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Edited Transcript of SEIC earnings conference call or presentation 19-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 SEI Investments Co Earnings Call

OAKS Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of SEI Investments Co earnings conference call or presentation Wednesday, April 19, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred P. West

SEI Investments Co. - Chairman and CEO

* Dennis J. McGonigle

SEI Investments Co. - CFO and EVP

* Joseph Paul Ujobai

SEI Investments Co. - EVP and Head of Private Banking

* Kathy C. Heilig

SEI Investments Co. - CAO and Controller

* Paul F. Klauder

SEI Investments Management Corporation - VP and MD of Institutional Group

* Stephen G. Meyer

SEI Investments Co. - EVP and Head of Investment Manager Services

* Wayne Montgomery Withrow

SEI Investments Co. - EVP and Head of SEI Advisor Network

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Conference Call Participants

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* Bruce Kennedy

* Christopher Roy Donat

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Christopher Shutler

* Glenn Edward Greene

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Robert Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Sam Hoffman

BlueCrest Capital Management (UK) LLP - Portfolio Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you very much for standing by, and welcome to the SEI First Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded. I'll turn the conference now over to your host, Mr. Al West, Chairman and CEO. Please go ahead, sir.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [2]

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Thank you, and welcome, everyone. All of our segment leaders are here on the call with me as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller. I'll start by recapping the first quarter 2017. And then I'll turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results of their segments. Then, finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report. So let me start with the first quarter of 2017. First quarter earnings increased by 15% from a year ago. Diluted earnings per share for the first quarter of $0.55 represents a 17% increase from the $0.47 reported for the first quarter of 2016. We also reported an 8% increase in revenue from first quarter 2016 to the first quarter of 2017. Also during the first quarter of 2017 our noncash asset balances under management increased by $10.7 billion. SEI assets grew by $7.3 billion and LSV assets grew by $3.4 billion. Finally, during the first quarter 2017 we repurchased approximately 1.1 million shares of SEI stock at an average price of $50.42 per share. That translates to approximately $55.5 million of stock repurchases during the quarter. In addition, we capitalized approximately $16.7 million of the SEI Wealth Platform development, amortized approximately $12 million of previously capitalized SWP development, and capitalized $1.7 million of IMS development. Our sales events, net of client losses, were $20.2 million during the quarter, which will generate $17.2 million of recurring revenue. Each of the segment heads will address their first quarter sales activity. As we noted last year, we have been increasing our investment in SWP and its conversion and service infrastructure. These investments are primarily aimed at preparing the platform to accept the Regions and Wells Fargo Bank operations. It's important that we successfully convert Regions and Wells Fargo Bank. These installations will signal to the market that this platform can handle large Platform as a Service clients and even larger Software-as-a-Service clients. Successful conversion of these 2 bellwether accounts will enhance our opportunities with other large and jumbo wealth management firms. We're also making investments in the migration of our Investment Advisor clients to SWP. Already the Advisor team has migrated a number of larger, more sophisticated adviser clients to SWP. Plus, they are readying 2 large tranches of advisers to convert in the second and third quarters of this year. New investments in the IMS platform are being made to enhance our competitive position and to support the installation of large new clients. In the Institutional Investors segment we are investing in the foundation and endowment market segment, defined contribution solutions, as well as other market segment opportunities that buck the downward trend occurring with U.S. corporate defined benefit plans. In summary, we are investing in each of our business lines as they face transformational changes in their marketplaces. These changes, while challenging in the short run, are full of new opportunities in the intermediate and long run. We look forward to capturing them. Now, this concludes my remarks. So I'll now ask Dennis to give you an update on LSV and the investment in new business segment. I'll then turn it over to the other business segments. Dennis?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [3]

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Thanks, Al. Good afternoon, everyone. I'll cover the first quarter results for the investments in new business segment, discuss the results of LSV Asset Management, and a couple of items of note for the company during the quarter. During the first quarter of 2017 the investments in new business segment continued its focus principally on two areas -- the ultra-high-net-worth investor and the development of a web-based investment services advice offering coupled with the use of mobile technologies. During the quarter the investments in new business segment incurred a loss of $3.3 million, which compares to a $3.8 million loss during the first quarter of 2016. There has been no material change in this segment. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the quarter. LSV contributed $33.6 million in income to SEI during the quarter, which compares to a $29.2 million contribution for the first quarter of 2016. Asset growth was approximately $3.4 billion during the quarter. Revenue at LSV was approximately $110 million, of which about 1% was performance-fee related. Corporately, during the quarter our tax rate was 31% compared to the 35% rate experienced during the first quarter of 2016. The lower rate is due to the impact of the accounting change while recording the tax effect from stock option exercises. Under the previous rule, the tax benefits from stock option exercises was recorded as an increase to additional paid in capital. This new rule will likely result in a more volatile tax rate quarter to quarter than we have previously experienced. In addition, this change in accounting makes it more difficult to accurately provide guidance on our effective tax rate. Finally, you will notice we have begun to report a new asset category, advise assets, on the quarterly asset balance schedules in the earnings release. This represents assets from which we are earning an advisory fee that are not invested in SEI programs or products. We felt the assets reached a meaningful level and that it was important to start to include this data element in the schedule. Both of these assets are in the Institutional business and Paul Klauder will discuss further. With that, I'll now take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first from the line of Chris Donat with Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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Dennis, just wanted to ask, in the text of the release there's a comment that the LSV earnings were negatively impacted by increased personnel expenses. Is that sort of a one-time phenomenon or is it something that we should expect to be kind of recurring here for LSV?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [3]

