Q1 2024 SEI Investments Co Earnings Call

Participants

Alexander Whitelam; Director of IR; SEI Investments Company

Dennis J. McGonigle; Executive VP & CFO; SEI Global Services, Inc.

Paul Francis Klauder; Senior VP & MD of Institutional Group; SEI Investments Management Corporation

Ryan P. Hicke; CEO & Director; SEI Investments Company

Unidentified Company Representative

Jeffrey Paul Schmitt; Research Analyst; William Blair & Company L.L.C., 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 First Quarter 2021 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Alex Whitelam. Please go ahead.

Alexander Whitelam

Thank you, Eric. Thank you, everyone. Welcome. We appreciate you joining us today for our first quarter 2024 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer; Dennis McGonigle Chief Financial Officer; and Sean Denham, incoming Chief Financial Officer with leaders of our business segments, James Cipriano, Sandy Ewing, Paul Klauder, Phil McCabe, Sneha Shah and Sanjay Sharma.
Before we begin, 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, and good afternoon, everyone. We are out of the gates this year with high-quality results, top line growth and margin expansion in the first quarter. This deepens our conviction to maintain our focus on excellent execution against our strategic priorities. We are seeing significant traction in our technology and operational businesses as we manage expenses diligently, especially manifesting in profit growth in private banking.
Our attention remains on increasing sales and pipeline activity and allocating capital and talent to new growth initiatives and emerging technologies. Accelerating activity and innovation is also a strategic priority in our asset management businesses as market trends and product types, asset allocation and investment choices continue to be headwinds. Our broader value proposition and solution set is resonating and gaining momentum. We need to translate this momentum into increasing new client acquisition and adoption.
We will continue to lean into growing segments in the intermediary and institutional markets. Let me dive into our results for the quarter. Revenues in the first quarter were $511.6 million, up 9% from the first quarter of 2023. Net sales events in the quarter totaled $21.3 million, of which $16.6 million were net recurring. This was driven largely by a combination of technology and operational outsourcing sales of $24.5 million, offset by net negative activity in our AUM-oriented businesses.
In our advisor business, we generated over $9 million of revenue with the FDIC-insured component of the SEI Integrated Cash program, which we launched in December 2023. Net income for the quarter increased 23% over the same period to $131.4 million. This is an important indication that our focus on sales implementing the backlog and driving more operational leverage across SEI trying to show results. We have more to do on all fronts.
In the quarter, we repurchased approximately 808,000 shares of SEI stock at an average price of $69.32 per share for a total of $56 million of stock purchases. EPS was $0.99 for the first quarter, up 25% over the $0.79 reported in the prior year period. We believe we are well positioned for the remainder of 2024 and into the future, combining a strong financial position and unmatched set of capabilities and an engaged client and employee base. We're focused on delivering comprehensive solutions for the markets we serve and enhancing shareholder value.
With that, let me turn to our business lines. Our Investment Managers business had another exceptional quarter. On the growth front, we have new business and cross-sales in the alternative and traditional markets, notably with the expansion of their product line, including CITs and the conversion of mutual funds to ETFs. This is a trend we are seeing increase in the traditional asset management segment.
We also implemented more than 60 new funds from a competitor onto our private equity platform for one of our larger clients. We continue to expand our reach in global markets. In particular, we are actively engaging with European-based private asset managers and we've made investments to further strengthen our global operations in Dublin, London and Luxembourg. The expansion of our IMS services in the non-U.S. markets is an important component to our future growth strategy.
Most importantly, we hosted 80 of our clients for an annual event earlier this month, and it makes me extremely proud to be part of SEI. When I get the privilege to your firsthand, the experience our clients are having and the excitement they have to continue to grow with us. It shows how powerful our people, our culture and our capabilities are in the market. Private banking continues to execute effectively. The team carried last year's momentum through the first quarter with solid revenue growth and margin expansion compared to a year ago.
While new contract signings were light in the quarter, this is simply a function of contract timing versus activity. The team already has a good start to Q2. We are seeing increased activity and success in the regional community bank segments. U.K. private client investment managers and our professional services offering across all segments. This go-to-market strategy was a key part of Sanjay's reorientation of the client-facing teams and it is being received positively in the market. The focus and deployment of additional investments in marketing, R&D and talent over the past 18 months is paying off.
Moving to our Global Asset Management businesses. Investment Advisors saw positive net cash flows of approximately $915 million. This was largely driven by our Strategist Partner Solutions and separately managed accounts, along with AUA growth from advisors leveraging our technology and operational solutions. Offsetting these inflows were outflows in our active mutual fund products as a result of markets shifting to lower-cost products and package solutions.
During the quarter, we brought on 61 new advisors. And we also saw 3 of our existing RIAs crossed the $1 billion threshold on our platform, demonstrating our value and helping our advisors scale and grow their businesses. In the Institutional Investors segment, we remain focused on growing this business by aligning our cost structure and our talent to drive sales and margin expansion.
While our results continue to reflect industry challenges, our teams did a really nice job managing expenses and securing a number of new wins with new and existing clients. Of note, we completed the transition of our first SWP client with a sizable private foundation into our OCIO program. We also recontracted 3 clients in the quarter, and finally, we have made adjustments to the cost structure and focus of SEI Novus to improve overall business results.
