Q2 2021 SEI Investments Co Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the S. E <unk> second quarter 2021 earnings call.
This time all participants are in listen only mode. We will have a question and answer session. Following each presenter and instructions for queuing up will be given at that time.
Did you require operator assistance press Star zero on your phone's keypad and as a reminder, this conference is being recorded.
And now I'll turn the conference over to our host Chairman and CEO Al West. Please go ahead.
Thank you very much.
Good afternoon, everybody welcome.
All of our segment leaders around the call with me here and.
Well as Dennis Mcgonigle, CFO, and CIO, CFO, and Kathy Heilig Sei's controller.
I'll start by Recapping second quarter 2021 I'll, then turn it over to Dennis to cover L. S D and the investment and new business segment.
After that each business segment, Peter will comment on the results of their segments.
And as usual, we will field questions at the end of each report.
So now, let's turn our attention to the financial results of the second quarter 'twenty 'twenty 1.
Second quarter revenues grew 19% from a year ago.
Second quarter earnings increased by 32 per cent from a year ago.
Second quarter EPS of 93 cents grew 37 per cent from the 68 since reported and the second quarter 2020.
Second quarter asset balances grew by approximately $7 billion, while L. S vs Alexandra and imbalances and assets on the balances grew by.
800 million.
During the quarter, we repurchased 21.
And shares of Sci stock at a price of 61 day.
And 93 cents per share that translates into a 129 million of stock repurchases.
Now I'd like to provide you our situation today.
1 of our businesses and steadily growing its restaurant revenues and profits.
I M S.
Another business and you are a segment has recently been executing against the new technology driven strategy. Currently we are experiment and.
Experiencing strong indicators that the business has turned a corner.
And we're very excited about that.
Another business private banking is diligently working on and implementation backlog and strong sales pipeline and enhancing client satisfaction.
The fourth business is the institutional investor segment, while it faces strong headwinds in the legacy Oh C I O client base.
It's addressing growing segments of O C I O N E C.
We are also searching for.
Our growth engines and beyond that for traditional businesses.
Here, we are finding opportunity and markets and services adjacent to our 4 main business engines.
You have been exposed to a couple of these innovative young businesses.
Yes.
First G R C.
Offering global regulatory and compliance services.
Second SCE.
And I I T services, those leading sir who's leading service.
<unk> security.
And third.
Private wealth management, providing a complete platform to ultra high net worth families and individuals.
Next let's turn to ever and in production.
Net sales events and private banks and investment managers were $13.2 million of which $9.8 million are expected to be recurring.
In addition.
Net sales events of 2.8 million loss incurred in the asset management related units.
These events.
Positive asset flows and then.
Investment advisors and a M D.
Offset by losses, and our legacy institutional investor client base.
And in a few minutes unit heads will provide more detail on their specific sales results.
And there are new business opportunities.
And I have to grow and prosper and the future we know that things will never be the same.
So we have been busy adapting to new mental models and realities.
1 such new reality.
Is it remotely distributed workforce.
They've been planning, how we will work and future and occur.
Currently acting on those plans.
Fortunately, we have a lot of positive momentum were created during the first half of 'twenty 'twenty 1.
We have a strong backlog and sales and implementations and a number of key prospects late in the sales cycle.
We have also made progress and repositioning our asset management related business segments.
So net net we look forward to capture and the opportunities and inherited and.
Aaron and significant change.
And this concludes my formal remarks, so I'll turn it over to Dennis to give you an update on LLC and.
And the investment and new business segment.
After that our segment heads will update the results and their citizens.
Dennis.
Thanks Al Good afternoon, everyone as Al mentioned and I'll cover second quarter results for the investments and new business segment and that was the.
During the second quarter, 2021 investments and new business segment activities.
And so some of the operations of our private wealth management group, our it services business opportunity.
Amortization of larger technology platforms to deliver on our what LCI strategy and other investments.
During the quarter, the investments and new business segment incurred a loss of $5.6 million.
Which compared to a loss of $10.1 million.
During the second quarter of 2020.
Approximately $7 million of expense during the second quarter 2021 is tied to our 1 sci effort.
Regarding <unk>, our approximate 38, 7% ownership.
And at $35.1 million and income to Sci for the second quarter 2021, and this compares to a contribution of $28.3 million and income for the second quarter of 2020.
Asset during the quarter grew approximately $800 million.
<unk> experienced net negative cash flow during the quarter of approximately $4.2 billion offsetting market appreciation of approximately $5 billion.
Revenue was approximately $116.4 million per the quarter with nominal performance fees.
Corporately our expenses during the quarter included approximately $1.9 million of severance expense.
As recorded and the impacted business segments.
And approximately $5.6 million related to sub advisor expenses tied to revenue growth.
As we discussed on prior calls similar to other companies other industries, we're seeing competition for talent that is driving up personnel costs.
We expect this to continue in addition, our business growth, particularly in our IMS segment will lead to an increase and overall please.
Each quarter, we reassessed the vesting time frame for all previously issued options.
This quarter, we made a change to the expenses amortization schedule. This included and due to our judgment that certain option tranches will invest 1 year sooner than previously estimated additional expenses during the quarter of approximately $500000.
Disclosed in our earnings release, we expect option expense for the remainder of the year to approximate $25.7 million.
