Q2 2023 SEI Investments Co Earnings Call
Participants
Alex Whitelam
Dennis J. McGonigle; Executive VP & CFO; SEI Investments Company
Ryan P. Hicke; CEO & Director; SEI Investments Company
Sanjay K. Sharma; Executive VP and Global Head of Private Banking & Wealth Management of SEI; SEI Investments Company
Jeffrey Paul Schmitt; Research Analyst; William Blair & Company L.L.C., Research Division
Michael C. Brown; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Owen Lau; Associate; Oppenheimer & Co. Inc., Research Division
Ryan Michael Kenny; Equity Analyst; Morgan Stanley, Research Division
Presentation
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the SEI Second Quarter 2023 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.
I'd like now to turn the conference over to our host, Mr. Alex Whitelam, Director of Investor Relations. Please go ahead.
Alex Whitelam
Thank you, and welcome, everyone. I'm excited to join the team here at SEI and look forward to working with you all.
We appreciate you joining us today for our second quarter 2023 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer; Dennis McGonigle, Chief Financial Officer; and leaders of our business segments, Wayne Withrow, Paul Klauder, Jay Cipriano, Phil McCabe and Sanjay Sharma.
Before we again, I'd like to point out that our earnings press release can be found under the Investor Relations section of our website at seic.com. This call is being webcast live, and a replay will be available on the Events and Webcast page of our website.
We would like to remind you that during today's presentation and in our responses to your questions, we have and will make certain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements that appear in today's earnings press release and in our filings with the Securities and Exchange Commission. We do not undertake to update any of our forward-looking statements.
With that, I'll turn the call over to our CEO, Ryan Hicke. Ryan?
Ryan P. Hicke
Thanks, Alex. Hello, everyone. I hope you're all having a great summer.
Over the past year, we have been laying the foundation for strategic growth. We've evolved leadership, invested in our talent, increased our market presence and aligned our resources to drive an enterprise-wide approach to our markets. The headlines for the quarter's financial results are: revenues in the second quarter were $489 million, up 2% from a year ago. Net income for the quarter was $119 million, a 7% increase compared to last year's second quarter. EPS was $0.89, up 10% from the $0.81 reported in the same period last year. Dennis will provide more details on our results shortly.
In the quarter, we repurchased 1.3 million shares of SEI stock at an average price of $58.56 per share. That translates into $75.5 million of stock purchases. We also declared and paid a semiannual dividend of $0.43 per share. The sales momentum we saw earlier in the year continued through the second quarter. Our focus on proactively engaging with current clients, expanding our pipeline and connecting resources across the enterprise to identify and execute against cross-selling opportunities are translating into more wins for our sales teams.
Net sales events totaled $29.3 million, $23.6 million of which were net recurring. This represents a 24% increase over the net recurring number we reported in the first quarter this year. While markets have improved recently, we remain vigilant on growing our profits, prudently deploying capital and delivering at a high level for our clients.
With that, let me turn to our business lines.
The Investment Managers segment had another solid quarter. We successfully converted several new clients and funds while growing profits. We also recontracted multiple clients and converted our backlog, implementing a number of large accounts during the quarter. Dennis will provide further detail on this in just a moment.
Our teams are cultivating strategic relationships and driving growth for our clients. During the quarter, we won new accounts in the global, traditional and alternative segments. In alternatives, our largest clients continue to expand in the private credit, private equity, real estate and infrastructure markets.
In the quarter, we onboarded a private equity firm previously using in-house administration and 2 private credit firms. One is a competitive takeaway and another through a competitive bid process. We also signed a large cross-sell PE access platform client, which was also a competitive takeaway. The traditional business in IMS had a very strong quarter. We added new business in all product lines across more than 40 investment managers. In particular, our business expansion in both our turnkey collective investment trust and ETF solutions continue to be strong.
We're also pleased to announce that we recorded our first SEI Wealth Platform sale to an existing client in this unit. Finally, we completed a large transfer agency conversion, adding more than 1,700 institutional accounts and successfully partnered with a renowned global asset manager to utilize our CIT platform. This highlights the breadth of our capabilities and the expanding reach on our global scale.
