Q3 2021 SEI Investments Co Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the S E <unk> third quarter 2012.
Anyone earnings call at this time, all participants are in a listen only mode. We will conduct a question and answer session and I will give instructions at that time, if you should need assistance during the call. Please press Star then zero and as a reminder, this call is being recorded I would now like to turn the conference over to our host chairman.
And CEO Al West. Please go ahead Sir.
Hello welcome everyone.
All of our segment leaders are on the coal as well as Dennis Mcgonigle, Sei's CFO and Kathy.
The high leg Sei's controller.
I'll start by recapping, our third quarter 2021.
Ill turn it over to.
Dennis to cover <unk> and the investment in new business segment.
After that each business segment leader, who will comment on the results of their segments.
And as usual, we will field questions at the end of each report.
So, let's now turn our attention to the financial report.
Financial results.
Of the third quarter 2021.
Third quarter revenues grew 14% from a year ago.
Third or third quarter earnings increase.
Increased by 24% from a year ago in third quarter EPS of <unk> 97.
Grew 29% from.
From the 75 reported in third quarter of 2020.
Third quarter asset balances decreased by approximately $3 7 billion.
While lsp's balance decreased by $4 8 million.
During the quarter.
We repurchased 20.
Excuse me two points.
Zero.
Dollars shares of ACI stock at a price of $60 58 per share that translates into a $120 million worth of stock repurchases.
I'd like to provide you with our situation today.
One of our businesses steadily grows its revenues and profits that IMS.
Another business in the advisor segment has recently been executing against our new technology driven.
Strategy.
Now we are experiencing strong indicators that the business has turned the corner and we're very excited about that.
Another business private banking is diligently working on an implementation backlog strong sales pipeline and enhancing client satisfaction.
Now.
Business.
Is the institutional Investor segment.
Facing strong headwinds in the legacy defined benefit or CIO client base.
It's currently addressing other growing segments.
We're also focused on building growth engines.
Four beyond our core traditional businesses.
Here, we are finding opportunity in markets and services.
Adjacent to our four main engines.
In the past we have shared a couple of these innovative young businesses.
First trc, providing global regularly.
Regulatory compliance services for financial service organizations throughout the World.
What has been renamed from STI.
It services through Sci sphere.
<unk>, leading edge service is network and data security.
Third the private wealth management <unk>.
This is providing.
And then enterprise platform to ultra high net worth families.
In addition, we have made two acquisitions in October that will add additional capabilities for both our IMS and institutional business lines.
Dennis Steve and Paul.
<unk> will provide more information.
Next let's turn to revenue production during the third quarter net.
Net sales events and private banking and investment managers.
Were $19 $4 million of which 15.
$15 $1 million or as expected.
Paul to be recurring.
In addition, net sales events of $6 9 million incurred in the asset management related units. These events to reflect positive asset flows of advisors and institutions.
In a few minutes unit heads will provide more.
<unk> tail on their specific sales results and their new businesses.
Opportunities for new business.
To grow and prosper in the future, we know that things will never be the same so we've been busy adopting new mental models and realities.
One such new reality as the remotely distributed.
More data for us.
We have been planning out.
Workforce will work in the future and today, we are beginning to act on our plans.
Fortunately, we have sustained the positive momentum created during the first half of 2821.
We have a strong backlog of sales and implementations.
Worked in a number of key prospects late in the sales cycle and.
In addition, we have been successful in repositioning our asset management related business segments.
In conclusion, we look forward to capturing the opportunities inherent in.
Insignificant change and with that I.
<unk> turn it over to Dennis to give you an update of LSP in the <unk>.
Investment in our new business segment.
Dennis.
Thanks Al Good afternoon, everyone I'll.
I'll cover the third quarter results for the investments in new business segment and discuss the results of LSC asset management.
During the third quarter.
We will see investments in new business segment activities consisted of the operation of our private wealth management group.
Our it services business opportunity, which al.
Told you know, we now call Sci sphere.
Modernization of assets and data integration of different platforms to deliver on our one Sci strategy at other.
Yes.
During the quarter the investments in new business segment incurred a loss of $8 5 million.
Which compared to a loss of $9 6 million.
During the third quarter of 2020.
Approximately $6 5 million of expense during the third quarter 2021 is tied to our one sci.
Our investment.
Regarding <unk>, our approximate 38, 7% ownership contributed $35 million.
And income to Sci for the third quarter 2021. This compares to a contribution of $28 3 million and income for the third quarter of 2020.
Assets during the quarter contract at approximately $4 8 billion.
<unk> experienced net negative cash flow during the quarter of approximately $3 1 billion with market depreciation of approximately $1 7 billion.
Revenue at <unk> was approximately 115.
$7 million for the quarter.
With $1 9 million of performance fees.
As we discussed on our last quarter call and over time.
Our people are the key to making Sci go our business growth adds to our need to.
To develop and retain our talent in all areas, including our operational teams.
During the quarter and again recently, we have taken steps to invest in our operational talent with adjustments to their compensation.
We recognize their contribution to our success and the role they play in our competitiveness as a company.
Recruit regularly we monitor the labor markets within which we compete and we will make appropriate investments to keep Sci as an employer of choice.
While this has an impact on overall expenses. We believe it is the right thing to do.
As Alan mentioned, we have recently closed on two acquisitions.
The first is in the United States, we have purchased the technology assets of a company called <unk>.
These assets enhance our investment manager services offering in the areas of Investor services and regulatory compliance.
In addition, the talent that is now part of Sci enhances our technical.
It grows our cloud computing expertise.
