Earnings Call Transcript - SEIC Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the SEI First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session. Instructions will be given at that time. As a reminder today’s conference is being recorded. I'd like to turn the conference over to our host Chairman and CEO, Al West. Please go ahead.

Al West, Chairman and CEO

Thank you and welcome, everyone. All of our segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller. I'll start by recapping first quarter 2021. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each business segment leader will comment on the results of their segments. As usual, we'll field questions at the end of each report. So, let's turn our attention to the financial results of the first quarter 2021. First quarter revenue grew 10% from a year ago and first quarter earnings increased by 19% from a year ago. In addition, first quarter EPS of $0.89 grew 24% from the $0.72 reported in first quarter 2020. Finally, first quarter asset balances grew by $3.4 billion, while LSV's balances grew by $7.9 billion. During the quarter, we repurchased 1.2 million shares of SEI stock at a price of $58.11 per share. That translates into $66.9 million of stock repurchase. Also, this quarter, we continued our investment into growth-generating initiatives. The newest effort is One SEI, which is a large part of our growth strategy. As you will recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets, and all other platforms. Turning to revenue production, net sales events in private banks and investment managers were $17.5 million, of which $13 million are expected to be recurring. On the other hand, net sales events of a negative $12.7 million incurred in the asset management-related units of investment advisors, institutional investors, and banking AMD. In a few minutes, unit heads will provide more detail on their specific sales results and their new business opportunities. To grow and prosper in the future, we know that things will never be the same. So, we have been busy adopting new mental models and realities. One such new reality is a remotely distributed workforce. We have been planning how we work in the future and are acting on these plans. Fortunately, we have a lot of positive momentum moving in 2021. Currently, we have a strong backlog of sales and conversions and a number of key prospects late in the sales process. We have also made progress in strategically repositioning our asset management-related business segments. We are poised and ready to capture the opportunities inherent in significant change. Now, this concludes my formal remarks. So, I'll turn it over to Dennis to give you an update on LSV and the investment in new business segment. After that, our segment heads will update results in their segments. Dennis?

Dennis McGonigle, CFO

Thanks, Al. Good afternoon everyone. I'll cover the first quarter results for the investments in new business segment and discuss the results of LSV asset management. During the first quarter of 2021, the investments in new business segment activities consisted of the operation of our private wealth management group, our IT services business opportunity, the modularization of larger technology platforms to deliver on our One SEI strategy, and other investments. During the quarter, the investments in new business segment incurred a loss of $9.5 million, which compared to a loss of $11.4 million during the fourth quarter of 2020, with approximately $7.5 million tied to our One SEI effort. Regarding LSV, our approximate 39% ownership contributed $33.4 million in income to SEI for the first quarter. This compares to a contribution of $30.6 million in income for the fourth quarter of 2020. Assets during the quarter grew approximately $7.9 billion. LSV experienced net negative cash flow during the quarter of approximately $4.8 billion, offsetting market appreciation of approximately $12.7 billion. Revenue was approximately $110.8 million for the quarter with nominal performance fees. Finally, our effective tax rate for the quarter was 22.6%. We have also included in our earnings release additional financial information. If you have any questions on any statistics, Kathy will be available to answer them. With that, I'll take any questions.

Operator, Operator

Thank you. Our first question is going to come from the line of Owen Lau, Oppenheimer. Please go ahead.

Owen Lau, Analyst

Thank you. Thank you for taking my questions. So, Dennis with the vaccine, could you please give us an update on your operating model in 2021? How does the vaccine change your view about the T&E spend, healthcare costs, and G&A spend for the rest of this year? Thank you.