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Yes, the earnings release are year-over-year comparisons. So that's relative to first quarter of last year. So during the course of last year they had higher expenses in the personnel area and that will carry through this year. It's not a -- but it's not relative to fourth quarter. It's relative to last year's first quarter.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Right, right. But it's -- but you just said it's something that should carry forward through this year?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [5]

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Yes. So we report our full financials in the 10-K for last year. So you can see what their total margins were. And that will continue this year.

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Operator [6]

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Next we'll go to Robert Lee with KBW.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [7]

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I have two quick questions. First one is going back to LSV. Can you just update us on what their flows were like in the quarter?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [8]

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Sure. They had [ as good as ] expected market performance. And that was offset -- they had slightly negative cash flows. So they did bring in new money from new clients. They launched a couple new products, particularly in the emerging markets area and have had successful launches. But they did lose some assets through rebalancing. And they're also a little bit of victimized by the active passive. And I hate to say it, but some of our OCIO competitors have probably taken a little bit of assets away. So -- but overall they'll have really healthy asset growth going forward net-net.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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And then maybe just as a quick follow-up, I mean understanding that it can be hard to kind of forecast the tax rate given the changes in accounting, but could you maybe give us a sense of what that impact was in the quarter, kind of what the tax rate would have looked like ex that kind of -- the exercise of the options?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [10]

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Yes. We had about 400 basis points of rate benefit in the quarter.

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Operator [11]

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

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Christopher Shutler, [12]

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Let's see. So I guess first on the taxes, can you just give us some sense of, I guess, timing? When do you usually see options exercised? Is there particular quarters or is there anything to call out from a seasonality perspective?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [13]

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No, there's really not. And that's why it gets a little more tough and it's more difficult to predict the tax rate. The issue that we're all going to face kind of as we go through the year is if we have lower exercises in the second quarter or the first quarter, then you've got to adjust the second quarter rates to smooth out what you expect the rate to be for the full year. So you have that. So you wind up with a higher rate. Or conversely, if we had a consistent level of option exercise, you're going to see a similar rate. But there's no predictability to the -- when our employees can exercise options or not.

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Christopher Shutler, [14]

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The only other one was just on I guess expenses for the overall company, just the -- maybe just update us on your outlook for the year. And not to steal any of Joe's thunder, but the expenses in Private Banks came in better than I think we expected. So what's the outlook there?

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [15]

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Well, I'll let Joe provide his thunder on that. But, yes, generally I think, as we've always said, we do have pressures on our business to spend more money, particularly in areas that are critical to us strategically, whether it be technology development and investment, certainly, and operational staffing to accommodate new client activity. And I'd say that's been more impactful in Steve's business and a little bit in Joe's business. The conversion process in Wayne's business has certainly put pressure on expenses. But at the same time, as we look across the entire company, how do we manage things as best we can in other areas to keep our expense growth, or rate of growth, fairly calm, I'd say. So as we look out to the rest of the year, we've got those same pressures. Some of them, a lot of them, frankly, are for good reasons. And we'll do our best to kind of keep things on the path we're on right now.

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Operator [16]

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We have no further questions, so please continue.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [17]

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Thank you, David. I am now going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [18]