In the UK pending regulatory approval, we are expanding our institutional capabilities in the Master Trust solutions space with the acquisition of the Atlas Master Trust.
This trust will combine with the Sci Master Trust.
Team, giving us greater scale and capabilities to compete and grow.
Neither of these acquisitions are financially material, although we believe that carry high strategic value.
Steven Paul will provide additional commentary.
Speak to their respective segments.
For the quarter, our effective tax rate.
22, 3%.
We are also included in our earnings release additional financial information.
Please refer to our soon to be filed 10-Q for more information I will now take any questions.
Ladies and gentlemen, if you wish to ask a question. Please press <unk>.
One zero on your phone.
And a speakerphone, please pick up the handset before pressing the numbers.
Again that is one zero.
We will go to the line of Owen Lorem with Oppenheimer. Please go ahead.
Thank you for taking my question Dennis could you. Please give us an update of your latest status.
It is about people working in the office versus working remotely for the rest of 2021 and also the planning going into 2022. Thank you.
Sure so essentially the end of the second quarter.
We have.
Gradually wealth.
Employees back to our offices.
<unk> <unk>.
And in London, and somewhat in Ireland.
Indianapolis.
Starting just Monday of this week.
Have what I kind of call.
At open door for anyone who voluntarily we'd like to come and work in.
Both offices, whether it be one or two or three or five days a week.
We have.
I think proven protocols on how to keep people safe safe.
And protected.
We certainly look forward to seeing more people on our campuses.
But as Al mentioned, we have adjusted.
And our <unk> and we will continue to take advantage of.
The opportunities in the <unk>.
<unk> if you will from how we've worked over the past 20 plus months.
And we've learned that and we certainly can run effectively with people distributed in different geographic areas.
We can run effectively.
Well it will not coming into the office every day.
Do recognize in our workforce recognizes the benefits of.
Being in the office when they can be relative to things like team engagement group meetings and conversations certainly the benefits of spontaneity.
Running.
With <unk>.
And covering specific business issues, when they do but that being said were taken.
Kind of gradual build back process, if you will versus the big Bang event. So.
See this certainly that's our process really for the rest of this year as we work through.
<unk>.
Fourth quarter, we'll make some decisions around how we go into 2022.
Thank you and our next question is Robert Lee with K B W. Please go ahead.
Thanks, Hi, Dennis Good afternoon, Hey, I'm doing well thanks.
Great.
Okay.
Through good thanks.
Another earning season.
They come up that they do.
Yes.
I just want to go back to me two things, where maybe your commentary around.
I guess, what's kind of employee compensation expense and I apologize.
Maybe.
So a little bit of it but I mean would there like specific metrics or whatnot.
You know that you had you had made you may have mentioned that.
The reason I kind of I kind of missed that and Thats a metrics, but if you remember back on our second quarter call we talked about.
That we were seeing.
The inflation deflation.
And the fact, hitting our compensation structures, particularly in certain areas.
Okay.
Wanted to make sure everybody knew the third quarter.
We were going to see some impact of that because July one for many of our employees as their anniversary date for compensation and so we would have a full quarters effect.
<unk>.
And the adjustments we made then.
But as it worked through the quarter and as we look at our kind of workforce strategy and long term planning.
Particularly in the area of operations and operational talent, we made a recent decision to do something in addition to what we did for our workforce back in.
At the beginning of July.
So it was more kind of.
Yes.
Set the expectation that again youll see some growth in compensation costs in the fourth quarter and then ongoing as a result.
Those decisions.
Okay, Great and you know maybe sticking with <unk>.
I would just say.
My second <unk>, while there's plenty of that.
Conversation back in the second quarter is that within.
Within a couple of weeks after the call ended.
What we had said on our call.
Much more of the norm than the outlier.
Because every company is talking about.
It's a labor force.
Say that.
Thank you.
Yes.
Yes, very much so and maybe keeping with that theme and this maybe goes back to the party.
A question a little bit of back office, but as you know knock on wood, we hopefully start exiting.
The COVID-19.
And whatnot.
Anything we should be thinking about maybe on other expenses like maybe marketing teeny starting to pick up as you get into the quarter, our expectations for next year or anything.
Or.
That we should maybe just thinking about as you think ahead to next few quarters into the first part of next year.
And I think pinpoint.
During the third quarter, we saw a little bit of elevation of that.
Did have more people on the road, it's all relative though too.
Kind of where we were in the first half of the year and we're seeing with <unk>.
More client engagement.
Yes.
As simple as dinners or.
Meals with clients too.
Outdoor activities with <unk>.
The most positive or prominent one that now with.
The winter common maybe that will die down, but I think.
Sales.
And client relationship folks that are comfortable and then we do have a process of approval for what we allow and won't allow.
We'll see that continue to inch up I don't think youre going to see a big Bang event, where.
We're going to drop the flag.
It's going to look like a NASCAR races.
Folks so.
And then maybe that worldwide that I also think there's probably a few people at Eagles games and giant games in.
Some of that going on as well so.
Okay, and lastly, and I appreciate your patience the.
The one Sci and the investments in new business I guess.
Had been thinking about that kind.
And to trail off as we got deeper.
Into the.
Second part of this year, so should we still expect that that's going to start kind of trailing off somewhat.
That $6 5 million of expense or is that kind of a reasonable place to be the next couple of quarters.
Got a little bit second or third it'll trail down a little bit more third fourth and then it'll that'll stepped down I think more as we go into the next year, So I wouldn't necessarily carry where we are today.
Into next year, because it will be.