Finally during the quarter, we increased our spending and corporate marketing and branding and the.
Branding area enhancing our digital capabilities.
And expanding our market reach and we will continue to do so and supported the promotion and sale of Sci services.
Our effective tax rate for the quarter was 22, 3%. We are also included in our earnings release additional financial information.
And I always remind you please refer to our soon to be filed 10-Q for additional information.
And I'm now happy to take any questions.
Ladies and gentlemen, if you have a question and please press 1 zero on your phone's keypad, you'll hear and acknowledgment that you've been placed in Q3 on a speakerphone. Please pick up per handset before pressing the numbers once again for questions and <unk> zero and.
And we'll go first to Robert Lee with <unk>. Please go ahead.
Thanks, Hey, Dennis how are you good afternoon.
Hey.
Could you. Please go over some of your commentary.
On the kind of expenses and spending and I apologize because I was.
I think writing and kind of missed some of this maybe just kind of go through that again.
And there is a couple of things I pointed out that in the quarter.
Company, we incurred $1.9.
Million of severance expense, so it's really not a repeatable expense.
And the expenses that gets a different.
Business segments, or corporate overhead and dependent upon where the.
Where are they.
Folks.
Residents of if you will and.
And I also just wanted to point out that of our expense increase is about $5.6 million was tied to revenue so tied to asset growth.
So it's.
Cost of revenue growth.
And sometimes that doesn't get aggregated.
And we don't point that al.
And then I mentioned that.
Every quarter, we go through and evaluation of when we think all the option tranches that we issue as a company will vest and as you know, we amortize that cost over the vesting period.
And in the quarter, we made a determination that a couple of options with robust sooner.
And essentially 1 year sooner than we had.
And we're amortizing against and the first quarter.
And is that added and about 5 and ourselves and hours of additional cost and the second quarter and our option expense for the remainder of the year. So the third and fourth quarter and we expect it to be about $25.7 million.
Okay, Great and maybe 1 quick question with the severance I mean, obviously, that's a onetime thing but.
How should we be thinking just broadly about kind of head count.
Growth and maybe pressure on compensation just given.
Competition for talent and true.
As the year progresses.
Yes, I think on.
And when the talent side.
It is clear to us and I can't imagine other comps and as we're competing for talent against other.
Other companies and some companies you all cover.
The cost per count is going up and has gone up and so to the extent.
There is inflation compensation inflation.
Alive, and well and the markets at least that we compete and for talent.
It's true and.
And.
So far be it from me to call that transitory.
And Thats.
That's just the nature of the piece right now.
Secondly, and you'll hear this from Steve as well that and the IMS business, we've had really solid growth.
Even faster and matriculation of some of the sales activity and.
I would say, we're a little bit behind and the hiring process.
So we will be adding people to support not only future growth, but growth we've already brought on the book So.
Head count and it's likely to go up and other businesses.
Or less so and.
Paul I'm sure it'll mentioned or at least can speak to.
And given what's going on and his business, the changing nature of how marketing and selling.
Changed significantly over the past.
Year 2 years.
Yes.
This work.
And reset as organization not only for the.
The current environment, but the future of that business. So.
I would just say it's adjustments really working also what our business strategies are.
And how the market is behaving.
Okay, great. Thanks for taking my questions Dennis.
Thanks.
And next we go to Chris Donat with Piper Sandler go ahead. Please.
Hey, good afternoon, guys Hi.
Hi, Chris.
Just wanted to follow up on the spin.
And specifically looking at the consolidated income statement and the sub advisory fee line.
As a percentage of.
Your asset management revenue that that good increase was there anything unique going on there and anything kind of onetime in nature or was.
We've just seen sort of and elevated <unk>.
Level here, yes, there are other ones.
There was a 1.1 time adjustment that occurred in the institutional business on the sub advisory flows from expense and Paul will mentioned that and.
And his comments.
Other than that.
Some of it is arguably the mix of assets relative to the sub advisor costs associated with those assets and could also be a play.
Yes.
Okay, I'll wait for Paul's comment yes.
And there was like I said 1 time.
Catch up catch up.
Expenses.
Okay.
And we currently have 1 left in queue again for questions from Mr. Mcgonigle pressed 1 zero and we're going out to Ryan and Kenny with Morgan Stanley Go ahead. Please.
Hey, Dennis how are you.
Alright, great Ryan and I'll, let yourself.
And so I heard al on the opening remarks mentioned the possibility for more remote work.
And so given the pressure on personnel expenses, just wondering if theres 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, So let me just to confirm what al said, it's more of that.
We've put a plan together and we're executing against to bring our people back and.
And we certainly expect that.
Probably a fairly large percentage of our workforce, we will have the b and what we call a hybrid kind of category of and office.
Sometimes and sometimes and working from home and work working remotely.
So that said given that we own the real estate and <unk>, Pennsylvania, which is our predominant.
And our real estate footprint in terms of square footage.
And given that our other larger facilities, London and.
And Ireland and in India.
And for Us our operational centers.
And we will be bringing people back to those facilities as well plus they are under longer term leases, so our ability to shrink our real estate footprint.
Pretty limited and frankly.
Got it thank you.
Youre welcome.
And we do have a question from Ryan Bailey with Goldman Sachs Go ahead, Mr. Bailey.
Hi, Dennis.
Hey, Brian.