Next, Private Banking had another active quarter. signing 3 new deals and recontracting 4 clients. We also successfully implemented 3 clients on the SEI Wealth Platform during the quarter. We're making significant strides on the technology front, including the SEI Data Cloud. Our cloud solutions are generating growing interest with both existing clients and new prospects. We also continue to make headway in converting clients from TRUST 3000 to SWP. During the quarter, we successfully migrated more than 35,000 accounts and approximately $120 billion in assets for one of our larger banking clients.
Sanjay and the team continue to capitalize on our pipeline, prudently manage expenses and drive that growth to the bottom line. We still have some previously announced events to absorb in coming quarters, but we are confident in our current strategy to grow both revenues and profits.
Turning to our Investment Advisors business. We completed the integration of our North American-based intermediary businesses during the quarter. We believe our intermediary business is better positioned to accelerate growth across each of its channels with this realignment. We're seeing early signs of that growth already, especially in the RIA channel, in which we experienced accelerated positive net cash flow during the quarter.
Our technology, investment processing and asset management capabilities allow us to meet our clients where they want to be met and provide a holistic solution that is unmatched in the market. In the Institutional Investors segment, we secured wins with our outsourcing capabilities across the full spectrum of our offerings. Additionally, existing clients continue to consume our expanded suite of products.
Corporate defined benefit curtailments and annuitizations continue to be headwinds in the U.K. and U.S. and were the driving factors for the quarter's financial results. We continue to mitigate the DB headwinds, though, through improved cross sales and lead generation for other SEI services in our Private Wealth Management business as well as expansion in other institutional markets. Additionally, we recently announced our agreement to acquire National Pension Trust, pending regulatory approval. NPT is a leading master trust in the U.K. serving more than 60,000 members. NPT is our second master trust acquisition following the purchase of Atlas in 2021.
As we've mentioned, we built a corporate development team last year with a focus on developing, executing and integrating our strategic transactions to accelerate growth. The NPT acquisition demonstrates our commitment to this strategic priority as well as our commitment to the U.K. market.
Turning to our investments in new business segment. SEI Sphere had a positive quarter, adding a new credit union client and successfully migrating its first client to the cloud. And our partnership with LSV remains very strong.
On the talent and culture front, we expanded our executive leadership team with the addition of Sneha Shah, who will lead new business ventures and will be a future participant on our earnings calls. We are excited to have Sneha join the team as she brings a wealth of knowledge and experience. Throughout her career, Sneha has led growth initiatives in leading international firms where she created and scaled new businesses at the intersection of data, artificial intelligence and technology. Sneha's hire also highlights the fact that with our existing growth engines positioned for success, it is now time for us to increase our attention into those additional resources to new businesses and platforms.
Sneha will be focused on identifying and incubating those businesses, including SEI Sphere that we believe will build upon SEI's foundation for future growth and contribute to our corporate revenue goals. It also evidences our commitment to infusing external talent into the company and our ability to attract that talent.
On the cultural front, we also made strategic investments in building SEI's brand awareness and our community engagement initiatives. These investments will help amplify SEI's message, drive employee engagement and elevate our core values.
This concludes my prepared remarks. I will now turn it over to Dennis to discuss our financial results for the quarter. Dennis?
Dennis J. McGonigle
Thanks, Ryan.
As Ryan mentioned, EPS for the quarter was $0.89 per share. This compares to $0.81 during the second quarter of 2022 and $0.79 for the first quarter of 2023. Revenue for the quarter was $489 million compared to $482 million in 2022 and $469 million in the first quarter. Total expenses for the quarter were $376 million, which compares to $366 million last year and $367 million in the first quarter.
On the sales front in our technology and investment processing businesses of private banking and IMS, net sales events totaled $31.1 million and are expected to generate $25.4 million in recurring revenue. In our asset management-related businesses, net sales were approximately negative $1.9 million. Sales from our newer initiatives were slightly positive. Total net sales were $29.3 million of which $23.6 million is recurring.