Okay, great. Thanks for taking my questions.
Thanks, Rob.
And the next is Chris Donat with Piper Sandler. Please go ahead.
Hey, Dan Thanks for taking my question just a small one on the facilities.
Supplies and other costs just looked looked a little.
Travelling anything to call out there or is that.
At a new run rate for some reason.
Just trying to understand what's moving there.
And that line item on the income statement.
We're the beneficiaries of.
State tax program for.
Lighting investments.
And we.
After frankly, a very exhaustive process by our tax team.
Our IP.
Folks and other folks in accounting we applied for.
A rebate if you will on R&D investments, we've made in our data center.
And so we did pick up.
A nice check.
They did it actually accept our application.
Question, Lee and we got that benefit in the third quarter.
So I would say that number is probably more it's a little bit understated.
So from an expense standpoint, we did get that benefit.
On the other side there were some.
To say more.
One time expenses that went the other way so in total cost for the company in total expenses.
Yes.
It was fairly neutral neutral in terms of things that went one way or the other.
Okay, but as we think about the individual line items.
<unk> facility has probably comes off that I would like some others come down okay.
Okay.
That's it for me for now thanks.
Thanks.
And we have one more question in the queue Ryan Kennedy with Morgan Stanley. Please go ahead.
Hey, Dennis how are you.
Great Ryan for yourself.
Items like that.
One more question on expenses.
So we've talked about comp and the return to work.
But given that revenue growth at the company level has been up 14% year to date, how should we think about how much of that do you plan to reinvest into the business beyond the comp and beyond when Sci is there any other type of.
Many initiatives that you might lean more heavily into.
Water.
How you define heavily but we are clearly.
Investing in some new initiatives that al outlined it is.
Talk.
Ci sphere business activities.
The.
DRC business activities.
As I mentioned, we did too.
Smaller acquisitions.
In October and which Steve and Paul will speak a little bit more to those have.
Probably short term expense.
Expense elements to them.
And battle, we are investing.
Now, we always speak in terms of.
Percentage of our revenue is in terms of total R&D.
And I think we are still operating in that kind of 10.
10% type range in total.
Theres nothing that.
So I think would surprise anyone.
Yes.
We are doing.
Sure.
Arc don't already have in place.
Yes, things like private wealth management, that's a self funding.
Business now because it's a revenue generating.
And our business.
Thank you.
Youre welcome.
And we do not have any more questions. Thank you Sir.
Before I turn it over to Steve.
We would like to remind you that during today's presentation and in 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.
The highlight is so happy that I get to say that.
With that I'd like to now.
But over to Steve.
Thank you Dan good afternoon, everyone as usual I'll start with the private banking segment.
Third quarter, 2021 revenues totaled $123 million, which was up $8 million or 7% as compared to the revenues of the third quarter of 2020. This increase was driven primarily from recurring revenues.
Now I'll turn it third quarter of 2021 quarterly profit of $6 3 million for the segment was up $4 $6 million from the third quarter of 2020. This increase in profit was primarily due to the increase in recurring revenues.
And turning to sales activity during the quarter, we signed an agreement with a new client to Sci.
<unk> Bank based.
<unk> real Pennsylvania, we won this business had a competitive process and we expect CMV bank to migrate to SVP from a competitor platform in the first half of 2022, and we look forward to welcoming them to the Sci family and supporting our future growth initiatives.
For the third quarter of 2021, our total gross sales events signed for.
Clear investment processing business was approximately $1 million of annualized revenue.
Total net sales for the investment processing business was essentially flat.
The primary driver of this was our new sales event offset by a reduction in several trusted contracts, reflecting some reductions in the size of a specific clients business or reduction.
For the endeavors is utilized.
Also in the quarter, we closed $2 $6 million of one time revenues.
While we would've liked to see stronger sales events signed in the quarter. This net result was more a function of timing than.
It is safe to say, we have a good start to the fourth quarter, having moved some transactions along I'll wait to give an update.
<unk> surf activities, when we report our fourth quarter results.
Turning to implementation activity for the quarter last year, we announced that we're expanding our relationship with our long term client first horizon first horizon and Sci clients since 2003 in July 2021st Horizon merge with Iberia Bank.
<unk> had previously been running on a competitor platform. We were pleased to announce a dork announced that during the quarter. We successfully completed the migration of that book of business to Sci.
We are excited 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.
Which had loggers approximately $72 million in net new recurring revenue at the end of the third quarter.
From an asset management standpoint, total assets under management ended the period of $25 6 billion.
Which was down two 5% from the second quarter of 2021 our.
Our cash flow for the third quarter of 2021 was a negative 80 million.
This resulted in a negative 200000 sales event for the asset management side of the business for the quarter.
As we go through the rest of the year, we will remain focused on containing continuing our momentum executing on sales and prudently investing in the business to ensure sustainable growth. We will also continue to execute on our <unk>.
LNG, which will allow us to increase our growth opportunities by unlocking all of the assets and platforms Sci asked 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.
Ladies and gentlemen, once again, if you have any.
<unk> is one and then zero on your phone.
And we will go to Ryan <unk> with Morgan Stanley. Please go ahead.
Hey, Steve how are you hey, how are you.
Great.
So you've outlined some growth opportunities in private banks I'm, just wondering how much of the growth is expected to come from expanding existing.
Question ships versus new clients, if you could help us size that.
Yes.
Yes, I think Brian it's hard to size and I, probably wouldn't give you the exact size, but I would say when we look at the pipeline right now.
We probably have about 60% a little bit more on new opportunities and 40% from what.
