SEI Investments Co (SEIC) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Fourth Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, the conference is being recorded. I'll now turn the conference over to our host, Chairman and CEO, Mr. Al West. Please go ahead, sir.

Welcome, everyone. All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller.

I'll start by recapping the fourth quarter and full year 2018. I'll then turn it over to Dennis to cover LSV and the investment in 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'll field questions at the end of each report.

So let me start with the fourth quarter and full year 2018. Fourth quarter earnings decreased by 5% from a year ago. Diluted earnings per share for the fourth quarter of $0.73 represents a 3% decrease from the $0.75 reported for the fourth quarter of 2017. For the year 2018, our earnings increased by 25% over 2017 earnings. Diluted earnings per share for the full year of $3.14 is a 26% increase over the $2.49 reported in 2017. We also reported a 1% decrease in revenue from the fourth quarter 2017 to fourth quarter 2018 and a 6% increase for the full year. Also, during the fourth quarter 2018, our noncash asset balances under management decreased by $30.5 billion. SEI's assets grew -- excuse me, fell by $17.3 billion and LSV's assets decreased by $13.2 billion. For the year, assets under management decreased by $29.1 billion.

In addition, during the fourth quarter 2018, we repurchased approximately 2.3 million shares of SEI stock at an average price of $49.56 per share. That translates to over $115 million of stock repurchases during the quarter. For the entire year, we repurchased approximately $6.7 million -- I'm sorry, shares at an average price of $60.02 and share representing just over 4 -- $404 billion -- $404 million of repurchases. Sorry about that.

Between our stock buybacks and cash dividends during 2018, we returned approximately $502 million in capital to shareholders. During the fourth quarter, we capitalized approximately $10.9 million of the SEI Wealth Platform development and amortized approximately $11.5 million of previously capitalized development.

Fourth quarter 2017 sales events, net of client losses, is approximately totaled $10.7 million and are expected to generate net annualized recurring revenues of approximately $3.7 million. For the full year 2018, sales events, net of client losses, totaled approximately $82 million and are expected to generate net annualized recurring revenues of approximately $57 million. The bottom line is that 2018 was a good year but ended on a negative note due to extreme volatility in the fourth quarter.

These highly volatile markets are continuing through January. Also affecting us as we enter 2019 is the lost business we know about and have communicated to you, yet these clients are still operating on our systems. Our reaction to all the volatility is to maintain our strategic course. We have headwinds of fee compression to deal with as well as the decline in U.S. corporate-defined benefit plans. On the other side, the coin -- on the other side of the coin, there are tailwinds we need to take advantage of, mainly the intensification of financial regulations worldwide, plus the growth of family offices and the widespread need of financial institutions to replace legacy systems.

As we enter 2019, we are emphasizing long-term growth. At the same time, we are doing what we can to manage expenses and profits while executing our strategy. We believe that the reorganization we announced in November will help us achieve our long-term goals. The new organization we discussed also recognizes that the needs of manufacturers and distributors are converging, particularly in the large end of both markets. We have a number of case studies of a single organization using 3 to 6 of our platforms, necessitating the high level of collaboration to properly serve the client. That is why we have put IMS and banking together.

Now while the road ahead in 2019 is challenging, it's also full of new opportunities. We believe we will be better suited to capture the new opportunities with our new strategies and organization.

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

Thanks, Al. Good afternoon, everyone. I'll cover the fourth quarter and full year results for the investments in new business segment and discuss the results of LSV Asset Management.

During the fourth quarter 2018, the investments in new business segment continued its focus principally on our digital advice offering and on the ultrahigh net worth investors segment through our private wealth management group. During the quarter, the investments in new segment incurred a loss of $3.2 million, which compared to a loss of $3.8 million during the fourth quarter of 2017. For the full year, the investments in new business segment incurred a loss of $12.4 million compared to a loss for 2017 of $13.8 million. This improvement reflects the growth of our private wealth management business offset by other areas of investment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the fourth quarter. LSV contributed $36.4 million in income to SEI during the fourth quarter. This compares to a contribution of $43.3 million in income during the fourth quarter of 2017. For the full year 2018, LSV contributed $159.8 million in income compared to $152.6 million in 2017. As Al mentioned, the assets during the quarter fell approximately $13.2 billion at LSV. LSV experienced net positive cash flow during the quarter of approximately $360 million, which was offset by market declines. Revenue at LSV was approximately $119.5 million and performance fees were minimal.