Private banking sales were $7.4 million in net recurring, of which $4 million is net recurring. This reflects 3 new SWP sales. We recontracted 4 clients during the quarter, representing $15.2 million in annual recurring revenue. The Private Banking segment's focus on the regional community bank segment along with the PCIM segment in the U.K. is paying off.
During the quarter, we were active with backlog delivery and conversion activities, including implementing Waverton Investment Management, which helps to further strengthen our PCIM solution for the U.K. market. We also completed additional business migrations for U.S. Bank, which helps to solidify our SWP SaaS solution, including the conversion of their acquired Union Bank business onto SEI platforms. The current backlog of sold but expected to be installed revenue in the next 18 months is $36.6 million.
During the second quarter, 2 client installations that were scheduled to occur were delayed to later in the year by the clients. We are ready technologically and operationally when the clients say go.
Based on current schedules, we expect approximately 60% of the current backlog to convert by the end of the year. The banking segment revenues benefited from a $10.5 million onetime fee related to the U.S. Bank, Union Bank consolidation. Asset Management revenues in Private Banking were up slightly during the quarter benefiting from market appreciation. Expenses in the quarter were up slightly from the first quarter of 2023, primarily from onetime items. On the IMS front, net sales for the quarter were $23.7 million, $21.4 million is recurring.
During the quarter, we recontracted 4 clients totaling $30.7 million in annual recurring revenue. Revenue for the quarter was up compared to first quarter, reflecting the impact of client installations and capital markets. Expenses were up slightly from the first quarter as we continue to invest in talent and capabilities to support our growth. Our backlog of sold but expected to install in the next 18 months recurring revenue is $32.1 million.
For investment advisers, net cash flow onto our platforms was essentially flat. We experienced increased flows into our newer strategic asset management and platform-only programs and negative flows from our more mature mutual fund products. The adoption of our AuA platform-only program which leverages our technology, administration and custody capability continues to show increased momentum. Our newer offerings are helping us move the business forward providing more choice to our clients and helping us offset the movement of assets out of mutual funds and the associated revenue impact.
Revenues for the quarter were up from first quarter as a result of improved capital markets. Expenses were up slightly due to asset appreciation. We recruited 68 new advisers during the quarter, 10 of which are in the newer RIA channel. In the Institutional Investors segment, net sales events for the quarter were slightly positive. The unfunded client backlog of gross sales at quarter end was $2.2 billion.
Revenues for the quarter were up slightly from first quarter due to capital market activity and net client fundings. Expenses were up $4.6 million, $4.5 million of which represents a onetime charge related to a client reimbursement. This expense item is recorded in facilities, supplies and other costs on our income statement. Without this expense, expenses were roughly flat for the quarter.
In the investments in new business segment, revenues were flat and expenses down slightly compared to first quarter. We expect expenses in this segment while shifting to and supporting new initiatives to remain in this range.
In addition to the segments, the company also incurred a $2.5 million expense reflected in the consulting, outsourcing and professional fees line item on our income statement through a strategic growth project that was completed in the quarter. This will not repeat.
LSV produced $32.7 million in profit during the quarter. This compares to $28.9 million during the first quarter. Revenues for LSV were $108.8 million compared to $98.2 million in the first quarter.
Second quarter revenues included $12.7 million of performance fees. As a reminder, LSV recorded performance fees of $2.5 million during the first quarter. Performance fees are a reflection of continued positive relative performance at LSV. Core revenue growth is a result of investment performance and capital growth in assets, offset by net negative client flows.
One final item. As Ryan mentioned, on July 13, 2023, we entered into an agreement to acquire the National Pension Trust. The transaction is expected to close before year-end, subject to applicable regulatory approval. I point you to a recent press release for more information.
Our tax rate for the quarter was 23.4%. This higher rate is due to a reduced level of option exercises and the related tax timing difference benefit. You can expect our tax rate to be in this range during 2023 with a slight step down in the fourth quarter.
That concludes my remarks. As a reminder, all of our unit heads are on the call, and we will now take any questions.
Question and Answer Session
Operator
(Operator Instructions) And our first question is from Ryan Kenny of Morgan Stanley.
