SEI Investments Co (SEIC) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SEI second-quarter 2015 earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I'd now like to turn the floor over to Al West, Chairman and CEO. 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 will start by recapping the second quarter of 2015, and then I'm going to turn it over to Dennis to cover LSV and the investment in a new business segment. And after that, each of the business segment leaders will comment on the results of their segments. And then finally, Kathy will provide you with some important Company-wide statistics. And as usual, we will field questions at the end of each report.

So, let me start with the second quarter of 2015. Second-quarter earnings increased by 4% over a year ago. Diluted earnings per share for the second quarter of $0.51 represents a 6% increase from the $0.48 reported for the second quarter of 2014.

We also reported a 6% increase in revenue from second quarter 2014 to 2015. Also during the second quarter of 2015, our noncash asset balances under management increased by $5 billion. SEI's assets grew by $2.8 billion, and LSV's assets grew by $2.2 billion.

Finally, during the second quarter 2015, we repurchased 1.3 million shares of SEI stock at an average price of $48 per share. That translates to over $61 million of stock repurchases during the quarter.

Turning to sales, our net new revenue sales during the quarter were strong. Of the $45.2 million of net new sales events we generated, $32 million are recurring revenues.

The large amount of revenue sales during the quarter includes the net revenue increase we expect from the sale of a large US bank. Each of the segment heads will address their second-quarter sales results, and Joe Ujobai will also cover our sale of a large US bank.

We continue to make investments in SWP and its operational infrastructure. And during the second quarter, we capitalized approximately $6.3 million of the SEI Wealth Platform development, and amortized approximately $10.6 million of previously capitalized development.

Now, our development agenda for SWP remains the same, and that's to deliver functionality important to the large and medium-sized advisors and banks in the US and UK markets, as well as to further automate our operations. While, as we have previously discussed, we are facing long sales cycles with large banks, we're happy to announce that one of the sales cycles has come to an end with the signing of a large US bank. This should over time significantly expand our market activity and acceptance.

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. In the institutional segment, our strong sales and profits throughout the world are living proof of the strong market adoption of our very 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 are succeeding with their objectives to sell to larger prospects and to increase the business we do with existing clients.

Now, behind all of the business units, I am encouraged by the feedback I receive from clients and prospects across our Company's target markets. Our reputation for delivery remains intact, and the sales activities and events in all units confirm the positive feelings in our target markets and our client bases.

This concludes my remarks. I will now ask Dennis to give you an update on LSV and the investment in new business segment. I will then turn it over to the other business segments. Dennis?

Thanks, Al. Good afternoon, everyone. I will cover the second-quarter results for the investments in new business segment, discuss the results of LSV asset management and discuss a couple items of note for the Company during the quarter.

During the second quarter 2015, the investments in new business segment continued its focus principally on two areas: the ultrahigh net worth investor segment and continued a development of a web-based investment services offering coupled with the use of mobile technologies. During the quarter, the investments in new business segment incurred a loss of $3.4 million, which compares to a $3.3 million loss during the second quarter of 2014. There has been no material change in this segment.

Regarding LSV, our earnings from LSV represent our 39.3% ownership interest during the second quarter. LSV contributed approximately $38.3 million in income to SEI during the quarter. This compares to a $34.5 million contribution for the second quarter of 2014.

During the quarter, asset balances at LSV grew by approximately $2.2 billion due to increased market valuation and net positive cash flow. Revenue at LSV for the quarter was approximately $117 million, of which over 10% was performance-related fees.

One item I wanted to mention that occurred during the quarter was an approximate $1 million charge we took to fully write down our investment in [Galfu]. We no longer carry any remaining value for this investment.

I also wanted to let you know that there is a possibility that we will be accelerating by one year divesting of a tranche of equity options. If so, this would result in an increase of approximately $2.5 million in option expense spread over the third and fourth quarters of 2015, with a reduction of a similar amount in 2016. I will now take any questions you have.

(Operator Instructions)

Our first question comes from the line of Chris Donat. Your line is open.

Hey, Dennis. Thanks for taking my question. Just on the acceleration of the options, can you give us -- tell us what drives that, and when you expect to make that decision? Is it a function of the large contract you signed, or is it something else going on?

No, as you know, our options are best on specific earnings targets. And so as our estimates around when we expect to achieve those earnings targets change, then we make a change in the amortization life of the option expense. So, we just have one tranche of options that were granted in prior years that we think might move up a year. It really has nothing to do with -- and I won't steal any thunder with Joe's news.