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Thank you, Al. I will start with a financial update on the first quarter, followed by an update on new business activity. First quarter revenue of $113 million was down slightly from the fourth quarter. The decline was due mostly to the timing of professional services fees and a decline in mutual fund trading revenue. Expenses remained relatively flat to the fourth quarter. We are focused on controlling spending as we work to convert the backlog, including key clients Regions Bank and Wells Fargo. Operating profit of $4.1 million was down slightly from the fourth quarter, again due to the small revenue decline. During the quarter new business momentum began to grow, with net sales events of $6.6 million, of which $4.4 million is recurring and $2.2 million is one-time for professional service fees. Included in the sales events are three new name SEI Wealth Platform clients -- Washington Trust Company and 2 U.K.-based wealth managers, [ Hiller ] and Wealthsimple. We also signed a 7-year extension with the Tilney Group, a large and growing national wealth manager in the U.K. Tilney is the consolidation of several successful firms who are SWP clients, including Bestinvest, Towry and [ Ashport Willet ]. Tilney has committed to additional asset growth as part of the new contract. Recurring sales events were negatively impacted by the loss of a Trust 3000 client in a heavily competitive situation and also the loss of a US SWP client due to merger activity. Earlier this week we signed an important Trust 3000 client, TIAA, for conversion to the SEI Wealth Platform. TIAA is fast-growing and the leading provider of financial services in the academic research, medical, cultural and government fields. TIAA is a second quarter event so it is not included in the first quarter sales event numbers nor is it included in the backlog that I will discuss in a few minutes. With the sales announcements today the SEI Wealth Platform value proposition is gaining traction in the market. TIAA, Tilney, and Washington Trust Company are all comprehensive wealth management firms supporting multiple businesses and client segments. These firms are seeking to consolidate and leverage infrastructure, which is helping us win business now and is also setting us up for future growth. During the quarter we also re-contracted 8 Trust 3000 clients, securing $41 million in annualized revenue and key clients until their eventual move to SWP. Our asset management distribution business also showed growth with positive cash flow by adding $340 million of net new assets. New flows were representative of key distributors in Asia, Europe and the U.S. At the end of the first quarter, our total signed but not installed backlog with the SEI Wealth Platform is now $45 million in net new recurring revenue. We expect to install $25 million in the next 18 months and the remainder to install in later years. In conclusion, we are focused on the following -- installing the current SWP backlog; increasing sales to new clients to grow that backlog; protecting our current revenue and maintaining strong client relationships; and of course investing in the long-term growth of our business while managing expense. We're off to an encouraging start in 2017. Any questions?

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Operator [19]

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(Operator Instructions) And we'll go to Glenn Greene with Oppenheimer.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [20]

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Yes, so nice to see some momentum. And you sound more encouraged. So maybe a little bit more color on what you're seeing in the environment. And if you could give us a little bit more specifics on the TIAA signing -- any way to sort of frame order of magnitude or how we should think about that and also the conversion on that? And also wanted to get color on the -- a little bit more color on the two client losses.

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [21]

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Okay, so couple of points there. So I think we've been working for a long time with a number of these prospects. And they're beginning to come to fruition. I think that they have watched closely our conversion activities at places like Wells Fargo and at Regions Bank. And I think the market is growing increasingly comfortable that we are delivering what we've said, which really is an integrated enterprise-wide financial services wealth management platform. So I think we're seeing some -- we're making progress in the pipeline towards the backlog. We really can't comment on any specific details around any one client. But as you know, TIAA has been a client of ours for about 16 or 17 years. They were an early adopter of our outsourcing solution. They are fast growing. There was a very interesting profile about them in last week's Barron's. It was really more focused on their acquisition and integration of Nuveen, but I think you get a sense of what the company is trying to accomplish. So we're thrilled to have them aboard as one of our next large really milestone clients. So we're making progress. Part of that is just the continued hard work. And I do think that banks and some of these more heavily regulated prospects of ours are beginning to feel that they should start to make some important capital decisions to grow their business. But we are seeing progress from a at least activity standpoint.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [22]

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And any way to frame maybe and combine the magnitude of the client losses? Because I assume that $4.4 million was a net figure.

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [23]

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Yes, the $4.4 million was a net figure. There were two client losses. One was a ASP Trust 3000 client, sort of a larger community bank. And we were involved in a fairly -- as I've talked about in the past, some of our competitors are using price as their biggest lever. So we unfortunately lost that one. And the other one was a smaller SWP client that was acquired and moving to the system of the acquirer.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [24]

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Okay. And anything -- all status quo and as it relates to the conversions with Regions and Wells?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [25]

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We're working very hard. We're going to model offices and testing. But I think we're meeting all of our commitments and we're making good progress.

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Operator [26]

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Our next question is from Robert Lee; KBW.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [27]

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Maybe just going back to TIAA, understanding maybe you can't give us too many specifics, but since they're an existing client, now would their [ take on ] SWP represent initially at least a step-up in revenue from what you're currently getting from them on kind of the legacy platform? Or is initially kind of a swap, but then you expect kind of more revenue down the road? I mean, how should we think of that?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [28]

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There will be some uptick on the revenue of the current book of business that's currently administrative and trust. And then I believe there's strong opportunity beyond that inside the firm, as well as we talk often about the business model, which our revenue grows as our clients grow. So that would be another lever for us to grow the business with them.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [29]

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Okay. And given that I assume they're a fairly sizeable existing client given the organization, should we think that this is something that's going to be kind of after you start converting Wells that they're kind of, I'll call it, next in line after that?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [30]

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No, we actually expect them to convert by the end of next year. So it's going to come in the middle of -- after Regions Bank and sort of somewhat simultaneously with the Wells Fargo conversion.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [31]

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And we shouldn't expect any, given your prior comments and what you're spending now, any kind of noticeable incremental spend to take them on, or to convert them, I should say.