In relation to that.
Maybe expansion of existing relationships and when you look at the platforms, we have including archway IMS and some of the other technology platforms. We have we see good opportunity and we've actually been successful with some of those during the past 18 months. So I would say we are equally bullish on both.
And you are trying to move both down the path.
Got it thanks, and just as a follow up how do you think about transition risks and I'm asking because one investor concern that we've been hearing is that theres been some chatter of a large wealth advisor looking to change their provider and we don't know if thats.
Someone on your platform or who it.
But it does bring up the question of how do you think about protecting yourself around that potential risks what flexibility you have in your model and if.
If you could remind us about your concentration in revenues is on maybe your top three or top five clients.
Yes, so I'll start in reverse order, we don't have any material.
Through the business single clients or.
Group of top five or so clients. So we ultimately go into specifics but.
If we had material client, we would certainly talk about that.
<unk>.
As far as transition ratio.
We are in our servicing and outsourcing business that.
Risk is out there for everybody in this business I think our client retention rates being in the very high 90 points to the fact that we manage that risk very well over the years.
It all comes down to execution on what you have in front of us.
Courses and the power of your technology and people and I think we feel pretty secure.
Typically I think we've covered this in Q2.
The risk we run in the private banking segment, when I look back to history, where the majority you see transition while we have had some client service or client movement.
Outside of M&A, most of that comes from M&A and when a bank is bought by another bank or wealth managers bought by another wealth manager and if that larger organization is not a client of ours.
Typically that's when we will lose a client but as I've also said the silver lining in that is for us they become an immediate.
Immediate prospect for us again.
Thanks sure.
And our next question comes from Owen Lau with Oppenheimer. Please go ahead.
Thank you for taking my question, Hi, Steve sort of expenses the expenses.
Slightly better than expected and I think it declined sequentially is.
Is there anything you want to call out for that expense discipline I think you've mentioned that you would consider a big investment, but it's a sign that it will start to tail off thank you.
Besides expert management no kidding.
We did.
Q2, we took a good look at what our expenses are and tried to manage that very judiciously and will continue to do that through the year that does not mean on that sir.
Certainly as Dennis mentioned, we will have some pickup in expense due to compensation.
That we do have operations folks and private bank.
Absolutely.
So, but again, we'll manage that and certainly manage as best we can but.
He was happy with the results and the team's working very hard to manage expenses.
Thank you we will now go to Robert Lee with <unk>. Please go ahead.
Thanks, Hi, Steve I hope you're doing.
Well I mean, how are you.
Thank you a couple of quick ones. The first one is this kind of on.
Bank M&A and its impact I mean I know.
Sometimes you win is with first horizon, sometimes it doesn't go your way, but more broadly as you know is banking they feels like.
Pretty heated and maybe likely to stay that way does that at all impact.
Excuse me, if that will impact kind of the.
The conversations you have with prospects in terms of their willingness to kind of go forward or go down too far down the path. If you know there's so much.
It's been activity.
Going on around them or is that not really a factor just kind of a day to day.
Prospecting and.
We're trying to move the pipeline along.
Yeah, Rob I would say I don't think its too much of a impact day to day unless the prospect, we are talking to us down a path of already.
It kind of becomes pretty evident when we start negotiations or discussions or.
If we reach out to them and their resident to startup conversation. There are typically the ones you'll see that our in process. Other ones I think they view it just like that that's a part of the business right now and they're making their strategic decision.
And now that they have to go forward to grow their business. So we really don't see it as being as a big fear hurdle in the sales of our prospecting process.
Okay, Great and then maybe it's a follow up on the on the backlog can you just remind us kind of.
How are you currently expect.
I know that that backlog you know too.
Yes, the fund over the next two years in.
As well as well as wells Fargo still in that still in the backlog as part of that or.
They dropped out of the way no I appreciate that Rob So yes, the wells Fargo the net up.
Would be in that backlog.
And the way, we're looking at right now of that approximately $72 million backlog about 61% of it we expect to come in in the next 18 months the remainder probably in the following 18 months with that said we have seen certain prospects.
We expect a delay.
Backlog, but it will be a short term delay probably more of a three to four months delay.
As you know the pandemic has hit development centers pretty hard over the past 18 months. So I think getting some development done in certain of our clients and prospects has taken a little longer.
So I.
I don't think it will dramatically.
Those timeframes I laid out, but there could be a couple that move here or there.
Great. Thanks, so much thanks for taking my questions Stuart umbrella.
And next we'll go to Ryan Bailey with Goldman Sachs. Please go ahead.
Hey, How's it going.
Hey, Ron.
Just a quick follow up to Rob's question.
If you cant comment completely understand but as well as in sort of that first 18 months of the backlog with the second 18 months.
It would be in the second.
Got it okay.
And the reason and the reason is because we just don't.
On that one.
Got it okay.
And then Steve I think you had said in some of your recent commentary that.
Feel like for the segment will be heading towards a more sustainable and accelerating margin.
As we sort of exit this year.
Now that we're kind of nearly 10 months through the year does that still feel like the right.
Have a base.
And how much of that is based on the matriculation of the $72 million.
Call it like over the next six months so sir.
Yes, Brian So that's one of the goals, we're not there yet I feel we are getting closer to a point, where again I can say, we are on more of a sustainable and accelerating margin level.
We still have some things to navigate through that I've mentioned through the year.
US getting to that sustainable margins really the two main pieces are matriculating that $72 million as well as us managing and looking to right size certain expenses.
And then the third piece of that of the third leg of the stool will be.