For the company, our effective tax rate for the quarter was 19.2%. A couple of items of note for the company. During the quarter, we recorded severance expense of approximately $2.4 million. This is primarily reflected in corporate overhead. We also had a true-up of incentive compensation expense of approximately $2.8 million, primarily reflected in the Investment Managers segment results.

With that, I will now take any questions.

(Operator Instructions) And we have a question from the line of Chris Shutler with William Blair.

So on the corporate expense, it jumps a little bit quarter-over-quarter. It sounds like some of that was severance. Was the $2.8 million in there also? Or was there anything else to call out?

Yes, the $2.8 million was in there also. They were the 2 major kind of, I'd say, more of onetime-ish items.

Okay. And could you state again, Dennis, what that $2.8 million was?

That was for a true-up on incentive compensation payments, primarily [related to] the Investment Manager Services segment given their strong performance this year.

Okay. The severance, is that related to any one individual? Or is that a number of people was that targeted -- related to?

(inaudible) our employees that left us during the course of the quarter.

Okay. And then tax rate from here, how should we think about tax rate in 2019?

Well, the good news is we're still operating under the 21% corporate tax rate. So that's a good starting point. I'd say we're going to be in that range, 21% range. Certainly, the -- we still have the option accounting benefit that could go one way or the other this year. That's one activity. So I'd say we're definitely 21%, if not a little bit higher.

(Operator Instructions) We have no one queuing up at this time, so please continue.

Thank you, Dennis. We are now going to change things up a bit based on the new organization. I'm going to turn it over to Steve Meyer to discuss both private banking and IMS segments. Steve?

Thank you, Al. Before I begin, just to outline my approach. I will first review the private banking segment's Q4 then take questions on that. After those questions, I will discuss Investment Manager's Q4 and take questions on IMS.

So for private banking. For the fourth quarter of 2018, revenue of $121.4 million was up slightly from the third quarter of 2018, primarily due to an increase in transaction-based revenues. Fourth quarter revenue as compared to a year ago is down $5.6 million, mainly driven by transaction-based revenues and a decline in our asset management revenue.

For the fourth quarter 2018, operating profit of $6.9 million increased from the third quarter due to increased transactional revenue and decreased expenses. For the year, our profit grew by $6 million, mainly driven by our asset management and SWP relationships.

And turning to sales activity for the quarter, we closed $7.2 million in gross processing recurring sales events and $3.7 million in onetime events. Q4 was a decent new business quarter. As we mentioned on our third quarter call, we are working with one of our larger U.K. clients to add a large book of global private accounts. During this process, we expect part of the current book to deconvert off of our platform in the near term. Although the timing of the deconversion is ambiguous, we have enough certainty that it will occur, but we believe it is appropriate to net the expected impact against our Q4 event. If successful, we expect the potential new business from this existing client will be a significant growth opportunity for us.

During the fourth quarter, we signed 2 new SWP agreements, 1 existing Trust 3000 client, Securian Trust Company; and the other, a new client to SEI. Also during the fourth quarter, in the U.K., we extended our relationship with Fusion Wealth until 2025. Given their strategic affiliation with Schroders and Lloyds Banking Group, we expect this to be a meaningful business opportunity for SEI.

Regarding Trust 3000, during the quarter, we recontracted 2 clients for a total of $10.2 million. For 2018, we have recontracted 18 Trust 3000 clients for $51.9 million of annualized revenue.

Our asset management distribution business experienced approximately $283 million in negative cash flows in the quarter. During the quarter, our AMD business signed several new deals, including Inovea, a large French wealth management firm that will use SEI's goal-based solutions as their exclusive approach to goals-based investing; and BMO Financial Group, who will offer SEI's strategic portfolios to their high net worth clients in Asia.

As an update on the wealth platform backlog, we converted a U.S. client to the SEI Wealth Platform during the quarter. This brings the total to 38 clients currently processing on SWP. Our total signed but not installed backlog for SWP is approximately $35.2 million in net new recurring revenue.