And a quick question I will ask me I think generally we've seen or heard of some better industry dynamics and value.
Maybe some rebalancing away from first and I was just wondering as you kind of look out or hearing anything around and maybe potential for that of course and that business.
Yes, so there are and therefore.
For the quarter, it's similar to our first quarter and even.
And a little bit closer and closer to fourth quarter also.
Their net flows and.
Negative working day.
And while we're rebalancing so lost assets from existing clients.
They did have some <unk>.
Gross sales and.
And sign a couple of fairly large mandates during.
During the quarter. So theyre also seeing more sales activity.
And sales activity and pick up and I think thats a good sign from because people are maybe looking at value.
Yes.
With our strong performance and the.
Yeah.
And the second half of last year and the beginning of the first part of this year and take it.
Probably had some impact on rebalancing as well.
Their performance for the quarter was.
And on a relative basis was was okay and then there were.
And I guess neutral or slightly positive and some categories.
But I would say the signs are that their ability to sell and the market being there to sell into is improving.
Got it okay and maybe just.
And our repurchase activity.
Law healthy for the quarter I was just wondering how we should be thinking about the pace from your.
Timing and maybe why or why was this quarter the right 1 to step up repurchase or was it sort of immediately after the last earnings release.
Yes, so picking up $2.1 million shares this quarter.
Which is fairly healthy amount and comparative first quarter is a little bit of.
Kind of.
Not really apples to apples because the first quarter, we had a longer blackout period and that kept us out of the market. So I would say the first quarter repurchases were under what we would've normally what you would normally expect.
Second quarter is a little bit healthier.
And the market made stock available if you will to us that we were able to capitalize on 1 and as we look forward and our board's view Hasnt changed.
And we will continue to be.
Active and the and the repurchase pace and.
Kind of respond to what the market gives us.
Got it thank you.
And.
And.
We have no additional questions and appeal.
And so before I turn it over to Steve I would like to remind you that true that during today's presentation and and our responses to your questions. We have and we 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 quarter, we continued our momentum and the market. While also executing on our 1 Sci strategy set.
Second quarter 2021 revenues for the banking segment totaled $123.7 million.
Which was up approximately $16 million or 14, 8% from the second quarter of 2020.
Increased revenues were due to asset management revenues, and an increase and our processing related revenues as well as elevated 1 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 and 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 and investment processing business. We did have a positive $1.6 million and asset management events. This all.
Offset from asset management brought our total net recurring events for the quarter to approximately $500 per segment.
In addition, and the quarter, we closed $1.8 million and 1 time revenues.
While we would've liked our net events for the quarter to be higher we are encouraged by our sales activity and fuel our results were more impacted by the timing and the length of contract of the contracting process, we continue to experience and 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 and our target markets getting back into normal operations and with that sales activity is increasing and the larger and of the market.
This bodes well for us going forward.
During the quarter, we signed an agreement with a new client the Sci Pumpkins financial Advisors. We won this business and a competitive process and we expect tompkins to migrate to the SWT platform from a competitor platform and the first half of 2020.2.
We look forward to welcoming them to the Sci family and supporting their future growth initiatives.
Turning to implementation activity for the quarter specific from your Trust Division of Pacific Premier Bank converted to Sci wealth platform from a competitor platform and we look forward to working together and supporting their growth and expansion initiatives.
Additionally, during the quarter, we completed the conversion of true us the combination of Suntrust and the merged BB&T business on Trust 3000, and the completion of this conversion and 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 and net new recurring revenue at the end of the second quarter.
From an asset management standpoint, total assets under management ended the period and $26.3 billion.
And which was up 4.7% from the first quarter of 2021, and 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 and the business to ensure sustainable growth we will also.
So continue to execute on our 1 MSCI strategy, which will allow us to increase our growth opportunities by unlocking all of the assets and platforms Sci 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 once again, ladies and gentlemen for questions press, 1 zero and were going in and out of our first question in the queue Ryan Kenny. Please go ahead and alright.
Alright, and Kansas with Morgan Stanley.
Hey, Steve how are you good how are you Robert.
Ed.
So I've heard the message on the higher personnel costs and the IMS segment, which I know, we're talking about <unk>, but just wondering if we should expect anything similar going forward and the banking segment.
And then any color on how that or any other expense pressure might impact the ability to get thinking margins higher.
Yes, so 2 things 1 we will add expense and banking, but I think we're trying to do this very judiciously like and other units, but we're also as I've mentioned before we're looking at areas that we feel we can be a little bit more efficient and.
And the technology operations area, and we did have increased and our expenses in Q2, primarily and personnel.
And and operations, but I think we will look to manage this.
Pretty tight and aligned with new revenue coming in.
And I think Joe.
And as far as margins.
Working on that expense plan.
Which is a longer term initiative, but hopefully we will 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 with some choppiness to margin.
I E. The M&A activity I mentioned so.
I think any.
Movement and margin you see from quarter to quarter. This year will be more of kind of those 1 time things and that choppiness.
As we go through the year.
Thank you.
Sure.
And for additional questions press 1 zero please.
We go now to Ryan Bailey from Goldman Sachs Go ahead. Please.
Alright.
I was just wondering regarding some of that elevated 1 time revenues that you were referring to or is there any way that we can try to think about sizing that and.
And what sort of like maybe the more normalized revenue per book like going forward.
