Earnings Call Transcript - SEIC Q3 2024

Operator, Operator

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

Brad Burke, Head of Investor Relations

Thank you, and welcome, everyone. We appreciate you joining us today for our third quarter 2024 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer; Sean Denham, Chief Financial Officer; Michael Lane, who leads our Investment Management unit, Advisor and Institutional businesses, and members of our Executive Committee, including Jay Cipriano, Paul Klauder, Phil McCabe, Mike Peterson, Sneha Shah, and Sanjay Sharma. Before we begin, I would like to point out that our earnings press release can be found under the Investor Relations section of our website at seic.com. This call is being webcast live and a replay will be available on the Events and Webcast page of our website. We would like to remind you that during today's presentation, and in our responses to your questions, we have and will make certain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements that are included in today's earnings press release and in our filings with the Securities and Exchange Commission. We do not undertake to update any of our forward-looking statements. With that, I will now turn it over to our CEO, Ryan Hicke. Ryan?

Ryan Hicke, CEO

Thank you, Brad, and good afternoon, everyone. SEI had, in many aspects, a record quarter. Our EPS of $1.19 is the second highest quarter in our company's history, and excluding one-time items, it represents our highest ever EPS achieved — a product of top-line growth and prudent expense management. Combined assets under management, administration, and advisement grew nearly 3.5% from the prior quarter, reaching new highs. We also had net sales events totaling $46 million, which is also a record quarter for SEI. And at the end of the quarter, we implemented modifications to our integrated cash program, which more than doubled the balances in the program. The increased attention and energy we have put into sales, client engagement, marketing, and availing more SEI capabilities to the market is showing meaningful results. These results are an early manifestation of strategic changes over the last few quarters. It should be noted that we did benefit in the third quarter with sales events that were delayed in the first half of the year, accelerating the closure in Q3. Over the last two years, we have been laser-focused on significantly increasing market activity, client engagement, and enterprise positioning. We intend to win continuously in our core markets as well as expand our share of total addressable markets. Our sales events in the Investment Managers business, which was a record quarter, reflect the response we're seeing in our enterprise sales efforts. The momentum is truly broad-based. SEI's third quarter earnings growth reflects both top line and margin growth across all of our business segments. We are also focused on reimagining and repositioning our asset management platforms for growth. I believe this value proposition will resonate across other SEI segments as well. Before concluding, I want to thank our SEI employees for our outstanding performance this quarter. We still have a lot of work to do to realize our full potential, and we will not be satisfied until we are hitting on all cylinders across this company. And speaking of change, I'd like to welcome Michael Lane to our earnings call to make some brief remarks.

Michael Lane, Head of Investment Management

Thank you, Ryan, and good afternoon, everyone. I have spent my first few weeks at SEI, getting up to speed in three areas: first, understanding the client segments that we do and do not serve. Second, looking across SEI products and services to align the solutions that meet the needs of our existing client base. Third, getting to know our people and learning our history, structure, strategy, and what is foundational and cannot be adjusted. What has become clear is that we have deep relationships with our wealth clients and serve them well, but these clients represent a very small percentage of the largest and fastest-growing financial advisers. Our institutional business has room for growth beyond outsourced CIO. Our collective challenge across the leadership team will be where we prioritize, reallocate, and invest to secure and grow our position as a market leader. I can honestly say that after five weeks, I am more excited about our growth prospects than when I accepted the opportunity to join this leadership team. With that, I’ll turn it over to Sean.

Sean Denham, CFO

Thanks, Michael. As Ryan mentioned, the third quarter was one of the strongest in SEI’s nearly 56-year history. Before I get into our financial performance, I want to call out a few items that impact comparability. The current quarter benefited from an $8 million gain on the sale of real estate, which was recognized below the line, a $2 million benefit from some one-time items in our Private Banking business, and a large one-time performance fee from LSV, of which our portion was approximately $5.5 million. Our revenue increased by 13%, operating income increased by 33%, and EPS increased by 37% versus the prior year, including a $0.09 EPS benefit from the three items I noted above. Turning to our business unit performance, our private banking business saw significant revenue growth with a 17% operating margin realized in the third quarter. Our Investment Managers business also posted strong performance, with operating profit increasing by 19%. We have and will continue to actively expand strategies to increase inflows into new programs to offset the revenue impact of outflows in our traditional mutual fund products. We have seen balances fluctuate significantly since quarter-end, and we anticipate they will continue to fluctuate. That said, based on current balances and a base case outlook for rate cuts, we could see a contribution from this program in the fourth quarter that would nearly double the $11 million realized in Q3. We also had an outstanding quarter for net sales events totaling $46 million, most of which is recurring. We are focused on maximizing the enterprise value for our shareholders and are proud of the momentum we are seeing in the market. Speaking of which, I'd like to welcome our new Head of Investor Relations, Brad Burke.