Within our investments in new business segment, we announced our strategic investment in TIFIN, a leading platform, accelerating the adoption of artificial intelligence and wealth management. With this partnership, we expect to more rapidly explore, develop and deliver new offerings that drive growth for our clients and the broader industry. We also had new wins in the family office services and private wealth businesses. Our partnership with LSV remains strong, and they had another quarter with positive relative performance, which Dennis will discuss.
Finally, we've launched new initiatives focused on developing talent for the future and elevating our culture across the organization. One focus area is on professional sales development, offering programs that are designed to expand and increase our bench of sales talent and support our client center culture. Another initiative is the launch of an employee-led group SEIsmic. SEIsmic's goal is to unite our innovation centers across the company, create opportunities for every employee to contribute to our growth and to actualize new business ideas aligned with our organizational objectives.
With that, I'd like to thank all my colleagues across SEI for their commitment to our vision. 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 $0.99 per share. This compares to $0.79 during the first quarter of 2023 and $0.91 for the fourth quarter of 2023. The revenue for the quarter was $512 million compared to $469 million in the first quarter of '23 million and $485 million in the fourth quarter. Total expenses for the quarter were $386 million, which compares to $367 million last year and $383 million in the fourth quarter.
Included in the first quarter, expenses were approximately $6.2 million of severance expense as a result of workforce changes principally in our SEI Novus and Finomial units. The EPS impact is approximately $0.03 to $0.04. On the sales front in our technology and investment processing businesses of private banking and investment managers, net sales events totaled $24.5 million and are expected to generate $20.7 million in recurring revenue.
In our asset management-related businesses, net sales were approximately negative $5.7 million, primarily due to asset movement from our mutual fund products into other investment programs as well as net losses in our institutional business. As Ryan mentioned, cash flows in our advisor business were a positive $900-plus million. We also sold $2.5 million of revenue in our new business segment. Total net sales were $21.3 million, of which $16.6 million is recurring.
Private banking sales were $2.9 million, most of which is onetime. During the quarter, we had one client win and one loss, both smaller in size that essentially offset each other. The 3 clients recontracted during the quarter represent $4.8 million in annual recurring revenue. Despite first quarter closes, sales activity is strong. The limited client signings, as Ryan referenced, are more an issue of timing versus activity.
During the quarter, we stayed on schedule with client implementations and conversions. We installed $1.4 million of revenue from our fourth quarter backlog. Our current backlog of expected to be installed revenue in the next 18 months is $18.5 million. Also note that as part of the segment change we announced yesterday, we moved $2.8 million from the banking backlog to the IMS backlog. This was a piece of business related to alternative asset processing that while the client is a bank is more aligned with IMS services and delivery.
Asset Management revenues in private banking were up from fourth quarter, flows were essentially flat. However, higher asset levels entering the quarter led to higher average AUM, which helped the revenue growth. Expenses in private banking were up slightly from the fourth quarter of 2023 reflecting overall business growth. Note that expenses year-over-year were flat.
On the investment managers front, net sales for the quarter were $21.6 million, $20.4 million of which is recurring. During the quarter, we recontracted 4 clients totaling $5.7 million in annual recurring revenue. Revenue for the quarter was up compared to fourth quarter, reflecting the impact of client installations. Expenses were down slightly. However, fourth quarter included a $5.3 million item for an asset write-down. Our backlog of sold but expected to install in the next 18 months recurring revenue is $28.9 million, which includes the $2.8 million move from private banking.
As Ryan mentioned, for investment advisors, net cash flow onto our platform were up including increased flows into our newer strategist partner and platform-only programs. This was offset by negative flows from our mutual fund products. One key item of note is the $9.6 million of revenue generated in the quarter from the FDIC insured deposit program launched in December.
As a reminder, this takes the cash allocation in our model portfolios generally used for operational purposes like paying fees and suits those balances into an FDIC insured deposit account. At quarter end, there were approximately $897 million in assets in this program.
Also note that we recognized approximately $1.5 million in revenue in the fourth quarter. Revenues for the quarter were up for reasons mentioned. Expenses were flat from fourth quarter, reflecting overall good expense management. In the Institutional Investors segment, net sales events for the quarter were negative $4.6 million reflecting positive client signings offset by losses and repricing and client retention activities. Revenues for the quarter were up due to positive markets. Expenses were also up slightly reflecting personnel-related costs. In the investments in New Business segment, revenues and expenses were also up compared to fourth quarter with modest profit improvement. LSV produced $31.6 million of profit during the quarter, this compares to $35.4 million during the fourth quarter. Revenues for LSV were $107.3 million compared to $117.1 million in the fourth quarter.
First quarter revenues included $6 million of performance fees. As a reminder, LSV recorded performance fees of $19.8 million during the fourth quarter. Performance fees are a reflection of continued positive relative performance. Our tax rate for the quarter was 22.9%. As I'm sure you all noted with our 8-K filing yesterday, we have made a few modest adjustments to our segment reporting. All numbers presented today reflect those changes.
As you also know, this is the last of my roughly 90-plus earnings calls. I would like to thank all the investment and financial professionals present in the past. This role has given me the opportunity to meet and engage with. I thank you all for the professional manner in which we engage and the insights and questions that you brought to me that broaden my and our thinking. SEI is in great hands, and I'm sure your interactions and working relationship with Sean will serve him and the company well.
That concludes my remarks. All of our unit heads are on the call, and we will now take questions. It's your last chance to stump me.

