SEI Investments Co (SEIC) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the SEI the third-quarter 2015 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions) As a reminder today's call will be recorded.

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

Thank you and welcome, everybody. All of our segment leaders are on the call with me as well as Dennis McGonigle, SEI's CFO and Kathy Heilig, SEI's Controller. I will start by recapping the third-quarter 2015. I will then turn it over to Dennis to cover LSV and the investment in new business segments. 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 imported Companywide statistics.

As usual, we will field questions at the end of each report, so let me start with the third-quarter 2015. Third-quarter earnings decreased by 5% over a year ago. Diluted earnings per share for the third quarter of $0.47 represents a 4% decrease from the $0.49 for the third quarter of 2014. And earnings for the quarter were negatively impacted by $6 million writeoff of some software that was part of the SEI Wealth Platform. We also reported a 4% increase in revenue from the third-quarter 2014 to the third-quarter 2015.

Also, during the third-quarter 2015 our non-cash asset balances under management decreased by $18.3 billion. SEI's assets fell by $9 billion and LSV's assets fell by $9.3 billion.

Finally, during the third-quarter 2015, we repurchased 1.7 million shares of SEI stock at an average price of $50.40 per share. That translates to approximately $86 million of stock repurchases during the quarter.

Now turning to sales, our net new revenue sales during the quarter was good. Of the $20.8 million of net new sales events we generated, $19.5 million are recurring revenues. Now each of the segment heads will address the third-quarter sales results.

Now while new business was a bright spot, all of our business segments are facing headwinds. The [following] capital markets are negatively impacting revenues and profits. In addition, all four of our segments are adding new business, three have to make investments ahead of the installation of the new business as well as to capture future opportunities in the pipeline. Each of our units will speak to their headwinds.

Now despite these headwinds, we are continuing to make progress throughout the Company. One of the investments we have been making is in SWP and its operational infrastructure. During the third quarter, we capitalized approximately $5.7 million of the SEI Wealth Platform development and amortized approximately $10.8 million of previously capitalized development.

Our development agenda for SWP reflects the needs of Wells Fargo as well as our software as a service delivery model, which Wells and other very large clients will use. This development is in addition to our need to continue 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.

In the Advisor segment, we continue to make solid progress in improving our asset gathering and increasing our distribution footprint as well as in preparing for the move of a number of advisors on to SWP. In the institutional segment, our strong sales and profits throughout the world are living proof with the market adoption of our differentiated fiduciary management systems.

Finally, our investment management services segment continues in its success in both selling and implementing new business while differentiating our solutions. They are succeeding with their objectives to sell to large -- larger prospects and to increase the business we do with existing clients.

Behind all of our business units, I am encouraged by the feedback I received from clients and prospects across our Company's target markets. Now this concludes my remarks.

I am going to 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 third-quarter results for the investments in new business segment, discuss the results of LSV asset management and discuss an item of note for the Company during the quarter.

During the third quarter of 2015, the investments in new business segment continued its focus principally on two areas: the ultrahigh net worth investor segment and the development of 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 $3.7 million, which compares to a $3.4 million loss during the third quarter of 2014. There has been no material change in this segment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $33.6 million in income to SEI during the quarter. This compares to a $38.2 million contribution for the third quarter of 2014.

During the quarter, asset balances declined by approximately $9.3 billion due to decreased market valuation. Cash flows during the quarter were neutral. Revenue for LSV was approximately $102.8 million, of which approximately 8% was performance fee-related.

One other item of note during the quarter was an approximate $6 million charge or $0.02 in earnings per share. We took to write down certain previously capitalized elements of our SWP platform. This $6 million impacted the banking segment by $3.6 million and the advisor segment by $2.4 million.

With that, I will take any questions you might have.

Robert Lee.