Operator, Operator

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

Owen Lau, Analyst

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

Ryan Hicke, CEO

Hey Owen, this is Ryan. I think that's a great question. The answer is a combination of both. When you think about all the strategic changes we have made, we are satisfied with what we see in terms of short-term production and delivery. However, we stay very focused on the medium to long term, ensuring that we don't get too far ahead of ourselves because some of these things are cyclical. When you look at the last quarter, we are really focused on leading indicators, and our pipelines look promising as we focus on expanding our addressable markets and positioning ourselves for broader capabilities.

Owen Lau, Analyst

Got it. That’s super helpful. And then going back to your FDIC cash program, I think it increased to $2.4 billion at the end of the third quarter, but the average balance was only $1.2 billion. Could you please talk about the driver of that growth closer to quarter-end and what is the average spread you are capturing in this program right now?

Paul Klauder, Executive Committee Member

Sure. The modifications we made in the program effectuated on September 30. That's why the average is substantially different than the ending balance. We think directionally, we should be nearly double where the contribution was in the third quarter in the fourth quarter. The average rate or the yield is probably close to about 4% after the interest rate cut. So we made a slight adjustment to the credit rate that we give investors.

Operator, Operator

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

Crispin Love, Analyst

Thanks and good afternoon, everyone. First, on the sales event strength in the quarter, can you just give a little bit of additional color there? How concentrated were the new wins? Were there any sizable ones? Was it more spread out? And were there any individual wins that spanned across segments?

Ryan Hicke, CEO

Yes. Crispin, this is Ryan. The sales events this quarter were broad-based; no single deal drove those results. It was a breadth of deals priced where we want them to be, with our value proposition resonating in the segments where we want to win. We are happier when you unpack it; it’s in the areas we want to win.

Sanjay Sharma, Executive Committee Member

Our go-to-market strategy in terms of different segments, such as regional community banks in the U.S. market and private investment managers in the UK, is resonating well with our clients. Our pipeline is solid and we are seeing great execution.

Phil McCabe, Executive Committee Member

As far as overall sales are concerned in IMS, we had record sales this quarter with a record number of new names. We are particularly strong in private assets, semi-liquid products, and CITs, with a very strong pipeline.

Paul Klauder, Executive Committee Member

Once again, we talked about $1.1 billion in net positive cash flow for the adviser market, with a record number of new qualified advisers. We're optimistic about some of the things that Michael is going to do in helping us to grow our position in the larger investor space.

Jay Cipriano, Executive Committee Member

We are excited about the opportunities we see in the institutional market, particularly in the OCIO market beyond defined benefit. The pipeline continues to be robust, and we remain optimistic about further growth opportunities there.

Crispin Love, Analyst

Great. Thank you, Ryan and everyone. That’s all very helpful. And then just one last question from me. You mentioned positive net flows in the quarter, particularly calling out investment advisers and investment managers. Can you give a bit more detail on the products driving those flows?

Ryan Hicke, CEO

Paul, do you want to start?

Paul Klauder, Executive Committee Member

Sure. We saw adoption in our strategies and SMAs. Some of the repricing we had done was a catalyst for strong growth in the third quarter. ETFs and direct indexing have been strong and newly launched opportunities around direct indexing for fixed income were major differentiators in the marketplace.

Phil McCabe, Executive Committee Member

We're benefiting from major industry tailwinds such as globalization, convergence of public and private markets, retailization of alternatives, and demand for private credit. All of these contribute to significant cross-sell and positively affect our bottom line.

Operator, Operator

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

Ryan Hicke, CEO

Thank you for attending the call today. While it was a great quarter, it was just one quarter. We're focusing on maximizing SEI's capabilities and potential. We look forward to creating the same momentum and energy across all our units and capabilities. Thank you, and look forward to seeing everyone in Q4.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.