SEI Investments Co (SEIC) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SEI First Quarter 2022 Earnings Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Chairman and CEO, Al West. Please go ahead.

Welcome, everyone. On our call today, we have Al Chiaradonna; Phil McCabe; Wayne Withrow; Paul Klauder; Kathy Heilig, our Controller; and Dennis McGonigle, our CFO. Also joining us is Ryan Hicke, who I will be transitioning to the role of CEO on June 1.

Now today, I'll start by recapping the first quarter 2022. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. And after that, each business segment leader will comment on the results of their segments. As usual, we will field questions at the end of each report.

So let's turn our attention to the financial results of the first quarter 2022. First quarter revenues grew 28% from a year ago. Our first quarter earnings grew by 47% from a year ago. First quarter EPS of $1.36 grew 53% from the $0.89 reported in the first quarter 2021. And during the quarter, asset balances decreased by $9.4 billion, while LSV's balances decreased by $3.0 [billion in] (added by company after the call) balances.

In the quarter, we repurchased 1.7 million shares of SEI stock at a price of $58.42 per share. That translates into $101.1 million of stock repurchases. We had a successful sales quarter with net events totaling $28.7 million -- $27 million -- I'm sorry, $28.7 million, $27 million of which is net recurring. Each of our segments will cover the details.

The big news this quarter is what we have selected -- that we have selected a new CEO. He is Ryan Hicke. Ryan is no stranger to SEI nor to you. He has worked at SEI for 24 years in a variety of leading positions in asset management, processing and technology. In addition, Ryan brings a global perspective to his career, having worked half of his years at SEI outside of the United States and recently, provided leadership to a fast-growing startup. And finally, what's really important is he lives and breathes our culture, providing a role model for all.

And now I'd like to turn it over to Al to say hello. Al? Did I say Al? Ryan. What kind of slip is that?

Thanks, Al, and good afternoon, everyone. I appreciate the opportunity to speak to so many of you over the last couple of weeks. I thought I would take a brief minute to share some of the things I am focused on presently.

While we are in a very strong position strategically and financially, we need to continue to make changes to truly capitalize on our opportunities in the future. As the year evolves, you will see a continued focus on maintaining and accelerating growth in existing businesses, including margin expansion in private banking and segment expansion in other units, rapidly expanding our focus on new growth engines, including SEI Sphere and other relevant M&A activity; and reinvigorating our culture and talent strategy with an emphasis on infusing new skills, perspectives, thinking, including diversity all across the company.

I truly look forward to spending more time with all of you, and I'm excited to continue to work closely alongside Al and the team to hit the ground running in June.

I will now turn it over to Dennis, but I look forward to any questions today or in the coming weeks. Thank you.

Thanks, Ryan. Good afternoon, everyone. I'll cover the first quarter results for the investments in new business segment and discuss the results of LSV Asset Management. I'll also go over a couple of corporate items.

During the first quarter of 2022, the investments in new business segment activities consisted of the operation of our Private Wealth Management group, SEI Sphere, the modularization of assets and data integration of different platforms to deliver on our One SEI strategy and other investments.

During the quarter, the investments in new business segment incurred a loss of $7 million, which compared to a loss of $9.5 million during the first quarter of 2021. Approximately $4.1 million of expense during the first quarter 2022 is tied to our One SEI effort.

Regarding LSV, our approximate 38.6% ownership contributed $32.5 million in income to SEI for the first quarter of 2022. This compares to a contribution of $33.4 million income for the first quarter of 2021. The assets during the quarter decreased approximately $3 billion. LSV experienced net negative cash flow during the quarter of approximately $1.7 billion, with market depreciation of approximately $1.3 billion. Revenue for LSV was approximately $108.5 million for the quarter with $1.3 million of performance fees.

As Al mentioned, in prior -- and as we mentioned in prior disclosure, we received an $88 million contract termination fee during the quarter. This fee was recorded as revenue in our Private Banking segment, and had the net impact of increasing our EPS by approximately $0.47 per share.

As we have previously discussed and consistent with others in the industry, we continue to experience inflationary pressures on personnel costs. In addition, we continue to add talent to support our growth. This has had an impact on expenses across the company, particularly in our operational groups. We expect this pressure to be with us for the foreseeable future. Also, our expenses reflect a full quarter of costs associated with our recent acquisitions, including Novus.

Our effective tax rate for the quarter was 23.1%. We have also included in our earnings release additional information that you should take a look at. Please refer to our soon-to-be-filed 10-Q for more information.

I'll now be happy to take any questions.

(Operator Instructions) Our first question will come from the line of Ryan Bailey with Goldman Sachs.

I had a question for Ryan. And I was wondering what are the key strategic priorities that you have going forward. And maybe what are the areas of the business that you've spent the most time evaluating and thinking about?