Dennis McGonigle, CFO

Sure. So, where we sit today, travel is still very, very limited. In fact, we can count on one hand not only the number of trips people have made but the number of trips people are requesting to make. So, it's a very limited amount of travel activity. But we certainly anticipate that as we move through the year, particularly in the second half of the year, after the summer, we might see a slight uptick in travel activity because we are starting to get some requests for folks to travel. That being said, if it has any impact on expenses, it's really going to be modest overall. In terms of healthcare spending, really, no trend change over 2020 per se, other than now we have a slightly higher or larger workforce, which is in itself driving benefit costs up. But I think if you're asking really based on the kind of anomaly we had in the third quarter of last year, I believe that was really case specific with certain health issues with employees.

Owen Lau, Analyst

Got it. That's very helpful. And then you touched on LSV, I got some numbers from LSV as well. So, could you please give us a bit more color on this because I think in the first quarter, the patient trade was quite strong, the growth to value trade was quite strong. Could you please talk about your view about how sustainable that is? And also, how would LSV capitalize on the strength? Thank you.

Dennis McGonigle, CFO

Their relative performance was strong both at the end of the year and in the first quarter. The value trade has certainly been beneficial for them, and their position within the value segment of the market has further supported their success. Time will tell if this value trade will continue in the market this year and beyond, but they are committed to their focus as a value firm. If the trend persists and their outperformance continues, it will enhance their competitiveness and asset growth. Additionally, if clients begin to shift back towards value in their portfolios, that should also provide them with an advantage.

Owen Lau, Analyst

Thank you. That's it for me.

Dennis McGonigle, CFO

Thanks, Owen.

Operator, Operator

And our next question, we're going to go to the line of Ryan Kenny from Morgan Stanley. Please go ahead.

Ryan Kenny, Analyst

Hey, Dennis, how are you?

Dennis McGonigle, CFO

Great, Ryan. How about yourself?

Ryan Kenny, Analyst

Good. Just a follow-up on LSV. The $4.8 billion of outflows, can I get a sense of was that more of a rebalancing issue or a lost client issue? And how should we think about organic growth in LSV going forward?

Dennis McGonigle, CFO

Yes, it was about 50/50. So, about 50% was rebalancing and 50% was lost clients, mainly in a managed volatility product they have. In terms of the future, I mean, they had positive growth sales for the quarter. But again, back to the answer I gave to Owen, I think that if the value trade persists and their outperformance adds to that. I think that bodes well for their ability to capture not only assets flowing back to them via rebalancing but also when firms who are clients look to find value managers for hire.

Ryan Kenny, Analyst

Thanks. And then just a question on One SEI, I was wondering if you could give an update on the trajectory for that going forward?

Dennis McGonigle, CFO

As we look ahead for the remainder of the year, the second quarter is expected to resemble the first quarter closely, which aligns with our planning and forecasts from last year. We observed a decrease from the fourth to the first quarter, and the second quarter will likely fall within a similar range, possibly slightly above the first quarter but not significantly so. In the latter half of the year, we anticipate further declines in both the third and fourth quarters as we complete our projects. Some of the One SEI modernization efforts are aimed at client implementation later this year, and we need to wrap up that work in the second quarter to ensure the software releases are ready for production and thoroughly tested for the client. Overall, we are on track, and I believe that things are progressing as we expected.

Ryan Kenny, Analyst

Thank you.

Dennis McGonigle, CFO

You're welcome.

Operator, Operator

Next, we'll go to the line of Chris Donat from Piper Sandler. Please go ahead.

Chris Donat, Analyst

Good afternoon, Dennis. Thanks for taking my question.

Dennis McGonigle, CFO

Hey, Chris.

Chris Donat, Analyst

I wanted to address both of the earlier questions regarding your total expenses on a consolidated basis for the quarter. There should be a positive impact from One SEI decreasing over time, but we may see higher expenses in the future due to a rebound in travel. Is it reasonable to consider the first quarter expenses as a good indicator for the full year?

