Edited Transcript of SEIC.OQ earnings conference call or presentation 22-Jul-20 8:30pm GMT

OAKS Aug 25, 2020 (Thomson StreetEvents) — Edited Transcript of SEI Investments Co earnings conference

OAKS Aug 25, 2020 (Thomson StreetEvents) — Edited Transcript of SEI Investments Co earnings conference call or presentation Wednesday, July 22, 2020 at 8:30:00pm GMT

* Alfred P. West

* Dennis J. McGonigle

* Kathy C. Heilig

* Stephen G. Meyer

SEI Investments Company – Executive VP & Head of Global Wealth Management Services

* A. Michael Lipper

Ladies and gentlemen, thank you for standing by, and welcome to the SEI Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Alfred P. West, SEI Investments Company – Chairman & CEO [2]

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

I will start by recapping our situation in second quarter 2020. I’ll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each business segment leader will comment on the results of their segments. Then finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report.

Before we cover the results of the second quarter, I will speak to the set of circumstances we face today. Around the globe, we are dealing with the COVID-19 pandemic. To defeat this foe at our doorstep, we are all involved. And from the beginning of this health crisis, our priority has been on safety and health of our employees and their families, along with the seamless delivery of service to our clients. We first transitioned 99% of our workforce into their homes, working remotely without compromising the robustness of our operations or the integrity of our services.

Lately, we have begun to show — we have begun the slow transition of certain employees back to the office. So far, we have returned approximately 200 employees to the workplace. I am incredibly grateful to our workforce for transitioning both workplace to home and home to workplace and all the while supporting our clients, each other and our communities.

The strengths of SEI shine best when the challenges are extreme. At SEI, we take immense pride in investing for the long term. We have proven business models that have been shaped over the past 50 years of experience. They are the bedrock of our ability to weather the uncertainties of today and emerge from the current crisis stronger and better positioned to take advantage of tomorrow’s opportunities. Our secret to the success is straightforward: remain focused on keeping our workforce healthy and productive, invest in our best-in-class technology, innovate continuously and deliver world-class service and solutions to our clients. We will also be relentless in executing on our strategic vision and launching the growth-generating initiatives we believe will be at the heart of our future successes. We look forward to sharing our progress with you. And while our accomplishments during the war with the COVID-19 are impressive, and we’re proud of them, the real heroes are those folks on the front lines caring for others and saving lives. We honor and thank those who are making the true sacrifices.

So let’s turn our attention to the financial results of the second quarter 2020. Second quarter earnings decreased by 20% from a year ago. Diluted earnings per share for the second quarter of $0.68 is a decrease of 17% from the $0.82 reported for the second quarter of 2019. We also reported a 2% decrease in revenue from second quarter 2019 to second quarter 2020. The first and second quarter earnings results were affected by the arrival of the COVID-19 pandemic. With the arrival of COVID, came a major downturn in capital markets. This caused our noncash asset balances to fall by $27.8 billion in the first quarter and rebound partially in the second by $14.8 billion, for a net decrease of $13 billion by the end of the second quarter.

For LSV, their balances during the first quarter dropped by $36.6 billion and rebound in the second quarter by $10.3 billion, for a net decrease of $25.3 billion. Also during the second quarter, we repurchased approximately 1.6 million shares of SEI stock at an average price of $54.48 per share. That translates to $89.5 million of stock repurchases during the quarter. In the second quarter, we also continued our investment in the growth-generating platforms. The newest effort is One SEI, which is a large part of our growth strategy. As you will recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets and all other platforms. As a byproduct of the investments we make in the second quarter, we capitalized approximately $6.1 million of development and amortized approximately $12.2 million of previously capitalized development. To date, we have not capitalized any of the One SEI work.

Turning to revenue production. Second quarter sales events, net of client losses, totaled approximately $22.1 million and are expected to generate net annualized recurring revenues of approximately $16.6 million. Clearly, we are encouraged with this year’s sales results. They reflect the fact that throughout the company, we have successful and entrepreneurial sales teams driving revenue. Our unit heads will speak to their specific sales results. In addition, a key objective of our business, particularly in these times of uncertainty and volatility, is to deliver smooth operations. This transition of our workplace from centralized operations to remote interconnected nodes went seamlessly, which, again, is a credit to the work ethic and customer commitment of our employees. We know that things will never be the same, and we will need to adapt to new mental models and realities. We look forward to catching the opportunities’ inherent and significant change.

This concludes my formal remarks, so I will turn it over to Dennis to give you an update on LSV and investment in new business segment. After that, all segment heads will update the results in their segments. Dennis?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [3]

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

During the second quarter of 2020, the investments in new business segment continued its focus on the ultra-high-net-worth investor segment through our Private Wealth Management group and additional business and research initiatives, including those related to our IT services business opportunity and the modularization of larger technology platforms into stand-alone components for the wealth management and investment processing space, to deliver on our One SEI strategy.