I mean I think it's pretty much exactly what I reiterated when we talked last week, but also in the call a few minutes ago, when we look -- the strategic priorities are really to continue to have a clear focus on accelerating growth in our organic businesses and looking at ways that we can kind of reposition and maybe redeploy some opportunities or capital there.

But also when we do that, I think everybody in the room shares the view that we have a great opportunity to really start to focus on new business opportunities and new initiatives. And I think equally important, as I mentioned a couple of minutes ago, with workforce coming back, all the changes -- we have a really, really great opportunity to kind of refresh and reinvigorate what we believe is an advantage we have with such a talented workforce. So they're kind of the real -- the key 3 areas that we're going to continue to drive down.

And as time evolves down, I will provide much more transparency around what we're going to do, but we'll continue working with the team to formalize those plans.

Got it. And hopefully, I'm not trying to preview too much around this, but you had mentioned in your prepared remarks, looking to expand the margin in the Private Banking segment. I was just wondering is that a change in view around how that business has operated. Or is that sort of the same view as previously that you get the backlog implemented and that will come with healthy incremental margins?

Yes. Al is going to go through that in his remarks, Ryan. But I mean I think you're right, we're going to continue to focus on what we've spoken about in the past. In certain cases, we'll look to accelerate opportunities we have to expand margin.

Our next question will come from the line of Owen Lau with Oppenheimer.

Also, Ryan, could you please talk about how you want to maybe position SEIC to navigate through the current geopolitical tensions and rising environment, and maybe anything you would do differently based on what you said in the prepared remarks?

I'm sorry, Owen. Good speak to you. I'd missed the middle of that -- navigates the geopolitical tensions?

Yes, navigate through the current geopolitical tensions and also rising rate environment. Anything you would do differently, just like what you mentioned in the prepared remarks?

We're not really that impacted specifically in our day-to-day business by kind of specifically about kind of Russia, Ukraine. So for us right now, Owen, it's kind of business as usual. We'll obviously stay acutely aware of any influences or impacts, anything that have or would have on our employees or our business. But we're BAU on that front.

Got it. And then maybe one for Dennis on the LSV. I think on the press release, you also mentioned that earnings were down year-over-year due to negative cash flows from existing clients and also client losses, maybe could you please provide a little bit more color and update on LSV?

Sure. So it's kind of, to me, a tale of coming out of the tougher markets for them as a value-oriented firm and moving forward, being able to take advantage of the fact that they've kind of stuck to their knitting. Their performance on a relative basis has been very good and strong, and some are reflected by the $1.3 million performance fee in the first quarter. Last year, that number was about $0.3 million.

So in first quarter is usually not a quarter of performance fees for LSV generally as a firm. So their performance has gotten better. While their cash flows were negative, they -- it's hard to hear this in a way, but they've actually gotten -- they've improved as value has gotten the attention of investors. And one thing in talking to LSV, there's a lot more search activity in the value space that they're optimistic about relative to prospects for the year to capture new asset flows.

Our next question will come from the line of Ryan Kenny with Morgan Stanley.

First, a question for Ryan. I understand the announcement is fairly recent. So I don't think anyone is expecting a detailed comprehensive outline of the strategy yet. But just as a follow-up to the first question, just wanted to dig in a little bit about big picture on your approach to operating leverage. How do you think about balancing the need to invest to grow versus being a CEO more focused on expense management.

Sure. And I think it's kind of a couple of parts, Ryan. I mean, as we've said in the beginning, I mean, SEI has been a really fortunate and privileged position to be as financially strong as we are. And I think we're going to continue to look at how do we allocate that capital. And that will include investments that we're making today to look at ways maybe in the short term that we may redirect or redeploy some discretionary investments that we think best align with revenue opportunities, but also to continue to invest in new opportunities that we've either started in the last couple of years or things that we see on the horizon to position ourselves for future growth.

And then just a follow-up question for Dennis. So SEI had the $88 million termination fee as a revenue tailwind this quarter. Is that something that you want to reinvest into the business? Or is it something that you think would be distributed to shareholders through accelerated buybacks?

I mean ultimately, that's a decision for our Board to make relative to capital allocation from a dividend perspective. But clearly, just -- it's a good problem to have, to have a very strong balance sheet, to have highly liquid balance sheet and one that gives our Board as well as Ryan and Al optionality relative to investment opportunities or capital return.

So -- but that's something our Board will talk about, the logistics of the actual capital is that piece of business was signed through one of our foreign subsidiaries. So there's a little bit of a process to get that capital moved, which will -- has to be worked on before, ultimately, our Board here would address that issue.

Our next question comes from the line of Robert Lee with KBW.

