SEIC - NASDAQ

Hello, and welcome to SEI Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Brad Burke, Head of Investor Relations. You may begin.

Thank you, and welcome, everyone. We appreciate you joining us today for our third quarter 2024 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer; Sean Denham, Chief Financial Officer; Michael Lane, who leads our Investment Management unit, Advisor and Institutional businesses and members of our Executive Committee, Jay Cipriano, Paul Klauder, Phil McCabe, Mike Peterson, Sneha Shah and Sanjay Sharma. Before we begin, I would 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 are here 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 will now turn it over to our CEO, Ryan Hicke. Ryan?

Thank you, Brad, and good afternoon, everyone. SEI had in many aspects and regards a record quarter. Our EPS of $1.19 is the second highest quarter in our company's history and excluding onetime items, it represents our highest ever EPS achieved, a product of top line growth and prudent expense management. Combined assets under management, administration and advisement grew nearly 3.5% from the prior quarter, reaching new highs. We also had net sales events totaling $46 million, which is also a record quarter for SEI. And at the end of the quarter, we implemented modifications to our integrated cash program, which more than doubled the balances in the program. Sean will unpack our financial results and changes to our integrated cash program in more detail shortly. The increased attention and energy we have put into sales, client engagement, marketing and availing more SEI capabilities to the market is showing meaningful results. These results are an early manifestation of strategic changes over the last few quarters. It should be noted that we did benefit in the third quarter with sales events that were delayed in the first half of the year, accelerating the closure in Q3. Over the last two years, we have been laser-focused on significantly increasing market activity, client engagement and enterprise positioning. We intend to win continuously in our core markets as well as expand our share of total addressable markets. As we invest in our platforms and talent and increase market awareness of SEI and the value we can bring to clients. We will not relent on maximizing new client growth and client expansion in the segments and markets where we want to win. For example, we continue to execute the blueprint for our private banking business by rightsizing expenses relative to the market opportunity, having a surgical focus on large segments like regional and community banks and UK private client investment managers, where we believe SEI can take market share and power growth-oriented organizations looking to increase their wealth footprint. We are also seeing real demand in this market for our data, cloud and integration transformation services. I believe this value proposition will resonate across other SEI segments as well. Our sales events in the Investment Managers business, which was a record quarter, also reflect the response we're seeing in our enterprise sales efforts. The momentum is truly broad-based. We're having success with both traditional, alternative managers, U.S. clients, global clients, existing clients and larger in-house providers looking to outsource. We expect the demand for these services will remain robust, and we will continue to invest in all parts of this business, including operational automation and AI to lead the market. SEI's third quarter earnings growth reflects both top line and margin growth across all of our business segments. In addition to the benefit from onetime items that Sean will discuss shortly. Some additional strategic highlights. Net cash flow in the advisor business grew by $1.1 billion, predominantly led by platform adoption in the RIA space. Consolidation across custody and investment processing platform providers in the market has created an opportunity to win more clients who view SEI as a key partner. This is a market segment where we believe SEI has significant opportunity for growth, expanding our technology and operational solutions as well as asset management. Beyond the third quarter, the trend of companies looking to scale and streamline their businesses with fewer strategic partners continues to grow, repositioning SEI as an enterprise partner and not just a single platform provider within a vertical market is gaining true traction. It's evidenced by existing clients turning to us to leverage the breadth of our capabilities. By going to market with an enterprise approach, we believe we have an incredible growth opportunity to gain share against firms that only have a singular focus. We are also focused on reimagining and repositioning our asset management platforms for growth. As the market continues to embrace new product types and asset classes, whether that be passive investments, the growth of alternatives, their place in more retail portfolios, we are increasing our choice of offering for our intermediary and OCIO clients. The continued consolidation and influx of private equity capital into the intermediary space creates disruption, but it can also create opportunity for SEI for us to position the breadth of our solution offering to a broader range of segments and allow us to strategically invest in the future of advice. Michael Lane's addition to the SEI team is a tremendous win for us in this space and beyond. With our eyes on industry trends, we are confident that SEI's combination of stability, culture, balance sheet strength, client focus and willingness to invest in innovation and scalable solutions will drive competitive differentiation and accelerated growth. We are focused on maximizing the enterprise value for our shareholders, and we are proud of the momentum we are seeing in the market and enthusiasm we have across the workforce to rethink opportunities for SEI. Before concluding, I want to thank our SEI employees for our outstanding performance this quarter. You should take a moment to celebrate and reflect on what is possible. I congratulate everyone on their persistence, resilience and willingness to embrace change. We still have a lot of work to do to realize our full potential, and we will not be satisfied until we are hitting on all cylinders across this company. And speaking of change, I'd like to welcome Michael Lane to our earnings call to make some brief remarks. Michael joined us last month from BlackRock to lead our Investment Management unit, Advisor and Institutional businesses. As mentioned, I'm confident his experience, expertise and leadership will help us reimagine asset management at SEI, capitalize on market opportunities and accelerate our growth. Michael has already made an extremely positive contribution to the leadership team in its early days. Michael?