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [32]

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Yes, that's correct. There's always some things you have to do for large new clients. But what they're buying from us is largely being accomplished in the launch of Wells Fargo and Regions Bank.

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Operator [33]

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

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [34]

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Just wanted to see if there was any more thunder you had to deliver on the expense side, any commentary there.

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [35]

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I think Dennis did a good job of answering that question. As you know, we did wrap up some development and infrastructure expenses over the last couple of quarters. As I said, those should peak in the first quarter and remain relatively flat for the next handful of quarters. We obviously are trying to manage expense in other areas. That's at the top of my mind every day. Sales is really at the very top of my mind. Managing expenses is right underneath that, and we're doing our best. So some quarters could be bumpy. I'm hoping to pay lots of big sales compensation to the team. There are some costs associated with conversions that don't necessarily line up quarter to quarter with conversion revenue. But our goal is to manage it as closely as possible but still deliver the strategy of a enterprise-wide-level platform for the marketplace.

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Operator [36]

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We have a question from Sam Hoffman, Lincoln Square.

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Sam Hoffman, BlueCrest Capital Management (UK) LLP - Portfolio Manager [37]

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I have a question on the revenue line. I guess if you look back to the third quarter of 2016, you guys had about $116 million of revenue. And it's kind of reduced each quarter down to $112.5 million. But that's about a $3.5 million run rate or $14 million per year. And I just wanted to ask 2 questions on that. It looks like you had negative sales events the last 2 quarters totaling about roughly $8 million or $9 million. But now you've had a significantly positive quarter. So how do you account for the negative $14 million annual run rate in that line? And then, can we assume that given the success that you've had recently that this quarter is the bottom in terms of revenue for the segment?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [38]

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Okay. So I'm -- could you explain to me again what the comparison you're using, because I didn't hear that in the very beginning? You're comparing this quarter versus when?

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Sam Hoffman, BlueCrest Capital Management (UK) LLP - Portfolio Manager [39]

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Yes. So if you look back to the third quarter of 2016, $116 million of revenue, that reduced to $113.7 million in the fourth quarter and then $112.6 million in the first quarter. And I assume some of that was because of the negative sales events that you had. But I didn't think that number was a $14 million run rate. And so my question was -- were there one-time items negatively in this quarter, positively last year? And then also, can we assume that this is the bottom of revenue for the segment?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [40]

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So there are a couple of impacts to revenue. So I can tell you that overall our revenue associated with our core product, the SEI Wealth Platform, has been growing quarter over quarter. So I mostly focused on that. The decline in revenue across the board has been subject to a couple of different things. One is, yes, we did have some negative sales events largely associated with some Trust 3000 clients. We also saw some decline in our asset management distribution business last year that impacted revenue, particularly over the last couple of quarters. The good news is that we are now in positive net cash flow in that business that we announced, about $340 million in positive net cash flow. Some of the timing of one-time from clients. There are also sometimes buyouts in that revenue where the client does -- no longer contracts with us. There may be a buyout of their current client. So there are a number of different factors. What I'm mostly focused on is we're growing our SWP revenue. We are protecting our Trust 3000 revenue. And we're now seeing positive impact in the asset management space. So I am mostly focused on that. Does that help, Sam?

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Sam Hoffman, BlueCrest Capital Management (UK) LLP - Portfolio Manager [41]

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Just the other question is, do you think that given what you said, that we're pretty much at the bottom in terms of revenue on this line and that it should be going up from here?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [42]

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Yes, it's always hard to predict that, but we're working very hard to grow our revenue. It's the first step in growing our profits. So I think we're making good progress. You'll also see some of the pipeline start to matriculate towards the end of this year, which will have a positive impact, that being the SWP pipeline, which will have a positive impact on revenue.

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Operator [43]

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We have a question from Chris Shutler with William Blair.

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Christopher Shutler, [44]

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So on TIAA, did they commit to additional books of business? And then, will -- are they moving from kind of the license model to an asset-based model?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [45]

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I think, again, TIAA is a fast-growing firm and so we are very focused on converting the book of business that we currently have on Trust 3000. As I said, there is lots of other opportunity for us there. So they are similar to several other wealth managers that are really looking to leverage consolidated infrastructure. So I think long term we have a terrific opportunity to grow that relationship.