Question and Answer Session

Operator

(Operator Instructions) And our first question will go to Owen Lau with Oppenheimer.

Owen Lau

So Dennis, as you wish, I'm going to give you a fast ball. Could you please talk about the traction for the cash program going into the second quarter? I know you generated a fee of $9.6 million in the first quarter. You gave us, I think, the quarter end number $897 million. But how much average cash did you get in the first quarter and in April so far? And how we should model out the revenue going forward?

Dennis J. McGonigle

Thanks, Owen. That is pretty much a fast ball right down the middle. I really appreciate doing that. You are too kind. I guess when we travel together this quarter, that helped. Average assets in that program for the quarter were just under $850 million. So the $9.6 million was derived from that average balance, but we ended the quarter with higher levels. And so this is our first quarter of experience with this program full quarter. Paul and the team are continuing to work with our advisor community and getting a better feel for how flows are going to occur into this program. So as the year progresses, I think we'll get a better feel for kind of what's kind of the consistent rate of cash in this program, which can be affected by how much rebalancing occurs when fees are paid, when this cash is used to meet the operational needs of customer accounts. But so far, so good. We're clearly on track for the $25 million we talked about back in January.

Owen Lau

And then on price of banking, margin continues to go up. Is there any explorational goal on when you can get back to historical 30% margin level? I mean it may or may not be a straight line up, but is there any potential investments that we should be aware of before it reaches your goal.

Dennis J. McGonigle

It's probably best that Ryan answered this question because I would be -- I'm not going to be here. I know what my aspirations are now. They've changed quite a bit (inaudible).

Unidentified Company Representative

It treated differently as the (inaudible)

Dennis J. McGonigle

But I think we've always said that this business, we expect the type of business it is, how we operate the business to scale and opportunities within the business that this should be a 30% margin business that we'll get to both through top line growth and efficiency and delivery that gets that top line growth or a big chunk of it to the bottom line. And Sanjay has really done a great job over the past 18, 20 months in reorienting the business both in terms of its market-facing activities and client engagement and the level of client engagement and prospect engagement, but also in working with not just with his own unit but across other units within SEI that contribute to the offering of private banking to bring costs down or to bring them to a level that we feel really good about the scale we'll get going forward.
So we're still looking at that I'd say, a 3-plus year time frame, 3 to 5 years as a good target. But a lot of it depends on continuing to execute the way the team has been executing.