I guess my main question, most of them were asked already, but Dennis, I'm just curious in the investments in new business. You called out that I think the ongoing costs from the One SEI initiative was $4 million. Can you just remind us or update us on kind of how we should think of? Is that kind of at a level where it's more of a permanent fixture around that $4 million? Or should we think of that continuing to kind of maybe trail off as we work our way through the year into next year?

Yes. I would expect that cost specific to that project will trail down as we move forward. But just a reminder, the investments in new business segment is an investment segment. So while it may trail down relative to One SEI, some of the technological investments we're making associated with One SEI, we -- based on -- particularly with Ryan -- building on Ryan's comments. There are other things and other ideas we have that we would probably reallocate some of that spending, too.

So I wouldn't look at it as a big opportunity for pickup on expense as much as continuing our ability to add to our asset base. So there's things in that segment. For example, we are investing in cloud, and that's part of that segment. We are investing in the data space, working with Snowflake. So the costs associated with that work is in that segment. So these are additional R&D projects at the company level, enhancing our learning, enhancing our abilities that we think will benefit most of our businesses, if not all of our businesses over time.

And the final question we have in queue at this time comes from the line of Michael Young with Truist Securities.

Al and Ryan, I understand you're not rolling out sort of any new thoughts or goals yet or anything like that. But just given kind of the long-term legacy of SEI, I'm curious, how much of sort of the legacy way of doing business is sort of on the table? And what sort of magnitude potentially have changed should we expect going forward? Is this more of a wholesale review of the way things are done? Could we expect balance sheet leverage to be an option, M&A to become more aggressive? Any larger shifts in kind of strategic thinking? Or is this more of a marginal change, that's just a question I'm getting from a lot of investors.

Which Al?

I think you or Ryan.

Okay. I'll say I feel that there should be a lot of change. And I'll leave the rest of it to Ryan.

I agree with Al, Michael. I don't think it's a wholesale review of what we're doing. We have a lot of really, really strong assets and things that we do really well. But it's not going to be marginal change, and we're going to continue to work through that. We have a tremendous opportunity ahead of us, and we expect to take advantage of that opportunity. So that's going to require a change.

Okay. And as a follow-up, just it's been mentioned a lot that you had international experience, and that was kind of the reason why you were selected for the role. Could you just talk about kind of the conversation with the Board there and what the opportunity set is ahead that you feel like made you uniquely qualified to take this position and kind of where the international piece is going to play in?

Yes. I mean Al mentioned that earlier. So I think part of it is when you look at our international kind of footprint and my time over there, a lot of it was really around starting new businesses, really trying to kind of put an imprint together with the other SEI folks on creating that culture and the environment that we're also proud of here, but really looking at ways that we could expand our growth opportunities, in many cases, leveraging things that we had in the U.S. were actually some of the businesses that we started there, bring some of those capabilities back here.

So I think it was a combination, Michael, of just the exposure to the global markets being so different than the domestic market, but a lot of that experience between '01 and 2012 was really around starting and growing new businesses, and that's something we highly value here, especially when you can do that alongside the right culture.

And we have no further questions in queue at this time.

We would like to remind you that during today's presentation and in our responses to your questions, we have and will make certain forward-looking statements that are subject to risks, uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements that appear in today's earnings release and in our filings with the SEC. We do not undertake to update any of our forward-looking statements.

Now I'd like to turn it over to the other Al, Al Chiaradonna. Al?

All right. Thanks, Dennis. Good afternoon, everyone. First quarter 2022 revenues totaled $213.5 million, which was up $95.9 million as compared to revenues from the first quarter of 2021. First quarter 2022 quarterly profit of $91.6 million was up $84.7 million from the first quarter of 2021. As Dennis mentioned, revenues and profits benefited from the onetime cancellation fee of $88 million, which netted $86 million in profit.

In turning to sales activity during the quarter, we closed approximately $8.4 million of net investment processing events, excluding the termination of HSBC, $7.1 million related to recurring revenues and $1.3 million related to onetime revenues.

During the quarter, we signed 2 clients of note. We signed an SWP agreement with Grove Bank & Trust, headquartered in Miami, Florida, currently running on a competitor solution, Grove Bank's selection of SWP represents the platform's continued success in the community bank space.

As I mentioned during the last quarter call, we've been working with HSBC to address their changing needs with respect to the business that was contracted in 2020. Last month, we filed an 8-K disclosing that HSBC Private Bank terminated one of its agreements with our U.K. subsidiary for convenience. We also discussed on that fourth quarter call, the sale of new business and alternative processing space with HSBC. This quarter, we will also sign an agreement with HSBC to move its U.S. investment processing book of business to the SEI Wealth Platform.

Our evolving relationship with HSBC demonstrates our ability to help our most complex and large clients, respond to ever-changing market environment, that impact our strategic goals. The changing environment for our most complex clients creates opportunity and adjustments in our relationships.