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Christopher Shutler, [46]

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And are they moving to an asset-based relationship? Or is it -- remain that --

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [47]

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Yes, SWP is an asset-based business model. So, yes.

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Christopher Shutler, [48]

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Are they BSP?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [49]

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They were an early adopter of BSP and they will continue to be a BSP client.

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Christopher Shutler, [50]

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And in the AMD business, Joe, I know that you re-contracted your largest client there last year. What have you seen so far in terms of net flows from that client? Sounds like overall the AMD picked up a bit. But I'm most interested in that one particular client.

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [51]

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I think we're off to a good start. We're pleased with the growth there. It's been driving a lot of our assets. And I get to meet sometimes with the relationship managers and private bankers that sell that. They're happy to be back in the market with the solution. And it continues to be a key offering for that bank.

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Christopher Shutler, [52]

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And then lastly, if -- sort of on expenses. So if we were to exclude any kind of sales-related incentive comp that may come from future wins, how would you expect the SWP expenses to kind of trend over the course of the year? My understanding previously was that you'd see sort of a flattening into Q2 and then a decline into the back half of the year as consultant expense rolls off. So is that still the right way to think about it?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [53]

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Yes, I think there's flattening and we have a lot of work to do between now and the end of the year and into next year with conversions. But, again, we're managing that based on the expectations and guidance we've given you in the past. Again, it could bounce around if we sell lots more big clients and have conversion expense that doesn't necessarily line up quarter by quarter. But we're managing it and I'm looking forward to starting to matriculate the revenue and increase our profit.

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Operator [54]

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We have a follow-up from Glenn Greene.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [55]

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Joe, just 2 quick ones. I don't know if you talked about it. If I missed it I apologize. But did you give the AMD flows in the quarter? And then back on TIAA, could you just remind us what book of business you were doing for them on Trust 3000?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [56]

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Yes. The AMD flows, net cash flows, was $340 million. And it came primarily from distributors in Asia, Europe, and the US. And the business we have historically done for TIAA is TIAA Trust Company. And it's where they have generally the fiduciary trust relationships with their clients. Tends to be their larger clients.

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Operator [57]

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A follow-up from Chris Shutler.

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Christopher Shutler, [58]

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Did you give the SWP net cash flows in the U.K.?

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Joseph Paul Ujobai, SEI Investments Co. - EVP and Head of Private Banking [59]

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I didn't, but I can give you a little update on that. The net cash flows were about $2 billion in the U.K., resulting in about $43 billion in total assets under administration. So in the U.K. our firms are largely private-client-led firms. And so SEI revenue is really driven by AUAs. And somebody asked, "Well, what's happening in the U.S. around that?" And I think the underlying characteristics are a little different with our clients in the U.S. It's generally a mix of private client and larger institutional accounts. So although an AUA-based business, AUA is maybe not as indicative to revenue growth in the U.S. book. But we are pleased with the flows in the U.K. It was probably our strongest quarter ever, I think.

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Christopher Shutler, [60]

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Yes, it's a great number.

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Operator [61]

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And we have no further questions. Please continue.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [62]

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Thank you, Joe. And our next segment is Investment Advisors. Wayne Withrow will cover this segment. Wayne?

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Wayne Montgomery Withrow, SEI Investments Co. - EVP and Head of SEI Advisor Network [63]

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Thank you, Al. During the first quarter we posted good growth in our traditional business. At the same time, we made significant progress in the transformation of our business into one supported by the SEI Wealth Platform. Assets under management were $58 billion at March 31, a 10.6% increase from March 31 of last year. During the quarter we had $660 million of positive net cash flow. Revenues for the quarter were $88.2 million. This compared to $76.7 million during last year's first quarter, a 15% increase. Contributing to this increase were net positive cash flow and positive market returns. A more favorable product mix also contributed to the revenue increase versus last year's quarter. Expenses for the quarter were up roughly 6% compared to the first quarter of 2016. This increase was driven by increased personnel expense and increased direct costs, both driven by our growth, and expense associated with their migration to the SEI Wealth Platform. On the new business front, we signed 120 new advisers. This is a slight decrease from the fourth quarter, but our pipeline of prospects remains strong. Moving on to the status of the SEI Wealth Platform, we now implement new clients directly onto the Wealth Platform as opposed to Trust 3000. We have over $13.5 billion on the platform and expect to be around $30 billion by year end. While the migration is a challenging task, we're proud of the progress we are making. In summary, we continue to recruit new advisors and gather net positive cash flow. While these activities are critical for our near-term financial success, in the broader view 2017 will be all about our transformation to the SEI Wealth Platform and the business model flexibility and growth opportunities it holds for us in the future. I now welcome any questions you have.