Quick question on LSV. Can you just maybe update us where they stand, couple things? Number one, if -- notwithstanding the recent selloff and decline in asset values, but if any of the key strategies are currently closed since new investors and then, I don't know if it's possible to -- any kind of color around there -- I don't know, their pipeline for lack of a better way of putting it?

Sure. Generally speaking, their larger cap products are open. And as they get to certain sectors of the market, particularly on the lower cap side, smaller cap, and some of their smaller say country products, those are the ones that wind up getting closed. Sometimes with -- when there is market movements like we had in the third quarter, if that were to be protracted, that would open up capacity.

But generally speaking, it's really cap oriented, so larger cap are open kind of on the smaller cap side, they're generally wind up close.

In terms of their sales activity, they do have -- continue to have a good healthy sales activity around the world. They have clients in most markets and they continue to attract clients from all of those markets. But what happens is as you get as big as they are, a lot of their new client activity, new net cash flow gets offset by the clients rebalancing or just clients moving along. So they had positive cash flow in the quarter. It was just offset by some negative flows.

Great, thank you for taking my question.

Chris Shutler.

Somewhat unrelated, but last quarter you mentioned that you might accelerate the vesting of a tranche of equity options in the back half of this year. I was just hoping you could touch on that. I don't think you did it, but just how should we look at that item going forward?

Yes, we did not do it, and there is still a possibility that could happen in the fourth quarter. But as you know, our options vest on earnings per share with the add-back of option expense. And this $6 million write-down would factor into that. So we will just kind of see how the fourth quarter plays out.

All right, thank you (multiple speakers)

But it's possible that it will get all accelerated into the fourth quarter. If not, it will stay on the current amortization schedule.

Okay, thanks.

Chris Donat.

Good afternoon. Just on one thing we have seen in the past with LSV, is that the -- call it your yield on average assets there, would increase in the third quarter from the second. But that did not seem to happen this year and I think it is normally a function of performance fees and what happens in the third quarter.

Is something different this year? Or is it more just like the market having an impact on performance fees?

Yes, I mean our performance fees compared to last year are down.

Okay.

Last year's third quarter was unusually high, relative to any other experience we had with them, whereas this year's third quarter I would say was a little more normal, relative to prior third quarters. So, part of the math is that last year's third quarter was just above normal, if you will. So I mentioned that about 8% of the revenues in this quarter were performance fee-related and that is -- I would say relative to other third quarters in the past, it's a little bit more normal.

Okay, got it. Thanks.

(Operator Instructions) Robert Lee.

Just on LSV and I forgot and maybe I missed it, but did you give us kind of the revenue numbers or anything?

Yes, the revenue for the quarter was $102.8 million.

$102.8 million, great. That's it. Thank you.

Gentlemen of the panel and ladies, if there's any present, there are no questions in the queue at this time.

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

Thanks. I will start with an update on third-quarter financials for the private banking segment. Quarterly revenue of $116 million was up slightly from the year ago quarter and up 6% compared to Q2 2015.

Early in the quarter, we converted two US clients to the SEI Wealth Platform on the same weekend, successfully testing our ability to convert multiple clients at the same time. In the UK, assets from current clients continue to grow. Net cash flow to SWP during the quarter was $1.5 billion and AUA now totals $35.9 billion.

Overall, the quarter was positively impacted by the growth of our SWP business. Quarterly profit of $12 million was up 25% from the year ago quarter, and up $14 million compared to Q2 2015. Profit was negatively impacted by two things: the $3.6 million of the writeoff previously mentioned by Dennis and market volatility.

In our asset management distribution business, assets declined by 7.5% to $18.2 billion. During the quarter, we had flat cash flows as some emerging market and other foreign investors pulled out of the market. This was offset by positive cash flow in other geographic regions. As a reminder, AMD is approximately 30% of this segment's revenue.

Net sales [events] for the quarter were $1.7 million and largely nonrecurring investment processing related professional services fees. To grow the private banking business, we remain focused on the following areas.