During the quarter, the investments in new business segment incurred a loss of $10.1 million, which compared to a loss of $7.5 million during the second quarter of 2019. This increased loss reflects an increase in investments specifically related to our One SEI strategy. We accelerated our efforts on this initiative during the second quarter, making significant progress. Of our expenses in this segment, approximately $8 million is tied to that effort. The One SEI strategy, as Al mentioned, is a company-wide initiative to open business opportunity across our entire company as well as creating new business lines. We expect losses in this range for the remainder of the year in this segment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the second quarter. LSV contributed $28.3 million in income to SEI during the quarter. This compares to a contribution of $37.8 million in income during the second quarter of 2019. Assets during the second quarter grew approximately $10.2 billion. LSV experienced net negative cash flow during the quarter of approximately $1.9 billion, offsetting market appreciation. Revenue was approximately $94.6 million for the quarter with no performance fees. During the quarter, our effective tax rate was 23.3%.

Before I turn it over to Steve, I’ll be happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll go to the line of Chris Donat with Piper Sandler.

We’ll go to the next line of Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [2]

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Just on the investments in new business segment, you mentioned the expenditure remained around like the Q2 levels for the remainder of the year. Any thoughts on timing or magnitude of when they will fall off beyond 2020?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [3]

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Yes. I mean we did take an opportunity to accelerate things this quarter. So there is an expectation that they’ll start to fall off beginning of next year. They won’t go away completely. But our goal — and other folks on the call also could address this, our goal is to really have this behind — all the work behind us by — in the first half of next year. But we certainly should see a decline entering next year.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [4]

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So I guess, is there any way to like to categorize at a high level what — will 2021 expenses look a lot like — more like fiscal ’19? Is that the right way to think about it?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [5]

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Yes, obviously, more like fourth quarter.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [6]

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More like fourth quarter? Okay.

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [7]

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Yes.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [8]

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And then anything on LSV, on the pipeline? Obviously, I think that some of the investment performance there has been difficult. But anything that you’re hearing on the pipeline as we look forward?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [9]

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Yes. I mean similar story to some of the prior quarters. Even though they had net negative cash flows, it was really blended of — they did sign new business, some significant-size accounts during the quarter. They lost one large account in a global product, and that was really the — what carried really their net negative event. And from what we hear from the leadership at LSV, they are active in the market now. We all know value is not the segment of the market that people are in love with right now. And that being said, deep value is even less and people are less in love even with deep value. But it’s interesting that when we talk to LSV in Europe, I get really their perspective on when they’ve gone through these tougher cycles in the past. A lot of firms that may have been in their space would — they — the firm itself would capitulate, whereas LSV is very disciplined. They know what they’re good at. They believe in what they’re doing. They have strong conviction that the sun will shine again, and they are going to do really well when it does.

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Operator [10]

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Next, we’ll go to the line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [11]

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My question were just asked.

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Operator [12]

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And next, we’ll go to the line of Michael Lipper with Lipper Advisory services.

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A. Michael Lipper, Lipper Advisory Services Inc – Chairman, President & CEO [13]

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Do you have any more current information on LSV since the end of the quarter? There is evidence that value funds last week started to outperform growth. Are they participating on that? Or is that not yet down to the deep value?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [14]

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Yes. Really, I guess I would comment on things that are kind of post quarter. It’s safe to say that if the value segment of the market begins to outperform, that will — they will definitely participate in that. And now their segment of value being more deep value, it wouldn’t be on an equal footing as the broad value space. But clearly, they would participate in the improved performance of value. And as we remind ourselves, we’ve had these moments over the past couple of years, particularly over the past year, of value having a strong, very short period of recovery and then only to be overwhelmed by the tech sector again.

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Operator [15]

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And next, we’ll go to the line of Ken Hill with Rosenblatt.

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division – Senior Equity Research Analyst [16]

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Just had a quick one on the COVID-19 kind of work from home. It seems like you guys moved pretty quickly to that digital type of environment. I’m wondering as far as how that relates to the One SEI spend. If there’s anything that’s maybe precluding you from moving further down some of those paths or things you would accelerate or things to get markedly better from here? Or kind of conversely, if things get markedly worse, does that increase the spend or decrease the spend at all as far as the One SEI type strategy there?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [17]

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I think we’re — generally, that we were able to get some more assets on this project from some of the firms we work with on this type of work, and I don’t see that changing one way or the other. And the work on One SEI is — really isn’t affected by whether we’re working from home or not. I mean the work will continue apace.

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Operator [18]

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And next, we’ll go to the line of Chris Donat with Piper Sandler.

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Christopher Roy Donat, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [19]

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I did want to ask just about the geography, the income statement. You referenced in the release that there were some higher travel — or sorry, lower travel and promotional expenses. Can you just help us understand where those appear in the income statement lines?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [20]

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Yes. Travel would be in the — that would show up kind of in facility supplies and other costs.