Dennis McGonigle, CFO

I believe, as we've discussed previously, we can expect some inflationary growth as the year goes on. Therefore, the 1% increase from the fourth quarter to the first quarter may not fully capture the pressures we might face on expenses in the coming months. As you'll hear from Steve and the unit, we have a substantial backlog of client installations that will affect our hiring. I don't anticipate travel will significantly offset the decrease in One SEI spending. In the first quarter, we did benefit slightly from option expenses due to some personnel changes that allowed us to reverse certain costs. Nevertheless, we expect our expenses to rise as we move through the year. Our goal is to execute as effectively as possible, keeping our spending aimed at the right priorities and maintaining productivity, all while continuing to invest in critical areas for our future.

Chris Donat, Analyst

Okay. Thanks very much.

Operator, Operator

Next, we're going to go the line of Robert Lee from KBW. Please go ahead.

Robert Lee, Analyst

Great, thanks. Good afternoon, Dennis. How are you doing?

Dennis McGonigle, CFO

Great Rob, how are you yourself?

Robert Lee, Analyst

Pretty good. Thanks. This question is a bit curious and at a high level, as you consider the potential for a rebound in spending on travel or similar activities in the second half of the year. More broadly, as you think about transforming the business model with a more distributed workforce, it might be early, but do you have any initial thoughts on how this might impact long-term expenses? Is there an opportunity here to reduce our real estate footprint, or could the costs associated with supporting this initial sales force offset any potential benefits? I'm curious about your initial thoughts.

Dennis McGonigle, CFO

Yes, the pandemic impacted us at an inopportune time for our real estate planning, as we were about 75% through the construction of a new building at what we refer to as the North Campus. We have completed that building, which is now ready for occupancy. The purpose of this building was to replace a couple of leased facilities we had in the Oaks area, and we successfully achieved that. Consequently, we have eliminated those leased spaces. However, most of those employees are now working from home instead of the Oaks location. Therefore, it’s fair to say that we have sufficient capacity. I hope that in the future, there won't be a need for another parking garage. We expect that the majority of our workforce will eventually return to our offices worldwide, focusing on the Oaks campus at minimum, in more hybrid roles that involve working a few days a week from the office. As we manage our workforce back to the office, we will optimize our capacity, offering more flexibility in terms of home and office work environments. The changes in costs related to our leased spaces in larger offices in Ireland, the U.K., and Indianapolis come into play as we lease some of those to clients. As we approach the end of our lease terms, if we find that we no longer need as much space, we have the option to reduce our footprint. But currently, we are under lease, so these facilities are not ideal for subletting.

Robert Lee, Analyst

Great, that was my question. Thanks so much.

Dennis McGonigle, CFO

All right. Thanks Rob.

Operator, Operator

And at this time, I have no further questions in queue. Please go ahead.

Dennis McGonigle, CFO

Thanks. Before I turn over to Steve, we would like to remind everyone that during today's presentation and 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, in our filings with the U.S. Securities and Exchange Commission. We could not undertake to update any of our forward-looking statements. With that, I'll turn it over to Steve.