And turning to implementation activity. In the first quarter, we successfully installed 2 new clients from competitor platforms to SWP and installed 1 additional new client to our TRUST 3000 platform.

Tompkins Financial Advisors, the wealth management firm of Tompkins Financial Corporation, has successfully converted its wealth management business to SWP from a competitor platform. Central Pacific Bank, headquartered in Hawaii and a primary subsidiary of Central Pacific Financial Corp., also migrated their wealth management business to SWP from a competitor platform. We're also pleased to announce that Central Pacific is further expanding their relationship with SEI by adopting SEI's asset management distribution products to help grow their business and serve their clients.

Also, during the quarter, we successfully migrated Principal Financial Group's institutional retirement and trust business to our TRUST 3000 platform. We look forward to continuing to work with Principal and grow our relationships as partners in the industry.

As an update on our backlog, our total signed but not installed global backlog is approximately $54.4 million in net new recurring investment processing revenue, including the signings and implementations I just mentioned and the netting of the canceled agreement. We continue to work with our clients with longer tail type time lines as their business needs change and opportunities present themselves.

From an asset management standpoint, total assets under management ended the period at $25.3 billion, which was flat to the first quarter of 2021. Our cash flow for the first quarter of 2022 was approximately a positive $362 million. As we go through 2022, we remain committed to our strategy of building a global pipeline and associated backlog, matriculating that backlog, gradually improving our operating profits and prudently investing in the businesses to create sustainable growth. We have a talented team across SEI that is focused on these goals. We remain excited and optimistic.

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

(Operator Instructions) Our first will come from the line of Ryan Kenny with Morgan Stanley.

I know a few years ago, SEI was talking a lot about investing to bring on more global wealth players. And I understand you're still working with HSBC on several services, but it does seem like a lot of the new wins that are announced are more in the domestic, midsize, super regional camp. So I guess my question is, do you need to invest more to attract more global players? Or do you think that there's any strategic shift to focus more on the midsize or super regional institutions that, at least from the outside view seems to be more of your sweet spot.

Ryan, great question. I'll take it in 2 parts. So I think we continue to have some success on the global side. So in the fourth quarter of 2021, we talked about Waverton [Investment Management] (added by company after the call) and a piece of that alternative platform for HSBC. So we saw some wins there. But I also discussed in a comment on that call how we were reinvesting in some sales talent, reestablishing a sales culture there. And I think that's going to be a big ingredient to our success globally.

And then I think -- when you think about our global expansion, it's really been limited on the investment processing side to outside the U.S. anyway to being in the U.K. And that's really related to the complexities of managing tax, regulatory and different strategies. So we're kind of delivering. I don't think we'll be dialing that back. The investment in personnel right now is to try to see, as Ryan mentioned, can we continue to expand our organic growth in this IP by looking at that global environment.

And then the other part -- Ryan, the other part of your question, I'm so sorry. You are correct, we are having some good success in the regional and community bank space over the last 2 quarters, and that probably represents the most mature solution and the one we can sell the quickest and install the fastest, so I think that's a fair observation.

And then just one follow-up on the lost HSBC contract. Are there any expense offsets to revenue loss there?

So the -- as Dennis mentioned, the 88 -- the impact of the $88 million was $86 million. So there was about $2 million of that. Beyond that, the other stuff that we invested, we would be leveraging. So there's really no other expense lift out of that.

Next question will come from the line of Owen Lau with Oppenheimer.

So it looks like the margin has come down a little bit if you exclude the termination fee. Is there any kind of like onetime expense? I think you just mentioned $2 million. But what drove that margin decline? And if you can also remind me -- sorry, I may have missed that, the revenue and cost impact from HSBC Private Banking going forward, how should we think about that?

Yes. So Owen, thanks for the question. I think your first question was related to the slight margin deterioration in the quarter if you net out the cancellation fee from HSBC. And the 2 things that really drove that quite candidly, one was capital markets, so we saw capital market pressure on the asset side of our business.

And then secondly, as we discussed in the press release, and I think Dennis just mentioned, the competitive labor market and the pressures of that have caused us to make some investments in our talent to retain that talent, and you're seeing that impact our margins.

And then your second question, I think, was related to the $88 million. The net impact of that $88 million is the $86 million, and there's really nothing else inside that related to that cancellation. Of course, as we install the other HSBC business, we'll begin to invest in implementing that, which we already have, which is in those numbers in the first quarter. And then as they implement, we'll begin to recognize that revenue over 12 to 18 months. So there's really nothing else related to what has been canceled.

Got it. And then another -- and then the follow-up is related to the previous question. How do you think about like large-scale M&A outside of U.S. and U.K. in order to expand globally? Are you -- like is this option off the table or you would still consider that?

