Sei Investments Co Q2 FY2021 Earnings Call

Thank you very much. Good afternoon, everyone. I want to welcome all our segment leaders who are here on the call with me, along with Dennis McGonigle, our CFO, and Kathy Heilig, our Controller. I will begin by summarizing the financial performance from the second quarter of 2021, after which Dennis will discuss LSV and our investment in the new business segment. Following that, each leader from our business segments will provide insights on their respective results. As always, we will take questions after each report. Now, let's focus on the financial outcomes for the second quarter of 2021. We saw a 19% increase in revenues compared to last year. Earnings rose by 32% year-over-year, with an earnings per share of $0.93, up 37% from $0.68 in the second quarter of 2020. Asset balances increased by around $7 billion, while LSV’s assets grew by $800 million. During this quarter, we bought back 21 million shares of SEI stock at $61.93 each, totaling $129 million in repurchases. Now, I’d like to outline our current situation. IMS is experiencing steady growth in revenues and profits. The RIA segment has been effectively implementing a technology-driven strategy, and we are currently seeing strong signs that this business is on the upswing, which is very encouraging. Private Banking is working through an implementation backlog, has a robust sales pipeline, and is committed to enhancing client satisfaction. The Institutional Investor segment is facing challenges with its legacy OCIO client base but is actively addressing expanding areas within OCIO and ECIO. We are also exploring growth opportunities beyond our traditional four business lines, identifying potential in markets and services related to them. Some of these innovative ventures include GRC, which provides global regulatory compliance services; SEI IT services focused on cybersecurity; and Private Wealth Management, offering a comprehensive platform for ultra-high-net-worth families and individuals. Now, turning to revenue generation, net sales events in Private Banks and Investment Managers totaled $13.2 million, with $9.8 million anticipated to be recurring. Additionally, net sales events for Asset Management-related units amounted to $2.8 million. These figures illustrate positive asset flows from Investment Advisors and AMD, counterbalanced by losses in our legacy Institutional Investor base. In a few moments, our unit heads will share more detailed information on their sales performance and new business prospects. Looking ahead, we recognize that the future will be different, and we are actively adjusting to new realities, including a remotely distributed workforce. We have been strategizing about our future work model and are putting those plans into action. Fortunately, we have generated a lot of positive momentum in the first half of 2021, with a strong sales and implementation backlog and several key prospects in our sales pipeline. We have also made advances in restructuring our Asset Management-related business segments. Overall, we are eager to seize the opportunities that arise from these significant changes. That wraps up my formal remarks, so I will now hand it over to Dennis for an update on LSV and the investment in our new business segment. Following that, our segment heads will provide updates on the results from their areas.

Thanks, Al. Good afternoon, everyone. As Al mentioned, I'll discuss the second quarter results for the investments in new business segment and LSV. In the second quarter of 2021, the investments in new business segment included the operations of our Private Wealth Management Group, our IT services initiative, and the modularization of larger technology platforms to advance our One SEI strategy along with other investments. During this quarter, the investments in new business segment reported a loss of $9.6 million, an improvement from the loss of $10.1 million in the same quarter of 2020. About $7 million of expenses in the second quarter of 2021 relates to our One SEI initiative. Regarding LSV, our approximately 38.7% ownership resulted in a $35.1 million income contribution to SEI for the second quarter of 2021, compared to a $28.3 million contribution in the second quarter of 2020. Assets increased by about $800 million during the quarter. LSV faced a net negative cash flow of about $4.2 billion during the quarter, which offset market appreciation of around $5 billion. Revenue for the quarter reached approximately $116.4 million, with minimal performance fees. Our overall expenses for the quarter included roughly $1.9 million in severance costs associated with the affected business segments and about $5.6 million for subadviser expenses linked to revenue growth. As we mentioned in previous calls, like many companies in our industry, we are experiencing increased competition for talent, which is driving up personnel costs, and we anticipate this trend will continue. Additionally, our business growth, especially in our IMS segment, will result in a rise in total employees. Each quarter, we review the vesting time frame for all previously issued options. This quarter, we adjusted the expense amortization schedule, including a determination that certain option tranches will vest a year sooner than we had previously estimated, resulting in an additional expense of about $500,000 during this quarter. As stated in our earnings release, we expect the option expense for the rest of the year to be around $25.7 million. Lastly, during the quarter, we increased our investment in corporate marketing and branding, specifically enhancing our digital capabilities and expanding our market reach. We will continue to do this to support the promotion and sale of SEI services. Our effective tax rate for the quarter was 22.3%. We have also included additional financial information in our earnings release. I always encourage you to check our soon-to-be-filed 10-Q for more details. I’m now happy to take any questions.

And we'll go first to Robert Lee with KWB.