Understood. Okay, thanks.

Next question comes from the line of Chris Shutler. Your line is open.

Hey, Dennis, how are you?

Good, Chris. How about yourself?

Good. Could you give us the flow number for the quarter?

The flow of assets?

LSV, yes, the breakout of market appreciation versus net inflows.

Sure. They were about $500 million in net cash flow, positive net cash flow. About $1.7 billion of market appreciation.

All right, great. And then I just want to confirm, you said the performance fees were 10%?

A little over 10%, yes.

Okay, great, thank you.

You're welcome.

There are no further questions in queue.

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

Thank you, Al. As you all know, we have focused our sales efforts on securing a large US SEI Wealth Platform client. This is important to future market acceptance and continued progress toward scale.

It's with great pride today I am announcing that Wells Fargo Bank will adopt the SEI Wealth Platform. SEI and Wells Fargo have an extensive history as partners that spans over 40 years, Wells Fargo was one of the earliest adopters of SEI's leading industry solution, Trust 3000, and has grown their wealth management business on Trust for over four decades.

Wells Fargo, one of the largest US wealth managers, will join over 30 signed clients committed to utilizing the SEI Wealth Platform as the core infrastructure to power and grow our modern wealth management business. Client confidentiality prevents me from discussing details of any single agreement. However, I will share some elements of the Wells Fargo sale.

In late June, they signed a long-term SWP contract and implementation agreement. Wells Fargo selected the SEI Wealth Platform to support the future of wealth management. Wells Fargo will consume SWP in a software as a service model. In delivering SWP to Wells Fargo, we will now offer two business models to the marketplace: software as a service, generally for the largest firms, and full-service outsourcing to other market segments. As this is the first large SWP client, we expect a multiyear conversion due to the scale and technological integration work required.

In the meantime, we will earn one-time revenue for professional services related to the project and custom programming. The commercial agreement is in line with other SWP relationships and our win-win pricing model.

Turning to second-quarter financials for the private banking segment, quarterly revenue of $115 million was up slightly from the year-ago quarter, and up 3% compared to Q1, 2015. Quarterly profit was $10.6 million.

As a reminder, Q2 of 2014 included the realization of a $6 million one-time professional services fee which was almost 100% margin in that period. Net sales events for the quarter were $29 million, of which $14 million is net recurring incremental investment processing revenue, $2 million net recurring asset management distribution revenue, and $13 million nonrecurring investment processing related professional services fees.

In the US, we continue to focus on larger prospects and believe that the Wells Fargo announcement will be an important catalyst for SEI in the marketplace. During the quarter, we installed one of the US clients in the backlog, and we expect to install two more this weekend.

During the second quarter, we accrued significant sales compensation from our sales events and had some generally higher expense across the overall business. I assure you that I will work hard to manage expense as we install large clients and grow.

In the UK, as we regain sales momentum, we're also focused on growing current SWP clients. As we have discussed in the past, the SWP business model is aligned to our clients' success; as they grow, so will we. Assets from current clients continue to grow. Net cash flow to SWP during the quarter was $1.4 billion, and AUA now totals $37.2 billion.

During the quarter, we successfully resigned two our largest UK clients. In our asset management distribution business, for the fourth quarter -- sorry, for the quarter, net cash flow from clients was over $367 million with assets under management now totaling $19.7 billion.

In conclusion, the Wells Fargo sale is a significant validation of our private banking strategy. Given our long-term and successful relationship, they are an ideal partner to work with as we scale and grow the banking business.

At this time, I will take any questions, although I'm sure you will have none. But I'd like to remind you that given the confidential nature of our client agreements, I will not be able to answer very specific questions related to our recent sale. Thank you. Okay, any questions?

Our first question comes from the line of Glenn Greene.

Hey, Joe. Good afternoon, and congratulations on the Wells Fargo win.

Thanks, Glenn.

I will ask a question, I'm not sure how you're going to answer it. If I think about the net sales in the quarter, $29 million, $14 million incremental, obviously I think a big part of that is the large bank win.

Is it all encompassing, or does it come on as you take on more modules or take on more assets? I guess what I'm getting at is I'm surprised it's not bigger. And am I not thinking about that right?