Also to update on Wells Fargo. All of our conversion activity continues, and we are working closely with Wells in this project. While we await the finalized implementation schedule from Wells, all milestones and deliverables continue to be met. We are hopeful to know more by the end of the first quarter.

And turning to 2019, our focus is on growth. Our sales pipeline is strong, and we will focus on closing new business and generating new opportunities with our current solutions and by expanding our opportunities by leveraging additional platforms and solutions available at SEI. Unfortunately, while doing so, we have to navigate some of the headwinds of the current market as well as the revenue losses from previously announced client deconversions. A significant one, the Department of the Interior federal contract we announced in Q4 2017 is expected now to move off at the end of this quarter. These events will put downward pressure on both revenue and profit growth in the short term. We will manage through these headwinds as we continue to sell new business, implement clients, grow the business and we will manage expenses diligently while we focus on positioning the segment for sustainable and accelerating profitability.

While new to leading this business segment, recognizing the short-term challenges to profitability, I'm optimistic about our long-term growth opportunity available to our markets and platforms. We continue to build our pipeline and work on increasing sales and implementing new business.

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

(Operator Instructions) We'll go to Chris Donat with Sandler O'Neill.

With the Department of Interior contract, so we know the revenues go away. Are there any expenses associated with that, that we would expect to also shrink? Or any restructuring cost that we should be thinking about in future quarters?

Well, what I'd say is it was one of our more profitable pieces of business. And while there are some expenses that we will reallocate within the unit, any takedown of expense won't be really matched with the release of the revenue. So I wouldn't expect to see kind of a match-up on that side. And I think we're going to use some of that expense, although we're managing it diligently to also kind of support new business coming on.

Okay. All right. And then with Wells Fargo, just in terms of what we can expect in terms of news flow, you said expect more clarity by the end of the quarter. Is that something we should expect to hear about on the first quarter earnings call? Or would you expect to put out a press release? I'm just trying to...

I would suggest you'll probably not hear it until the first quarter earnings call.

And we have a question from Chris Shutler with William Blair.

So the quarter-over-quarter step-up in revenue in the business, obviously, there was a negative market impact. Can you just break it down for us a little bit? Like how much of a step-up was there quarter-over-quarter in professional services or onetime type of revenue? And then how much of a step-up was there in transactional revenue?

Well, the -- so the step-up in revenue, I believe, was about $2.9 million Q3 over Q4, and the majority of that, I believe, was in our transactional revenue. It was both -- split between brokerage and our mutual fund servicing fees, which were actually down last quarter. They're actually up this quarter. We did have onetime revenue booked in Q4 about $4.9 million.

And that $4.9 million, how does that compare to prior quarters?

Well, it's kind of -- I don't think there's been a kind of standard flow. It's up or down depending on the exact signings we've had. But I think it's somewhat a little bit consistent with what we've seen in previous quarters.

Okay. And then just to reiterate, could you just go through your comments real quickly on the sales again. You said $7.4 million of gross and half of that was onetime. Can you just reiterate that again?

Yes, so it was $7.2 million gross and $3.7 million in onetime events sold in the quarter. And of that $3.7 million, about $1.8 million of it has been recognized in Q4.

We have a question from Robert Lee with KBW.

Just kind of curious, if we go back and look over time the -- a lot of the onetime fees you guys may have earned over the past couple years related to potential implementation of SWP, is it -- just trying to get a sense of when someone hires you and is paying you some upfront fee kind of exploring the platform, do you have enough of a tracker to say, "Gee, it's 100% conversion to a full client once they give us a fee," or it's 75 or 50? And if we think of those kind of potential clients who paid you the fees over time is -- are there still potential customers out there who pay you the fees, haven't made the commitment yet to a full platform so you haven't seen them flow through net new business?

Rob, this is Dennis. I'll help Steve out because he's really new to the [segment], and I think we only had one instance where we had a client pay us significant or any implementation fees, frankly, that didn't wind up signing a contract over the past -- that was probably 5 years ago. So every client that's paying us has converted to a contract, except one.

Okay. And are there still maybe some out there that have paid you the fee and you expect they're going to sign but they just haven't kind of gotten there yet, so there's kind of a little bit of a pretty big pipeline?

I think [everybody is] paying us a fee for implementation has signed the contract.

And we have a question from Glenn Greene with Oppenheimer.