Can you please go over some of your commentary on kind of expenses and spending? And I apologize because I was I think writing and kind of missed some of this. Can you maybe just kind of go through that again?

During the quarter, the company incurred $1.9 million in severance expenses, which are not expected to recur. This expense impacted various business segments or corporate overhead based on where the employees were located. Additionally, approximately $5.6 million of the expense increase was associated with revenue and asset growth, which is an important consideration as these costs are often not highlighted. Each quarter, we evaluate when we believe the option tranches we issue will vest, and we amortize the costs over the vesting period. In this quarter, we determined that some options would vest one year earlier than previously expected. This resulted in an additional $500,000 in costs for the second quarter and will affect our option expense for the rest of the year, which we project to be around $25.7 million in the third and fourth quarters.

Okay. Great. And so maybe one quick question with the severance. I mean, obviously, that's a one-time thing, but how should we be thinking just broadly about kind of headcount growth and maybe pressure on compensation, just given competition for talent and whatnot as the year progresses?

Yes. So I think on the talent side, at least it's clear to us, and I can't imagine other comps since we're competing for talent against other companies and some companies you will cover. Yes, the cost for talent is going up and how is going up. So to the extent there's inflation, compensation inflation alive and well in the markets, at least that we compete in for talent. That's true. And far be it for me to call that transitory. That's just the nature of the beast right now. Secondly, and you'll hear this from Steve as well that in the IMS business, we've had really solid growth, even faster matriculation of some of the sales activity. And I would say we're a little bit behind in the hiring process. So we'll be adding people to support not only future growth but growth we've already brought on the book. So our headcount is likely to go up. Now other businesses are less so. And Paul, I'm sure he'll mention or at least can speak to, given what's going on in his business, the changing nature of how marketing and selling has changed significantly over the past year, two years. Now he's just worked to reset his organization not only for the current environment but the future of that business. So I would just say it's adjustments really working off of what our business strategies are and how the market is behaving.

And next, we go to Chris Donat with Piper Sandler.

I wanted to follow up on the consolidated income statement, specifically regarding the sub-advisory fee line. As a percentage of your asset management revenue, that did increase. Was there anything unique happening there? Was it something one-time in nature, or is this just an elevated level?

Yes. There was a one-time adjustment in the institutional business related to a sub-advisory expense, which Paul will discuss in his comments. Aside from that, some of it may be due to the mix of assets in relation to the sub-advisory costs associated with those assets, which could also be a contributing factor.

Okay. I'll wait for Paul's comment.

Yes. But there was, like I said, one-time catch-up expense.

We're going now to Ryan Kenny with Morgan Stanley.

So I heard Al in the opening remarks, mentioned the possibility for more remote work. So given the pressure on personnel expense, just wondering if there's anything you can do on the real estate footprint side or on the travel expense side to keep margins at current levels? And I'm asking in context of the company margin currently at 29%, still being pretty elevated relative to historical levels.

Yes. To confirm what Al mentioned, we have developed a plan that we are actively implementing to bring our employees back, and we anticipate that a significant portion of our workforce will fall into a hybrid model, working in the office sometimes and remotely at other times. Considering that we own the real estate in Oaks, Pennsylvania, which is our primary property in terms of square footage, and recognizing that our other larger facilities in London, Ireland, and Indianapolis are operational centers, we will also bring staff back to those locations, which have longer-term leases. Therefore, our capacity to reduce our real estate footprint is quite limited.

And we do have a question from Ryan Bailey with Goldman Sachs.

I had a quick question on LSV. I think generally, we've seen or heard of better industry dynamics of value, maybe some rebalancing away from both. And I was just wondering, as you kind of look out or hearing anything around maybe potential for better flows in that business?

Yes. Their flows for the quarter were similar to the first quarter and somewhat close to the fourth quarter as well. Their net flows, which were negative, were mainly due to a rebalancing that resulted in lost assets from existing clients. They did experience some gross sales and secured a couple of significant mandates during the quarter. Therefore, they are also observing increased sales activity, which is a positive sign, as it seems people are starting to focus on value. Their strong performance in the second half of last year and the early part of this year likely influenced the rebalancing. Overall, their performance for the quarter was fairly neutral or slightly positive in some areas. However, the indicators suggest that their ability to sell in the market is improving.

Got it. Okay. And maybe just another on repurchase activity, fairly healthy for the quarter. I was just wondering how we should be thinking about the pace or your timing and maybe why was this quarter the right one to step up the repurchase? Or was it sort of immediately after the last earnings release?

Yes, we purchased 2.1 million shares this quarter, which is a solid amount. Comparing this to the first quarter is not entirely fair since we had a longer blackout period then that restricted our market activity. Therefore, the repurchases in the first quarter were lower than usual. The second quarter looks better, and the market provided us with stock that we could take advantage of. Looking ahead, our Board remains committed to being active in share repurchases and will adjust based on market conditions.