Thank you, Ryan, and good afternoon, everyone. I set my first few weeks at SEI, getting up to speed in three areas: first, understanding the client segments that we do and do not serve. Second, looking across SEI products and services to begin aligning what solutions exist that meet the needs of our existing client base and learning where we can leverage these products, be the individual investment products, custody services, outsourcing investment capability or technology to serve new clients. Third, getting to know our people and learning our history, structure, strategy and what is foundational and cannot be adjusted, while challenging each person to think bigger about areas where there is opportunity for both improvement and expansion. Now what has become clear in a short period of time is that we have deep relationships with our wealth clients and serve them well. But these clients represent a very small percentage of the largest and fastest-growing financial advisers. We have highly skilled people across both our institutional and adviser businesses that can be leveraged to help us move into new markets without increasing our cost of distribution. Our institutional business has room for growth beyond outsourced CIO. Both our adviser and our institutional businesses have focused on delivering the whole engine of SEI, including asset management, custody and technology delivered as a single product, but we also must be willing to deliver the individual parts of that engine. Parts delivery, be it investment products from our highly skilled in-house investment team, LSV, technologies or operational administrative services will help us serve the largest and fastest growing client segments. I come to realize that SEI has more opportunities for growth than we can reasonably pursue. Our collective challenge across the leadership team will be where we prioritize, reallocate and invest to both secure and grow our position as a market leader. Now as I turn it to Sean to share more detail about the quarter’s financial results, I can honestly say that after five weeks, I am more excited about our growth prospects than when I accepted the opportunity to join this leadership team. And with that, I’ll turn it over to Sean.