US continuing to fill the backlog with new sales as we matriculate.
The sales that are in there.
Got it okay, and if I can sneak one more quick one in.
Just on the Orange.
With a larger scale or any opportunity any sort of advancements there anything.
Developing a quick waiting.
No I think the team is working very hard building the pipeline. There. We continue to go down the path, we see that as a big opportunity for us.
But nothing to report yet.
Okay. Thank you.
Yes.
And we do not have any more questions in the queue you may continue.
Thank you so I will turn now to the investment managers segment during.
During the third quarter, our momentum continued in the segment with continued strong growth from both new and existing clients.
For the third quarter of 2021 revenues for the segment totaled $147 4 million, 19% higher as compared to our revenue in the third quarter.
<unk> 'twenty.
Profit for the third quarter for the segment of $57 $8 million.
Was 31, 4% higher as compared to the third quarter of 2023.
Third party asset balances at the end of the third quarter of 2021 were $861 6 billion approximately.
Approximately $14.
A $20 billion lower than the asset balances at the end of the second quarter of 2021. This decrease was due to net client fundings of a negative $25 6 billion.
Offset by market appreciation of $11 3 billion.
The net client funding decrease was driven by one client in sourcing they're.
<unk> liquidity product, resulting in a large drop in assets and a much smaller drop in revenue.
And turning to market activity during the third quarter of 2021, we had another strong sales quarter with net new business events totaling $15 2 million and recurring revenue as well as re contracts with $15.
Lower recurring revenues highlights of these events included in our alternative market unit, we closed a number of strategic new names, while our land and expand strategy continues to resonate as sales to existing clients to continue to be robust.
Sci won the business of a large private equity fund in a very competitive sales process.
Eight currently converting that client off competitors platform.
A highlight of the quarter was our selection as a service provider to an $80 billion private equity manager outsourcing of fund for the first time, thus, adding to our land and expand roster.
In our traditional market unit, we continue to add new business in all product lines with both new and.
And as clients and particularly our business expansion of our collective trusts and Etfs solutions is robust during the quarter. We added three new client relationships and expanded relationships with more than 25 clients. We had a multi fund complex joined our pioneering advisors in our circle 40 Act platform.
In Europe, we continue to solve.
Existing dollar cross sales with growth mainly in our private client credit clients.
And in the family Office services unit, we continue to see steady demand for the archway platform from a single family office market segment and strengthening demand for our outsourcing services in the multifamily office market segment.
Our backlog of sold but unfunded.
<unk> stands at $30 1 million at the end of the third quarter.
Turning to the strategic side of the business I am pleased to announce on October 18th we acquired the assets of phenomenal and Investor lifecycle and compliance cloud native fintech firm that complements our platforms and solutions and our global regulatory compliance service.
<unk>.
While not financially material this transaction adds complementary resources and expertise in cloud development and technology to our employee base. We are pleased to welcome the Meredith Mall mall and the <unk> team to adapt to the Sci family.
Finally during the quarter. We also received final approval.
Services, our Luxembourg servicing license, which allows us to start operating fully in Luxembourg.
We've established an office and hired our initial staff and look forward to adding our servicing capabilities in this important jurisdiction.
That concludes my prepared remarks, and I'll now turn it over for any questions you may have.
Ladies and gentlemen, if you.
Wishing to ask a question it is one zero.
And we will go to Owen Lau with Oppenheimer. Please go ahead.
Thank you very much Steve could you. Please remind us your criteria of doing M&A and what area do you think it's better to buy versus bill. Thank you.
Sure. So I think our criteria has switched where if.
If we feel we can get into an adjacent market add capabilities and its better serve because the markets move so fast doing it through an acquisition or strategic partnership versus build.
Think we're open for business, then and I think in <unk> case.
We came across a company with just a terrific.
Group of assets from their technology to most importantly, their people and their expertise and quite frankly.
As a kind of very tough labor market out there and we looked at this and thought would just be a great addition to a lot of the products we have in.
Flight to adding some kind of firepower can solutions products, we have and really as we look to build things out for the future. So we just thought it was a very good match and it made sense for US I think as we look and go down the path further and I think this probably across the company. If we see that opportunity comes to us that will help us get into a new.
Because whether that be in adjacent market for completely new market or help us build out.
<unk> our solution of platforms I think we'd be very interested in that we will not be interested in things just too.
Gain market share or just the bias is to gain market share that's not strategic to us we're very focused.
Martin the benefits of an acquisition or strategic partnership what comes after the actual acquisition to us Thats. The most important thing.
Got it that's very helpful and then.
In terms of the margin how should we think about the margin going into next quarter and maybe even 2020.
22, because I think your margin came down but you also mentioned that youre going to make some investments. So how should we think about margin. Thank you.
I was hoping to work on asset.
I think I've said this at this point I feel like the boutique private world I've said for the past few quarters.
Not feel of where the margin is right now.
<unk> is sustainable.
Being up close to 40% it did come down a little bit to 39, and some change this quarter I do believe again at the risk of sounding like the Woodford oil.
We will see that come down and more in line with the mid thirties, maybe a little higher and the reason for that is.
We are obviously growing the business and expanding our sales we're actually implementing those sales more rapidly than we have in the past.
The market is very active and we're actually bringing in revenue before the expense of supporting that that combined with the.
Now <unk>.
Salary increases that Dennis mentioned, we believe we will have an impact in Q4 and going forward. So that will normalize the margins back to where they were historically we believe.
Got it that's very helpful. Thanks, Steve I'm not sure.