We have no additional questions in queue.

So before I turn it over to Steve, I 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 release and in our filings with the SEC. We do not undertake to update any of our forward-looking statements. And now I'm happy to turn it over to Steve.

Thank you, Dennis. Good afternoon, everyone. During the second half quarter, we continued our momentum in the market while also executing on our One SEI strategy. Second quarter 2021 revenues for the banking segment totaled $123.7 million, which was up approximately $16 million or 14.8% in the second quarter of 2020. Increased revenues were due to asset management revenues and an increase in our processing-related revenues as well as elevated one-time revenues during the quarter. Second quarter 2021 quarterly profit of $6 million for the segment was up $6 million from the second quarter of 2020. This increase in profit was primarily due to the increase in revenues. And turning to sales activity. For the quarter, we closed just shy of $3 million of gross recurring sales events, which due to some M&A activity, which I mentioned previously, resulted in a negative $1.1 million of net recurring events for an investment processing business. We did have a positive $1.6 million in asset management events. This offset from asset management brought our total net recurring events for the quarter to approximately $500,000 for the segment. In addition, in the quarter, we closed $1.8 million in one-time revenues. While we would have liked our net events for the quarter to be higher, we are encouraged by our sales activity and feel our results were more impacted by the timing and the length of the contracting process we continue to experience in this market. Despite the long contract cycles, we are strongly encouraged by the market activity we are involved in, and we are now seeing many firms in our target markets getting back into normal operations. And with that, sales activity is increasing in the larger end of the market. This bodes well for us going forward. During the quarter, we signed an agreement with a new client to SEI, Tompkins Financial Advisors. We won this business in a competitive process, and we expect confidence to migrate to the SWP platform from a competitor platform in the first half of 2022. We look forward to welcoming them to the SEI family and supporting their future growth initiatives. Turning to implementation activity for the quarter. Pacific Premier Trust, a division of Pacific Premier Bank converted to SEI Wealth Platform from a competitor platform, and we look forward to working together in supporting their growth and expansion initiatives. Additionally, during the quarter, we completed the conversion of Truist, the combination of SunTrust and the merged BB&T business onto TRUST 3000. The completion of this conversion allows us to continue providing our current scope of technology and services to the new larger organization. As an update on our backlog, our total signed but not installed backlog is approximately $72.6 million in net new recurring revenue at the end of the second quarter. From an asset management standpoint, total assets under management ended the period at $26.3 billion, which was up 4.7% from the first quarter of 2021. Our cash flow for the second quarter of 2021 was a positive $269 million. As we go through the rest of the year, we look forward to continuing our momentum, executing on increased sales and prudently investing in the business to ensure sustainable growth. We will also continue to execute on our One SEI strategy, which will allow us to increase our growth opportunities by unlocking all the assets and platforms SEI has to offer across the company. We remain excited and optimistic on our growth opportunity. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

And we're going now to our first question in the queue, Ryan Kenny with Morgan Stanley.

So I've heard the message on the higher personnel costs in the IMS segment, which I know we're talking about next, but just wondering if we should expect anything similar going forward in the banking segment? And any color on how that or any other expense pressure might impact the ability to get banking margins higher?

Yes. So two things, Ryan. One, yes, we will add expense in banking, but I think we're trying to do this very judiciously like in other units. But we're also, as I mentioned before, looking at areas that we feel we can be a little bit more efficient in, in the technology operations area. We did have increase in our expenses in Q2, primarily in personnel and in operations. But I think we'll look to manage this pretty tight and aligned with new revenue coming in. And I think as far as margins, us working on that expense plan, which is a longer-term initiative of one I'm hopeful we'll have some benefit from through the year, should help us with margins. But also, as I mentioned in Q1, we will have some things this year will cause some choppiness to margin i.e., the M&A activity I mentioned. So I think any movement in margin you see from quarter-to-quarter this year will be more of kind of those one-time things and that choppiness as we go through the year.

And we will go now to Ryan Bailey from Goldman Sachs.

I was just wondering regarding some of that elevated one-time revenues that you were referring to, is there any way that we can try to think about sizing that? And what sort of like maybe the more normalized revenue would look like going forward?

Yes, our one-time revenues generally consist of professional services fees. This year, we experienced a buyout of a client that was a buyer, which contributed significantly to the increase from Q1 to Q2. I anticipate that this will normalize as we progress through the year, but there may be additional M&A opportunities that could introduce some fluctuations. However, as we have observed previously, the nonrecurring revenue primarily reflects our implementation fees. As we onboard more clients, you can expect to see an increase in the professional services implementation and conversion fees reflected in that figure.

Got it. Okay. And maybe just to sort of circle out that conversation just to make sure I'm thinking about it right. As you're thinking about the M&A activity in the space, the general sentiment could be that there is some more headwinds through the back half of this year?