Ryan P. Hicke

I would echo that. I think what's been consistent (inaudible) I mean, I think this is the fifth or sixth quarter that you kind of see consistent improvement and I think we sent hopefully a very clear message externally and internally when Sanjay took over responsibility that we were going to get this business back to historical margins. We were going to be extremely disciplined and focused on how we do that. But I think the thing that is encouraging for us as a leadership team is really seeing how the activity and focus on the revenue side and the sales side is starting to pay off with leading indicators that we track, such as activity and pipeline engagement. So I mean, I think Dennis' answer is spot on. But I think most importantly, Sanjay and the team just have this as a really strong blueprint and plan that they're executing against moving forward.

Owen Lau

Thanks a lot for your insight, Dennis. It's my pleasure working with you.

Dennis J. McGonigle

Thank you, Owen. Mine as well.

Operator

And next, we'll hear from Jeff Schmitt with William Blair.

Jeffrey Paul Schmitt

Dennis, I wish you the best in your retirement.

Dennis J. McGonigle

Thanks, Jeff.

Jeffrey Paul Schmitt

So question on the Investment Advisors business, the margin jumped up 45%. Expenses were pretty flat from last quarter. Is that improvement in the margin mainly from the addition of spread income? Or are there some expense initiatives underway. Just trying to think how should we think about that 45% margin going forward?

Dennis J. McGonigle

I'll let Paul jump in here. But clearly, the revenue up and the high-margin on that revenue stream helped in the first quarter, certainly compared to fourth quarter and last year. But there also is a very concerted effort on cost containment. And I would -- I use terms more like a greater efficiency and delivery, higher quality and delivery, higher scale, better -- we always invest in our technology in operational areas to help drive scale. So that's also been a help. I don't know, Paul, do you want to?

Paul Francis Klauder

Yes. I would concur. Net interest income and the profitability of the FDIC program, obviously, is a big contributor. The markets are a contributor. Expense management, we continue to be disciplined about that. And just from a sales and marketing perspective, we are looking for more larger advisors that convert, I would say, we call them chunk plays, bigger advisors over $250 million. We did see 3 of those this quarter and we continue to have a sales emphasis on those larger advisors while we still work our bread and butter, which is our advisors affiliated with broker-dealers.
So overall, a very positive quarter for the segment.

Jeffrey Paul Schmitt

And then a number of your biggest competitors in that segment are starting to implement price increases in their businesses. Does that sort of open the door for you to do the same? Or do you see it more as an opportunity if you don't?

Paul Francis Klauder

Yes. On the price increase side, I mean, we always look at the competitiveness of all of our offerings. I mean the mutual funds, we know have had some price decreases over time or just more investors kind of opting out for other implementation, whether it's ETFs, separate accounts, UMA programs. So we're always looking at the competitiveness. We don't see right now much increase that we can just build in, in absolute price relative to our competitive set, but we'll continue to evaluate that. But more importantly is just driving growth through getting more and more assets under management. That's where we really think there's going to be escalation in the profitability of the segment.

Dennis J. McGonigle

I'll just add to that. We're operating under a longer-term view that there's going to continue to be price compression and that the pricing environment in the asset management in particular is -- that pressure is not -- isn't changing. It's only going to continue, which is why we're so focused on technology build, operational efficiency and scale, client delivery, broadening out our market segments for growth. So it's -- I don't know that we've seen price increases in the competitive set, it would possibly be a good thing in certain areas if that occurred. But we're operating under that this is going to be a more price-competitive environment and making sure that from a delivery standpoint, we're as effective and efficient and scalable as possible. And that's something our clients really appreciate both within the advisor channel and the banking channel. I mean many of Sanjay's clients, every one of them is dealing with the same market issue.

Operator

(Operator Instructions) Next, we'll hear from Ryan Kenny with Morgan Stanley.

Ryan Michael Kenny

Dennis, congratulations on 90-plus quarters.

Dennis J. McGonigle

I survived, right? I am a survivor.

Ryan Michael Kenny

You have been very helpful. So thank you so much for everything throughout the years. I have a question on net new sales. So when I look at the 3 bullets, you have $24.5 million from private banks and IMS, it's pretty strong. You have $2.5 million from the newer initiatives and then there's the drag of negative $5.7 million from the Asset Management-related businesses. And when you look over the last few quarters, that drag has persisted for a while. So how should investors think about how much of a drag there is going forward. If you could give an update on where your current (inaudible) defined benefit plans stands? And how much headwinds should we expect going forward on there?