Thanks, Michael. As Ryan mentioned, the third quarter was one of the strongest in SEI’s nearly 56 year history. Before I get into our financial performance, I want to call out a few items that impact comparability. The current quarter benefited from an $8 million gain on the sale of real estate, which was recognized below the line, a $2 million benefit from some one-time items in our Private Banking business, and a large one-time performance fee from LSV, of which our portion was approximately $5.5 million. Our revenue increased by 13%, operating income increased by 33% and EPS increased by 37% versus the prior year, including a $0.09 EPS benefit from the three items I noted above. Financial results were also broadly favorable compared to the second quarter of this year. Each of our business segments realized revenue growth and margin expansion compared to both the prior year and second quarter. Turning to our business unit performance. Revenue and profit growth in our private banking business was notably strong. Revenue growth was supported by healthy backlog implementation converting new clients on to SWP as well as growth through existing clients. The 17% operating margin realized in the third quarter or 15.5% excluding the items I noted earlier continues the momentum realized in the first half of the year. Our Investment Managers business continues to post strong performance with operating profit increasing by 19% driven by significant sales and cross-selling to our existing clients in the alternative space as well as strength in CITs. Our Institutional business realized modest revenue growth versus last year, an improvement from the first half of the year when revenue declined by low single digits. Operating profit grew at a stronger pace, up 11% from last year, driven by, among other things, our disciplined cost management efforts. The Adviser business realized double-digit revenue and operating profit growth versus last year with a positive contribution from the integrated cash program and strong performance from separately managed accounts and ETFs offsetting outflows in traditional mutual fund products. We have and will continue to actively expand strategies to increase inflows into new programs to offset the revenue impact of outflows in our traditional mutual fund products. On September 30, we modified our integrated cash program, resulting in the total balance reaching $2.4 billion on the last day of the quarter. We have seen balances fluctuate significantly since quarter end, and we anticipate they will continue to fluctuate. Given these fluctuations, it is difficult to give a precise outlook on how the increased balance will affect operating income. That said, based on current balances and a base case outlook for rate cuts, we could see a contribution from this program in the fourth quarter that would nearly double the $11 million realized in Q3. We will be able to better estimate the normalized run rate from this program in a few months when we report fourth quarter results. And LSV contributed $37 million to equity income, up over 20% from last year, driven by the large one-time performance fee I noted earlier, which contributed $5.5 million or $0.03 of EPS after taxes in the quarter. Note that we do not expect a similar performance fee in the fourth quarter as these are naturally episodic. SEI also had an outstanding quarter for net sales events totaling $46 million most of which is recurring. Notice that we have increased the disclosure around sales events by segment in our press release, which should help put these trends into context. Q3 events were primarily driven by both our private business – Private Banking business, which has a mix of both recurring and non-recurring events and an excellent quarter for recurring events in our Investment Managers business. Events in the Private Banking business were entirely attributable to new business in addition to the continued growth of our professional services and data cloud offerings. In our Investment Managers business, events were supported by significant new client closing in addition to multiple cross-sells to existing clients in the traditional and alternatives markets. Our institutional business events were essentially flat in the quarter. With a couple of notable wins in the endowment and defined benefit space, offsetting defined benefit terminations. Turning to our asset balances. SEI's AUM increased by 5%, and our AUA increased nearly 2.5% from the prior quarter, bringing total combined AUM and AUA to a new record of nearly $1.6 trillion. Growth in the quarter reflects both market appreciation and positive net inflows. Growth in our private banking institutional businesses was largely attributable to market appreciation. Our Advisor Business benefited from healthy net inflows, notably in our strategists and platform-only spaces, offsetting net outflows in our mutual fund products. Our revised SMA pricing structure introduced on April 1 was a catalyst for strong growth in the third quarter. Our Investment Managers business, which is less sensitive to market changes saw assets increase by 3% and LSV benefited from strong equity market performance during the quarter, offsetting net outflows into passive products. Touching on capital allocation. We repurchased approximately 1.3 million shares for $86 million in the quarter. Over the last four quarters, we have returned $442 million of capital to shareholders through either repurchases or dividends, nearly 5% of our market capitalization. SEI continues to maintain a fortress balance sheet with no debt and a cash balance of $900 million as of quarter end. Before concluding, I'd like to reiterate Ryan's message to our employees. We should all be very proud of the strong results this quarter. And while we are proud of our record-setting quarter, I would also remind our investor community that the third quarter is just that, a single quarter. We remain focused on driving sustained growth for our business over the long term, and we continue to have a lot of work in front of us. Before concluding, I would like to welcome our new Head of Investor Relations, Brad Burke. Brad has deep experience leading investor relations and corporate finance functions in addition to being a former sell-side analyst. I know that many of you have worked with Brad in the past, and we are all excited to have him join our team. With that, operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Owen Lau with Oppenheimer. Your line is open.

Good afternoon and thank you for taking my question. So I want to start with a high-level question because when I saw the press release, I felt the energy level in this quarter, it's very different. Many segments have double-digit revenue growth and all segments printer margin expansion. And you also have, I think, record level of net sales event. But my question is – is it a one-off quarter that all things happened in this quarter? Or this is an accumulation of what they have done over the past two years and it comes into fruition, and it will be sustainable? Thanks.