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Christopher Roy Donat, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [21]

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Okay. Got it. So as we think about that going forward, that’s going to be dependent on how much travel goes on and promotion in the — whatever broader economy?

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Dennis J. McGonigle, SEI Private Trust Company – Executive VP & CFO [22]

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Right. Yes, yes. When you can come visit us again.

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Operator [23]

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

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Presentation

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Alfred P. West, SEI Investments Company – Chairman & CEO [1]

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Thank you. And with that, I’ll turn it over to Steve and he’ll give you an update on private banking and Investment Manager Services.

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [2]

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Thank you, Dennis. For the second quarter of 2020, revenues for the segment for private banking totaled $107.7 million, which was down 7.2% from the second quarter of 2019, which was due primarily to previously announced client losses and a decrease in our asset management revenues.

For the second quarter of 2020, quarterly profit for the segment was down $8.3 million and thus breakeven as compared to the second quarter of 2019. This decrease was primarily driven by the previously announced client losses and a decline in our asset management revenues.

And turning to sales activity. For the quarter, we closed $26 million of gross recurring sales events and recontracted 11 clients for another $17.6 million in recurring revenue, which, in total, solidified $43.6 million of recurring revenue during the quarter and resulted in $5.1 million in net new recurring sales events. The average term for our recontracts this quarter was 3.3 years. We had no client losses during the quarter. In addition to our recurring events, we closed $3.6 million in onetime sales for the quarter.

We are pleased to announce that we recently have expanded and extended our relationship with our longtime client, First Horizon Bank. First Horizon has been an SEI client since 2003. In July 2020, First Horizon merged with IberiaBank, which is currently running on a competitor platform but will migrate their business to SEI in 2021. This deal allows us to continue providing our current scope of technology and services to the new larger organization.

Additionally, as we mentioned last quarter, we are pleased to announce that we recently have expanded and extended our relationship with our longtime client, SunTrust Bank, which last year merged with BB&T to create Truist, the sixth largest bank in the U.S. This deal allows us to continue providing our current scope of technology and services to the new larger organization. Another event in Q2 was a large migration of Schroders Personal Wealth accounts that continue as part of SEI’s relationship with Fusion.

And turning to implementation activity. In the second quarter, we successfully converted 3 clients to the SEI Wealth Platform, Hills Bank & Trust, and Dorsey & Whitney Trust Company, both existing TRUST 3000 clients; and Connor Broadley, a new U.K. client also brought live on SWP in a 100% remote environment.

In late Q1, both SEI and our client partner teams immediately adjusted to remote environments and met all milestones and live dates to avoid any disruption to our clients’ businesses. The teams have enhanced our remote training and implementation capabilities and the success of these conversions will ensure our continued ability to bring clients live under unforeseen circumstances. This capability to finalize these implementations during these disruptive times is a testament to our clients, our workforce and bodes well for the future.

As an update on our backlog, our total signed but not installed backlog was approximately $76.3 million in net new recurring revenue. From an asset management standpoint, total assets under management ended the period at $22.9 billion, representing a 2% increase from second quarter of 2019. Our AUM increase was due to a market appreciation. Despite end-of-period assets being up, our average assets during the quarter were down, which caused our revenues to be down for the quarter. Our cash flow for the second quarter of 2020 was a negative $483.5 million.

And turning to the business in general. Despite the ongoing pandemic and challenges that has brought, we continue to operate business as usual, and our workforce continues to rise to the occasion and across our company, have executed extremely well. On the prior quarter’s call, I outlined our focus for the year. These priorities remain true. And as we enter the second half of the year, we continue to center our efforts on growth. This includes continuing to manage through the downward pressure of lost business we have previously discussed, continue to push our One SEI strategy and continue the expansion of our markets and solutions. We will also continue to expand our capabilities in the market across our platform, implementations and solutions. While this will result in our expenses upticking in the next few quarters, I view this as an investment in our business and to support the implementation of our strong backlog of revenue.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first, we’ll go to the line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [2]

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Just a couple of quick questions. First one is I just want to make sure I’m kind of thinking about the movement with all the sales, I mean, pretty high gross sales, recontracting. But relative to that, kind of the net recurring revenue seemed, I guess, low. So should — does that kind of factor in down on maybe some of the recontracting and whatnot that you were, I guess for lack of a better way, price concessions or something that kind of offset that you kind of factored into that $5 million net number?