Ryan Michael Kenny
Pretax margin came in at 13%, but if we strip out the onetime fee of $10.5 million, you get to around 6%. So I just want to understand, were there any expenses associated with that onetime transition? And can you update us just in general on the timing of pretax margin expansion expectations going forward for the Private Bank segment?
Dennis J. McGonigle
Sure. I'll answer the first part and then turn it over to Sanjay to kind of speak to the progression of the business.
On the first part, that $2.5 million consulting fee was in that segment that I mentioned. And also, there were some costs because there's work involved in converting that client. So that conversion is behind us, and that certainly would help. But we'll -- the cost won't go away because we'll redeploy those resources against all the other future implementations and conversion activity we had.
But Sanjay, you want to address kind of how the -- how you see margins or the business progressing from here?
Sanjay K. Sharma
So in terms of the margin improvement, as Ryan has called out over the last 3 plus quarters or so, our strategy has been very consistent. We came up with, okay, these are the 3, 4 focus areas where we are going to focus on. Client engagement, recontracting was with our existing clients so that we can solidify our pace. Backlog delivery and then, of course, the focus -- a very focused approach in terms of how we go to market in a targeted segment. And then, of course, the margin management. So you would see that this is how we are staying focused and expense management has been a key delivery item here as well. So this half, we are targeting. And so I would say that we will stay focused and the multi-benefit will be a key priority.
Ryan Michael Kenny
And then at the company level, is the One SEI initiative still impacting results at all? Or is that out of the run rate?
Dennis J. McGonigle
I would say that we've kind of -- well, we moved off that terminology, and there's really no cost in the P&L any longer associated directly with One SEI. There is some technology work that probably would have been under that umbrella, particularly as we work through a couple of client conversions and client onboarding activities. But there's nothing distinct -- no distinct expense in our P&L any longer related to One SEI , Ryan.
Operator
The next question is from Jeff Schmitt of William Blair.
Jeffrey Paul Schmitt
You continue to make good inroads with SWP. What is the mix of SWP versus TRUST 3000 business in the Private Bank segment today? And what type of revenue bump do you -- revenue bump do you typically get in one of those conversions?
Sanjay K. Sharma
So our go-to-market strategy has been that we are leading with SWP. TRUST 3000 and new sales, it's more for existing clients to support their initiatives. We are not going to market with the new sales as such with the TRUST 3000. And as far as SWP is concerned, we have been very focused in terms of like, for example, in the U.K. market, our focus in PCIM and IFA segment. In U.S. market, we are focusing on regional and community segment with a very specific go-to-market strategy there through our technology, operations and asset management and a similar kind of strategy for our jumbos and giant segment.
Ryan P. Hicke
And Jeff, this is Ryan. I think the other kind of extension to your question is when we're going to that market, especially in that regional community bank space, Sanjay and the team, we certainly expect that we are positioning certainly a premium from a cost perspective and a revenue perspective. But one thing that has certainly changed over the last 12 to 15 months is we're also thinking outside of those lanes in terms of other enterprise capabilities that we can bring to bear across those segments. So whether that be SEI Sphere, whether that be more asset management capabilities, more focused on the alternative space. So on a like-for-like basis, if somebody is just moving investment processing, we certainly would expect a premium.
What is more interesting to us is the firms have seemed to really be gravitating for Sanjay and the team in that segment have really clear growth agendas across their entire wealth management landscape, and more of our capabilities are definitely resonating there.
Sanjay K. Sharma
And Ryan, if I could add further to there. We are also looking at multiple operating models. Traditionally, we were focused for SWP for business outsourcing to SEI. With the U.S. Bank implementation and we have matured significantly in software-as-a-service model as well. So SWP go-to-market strategy analysis is another operating model.
Jeffrey Paul Schmitt
Okay. Okay. That's helpful. And then looking at the overall operating margin, I think it was 23% versus sort of mid- to high-20s historically. It appears that wage and service inflation continued to drive some of that weakness. Those have come down in the economy, but I was just curious what those are running at both of those items for you internally?