Yes.
Our 1 times.
And are typically professional services fee.
Fees, we did have a buyout.
Have a client that was acquired this year and that was part of it that was driving most of the elevation from Q1 to Q2.
I expect it to kind of.
Normalize as we go through the year, but there will be other potential M&A candidates that I've mentioned that again can provide a little choppiness to that but I think as we.
We've seen before that.
Recurring nonrecurring revenue line is primarily around our implementation fees.
So as we sign more clients as we bring them on and Youll see more of that as far as professional services implementation and conversion fees and that number.
Got it okay, and maybe just to sort of.
And I'll call out that conversation.
Just to make sure Im thinking about it right and you think you might be M&A activity and the space.
The general sentiment could be that there is some more headwinds through the back half of this year.
Yes, I'd say Theres, a couple more headwinds and again I don't think these are significant or material business, but more of 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 1 more quick 1 and just.
Regarding the $72.6 million for backlog any any change and the timeline for implementation.
No I think we're just north of saying about 60% of that wood from within the next 18 months. The remainder after that will probably still on pace for that.
Yes, there are some clients that are experiencing some delays on their side as we've all seen as the pandemic has continued and India. Some of those development needs that they have had been a little strain.
So we are seeing maybe some minor pushes there, but nothing significant and we're talking a couple of months et cetera, So I feel pretty bullish on that implementation schedules built.
Got it okay. Thank you.
Sure.
And.
Next we have all and low from Oppenheimer go ahead. Please.
Alright, Thank you very much hi, Steve just a quick question.
Just a quick question going back to the.
And like outsized onetime revenue in the second quarter did I hear correctly, it was $1.8 million from the second quarter and then there may be some lumpiness, Tom Derosa lightweight and thinking about that.
So there's 2 numbers, let's not confuse now and so the 1.8 is what we actually sign so and part of that was part of our sales of onetime revenue.
The 1 other 1 times revenue, we're actually book onetime revenues and we did have an increase in our book onetime revenues during the quarter, primarily due to professional and conversion fees, but also a buyout of a client who was acquired and when I talk about.
Central Choppiness of that onetime revenue.
And there could be an increase and as onetime revenue that we have of our buyout of clients have gone through M&A activity, but again.
Nothing material, it's more and impact on the quarterly margin.
Quarter over quarter.
Got it thanks.
Any change of the timeline when you mentioned previously that even though the margin will continue to expand share maybe this year and next year any change of timeline in terms of your expectation.
No we're still working on low and I think we're still looking to get through this year and look for a path. We can come out of where again my goal is to continue our momentum and get us to more of that sustainable and accelerating margin level, but we certainly haven't picked back yet.
Got it alright, thank you very much sure.
And our last question comes from Robert Lee with Covid BW go ahead. Please.
Great. Thanks, and good afternoon, Steve Hopewell as well.
Hey, Rob how are you doing good thanks.
Well first quick question back to the book.
Book to onetime revenue what was that number.
For the quarter.
We tend not to break it out Rob given 1 time et cetera, what I would tell you and I think thats more pertinent is that we did have an uptick over Q1 and most of that uptick.
$2 million was due to our book of the buyer.
Hi.
So just kind of curious to maybe on the competitive environment you talked about.
I guess, maybe it was tompkins kind of taking that from a competitor and.
Is there any way of general I don't know if you can but generalizing like if you're when you feel like you, maybe youre, losing potential new business to a competitor or something gets taken away.
Is it.
I guess, if it's trust and.
Trust 3000, maybe it's price, but it fits on something that's more <unk> related.
Is there a kind of a common characteristic why maybe you you feel like you don't win some business and then Conversely, when someone's coming to you and is it more because they are buying a specific component or do you or is it that coming over to you because they want the whole package they want it.
Straight the whole straight through processing and just trying to maybe get some sense. If there is any.
And as you can imagine that's a big question it kind of depends on the prospects. There are I would say the lion's share of why we win business is our capabilities, our technology and our people.
While we lose business well when someone gets acquired and.
They go on a competitor's platform because that changing platforms and the priority and finishing the acquisition is but there is a good news that the silver lining that clients who might be acquired from <unk>.
From a part of a bigger organization and they become a new prospect again.
And so I'd say.
You mentioned trust 3000, and I think when people leave and it's less to do with price and either more about them changing business model or capability Theyre looking for.
But.
And maybe they want less capability and a more streamlined so I think it's really again, it's hard to answer for the market, but we again feel pretty well positioned from our technology and platform we.
And we feel we have probably the best platform and the industry, both here and globally and.
And unless someone's doing kind of a plug and play and looking to maybe just ripped.
And we replaced 1 or 2 components.
We feel well situated against kind of our competitors.
And and maybe 1 question on client retention and maybe this is more for the UK versus the U S where the business is somewhat newer but.
How do you think of like retention rates.
And that's the BP contract comes up for renewal, which I know you've had a bunch and UK and I'm assuming.
And the U S.
Are you do you feel like you are.
Your retention rates, you know I know.
And number 90% 80% is there.
Our metrics and you've kind of think about.
Yes, Rob.
And don't have the specific number from me what I would tell you is it's well into the high nineties.
Again, when you look at why we lose business, it's because mostly if you look and the path. It's been because we have lost a couple of client service over the past 10 years, but most of it's been because of M&A activity.