Steve Meyer, Segment Head

Thanks, Dennis. Good afternoon everyone. I'm going to talk about banking first and then as usual, I'll turn it over to Investment Managers. So, let's focus on banking. During the first quarter, we continued our momentum in the market while also executing on our One SEI strategy and were able to continue to prudently manage expenses which aided in the profit for the quarter. First quarter 2021 revenues totaled $117.6 million, which was up approximately 4% from the first quarter of 2020 due to higher recurring revenues. First quarter 2021 quarterly profit of $6.9 million for the segment was up approximately $4.3 million or 168% from the first quarter of 2020 and up 49% from the fourth quarter of 2020. This is primarily due to expense management. And turning to sales activity, for the quarter, we closed $8.7 million of gross recurring sales events, which resulted in $3.6 million of net recurring events for our investment processing business, offset by a negative $2.5 million in asset management events. This offset from asset management brought our total net recurring events for the quarter to approximately $1.1 million for the segment. Also in the quarter, we closed $2.9 million in one-time revenue. While we are encouraged by the $8.7 million in gross sales events for the quarter and the momentum with new business that continues, we had to divest the headwind of an uptick in M&A activity in the industry, which negatively affected our sales total for the quarter. This is a headwind we will have to deal with this year as there are several other clients of ours who have been acquired. However, we remain very bullish on the new sales activity we continue to experience. As previously announced on our fourth quarter 2020 call, we closed three SWP agreements in the first quarter, two of them new clients to SEI and one an existing client from TRUST 3000. I outlined the details of these events on the previous call, but to summarize these new sales included Bangor Savings Bank, TRUST 3000 clients since 2011, who will convert to SWP in 2022. A West Coast large community bank will migrate to SWP from a competitor platform in the first half of 2022 and who is also a candidate for our One SEI strategy. We believe this firm has an opportunity to leverage additional SEI platforms and solutions, and is currently evaluating SEI's Asset Management Distribution products. And finally, our third signing was with another new client UMB, United Missouri Bank, who will migrate their Private Wealth Management book of business to the SEI Wealth Platform late this year. We are proud to welcome UMB to the SEI family. Additionally, for new sales in the quarter keeping our One SEI approach in the forefront, we were able to cross-sell our Archway Platform to one of our long-term TRUST clients as well as cross-sell additional services to several other clients, including an upsell of components to a client who is migrating to SWP. During the quarter, we also had six client contracts securing another approximately $9 million in recurring revenue. As an update on our backlog, our total signed, but not installed backlog is approximately $77.3 million in net new recurring revenue at the end of the first quarter. From an asset management standpoint, total assets under management ended the period of $25.1 billion, which was down 1.6% from the fourth quarter of 2020. Our cash flow for the first quarter of 2021 was a negative $885 million. The majority of this outflow is due to a single asset management client who had purchased one of our asset management products and decided to sell out of that product completely. As we continue through 2021, our focus continues to be on maintaining our strong momentum in the market, continuing to expand our business with clients and expanding into new markets to increase our opportunities. Key to this will be our One SEI strategy and being able to increase our growth opportunities by unlocking all the assets and platforms SEI has to offer across the company. We will also focus on driving scale in our business as we push toward providing a sustainable and accelerating margin growth in the future. We remain excited and optimistic about our growth opportunities. That concludes my prepared remarks and I'll now turn it over for any questions you have.

Operator, Operator

Thank you. Our first question will come from the line of Ryan Kenny from Morgan Stanley. Please go ahead.

Ryan Kenny, Analyst

Hey, Steve. How are you?

Steve Meyer, Segment Head

Good. How are you, Ryan?

Ryan Kenny, Analyst

Not so bad. Thank you. So, I just had a quick question on some of the implementation and work for the backlog. So, it looks pretty healthy, the growth in the backlog, quarter-over-quarter. As we look through the course of the year, how are you thinking about that getting implemented and how that can contribute to revenues?

Steve Meyer, Segment Head

I am focused on staying on schedule. Currently, we have personnel allocated, and everything is progressing as planned. While we didn't have any final implementations set for Q1, there are others planned for the rest of the year. Looking at our backlog, which I typically assess over an 18-month period, it's about 61% now, an increase from around 50% since our last discussion. This 61% is expected to be addressed within the next 18 months, with the remainder likely pushed to a 24 to 26-month timeframe. We aim to maintain this trajectory. There might be some delays, particularly with clients who are facing challenges, but overall, we are on schedule.

Ryan Kenny, Analyst

Got it, okay. That makes sense. I have a separate question, and to the extent you can discuss a specific client, I'll give it a shot. I was curious about one of the factors you've mentioned regarding the business, which is how your asset management and wealth management services are converging, giving SEI a competitive edge. With Wells selling the majority of their asset management business, how does that affect your relationship with them? What do you foresee for the future of that partnership?

