Q4 2022 SEI Investments Co Earnings Call
Speaker 3: Thank you for standing by. Welcome to the SEI fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If we should require assistance during the call, please press star and zero. As a reminder, this conference is being recorded.
Speaker 4: I would like to turn the conference over to our host, Ms. Lindsay Opshaw. Please go ahead.
Speaker 5: Welcome, everyone. Thank you for joining us on today's fourth quarter 2022 earnings call. Joining me on today's call are Ryan Hickey, SEI's Chief Executive Officer, Dennis McGonigal, Chief Financial Officer, and the leaders of our business segment, Paul Clotter.
Speaker 6: Phil McCabe, Sanjay Sharma, and Wayne Withrow. Kathy Heilig, SCI's controller, is also with us.
Speaker 7: Before we begin, I'd like to point out that our earnings press release can be found under the investor relations section of our website at SEIC.com.
Speaker 8: This call is being webcast live and a replay will be available on the events and webcast page of our website.
Speaker 9: We would like to remind you that during today's presentation and in our responses to your questions, we have and will make certain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements that appear in today's earnings press release and in our filings with the Securities and Exchange Commission.
Speaker 10: We do not undertake to update any of our forward-looking statements. With that, I'll turn the call over to CEO Ryan Hickey. Ryan?
Speaker 11: Thanks Lindsay. Good afternoon everyone. I hope you all enjoy the holidays and are off to a great start in 2023.
Speaker 12: Before the holiday season, we had the pleasure of hosting many of you at Oakes for our investor conference in November . I really hope everyone enjoyed that experience. Personally, I was engaged and energized by the entire engagement of the investment community, and I was really excited to share our vision and strategic focus for the future.
Speaker 13: We are going to continue to apply our proven business model by turning challenges into opportunities.
Speaker 14: helping clients and prospects more effectively deploy their capital for growth, and leveraging our financial strength.
Speaker 15: During the quarter, markets continued to feel the impact of economic factors, including inflationary pressures, geopolitical tensions, fiscal policy, and more.
Speaker 16: Fourth quarter revenues declined 9% from a year ago. Our fourth quarter earnings were down 23% from a year ago. Fourth quarter EPS of 83 cents decreased 19% from the $1.03 reported in the fourth quarter 2021.
Speaker 17: In the quarter, we repurchased 1.3 million shares of SEI stock at an average price of $59.36 per share. That translates into $79.6 million of stock purchases.
Speaker 18: We also declared an annual dividend of 43 cents per share.
Speaker 19: We continued to build off the third quarter's positive sales momentum, but we're still absorbing some losses that offset our wins.
Speaker 20: I feel very confident that we are turning the tide in a positive direction here, and we've spent a lot of time with key prospects and clients this year already.
Speaker 21: Net sales events totaled approximately $20.8 million, $10.9 million of which were net recurrent.
Speaker 22: During the quarter, we also had a successful execution of a recontracting strategy, resulting in more than $108 million of annual recurring revenue extended across our processing businesses.
Speaker 23: We expect to also remain surgical and vigilant in our expense management.
Speaker 24: I'm sure you all saw that one of the major themes coming out of Davos is companies say they are giving priority to profitability and efficiency amid concerns about macroeconomic conditions, whether that's to reach their strategic goals, slim down their workforces, or streamline operations.
Speaker 25: The market, especially the tech and financial services industries, are clearly making adjustments to spending, and we are going to manage SEI well through this time, but lean into those investments where we have high conviction to our ability to drive growth.
Speaker 26: We also see this time as catalysts and opportunities for SEI to more actively partner with existing and new clients to help them become more successful.
Speaker 27: Dennis will go into further details later on our financial results.
Speaker 28: Turning to our lines of business, in the investment manager segment, our alternative business continues to see our largest clients opportunistically launching new products.
Speaker 29: One of our large multi-strategy clients expanded into private credit business and a flagship investor platform client out of private equity business as well.
Speaker 30: In the traditional business, we continue to add new business and all product lines with both new and existing clients.
Speaker 31: In particular, our CIT business continues to thrive and expand.
Speaker 32: At a global level, we continue to grow our ETF, private equity, and private debt business, primarily through cross sales with existing clients and successful new client wins.
Turning to our investment advisor's business.
We began immediately leveraging the synergies between our US asset of US advisor business and our asset management distribution businesses globally.
We are only a few months into this effort, but we are starting to make progress.
We've integrated these business segments to better leverage competencies, aligning our talent and go-to-market strategies across segments.
Although it is early in the organizational alignment, when we look at the market landscape from institutional clients to BD-affiliated advisors to the growth of pure RIAs, we are excited about the future here and feel strong about our positioning.
A key component of our strategy is the continued unbundling of our investment option paired with the conviction and oversight of our investment management unit.
Providing clients both flexibility and choice.
Our ETF product line, the SCI systematic core strategies, strategic partnerships with Capital Group and Dimensional, were not only top net cash flow contributors, but they're increasingly resonating with existing and new advisors in solving their client needs.
Across this suite of solutions, we saw over $400 million in net cash flow for the quarter.
The institutional investor segment experienced new client wins, which included FCI Novus.