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Operator [64]

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(Operator Instructions) And allowing a few moments, there are no questions coming in.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [65]

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

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [66]

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Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the first quarter of 2017. First quarter revenues of $77 million increased 6% compared to the first quarter of 2016. This was primarily due to market appreciation on positive client fundings. Net fundings for the quarter were a positive $660 million. These net fundings were impacted by client losses from mergers and acquisitions. First quarter 2017 operating profits of $38.2 million increased 2% compared to the first quarter of 2016, primarily due to market appreciation and client fundings, but was offset by higher compensation expenses and negative currency impacts. Quarter-end asset balances of $86.2 billion reflect a $10.2 billion increase compared to the first quarter of 2016. This increase was driven by higher capital markets, positive client fundings and $3.2 billion of advise externally managed assets added to the asset base in Q1 2017. The unfunded client backlog at quarter-end was $2.8 billion and was aided by client signings of $2.1 billion this quarter. This includes 3 new U.S. defined contribution clients and 5 newly signed foundations and endowments. This success is as a result of greater sales focus on these market segments. The unfunded backlog is higher at quarter-end as new definite contribution clients take longer to fund and extended time needed to fund a large U.K. DB fiduciary management client. Our sales pipeline is strong and we will continue to focus on key growth markets in 2017. I now welcome any questions you might have.

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Operator [67]

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And we'll go to Robert Lee, KBW.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [68]

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I think I missed it, but could you quantify the unfunded backlog?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [69]

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Yes. That is presently $2.8 billion at the end of the quarter.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [70]

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And a big chunk of that you expect is -- that, like, in the fund and the short term is going to kind of take several quarters or so?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [71]

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No. We would expect the majority of that to fund in the second quarter of 2017. The DC accounts only fund at quarter end and you have to knock that over with the re-enrollment with HR. So if we saw any slippage there might be some of the DC accounts that might go to 9/30/2017. But the other accounts we're pretty confident we'll be able to fund in the second quarter of 2017.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [72]

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And maybe could you talk a little bit about kind of the pricing environment? I know that there been kind of an increased competition in kind of the outsourced OCIO business from consultants and whatnot. So maybe just update us kind of how that's affecting your -- obviously the business trends are good, but the impact you're seeing on resigning clients. Are you finding that you have to kind of resign them at a lower price point?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [73]

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Yes, if we have a client go through a due diligence, there could be some pricing pressure associated with that. Again, we'll point them back to the value proposition that we've brought, the [ net of fee ] value that we've brought, the asset allocation advice that we've brought, their absolute return. But we might see some modest reduction with new client signings. Typically they're anniversary-based. So generally somebody would go through a due diligence process every 5 years. That's also a sales trigger for us, because of our other OCIO firms that are going through a similar process. So that's going to open up opportunity sets for SEI. As we pivot into the foundation and down the marketplace, that market in and of itself probably has the healthiest margins. They are comfortable paying a marketable rate for a high quality OCIO firm. They're also going to consume alternative investments at a higher clip than other institutional investors. And there's definitely higher revenue and higher profit associated with that. So generally, I mean, to get back to your original question, with more competition there is margin erosion that comes. But given the value proposition we have in these new markets, we think we'll be able to make up for that.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [74]

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And I know you mentioned it on -- gave some part in your remarks. So if we think of that unfunded pipeline and your net fundings in the quarter, could you kind of size how -- what chunk of that is coming from foundations, given that they're kind of the, I guess I'll call it a higher fee client compared to your legacy DB clients?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [75]

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About $1.2 billion of that $2.1 billion that we signed is from the 5 foundations and endowments.

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Operator [76]

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And we'll go to Glenn Greene, Oppenheimer.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [77]

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Just a couple questions. So going back to the DC adds, the 3, could you sort of give us just a frame of reference, like what size assets that you're signing and where are we in terms of total asset levels in the DC business?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [78]

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Sure. So the total assets are in and around about $7.5 billion of our now $86 billion -- probably about $8 billion. These 2 -- 2 of the 3 clients are both over $300 million. The good news with 2 of the 3 clients are they're incremental assets. They're actually existing DB clients. So these were cross-sells against great relationships we have on the DB side. They wanted to institutionalize their DC side similar to what they've enjoyed on the DB side. And, again, those will be funding either in the second quarter or the latest by the third quarter. As I said in previous calls, we have 220 U.S. corporate defined benefit clients. They all have DC plans. They may not all be opportunities, but a subset of that is and we're actively calling into that marketplace. And our capability as an OCIO firm helps. Another capability that we have in Steve Meyer's group is administrative capabilities. So to the extent that somebody needs unitization or CIT administration, we're one of the few firms in the marketplace that has those two competencies that we can bring together. So that's a pretty powerful solution we're able to bring into the marketplace.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [79]

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Nice to see those cross-sells. So one question -- the $660 million in fundings in the quarter, just help me reconcile that. Because you had a $2.1 billion backlog going into the quarter. I think you alluded to some client losses.