Okay, so let me just take you through how we calculate sales events. If a current client is to move to the SEI Wealth Platform, we would count it as a net sale. So, we would take the revenue that they have on Trust 3000, they pay it today. The annual revenue they have or they currently pay us on Trust 3000, and we only count as the additional revenue that they've contracted for as net sales revenue.

Okay.

Does that make sense to you? So, the $29 million we announced as sales revenue for the segment, $14 million of that is net recurring.

So that would include above and beyond what a client would currently pay us on Trust 3000, so that's annual new revenue to us. And we also announced $13 million of nonrecurring revenue.

Okay, and that $14 million incremental, is that fair to say that's like for like services going from Trust 3000 to SWP, and it's not necessarily new books of business at that client?

Well, it's a combination of things. We talked a lot about the levers of profitability or levels of fees for SWP, which includes a better core infrastructure. Global, [straight through] processing, those things.

It would also include some new services around advisor, desktop, those kinds of experiences. And it could potentially include the books of businesses, books of business. And again, I can't disclose specifics, but generally this is moving Wells Fargo's current book of business from Trust to the new platform.

Okay. And the $13 million nonrecurring professional fees, is it all specific to Wells or is this a few clients?

Again, that $13 million was for the whole segment, but largely tied to the Wells relationship.

Okay, and then the pipeline beyond Wells, has there been any change or movement in that in the last quarter?

Guys, give me a break, can I enjoy this one for day at least? (laughter)

Well, congratulations that's terrific. I don't want to -- (laugher)

I think as I said, this is a great catalyst for us, and certainly validates the opportunity. The pipeline is strong and we continue to be very happy with the market.

All right, thanks.

The next question comes from the line of Robert Lee, your line is open.

Good afternoon, and congrats, Joe.

Thank you.

Just two quick questions. Can you just refresh our -- at least my memory on the difference between the different levels of service on SWP? You mentioned Wells as taking that, I don't know if it was software or not, but just refresh my memory on the difference in the two usages.

Software as a service, think of that as a modern ASP. So, we host the technology and host the software here at SEI. It's in some ways more modern than ASP, because it will be easier for the clients to get access to their data than it had traditionally been on Trust 3000.

It will be easier for them to interface, it will be easier for them to write applications on top of SWP than historically has been for Trust, but they run their own operation. The other model would be all that plus we run the operation.

And Wells is going to run their own operation but use your software, right?

That's correct.

Okay. And just in general, one-time fees that often may accompany conversion, are those usually structured to pretty much offset your incremental expense related to onboarding that client, or is there -- just curious how we should --?

There are a couple things we do for clients, particularly these large banks. Some of it has to do with the implementation. So, what we signed with this client is an implementation agreement, which are things like the project planning and somewhat around the conversion of the data. And that's what's included in the agreement. We would expect over time there would also be some custom programming work, and we haven't signed that agreement yet with Wells Fargo.

Okay, and can you remind us what, in addition to Wells, what the existing backlog of conversions are? I know you mentioned you expect two this weekend, but after you get through those two and outside of Wells, what do you have in the -- already signed in the pipeline?

Yes, I think we announced at the last quarter, there's $5.7 million in the backlog. And after this weekend, we will have converted two-thirds of that. So, there's still some left there, and obviously, over time we will convert the Wells book.

Great. Thank you for taking my questions.

Thanks.

The next question comes from the line of Tom McCrohan.

Congrats, Joe and everybody, for signing that big deal. I'm sure that's a relief.

Thanks. It's a lot of fun to get it done.

I'm sure. Can you give us any insight (technical difficulty)?

I'm having a hard time understanding you. You have a bad connection.

I'm not going to be able to fix that. I'm on the train.

We can't hear you very well, Tom.

All right. Never mind.

And our next question comes from the line of Chris Donat. Your line is open.

Hey, Joe, congratulations. Just looking at the second quarter, one thing that caught my attention was on the full income statement, the information processing line increased by about $3 million from the first quarter. Does that represent anything nonrecurring that was part of this large contract win, or is this other nonrecurring stuff that's tied to either SWP or just a broader private banks business?

It's broader private banking business.

Okay. But is there -- can we look at that as a leading indicator like you had in the past a year ago when you had that $6 million one-time activity? Or is this -- should I not look at it in that context?

Don't look at it in that context. We were busy actually closing this contract. So, there wasn't a lot of revenue associated with this in the second quarter.

Okay. It's a big win, and we will look for more details in the future, I'm sure.

Thanks.

Next question comes from the line of Chris Shutler. Your line is open.