Steve Meyer, Segment Head

I don't believe it has changed our relationship with Wells. They are currently undergoing their own restructuring and focusing on their business. We maintain a strong relationship and regular communication with them. We were aware of their plans to divest that part of their business. We provided some services to that segment, but it does not represent the majority of their operations, and we do not anticipate any significant impact on our revenue. In fact, we see this as a positive development because Wells is stabilizing and optimizing their business for the future. Once they reach a solid position, we will be able to discuss how SEI can continue to support them and enhance our partnership and business with them.

Ryan Kenny, Analyst

Awesome. Can I sneak one more in?

Steve Meyer, Segment Head

Sure.

Ryan Kenny, Analyst

I was wondering about the upsell of a client transitioning from TRUST 3000 to SWP. Could you provide more details on that, including what components were involved and the revenue increase associated with it?

Steve Meyer, Segment Head

Are you talking about the cross-sells, Ryan?

Ryan Kenny, Analyst

Yes, I think so. Yes.

Steve Meyer, Segment Head

Yes. I won't dive into specifics about the client, but it's important to note that while we've previously discussed new business, we haven't focused much on cross-sells. As I've mentioned, part of our strategy involves the concept of land and expand. A key element of our One SEI strategy was to break down parts of our platform for easier digestion and quicker movement. During this process, as we engaged with clients, if there was an opportunity to upsell them or introduce additional functionalities, we took advantage of that. For instance, in this case, we added front office capabilities since the client was initially focused on just the back or middle office. We believe that as we deepen our engagement, there will be more chances for upsells, both with existing clients converting and with new sales. This is a very encouraging development for us, providing another avenue for business expansion and growth.

Ryan Kenny, Analyst

Great. Thanks, Steve.

Steve Meyer, Segment Head

Sure.

Operator, Operator

And at this time, we have no further questions in queue. Please go ahead.

Steve Meyer, Segment Head

Great. Thank you. I'll now turn it over to Wayne Withrow to cover the Advisor segment. Wayne?

Wayne Withrow, Segment Head

Thanks, Steve. During the first quarter of 2021, we continued execution of our strategy, including improvements in our sales and marketing process to fit a virtual environment. The offering a bundle fee, and our new unbundled fee investment products and continued enhancement and delivery of a completely integrated front-to-back office technology platform, including custody. First quarter revenues totaled $113 million. Its 11% increase from the first quarter of last year reflects the impact of AUM growth as well as lower fee rates on some of our products. Expenses were up compared to the first quarter of last year, primarily due to an increase in direct costs, and to a lesser extent, expenses associated with that purchase of the Oranj technology platform. Same factors influence the expense increase in the fourth quarter of last year, as well as inclusion in the fourth quarter expenses of some non-recurring saving. Overall, the profit picture for the unit remained relatively intact, light pressure on our asset management revenue rate. Assets under management rose to $77.4 billion at the end of the first quarter, and total platform assets stand at $90 billion. Market appreciation drove this increase. We did achieve strong cash flow growth in our newer unbundled fee products, but this is mostly offset by net redemption in our older embedded fee products, primarily in actively managed mutual fund wrap programs. Total net cash flow for the quarter was $306 million. Of this total, $125 million was in assets under management and $181 million was in assets under administration. We recruited 52 new advisors during the quarter. During the quarter, we purchased the assets of the Oranj technology. This acquisition was in furtherance of our front-to-back office technology strategy. While the financial size of the transaction was modest, we feel the end investor collaboration platform we acquired is compelling, and will unlock new opportunities for tech-forward client engagement. We intend to fully integrate this platform into SWP, and begin to roll out to our advisors in the second half of this year. In addition to this platform asset, the acquisition included a team of skilled cloud technology professionals. During the balance of this year, we expect to incur a $5 million expense increase as we integrate and roll out this platform. While there still remains much to be accomplished, I feel we are making progress in that three focus areas; evolving our sales and marketing process to fit today's digital world, designing and offering investment products responsive to today's investor, and delivering a compelling front-to-back office technology platform incorporating custody. It is my opinion that achieving success in these areas favors companies with added skill sets and assets. I'll now welcome any questions you have.