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [80]

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Yes. So about $700 million did not fund from the previous quarter. About $1.3 billion of that is gross new client fundings and about 700 -- or $1.36 billion of that is gross new client signings and $700 million of that is client losses and, again, almost exclusively due to mergers and acquisitions.

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Operator [81]

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

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Christopher Shutler, [82]

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If we just look at the -- not to harp on expenses but if we look at the sequential trend in expenses I know it was up a little bit sequentially if you exclude the one-time item from Q4. I'm guess that's mainly just due to the strong sales quarter. But is there anything else to call out?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [83]

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It's predominantly because of the sales quarter and sales comp. That's correct.

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Christopher Shutler, [84]

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And then, Dennis alluded to this up front around the advised assets. I think it's $3.2 billion which was in the press release this quarter. Can you just explain what those assets are and how you're getting paid on them?

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Paul F. Klauder, SEI Investments Management Corporation - VP and MD of Institutional Group [85]

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Sure. So these would be larger clients that have legacy assets or best-practice assets that do not make sense to liquidate and move into comparable SEI programs or separate accounts. We are a fiduciary or an OCIO firm over those. We collect an OCIO fee over that and we integrate it as part of the overall asset allocation and take fiduciary responsibility. So the price point would be similar to whatever we would price a large account. We're not getting paid any more or any less for public market assets, whether they're in our kind of manager umbrella or whether it's a best practice that we're incorporating. And this just shows the evolution of our program, the flexibility of our program, and the ability of accepting fiduciary standards over best practices that a client might already have in the portfolio.

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Operator [86]

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And we have no further questions. Please continue.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [87]

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Thanks, Paul. Our final segment today is Investment Managers. And I'm going to turn it over to Steve Meyer to discuss the segment. Steve?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [88]

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Thanks, Al. Good afternoon, everyone. For the first quarter of 2017 revenues for the segment totaled $80.5 million, which is $10.6 million, or 15.1% higher as compared to our revenue in the first quarter of 2016. This increase in revenue was primarily due to new client fundings and implementation of new business. Our quarterly profit for the segment of $28.4 million was $3.8 million, or 15.3%, higher than the first quarter of 2016. Third-party asset balances at the end of the first quarter of 2017 were $457.4 billion. Approximately $56.8 billion, or 14.2%, higher as compared to asset balances at the end of the first quarter of 2016. Increase in assets is primarily due to net new client fundings of $48.5 billion combined with market appreciation of $8.3 billion. Turning to market activity, during the first quarter of 2017 we had a solid sales quarter. Net new business sales events totaled just over $6.5 million in annualized revenue. Encouragingly, these sales were spread across all our segments and included 2 private equity outsourcing mandates won in a competitive process; a large, well established, traditional manager's asset [ SMA ] outsourcing mandate; as well as a large traditional manager's middle office outsourcing. Additionally we expanded our relationship with 2 of our primary global clients during this quarter. From a market perspective, we continue to see demand and opportunity. While we continue to get traction in a large segment of the market, these deals take time and have longer sales cycles, as we have discussed previously. However, we are encouraged by the mix of opportunities at all levels of size and complexity across markets, as well as among our solutions, from our outsourcing to technology to our global regulatory and compliance solutions, to name a few. Our pipeline, client retention and growth opportunities with existing clients all remain strong. That concludes my prepared remarks and I'll now turn it over for any questions you might have.

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Operator [89]

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(Operator Instructions) And we'll go to Chris Shutler.

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Christopher Shutler, [90]

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Did you give the net new client fundings number for the quarter?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [91]

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I did. I gave it -- basically we looked at it year over year. So basically it was for the entire year, quarter over quarter.

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Christopher Shutler, [92]

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Could you just call it out for Q1?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [93]

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Q1 was a little lower. It was about -- I think it was about 2.9% up from -- fundings-wise.

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Christopher Shutler, [94]

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And then the backlog number?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [95]

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Backlog we ended the quarter at around $39 million and we're coming out -- right now backlog's $29 million. We have just about $10 million of fundings during the quarter.

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Christopher Shutler, [96]

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You said redemption rates were what, stable, maybe a little better (indiscernible)?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [97]

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Oh, I wish I could say that. I think that's the one headwind we continue to see and I think it's something that the industry's plagued with. We still have headwinds of liquidations and redemptions in hedge. I'd say they were a little down in the quarter, but they're still steady. But we're burning through them.