So I mean, I guess the big picture question, you're sort of now running private banking along with Investment Managers. And I just want to get a sense how you sort of view the pipeline and what you think you can do or what could be changed to sort of move some of these deals in the pipeline over the goal line and really get the sales to get moving?

Well, Glenn, all eyes are on me in the room now. So listen, it's 2 months in. So it's probably a little early for any broad strategic discussion. But what I'd say to you is I do -- my assessment is we have a lot of opportunity. We have a strong pipeline both here in the U.S. and the U.K., and I think there's a lot of people who've worked very hard and are moving these deals along. Not to use the same phrase you've heard, but the process is a long one. I do think there's opportunity for us to look and leverage, and this is one of the reasons we did the reorg, other platforms and solutions we have across SEI that might help us expand the offering we have for this client base as well as maybe have some other shorter-term sales agendas while we're working on longer-term platform agendas. But with that, I think I've walked into an opportunity where we have great group of people that work really hard. We have a very strong pipeline, and I think it's just a matter of moving them through the pipeline at this point.

Is there anything more specifically tactically that you're thinking about, whether it's pricing or maybe going more modular in terms of the product or maybe something in terms of distribution on the sales side that you're rethinking?

What I'd say, Glenn, and I'll have more color for you as we go along, but right now I think it's safe to say my #1 focus is on growth and grow the top line and bottom line. And I'm considering everything and looking at everything we do from pricing to how we package, sell the platform to our other platforms and solutions on how we can speed up the growth across this division.

(Operator Instructions) We'll go to Sam Hoffman with Lincoln Square.

Steve, can you give a bit more color on what you're working on, just to follow up on the previous question in terms of developing products to cross sell the Investment Managers platform to the private banking clients? And then specifically, do you have [needs] within your budget? Currently, you're at the run rate of $114 million to $115 million of expense per quarter. Is that going to be enough to kind of accomplish what you're looking to achieve over the next year or 2?

Okay. Great. Thanks. So 2 questions. One, what we're looking at as far as maybe leveraging some of the solutions, primarily in IMS but maybe just not limited to IMS. When we first made this announcement, we used the example of a client we recently signed, Cornerstone, which is a large RIA, which is absolutely using 3 of the platforms we have. If you want to look more granularly to banking, many of the large banks we deal with are also manufacturers. So many of the solutions and platforms we've built, we are either already have them as a client, such as Wells Fargo who's a client of IMS as well as banking, or we have the opportunity to look at and support their manufacturing businesses. So that's really kind of the main focus I have initially on looking how we can expand that. As far as the budget, what I would say is as we go into this year, we certainly have to manage the budget, and I'm going to be managing expenses. So I feel the expenses we have are more than enough for us to accomplish what we have to do, and we'll be looking and actually manage them pretty tightly.

Okay. So you're going to be saving money on merging some of the organizations and that will offset any expenses that you need to make to develop products for growth?

Well, I'm not sure I'd exactly classify it that way. But what I would say is I think we're spending a decent amount, and I'm confident with the amount we're spending, on development and implementing clients. I think there's ways we might be able to do things maybe a little bit more efficient that can result in us in saving some money.

And we'll go back to Chris Shutler with William Blair.

Can we just get the net cash flow number in the U.K. for SWP?

Net cash flow in the U.K., I know the total net we are negative. I don't know if I have the U.K. on me handy, Chris.

Okay. I can follow up on that. And then...

We'll try to get that before the end of the call and I'll come back to you.

Okay. And then any update, Steve, on just the outlook for -- I know you didn't have any Trust 3000 attrition in the quarter. How do you feel about the next handful of quarters?

I feel good. We've had a pretty good year recontracting. More importantly, I think if you look at our average concession, we had 0% concession in recontracting fees with the clients we did in Q4 and just shy of 2% on average for the year 2018. So we're active. We're engaged with them. And obviously, our main goal is to convert them to SWP or for the ones that are not ready, to recontract them in advance of moving to SWP. But I feel pretty confident we're on it. We obviously have some clients that we'll certainly look in the market and will be a competitive conversation, but that's the nature of the business.

And we have no additional questions, so please continue.

Sure. And just to follow up there, Chris, the flows in the U.K. were $440,000 positive.

So with that, turning to Investment Managers.