Ryan P. Hicke

Yes, Ryan. It's Ryan. Hope you're doing well. I'll start and then Jay is in the room, and Paul can add. So let's start with the first of the 3. So if you look at IMS bills in the room as well. That's another exceptional quarter of sales, as I mentioned. When you think about the breadth of our capabilities set there, the overall market trends around the appetite and the embracing of outsourcing and our ability to continue to invest and deliver differentiation through technology and operational solutions and our people, we feel good on the traditional side of the alternative side and the emerging in the global side to continue to drive net new sales numbers.
We already touched on what Sanjay and the team are doing. So first of all, we feel good. We look at the total addressable markets. We'll continue to be nimble. We'll allocate resource where needed, and we'll continue to expand our footprint in areas there. We made a concerted effort, as you know, last summer to bring in an executive from the outside and look at our new business initiatives and investments in new business in different ways. I talked about a little bit of that earlier with what we're doing with TIFIN and SEIsmic, but when you see family office services and sphere and private wealth management, we know when we think about the company 5 to 7 years out, we want additional growth engines beyond what we have today, and we're starting to really lay some railroad tracks to make some investments there. We feel good about that.
And then when you get to the AUM-based businesses, I honestly think it's a tale of 2 cities right now. You just have an overall market and macro shift in terms of product types, whether that is a move from mutual funds to ETFs or lower-cost products and I think a continued move overall, especially in developed markets from active portfolio management to passive portfolio management driven partially by price. So in some ways, we're a victim of success that we've had over many years, but I believe that we have been extremely thoughtful and aggressive in figuring out how do we continue to invest not just in differentiated investment management solutions, but as Dennis mentioned, technology and operational platforms that will really allow us to deliver value to a broader set of intermediary and institutional clients in the future.
So really long-winded answer to say, how should you think about it? I think it will continue to be a little bit choppy, but we're looking really at how are we increasing client adoption. Paul's point around larger conversions, expanding into different segments and really continuing to rethink what our asset management offering is both proprietary and third party to drive value. So it's there, you're on it, we're on it. And Jay, if you want to provide a little commentary maybe underneath institutional around DB and different segments there. And I can always come back, Ryan, and unpack anything I said.

Unidentified Company Representative

Sure. Thanks, Ryan. Certainly, planned corporate defined benefit plans, making the decision to annuitize. We've touched on this in the past. It continues to be a reality in the corporate DB space. Certainly in the rate environment that we've experienced over the last couple of years. It's encouraging to see a few reports out there that the pace of annuitization has slowed over the last 6 months and also talking to some of our clients who may experience a funding status over 100%. Some are utilizing that cash to fund other opportunities instead of moving towards annuitization.
What I'm most encouraged about those as I look across the new business activity that we did close in the first quarter of this year, the new names we brought in span U.S. corporate defined benefit U.S. endowments, U.K. master trust business, know this business. So we continue to see activity across all of those sectors and the new names as we work through some of those planned annuitizations that we've talked about now for a bit.

Paul Francis Klauder

And Ryan, if I could that (inaudible). Ryan, this is Paul. Just to add one other thing. With regard to the FDIC program, I know you know this, but I just wanted to call it out. We did not recognize that as a sales event. So that's very strong revenue and profitability that the unit and the firm is getting, but that is not a sales event. So recognize that lift that's not in there, but the lift -- the decrease associated with moving out of mutual funds to ETFs and other passive implements are in there.

Operator

And that was our final question. I would now like to turn the call over to CEO, Ryan Hicke.

Ryan P. Hicke

Thank you. As I mentioned, we started the quarter with strong financial results and are poised to drive future success. We also announced in Q1 the hire of Sean Denham as Dennis' successor as CFO for SEI. Sean is a terrific addition to the SEI executive team and brings a wealth of experience and talent to drive our future growth.
But I would like to close by thanking and acknowledging my friend, Dennis McGonigle. For almost 40 years, Dennis has set the standard for leadership, culture, stewardship and care and that care extended to shareholders, clients, employees and our families. I have the deepest amount of personal and professional respect and admiration for Dennis, and I'm extremely proud to have worked with him for 26 years, learned from him for 26 years and laughed with him for 26 years. Many more times ahead for us in the future, but on behalf of all of us at SEI, I want to say thank you to Dennis, and thank you to everybody for joining today's call.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.