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [3]

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No. I know I threw a lot of numbers at you, Rob. So let me explain. So in the recontracts we did in Q2, our — across the board, our fees pretty stayed the same. I think in total, the net down was less than 1% of total fees that recontracted. I think the delta that you’re looking for there, the $26 million gross, that includes the couple of clients I mentioned that literally went out for large — had large mergers and put their business out basically into the market. So we had to go — even though they are clients, we sell to those clients, and we obviously were successful. And while if we had unfortunately lost the business, which we didn’t, I would have announced and netted the loss of the current revenue. I’m not going to take credit for the current revenue, even though it was an active sales agenda that’s in the door. The only net that I’m going to announce that’s in that $5.1 million is the net new up revenue.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [4]

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Okay. I understand. That makes sense. Thank you for clarifying that. And I’m just curious — I mean, some very sizable backlog. But given the environment and as you look forward, what is the thinking about kind of the — versus original expectation around the pace of putting the backlog to work in the sense of — our — assume a lot of banks are pretty focused on other things at the moment, even things are running efficiently, work from home. But are you expecting that it’s going to fund over a longer period of time than maybe you did January 1?

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [5]

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Yes. So it’s a great question, Rob. So there’s — what I’d say is, yes, we’ve seen some delays in it and obviously, this pandemic has impacted that. But I think pointing out to the 3 conversions we had during the quarter, I think we’ve proven we can do this in a remote environment. And I think that we’ve certainly relayed that communication to our client base, and I think they’re very eager to continue. With that said, I’d say right now, as I’m looking at the backlog, I would say about 50% of it, as of right now, we are hopeful that we’ll fund within the next 18 months, 50% over — extended out past 18 months. Will that change a little bit? Yes, probably. Do I think it will drastically change? No, I’m hopeful not. And I’m hopeful, and that’s why I called out the fact that we did these conversions and implementations in a remote environment. So while some of the larger clients do have other things to focus on, we still do move all of our implementations and conversions and our backlog, we are active. I just think the longer this goes, yes, could there be some delays, but I don’t think they’ll be — at least we’re not expecting right now, significant delays.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [6]

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And maybe if I can squeeze one more in. With a strong kind of recontracting, keeping clients that were at to bid, I’m assuming a fair amount of that kind of was in process before everything kind of hit the fan more or less. So in terms of new sales activity, are you starting to now see that kind of stretch out more just like the…

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [7]

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Yes. I’d say — yes, so as far as the new activity, what I’d say is it’s very engaged and active. So in the U.S. alone, we have over 22 active agendas that we’re pursuing right now, and I’d say they are all still moving. My prediction, and I said this on the prior quarter call, I think it will delay a little bit. I just think — especially for new business, I just think doing the due diligence and going through everything you have to do is a little bit harder in remote process. There’s a lot we can continue to do and we are doing through virtual presentations. But I just think the end decision-making and contracts signing might be delayed a little bit. But it’s not like things were put on hold or pause. Things are moving, and that’s very positive from my standpoint. And while I do believe things might push a quarter or 2, I think we’re seeing, I feel hopeful that a number of these agendas will come to fruition this year.

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Operator [8]

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And next, we’ll go to the line of Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [9]

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So I just want to go back to the last — the first question previously. And just to be clear, the only number that we should really be looking at as far as sales is the $5 million, right? And the $21 million delta is business that you already had that just is remaining at SEI, is that correct?

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [10]

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Yes. That’s a good way to look at it. However, what I’d say is I don’t think $5.1 million is the only number, you want to be concerned about. Obviously, in our business, we’re driving 2 things right now to achieve growth: retention of our current revenue and expansion and growth of our current revenue. And I think the number that I would focus on, while I understand the $5.1 million is one that drives new revenue and new growth, we basically secured $43.6 million, which is a strong number in the quarter. So I think that’s not a number to pass over.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [11]

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Yes. Okay. That all makes sense. And then secondly, just could you give us an update on the competitive environment, and to the extent possible, bifurcate what you’re seeing at larger FI versus competition in the smaller FI segment? And then lastly, any thoughts on some of the announcements out there, I’m thinking like State Street, FNZ? Any impact competitively that could have on SEI longer term?

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [12]

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Yes. So 2 — I think you have really at the heart 2 questions there. So the first one, I’d say, Chris, the competitive environment remains the same. We’re still seeing the same competitors that you know well, competing with us. I think everyone is dealing with this new normal and the pandemic. But we’re staying in our lane and do what we do best, and I think that’s still resonating very well. The power of our platform, our people, our technology is still resonating, and I think we have a very strong value proposition. So from a competitor standpoint, while I look at them, I’m focused more on what we’re doing and sticking to our playbook.

As far as announcements, there’s always announcements. There’s been consolidation in this industry. The specific one you brought up on FNZ, so it was announced and made public this year, State Street’s wealth management business — services business, which is part — it’s been a client of ours for a long time, they sold off that business to FNZ, which is a competitor overseas. So that business is still a client of ours and still under contract. And we have talked to the folks at State Street, and we’re in discussions with them what that means long term for us, but really no update on that. What it means from a competitive standpoint, it’s another competitor really from outside the U.S. entering the U.S. market.