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Christopher Shutler, [98]

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Down a little versus what you saw a year ago?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [99]

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Yes.

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Christopher Shutler, [100]

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And then, just two more. On the last call you mentioned seeing an uptick in middle office opportunities. Sounds like you just won one with traditional managers. It sounds like others have been seeing the same thing. So just curious, is that kind of a broader trend in the market? And what's driving it?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [101]

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I think if you look at all these trends that we're facing in our business -- and we've talked about it. So there's fee pressure obviously in the asset management business. So all of our clients are not immune to that fee pressure. So as they look to grow and as they deal with this new fee compressing that they have on their fees, they're looking to kind of recast their infrastructure and the way they're running their business. And for many of them that have this large infrastructure of middle office, which many of them have not outsourced, I think they're realizing to go forward and to grow the right way they can't have that infrastructure. So it's prime for outsourcing. And I think we're seeing that across the industry.

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Christopher Shutler, [102]

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And then last one, I think in the first quarter business highlights in the press release you talk about some increased marketing costs associated with new client acquisition. Can you just explain that comment?

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [103]

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I don't remember that comment. Where was this, Chris?

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Christopher Shutler, [104]

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Just on Page 3 of the press release. And maybe there's nothing to call out. It just says the expenses primarily were due to operational and marketing costs.

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Stephen G. Meyer, SEI Investments Co. - EVP and Head of Investment Manager Services [105]

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Yes, that's probably sales -- that's sales-compensation related. Yes.

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Operator [106]

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We have no further questions.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [107]

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Thank you, Steve. And I'd like Kathy Heilig to give you a few company-wide statistics. Kathy?

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Kathy C. Heilig, SEI Investments Co. - CAO and Controller [108]

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Thanks, Al, and good afternoon, everyone. I have some additional corporate information about this quarter. The first quarter cash flow from operations was $73 million, or $0.45 per share. And net free cash flow for the first quarter was $53 million. We had capital expenditures, excluding capitalized software, of $3.2 million and we project about another $22 million of capital expenditures, excluding capitalized software, this year. As we've discussed, the tax rate for the first quarter was 31%. And that change is due to the adoption of a new accounting standard which required us to record the tax benefit of the first quarter's stock option exercises in the calculation of our income tax expense. Our effective quarterly tax rate could fluctuate as the result of this new standard. We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of the various risks and uncertainties that could affect our future financial results. And now, feel free to ask any other additional questions that you may have.

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Operator [109]

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

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [110]

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I actually have a quick follow-up for Dennis on really -- this goes back to the earlier question thinking about expenses for the year. I mean, if I remember correctly we'd been talking about full year '17 total expenses of something around, call it, $1.1 billion. And at least versus where we were, expenses seem to be running a little lower at least than forecast. Should we still be thinking that that's kind of where your thinking will end up? Or is that kind of -- would that be more a little on the high end of where you think it would be? Just kind of help us maybe frame that for the full year.

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [111]

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Because where we sit today, I would say -- my answer would be that I'm still thinking kind of in that range. It might be up a little. And sort of that's not the range -- that's what -- not where we want to get to, but that's to me more conservative to think that way. Our current run rate wouldn't get us there. But hopefully a lot of new business wins will close the gap a little bit. But I think it's -- conservatively I'd stay there in that range. Because it was never an exact number to begin with, Rob.

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Operator [112]

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And we have a question from Bruce Kennedy, D. F. Dent.

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Bruce Kennedy, [113]

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I just had one question involving stock repurchases. It looked like the capital deployed into stock repurchases was the lowest amount since the second quarter of 2013. And I was just curious to hear how you all are thinking about that and if there's any change there or just anything noteworthy.

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Dennis J. McGonigle, SEI Investments Co. - CFO and EVP [114]

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There hasn't been any change from our board's perspective on the use of capital. I'd tell you the first quarter, even though some years in the first quarter we can get more stock in, we have a little bit longer blackout period as a general rule because of the 10-K filing. So we're a little more conservative and not being in the market too much. The way the stock traded during the quarter, there were days when the volumes just weren't there. But I would say generally our capital utilization approach hasn't changed.

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Bruce Kennedy, [115]

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Okay. Congratulations on the strong quarter and the TIAA deal.

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Operator [116]

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And we have no further questions in queue.

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Alfred P. West, SEI Investments Co. - Chairman and CEO [117]

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Okay. Thank you. So ladies and gentlemen, sales activity and our pipelines are healthy. We like that. In addition, I'm encouraged by the strategic direction each of our business lines is taking and the progress that we're making. And I believe that our investments will help us and our clients benefit from all the changes taking place in our industry. So have a good evening. Thank you for attending our call.

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Operator [118]

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Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.