For the fourth quarter of 2018, revenues for the segment totaled $102.4 million, which was $8.1 million or 8.5% higher as compared to our revenue in the fourth quarter of 2017. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion. For the full year 2018, our revenue was $398.1 million, which was $48.6 million or 13.9% higher than the full year of 2017.

Our quarterly profit for the segment of $34.6 million was $1.1 million or 3.2% higher as compared to the fourth quarter of 2017. Our full year profit for the segment of $138.4 million was approximately $15.4 million or 12.6% higher than the annual profit of 2017.

Third-party asset balances at the end of the fourth quarter of 2018 were $552.3 billion, essentially flat as compared to the asset balances at the end of the third quarter of 2018. Although the assets were flat quarter-over-quarter, we did have an increase in assets due to net new client fundings of $19.4 billion net against market depreciation of $19.5 billion.

And turning to market activity. During the fourth quarter of 2018, we had a very strong sales quarter with net new business events totaling $12.9 million and recurring revenues as well as recontracts of $13.9 million in recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new name business and expansion of existing wallet share with current clients.

These events included the following highlights: a $17 billion alternative manager deciding to outsource for the first time along with 2 new start-up alternative managers; continued growth with new business wins and cross-sells within the private equity market segment; multiple new family office wins and an expanding solution footprint at several existing clients; events in our traditional market unit across all product lines, including 2 Middle Office Services mandates, multiple collective trust and an expansion of solutions with several clients.

Our total net business sales events for 2018 were just over $50 million, which was a record and our largest sales year to date and approximately $10 million higher than our total events in 2017. We feel this continues to validate the market acceptance and strength of our strategy and solutions.

As we enter 2019, our focus will be on: one, continued execution of our sales and growth opportunities; two, continued expansion of our platform into the front office, supporting our clients and investors; three, continued expansion of our emerging solutions and platforms, including data analytics and global and regulatory compliance; four, leveraging our platforms and solutions to support growth opportunities in other market segments.

We will continue to invest in our platforms and key solutions to support our growth momentum while also managing overall expenses diligently. We are focused on driving scale and efficiency as we grow. Our pipeline remains strong, and I'm optimistic of the continued growth opportunities.

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

(Operator Instructions) We'll go to Robert Lee with KBW.

Steve, could you just -- I mean, to start, maybe just repeat the new -- the net new business in the quarter that you mentioned? I think I kind of missed some of it.

Sure. Net new business in the quarter was $12.9 million in recurring revenues. The recontracts of existing clients was $13.9 million.

Okay. Great. And then can you maybe talk a little bit about kind of the competitive environment? I mean, some of the -- and clearly you're not in the custody business, thank God, but some of the large custody banks have talked about the pricing pushback they're getting from a lot of their clients as their clients clearly struggle on the revenue front. Can you maybe talk about what you're seeing there, kind of how you're reacting to it? And I mean, clearly, it's not keeping you from generating new sales, so just kind of recontracting. But maybe just give us a sense on how you're positioning yourself for that kind of environment.

Yes, well, I mean, it's certainly out there and there's -- this is a competitive market. There's a lot other competitors out there. We typically don't compete on price. That's not to say that we don't have clients or prospects that come to us and -- when you get into a competitive bid. We are typically not the low price -- low-cost provider. We're usually not the highest, but we do require a premium, and I think that's justified with the platform and solutions we built. Quite frankly, with the fee compression that's coming from the managers that's now working its way down to their partners, including us, I still view that as an opportunity because it's requiring managers, and I've said this before, to rethink their business model. As they have to rescale and relook at their business, there's other areas of their business, whether either a middle office, their front office, their support groups around their trading, their support groups around the middle office, that they now have to look at a different way of doing versus doing it inside their firm. And I think it provides plenty of opportunity for us to add more solutions and to add to our platform and to expand our wallet share of the client. So to me, I view it as silver lining and that adds opportunity for us.

(Operator Instructions) We'll go back to Chris Shutler with William Blair.

Steve, can we just get the backlog numbers and then the time line?

Sure. Backlog is about $43.4 million right now, and I'd say expect that to fund within the next 12, the majority of it, 12 to 14 months.

(Operator Instructions) We have no one queuing up, so please continue.