Dennis J. McGonigle
We're not seeing the same level of wage inflation that we saw in 2021, 2022 this year. And as part of our kind of focus on expenses, we're also been very, I'd say, diligent in our hiring practices and our onboarding of talent. That being said, we want to make sure that we are competitive in our markets for talent. So compensation is a key element of maintaining that competitiveness.
I think the attractiveness of working for SEI goes beyond that element of competitiveness to our growth orientation and the type of company we are and our culture. But we are still -- yes, so wage market competitiveness is still there, but it's definitely cooled off from the past couple of years.
So as we get topline growth, particularly as our asset management businesses continue to show topline growth with markets in a better position today than they were coming into the year, a lot of our margin deterioration was really asset management revenues flowing out, which is high-margin revenue and the ability for -- and as that starts to come back in with what we expect to see higher net cash flow activity, that will go a long way to move in the margins back up.
Operator
The next question is from Owen Lau of Oppenheimer.
Owen Lau
So Ryan, you just mentioned -- you mentioned you just hiring new business ventures. Could you please add more color about your vision in these ventures and how you expect this venture can help SEI longer term?
Ryan P. Hicke
Yes, Owen, great to hear from you. I hope you're doing well. So the hire of Sneha was something that we had laid out as a part of the growth strategy about 12 months ago in terms of focusing more on, I'd say kind of 3 things if you think about how SEI is structured today. Today, we have a couple of new businesses in SEI Sphere, SEI Ventures, SEI Atlas. And we wanted to put more structure in place, more leadership in place in terms of really thinking about how do we incubate and scale those businesses to drive business growth. But I think the second and third is really creating a system inside of SEI. We really want to promote a culture where we think of the workforce is 4,900 entrepreneurs. And how are we facilitating and fostering that culture.
So we're generating ideas from grassroots level and putting a system in place to identify those ideas, cultivate them, see if we can get more things out into market. Kill those ideas, if they don't have legs, but then be able to scale things, it looks like they have momentum. But also expand that thought process outside our role because one of the things we're really starting to see with such a significant increase in client engagement and market engagement in the last 18 months, we're starting to see some interesting partnership opportunities with our clients, with our partners.
So Sneha really had a terrific track record and doing these sorts of things will be a wonderful cultural addition to the executive committee, and we'll really put a system in place, Owen, for us to say when we think about the future of SEI, how are we going to identify that fifth engine, that sixth engine from an organic perspective alongside what we're doing on the corporate development side with M&A. I just think we're in a position right now where we really can start pivoting and getting focused on new business additions and engines because we feel confident that we've got some really great momentum in our current core businesses.
Owen Lau
Got it. That's helpful. And then you had a consulting engagement. I think it was related to outsourcing that ended in the second quarter. Could you please talk about what you have learned from that engagement? And then is $30 million a good runway going forward for the overhead expense?
Dennis J. McGonigle
Answer to those -- second question is, yes. That's a good target. And I'll -- the work that we did with the outside consulting firm kind of had 2 elements to it. And I think it's probably best to have Sanjay answer since the key focus was on our banking business. And then Ryan, maybe you want to comment on kind of the broader aspects of the...
Ryan P. Hicke
Yes. I can start first and then turn to Sanjay. So Owen, I think we may have mentioned this in the call last summer, but one of the very first things we did across leadership at SEI last summer, which was sales, solutions, product, operational and technology leaders as we step back and we looked at our total addressable market. And not just the size of each universe, so we weren't saying how many RIAs are out there, how many regional community banks. But we've really tried to distill that down to another level of granularity and look for criteria, which firms were really growing, what was their appetite to outsourcing, how repeatable would our success be in those pools and in those channels. And then when we finished that process, we also thought it was an opportunity to think differently and bringing an external firm to help challenge or validate some of those thoughts and ideas an outcome that we had. So Sanjay -- we did that, Owen, specifically in banking in the U.S. and U.K. So if you want to talk high level about that.
Sanjay K. Sharma
Absolutely. So last time, we talked about it that we had a Chief Strategy Officer in our Banking Wealth Management business segment. And as part of my innings of (inaudible), thinking our best currency that how we should go to market. And that's why we came up with this a 4-wheel of strategy and then we engaged some external consulting company to evaluate our go-to-market strategy and understand the total addressable market, both here in U.S. as well as in the U.K.