Number one, executing the Wells Fargo conversion plan. This includes the continued build-out of technology and infrastructure to deliver scale on the platform. It also [concludes] the build towards our software as a service delivery model as well as client conversion and change management programs. We are in early days, but we are making good progress.

Number two, progressing sales activity in the U.S. and the UK. As expected, the Wells Fargo announcement had a positive impact on our sales activity with both new names and current clients. We are encouraged by our progress with other important prospects.

In summary, market headwinds will impact profitability as some of our revenue is asset-based. Also, as we implement Wells and sign other large prospects, we will continue to make substantial investments in the platform to meet their needs. Quarter-by-quarter margin will be variable, but we are making good progress as we execute our strategy to deliver the SEI Wealth Platform and to grow our business.

At this time, I will take any questions.

Glenn Greene.

So, just looking at and normalizing for that one-time charge, just to make sure we are on the same page, it looked like a 13.5% margin sort of normalized which, given the market headwinds and whatnot, looked like a pretty healthy margin increase Q to Q. Am I missing something? How did we sort of deliver that in the context of what you are sort of explaining?

Well, as you know, whenever we talk, I am focused on making sure that the money we spend as value either to build new client -- to sign new clients or to lower our costs. So quarter to quarter, things bounce around a little bit. So we obviously did not have a big sales comp expense, but we did have the write-off.

Unfortunately, we also had some lower expenses, because asset management revenues went down and direct costs associated with that went down. I would prefer to have that expense. So, we are trying to manage it as best as we can. Clearly we are going to need to make some investment as we bring on more clients. But we think we are making progress.

And the AMD flows being relatively flat, I know you sort of talked about this at the analyst day. But just remind us how did that compare sequentially Q to Q? I know there were some challenges I think maybe in Asia or the Middle East.

Yes, we have seen challenges in some of the emerging markets, Asia and Latin America, through some of our bigger distribution relationships. So we had about $370 million in net cash flow in Q2, but that was about flat in Q3.

Okay, and just a little bit more color maybe on the SWP big prospect pipeline, I know you went into this a lot at the analyst event. But maybe high level, what you have sort of seen post the Wells announcement, say we call around the pipeline from bigger prospects?

So Wells was, as I mentioned, certainly important to us as part of our rollout strategy and platform. And it certainly helped us with sales activity, both with clients and with prospects. But, these, as we all know, are long decision processes, so we continue to work through the pipeline, but we feel good about the progress we're making.

Okay, thanks, Joe.

Robert Lee.

Just kind of curious, obviously you have given the color on spending for Wells and other potential declines. I am just curious. Have you actually kind of started to spend the money for Wells yet? Or is that type of thing kind of -- the incremental cost to prepare for them is definitely starting to ramp up, so it is already in the numbers? Or is that something that, all else being equal, you expect over the course of the next year or so to start kind of creeping in?

Yes, I think both. We are -- we have started to ramp up some. Again, we are focusing on making sure this platform scales. I plan to bring a lot of clients on to this platform, so does Wayne. So we are investing in scale. We are also investing in this software with the service delivery, which is more sort of akin to the ASP solution we offered in the past. So we've gotten started, but there is still some more ramp up to happen in coming quarters.

That was actually my only question. Thank you.

Chris Shutler.

Just two questions. First, on the expense side in the segment, if you exclude kind of the big sale last quarter and the commissions associated with that, it seems like the expenses have been really flat now for six quarters in a row. So, should we expect that to essentially continue if you were to exclude future sales events? Or will it creep up?

As I mentioned, there are things we are investing in. We are investing in scale, we are investing in ASP. We hope to pay a lot of sales comp over time. Sometimes expenses associated with conversions that don't always fall in the same quarter as the revenue associated, so again, we are watching this very carefully. But at the same time, we recognize we have a big business opportunity and we will invest where we think it makes sense.