Thank you, Steve. Our next segment is Investment Advisors. Wayne Withrow will cover this segment. Wayne?

Thanks, Al. 2018 was really a tale of 2 cities with the advisors segment achieving good growth during the year until the market turned down in the fourth quarter. However, despite the challenges of the fourth quarter, we still achieved record revenues and profits for the year. More importantly, we are closing in on completion of our migration to the SEI Wealth Platform.

Fourth quarter revenues totaled over $97 million. These revenues were down only slightly from our revenues in the fourth quarter of last year. The impact of positive net cash flow was more than offset by negative capital markets. Expenses were down in the fourth quarter versus last year's fourth quarter. As compared to the third quarter, expenses were up only slightly as increases in some expense categories were offset by declines in variable sales compensation. Our profits were flat compared to last year's fourth quarter but were down $5 million in the third quarter primarily due to capital market declines.

Assets under management were $61.3 billion at December 31, a decrease of $3 billion from December 31, 2017. The decrease was driven by negative capital markets, only partially offset by net positive cash flow. While the net cash flow is positive for the year, we did experience $650 million in net negative cash flow in the fourth quarter as market volatility impacted investor behavior. We also saw a shift from riskier assets to cash during the quarter.

During the quarter, we recruited 87 new advisers, bringing our total for the year to 417. Our pipeline of new advisers remains active.

For 2019, we will concentrate on 3 main areas. First, we are focused on completion of the rollout of the SEI Wealth Platform. In 2018, we converted 3,500 firms and over $27 billion in assets. We now have over 90% of our AUM migrated onto the platform and should have all of our clients in the platform by the end of the first quarter.

Second, as we complete the technical migration, we will be focusing more on having advisers adopt all of the functionality of the SEI Wealth Platform, allowing them to capitalize on its capabilities and strengthening our relationship with them. Third, we will reexamine our go-to-market strategy as we shift the focus of our sales force away from migration and back to pure growth.

In summary, 2018 was negatively influenced by the market volatility of the fourth quarter. But on a positive note, we continue the solid progress in our migration to the SEI Wealth Platform. We look forward to completion of our migration and remain confident in the long-term opportunity in front of us.

I welcome any questions you may have.

(Operator Instructions) We'll go to Chris Donat with Sandler O'Neill.

Was just wondering with the -- you talked about the movement from risky assets to cash and it does look like, as we calculate your fee rate, that it ticked down a basis point or so. Just wondering if you expect any implications for first quarter 2019 about end investors having more cash. Or have you seen the cash kind of revert back into the market as conditions have improved in January?

Yes, I mean, I think basically, the market volatility moved people out of the riskier asset classes. I'd say most investors still have the hangover from the fourth quarter, and it's probably a little bit early to predict what will happen. But -- and while I can't say it's the first quarter, second quarter, whatever, I would say that the good news is the balances in the liquidity will eventually return, hopefully, to higher-fee asset class.

Okay. But we might see a little -- I'm putting words in your mouth, I recognize, but we might see a little pressure on fees in coming quarters if you do have people sitting in cash for a while?

I guess it's kind of hard to say really. It depends upon what the mix is.

We have a question from Robert Lee with KBW.

Just with getting close to the point where everyone will be on SWP, I guess 2 questions in this. First, are there any kind of decommissioning, savings or something that you kind of realized from being completely off kind of the legacy platform in your channel that you no longer have to bear? And I guess to the extent -- and you kind of suggested they're going to kind of shift back towards kind of a growth footing, but maybe it's early days. But given the increased functionality of the platform and therefore increased sources of revenue, I mean, have you -- any sense, early days, that you're starting to see at least some advisers start to use the functionality and starting to see some uptick of kind of ancillary fees from the platform?

Yes, well, Rob, really 2 questions. I think as we shifted the platform, as we lose some of the migration expenses associated with the platform, I think we will save in that area. How we choose to redeploy that, whether we try to reinvest that to growth or not, is a decision we continually make. In terms of cross-selling other asset classes to that, I think as we shifted the sales force away from what I would call, basically, handholding and helping the clients through the migration process, they could focus more on going out and getting better growth in SEI assets and non-SEI assets.

(Operator Instructions) We have no additional questions, so please continue.

Thank you, Wayne. Our next segment is the Institutional Investors segment. Paul Klauder will report on this segment.