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Operator [13]

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I have no further questions in queue at this time.

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Presentation

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [1]

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Okay. Thank you. So if there’s no questions, I’ll turn to Investment Managers.

So turning to the Investment Managers segment. For the second quarter of 2020, revenues for the segment totaled $119.3 million, which was $10.1 million or 9.3% higher as compared to our revenue in the second quarter of 2019. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion.

Our quarterly profit for the segment of $44.7 million was $3.8 million or 9.4% higher as compared to the second quarter of 2019. Higher profits year-over-year were primarily driven by an increase in revenue, offset by a smaller increase in personnel expense and investments. Third-party asset balances at the end of the second quarter of 2020 were $668.6 billion, approximately $57.8 billion higher than the asset balances at the end of the first quarter of 2020. This increase was due to net new client fundings of $19 billion and market appreciation of $38.8 billion.

And turning to market activity. During the second quarter of 2020, we had a strong sales quarter with net new business events totaling $15.2 million in recurring revenue as well as recontracts of $9.9 million in recurring revenues. Our backlog of sold but not yet implemented events stands at $34.6 million at June 30, 2020. Our events for the quarter included the following highlights. In our alternative market unit, sales to existing clients were robust as many of our larger sophisticated managers seized market opportunities and launched new products or deployed additional capital. In addition, we were selected by a $60 billion debt diverse manager to automate their fund subscription process and a start-up venture capital firm for full administration. In our traditional market unit, in addition to continuing our momentum with collective investment trust and all product lines for new and existing clients, we also had success expanding middle office servicing relationships with 3 existing clients.

In Europe, private credit and private equity continue to be main drivers of new names as well as cross-sells with existing clients. And in the family office services unit, we’ve signed 7 new single-family office clients to the Archway Platform and continue to see strong demand from this segment. From an overall standpoint on the market and our business, the word engaged comes to mind. We see our clients and prospects highly engaged with us as we continue to navigate through the pandemic and new business model of work from home.

Across SEI, from our sales team to our frontline operations, our workforce has continued to be nothing less than impressive in the resiliency and execution in this new norm. It is noticed and appreciated by our clients. While we see some slowing in the process of new sales, we see this as a delay, not a stoppage, and we will remain highly engaged in the market with clients and prospects. The value of our platform, technology and services shines well in disruptive times like these, and we feel well positioned to execute on our growth strategy.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll go to the line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [2]

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A question on margins. I mean margins in this business are holding up really well. I think if my numbers are right, you may have had your highest margin in at least over the last bunch of years, maybe ever. So do you think that maybe you’re getting to a scale in this where maybe your level of profitabilities at least, call it, a couple of hundred basis points higher than where maybe had run historically, call it, that 35-ish percent range, now it looks like — getting more like close to 36%, 37% and change. Is that fair? Do you think ultimately it’s…

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [3]

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Yes. So — yes, I get you, Rob. So what I’d say is what I always say, I’m comfortable with this business being in the mid-30s. That means, over some of the quarters, it might bump up, 36%, 37%; it might bump down, 33%, 34%. I do think the business has been at scale. I think with the larger clients base we’ve had and really grown over the past 5 years, obviously, that adds a good bit of scale for the business. And listen, we’re getting better and we’re adding more automation and more tools and investing in our business. So that helps.

I do think the way to look at it, though, is not really quarter-over-quarter, it’s year-over-year and how that trend goes. I’d say this quarter, we had a lot going on. We were doing a lot. There was a lot of client movement. But there are still things that I’m looking at that I continue to want to invest in and build-out for sustainable growth, and that’s the most important to me for the future. So could the business tick up a little bit over 35%? Sure, it could. But I do think it’s going to be within that range for a while because I do think there will be continued investment we’ll make.

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Operator [4]

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

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Presentation

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Stephen G. Meyer, SEI Investments Company – Executive VP & Head of Global Wealth Management Services [1]

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Okay. Great. If there’s no questions, then I’m going to turn it over to Wayne Withrow to discuss the Advisors segment. Wayne?

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [2]

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Thanks, Steve. During the second quarter of 2020, we started to settle into an operating model reflecting the COVID-19 crisis. Both the migration to this model and improvements to it are a focus for us.

Second quarter revenues totaled $94 million. These revenues were down 6% from the second quarter of last year. The impact of COVID-19 on market valuations and a corresponding derisking of portfolios were the dominant factors reflected in these results. Expenses were down 1% compared to the second quarter of last year. As Dennis predicted on the first quarter conference call, we had significant savings in the travel and client event area. These were mostly offset by increases in personnel costs, some technology increases and increases in sub adviser fees, mostly attributable to growth in our SMA program.