Okay. And you kind of touched on this, but I was going to ask on the -- with like Wells and any other big prospects, how much of a mismatch should we expect between the implementation/professional services revenue in the expenses -- on the P&L? Will there be a decent bit of mismatch or not?

Yes, we try to do that as closely, sort of [tight] as possible, but sometimes we spend ahead of the revenue. I think that makes sense given the opportunity we have and as I've mentioned on the calls for a very long time, every quarter is going to have its own little anomalies, given the amount of work we're doing. And like I said, we try to keep it as close as possible where that makes sense. But it is hard to predict that.

Okay, thanks.

There are no further questions in queue at this time.

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

Thank you. During the third quarter, we continued good cash flow momentum and had a solid quarter of new advisor recruiting, although market headwinds and increased investment hurt our bottom line.

Assets under management were $48.7 billion at September 30, a 2% decline from the June 30 balance. During the quarter, we had almost $1.4 billion of positive net cash flow. For the first nine months of this year, we had $3.5 billion in net cash flow, which compares to $3.8 billion for the entire year in 2014.

Revenues for the quarter were $76.2 million. This compares to $77.8 million for the second quarter and represents a 2% sequential decline. A decrease in market valuations and a shift to more conservative investment strategies by some of our advisors were the chief drivers of this decline, while net cash flow partially offset these negatives.

Expenses for the quarter increased from last quarter, primarily due to an increase in personnel costs associated with our asset and client growth. Increased expenses associated with both the development and implementation of the SEI Wealth Platform and the one-time software write-off mentioned by Dennis. On the new business front, we signed 240 new advisors. This brings our total for the year to 597 and our pipeline of prospects remains very strong.

Moving on to the status of the SEI Wealth Platform, we are on track for our October 31 conversion event. This will almost double the amount of advisor AUM on the platform and represents the start of the entire advisor business migrating on to the platform. In preparation for this migration, we have increased staffing on our conversion and operations teams. New revenue opportunities enabled by the platform should begin next year, and I expect them to begin making an impact in 2017.

In summary, net cash flow and new advisor recruiting were very positive for the quarter. Momentum for our existing business model remains strong, but market headwinds and increased investment have made it difficult in the short term to translate this momentum to the bottom line. Nevertheless, I remain optimistic about our prospects and am confident in our investments to capitalize on them.

I now welcome any questions you may have.

Robert Lee.

Couple quick questions. I guess the first thing is the -- you went through some of the expense side and so if we exclude the software charge, should we be thinking that roughly $42-odd million is kind of ongoing expense level at least for the foreseeable future as the starting point?

I don't know if I would say [eventual]. I think what we need to do is we need to time our investments. And as we see the opportunities, it is going to be a function of the sales opportunities we see, the commissions associated with that, and how fast we migrate onto the platform and what resource that requires.

Okay. And if I think of the revenue yield, and maybe this isn't the right way to look at, but just thinking of revenue over kind of average AUM, understanding that clients got more defensive and you have some pick-up in I guess liquidity assets and whatnot. But if I think of it kind of over the past three, or at least relative to last year, it does feel like it has been running at a somewhat lower level.

Is there some kind of underneath the recent more defensive stance, is there some other -- something else that has been kind of impacting the revenue yield on the AUM, in terms of maybe just different mix of business or something?

If you go back to the third quarter of last year, if you recall, we mentioned that we had some advisory assets that went into passive investment strategies which resulted in a lower yield, and that was in the third quarter of last year. We also reduced the expense ratios of a couple of our funds to make that more competitive. So that impacted the yield. And those two happened in the third quarter last year, if you go back. And you are seeing that start to be fully reflected in the yield.

And you're also right about the liquidity. Assets are down 2% sequentially. But, what I would call our more permanent assets, or higher revenue assets, fixed income and equity, are down over 6%. So that is the bad news. The good news is that we kept the assets as they went into lower yielding products and I fully expect that when the markets recover, we will get those assets back in our other higher yielding products.