Yes. I'd say there's a couple more headwinds. And again, I don't think these are significant or material to business, but more that will provide a little bit of choppiness when you come down to the profit margin.

Got it. Okay. And maybe if I can sneak one more quick one in. Just regarding the $72.6 million for backlog. Any change in the time line for implementation there?

No, I think we are looking at about 60% of that being completed within the next 18 months, with the rest following afterward. We are likely still on track for that. Some clients are experiencing delays on their end, especially due to ongoing pandemic challenges in India, which have affected their development fees. We are seeing minor delays, but nothing major—just a couple of months. Overall, I remain optimistic about the implementation schedule.

Next, we have Owen Lau from Oppenheimer.

Just a quick question. Going back to the like outsized one-time revenue in the second quarter. Did I hear correctly, it was $1.8 million in the second quarter and then there will maybe be some lumpiness down the road? Is that the right way we think about that?

No. There are two numbers to consider, Owen. The $1.8 million is the amount we actually signed, which is part of our one-time revenue sales. The other one-time revenues were indeed recognized as booked revenues. We experienced an increase in our booked one-time revenues during the quarter, mainly due to professional and conversion fees, as well as a buyout of a client who was acquired. When I refer to the potential fluctuations in one-time revenue, there's a possibility of an increase if we have more client buyouts resulting from mergers and acquisitions. However, it’s not expected to be significant; it will mainly affect the quarterly margin from one period to the next.

Got it. And just any change of the time line when you mentioned previously that the margin will continue to expand there, maybe this year and next year. Any change of time line in terms of your expectation?

No, we're still working on getting through this year and finding a way forward. My goal is to maintain our momentum and reach a more sustainable and accelerating margin level, but we haven't determined that yet.

Our last question comes from Robert Lee with KBW. Just any change of the timeline when you mentioned previously that the margin will continue to expand this year and next year. Any change of timeline in terms of your expectation? No, we're still working on it. I think we're still looking to get through this year and find a path we can come out of. Again, my goal is to maintain our momentum and reach a more sustainable and accelerating margin level, but we certainly haven't determined that yet.

Well, first quick question back to the booked one-time revenue. What was that number for the quarter?

We tend not to break it out, Rob, given one-time, etc. What I'd tell you, I think that's more pertinent is that we did have an uptick over Q1 and most of that uptick. A few million dollars was due to the buyer.

I'm curious about the competitive environment. You mentioned Tompkins taking business from a competitor. Is there a way to generalize when you feel you're losing potential new business to a competitor? For example, if it's related to TRUST 3000, could it be due to pricing, or is it more associated with something related to SWP?

No. I understand, Rob. That's a significant question. It really depends on the opportunities available. I would say the majority of our lost business relates to our capabilities, technology, and workforce. We tend to lose business when a client gets acquired and transitions to a competitor’s platform, as the priority shifts to completing the acquisition rather than changing platforms. However, there’s a positive aspect; a client that is absorbed into a larger organization becomes a new prospect for us. Regarding Trust 3000, I believe when clients leave, it’s often less about pricing and more about changes in their business model or the capabilities they require. They may prefer a more streamlined approach with fewer capabilities. It’s challenging to provide a definitive answer for the market, but we feel well positioned thanks to our technology and platform. We believe we have one of the best platforms in the industry, both domestically and internationally. Unless a client is simply looking to swap out a couple of components, we are confident in our standing against competitors.

I have a question about client retention, particularly in the U.K. compared to the U.S., where the business is still relatively new. How do you assess retention rates when SWP contracts are up for renewal? I know you've had several renewals in the U.K. and likely some in the U.S. Do you have a sense of your retention rates? Perhaps you can estimate a percentage like 90% or 80%. What metrics do you consider?

Yes, Rob. I don't have the exact number right now, but I can tell you that it's in the high 90s. In the past, we've lost a few clients mainly due to mergers and acquisitions, as some have shifted to pure advisory models in their wealth management practices, reducing their need for our comprehensive platform. The positive aspect is that while we acknowledge we are not perfect and have room for improvement, we have a loyal client base. We prioritize being client-focused and aim to provide an exceptional client experience, which I believe supports us during contract renewals.

And we also have a question from Chris Donat with Piper Sandler.

Steve, just wanted to ask on that buyout. If you can give us a specific number that it was? And if you can't give us a specific number, maybe what sort of range you've seen over time and how frequently you see these kinds of buyouts?

Yes, it's around $2 million. It's a few million dollars, but not significant in the overall picture. As I mentioned previously, we have had M&A activity in this industry over the past several years that has benefited us. We have seen clients undergoing M&A processes where these transitions typically prioritize completing the acquisition over changing platforms. While we might temporarily lose some clients, they eventually become prospects for larger opportunities down the line. It's part of doing business; we will win some and face short-term losses, but ultimately, these clients will be on our radar as future prospects.