Hey Owen, how are you? I hope you're doing well. This is Ryan. I think that's a great question. So I think the answer is a little bit of all of the above. So when you think about all the strategic changes we have made and the things that we continue to prioritize across the organization, I would say we are satisfied with what we see in terms of short-term production and delivery, but we stay very focused, as you know, in the medium to long term and ensuring that we don't get too far over our skis because some of these things are cyclical. When you look at the last quarter, as Sean talked about or what we're talking about right now, I think it's a more combined and focused execution across all business units, we definitely benefited a little bit in timing, especially in Sanjay's around banking in terms of sales. But we talked about that in Q1 and Q2 that some of that was a little bit lower than normal. When we think about the run rate for SEI moving forward, we are really focused on leading indicators so what do our pipelines look like? What does the activity look like? How are we expanding our total addressable markets? How are we positioning the enterprise for broader breadth of capabilities? And then when we think about the earnings side of that, we're only focused, as you know, Owen, on expanding margins, focused on growing EPS but at the same time, we run this company with a medium to long-term lens. So we're constantly thinking about investments that we can make to accelerate or expand our position for growth in the market. Great quarter. As Sean said, though, it is one quarter, but we like the underlying structural things that are happening around SEI.

Got it. That's super helpful. And then going back to your FDIC cash program. When I look at the balance, I think it increased to $2.4 billion at the end of the third quarter, but the average balance was only $1.2 billion. I think Sean touched on, do you expect 4Q fees will – like will be double to like $20 million or so? But my question is, could you please talk about the driver of that growth closer to quarter end? And what is the average spread you are capturing in this program right now?

Sure. Hey Owen, it's Paul. Let me give a little bit of commentary there. As indicated, the modifications we made in the program effectuated on September 30, that actual day. So that's why the average is substantially different than the ending balance. We modified the program on September 30, such that cash in non-positional cash is entirely allocated to the integrated cash program. Our model portfolio as prior had 1% for operational cash, but with the modifications we made sweep all cash that may be invested on a discretionary basis above the 1% unless the adviser trades away from the automatic suite into the money market fund and none of this is positional cash held by investors outside of a model. So those are the modifications we made. Again, we're going to see – we have seen fluctuations, but we think directionally, we should be nearly double where the contribution was in the third quarter in the fourth quarter. And the average rate or the yield is probably close to about 4% after the interest rate cut. So we made a slight adjustment to the credit rate that we give investors. So even though the interest rates went down, we took the position of modifying the investor rate from 90 basis points to 100 basis points. So hopefully, that gives you some more color.

Got it. Thanks, Paul.

Thank you. Please standby for our next question. Our next question comes from the line of Crispin Love with Piper Sandler. Your line is open.

Thanks and good afternoon, everyone. First, on the sales event strength in the quarter, I see the tables at the end of the press release, which are very helpful. But can you just give a little bit of additional color there. Private banks and investment managers saw a nice pickup as well as investment advisers. But how concentrated were the new wins? Were there any that were really sizable? Was it more spread out? And then were there any individual wins that spanned across segments, which we might expect to see a little bit more just given that enterprise sales approach you’ve discussed?

Yes. Crispin, hope you are doing well. This is Ryan. I’m going to go first with a quick answer to your question, and then we’ll let some of the unit leads give some more color. I think the thing that we are proudest of this quarter with the sales events is when you unpack those sales events, there is not one name or one deal that drove that. It was a breadth of deals it was deals that were priced where we want them price where our value proposition is really resonating in segments where we want to win. So as a leadership team, I think we are really convicted that the sales events especially when you look at their ability to translate into revenue when installed and profitable revenue, we feel strong about that. So we did not do anything with lowering pricing, chasing deals that we would have liked nor did we do anything on the expense side that would really deteriorate a client experience. So I think when we look at the sales event, we’re going to continue to be really, really focused on segments where we can win, replenish, install, refresh. But I’ll let Sanjay, Phil, Michael, Paul give some color to what they’re seeing in the market right now. But I think it’s a great question, Crispin, not only were we happy with the top line number, we’re actually happier when you unpack it, it’s in areas we want to win.