Hey, Joe, good afternoon.

Hi.

A follow on to Glenn's question earlier. But is there any way to talk about the -- is this the full potential of this relationship, or are there more opportunities available down the road at a high level?

I will talk generally about large banks. I think there's a lot of opportunities at large banks. We built the SEI Wealth Platform because we think we have something that can span across all kinds of wealth management markets inside of very large firms.

We have targeted some of our Trust 3000 clients, and so the first is typically the accounts that are on Trust onto the SEI Wealth Platform, and providing a lot more value to our firms but giving them not only a much stronger underlying core infrastructure, but also additional services around the front end which could include things like better experience for the advisors, more efficient tools for advisors, more efficient tools for portfolio managers, bettering client services, and so on and so on.

So, we think that there are more services, there's a better core infrastructure, there are more services we can provide to banks so they can provide ultimately a much better experience for their workforce and for the end market and they can grow their business. There's also an element of better control. There's pretty substantial workflow built into the platform, and there's better risk control, there's better data security, there's better debt recovery. So in those cases, our first step is to go in when it's a current client and enhance what we've delivered for many, many years on Trust 3000.

And the second step would be then to gather more books of business, get into other segments that the bank has. So, this is really an example of a first big step into a very large wealth manager in the US.

Okay, great. And then I heard you say this is mainly a SaaS or technology sale, but is there a potential, either with Wells or other large banks to be doing more of the outsourcing functions, back of office type of stuff?

Yes, the first clients we've been able to sell the whole process. I think larger banks have a tendency to want to run operations themselves.

But certainly we saw on Trust 3000 every time clients had bought us in the SP version ultimately started buying some of our services, maybe not all of them, in an outsource. So, that certainly is an opportunity for us as we go forward.

This is Dennis, and I would add to that we've probably to a point of exhaustion, bemoaned the fact that these sales cycles are very long. As you can imagine, in a very large institution, trying to get them to absorb not only a significant technological change that's going to take multiple years to implement, but also to absorb a complete operational footprint change at the same time is, in some situations, a little bit too much to ask.

Yes.

And that's one of -- I'd say one of our learnings over the past two years, in selling to these very large, complex institutions is that when we're trying to address the entire enchilada, we're putting a little bit too much on the table for them to decide. So, having this option of a more ASP like or software as a service option like for clients, to the larger ones, reduces the amount of change and the dynamic of change that we're asking them to absorb. So, I view it as a very good thing that we have these two models to operate within.

Yes. Okay. Thanks, guys.

And I agree with Dennis. I think we've talked to some of these larger firms about this as a model. And we will work real hard to deliver the platform in this model going forward to some of the bigger ends of the market.

And our next question comes from the line of Glenn Greene. Your line is open.

Sorry, Joe, for the follow-ups. Just a few quick ones. Did you say the length of the contract, the timeline to convert it, and then the third one would be, is there a way to frame the margin differential between the SaaS model and the outsource model?

No, I didn't really answer any -- I didn't say any of those things. It's a long-term contract. So, as part of this contract, we've extended our Trust 3000 relationship until we do the conversion. Then once we do the conversion, there's a long-term SWP contract. And so I'm very pleased with the length of the contracts.

And when you think about profitability, as you know, we are very focused on both time, not only increasing the profitability of the SWP platform, but also really more focused on increasing the profitability of the private banking segment back to the historical margins that we have. And certainly winning and converting a large bank of the nature of Wells Fargo will be an important step towards that.

Okay. Thanks, Joe.

We have a question from the line of Robert Lee. Your line is open.

Thanks, just a quick follow-up. Just curious, Joe, you mentioned I guess that you recontracted a couple of clients. That was recontracting on existing clients on SWP that were recontracted?

I'm just curious, number one, make sure that I understood it correctly. And just curious since those are clearly some of your earlier clients, now how did, if at all, did the pricing dynamics maybe change on recontracting? Were they roughly unchanged? Did they become more or less asset based? I'm just trying to think about what maybe changed from when you first started this or signed those clients on.

So, we recontracted two our largest clients in the UK, and these were longer-term clients that have grown fairly substantially. And so I think what -- I was pleased with the recontracts that we were able to secure, and I think that again shows the overall satisfaction we have with those clients.

They've grown their books of business. They've committed to continue to grow their business. And we've continued to see the asset-based pricing model as successful commercial model in the marketplace.