There are no additional questions in the queue.

Great. So with that, I'll turn to the Investment Manager segment. During the second quarter, we continued our momentum and saw strong growth from both new clients and expansion with existing clients. For the second quarter of 2021, revenues for the segment totaled $142.8 million, which was 19.7% higher as compared to our revenue in the second quarter of 2020. Profit for the second quarter of the segment of $57.8 million was 29.4% higher as compared to the second quarter of 2020. Additionally, the second quarter's profit margin was 40.5%, high for the segment. This is a result of several factors, specifically a substantial increase in revenue due to market growth, a significant portion of our quarterly sales implemented during the quarter as well as a delay in onboarding the operational and infrastructure expense related to this new business during the quarter. Also a temporary reduction in investment expense this quarter aided the margin increase as well. I expect our margin to normalize over the next two quarters. Third-party asset balances at the end of the first quarter of 2021 were $875.9 billion, approximately $44.1 billion higher than the asset balances at the end of the first quarter of 2021. This increase was due to net client fundings of $5.9 billion as well as market appreciation of $38.2 billion. And turning to market activity. During the second quarter of 2021, we had another strong sales quarter with net new business events, totaling $11 million in recurring revenue as well as recontracts of $6.3 million in recurring revenues. Highlights of these events included in our alternative market unit, we closed a number of strategic new names, while sales to existing clients continued to be robust. SEI has also won the business of a large multi-strat manager in a competitive sales process and is currently converting that client off competitors platform. Momentum also continues in the private equity and private debt space as we continue to launch funds with both new and existing firms. In our traditional market unit, we continue to add new business in all product lines with both new and existing clients, consistent with our land-and-expand strategy. In particular, we continue to experience strong momentum in both our turnkey collective investment trust and ETF platforms. For the quarter, we added 3 new client relationships and expanded relationships with more than 30 clients. In Europe, we continue to have solid gross sales. And in our family office services unit, we signed 6 new names, single-family office client on the Archway Platform, and assets on that platform exceeded $500 billion for the first time. Our backlog of sold, but unfunded new business stands at $29.4 million at the end of the second quarter. So in summary, this business had another strong quarter. We continue to see strong demand for our solutions and platform and see great opportunities for continued growth as we execute on our strategy. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

We go now to Owen Lau from Oppenheimer.

Steve, just one clarification. I think margin, second quarter, 20.5%. But you did mention you expect margin to normalize over the next few quarters. Could you please elaborate a little bit more? Do we expect to spend more, so the expense line would go up, you expect kind of revenue would be under pressure? And what's the reason for that?

Yes. So Owen, the primary reason is, as I said, we had the benefit of this quarter, which I love seeing it. We had quite a good bit of market revenue growth as well as new business. The new business we sold in Q2, 87% of that has funded already. So that funded well ahead of us bringing in the expense to support it, both the infrastructure expense and the personnel. So I do expect this is a competitive environment for hiring, as Dennis mentioned. I do expect that expense line item to go up. When I look out over the quarter, there's always a question, will the margin get up to the 40%, which is at. I don't think that's long-term sustainable. And I think we'll come back down to the mid or just above mid-30s again over the next two quarters. And I wouldn't say it's pressure on expense. I think it would be adding normalizing the expense to max the revenue we already have in door.

Got it. That's very helpful. And then on a kind of related topic, when you look back, do you feel like COVID had any impact on your Investment Managers business? And do you expect all things equal, do you expect any acceleration or deceleration of your business given that the vaccination rate is going up?

So what I'd say is if you look back during the pandemic that IMS continued to execute. I think we executed it in a different way. If you look at the percentage of sales, we started to grow a lot more with clients than new business. While there was new business, a lot of the larger initiatives especially over the past year in the market and in the industry we put on hold. So I think we executed well. We continue our growth rate. But I think the one impact with us was the new business, especially the larger side, slowed down a little bit. And I expect that to start to pick up. We're starting to see signs of that already. So I'm not sure that will add fuel to the acceleration or just add another lever to accelerate with.

Got it. That's good. And then finally, could you please maybe give us an update about any demand of enabling maybe crypto transactions from your clients? Do you think can be kind of incremental to your business from a revenue standpoint?

Yes, that's a great question. Currently, we do support cryptocurrency funds and servicing. We've been in touch with several clients who are incorporating this into their investment management options, and we're observing growing demand in this area. There's a team focused on expanding our solutions, and although our investment spending was slightly lower last quarter, which helped profits, we plan to increase that investment in cryptocurrency. We're also exploring it within our investment manager services and running an experiment regarding the custody of cryptocurrency. We believe this has potential not only for investment manager services but also for the entire company and all our investment processing divisions. This could also benefit Archway and serve as an additional growth opportunity for us.