Owen, this is Dennis. I think large-scale M&A or just M&A in general is kind of driven corporately. And while one of the lenses we look through is how M&A can help enhance our growth opportunities and our strategic positioning in our existing businesses and certainly geographic expansion or acceleration of geographic expansion through M&A which would benefit any of our businesses, not just private banking, we would take a hard look at and be interested in considering. So it's really not a specific question for private banking as much as it is a strategic initiative of SEI, the company around one of our rationales for M&A.

Our next question will come from the line of Robert Lee with KBW.

Just on the backlog. So the 50 -- I think it was $54.5 million backlog of recurring. Can you maybe parse that down for us? I mean particularly since I'm assuming a fairly significant chunk of that is still Wells Fargo, which seems to be kind of open-ended in terms of when it may or may not begin converting. So what should we reasonably expect over the next 2 years of that backlog and where you sit today to convert or begin converting?

Robert, thanks for the question. The 54 and change in backlog, if you -- if we think about where that stands today over the next 12 months, about 25% of that would be converting. And then over the 13- to 24-month period, we should feel the remainder of that converting.

Your comment on Wells Fargo, yes, Wells Fargo is still in that backlog. And the biggest challenge with the backlog overall is large jumbo clients, they just take time. They have M&A, they restructure, they have leadership changes, and we continue to work with them in that as we implement those clients.

Yes. And maybe along those lines as a follow-up, unless I kind of misunderstood, I think a couple of years ago, that one of the idea was while converting the community banks is great and smaller regions is great to really kind of scale the platform you kind of needed to get more of the Truist, SunTrust kind of made more and more bigger and bigger banks, which, to your point, seems just to take a long time.

So I don't know, as you sit here today and you look at your pipeline, is there a reasonable expectation that you could see this an acceleration of those kind of big chunky wins that really will drive the scale on the platform? Or do you feel like this -- the pattern room with the kind of community and some of midsize or smaller regional bank is kind of -- that's quantity, that's kind of what we're going to reasonably expect for the next 18 months or 2 years?

Robert, that's a good question. When I think about the pipeline, the pipeline is healthy. We have good activity in the market. I think outsourcing trends in the market are leaning our way, which are helpful to us. I do think you're right. A lot of our pipeline activity has been in terms of wins and installations has been regional and community. We'll continue that because those are things that we know we're going to get up and get done.

The jumbos, we are focused on those. We are talking to them every day. They are active in the market. What I can't do for you, Robert, is predict when they'll actually close. Unfortunately, these sales cycles, it's not really driven by SEI's ability to close it. It's driven by the time it takes to negotiate it and then the time it takes to implement it. And those are just a little less predictable than your regional and community. But in no way are we shaping our pipeline strictly around regional and community.

We're going to continue to push forward on those jumbos. And then as those jumbos land, we'll discuss them. And it will come with the same caveats I mentioned on the last 2 calls, which is it's just hard to predict how a multiyear implementation will land, not just because of what we're doing, but because the banks themselves have development and integration they're doing on their side.

I appreciate that. And can I ask you maybe just -- I know you've given us back the funding of the backlog of 25% over the next 12 months, but I apologize I missed kind of the second part of your comments subsequent to the next 12 months.

Yes, Robert, I think you had said in your question, can you give me an idea of what it looks like over the next 3 years? And what I did was I said, on the 54, you could expect 25% of that to matriculate in 2022, and then you could expect the remainder of that to matriculate across '23 and '24. That's where those implementations fall today.

And our next question comes from the line of Christopher Donat with Piper Sandler.

I just had one more about the backlog. Last quarter, you quantified it at $81.7 million. And so this quarter, I think, $54.4 million. Can we think of the difference is solely HSBC? Or do some of the other activities affected the backlog or I say solely, but mostly HSBC? Is that the right way to think about the change quarter-on-quarter of the backlog?

Chris, that's a great question. Thanks. I think I can help you and I can provide some clarity. So yes, of course, HSBC is in it. But the truth of it is it has also affected by the 3 installations I talked about that happened in the first quarter. So that would negatively affect the backlog. It will drop down because we're matriculating that. But then it would be -- we would be really refilling that with the sales I just talked about in the first quarter. So while HSBC was a large number, there was still a significant amount of revenue matriculation and new revenue added back. And it's the combination of those events that give you that delta.

And our next question will come from the line of Michael Young with Truist Securities.

Just wanted to touch on kind of with the pandemic subsiding, it sounds like people are coming back to work more and more. Is that a tailwind to sales activity? Should we expect sort of an uptick in the pipeline building for new implementations all else equal? Or any other color there would be helpful.

Yes, Michael, good question. I think -- we've been kind of fortunate. One of the things we were able to do during the pandemic is think about how to digitize our sales channel. And we had some deals that I know my predecessor talked about that we closed almost completely remotely. So I don't think it slowed down our ability to reach clients. But it did slow down, I think, decision-making in some level because people were wondering where they stood and what they could do with the pandemic.

