s.

That's helpful. Thank you.

(Operator Instructions)

There are no further questions in queue at this time.

Thank you, Steve. I would now like Kathy Heilig to give you a few Company-wide statistics. Kathy?

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

The first quarter cash flow from operations was $43.9 million, or $0.25 per share. First-quarter free cash flow was $26.8 million, or $0.15 per share.

Capital expenditures, excluding capitalized software were $7.6 million, and we would expect capital expenditures excluding the software for the rest of 2014 to be about $20 million, and that does conclude some additional costs that we will have for our expansion of our facility. Accounts payable balance at March 31 was $8.4 million.

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

We have no obligation to publicly update or correct any statements herein, as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties, that could affect future financial results. And now, please feel free to ask any additional questions that you may have.

(Operator Instructions)

Glenn Greene.

This is for Dennis. A couple questions. One on the stock option expense in the quarter, which is obviously was a theme throughout the call.

I think we looked, but it was down about $8 million Q to Q, which is something like a 260 basis point margin benefit. But could you just help us understand how to think about the trajectory going forward? Obviously, it's got such a big margin impact even across segments, so it would be helpful to understand this, if it's running at the same level, or if there's any seasonality there.

That's probably what you should expect going forward. There might be slight variations there, based on if some options get retired, or if we have small grants for whatever reason, first quarter's numbers should really reflect quarter-to-quarter for the rest of the year.

And then on the share repurchase. It looked like you picked up the pace if it. 2 million or $65 odd million repurchasing, higher than recent quarters. Is this kind of a reasonable level to be thinking about, or it has stepped up as the cash flows have grown?

I'd rather not get into projecting what we will do in the future, but I think that it's safe to say that our use of capital isn't going to change a whole lot, in terms of reinvestment and return to shareholders. As you know, that's one of the principal ways we return to shareholders.

Okay. All right. Thanks.

There are no further questions in queue at this time.

Just so everyone is aware, we do expect to file our Q today, also. As you prepare your notes, know that is a good possibility, that we will be able to file today, as well.

Okay. Thank you Dennis, thank you Kathy. Ladies and gentlemen, we continue to concentrate on maintaining highly satisfied clients, growing new business events, controlling costs, and investing in projects critical to our future. Our focus on long-term growth and revenues and profits is unwavering, and I'm very bullish about our intermediate and longer-term business opportunities. I feel good about what we're doing in the short run.

Before we go, as a reminder, our annual investor day is being held on Tuesday, June 3, with a dinner the night before, on Monday, June 2. I look forward to seeing you there. If there's any other questions, please ask them now or we will say, good afternoon. Thank you very much, and I appreciate your attention.

Ladies and gentlemen, that does conclude our conference call for today. On behalf o f today's panel, I would like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.