Let's go back to Robert Lee from KBW.

Great. I have a quick question. I believe you mentioned that there was $6 million in revenue from recontracting existing clients. I want to clarify if this means that the clients were recontracted and as a result, there was an actual increase of $6 million in revenue.

No, no. That's the number of recontracts in there, Rob, might be some slight upticks maybe for additional services, etc. But it's basically looking at clients that we contracted and the contract value of their contract that time. So there was a few of them during the quarter, I just called out that recontract on.

And next, we go back to Ryan Bailey with Goldman Sachs.

Steve, for, I guess, private equity in general, we're seeing deployment pipelines near or at record levels for the industry, and that's probably pretty good for a private creditor. I was just wondering if you could give us a reminder on roughly how much of either revenues or assets are tied to deployed capital for the business versus committed capital?

Yes. So I don't really get into that level of number, Ryan. What I'd tell you, though, from our asset split we're still about 55%, 56% alternative. That would include hedge, private equity and 45% traditional, which would be ETFs, CITs, mutual funds. Of our alternative assets, of that 55%, more and more of that is going to our private equity, both in private credit, private debt, real estate. But we really don't break that out in that specific.

At this time, there are no additional questions in queue.

Great. So with that, I'll now turn it over to Wayne Withrow to cover the adviser segment.

Thanks, Steve. During the second quarter, we were immersed in execution of the strategic framework we've been building over the last few years. In this regard, we are seeing benefit from each of the three pillars of that framework. First, our robust technology stack, built on the SWP foundation, is being increasingly adopted across both existing clients and our new adviser prospects. Second, evolution of our sales and marketing process to fit today's digital-first marketplace continues to gain acceptance. And third, the impact of offering both bundled and unbundled fee investment products has been a catalyst for strong adviser net cash flow. Second quarter revenues totaled $119 million. This 27% increase from the second quarter of last year reflects the positive of our asset growth as well as the negative of lower fee rates on some of our products. Expenses were up compared to the second quarter of last year, primarily due to increased direct cost and costs associated with our purchase and ongoing integration of the Oranj technology platform. The year-over-year comparison also reflected one-time pandemic-related expense reductions included in the Q2 2020 total. Direct costs and Oranj expenses had a similar impact on the Q2 to Q1 comparison. Overall, the profit picture for the unit remains intact despite pressure on asset management revenue rate. Total platform assets rose to $95 billion at the end of the second quarter and included $81.6 billion in assets under management. Market appreciation and positive net cash flow drove this increase with market impact being the biggest factor. Quarterly net cash flow on to app platform was approximately $1.2 billion. Of this total, $874 million represented assets under management and $300 million represented assets under administration. This is our strongest cash flow quarter since completion of the SWP migration over 2 years ago. Please note that while AuA growth may be viewed as a factor indicating strengthening market acceptance of our technology stack, our AUM growth would not have occurred without advisers choosing to adopt our technology platform. Contributing to our growth in platform assets were 65 new engaged advisers during the quarter. Perhaps more significantly, 104 advisers began engagement with SEI in the second quarter, strong improvement from the 67 we recorded in the first quarter. Partial engagement reflects a valuable step in the sales process. And while some of these advisers move directly into new adviser engaged status within one quarter, our goal is to ultimately move all of these firms to new adviser status. Our competitive advantages are built upon the technology capabilities in which we have invested and continue to invest. To this end, we continue to integrate the Oranj platform, and our goal of a late 2021 rollout remains on track. We have also begun the Phase 1 rollout of our fully digital account open technology, which will connect in a straight-through manner proposal generation and automated account opening as well as enhanced mutual fund and SMA model management and trading automation. While there still remains much to be accomplished, we continue to make progress in our three focus areas: delivering a compelling front-to-back technology platform; designing and offering investment products responsive to today's investor; and evolving our sales and marketing process to fit today's digital world. I now welcome any questions you may have.

We're going now to Ryan Kenny with Morgan Stanley.

So I saw the press release come through last week on the reorg in your business with a lot of additions to the management team. So maybe you could just elaborate on the opportunity and rationale there, and how the new organization can better serve clients?

Well, I think behind the whole reorganization is the fact much stronger technology focus built upon our ever maturing technology stack and a lot more focus on our digital-first distribution and marketing strategy. So we had to add some expertise in some of those areas and organize in sort of what I would call a more modern framework as opposed to a more traditional geographic/AUM-based model.

Makes sense. And then just one more. I know that you mentioned that the lack of travel during the pandemic helped margins a bit. So I'm just wondering if you can help size how much and when travel resuming might impact margins from here?