So I think to bring back of people is not going to be an accelerant of pipeline. These people have been working on that pipeline throughout the pandemic. We might begin to see people willing to meet at the client level, decisions a little bit quicker, but I can't tell you that I'm certain of that.

As I think about implementations, I would give you the same answer. Our implementations as of March, the year of the pandemic, we went digital immediately. So we have done almost all of our implementations in a fully remote environment.

Now what has benefited us is as the pandemic has waned and people have gotten back into the office, we are making more and more client visits. And I just think as you make client visits, the level of your intimacy improves. And as the level of your intimacy improves, opportunity should manifest itself. But I don't think it's going to change dramatically just because of people getting back to work.

Okay. Great. And then the last one, just maybe on pricing power. We're seeing obviously a lot of inflation. I think that was mentioned in terms of upward pressure on personnel costs. Are you all able to get sort of pricing power within contracts to kind of offset that impact? Or should we expect a little bit of margin compression as a result of kind of just core inflation pressure?

I mean I think as Dennis talked about in his -- I think the labor markets are tight. So I think we will have some compression inside those numbers today. I don't think it will be dramatic. I do think we're able to -- I don't know that I would call it a -- in reaction to inflation. I think as we continue to advance our solution, we can sustain and improve our price points across it. I think it's a little hard to say it in a general term across all deals, Michael, just because each deal has a negotiation attached to it because it's a multiyear contract. But I think we'll be able to preserve and probably modify our price point positively. I don't think we'll have to succumb to any significant pressures there.

And we have no further questions in queue.

Okay. Thanks. I'll pass it off to my friend, Phil. Phil, it's all yours.

All right. Thanks, Al. Good afternoon, everyone. For the first quarter of 2022, revenues totaled $156.9 million, which was 15% higher as compared to our revenue in the first quarter of 2021. Profit for the first quarter of $58.1 million was 8.7% higher as compared to the first quarter of 2021. While profits were strong, they were impacted by increased hiring and labor expenses in operations, offset by increased revenue. Our margin of 37% for the segment is closer to our previously discussed margin expectations.

Third-party asset balances at the end of the first quarter 2022 were $895.2 billion, approximately $12.1 billion lower than the asset balances at the end of the fourth quarter of 2021. This increase is primarily due to market depreciation of $8.7 billion and net client fundings of negative $3.4 billion.

And turning to market activity. During the first quarter of 2022, we had our highest sales quarter ever, with net new business events totaling $17.8 million, which are expected to generate net annualized recurring revenues of $17.1 million. In addition, we recontracted $7.5 million in recurring revenue. Highlights of these events include in our alternative market unit, we signed a number of new names ranging from startups to large global managers and our cross-sell strategy continues to resonate in robust sales to existing clients.

SEI was also selected to provide fund administration for 2 multibillion-dollar private equity firms. One was a self-administered firm and the other a takeaway from a competitor.

Our traditional market unit propelled our record sales quarter, highlighted by one of the largest collective trust conversions in the industry. This win will make SEI the leading provider of third-party outsourcing services in the CIT industry based on collective trust assets. We also added business across all other product lines with new clients, and expanded wallet share with many existing clients. In Europe, we continue to expand our ETF, private equity and private debt businesses, primarily through cross sales with existing clients.

At the end of the first quarter, our backlog of sold but unfunded new business stands at $37.7 million. So in summary, the business had another solid quarter with record sales, implementation of our backlog and continued client delivery. We remain optimistic and excited about our strong growth prospects and our path forward.

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

(Operator Instructions) Allowing a few moments, we have no one in queue at this time.

All right. Thank you very much. I guess you tuckered yourself out with Al and Ryan. Thank you.

Okay. Next up, we have Wayne Withrow with the update on the Advisory segment.

Thanks, Phil. In the first quarter of 2022, we continued execution of our road map targeted at building great futures for our clients. Some of the pillars of our strategy were on display in the first quarter highlighted by the following: continued sales growth of curated external fee strategists offerings as the demand for investment personalization continues to grow. The rollout of our new collaboration platform powered by the Oranj technology continues on schedule. And that sales process continue to evolve and we also named a new executive to take over the reins from a 34-year veteran.

Numerical comparisons of our financial results to Q1 of 2021 are included in the press release. Color explaining some of those comparisons include first quarter revenues increased from Q1 2021 due to positive capital markets and positive net cash flow. These increases were partially offset by some shift into lower fee liquidity products and a small reduction in our basis point yield rate.

Expenses were up, contributing to a decline in margins. Direct costs, including sub-advisor fees are reflected in this increase. Investments in our internal digital sales technology and in the integration of our client-facing Oranj platform were also factors. Like others at SEI, investments in our personnel due both to growth and the tight labor markets were a factor.