The clients like the fact that it's an open [end] solution. We're able to in some cases sell additional services to the clients. We've seen that many of our clients in the UK are at the leading edge of the consolidation that's occurring there. So that business continues to grow amongst -- the current clients continue to grow their books of business.

And just maybe a general question. As a general rule, with the asset-based pricing model, if your clients grow successfully, are there generally almost like a mutual fund thing, like break points if they hit certain asset levels, incremental assets, you see that change a little bit?

Yes, there are absolutely break points. And as they grow, they certainly come back and talk about creating additional break points as they hit them. But absolutely, yes. We do see more revenue as they grow their business.

Great, thanks for taking my question.

And there are no further questions in the queue.

Thank you, Joe. Our next segment is SEI Advisor, and Wayne Withrow will cover this segment.

Thank, Al. During the second quarter, we continued good cash flow momentum and had a solid quarter of new advisor recruiting. Assets under management were $49.8 billion at June 30, an 11% improvement from a year ago.

During the quarter, we had almost $1.2 billion of positive net cash flow. Revenues for the quarter were $77.8 million. This compares to $70 million for the second quarter of last year, an increase of 11%.

Net cash flow was the largest driver of revenue growth. Market appreciation also helped somewhat, even though we had slightly negative returns in the second quarter of 2015. Expenses for the quarter increased from the second quarter of last year, primarily due to an increase in direct costs and personnel costs associated with our asset growth and increased expenses associated with the SEI Wealth Platform. On the new business front, we signed 162 new advisors. This brings our total for the year to 357, and our pipeline of prospects remains very strong.

Moving onto the status of the SEI Wealth Platform, we continue to implement the learnings from our beta conversions and are in the middle of a larger conversion through October 31 of this year. This will almost double the amount of advisor AUM on the platform, and is the beginning of a larger advisor book migration onto the platform. After this conversion, we will begin looking for new revenue opportunities enabled by the platform.

In summary, net cash flow and new advisor recruiting were very positive for the quarter. Momentum for our existing business model remains strong, and momentum is building for our migration to the SEI Wealth Platform.

I welcome any questions you may have.

Our first question comes from the line of Chris Shutler.

Hey, Wayne, how are you?

Good, Chris, how are you?

Good. So, it sounds like you're still on track for the 10/31 conversion, right?

That is correct.

Okay. And can you give us some sense, I know last quarter I asked this, and you deferred to this quarter. Can you give us some sense how many advisors or assets are going to be moving over?

The amount of assets is somewhere north of $2 billion. I think that's the significant number. And the number of advisors -- perhaps the absolute number is not as large as in the past because we're moving much larger advisors at this time. We're getting to our core book of business.

Okay, got you. And you mentioned again this next tranche of advisors, once they do convert over, that you're going to start looking for additional revenue opportunities. So, how should we think about the timing of that? Do you think that you could start to see a noticeable amount of incremental revenue over the next year, year and a half following that, or how should we think about the potential there?

Yes, I think over the next 12 months we're going to be ramping up the new revenue opportunities. And subsequent to that point, I think it will start to become significant.

Okay. And then lastly, can you give us a breakout of flows between new and existing advisors, roughly?

Yes, the flows from new advisors continue to outpace existing advisors. But existing advisors, as I just mentioned in my sales kickoff meeting, existing advisors are catching up. I'd say we're kind of in maybe a 60/40 mix, with new advisors leading the way.

All right, great, thanks a lot.

Your next question comes from the line of Chris Donat.

Hey, Wayne, thanks for taking my question. Just wanted to go back to the revenue option as you talked about. Is that really -- what you talked about in prior investor days, the doubling of the addressable market, with SWP being the platform now, and being an open architecture, or is there something else going on, on those revenue opportunities?

I think the revenue opportunities are two-fold. I think there's a chance what we term are custody consolidation. So, the chance for us to have clients bring additional non-SEI assets onto the platform, that's existing clients, and that's one revenue opportunity. And the other revenue opportunity is just the whole new addressable market that's going to open up, where we're going to be able to go after clients that we really haven't been adequately equipped to go after in the past.

Okay, and like you just said, it's a 12-month ramp-up to get your sales people in contact with those people. That's really all beginning after October 31, right?

That is correct.

Okay, got it. Thanks, Wayne.

We have no further questions in queue.

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

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

Revenues approaching $76 million for the second quarter increased 7% compared to the year-ago period. New client funding and market appreciation during the period contributed to the increases. Currency changes during the period negatively impacted revenue.