Yes, I can address that, although I don't plan to. We do look at expenses regularly, but what excites me more is our response to the changing dynamics of physical work locations. This will aid us in tackling the earlier question about the competition for talent. My priority is on how we can adapt to this challenge. While it may lead to increased costs, it's not something that concerns me, as it could give us a competitive edge in attracting talent.

We go now to Owen Lau with Oppenheimer.

So Wayne, I think you just launched a direct indexing product in ESG overlay in February this year. Could you please give us an update on the recent traction you have? And what have you learned from this rollout?

Yes. We're experiencing significant progress with direct indexing and ESG overlay. To clarify, direct indexing serves as a tool that enables the integration of ESG overlays in a passive investment approach, as well as facilitating tax management. It's essential to consider both aspects together rather than viewing them separately. The ESG overlay is gaining momentum across all our products, transitioning from what was once mostly an SMA actively managed offering to now being available in a passive format, which provides a considerable advantage. We are also achieving similar advancements in tax management. The integration of technology across these products is what makes them particularly compelling.

Do you have any estimates or sizing regarding the total addressable market opportunity in this area, specifically when combining direct indexing and ESG?

Yes. I don't really have a number to share, but I would say those two components are among the fastest-growing aspects of our business.

Our next question comes from Robert Lee with KBW.

I would like to clarify the cash flows for the quarter. Regarding assets under management, with the amount being a little over $800 million, can we break that down further? Should we assume that continued outflows have been seen from legacy products, like the direct indexing product or the ETF overlay product? It seems there is ongoing movement beneath that $800 million. Additionally, in terms of overall cash flows, which were quite strong this quarter, how much of these flows are coming from advisers who joined in the last 18 months to two years? Are older advisers’ books more stagnant or experiencing outflows? Any insights into the dynamics of adviser relationships would be helpful.

Rob, our marketing group informed us that we need to wrap up by 6, so I'll address your question. Regarding the aging of advisers, we analyze their cash flow internally and evaluate them based on their maturity. Generally, newer advisers tend to be more active, but there comes a point where larger and rapidly growing advisers can dominate cash flow, and some of them may have been with us for a long time. Overall, newer advisers typically generate cash flow more quickly, but this is a rough generalization. As for newer versus legacy products, many new products utilize an unbundled fee structure. We are taking advantage of increasing transparency in the industry, where there is a growing awareness of revenue flows among providers in the value chain. As a result, we're experiencing better cash flow from the unbundled fee structure, which is more transparent.

I mean just a curiosity, things like direct indexing...

Fee structure as a product for us.

Right. So maybe just with direct indexing to the extent that starts to take off. Is that going to flow through? I'm assuming as an AUM or is that actually going to be an AuA?

That's AUM.

We will go now to Ryan Bailey with Goldman Sachs.

Just a quick one on the direct indexing. Is there any sort of rough gauge you can help us think about for the economics that SEI receives for those products? Is it sort of in addition to the fee rates you're already owning? Or is it sort of like a substitute for existing products?

I would say, let me see if this is the question you're asking. When you look at the growth in direct indexing products, I would estimate that half of the money is new to SEI and the other half comes from people switching from more traditional products to direct indexing products. That addresses your question.

I understand. So, when considering the revenues, does switching from a traditional product to a direct indexing product increase the firm's fee rate, accounting for the sub-advisory costs? Or would it result in a decrease in the fee rates?

Yes. I think if you look at from our traditional, if you will, kind of a mutual fund product, that is a net down in terms of the revenue rate.

Okay. All right. And that is inclusive of the sub-advisory compartment?

There isn't a separate sub-advisory fee included; we handle everything in-house, Ryan.

We have no additional questions in queue at this time.

Okay. Thanks. With that, I will turn it over to Paul. Have a great afternoon.

Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the second quarter of 2021. Second quarter 2021 revenue of $85.7 million increased 12% compared to the second quarter of 2020. Operating profit for the second quarter of 2021 was $43.8 million and increased 11% compared to the second quarter of 2020. Both revenue and operating profit increases were due to market appreciation, positive currency translation offset slightly by negative client fundings. Second quarter 2021 expenses were impacted by $1.8 million in nonrecurring expenses that primarily represented a true-up of a sub-adviser incentive fee and one-time severance expenses. Operating margin for the quarter was 51%. Quarter-end asset balances of $100.1 billion reflect a $14.5 billion increase versus the second quarter of 2020. This was due to market appreciation. Net sales event for the second quarter were a positive $200 million. Gross sales were a strong $2.6 billion, and client losses totaled $2.4 billion. Second quarter new sales were diversified globally and included Canadian OCIO, U.S. not-for-profit OCIO and U.K. Fiduciary Management. Client losses for the quarter and year-to-date were predominantly due to unsuccessful client rebids, M&A activity and continued DB curtailments and will provide headwinds on revenue and profits in Q3 and Q4 of 2021. In the quarter, we were able to retain a number of OCIO relationships globally that we went through a competitive rebid process. The unfunded client backlog of gross sales at quarter-end was $2.6 billion, offset by $3.7 billion of recognized losses that are still part of the 6/30/2021 asset balance. We continue to focus on stabilizing our client base, distinguishing our OCIO solution and selling new OCIO relationships. We continue to advance our ECIO solution with global large and mega suspects and prospects as well as evaluate enhancements to the overall solution. Thank you very much, and I'm happy to answer any questions that you may have.