Great. And maybe just one last question, and maybe it is just too early in the quarter to think about or talk about, but just kind of curious from where you sit, clients got more defensive and I guess in Q3, August, maybe in September, but are you sensing or expecting any shift in investor activity or sentiment? Is it kind of still getting more defensive or kind of they reacted, it's done and they are kind of sitting and waiting? Any kind of color (technical difficulty) investor behavior.

Rob, I wish I was smart enough to really know the answer to that question. I guess what I would say is we saw a movement and that occurred, and people are sort of staying put right now. But we are not seeing -- kind of that movement is continuing, if that is what your question was.

Yes, that was (multiple speakers)

What they will do in the latter part of this quarter I really don't know.

Okay, thanks so much, Wayne.

Chris Donat.

I just wanted to explore a little deeper on what Rob asked with his first question. In terms of what you have seen in the past with investors maybe stepping to the sidelines, is that why you think they are likely to reengage inequities and therefore generate higher fees in the future? Is that sort of the pattern you've seen in prior cycles?

Well, we see that all the time. I think if you wanted to contrast this to 2008, where we were in much more of a panic mode, the assets came out of our long-term investment products and completely left SEI as they went into guaranteed products, be it bank-sponsored products, annuities, those types of things. We have not seen that. We've kept the assets, and as I said, I totally expect that they will move back into our higher yielding products as soon as people get more confident.

Okay, got it. Okay. Thanks.

Glenn Greene.

First question, so the positive question, all the skittishness we are talking about, the flow is $1.4 billion, probably the best number I recall in a long, long time, if ever. So help me (multiple speakers)

Since 2000, but I am not keeping track.

All right, so help me reconcile that. I mean how did you have such strong flows given the context of the skittishness and all those kind of commentary?

I don't think people are absolutely leaving the market. We have a big book of business and we have a really big book of business and people move. That can sometimes -- or markets move, that can sometimes exaggerate the bottomline results. But our activity with new advisors remains very, very strong. And as Al mentioned, we are increasing the number of sales territories and you see some of that in the expense. We are increasing our footprint because we see more opportunity to get more assets and we can get more coverage.

Okay. The other side of the coin, not as positive a question, so if I look at the revenue growth and you called it out, up 2% year over year, down 2% Q to Q, but if I look at the profitability, and I know part of this investments, it fell 10% Q to Q, and 10% year over year, which is a lot in sort of a one-quarter period. And that is excluding the one-time charge.

Can you sort of talk about that? Are we sort of at a run rate level of profitability? Did you have the full investments in here or there is more to go? I guess I am just trying to think about the margin level on a normalized basis, relative to what had been high 40% level not too long ago.

I think we are still in a situation where we can grow the profits of this business. One dynamic to keep in mind is when you look at the asset growth, we had declines in the market reflected in our revenue and we offset that by -- well, not completely but we helped offset that with $1.4 billion in net new sales. Net new sales has an expense component associated with it where appreciation and depreciation in the market really don't have much expense tied to them. They kind of fall right to the bottom line. So asset growth for markets is much, much more profitable than asset growth from actual sales, if that makes sense.

It does. And what about the incremental investments? Were there incremental investments in the quarter around SWP? Or are we just sort of talking about the sales -- it sounds like sales commissions because you had a strong sales quarter.

There were absolutely investments in SWP associated with both development and in the conversion activity as we begin the migration of the book. And -- but there are also investments in the sales force and in growing the operational infrastructure for the traditional business model. We're both.

Okay, thanks, Wayne.

Chris Shutler.

All my questions have been answered.

There are no further questions in queue at this time.

Thank you, Wayne. Our next segment is the institutional investment (technical difficulty) and I am going to turn it over to Ed Loughlin to discuss this segment. Ed?

Thanks, Al. Good afternoon, everyone. Today I'm going to start by framing the investment landscape during the third quarter.