Our profits decreased 12% from last year’s second quarter, following our revenue decline and reflecting our leveraged operating model. Our assets under management at the end of the second quarter was $66.6 billion. This is down roughly 1% from June 30, 2019, but reflected recovery of much of the steep market declines in March following some recovery in our cash flow during the first quarter as second quarter net cash flow lost ground and was a negative $642 million. We recruited 63 new advisers during the quarter, in line with our first quarter recruitment rate.

Moving past the numbers. There were changes in our product line, operational model and client engagement model during the quarter. As to our operations model, we hit the ground running when our operations transitioned to a work-from-home environment. Quite frankly, this will influence our operations thinking going forward. Our client engagement model, however, was not so easy as SEI, our advisers and our advisers’ clients are all changing at the same time. The good news is that client and prospect engagement at our virtual activities has been strong, and we are investing in our digital marketing and sales activities with a goal to convert that virtual activity to actual cash flow.

Moving on to product line changes. We announced a partnership with the American Funds and have launched the SEI American Fund models. These models are designed, constructed and maintained by the SEI Investment Management Unit and are implemented with American Funds, managed by the Capital Group. Bringing together the power of both organizations should result in an attractive offering for advisers. Early indications support this thesis.

In summary, the COVID-19 crisis and its fallout dominated the second quarter, and will have a prominent role in what we do going forward. Our scale, strong financial position and resilient infrastructure will allow us to make the best of this challenge. At its core, restoring our growth rate remains our primary objective. I now welcome any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll go to the line of Chris Donat with Piper Sandler.

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Christopher Roy Donat, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [2]

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I wanted to ask about — your comment about the derisking of portfolios, is that something that was more prevalent early on in the quarter and then have we seen any re-risking since then? I’m asking because I’m curious if we might see a recovery in the revenue yield in coming quarters with maybe a higher mix of — or with less cash, probably.

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [3]

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Well, I guess, Chris, the latter part of your question was your real question, and yes, that’s exactly what happened. When you look at the yield, the yield reflects — if you look, the point-to-point — in the change in money market and other less risky assets, the point-to-point increase does not kind of reflect as much as the average basis. So the average was really what drove the revenue. So yes, it has started to recover. And the derisking occurred during the quarter, but it could go the other way. I would expect it to go the other way going forward.

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Operator [4]

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And next, we’ll go to Ken Hill with Rosenblatt.

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division – Senior Equity Research Analyst [5]

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So just a quick question on client engagement. As you’re thinking about it here going forward, I mean, what types of tools are you looking at are different processes are you thinking about bringing in that’s kind of going to engage clients in a little bit more of a digital way for the current environment? Just kind of hoping to kind of learn a little bit how you’re thinking through that here.

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [6]

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Yes. I think a lot of the engagement is — historically, a lot of the engagement has been face-to-face. Now we’re doing traditional — what I would call traditional digital engagement with Webex and Zoom kind of digital meetings. But then we’re supplementing that with, if you will, kind of on-demand videos around certain components of the offering, certain components in the sales cycle. So you see a little bit of a shift from a push kind of sales process to a pull kind of sales process. We’re making catalogs of digital engagement available to advisers so they can, if you will, shop at their own pace. I would say that’s the major changes.

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division – Senior Equity Research Analyst [7]

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Got it. And then from an adviser perspective, I think you mentioned 63 coming in, that’s kind of on bar with the prior quarter. What’s the pipeline there look like? And any color you can provide kind of looking a little bit further out?

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [8]

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Yes. I think our pipeline of new advisers remains very strong. And we’re very — the amount of digital engagement is really strong, so we feel pretty good about it.

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division – Senior Equity Research Analyst [9]

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Okay. Any particular areas those are coming from? Or is it just more broadly?

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [10]

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I think it’s pretty broad. It’s across the Board.

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Operator [11]

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And next, we’ll go to the line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [12]

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A couple of questions. So first, just make sure I — have the numbers right. The net cash flows in the quarter was — the minus $660 million and then I want to — I just want to clarify the number. But also I think you had started last quarter kind of breaking that down between kind of cash flows from your traditional business and cash flows into — onto the — more on the AuA side of the fence, so to speak. So can you maybe give us that breakdown?

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [13]

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Yes. What I gave you was cash flow into the managed programs. I didn’t mention, but I would tell you the cash flow into, what I would call, the AuA, we had $600 million in positive cash flow in the AuA level. That wasn’t in my comments, but that’s the number.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [14]

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Okay. And then the traditional platform, assets under management at minus — was it minus $660 million? Just — I’m trying to have it right.

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [15]

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Yes, you have it right. It was $660 million.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [16]

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All right. Great. And then just kind of curious just most to the American Funds initiative, which seems like a pretty — somewhat a pretty large departure from what you historically done with kind of your architecture, kind of picking the right managers for your products. And you’re, I mean, great organization, but you’re just sticking with one manager, I guess, kind of (inaudible). Maybe just trying to get a sense of how you think of your value-added to that was really way for American funds to reach your advisers in a different way. I mean just trying to get a sense what’s unique about that from an adviser perspective versus something may be go to American Funds today.