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the fourth quarter of 2018 as well as the entire year. Fourth quarter 2018 revenues of $81 million were 7% lower than the fourth quarter 2017 revenues. This was due to lower capital markets and the inclusion of a onetime performance-related fee of $3.4 million in 2017.

Market appreciation and net client fundings positively impacted revenue on a year-over-year basis. Full year revenues of $333 million increased 3% compared to 2017. Operating profits for the fourth quarter 2018 were $40 million, 7% lower than the fourth quarter 2017 due to the previously mentioned items offset slightly by lower operating expenses. 2018 full year profits were $169.8 million and increased 6% compared to 2017. Net client fundings, higher capital markets and lower operating expenses contributed to this increase. Operating margins for the full year 2018 were 51%.

Net asset event for the quarter were a negative $950 million. Gross sales were $1.05 billion, but client losses totaled $2 billion. New clients were across multiple markets, including U.S. endowments and foundations, U.K. fiduciary management and U.S. hospitals.

Total new client signings for 2018 was $3.6 billion. That represents $11.9 million of revenue. The client loss number for the quarter was driven by a U.S. corporate relationship that got merged into a larger organization, continued corporate DB curtailments and investors that decided to offer a complete passive management implementation.

The unfunded client backlog at year-end was $750 million. Quarter-end asset balances of $84.4 billion reflect a $10.1 billion decrease versus the fourth quarter of 2017. This is primarily due to fourth quarter's negative capital market performance.

Our focus in 2019 will be to continue to diversify new business growth out of the U.S.-defined benefit market and into endowments and foundations, health care, non-U. S. DB and fiduciary management, governments and unions, defined contribution and entering new global markets. We continue to believe that market volatility will be a positive catalyst for institutional investors to reconsider their investment management process.

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

(Operator Instructions) We'll go back to Robert Lee with KBW.

Just kind of curious. I mean, given some of the net new business challenges, certainly at least recently, the -- I mean, how do you kind of think about maintaining the existing kind of profitability in the segment? And (inaudible) obviously free pressure on top of that, the segment has been pretty steady around 50%, give or take, quarter-to-quarter for a while now. Is there anything you kind of see in terms of either the new investment you have to make in distribution or infrastructure coupled with kind of shifting fees that -- makes you think that that's not sustainable or should be sustainable? How should we view that going forward?

Well, we think we've made all the investments in infrastructure and distribution, whether that's in the U.S. or our EMEA or Asia business. So we think we're good there. Your point is dead-on in the fact that what might roll off might be a little bit more profitable than what rolls in. But we saw that phenomenon actually switch a little bit this year because of the fact that we did really well in foundations and endowments. Those assets are growing. People are donating to foundations and endowments, and their consumption rate of alternative investments is much higher than defined benefit plans and we have a much higher yield on alternative investments than we do on public markets. So while I can't sit here and say this business will always be a 51% profit margin business, I think we're going to see some downward pressure just on some realities. And we saw a slip down to 49.4% in the fourth quarter. I am confident that it's a high 40% profit margin business and again, we'll make the right investments. And if we have to go a little bit low -- below that to get into accretive markets, we'll make those decisions so we can strategically position the business.

(Operator Instructions) And we have no questions, so please continue.

Thank you, Paul. I'd like to now have Kathy Heilig give you a few company-wide statistics. Kathy?

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

Our fourth quarter 2018 cash flow from operations was $170.5 million or $1.07 per share, bringing year-to-date cash flow from operations to $588.4 million or $3.65 per share. Fourth quarter free cash flow was $152.2 million, bringing year-to-date free cash flow to $485.1 million.

In the fourth quarter, we had capital expenditures, excluding capitalized software, of $7.4 million. That did include $4.9 million for facility expansion. Year-to-date capital expenditures, excluding capitalized software, were $29.1 million, which included $9.8 million for facility. In 2019, we expect capital expenditures to be approximately $55 million, which would include about $33 million related to our facility expansion. We already mentioned that the tax rate was 19.2% for the quarter, and the annual tax rate was 17.6%.

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. In some cases, you can identify forward-looking information statements by terminologies such as may, will, expect, believe, continue or appear.

Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing and scope of deconversion events, our ability to capitalize on new business opportunities and the timing of these events, our strategies for the execution of our business in existing markets and the degree to which market conditions create opportunity for us, those market conditions that will create opportunities for us to grow our business, the strength of our pipeline and our ability to execute on and the success of the 2019 strategic objectives articulated on this call.

You should not place undue reliance on our forward-looking statements as they are based on current beliefs and expectations of our management and subject to significant risks and uncertainties, many of which are beyond our control or subject to change. Although we believe the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in our risk factors section of our annual report on Form 10-K for the year ended December 31, 2017, that was filed with the Securities and Exchange Commission.

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

We have a question from the line of Sam Hoffman with Lincoln Square.

My question is what are your objectives for the expense budget growth rate for 2019 given that revenue growth is probably going to be challenging this year, and whether the main areas that you feel you need to invest in, in terms of expense and other areas where you're going to be focused on cost control?

Sam, this is Dennis. Probably from listening to prior calls, you know we're not all that real happy about predicting the future from an expense standpoint. I would just say, to echo what Steve talked about particularly in his segments, we are looking at '19 as a really tight year to manage expenses, I'll use Steve's word, diligently. So that's what you can expect, that -- I mean, and I think you saw kind of third to fourth, if you take out those 2 unusual items, we're pretty -- it kind of was an indication of how we're going about that and the tightness with which we're managing expenses and to the areas that we're going to continue to invest in certainly in order to meet the commitments we've made to our clients and to fulfill what we believe are the opportunities in the market strategically. So technology expenditures will continue, and the folks running that -- those organizations will -- are working closely with the business units to make sure there's clear priorities, that we're only spending on things that are absolute priorities and they're going to help us in the future. And around that, it's managing everything else around the company pretty tightly.

We'll go next to Chris Donat with Sandler O'Neill.

Yes, I'm going to just twist the prior question a little bit. I saw in the press release that you're guiding to a stock-based comp of $22.6 million. I guess on that line specifically, are there really any puts and takes that -- or what are the factors that would cause that stock-based comp to be higher or lower meaningfully in '19?

Well, I mean, as you know, our -- the vesting of our options is driven by us hitting certain pretax earnings targets, particularly the options that were granted the past 2 years, and prior to that, it's an aftertax earnings target. So how we amortize the costing associated to those options is based on our estimates of when we think we'll hit those targets. So the only real variable that would change those -- that expensing is a change in that timing expectation. And we had that occurred. It was last year. If you remember, fourth quarter, we had a little bit of that, third, fourth quarter in '18. But that's the only real variable relative to options.

Okay. And then just thinking about compensation more broadly, it's still a case that if you had large contract wins, often you'll see salespeople get -- you'd accrue some compensation for things like that. Just trying to think what swing factors you might see in compensation.

Yes, the only -- the change there though, Chris, you remember from last year, the new accounting rule that went into place in terms of some of that -- most of that getting deferred and then expensed in over the life of the contract or the life of the relationship, even crazier than that, an estimated life. So you wouldn't see as much of that like you would have in, let's say, 2016 or 2017.

And a question from the line of Chris Shutler with William Blair.

Let's see. The $3.7 million recurring revenue from sales events that occurred in the quarter, can you break that down by segment? I think you said $3.5 million in private banks, $12.9 million in IMS. What were advisors and institutional?

They were negative because their cash flows were negative.

Yes, the first 2 numbers were correct, right?

Banking was essentially flat in terms of net recurring because a lot of those -- the fact that we -- I'd say we're being a little conservative by including in our net number that one client that's in transition, and we have upside opportunity. But in the meantime, they're going to -- there's a good chance they're going to transition the business away from us. And then the other 2, advisor and institutional, they were negative cash flow. So the total number is really, kind of to make it simple, IMS less kind of the advisor and institutional cash flow number because banking was relatively flat.

(Operator Instructions) We have no questions coming, so please continue.

So ladies and gentlemen, these are difficult times. But despite the volatility, I'm encouraged by the direction each of our business lines has taken and the progress they're making. I believe that the investments we are making that will help us benefit from all the changes taking place in our industry. Have a good day, and thank you for attending our call.

Thank you. And ladies and gentlemen, this will conclude our teleconference for today. We thank you for using AT&T Executive TeleConference service, and you may now disconnect.