The quarter was marked by heightened volatility with high-quality fixed income segments faring pretty well, while higher risk segments delivered a range of negative returns. Global equity markets fell significantly with steep declines ranging from negative 3% for US small cap to negative 17% for merging market equities. As you know, revenue for the institutional segment is asset-based as calculated by averaging the last four months ending balances. Market depreciation negatively impacts revenues earned during the quarter and if capital markets are negative during the last month of the quarter, revenue is negatively impacted for two quarters.

Ending asset balances compared to the second quarter declined by $4.8 billion to $73 billion.

Revenues of $74 million for the third quarter increased 3% compared to the year-ago period. However, third-quarter revenues declined $1.5 million compared to the second quarter due to capital market performance during the quarter. I would expect fourth-quarter revenues to be negatively impacted due to starting the fee calculation with depressed September ending asset balances.

Quarterly profits of $37 million were flat year to year, but declined $2 million compared to the second quarter. Margins at 50% declined slightly compared to the second-quarter 2015 and the year-ago period.

Net new client assets funded during the quarter was negative $144 million due to slower client transitions during the summer. As a result, the backlog of committed but unfunded assets at quarter end was $2.5 billion. New client sales closed during the quarter were $1.7 billion. New client adoption continues to be well-diversified by both market segments and geography.

So in closing, we continue to be well-positioned to successfully compete in the institutional fiduciary management space. We enjoy a strong pipeline and we remain optimistic about the growth opportunities for the segment.

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

Chris Shutler.

So, just one question. It looks like the average fee rate has continued to improve modestly this year. I am guessing that is a mix issue gravitating maybe a little bit more towards alts, but it is a little bit surprising, given the unbundling trend that you have talked about a number of times. So maybe just touch on that.

And secondly, what percentage of your asset today are in alternatives?

Sure. I guess the trend towards unbundling, that is typically is with larger institutional investors, so we continue to see a fair amount and what we would call the core market that are bundled types of deals. So that is something that is not across the board in the unbundling and the pressure on the fees from that perspective.

Alts Continue to grow in popularity. I would say that of the $73 billion that we have in assets, we have about $5 billion in alternative programs. So it's relatively small. You know, in proportion of the assets.

Okay, thanks a lot.

Glenn Greene.

Thanks, hey Ed. How are you?

Do you have easy ones for me?

Yes, they are really easy. (laughter) The negative findings in the quarter, which was unusual, just clarify that a little bit more and then the backlog of the $2.5 billion, do you expect that to convert at sort of a normal level during the quarter? I recall it being sort of generally converts within the quarter or within a 90 days kind of thing.

Yes, I mean there is kind of good news and bad news. The good news is that we continue to see a lot of sales activity, positive sales activity and closes in the global market, the UK market in particular, and the contract process is slower there. And it is primarily because the trustees do not work for the Company. They are separate from the Company.

So, unlike in the US, where if a contract is negotiated it could just be sent around on their office mail and signed by all the trustees because they are employees of the Company, it doesn't happen that way in the UK. And they don't call special meetings just to sign our contracts. So there really is kind of a delay. We have about 10 clients that are in that backlog.

I would suspect that between now and the end of the year, the bulk of those if not all of those would be funded. And then the summertime is just maybe a little bit slower for funding just in general.

Okay, great. Thanks.

Robert Lee.

Just a quick question on expense levels. If I look at just the absolute level of expenses in the quarter, since the fourth quarter of 2013, I think it is up only about 3.5%. It has been kind of pretty much in $35 million, $36 million range for almost -- I guess next quarter it will be two years. So I am just kind of curious if there is -- you think there may be any kind of pent-up investment need in this segment, whether it is infrastructure or adding personnel? Or do you feel pretty comfortable that you have been able to manage expenses, build that kind of -- continue to build infrastructure and personnel and marketing and not see -- expect much ramp up in expense levels?