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [17]

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Well, I think there’s a couple of different aspects to it. Number one, it is this — the models are constructed and maintained by the SEI investment management unit, taking out all of our experience and our history in sort of portfolio construction and management. So we’re comanaging them, if you will, with the American Funds. And the components, if you will, the implementation components are what the America Funds provide. In addition, all of these assets are on the SEI operating platform. So it’s the strength of our technology platform, which is also available to us. So in many ways, it is offering, if you will, an asset — a branded asset management product to implement our portfolio thinking at the portfolio structured level on our platform. That’s what makes it different. Now it’s still adheres to our goal-based investment management strategy. It’s still our overall investment structure. It’s just some of the — when you think about it, it’s no different than what we do when we offer ETF products in our portfolios, where we have ETFs and we don’t manage ETFs, the third-party ETFs. But we structure them. We manage them. We do the tax loss harvesting. We run them on our platform. It’s all those components.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [18]

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Great. And then maybe just kind of curious, is there any sense you could give us on kind of how business trended through the quarter? I mean as markets almost felt like they went mostly straight up since the end of March. But I mean, have you — as you kind of made your way through the quarter and equity markets rebounded, notwithstanding the (inaudible) is out there, is there any sense that the client — adviser and client engagements was changing or improving over the course of the quarter? Or is it pretty spotty? Any color you may have on that.

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [19]

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I guess I would say is when you look early in the quarter, everyone was just reacting to the crisis. And I don’t want to say it was panic, but volumes were astronomical, and people were just reacting, derisking portfolios, stabilizing their clients. I think as we progress through the quarter, we’re not entirely there, but we’re slowly, when I say us and our advisers, are slowly returning to — well, it may be a little bit of a new operating environment in this COVID-19 world, but we got to get back to business again. So that — I think that would describe the change I’ve seen during the quarter.

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Operator [20]

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And next, we’ll go to the line of Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [21]

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So on the outflows in the quarter, were those due to, I guess, tougher new sales or greater attrition or both?

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [22]

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I would say it was more outflows from the existing business and not new adviser signings. I think the new adviser activity is new. But I think what you’re seeing is people moving out of managed products into safer, maybe guaranteed-type products. And you’re just seeing an overall slowdown in just receipts. I mean it’s entirely consistent with what we’ve seen in other periods of financial market stress.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division – Research Analyst [23]

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Okay. And then I guess, secondly, just there’s a lot of consolidation activity happening in the TAMP space. And I think some other firms out there are growing at, frankly, a better clip than your business is today. So I guess the question is, are you contemplating making any more or feel there’s a need to make any more material changes to the business or the structure of the business to see a real pickup in growth?

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [24]

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I don’t know exactly how to answer that. I mean we’re constantly making changes. I think that we need to continue to change our product line and continue to change our technology platforms going forward. In terms of anything more specific, I’m not really prepared to talk about it in this type of public forum.

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Operator [25]

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

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Presentation

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Wayne Montgomery Withrow, SEI Investments Company – Executive VP & Head of Independent Advisor Solutions [1]

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Thank you very much. At this point, I’d like to turn it over to Paul Klauder to talk about our institutional segment.

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Paul Francis Klauder, SEI Investments Management Corporation – Senior VP & MD of Institutional Group [2]

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Thanks, Wayne. Good afternoon, everyone. I’m going to discuss the financial results for the second quarter of 2020.

Second quarter revenues of $76.5 million decreased 6% compared to the second quarter of 2019. Second quarter operating profits of $39.6 million decreased 5% compared to the second quarter of 2019. Operating margin for the quarter was 52%. Both revenues and operating profits were impacted by negative client fundings, lower capital markets and currency translation. Operating profits were positively impacted by lower travel costs and reduced costs associated with client events.

Quarter end asset balances of $85.6 billion reflect a $2.6 billion decrease compared to the second quarter of 2019. This decrease is driven primarily by negative client fundings. Net sales were a positive $400 million for the quarter, which was comprised of gross sales of $900 million and client losses of $500 million. New signings included a U.S. hospital, U.K. DB fiduciary management and a U.S. not-for-profit relationship. The unfunded new client backlog at quarter end was $460 million.

New sales momentum and activity has been impacted by the crisis as prospects have extended their time frames. However, we did see an increase in OCIO RFPs, inbound inquiries and formal decision-making processes in the second half of the quarter. We continue to receive positive feedback from our clients on our proactiveness and attentiveness. We have spent much time learning in enhancing our delivery approach in this virtual environment.