Quarterly profits of $39 million increased 10% compared to the second quarter of 2014. And margins for the period increased 1% to 52%. Ending asset balances increased to $78 billion on June 30.

Net new client assets funded during the quarter were $1.5 billion, and the backlog of committed but unfunded assets at quarter end was $1.3 billion. New client sales closed during the quarter were $1.7 billion, and totalled $3.9 billion year to date through June. We're pleased with the continued market acceptance of our trustee-directed outsource solution, and I'm happy to announce the signing of a new large corporate-defined contribution fiduciary management client during the quarter. In closing, we enjoy a strong pipeline, and remain optimist about the growth opportunities for this segment.

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

(Operator Instructions)

Our first question comes from the line of Robert Lee.

Yes, hey, Ed, how are you?

Good, Rob, how about yourself?

Good, thanks. Just curious, you mentioned signing a large DC client. Can you maybe talk a little bit about specifically at least the services you will be providing them? Is it putting your investment programs in place pretty quickly, or is it more of an advisory service that hopefully you can get some of your programs in there over time? Just trying to get a sense of how those relationships work.

Sure. Well, again, you know it's relatively early for us, but what seems to be the driver that is resonating out of the marketplace is there is a concern on the part of plan sponsors for making sure they have a fiduciary coverage for their DC plans.

So, this particular client hired us as the fiduciary manager, and they really wanted to improve the participant outcome. So, the first thing would be a re-enrollment. And that's a practice that would really help to get the participants into a better investment framework, a better asset allocation that would be appropriate for them.

So, as part of that, we're streamlining a lineup. So, we're taking funds and putting those together into proprietary, if you will, or white label types of funds. So, simplifying that putting all the US options together into one fund rather than multiple funds, so there's less choices that a participant would have to make. And in addition to that, creating proprietary target date funds.

So, over time, we believe that we will see asset flow into these particular programs. And I think the re-enrollment is a key step in order to ensure that.

How does the pricing for you guys in that type of thing? Is it pretty similar to or different from your more traditional business?

Well, it's an asset-based fee. Again, I think it's a little bit early to know exactly where that's going to settle in. I think that we're looking at this as something that's probably the low-double digits, you know (inaudible) formed on that.

Okay. I guess related to that, I mean, obviously there's this, but you've talked over the last couple years about the traditional parts of your Business migrating up market, at least in terms of size. And usually with that there are some maybe lower fees that you would expect to come from that. But so far at least it doesn't really feel like there's been much overall pressure, at least in calculating a fee rate that seems that visible.

Is that -- should we be expecting, particularly with things like this DC, that, over time, asset growth may stay at a high level, but there should be some moderation in the fee rate per asset? I would assume so.

I think the biggest change, Rob, in the marketplace has been this whole idea of separation of our fee from the underlying managers' fees. That is starting out in the larger end of the market.

I think your observation about not much of a difference insofar as fee realization is a function of the larger clients who are paying a lower effective fee anyway because they had more assets and they were able to get the benefit of aggregation. So, I think that's probably the bigger issue. We started out here on the defined contributions side with a larger pool of money right away; we will have to just see where that goes as we go up and down the asset scale.

Okay, great, thanks for taking my question.

Sure.

There are no further questions in queue.

Thank you, Ed. Our final segment today is investment management. I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Thanks, Al. Good afternoon, everyone. For the second quarter of 2015, revenues for the segment totaled $63.3 million, which was $4.8 million or 7.7% higher than our revenue in the second quarter of 2014. This quarter-over-quarter increase in revenue was primarily due to an increase in our asset balances, along with new client fundings across all products. Our quarterly profit for the segment of $25.1 million was approximately $2.1 million or 9.3% higher than the second quarter of 2014.

Third-party asset balances at the end of the second quarter of 2015 were $382 billion, approximately $9.8 billion or 2.6% higher as compared to our asset balances at the end of the first quarter of 2015. The increase in assets was primarily due to net positive cash flows of $10.3 billion, offset by a slight market depreciation of approximately $500 million.

In turning to market activity, during the second quarter of 2015 we had a solid sales quarter. Net new business sales events totaled $7.3 million in annualized revenue during the quarter, which was diversified across all of our market segments.