During the quarter, we had $1.3 billion in positive net cash flow. Of this total, nearly $1 billion was into our managed asset programs. In Q1, we recruited 81 new advisers and reengaged 13 existing advisory firms. We have seen many of the reengaged advisers from last year continue as advisers producing cash flow this year, validating our decision to direct some of our sales focus to this activity. Our pipeline of new and reengaged advisers remained active.

As we continue into 2022, we will focus on our goal of building brave futures for all our clients. To this end, focus areas will be: first, to continue to enhance the client-facing components of our platform; second, the creation of an industry-leading multichannel sales process incorporating both digital and in-person components; third, continued evolution of our investment offerings to enable mass personalization. And fourth, an enhanced focus on the pure RIA channel. We continue to make good progress, and I believe we are well positioned even with uncertain markets and global dynamics.

I now welcome any questions you may have.

(Operator Instructions) Our first question will come from the line of Robert Lee with KBW.

Just a quick question on, I guess, expenses. So I mean, the expense was pretty similar to the fourth quarter, but obviously up dramatically from where it had been kind of a year ago in the course of inflation and wage pressure and presumably some increased travel and whatnot around -- you move past the steps of COVID. But is there anything -- what else should we think is in that? And should we think of this as really kind of a new base level 64 -- kind of mid-64 range to work from? I just want to make sure I'm not -- double-check that maybe there's not some other things that could be more transitory running through the expense.

Hey, Rob, can I ask you to -- I'm having trouble hearing you.

Okay. I'll try this. So on the expense levels. I'm just trying to get a better read, is there anything that we should think of as being somewhat transitory, maybe new spending initiatives in the expense base? Or is this $64 million that's been in the last couple of quarters really is kind of an all-in ongoing or I'm just trying to see if there's any reason to think of the pace could moderate somewhat as we go forward?

Yes. I think the comments about expenses, I think the one item you need to keep in mind is we talk about a shift in some of our investment offerings. A major element here is when we sell internally managed mutual funds, a lot of the advisory fees are embedded in the revenue numbers, so the revenue number is net of the sub-advisory expenses. We go to more sub-advised accounts, whether it be by us or someone else.

The P&L, the accounting is such that the sub-advisory expenses appear as a separate line item. So revenue growth will be reflect -- will also contain expense growth because it's not -- the revenue number is not net of those expenses. So I think that's the biggest item I think we need to be aware of (inaudible)

Okay. Fair enough. And then also just curious -- sorry, also just curious, as the quarter progressed, things have obviously gotten more volatile and more negative in a way. So any color you have if you think about your new business trends kind of the pattern as you got through the quarter that you're starting to maybe besides some movement of cash starting to see, it impact new business activity as people kind of pulled back? Are you seeing anything like that at all?

Yes. I'm catching some of it, Rob. I think if the question is sales, I mean, I think our sales activity is strong. I mean we had a very strong new adviser quarter. I also think that we had -- when I look at the quarter, we had a very good quarter on sales to our existing advisers, too.

And advisers getting cash flow.

And in cash flow, I mean, I think that -- is that was your question? I mean I think we're experiencing a lot of positive growth, and I think that trend is going to continue, if that's your question.

Yes. I mean I apologize if it's not coming through clearly -- I'm on the cell phone, so my apologies. But if -- I guess I was also thinking really the pattern through the quarter. Has the environment maybe got more challenging or more volatile? What was the pattern as you got through March into April, you're kind of seeing the pace of activity moderate or change at all?

Yes. I think that the -- I think a lot of the -- when you look at sort of the interest rate inflation and then the Ukrainian war shock, I mean, I think we saw that go through the markets and that kind of impacted the flow. I think that's going to stabilize some, but it's hard for me to kind of predict what's going to happen.

And we have no -- we just had one queue up. It comes from the line of Michael Young with Truist Securities.

Just wanted to ask, there's been a lot of news lately about potentially a competitor in the TAMP space, potentially changing hands. I'm just curious maybe historically, when you've seen that take place kind of in the industry, is that a benefit to you guys? And any way to kind of think through how that could impact your business segment specifically?

Well, it's -- rather than talk about it if it's a benefit or a detriment, I think that any time there's disruption, we like to call that money in motion. And we -- it's kind of our job to look at any disruption in money in motion as kind of an opportunity. So what will happen, I don't know. But it's our job to kind of figure that out.

Okay. Do you guys usually put together -- I mean, do you do special marketing? Or should we expect any kind of ramp in any efforts if something like that were to happen, where there is money in motion, so to speak?

To be honest, I'm not really comfortable talking about sales tactics before I do them.

Okay. All right. Fair enough.

For obvious reasons.

Understood.

So it's all of the above.

You'll find out when everybody else does.