And we will go to Robert Lee.
<unk> with <unk>. Please go ahead.
Great. Thanks for taking my questions.
My margin question already but I do have a question kind of on that.
I guess nowadays almost have to feel like I'm always close almost have to ask about crypto and equip the assets and capabilities. So I'm just kind of curious.
We will be a question for Wayne later, so be prepared.
Yeah.
Can you talk a little bit about in your business are you seeing a need or demand from your clients to start building out.
Providing more some of those capabilities, whether it's safe keeping transaction have you wanted to find it.
Sure.
Crypto assets.
Yeah, Rob So I think we did cover this a little before we highlighted the need we're already there. So we are supporting some funds. We have we do see a demand from our client base and.
And we actually have quite a few inquiries from a number of our clients and prospects on our capabilities. So.
So we do think.
There is a burgeoning demand for what I would say, though is even with the ones. We have those funds are typically smaller.
While we do see some adoption of them, it's not wide scale adoption. So I think we're in the early innings of this still I think there is still a concern about regulations around how Hal.
They will take off and wide scale, but there is definitely a question we get asked and we're getting asked on a lot of prospecting meeting our capabilities around crypto. So we actually have a cross functional team across banking adviser IMS looking at how this would impact platforms operations additional services we.
Might have to offer the right now as far as IMS, we can at least offer the administration and outsourcing services around those loans.
Great that was it thanks for taking my questions sure.
And the question is from Chris Donat with Piper Sandler. Please go ahead.
Hey, Steve Thanks for taking my question just wanted to ask what the.
Yes.
<unk> it.
I thought I heard you say that it was cloud native and Im wondering how youre thinking about the world and how your clients want you to think about the world in terms of.
Single tenant or multi tenant cloud.
Are your clients expressing a strong opinion or do they prefer.
Data centers are on Prem.
Are your clients heads right now in terms of architecture.
I think our clients are very some of US I think people realize we have to be on the cloud.
I think theres, obviously people who still.
Still have concerns, especially when you get into some more of the wealth managers and banking side.
However, if you look across many of the large institutions most of them have cloud initiatives or the middle of them. So we think we're kind of in line with US. We believe this is inevitable. We believe it's a key part of our future.
And we believe that experts.
Expertise and taking all of our platforms.
To be able to be cloud native multi tenant is very important so I think strategically we're very well aligned with our markets.
Got it thanks, Steve.
Sure.
And I apologize if I get the name.
But it is rajeev.
With Morningstar. Please go ahead.
Great. Good afternoon can you remind us what your revenue mixes between traditional versus alternative and how does the traditional versus alternative revenue growth rates compare.
So our split is about 55% alternative.
<unk>.
The remainder of traditional obviously the alternative side of the business over the past several years has been higher what I would say specifically for this quarter and what we saw the trend starting in Q2, our traditional business had a strong showing as well. So I would say it was it was close to split.
Down in the Middle maybe 50, 558% alternatives remainder of traditional but we are very excited to see.
A strong push from our traditional clients as well as they expand out their passive.
Management capabilities as well as look for some of our other services around our platforms and middle office.
Got it thanks sure.
And we do not have any more questions in queue you may continue.
Thank you so I'll now turn it over to Wayne Withrow to cover the advisors segment.
Thanks, Dave.
The third quarter reflect the continued progress.
Sure.
One of our strategic framework.
Third quarter revenues totaled $125 million.
This 21% increase from the third quarter of last year.
Reflect positive net cash flow.
As well as lower fee rates on some of our products.
Expenses increased compared to the third quarter of last year.
Primarily due to sub advisor and personnel costs tied to our growth.
And to a lesser extent increased investments in our technology platform.
Overall.
The profit picture for the unit remains intact.
Slight pressure on asset management revenue rate.
Total platform assets rose to 96 billion at the end of the third quarter.
And included $82 billion in assets under management.
Actual won't drive platform during the quarter was approximately $1 $4 billion.
Of this total $1 1 billion represented assets under management and $300 million represented platform only asset.
Like was.
The case in the second quarter.
This quarterly AUM.
Total platform asset cash flow is the strongest we have realized in over two years.
I believe.
This is a clear indication that our strategy is working.
Contributing.
Getting to our growth and <unk> 82, due engaged advisers during the quarter.
Our competitive advantages are built upon the technology capabilities in which we have invested and continue to invest.
To this end.
We continue to integrate the.
Orange platform.
Our goal of a launch this year remains on track.
We are also continuing rollout of a fully digital account opening and proposal technology.
As well as enhanced mutual fund and SMA model management and trading.
Automation.
While there still remains much to be accomplished we continue to make progress in execution of our strategy.
I welcome any questions you have.
Ladies and gentlemen, if you have a question that is one and then zero on your phone to get in the queue.
And we have Ryan <unk> with Morgan Stanley. Please go ahead.
Hey, Wayne how are you.
Good afternoon.
So I heard the comments on your competitive advantages with the Orange acquisition and some of the automation work. They are doing so I'm wondering if we could just get a broader picture update on the competitive.
Environment.
Specifically there have been a lot of new entrants in the tamp space. So I'm wondering if you're mostly competing today with the big players like investment in asset Mark where are you seeing more competition from some of the newer entrants.
Yeah, Yeah I think.
To be honest it will be a mistake just to focus on.
Other firms that compete in this space I think you also need to look at.
The broker dealers.
Most of our adviser affiliated with and they are building sort of complementary platforms, where people could take the business in house. So that's also a competitor and you might not see that much so really compete against those proprietary platform.