This is Sanjay. Ryan, I will echo what you call earlier. Our go-to-market strategy in terms of different segments, regional community banks here in U.S. market, the private [indiscernible] investment managers in the UK. That strategy is resonating really well with our clients. And the wins we have been created [ph] we have this quarter as well as our pipeline we are seeing that's resonating really well with respect to our strategy. And our pipeline is pretty solid. When I say solid, it is in terms of the quality of pipeline and our ability to deliver that backlog and realize revenue.

And Crispin, this is Phil McCabe. I’ll jump in real quick. As far as overall sales were concerned in IMS, we had record sales with the quarter. We had a record number of new names. We had sales across all products and jurisdictions. We are particularly strong in private assets, semi-liquid products and CITs. They were the bright spots. We’re gaining significant traction in EMEA. And other than that, the pipeline is very, very strong and I think the team is doing really well. As far as concentration is concerned, it was 40% new business and 60% cross sales, and we cross-sold over 90 different clients throughout the quarter. So there was no major concentration. So we are just – it’s a very, very healthy business, and the pipeline is very strong.

And Crispin, this is Paul. Just real quick, $1.1 billion in net positive cash flow for the adviser market, nice adoption across all of our product mix. 114 new qualified advisers, that’s a record for us over the last three years in one quarter. So that’s great. Pipeline is strong. And we’re really super optimistic about some of the things that Michael is going to do in helping us re-managing [ph] going upmarket to larger investors and larger RIAs that he kind of talked about. So we think our TAM is going to increase by some of the views he has in the marketplace.

Thanks, Paul. This is Jay. Good evening, everyone. Yes, I’ve mentioned in prior calls that we are excited about the opportunities we saw in the institutional market in the OCIO market beyond defined benefit that manifests itself this quarter and deals in the endowments in municipality space – and when we look at the pipeline across those with health care foundations, unions, not for profits, we’re – it’s a very robust pipeline. We continue to be optimistic about further growth opportunities there.

And then, Crispin, I’ll answer just to close with the second part of your question. So we’ve got three client conferences in October – we had a large adviser event out in Arizona, Jay had an institutional client event with Michael Lane down in Austin and then Sanjay had about 100 clients in the event. On your question around the enterprise positioning, I still think we’re still in the early innings. What is really refreshing to see though is the content for these client conferences are now a much broader exposure to SEI capabilities instead of just unit capabilities. So again, caveat this would we have to execute, but I don’t even think we’ve gotten started on the full enterprise positioning of SEI in the market.

Great. Thank you, Ryan and everyone. That’s all very helpful. And then just one last question from me. Just in the release, you mentioned positive net flows in the quarter, calling out investment advisers and investment managers. Can you just give a little bit more detail there as it relates to products or specific types of clients that drove the flows there?

Paul, do you want to start?

Sure. So once again, we talked about $1.1 billion. We saw adoption in our strategies and our SMAs. Some of the repricing we had done on April 1, certainly helped contribute to that. We see a headwind in the marketplace around the SEI mutual funds. Frankly, we see a headwind in the industry around active mutual funds. So that’s not uncommon, but that denominator is getting lower. Those assets are staying on platform and redistributing amongst our other product mix. ETFs are strong, direct indexing is strong, launched an opportunity in direct indexing around fixed income, which is a major differentiation in the marketplace. And then finally, we had strong cash flow on our AUA side which is predominantly on our RIA side. When we talk about AUA, those are larger relationships that we signed. We had a large one in the third quarter. Some of that asset does get redistributed in assets under management as they see the breadth of the capabilities. So hopefully, that gives you some more detail.

The only thing I would add on the IMS side that we didn't cover, we're benefiting from three or four major tailwinds. One is the globalization of the business. Another one is the convergence of public and private markets. Third is the retailization of alts. And the fourth is just private assets and private credit in general. So all of those industry themes are sort of tailwinds for us and they're causing us to have that significant cross-sell and those cross-sells are matriculating and falling to the bottom line very, very quickly.