And we have no further questions in queue at this time.

All right. Thank you very much. I will now turn it over to Paul.

Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the first quarter of 2022. First quarter 2022 revenue of $86.8 million, increased 3% compared to the first quarter of 2021. Operating profit for the first quarter of 2022 were $41.5 million, and decreased 9% compared to the first quarter of 2021.

Revenue increase was driven by full quarter revenue contribution from Novus and Atlas, offset by net client losses. Operating profit was negatively impacted by operating and amortization expenses from Novus and Atlas and higher compensation expenses. Operating margin for the quarter was 48%.

Quarter end asset balances of $94.2 billion reflect a $5.1 billion decrease versus the first quarter of 2021. This was due to net client losses. OCIO net sales events for the first quarter were a negative $4 billion. Gross sales were $800 million and client losses totaled $4.8 billion. First quarter new sales were diversified across U.S. endowment and foundations, U.K. fiduciary management and health care. SEI Novus had 3 new sales in the quarter. The client losses for the quarter were predominantly due to unsuccessful client rebids, a DB termination and a merger of a long-standing health care client into a very large health system.

We continue to see client rebids as the OCIO marketplace is very competitive. These rebids provide near-term headwinds. The unfunded client backlog of gross sales at quarter end was $695 million.

For the year, we are focused on stabilizing our client base, distinguishing our OCIO solution, selling new OCIO and U.K. master trust relationships and selling our enhanced ECIO proposition powered by SEI Novus.

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

(Operator Instructions) Our first will come from Ryan Kenny, Morgan Stanley.

Wondering if you could update us on how material the current interest rate outlook is for your business. At the end of last year, the 10-year yield was at 1.5%, and now it's quickly approaching 3%. So just wondering how does that impact the funding status of your DB plans? And how big of an impact do you think that translates to revenues?

Yes. As it relates to revenues, it doesn't really impact the revenues that much because we have a segregated fee for our OCIO relationships. Now with respect to funded status, we have seen a little bit of a tick up with regard to funded status. With that said, Ryan, most of the clients that are on a termination path or have made a decision to close their defined benefit plan, part or most of the portfolio is the fees with long-duration fixed income. So as the interest rates go up, the liabilities come down as we know, but also the assets come down because the assets are there to, in a sense, immunize part of the portfolio.

So it hasn't really materially changed the funded status, which is why you have LDI portfolio, which is why when rates go down, it was a protection strategy. So really, what comes into play is whether a company has the cash and the wherewithal to want to kind of close out that deficit between where the assets are and where the liabilities are. We still see most do not want to do that. They might curtail part of it. So I don't think it's really changed the position that dramatically, even though with interest rate rising.

Next, we'll go to Robert Lee with KBW.

Great. Just a real quick question, Paul. I think I just missed what the net new client fundings were in the quarter. And I apologize if I repeat it, but I just missed it.

Yes, you're really making me look bad here, Robert. But the gross sales were $800 million. The losses were $4.8 billion, so the net was a negative $4 billion.

Okay. And can you maybe just real quickly, maybe you touched on it, but on the competitive environment, you talked about kind of the increased competition in the OCIO market, and you're obviously trying to diversify away from that. But I know if you look at it today, any signs of just given market weakness, volatility that's in any way changing the -- maybe it's too early, but changing the competitive dynamics, some of the smaller players that your resources to compete. Just trying to get a updated sense of the competitive environment.

Sure. I mean it's still a large number of competitors. Some are very large. We're safely in the top 10 as far as OCIO assets under management. We would think there's going to be a strain on the lower sized ones, the ones that are less than $25 billion, who may not have scale and leverage, especially as clients diversify and get more into alternative investments.

One of the beauties of the Novus transaction in addition to its unbelievable capability of powering our ECIO solution, is we're using that technology as us as the OCIO firm and showcasing some of their advanced analytics to more sophisticated OCIO clients. That, in its early days, has already been a point of differentiation of showing a very advanced capability look through transparency detailed reporting that we think is differentiated versus what other OCIO firm.

So the Novus transaction, really, we think, will benefit us 2 ways, not only on the ECIO front, which I've messaged before, but also on these larger, more competitive OCIO deals, which are very important to us.

And we have no further questions in queue.

Great. I'd like to turn the call back over to Al West.

So, ladies and gentlemen. We're excited about Ryan. He is going to do a great job. And for me, it's bittersweet, since going public in 1981, some 41 years ago, I have been involved in the quarterly analyst call, a total of 164 times. Enough is enough. In my new role for me as Executive Chairman, I'll see you at strategy days and on your visits at SEI. I look forward to it. And I want to thank you for attending our 164th quarterly call, and have a good day. Thank you.

Ladies and gentlemen, that does conclude today's conference. I'd like to thank you for your participation. You may now disconnect.