Regarding new strategic initiatives, we have made progress on our large investor platform of offering technology, nonfiduciary investment services and risk management consistent with the One SEI mindset. We are moving forward to a formal launch in the third quarter.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll go to the line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [2]

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Can you maybe expand a little bit on the new business initiative product launch? I just want to make sure I understand it fully, kind of what product capabilities that entails. And maybe over time, how we should think about how that maybe changes the — all the economic functions or could change economic functions.

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Paul Francis Klauder, SEI Investments Management Corporation – Senior VP & MD of Institutional Group [3]

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Yes, absolutely, Robert. So this was something that we introduced the concept last November at the Investor Day. This would be going to larger institutional investors, typically over $2 billion, doesn’t have to be over $2 billion. But effectively, these would be organizations who don’t want to outsource, who want to have an investment team, who want to have investment talent and are looking for technology similar to the technology that Steve sells through the Investment Manager market segment. So technology to help with the entire administration, valuation, all the alternative investments. Nonfiduciary investment services, so we would not be taking accountability for picking and overseeing managers, but we would be providing access to them and opinions to them about managers and about asset allocation studies. And then a full risk management platform.

So in essence, it would be taking all the capabilities of the firm and offering them in a flexible environment. And Robert, this represents a whole new market for us because at some level, say, it’s $2 billion, maybe $3 billion, maybe it’s $1 billion, depending on the segment, there are organizations that will not outsource. They are committed to their investment process and their team. So this is a whole new incremental market for us to be able to go into and take all the horsepower of SEI and be able to offer it to this market segment.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division – MD & Analyst [4]

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And I mean, I guess — I don’t want to mischaracterize it, but it almost kind of feels like going back to what you did decades ago, which is, for lack of a better way, investment consultant world? Is that not a fair way of thinking of it? Or is there something really kind of much more different about it?

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Paul Francis Klauder, SEI Investments Management Corporation – Senior VP & MD of Institutional Group [5]

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Yes. I would not categorize that we’re trying to be an investment consultant. This, at its heart, is technology sales. This is technology that these organizations need, again, very similar to the technology that Steve has delivered to the investment management segment, to help them be able to run their sophisticated investment process. Most of the time, these types of organizations have a myriad of Excel spreadsheets and have a global custodian, and it is a very fragmented and a nonintegrated process. So I would say it’s far more of a technology sale. Some of the sweeteners that we can add are the nonfiduciary services with regard to giving opinions about managers and asset allocation studies. But at the heart of it, it would definitely be much more technology than it would be trying to sell consulting services.

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Operator [6]

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

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Presentation

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Paul Francis Klauder, SEI Investments Management Corporation – Senior VP & MD of Institutional Group [1]

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I would now like to turn it over to Kathy Heilig, SEI’s Controller.

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Kathy C. Heilig, SEI Investments Company – VP, CAO & Controller [2]

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

Second quarter 2020 cash flow from operations was $165.2 million or $1.10 per share. Year-to-date June 2020, cash flow from operations is $264.1 million or $1.75 per share. Second quarter free cash flow, $145.3 million; and year-to-date free cash flow, $217.2 million.

For the second quarter, capital expenditures, excluding the capitalized software, were $13.8 million, which did include $5.5 million towards the new building, bringing year-to-date capital expenditures, excluding capitalized software, to $34.4 million and about $15.7 million relates to the new building. We’re projecting remaining capital expenditures for the year, excluding capitalized software, to be about $16 million, which includes about $9 million related to the facility.

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 statements by terminologies such as should, may, will, expect, believe, continue or appear.

Our forward-looking statements include our expectations as to the long-term consequences of and potential opportunities resulting from the disruptions precipitated by the COVID-19 pandemic; the degree to which we will benefit from our scale, resources, technology and infrastructure; the client offerings, business segments and client types that will drive our growth; revenue that we believe will be generated by sales events that occurred during the quarter or when our unfunded backlog may fund; our resources, allocations and technology and platforms in which we choose to invest, including our One SEI initiative; the strategic initiatives and business segments that we will pursue; our ability to manage our expenses, scale our offerings and establish sustainable and accelerating margins; the strengths of our pipeline and growth opportunities and our ability to execute on and the success of our strategic objectives.

You should not place undue reliance on our forward-looking statements as they are based on the current beliefs and expectations of our management subject to significant risks and uncertainty, 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 the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2019. And now please feel free to ask any additional questions that you may have.

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Operator [3]

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(Operator Instructions) And I have no questions in queue at this time.

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Alfred P. West, SEI Investments Company – Chairman & CEO [4]

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So ladies and gentlemen, we are fighting on 2 fronts. First, the COVID-19 disruption; and second, growing revenues and profits during disruptive time. On the first front, we are very fortunate to have planned well and have been able to keep our workforce healthy and productive.

On the second front, we face short-term headwinds, but we believe that we will prevail, thanks to our motivated and innovative workforce and the strategic investments we’re making in our future. So please be safe and remain happy and healthy. And have a good day. Thank you for attending our call.

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Operator [5]

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Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.