Operator, Operator

Thank you. We’ll go to the line of Ryan Kenny from Morgan Stanley. Please go ahead.

Ryan Kenny, Analyst

Hey, Wayne, how are you?

Wayne Withrow, Segment Head

I'm great, Ryan. How about you?

Ryan Kenny, Analyst

Good. Just a question on the Oranj acquisition, wanted to get a sense of how it fits into your tech strategy in terms of what specifically it enables you to do that you weren't able to do before? And then from here, are there any other gaps in tech or capabilities that you're looking to fill in?

Wayne Withrow, Segment Head

Oranj was primarily an end investor collaboration tool, but we didn't have a strong presence in that area. Specifically, it offers functionalities like account aggregation, a digital document vault, secure messaging, and collaboration among us, advisors, and clients. It's also a fully cloud-native technology platform, which will help us transition all of our end investor technologies into the cloud.

Ryan Kenny, Analyst

And then are there any other gaps or capabilities that you're looking to fill in from here?

Wayne Withrow, Segment Head

Yes. I believe that we will continuously improve our end customer reporting. We anticipate being able to achieve that. Additionally, on the financial planning side, we're working on features that allow for real-time review and modification of financial plans, which is part of our future plans. These are just examples without disclosing our entire technology strategy.

Ryan Kenny, Analyst

Got it. Okay. Thanks.

Operator, Operator

And next, we’re going to go to the line of Ryan Bailey from Goldman Sachs. Please go ahead.

Ryan Bailey, Analyst

Hi, Wayne. How's it going?

Wayne Withrow, Segment Head

Hi, Ryan.

Ryan Bailey, Analyst

Wayne, I'm sorry, I missed the number. Did you say for the AUM side you had inflows?

Wayne Withrow, Segment Head

Right. Total new assets in the platform were $306 million, the net cash flow of that total $125 million with assets under management and $181 million with assets under administration.

Ryan Bailey, Analyst

I understand. I have a question regarding the bundled versus unbundled approach. It appears that there has been strong momentum in the unbundled or AUA approach over the past several quarters. Can you shed some light on why advisors might be opting for the AUA approach or choosing AUM with you? Is it primarily a decision based on investment selection, or is there a pricing factor involved? Or could it be driven by another reason that I'm not considering?

Wayne Withrow, Segment Head

Yes, you covered all the key points. As we delve deeper, the situation becomes slightly more intricate. Some of our products are priced higher than existing ones. If I were to summarize, the individual (unbundled) products tend to be cheaper when you consider all the components together. However, some clients prefer the bundled price, even if it's slightly more expensive, because it seems more affordable without having to deal with many line items. The primary distinction between unbundled and bundled options is that unbundled allows you to break down the entire investment management process. For instance, if you want to focus solely on tax management, you can do that with an unbundled structure. In a bundled setup, you must accept all asset management components, regardless of their value to you. For example, if you have qualified funds in a bundle that includes tax management, you'd pay for it even if you don't need it. This flexibility allows us to tailor pricing and product delivery to meet the actual needs of the investor, which I believe is resonating well.

Ryan Bailey, Analyst

Got it. That makes sense. And then I know I asked this question last quarter, but if I can ask it again. If you could do sort of rough justice on the split of the AUA flows between sort of like new advisors versus existing advisors sort of converting existing books of business from AUM to AUA?

Wayne Withrow, Segment Head

Yes. I think right now, the majority of the growth is coming from new advisors at this point.

Ryan Bailey, Analyst

Okay. Perfect. All right. Thanks, Wayne.

Operator, Operator

And at this time, I have no further questions.

Wayne Withrow, Segment Head

Great. With that, I will turn it over to Paul to talk about Institutional Investors.