We go now to Ryan Kenny with Morgan Stanley.

Just wondering if you could give an update on the percentage of revenues or business coming from corporate DB versus some of the growth industries, like endowments and foundations? And then what is the optimal business distribution you think you could ultimately get?

Percentage of assets for corporate DB still hover around the low 30% threshold. We certainly have seen more losses on the DB side. But the DB balances have gone up for a couple of reasons. One, obviously, asset appreciation, but the long-duration nature of the fixed income has actually improved as well. So that's where we are from a business perspective as far as assets under management. And note that 5 years ago, that number was probably closer to about 52% or 53%. So it's still a sizable piece of the business. It does not mean that all the DB plans are on a path determination. Certainly, we know what's happening in the U.S. and in U.K. with regard to defined benefit plans, but not all of them are on a kind of final glide path, some subset of those are, and we certainly have seen some impact of that over the last 4 or 5 quarters. As far as an optimal mix, there's probably a home for defined benefit plans long term. There are some that are still active in some industries that are still supportive of DB. That's usually the minority and the smaller industries like the utility industry. So I would say that that's going to continue to add over time and really is being replaced with the longer-term assets of foundations, endowments, other defined benefit plans that are going to be around long term like governments and unions, hospitals, defined contribution, sovereign wealth fund, etc. So I hope that answers your question.

And next, we'll go to Robert Lee with KBW.

I have two questions. I want to clarify the unfunded pipeline. If I understood correctly, there is $2.6 billion that is committed but unfunded. Additionally, there is $3.7 billion in relationships that have been lost, but the funds haven't been withdrawn yet. I want to confirm that the $2.6 billion is not net of the $3 billion.

No. No. The $2.6 billion is the gross sales. We've had a little bit of sales that have funded from the second quarter in the second quarter, but we have a couple of sales from the first quarter that still haven't funded. And then I just wanted to call out given the losses that we have incurred that in the $100.1 billion, as of 6/30, there's $3.7 billion of losses that we've been notified that we have recognized or we'll recognize in revenue when they actually lose that should come out probably sometime in the third quarter.

Okay. I have a question about margins. If we exclude the one-time $1.8 million, margins are still at pretty strong levels. In previous calls, you mentioned that you expect margins to return to the high 40s or 50%. Is that still the expectation going forward? Or do you think that consistently maintaining around 52% or 53% for almost a year now is a better indication of what to expect in the coming quarters?

Yes, I think in light of the challenges from losses and the fact that even clients who remain with us contributed to a healthy rebid process this year. We retained $4.5 billion in competitive tenders this quarter, which is an excellent achievement for us. However, despite this success, we do experience some fee reductions due to the competitive nature of these tenders. When you consider everything together, the impact of losses affecting us more than the benefits we're gaining, I believe a high 40s estimate is more realistic as we look toward the long term in 2022. We manage the business carefully, but our focus isn't solely on cutting costs. We also want to make the right investments, particularly regarding ECIO and some initiatives we have underway. We've seen some benefits from travel, and it appears that our clients will likely have a delivery method that incorporates some virtual components. This suggests potential long-term savings in travel. While we enjoy being in front of our clients and value that interaction, we may not require as many resources as we did in the past for client engagement in the future.

Is there a general trend you've noticed regarding concessions on fees when we succeed in rebidding? For instance, do concessions typically fall around 10% or 20%? I'm curious if you've observed any patterns that could provide insights.

Yes, I could go on for a while on that. And unlike Wayne, I worked to 7, so I can go longer if you want. But kidding aside, it's so idiosyncratic based on each specific deal. But if you look at it in general, it's probably 10% to 12% concessions off of what we've had in the past, but it depends on the competitive framework. Now again, some of that we might be able to get back over time if they're looking to redeploy more into alternative investments. But I'd say 10% to 12% is probably a good marker to think about.

And there are no additional questions in queue.

Great. I'd like to turn the call back over to Al West.

Thanks, Paul. So ladies gentlemen, we're making progress on two fronts. On the first front, we were very fortunate to have kept our workforce healthy and productive, delivering a high level of client service throughout the pandemic. On the second front, we are building momentum throughout our businesses. And this is the end of our time this afternoon. Please be safe and remain healthy. Thanks a lot.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.