There are people that have changed business model they might go to more just.
Sure Advisory model and their wealth management practice, and they don't need a full blown platform leg up.
So the good news is and listen.
We're not perfect we have things to work on and we're always looking at what we can do to improve.
But we have a pretty solid loyal client base and we look to be client obsessive.
And to deliver and new client experience and I think that helps us as we go to re contract.
Okay, great. Thanks for taking my questions sure.
And we also have a question from Chris Donna with Piper Sandler go ahead. Please.
Hey, Steve just wanted to ask on that buyout. If you can give us a specific number than it was and if you can't give us specific number and maybe what sort of range <unk> seen over time and how frequently you see these kinds of buyouts.
Yes, so it's.
It's literally around $2 million.
Like I said, it's a few million dollars. It was not significant and the Grand scheme of things and Chris. This is 1 of those that again, it's not something I look to kind of forecast. If you look we've talked about this and the last quarter call, we've and M&A activity since we've been and this business as part of this industry over the past several years, we've had M&A activity that's benefited us.
And we've won the combined entity so as I'm looking through I think 1 of the things we wanted to give a heads up on last quarter was we do see a couple of clients that are in and MAA process, where it has been completed and typically when that happens as I mentioned previously the changing of platforms is not the priority is getting the acquisition.
And while we might lose them short term they become a prospect growth.
Longer term and and a bigger organization. So I think the way we look at as a part of doing business, it's something that we will win.
And we'll win some and it will help us some that we might lose for the short term, but the way I look at it as yes. They become the next prospect on our list.
Got it thanks, Steve.
Sure.
And there are no additional questions in queue.
Great So with that I will turn to the investment managers 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 and the second quarter of 2020 <unk>.
Profit for the second quarter, but 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 45% high from a segment. This was 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 and onboarding the operational and infrastructure expense.
Related to this new business during the quarter.
Also a temporary reduction and investment expenses quarter aided the margin increase as well.
I expect our margin to normalize over the next few 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.
And as well as market appreciation of $38.2 billion and.
Turning to market activity during the second quarter of 2021, and we had another strong sales quarter with net new business events totaling $11 million and recurring revenue as well as re contracts was $6.3 million and recurring revenues highlights of these events included and our alternative market unit, we closed a number of strategic new names while sales to <unk>.
<unk> clients continued to be robust.
<unk> has also won the business of a large multi strat manager and a competitive sales process and is currently converting that client off competitors platform.
Momentum has also continues and the private equity and private debt space as we continue to launch funds with both new and existing firms and our traditional market unit, we continue to add new business and all product lines with low.
Book with both new and existing clients consistent with our land and expand strategy and particularly.
And we continue to experience strong momentum and both our turnkey collective investment trusts and ETF platforms for the quarter. We added 3 new client relationship expanded relationships with more than 30 clients.
And Europe, we continue to have solid cross sales and and our family Office services unit, We signed 6 new named single family office clients on the archway platform and asset 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, I'll now turn it over for any questions your math.
Yes.
And once again, ladies and gentlemen, plus 1 zero for questions. We go now to Owen Lau from Oppenheimer go ahead. Please.
Alright. Thank you for taking my question, Steve just 1 clarification I think.
Margin second quarter, 25%, 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 and sort of expense line would go up we expect kind of revenue would be under pressure and what's the reason for that thank you.
Yes so.
And the primary reason is as I said we.
And we had the benefit of this quarter.
Which.
And 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 is funded already so.
So that funded well ahead of us bringing in the expense to supported both the infrastructure expense and the personnel. So I do expect.
This is a competitive environment for hiring and as Dennis mentioned I do expect that expense line item to go up when I look at it over a quarter. There is always a question we.
Well the margin get up to the 40%, which is that I don't think thats long term sustainable and I think we will come back down to the mid or just above mid thirties again over the next 2 quarters.
Got it and I wouldn't say the pressure on expenses I think it would be adding normalize and we expense to match the revenue we already have in the door.
Got it and that's very helpful. And then on a related topic. When you look back do you feel like Covid had any impact on your investment and managers business and do you expect and all things equal would you expect any acceleration or deceleration of your business given that the fashion.
<unk> way, it's going up.
So and what I'd say is if you look back during the pandemic that IMF continue to execute I think we executed and in a different way.
If you looked at the percentage of sales and we started to grow a lot more with clients and new business. While there was new business a lot of the larger initiatives, especially over the past year.
And the market in and industry were put on hold so I think we executed well we continued our growth rate, but I think the 1 impact of this was the new business, especially the larger sized slowed down a little bit and I expect that to start to pick up and we're starting to see signs of that already so.
Not sure that will add fuel to the acceleration or just add another lever to accelerate west.
Got it that's good and then finally could you. Please maybe give us an up day about any demand and enabling crypto.
Crypto transactions from your clients do you think can be kind of incremental to you all.
This is from revenue standpoint.
And I missed the first part of the question I apologize.
So I'm asking about sorry, I'm asking about the <unk>.
Demand of enabling crypto transactions like do you share.
Yes, yes, sorry, yes, and yes.
Do you think it can be incremental to your business from revenue standpoint your base.
And request 1 clients and say Hey can you help us to enable some quick co transactions. Yeah. So great question, So actually right now and when.
And we actually do support Christos.