Touching on the market environment, we continue to see steady market activity. New products, new services, and the evolution of needs in the global investment management industry will continue to drive change, and provide a strong pipeline of growth for us. We are well positioned to drive growth from this opportunity.

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

Our first question comes from the line of Robert Lee.

Great, and good afternoon.

Hey, Rob.

Hey, a couple questions. Last quarter, I think you had talked about how, you obviously had a lot of success signing on clients and increasing recurring revenue, but there's been I guess -- taking some time for some of those contracts actually come on board. And I think last quarter you mentioned there was, I guess I will call it, a backlog of $30-million-odd revenue-wise of signed clients that haven't come on board yet.

Yes.

If I have the numbers right. So, can you maybe just update us on if you were able to make a dent in that, where that stands today?

Well, I think, if memory serves correct, I think the end of first quarter we were around $32 million, and today we stand around $34 million. So, what I'd say is we've made a dent in that Q1 backlog, we made a dent in it, but the good thing is, as we continue to sell and as we continue to sell off-market, that backlog will be continually filled then with deals that we've sold but have not yet funded. Our focus is not only to sell these deals, but to fund them.

But I think the universal trend you're seeing, not just with me, not just with SEI, but also with the market, these larger deals and as we go upstream market to these larger organizations, larger more complicated deals; they are going to take time. These are not simple products. These are not simple processes. This is not a simple transition.

So, what you will see is, and I think one of the things we've seen, as you win these, and it takes a while to implement, they don't implement all at once. There's phases. And those phases take a while. But conversely, when you have either a liquidation or a market downturn or a client fund shutdown, that typically happens pretty quickly, so you're constantly fighting that balance there.

But I'd say with the backlog, it's at a, what I feel, a comfortable balance right now. We're seeing movement, we're seeing a strong pipeline, movement in the pipeline, but then also we're seeing the backlog; things come off. But as we sell, things go on.

Great. Just maybe one more question, Steve: Margins in the segment, the last three quarters, really the last four or five quarters, have really been trending up -- been over 37% last three quarters. I know in the past you've questioned that, at least I think you've questioned that, maybe mid-30%s is a comfortable range, just given the ongoing investment you always have to make in the Business. So, should we be thinking that margins are running around peak, and that just over time, as you have to continue to invest in the Business, that those could come down a bit? Or are we really on a new trajectory up, as you continue to scale the Business, and maybe mid-30%s is too conservative a margin for the segment?

Well, I'm trying to keep up with that as best I can. But what I'd say is, the margins have trended up. And that's a little bit of benefit of the business we have brought on. As we've gotten larger deals, there's a little bit more scale.

We are very focused on managing our ongoing expenses. With that said, we're also as focused on continuing to build out, not just for the needs we see today, but more importantly for where we see the market going and the needs down the road. So, we are in the process also of continually building out our platform.

I do expect that investment to continue. I do imagine that investment will uptick in certain quarters.

So, I think I said this in Q1 as well. I do think, looking out, we will see, there's a potential to see, a little choppiness in the margin. But again, I do think, if I'm using a gauge of the mid-30%s, I think that's a good number to have in your mind. That does not mean that it could not go down below that as we uptick investment, nor does it mean that it's going to go above that. But if I was looking at a mean, I would say that mid-30% is still the range I'm targeting.

All right, thanks, Steve, I appreciate you taking my questions.

Sure, thanks, Rob.

There are no further questions in queue.

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

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

Q2 cash flow from operations was $78.9 million, or $0.47 per share, which brings the year-to-date cash flow from operations to $156.8 million. The second-quarter free cash flow was $62.4 million or $0.37 per share, which brings year-to-date free cash flow to $124.8 million.

Second-quarter capital expenditures, excluding the[capitalized stock, were at $8.3 million, and we would project approximately another $21 million in the second half of the year. The tax rate for the second quarter was 35.6%, but we would expect the tax rate to trend slightly lower in the second half of the year as we file our tax returns and really true up all of our tax contingencies.

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 the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

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

Our next question comes from the line of [Allen Chung]. Your line is open.

Hey, guys. I have a couple of questions. First off, congratulations on the Wells Fargo close. I know that's been a long, long time coming. And it's great to hear the news.

Thank you.

And then just -- can you give me a sense for when the discussions on the Wells Fargo deal started? Like, was that a five-years-ago discussion? Was that 10 years ago?

I recall you guys talking about the sales cycle for at least five years now. And I'm trying to get a sense for how long that is in total.