Platform as well as you know.
And accurate Mark Gordon investments.
People.
But I think our advantage as we continue to.
To gain additional traction in the <unk>.
Market acceptance of our platform.
The tamp space I think that.
Our strong technology.
Which really give us an advantage in that market.
Thanks, that's helpful color.
And our next question is from Robert Lee with <unk>. Please go ahead.
Thanks, So good afternoon, Wayne hope you're doing okay.
Great.
Could you just kind of refresh our memory on the on your new cash flows. So you know the $1 1 billion.
How should we think of that from like an aging perspective, and what I mean by that is you know I guess my impression has always been that <unk>.
Advisors are recently added advice.
It does tend to obviously be kind of that yeah.
They tend to be bigger drivers, maybe net flows, whereas you know advisers had been on the platform for a while been around you know maybe their books of business you know I had less organic growth baked into them. So.
Is that.
You know, it's still the case or are you seeing any kind of changes and kind of how has the book of business is flowing overall or is it still skewed towards the newer advisors.
Yeah, I think I mean your <unk>.
Right that has always been the case.
We still.
Look at it that way.
But this shift we're seeing and maybe this is a lot of this is built on a new technology platform.
We're seeing kind of reengagement.
And a lot more growth coming from our existing book.
Point, where if you look at the last quarter you know most of the growth came from the existing book and not the newer book.
And that's been one of our key to that.
They often say you know.
New customers and existing customers.
So I think there's been a little bit of shift in that.
Traditional view.
Great and then maybe I'll ask the same question I'd just add Steve with.
John Crypto, So you know you.
Do what you are hearing from some of the brokers and others who report the there more are there.
Advisers are getting asked about you know, adding crypto to portfolios or having the capabilities. So can you maybe just talk a little bit of you know Steve.
Steve obviously talked about.
But you know are you seeing that same from your kind of advisor base and.
You have to kind of build that you know spend more time or money or whatnot building that out or just kind of curious what you're seeing there.
Yeah, I mean, I think you need to sort of combine it into two separate items.
Steve.
Some drastically in that.
That has had its crypto fit into.
Your whole processing capabilities and your platform capabilities and also with the FERC to Steve's comments, which I agree and we need to continue to.
Build out that capability.
And a lot of that supports kind of a more of a.
<unk> slash trading capability.
Now the second question is how does it fit into an investment portfolio and have you modified your investments guidance to incorporate crypto into asset allocation into the portfolios that you.
We're making available with it without your advocate.
Cut clients.
I think we're still studying that right now I don't know that we have an answer for you on that right now.
Classy capability is one and how it fits into an investment strategy a different conversation, but further along on the processing side.
Great that was it thanks for taking my questions.
Before you and the next question is Ryan Bailey with Goldman Sachs. Please go ahead.
I win.
Okay.
So I was just wondering what was a very strong this quarter accelerating over the last quarter.
I think generally we're seeing accelerating trends from from some.
He is as well.
Clearly there are some specific tail winds, which are helping us I was just wondering if you're hearing anything from the new advisers joining as to why they are more willing to outsourcing use tense now relative to call. It six or 12 months ago, if anything's changed or was that pent up demand or is that something like.
Some of you.
Yeah, I don't I don't know if I'd call it really pent up demand.
Think that.
What I'm, saying is as we have.
Further enhanced our technology platform now when we look at some of the capabilities sort of I've mentioned.
Earlier and which.
That vesting.
Our technology platform and this is not just we call it sort.
The text Odeon.
The whole the entire business platform, including custody as that becomes more and more compelling people are more and more willing to make a change.
For me I would say that.
The dynamic that's going on out there.
Got it okay.
And also just a.
Passing along appreciation for breaking out.
The platform assets.
Closure, thank you for doing that.
You're welcome.
We do not have any more questions in queue you may continue.
Okay. Thank you with.
With that I will pass it onto Paul.
Thanks, Lynn good afternoon, everyone.
I'm going to discuss the financial results for the third quarter of 2021.
Third quarter 2021 revenue was $85 8 million.
<unk> increased 8% compared to the third quarter of 2020.
Operating profit for the third quarter, 2021 were $44 1 million and increased 6% compared to the third quarter of 2020.
Both revenue and operating profit increases were due to market appreciation positive currency translation offset slightly by fee.
Fashion across the client base.
Operating margin for the quarter was 51%.
Quarter end asset balances of $96 7 billion reflect a $7 $1 billion increase versus the third quarter of 2020.
This is due to market appreciation.
Net sales event for the third quarter rate.
A positive $310 million.
Gross sales were $370 million and client losses totaled $60 million.
Third quarter, new sales, including U S not for profit health care and UK fiduciary management.
The unfunded client backlog of gross sales at quarter end was $2 5 billion.
<unk> comprise Alan Dennis mentioned, we completed the acquisition of Atlas catheter is defined contribution master trusts in the U K.
Subject to regulatory approval the acquisition positions the Sci Master Trust to continue to deliver best of breed service with greater scale and more capabilities.
The combined assets under management as of nine.
232021 of the two trusts are approximately $1 $9 billion pounds or <unk> $2 6 billion U S dollars.
Presently the UK D C Master Trust marketplace is $80 billion pounds. According to go pension is limited and is growing rapidly.
While not financially.
Financially material this transaction significantly increases our competitive presence in the U K DC market and demonstrates our commitment to the Master trust clients and members.
This transaction gives the FDA master trusts additional scale and the Sci Master Trust as a long term track record of investment results dating back to 2007.