Funds and servicing we have and in contact with a number of our clients were adding this to their.
Investment management suite. So we do see some burgeoning demand here, we actually have a group that is low.
Looked at expanding our solution and when I mentioned.
Our investment spend was a little down quarter, which helps profit.
And looking to expand that investment and crypto currency and this just as an investment manager services. We're also looking at that and.
WP and we're actually running experimental breakdown around SVP and looking at the custody of crypto currency NSW day. So this is something that we think is has got some legs not just for IMAX book, where the company and and all of our investment processing businesses. This will also impact archway as well and we think it will.
Provide another lever for growth for us.
Got it thank you very much sure.
And next we'll go back to Robert Lee from K BW and go ahead. Please.
Great. Thanks, and thanks again, Steve just real quick question.
I think you mentioned was $6 million of revenue from I guess re contracting and existing clients just wanted to make.
Sure I understood that was that like clients re contracted and upon re contract.
Actually we're able to increase the revenue $6 million.
And that's been number of rig contracts and there Rob and might be some slight upticks, maybe for additional service et cetera, but it's basically looking at clients that were re contracted and the contract value.
They're out.
Their contract that time, so there was a few of them during the quarter and I just called out that re contract value.
Okay and I was just wanted to clarify that that was my only question. Thank you sure.
And next we'll go back to Ryan Bailey with Goldman Sachs. Please go ahead.
Hey, Steve.
Paul.
Private equity and in general, we're seeing deployment pipeline near or at record levels for the industry and Thats, probably a pretty good sort of private credit. Sir I was just wondering if you could give US a reminder, on roughly how much of either revenues or asset tied to.
Deploying capital so the business growth committed capital.
Yes, so I don't really get into that level of a number.
And Ryan what I would tell you, though from our asset split west.
Still about 50, 556% alternative that would include hedge private equity and 45% traditional which would be etfs cit's mutual funds.
Our.
Alternative asset so that 55% more and more of that is going to a private equity both in private credit private debt real estate, but we really don't break that out and.
And that specific.
Okay alright, thank you.
Right.
Sure.
At this time and no additional questions in queue.
Great So with that I'll now turn it over to Wayne Withrow to cover the advisors segment Wayne.
Thanks, Steve.
Yes.
During the second quarter, we were immersed and execution of the strategic framework, we have been building over the last few years.
And with regard.
We are seeing benefits from each of the 3 pillars of that framework.
First.
Our robust technology stack.
On the <unk> Foundation.
Is being increasingly adopted across both existing clients and our new advisor prospects.
Second <unk>.
Evolution of our sales and marketing process.
And today digital first marketplace.
<unk> continues to gain acceptance.
And third the <unk>.
<unk> offering both bundled and unbundled the investment products.
And then a catalyst for strong advisor and net cash flow.
Second quarter revenue totaled $119 million.
This 27% increase from the second quarter of last year.
To reflect the positive of our asset growth.
As well as the negative of lower fee rates from about product.
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 <unk> technology platform.
The year over year comparison.
And so reflected onetime pandemic related expenses reduction included in the Q2.2020 total.
Direct costs.
And R&D 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 range.
Total platform assets rose to $95 billion at the end of the second quarter and included $81.6 billion.
And asset under management.
Market appreciation and positive net cash flow drove this increase with market impact being the biggest factor.
Quarterly net cash flow onto App platform was approximately $1.2 billion.
Of this total $874 million represented asset under management and.
$300 million represented asset under administration.
This is our strongest cash flow quarter.
Completion of the WP migration over 2 years ago.
Please note that while AUR growth.
To be viewed as the factor, indicating strengthening market acceptance of our technology stack.
And growth would not have occurred without advisors choosing to adopt our technology platform.
Contributing to our growth and platform asset with 65, new engaged advisors during the quarter.
Perhaps more significantly 100 for advisors began engaging with Sci and the second quarter.
Strong improvement from the 67, we recorded and the first quarter.
Partially engagement reflects a valuable step and the sales process.
And while some of these advisors move directly into new advisors engaged status with and 1 quarter.
Our goal is to ultimately move all of these firms do new advisors status.
Our competitive advantages are built upon the technology capabilities, and which we have invested.
And continue to invest.
To this and we continue to integrate the orange platform.
And our goal of a late 2021 rollout remains on track.
We have also begun the phase 1 rollout of a fully digital accounts open technology.
Which will connect and a straight through manner.
Total 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.
Our 3 focus areas.
Delivering a compelling front to back technology platform.
Designing and offering investment products and responsive to todays investor.
And evolving our sales and marketing process.
Good day digital World.
And now welcome any questions you may have.
Once again for questions per 1 zero, we go in and out of Orion 10 and Orion.
Kenny with Morgan Stanley. Please go ahead.
Hey way and good afternoon.
Good afternoon.
So saw the press release come through last week on the rework and your business with a lot of additions to the management team.
And 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 and the fact and wood.
Much stronger technology focus.
And build upon our ever majority technology stack and.
And a lot more focus on our digital first distribution and marketing strategy.
So we had to add some expertise and some of those areas and.
Organized.
And sort of what I would call a more modern framework as opposed to a more traditional.
Geographic flash.
AUM base model.
Makes sense.
And then just 1 more I know that you mentioned that the lack of travel during the pandemic help margins a bit. So I'm. Just wondering if you could help size, how much and when travel resuming might impact margins from here.