Al, this is Joe. Wells has been a client of ours for four decades. So, certainly as we've been developing the SEI Wealth Platform, we have had numerous conversations with them over the years. But I'd say the conversation really began in ernest about 18 months ago.

Got you. And then, do you have other comparably sized clients that are also maybe in the 12-month range of that discussion? Or are you just starting off really in ernest? Like, do you have other comparable clients, and can you quantify that?

Yes, we have some really great market share with some really terrific, large US banks here. And so, we're in a variety of conversations and the pipeline looks strong. But it's hard to predict when someone will make a final decision and sign a contract.

But again, I think this is a great catalyst for us. And certainty other large organizations will take note of this.

Got you, thank you. And then, I know this will come out in your 10-Q later, but if you happen to have this handy, would you be able to provide -- in your 10-Q, you provide a breakout of your private bank revenues by processing, asset management and transaction. Would you happen to have that in front of you that you can disclose? If not, I can wait for the filing as well.

Wait for the filing because the filing is going to occur in a couple of hours actually.

Okay, perfect. And then, the last question I have is just a higher level, maybe a more basic question. But in your advisor and your institutional businesses, what is the -- it sounds like you provide investment management services. So, how do we think about the level of risks associated with underperforming?

So, for example, if you have some large-cap US equity fund, it sounds like you guys actually provide an actively managed fund. How much risk is there, or how do we quantify or think about the risk around you having three or four years of underperformance in your funds? Or do you only solely provide passive strategies and products through those businesses?

This is Wayne. We don't look at it as that we provide active or passive investment. We're an active management shop. But in the advisor segment, we provide total business solutions, of which the investments are just a component.

So, I would not look at us as a pure asset management place, subject to the risk that you have in a pure asset management play. We provide technology, we provide custody, we provide back office outsourcing, we provide the investments all as part of a package. So, our value proposition is all around the business solution for the advisor.

Got you, great, thank you. And how about on pension on the institutional investors client side?

Yes, this is Ed. If you were to think about our particular business, we're really in the OCIO, the outsource Chief Investment Officer. So, we're not really selling products out to clients.

Basically, our client is buying us from a value proposition standpoint for the advice and the strategy work that we're going to do to align their particular portfolio with their corporate financials, as well as their funded status. And then we're implementing the portfolio with probably 12 or 13 different asset classes going from cash to alternative investments of all kinds of sorts.

So, it's a pretty well-diversified portfolio, as you would imagine. There's always something doing well, there's always something that's maybe not doing quite as well as something else. But in general, we're meeting the clients' expectations. So, it's a pretty solid, sticky business.

Have there ever been periods in the past -- I know, I think this business is maybe about 15 and 20 years old now. Have there been periods in the past where you've had maybe two or three years of disappointments for your clients has created potential risk of clients wanting to leave or switch providers?

Well, I mean, I think there's always periods of time where performance isn't what you would expect it to be. But I would say that our client retention is very, very high, if you look at our particular business. And the reason that we see clients leaving -- it varies by market. Many times in the corporate marketplace, unfortunately, we see somebody's pension plans don't make it, and they get taken over by the PBGC.

Or we see maybe a merger that would occur, and we're on the shorter side of that merger, we're on the smaller company's side. So, the portfolio gets taken over by somebody larger. In the not-for-profit space, sometimes you see a new investment committee head that comes in and decides that they don't really want to outsource it anymore; they want to be more involved in it. So, it's more of either a financial strain in the one situation in the corporate space, or it's maybe of a change of viewpoint in the not-for-profit space.

Got you, great, thanks. Thank you, Joe, Ed, Wayne; that answers my questions, and I look forward to meeting you guys at the investor day this September.

That's great.

Great.

We have no further questions in queue.

Okay, thank you. Ladies and gentlemen, we feel that the second quarter was solid, and we believe the SWP sale to Wells Fargo validates the large investment we've been making in SWP over the years.

And looking ahead, we intend to keep our focus on long-term growth in revenues and profits, as always. And we remain bullish about our opportunities.

Before you go, as a reminder, our annual investor day is being held on Thursday, [December] 10, with a dinner the night before on Wednesday, [September] 9, and I look forward to seeing you there. If you have any other straggling questions, now would be a good time.

You all have a great afternoon. And thank you very much for your attention.

Ladies and gentlemen, that does conclude the conference for today. We do thank you for your participation, and for using AT&T's executive teleconference service. You may now disconnect.