I think that your observation about the expense levels is pretty much correct. I think that one thing that would change that if it does change it, would be direct costs. So the more successful that we are outside of the US, okay, the manager costs there, we account for them a little bit differently, but that is good news. I have other good news for you. I am not going to develop my own SWP, okay, so I will convert to that when it is ready. You don't have to worry about any rogue projects going on in the institutional business. So other than that, we tend to just kind of invest through the business.

So we buy new modelers. We have done that in the UK last year. We didn't in the US this year. And it just gets absorbed by the business.

Great, that was it. Thank you.

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 sit discuss this segment.

Thanks. Good afternoon, everyone. For the third quarter of 2015, revenues for the segment totaled $67.2 million which was $3.5 million or 5.5% higher than our revenue in the third quarter of 2014, and was slightly lower as compared to our revenue in the second quarter of 2015. This quarter-over-quarter minor decrease in revenue was primarily due to market decline during the quarter, as market depreciation more than offset our new client fundings.

Our quarterly profit for this segment of $23.3 million was approximately $1.9 million or 7.5% lower than the second quarter of 2015. This decrease in profit was primarily driven by our increase in investment and addition of headcount for future new business.

Third-party asset balances at the end of the third quarter of 2015 were $376.1 billion, approximately $5.8 billion or 1.5% lower as compared to our asset balances at the end of the second quarter of 2015. Decrease in assets was primarily due to market depreciation of $12.4 billion, offset by net client fundings of $6.6 billion.

Turning to market activities, during the third quarter of 2015, despite market volatility we had a solid sales quarter. Net new business sales events totaled $7.1 million in annualized revenue. These sales included new name sales and expansion of our business with our current clients.

In summary, despite the volatile market which dampened revenue growth in the quarter, we continue to add new business and see growth opportunity in the market. To that end, we will continue to invest in our solutions and workforce as we look towards executing on this growth.

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

Robert Lee.

Curious, in the past -- at least the past couple of quarters, you have given us the kind of previously won pipeline but that has not converted yet. So I am just kind of curious where that stands at this point.

Yes, I think you are referring to backlog and that is hovering right around $30 million.

So I guess it has been relatively consistent the last couple of quarters.

Yes, I mean as things fund, luckily as we continue to sell and grow business in the quarter, that's typically goes on for at least a couple of quarters. And then obviously we will work into the fund what is on the backlog as quickly as possible.

Okay. And maybe a quick question on the competitive environment. Some of your big competitors who are banks, I am just kind of curious if you're seeing any change in their behavior. I know they are always pretty aggressive competitors, but presumably given their desire to grow their fee base businesses, are you seeing any kind of -- any behavior becoming less rational or -- just curious if you are seeing any change?

Well, I think -- I don't think there's any change you saw in this quarter. But I think what we continue to see this year has proven out, and it is not just our bank-based competitors. This is a very competitive market. There are fees and competitors that try to compete with fees, but certainly puts pressure. But I think when you stick to the right segment of the market, and the values that you entered the market with, we are really focused on not providing a commodity for our clients and new prospects. And I think when you match up with the right folks, while fees are always important, I think people are willing to pay for the right value proposition. So what I say is I think we will what we see from all of our competitors a little bit more aggressive this, but nothing that is out of the norm behaviorwise or otherwise.

Okay. And then last question, just anymore commercials planning on taping soon?

(laughter)

Thank you Rob, for bringing that up. Yes, you can hear us on Bloomberg every day. Thank you for the plug, though.

Chris Donat.

I am actually flipping through the slide deck from your investor day, and just wanted to get your comments on sensitivity to market moves like we had and how should we should think about the mix of the roughly $400 billion of assets under administration. What are the biggest buckets there if we want to think about them and just in broad strokes?