Great. Thank you all. I appreciate taking my questions.

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Schmitt with William Blair. Your line is open.

Yes. I may have missed it, but could you discuss the revenue growth drivers in private banks, like how much was from new clients versus existing clients versus the professional services piece, which I know is ramping now. And then how much is just kind of speeding up the backlog, maybe driving some of that too?

Hey Jeff, it's Sanjay here. So it's a combination of all three things you called out, our backlog delivery is solid. You have seen that if you look at our trend line over the last eight quarters, in terms of backlog delivery, in terms of operating expense management, in terms of signing new clients. You could see consistently, we are improving. And sometimes [ph] new sales of the new revenue growth the professional services as well as an FDA data cloud offering. Those two offerings are helping not only with the change management on the client side, which is helping us with the backlog delivery, but it is also helping with the sales cycle. I think about any changes on the client side when they're moving from a platform to other platform, it's a significant undertaking for the clients. The clients generally they – they run these kind of projects once in 15 years, 20 years. In SEI, we are running 20-plus of such projects as the year and that's it, we are bringing our best expertise in terms of professional services, enterprise capabilities and data cloud. And that is what is really helping us not only with the revenue realization at a faster pace, but also winning new business. Ryan, do you want to add anything?

No, Sanjay, everything is perfect.

Okay. And then you've been managing expenses in that segment really well. Obviously, we're down last year. I think year-to-date, they're up less than 1%. And can you talk – and I know you've touched on this before, but like how much of that is kind of coming from R&D cuts versus maybe more efficiency initiatives? And then how should we think about that growth for $25 million.

So that's a great question. If you look at our focus on backlog delivery, our focus on professional services and data cloud, as I talked about, that is helping us with the overall efficiency improvement. I think about the end of the day, when our clients are consuming our platform, they are relying on us from the operations outsourcing perspective, they're relying on us from the technology platform perspective and that way we are differentiating also with respect to competition. Regarding the margin management of expense management, R&D expenses, we have been very judicious because that's something very, very critical for us to keep pace with the change in the industry. The new products and solutions we need to invest in, in terms of solution expansion and segment expansion and continue to provide superior services to our clients that's absolute priority for us. Our motto is that okay, we are going to help our clients to grow their business, and we are not compromising on R&D expenses as part of our expense management. What we have really realized our margin expansion is through efficiency improvements. We are investing in AI. We are investing in automation. We are investing in how we can better manage our backlog delivery. So those are the differentiating factors which are helping with our expense management.

Jeff, I'd actually add and you talked about this a little bit in New York when Sean and I were with you, also continue to think about the company though, not just with the vertical lens with a horizontal lens as we drive more leverage and efficiency across our technology footprint as we think about our operational footprint, all the unit leads benefit from that focus and energy that we're putting and optimizing there. And they're actually starting to collaborate more, we're able to accelerate more delivery of things. We're able to prioritize differently. So Sanjay's team has done an amazing job of managing the expenses in the vertical. But as a leadership team, we continue to think about horizontally, what can we be doing foundationally that really drives true scale and infrastructure. Because one of the other things we talk about, we are certainly happy with the sales events in this quarter, but we expect greater things in the future, and we're not going to stop investing in the infrastructure and all the things required to absorb that and deliver a great client experience. But those are things are done horizontally across the company.

Okay. Yes, that makes sense, very helpful. So thank you.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to Ryan Hicke for closing remarks.

Thank you. Thank you for everybody for attending the call today. I would just leave you with Sean's remarks from earlier, it was a really great quarter, but it was one quarter. We're focused on the long term. We're focusing what we need to do to maximize SEI's capability and potential. We like where we see ourselves right now. We'll continue to lean into more secular trends where we can win but we're really focused on how do we create the same momentum in energy and success across all of our units and capabilities that we're starting to see emerge in a few of them. I appreciate everybody's time and look forward to seeing everybody, hopefully, in person in Q4.