SEI Investments Company (NASDAQ:SEIC) Q2 2023 Earnings Call Transcript

SEI Investments Company (NASDAQ:SEIC) Q2 2023 Earnings Call Transcript July 26, 2023

SEI Investments Company misses on earnings expectations. Reported EPS is $0.81 EPS, expectations were $0.86.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the SEI Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. [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 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 two 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 three new deals and recontracting four clients. We also successfully implemented three 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.

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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 experience 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 annuitization continue to be headwinds in the UK 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 UK 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 UK 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 at 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 and devote 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 in 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 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 or of which $4 million is net recurring. This reflects three new [indiscernible] sales. We re-contracted four clients during the quarter representing $15.2 million in annual recurring revenue. The private banking segment’s focus on the regional and community bank segment, along with the PCIM segment in the UK 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 UK 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, two 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 one-time 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 one-time items.

On the IMS front, net sales for the quarter were $23.7 million, $21.4 million is recurring. During the quarter, we re-contracted four 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 advisors, 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 capabilities 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 advisors 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 one-time 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 a professional fees line item on our income statement for 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 Pensions 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 was 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.

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Q&A Session

Operator: [Operator Instructions] And our first question is from Ryan Kenny of Morgan Stanley. Your line is now open.

Ryan Kenny: Hi, good afternoon. Thanks for taking my question.

Ryan Hicke: Hey, Ryan.

Ryan Kenny: Private banks pretext margin came in at 13%, but if we strip out the one-time fee of $10.5 million, you get to around 6%. So I just want to understand were there any expenses associated with that one-time transition? And can you update us just in general on the timing of pre-tax margin expansion expectations going forward for the Private Bank segment? Thanks.

Dennis McGonigle: Sure. I’ll answer the first part and then turnover 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 working 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 have. But Sanjay do you want to address kind of how the – how you see margins or the business progressing from here?

Sanjay Sharma: Sure. Hey Ryan, how are you? So in terms of the margin improvement as Ryan has called out the last three plus quarters or so, our strategy has been very consistent. We came up with, okay, these are the three, four focus areas where we are going to focus on client engagement, recontracting work with our existing clients, so that we can solidify our base, 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 is how we are targeting. And so I would say that we will stay focused and the margin management will be a key priority.

Ryan Kenny: Thanks. 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 McGonigle: I would say that we’ve kind of – well, we’ve moved off that terminology and there’s really not cost in the P&Ls any longer associated directly with One SEI. There is some technology work that probably would’ve been under that umbrella particularly as we worked through a couple client convergence and client onboarding activities. But there’s nothing distinct – no distinct expense in our P&L any longer related to One SEI, Ryan.

Ryan Kenny: Thank you.

Ryan Hicke: You’re welcome.

Operator: The next question is from Jeff Schmitt of William Blair. Your line is now open.

Jeff Schmitt: Hi. Thank you. You continue to make good inroads with SWP. What is the mix of SWP versus TRUST 3000 business in that, in the Private Bank segment today? And what type of revenue bump do you typically get in, in one of those conversions?

Sanjay Sharma: So our go-to-market strategy has been that we are leading with SWP. TRUST 3000 and new sales is 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 UK market, our focus is PCIMs and IFC segments. In U.S. market, we are focusing on Regional 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.