Well, first, it's a great question. But I think it's a difficult question to answer. If you look at -- we have a diverse client base, which is great. Obviously a good portion of our business, about 56% is in the alternative side, which ranges from hedge fund, some fund to funds, private equity. So it is hard for me to give you a sliver of percentage moves. What I would tell you is if you look at most hedge fund indexes for Q3, I think the average hedge fund was down around 3.9%. If you look at our asset declines, we were down about 1.5%. I think if you went back to 2008 and looked at the declines there, you would see a similar trend.

While we certainly went down, I don't think we had quite as an aggressive impact as kind of the pure asset classes or even some of our competitors. And I think what has balanced that is we do have a good diverse portfolio of clients.

So what I say in general, and I am not sure this helps you completely, but we are not immune to the market moves. And certainly we saw that, but I do think because of the caliber of our client base and the diverseness -- the diversity of them, it does offer us somewhat.

Okay, that helps. Yes, like you said, there are other indexes I was looking at there that's adjusted to me that maybe you would be a little worse than you are, but you were a little better and I -- there is part of the diversity that are hard to see from the outside. But the data shows it, so that helps me. Thanks.

Chris Shutler.

Two questions, first the net sales, they were -- the 7.1, they were up year over year but down from the last three quarters. Were there any customer losses that offset maybe gross sales activity?

Yes, that is in that number, and in this business there is always losses. There was no -- what I would say significant losses. I would certainly bring them up or we certainly have a significant recontract order. I view that as part of the business day today. So the number you did get was net. What I would say to you is we are right in the range of -- and I choose my words carefully -- but I view it as a solid quarter. I would expect that sales number and our goal is to drive that sales number higher.

All right, great. And then the -- the pipeline, I guess you just alluded to it, but in the medium term pipeline that you see now compared to maybe what you saw in the last several quarters, is that on par, better, worse?

Well, Chris, the number I just gave, just to be clear, so we are all talking the same, the number I gave previously was backlog. That is deals that we have won that have yet to be funded. I think what you are asking is pipeline of the deals out there. What I would tell you is, it is strong. Our pipeline is probably the largest it has been in two years. However, it is taking longer to get to the pipeline.

All right, thanks a lot.

There are no further questions in queue.

Thanks, Steve. I would like Kathy Heilig to give you a few Companywide statistics. Kathy?

Thanks, good afternoon, everyone. I have some additional corporate information about this quarter. Third-quarter cash flow from operations was $117.7 million or $0.70 per share, which brings year-to-date cash flow from operations to $274.5 million. Third-quarter free cash flow was $91.2 million or $0.54 per share, which brings year-to-date free cash flow to $216 million. Capital expenditures for the third quarter, excluding any capitalized software, were $20 million and we project about another $10 million capital expenditures in the fourth quarter.

The tax rate, as noted in the release, was 34.1%. However, we project the overall annual tax rate to be 35%. We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks, and that financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

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

Glenn Greene.

Dennis, just back on LSV real quickly, the whole performance fee dynamic, can you remind us of the fourth quarter last year what the performance fees were and if there are any high-level expectations, how we should think about the fourth quarter this year?

Well, it is hard for -- to predict the next quarter of future performance fees because they are based on performance. So (multiple speakers) that is a little bit more challenging. But fourth quarter is generally -- last year was in a similar range, about 7% of total revenue.

Okay.

So it is roughly in the same range we had in third quarter.

And 3Q of last year was what?

That was about close to 13%, 14% of revenue.

Okay, great, that's it. Thanks.

There are no further questions in queue.

So, ladies and gentlemen, despite our headwinds, we are optimistic about what we are doing and the investments we are making. Looking ahead, we intend to keep our focus on long-term growth in the revenues and profits and we remain bullish about our opportunities. So good afternoon, and thank you for your time and interest.

Ladies and gentlemen, that does conclude our conference call for today, which will be available for replay from today at 4 PM Eastern time until January 21, 2016 at midnight of that day. You may access the conference by dialing 1-800-475-6701 and entering the access code 371051. Once again, that does conclude our call for today. We would like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now all disconnect.