Ideally it was to, one, reevaluate our strategy. At the same time, we asked the consulting company to engage with our existing clients, the clients we lost as well as the new prospects, which were in line. (inaudible) thinking. So it's a great (inaudible) from our strategy and so there's been several new insights. So -- and that further reevaluate our strategy as we define, and that's what we are executing now.
Operator
(Operator Instructions) The next question is from Mike Brown of KBW.
Michael C. Brown
Maybe just a follow-up on one of the prior questions. It sounds like there's certainly a concerted focus on your new initiatives, and you guys have been talking about them for a while here. But I guess the revenue in that line has been relatively unchanged for a while here. If you could give us some thoughts here on to when that could start to inflect higher as you look forward for those initiatives?
Ryan P. Hicke
Mike, it's Ryan. I mean I don't think we have any specific thoughts in terms of exact timeline. All I can tell you is that -- we know that with our corporate goal of doubling the revenue of the company over the next 5 to 7 years, we need new engines to be a part of that. And that's why we made the hire, that's why we're going to invest in these areas. So I think part of what Sneha is going to be doing moving forward is really helping us from the executive committee really think through what our expectations should be, how do we invest, what our return on that investment should be? But I think you will start to see a greater focus in those areas around new engines, new businesses, new ideas that could generate revenue for SEI.
I think the more important point that we're trying to kind of get across today is because of how well some of the existing units are moving right now, because of the client engagement, client penetration, we feel like we have some capacity, both from an intellectual perspective, a talent perspective and financially to go focus on some of these new things. So when you look at IMS this quarter fills in the room, we're really excited about the level of engagement and results with a really terrific sales quarter across all of SEI . But we're also very excited that those sales are manifesting themselves in segments where we said we wanted to focus and our ability to not just sell but to install those sales more quickly so that revenue is hitting and that revenues fall into the bottom line.
Michael C. Brown
Okay. Great. I just wanted to touch base on capital allocation and maybe the balance sheet here. Any change in your views on kind of cash level that you want to run with going forward? And then -- and maybe that can dovetail into how you're thinking about capital allocation here. Obviously, seeing some inorganic growth here recently, but how are you thinking about other transformational M&A down the road and maybe balancing that with capital return?
Dennis J. McGonigle
Sure. So I mean I'll start with our capital allocation hasn't -- today, it is consistent with where it's been for quite a while now, which is reinvest in the business, first and foremost, and that includes M&A to the extent there's an asset or business out there that makes a lot of sense for SEI and for us to own that business and make it part of SEI. And then second is to continue to return capital to shareholders. And you saw that -- you've seen that kind of continue consistently.
Now the word transformational gets thrown around a lot. And to the extent we had a bigger transaction that our current balance sheet makeup wasn't sufficient enough to fund, we're not hesitant to go to market and raise capital. And I think sometimes we get -- there's this perception that we're -- these are my words, allergic to debt, and that's not the case at all. We will be proven certainly in our capital approach, but we're not allergic to changing the nature of our balance sheet putting us in a better position for growth and success in the markets we're in.
Operator
And there are no further questions at this time, Mr. Hicke.
Ryan P. Hicke
Thanks.
So in closing, we have an outstanding foundation and momentum to drive continued growth for our stakeholders. Looking at the future, it is with mixed emotions that after 38 years, numerous leadership and executive positions and countless enormous and lasting contribution to SEI's success and culture, Dennis McGonigle has decided to step away at the end of 2023 to reallocate his time to other parts of his life. Dennis has been an invaluable partner, friend, adviser and colleague to me over my entire career, and I personally have an enduring debt of gratitude. He and I will work with the executive team on his new transition of duties over the coming months, and we will explore ongoing opportunities for Dennis to remain involved with SEI. As we focus on the opportunities ahead, I'm confident in our strategy, and I'm confident in our ability to deliver just as we've done for 55 years.
Thank you for joining today's call.
Operator
That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconferencing Services. You may now disconnect.