These are important criteria when DC schemes evaluate candidates to serve their members.
In addition to the news regarding our U K Master Trust, we continue to focus on stabilizing our client base distinguishing our <unk> platform and selling new <unk> relationships.
We are advancing.
Our <unk> platform with global large and mega prospects, while making enhancements to the overall platform.
Thank you very much and I'm happy to answer any questions that you may have.
Ladies and gentlemen, if you wish to ask a question that is one and then zero on your phone.
And we will go to Robert Lee with K B W.
Please go ahead.
Hey, Hi, Paul how are you.
Good Robert.
I'm curious.
Maybe I have my notes for the wrong, but what I guess I recall that there was like a large you know a lot of I think it was like $3 billion or so a business that you thought you were going to lose in the quarter.
Bill out there or did I.
Misunderstand something last quarter.
Now last quarter, we reported gross sales of 2.2 dollars 6 billion and losses of $2 4 billion mhm.
And the majority of that $2 4 billion that we reported it as al has a 930, which.
That's why the asset balances down.
Relative to the $6 30 asset balance.
Okay, I guess I must have misunderstood I thought there was a.
Something else out there you'd thought you may be losing but I had the wrong number I guess.
And then maybe going back to the margin I guess your notes.
It's been holding.
Which as well, although I mean, obviously down from where it was a bit.
The end of last year, and last quarter, but or the first quarter, but you know I know you've talked about getting back towards kind of out of the fifty's range, but it's been you know.
Is pretty sticky so you know any reason that.
Really no.
It should start to.
Turned down a bit or.
You feel pretty comfortable that this is where it's going to be for the round here give or take for the foreseeable future.
Yeah, I feel a little bit like Steve in the boiler cried wolf about the margin.
But I do expect that there's.
The pressure on the margin percentage given fee compression to Rebids, which we've messaged.
Travel is increasing which is good so it's certainly not at the levels that we saw pre pandemic, but we are seeing clients and prospects, which we think is helpful. In both retention as well as being.
Going to be able to distinguish ourselves in new business settings.
We're hopeful that sales comp increases with greater production around <unk> and <unk>.
So just generally given some of those those macro things, we think there will probably be some margin pressure over time.
We've been holding nicely in the low 50% and then investing back in the business, including the acquisition of a catheter, which would be accretive to earnings.
We see.
Relative to just profit and op profit percentage.
But making an investment in that business.
Then investment in salespeople as well as being able to get it in the marketplace and compete in that very large market of 80 billion pounds.
So for those reasons, we're probably going to see ultimately some margin percentage erosion, but we hope by retaining returning to growth on the top line.
Is that the profit itself in absolute terms will increase over time.
Great and then one last question things for it.
Taking the time.
Kind of a bit you know client mix I mean, if we think of kind of your pipeline of gross sales and any update on how maybe that's shifting.
Line.
More towards Endowment Foundation hospital systems.
So let's.
Unless DB just kind of curious how your how that's evolving.
Yes, we certainly have seen a switch over the years too endowment and foundations in hospitals and.
And some of the non corporate DB, whether thats governmental our multiemployer plan or DB plans that arent being terminated I mean thats the other thing that.
We look at when we.
Our thinking about DB defined benefit for new business not all plans are on a path of termination if they have a lifecycle that's longer thats still attractive because thats going to be around.
Round for a longer period of time.
So clearly the the mix is diversified more to what I would call evergreen or longer term longer term asset pools.
So we're.
We're confident where we are in building the pipeline one of the things that we really like.
With the larger end of the market segment.
As we have this continuum of Oc <unk>. So we have the ability of walking into a $1 billion foundation and honestly letting them self select.
Whether a delegation model makes sense for them or whether a model, where we would help them be.
More efficient with an investment team makes sense, we never had that before.
So that actually may pivot to go to outsourcing because they may decide that thats more palatable for them. It also may pivot to go to <unk>, but having that continuum.
Forcing them into one of those categories, which has really been nice on the larger end of the market.
<unk> segment.
Great. Thank you so much.
Thanks Robert.
Sure.
And it will have a question from Owen Lau with Oppenheimer. Please go ahead.
Thank you for taking my question Paul just one quick one from me I E. C. I O. You just mentioned could you. Please talk about our progress there.
It started generating any revenue or its still in the investment and an expense stage. Thank you.
Yeah, Oh, and we've been at it for about a year, we announced it.
Time about a year ago. So we haven't gotten any over the goal line, yet there's active suspects and prospects.
And there is also in.
Evaluation that we continue to do in enhancing the platform specifically around the front end capabilities in analytics.
So a lot of nice work has been done.
Suspects are turning to prospects and we're hopeful prospects will turn to clients. We've seen this reality before getting the early ones are the harder ones getting them.
Them over the goal line.
But where we're bullish and we're confident about the capabilities, we have there and again I'll just harken back to the comments I, just said and having that continuum to be able to go in the marketplace really gives the buyer a decision to choose as opposed to us pushing them one way or the other so we're excited about that.
Got it thank you very much thanks Alan.
And we do not have any other questions in queue you may continue.
Great I'd like to now turn the call back over to outlet.
Thanks, Paul.
So ladies.
Ladies and gentlemen, we are making.
Progress on two fronts.
On the first front, we were very fortunate to have kept our workforce healthy and productive delivering our highest level of client service throughout the pandemic.
On the second front, we are building momentum.
Sure.
Please be safe and remain.
Housing have a great day.
Thanks for attending our call.
That does conclude our conference for today. Thank you for your participation and for using AT&T event services you may now disconnect.
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