Yes.
Yes, I can.
And do that and.
But I want I mean, I think that day.
And we look at that.
And my mind.
And that's the most funding is not how we manage the expenses, which we do every day, but.
And when you look at our response to the evolution of the <unk>.
Physical locations dynamically to work for it it's going to help US address the question somebody asked earlier, which is the war for talent.
So on and more focused on how we can respond to that and yes. It will cost us some more money I don't think it sorry.
And I worry about but I think it can get up and advantaged in the war for talent.
Thank you.
We'll go now to Owen Lau with Oppenheimer go ahead. Please thank.
Thank you for taking my questions again.
So I think you just launched it direct indexing product and ESG overlay.
In February this year could you please give us an up day on the recent traction you have and.
And what have you learned from this rollout thank you.
Yes, I think that the.
Again, a lot of traction and sort of a direct indexing and ESG overlay and what I would say it.
Don't look at Tate.
And take direct index and for example, direct index thing as a tool.
Direct index and gives you the ability to do something like and ESG overlay and a path to the world that also gives you the ability to do tax management and our parents and world. So you need to look at the combination of those 2 together and not each 1 of those individually.
ESG overlay is getting a lot of traction and all of our product that used to be.
Primarily limited to and SMA actively managed product now we can operate and sort of the path of the world.
Which is a big advantage and we can do the same and attach.
<unk> management so.
Hopefully that answers your question need to look at it the technology capabilities and all those products need to be combined and thats what compelling.
Got it and then do you have.
Any kind of maybe ask them and of course sizing up the Tam opportunity here and this space by combining directly and designee indexing plus the ESG and.
And number you can share.
Yes, I don't really.
I have a number to share, but I would say.
Those 2 components are among the fastest growing.
Aspects of our business.
Got it Okay alright, that's it from me thank you very much.
Our next question comes from Robert Lee with BW. Please go ahead.
Thanks, Good afternoon Wayne.
Afternoon.
Real quick I'm, just kind of maybe unpack a little bit.
Cash flows for the quarter so on the.
I guess, the AUM side, the $800 million and change.
This is possibly kind of unpack that a little bit more should we.
And kind of assume I don't want it but it happens when you assume.
And that Youre still that there is no reason to believe that you havent seen kind of continued outflows from kind of the I'll call. It the legacy products and whether it's the direct indexing product of the ETF AUM overlay product do you mean that you're still seeing that kind of ongoing mix shift.
Underneath that and kind of $800 million and then if I think of the cash flows overall, which were pretty healthy this quarter how much of your cash flows or do you tend to find that hey, It's advisors, who signed on and the last 18 months 2 years, who are really driving.
The gross sales and those advisors, who have been with us for a while.
And maybe their books and more.
And more stagnant or an outflow of any kind of color around kind of the aging of advisory relationships so to speak.
Okay.
Bob.
Our marketing group told US we have to be done by 6 so I'll try to answer this.
Okay.
I would say that when you look in terms of anything of advisors I think.
And internally.
And we ate all the advisors from it.
First we'd be doing.
And how the cash flow growth, we had metrics and we measure them and when we marked and and based upon the maturity of the bonds I would say that as a general rule.
And the annuity advisors and the more active they are but it reaches a tipping point, where you had these large and.
And it's growing and goodbye and they could dominate the cash flow and they could have been with us a very very long time.
But as a general award and newer the binder that factor that cash flow.
That answers your question, but that's a really rough rough generalization sure.
In terms of newer products and legacy products, what I would say and a lot of the newer products. They use more of an unbundled fee approach and I think we are capitalizing on.
Yeah.
Just overall transparency and the world I mean, you can see.
And all the press around.
They're kind of the revenue flow among the providers and the value chain and theres much more and more transparent and so we're absolutely seeing better cash flow and the unbundled fee, which is the more transparent fee structure.
I mean, just out of curiosity and things like direct investment.
Fee structure as our products for us right.
So maybe just.
With direct indexing and <unk>.
It starts to take off is that going to flow through I'm, assuming is and AUM or is that actually going to be an EUA.
That AUM.
Right Okay.
Great. Thanks Wayne.
And we'll go and out of Ryan Bailey with Goldman Sachs. Please go ahead.
Highway.
Just a quick 1 on the direct and next thing is there any sort of rough gauge you can help us think about for the economics that Sci receives.
For those products is it sort of in addition to the fee rates are already earning or does it sort of like a substitute for existing products.
Uh huh.
I would say.
And then let me see if that's the question you're asking when you look at the growth in direct and texting product I would say.
Half of the money is due to SDI and half maybe people who are changing out of our more traditional product into a direct index and product that with your question.
Okay, and I guess as we think about the revenues.
I guess is it accretive to the from E rate from where the switching from our more traditional product.
And that's kind of like net of the sub advisory or is it.
It'd be kind of like a net down and the fee rate.
I think if you look at.
From our traditional if you will kind of a mutual fund product.
And that is a net down and attempted revenue way.
Alright, and then.
And that is inclusive of the sub advisory compartment.
Yes.
Okay alright. Thanks.
Or is it really.
Yes.
There isn't a separate sub advisory fee and there and we manage all that and housing.
Got it okay, yes, yes, okay.
We have no additional questions in queue at this time.
Okay with that I will turn it over to Paul and 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, 2021 were $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 and nonrecurring expenses that primarily represented a true up of a sub advisor incentive fee and 1 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 of them 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, we're diversified globally and included Canadian <unk> CIL.
And not for profit or CIO and UK fiduciary management.
Client losses for the quarter and year to date was predominantly due to unsuccessful client rebid Emma.
M&A activity and continued DB curtailments, and we will provide headwinds on revenue and profit in Q3, and Q4 and 2021.
In the quarter, we were able to retain a number of OCI our relationships globally that we went through a competitive rebid process.
The unfunded client backlog of gross sales quarter and was $2.6 billion.
Offset by $3.7 billion of recognized losses that are still part of the 632021 asset balance.
We continue to focus on stabilizing our client base distinguishing our <unk> solution and selling new low scale relationships.
We continued to advance our <unk> 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.
And once again for questions plus 1 zero on your phone's keypad, we've gone out and Orion and Kenny with Morgan Stanley Go ahead. Please.
Hi, Paul how are you and Ron.
And.
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 and do you think you could ultimately get so.
And percentage of asset for corporate DB is still hover around the low 30% threshold, we certainly have seen more losses and the DB side.
But the Dv balances have gone up for a couple of reasons, 1 obviously asset appreciation, but the long duration nature of the fixed income is actually.
Improved as well.
So that's where we are from.
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%.
It's still a sizable piece of the business.
It does not mean that all the DB plans are and a path to termination and certainly we know what's happening and the U S and and UK 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 is probably a home for defined benefit plans long term. There are some that are still active and some industries that are still supportive of DB, that's usually the minority.
The smaller industries like the utility industry.
So I would say that thats going to continue to add over time.
And really is being replaced with the longer term assets and foundations endowments.
Other defined benefit plans that are going to be around long term like governments and unions hospitals.
Defined contribution and sovereign wealth funds et cetera, So hope that answers your question.
And next we'll go to Robert Lee with <unk>.
Good afternoon, and Paul Hi.
Hi, Robert Hi.
2 questions just wanted to make sure and.
Unpack a little bit.
And the unfunded pipeline just want to make sure I understood correctly, So it's $2.6 billion and kind of.
Committed but unfunded, but then there is.
$3.7 billion of <unk>.
Ships that were you know you've lost that they just haven't flowed out yet.
So I just wanted to make sure that at this 0.6 is not net of the 3 step now.
2.6 is the growth sales.
Had a little bit of sales that are 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 Hunter and <unk> 1 billion as of 630. There is $3.7 billion of losses that we've been notified that we have recognized our will and we'll recognize the revenue and they actually lose.
And that should come out probably sometime in the third quarter.
And.
And just maybe margin question I mean, if I.
We adjust for the 1 time $1.8 million margins is still running at pretty healthy levels and you have said.
And prior calls that.
Don't expect this and now you're kind.
Kind of expect that it'll maybe get back towards.
I think you have talked about maybe the high forty's or 50. So I mean is that still what we should be expecting over time or do you feel like you've been pretty consistently running at.
<unk>.
50, 350, 253% for almost a year now kind of.
Even adjusting for this so is that really.
Should be thinking and better indication of where you may be could be.
Over the.
Coming quarters.
Yes, I think regarding the headwinds of losses, and the fact that even clients that stay with US we had a healthy rebid process. This year, we retain and $4.5 billion I'm sorry, this quarter $4.5 billion of competitive tenders that went out that we retain which is a wonderful statistic for us, but even when that happens we do have.
Yes.
Reduction of fees based on the competitiveness of that so when you add all that up together and you.
Look at the realities of the losses, hurting us a little bit more than the winds benefiting us I think high Forty's is more realistic as we look at.
Longer term into 2022.
We manage the business judiciously, but we don't just management expenses, we want to invest appropriately and we're looking at that with regard to <unk> and some initiatives you're doing on that front.
But there is some benefits we've gotten from travel and really because of the client.
<unk> will have a delivery device that will always include some aspect of virtual so there will probably be long term travel savings that we have we want to be in front of our clients, we love to be in front of our clients, but we may not need as many Sci resources that we've had in the past and front of our clients and the future.
Great and then and the rule of thumb that Youre seeing that hey, when we went on and rebid on average the.
And the concession on fees.
And a 10%, 20% I mean I don't know.
And then kind of rule of thumb that youre or theres, something that youre experiencing net would be helpful.
Yes, I could go on for a while and that and unlike Wayne and I worked to 7 and so I can go I can go low.
And if you want but.
Kidding aside.
Idiosyncratic based on each specific deal.
But if you look at it and in general.
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 and they might be able to get back over time.
We're looking to redeploy more and alternative investments, but I would say, 10% to 12% is probably a good.
Market and think about.
Okay, great. Thanks, so much.
Thank you.
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 and gentlemen.
And we're making progress on 2 fronts on the first front, we were very fortunate to have kept our workforce healthy and productive.
Delivering a high level of client service and.
And the pandemic.
On the second front, we are building momentum throughout our business.
And.
And.
Alright times and that.
This afternoon, please be safe and remain healthy.
Excellent.
Okay.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T and conferencing you may now disconnect.
We'll see.
By Al.
Alright.
Paul.
We're sorry your conferences ending now please hang up.
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