But revenue and profit during the quarter were directly impacted by capital markets and client losses. Summer 2021
Capital market activity was related to a decline in equities, long-duration fixed income balances, and alternative investments.
But despite the vow to marketplace last year, OCIO sales in 2022 produced strong results.
Asset values will be a headwind as we move into 2023, but we will remain focused on where we believe there are growth opportunities, including selling and installing OCIO new business and growth markets, retaining current OCIO clients, further integrating SEI Novus and advancing the ECIO platform.
integrating and leveraging SEI private wealth management in our institutional business.
In the private bank business, we had a very active quarter.
We recontracted eight clients.
including three in the US, four clients in the UK, and one Trust 3,000 client.
Four of these eight clients were in competitive situations.
Our contract with Wells Fargo was resized as previously announced, and our relationship has been extended until December of 2028.
We signed three new names in the quarter, including Hilltop Bank and First Financial in the U.S. And we also implemented two clients that were in our backlog.
We will continue to right size expenses in this segment and look to accelerate sales activity including cross sale opportunities across our markets.
I'm acutely aware of the attention that has been paid to this segment in the past.
The leadership changes we made last year, the aggressive increase in client engagement and expense management, combined with a renewed focus on sales and what we believe are attractive segments for SEI, make me optimistic that we have solidified the foundation for this business now for future growth.
Highlighting some more positive traction and growth areas in our Investments in New Business segment, SCI Sphere continues to be a focus area with an aggressive growth plan for 2023.
This includes increasing the size of the sales force, investments in marketing, accelerated activity with existing SEI clients and new prospects, and increased traction in the cyber and cloud services offering.
During the quarter, we also began building a corporate development team.
They will be focused on the development and execution of our strategic transactions plan to drive growth.
Finally, our partnership with LSV remains very strong.
Dennis will report on their financial results for the quarter.
As I mentioned in these calls,
We're also focused on initiatives and programs that support the development of our talent and enrich our culture, particularly in diversity, equity, and inclusion.
We continue to invest in these areas as competitive advantages for SEI in the future.
To echo my comments at the Investor Conference in November , SEI is going on offense in 2023.
We'll focus on seizing opportunities that we believe will meaningfully drive growth and will continue to make the changes necessary to keep us on the path that we've laid out.
2022 was a year of organizational transition for SEI, coinciding with a volatile market environment.
We remain steadfast in our belief that we are well positioned to not only help our clients succeed, but continue driving our own success in the year ahead and beyond.
This concludes my prepared remarks. I will now turn it over to Dennis to discuss our financial results for the quarter. Dennis? sonic
Thanks Ryan. I'll cover information related to the quarter for the company and units.
As Ryan mentioned, EPS for the quarter was 83 cents.
This compares to a dollar three during fourth quarter 2021.
and 45 cents for the third quarter of 2022.
The revenue for the quarter was $457 million, compared to $502 million in 2021.
and $471 million in the third quarter.
Total expenses for the quarter were $363 million, which compares to $358 million last year.
at $420 million in the third quarter.
items related to the voluntary separation program and other severance.
Expenses for the third quarter were approximately $358 million.
Expenses in the fourth quarter included $2.7 million of severance and $3.5 million in incentive compensation true ups for the year.
Revenues for asset management and administration were impacted by lower average assets during the quarter due to how we entered the quarter, capital market performance during the quarter, and cash flows.
Processing revenues were impacted by a one-time $6 million reduction in revenue related to Wells Fargo, which was discussed on last quarter's call.
on the sales front in our processing businesses of private banking and IMS.
Net sales events total $25 million and are expected to generate $15.1 million in recurring revenue.
In our asset management related businesses, net sales were approximately a negative $4.7 million.
Private banking processing sales were 10.2 million, of which 3.3 million is recurring.
This reflects three new SWP sales, two in the US and one in the UK.
We recontracted eight clients during the quarter, representing $53 million in annual recurring revenue and an average extension of four plus years.
One of these three contracts was Wells Fargo, resulting in the recorded revenue reduction.
One other re-contract was with a large UK client.
that extended our relationship for five plus years.
While successful in retaining this client, it will result in a current reduction in run rate revenue of approximately $7 million in 2023.
We view this as an investment in a key relationship in the UK due to their long-term growth prospects and opportunities for us to grow this relationship over time.
This recontracting item is separate from and not included in our sales results.
At year end, we successfully installed two clients on SWP.
The current backlog of sold but expected to be installed revenue in the next 18 months is $40.1 million.
Asset management revenues and private banking were up slightly during the quarter as a result of positive flows of approximately $500 million.
Expenses in the quarter were down from the third quarter of 2022. This reflects our focus on expense management as Sanjay and his team reset the business for growth.
On the IMS front, net sales for the quarter were $14.8 million, $11.7 million is recurring.
The quarter sales activity remained active, reinforcing our belief that the trend of outsourcing is continuing to grow.
During the quarter, we re-contracted 15 clients.
totaling $55.2 million in annual recurring revenue with an average length of over three plus years.
Revenue for the quarter was flat the third quarter, reflecting the impact of capital markets offset by client installs.
We continue to see growth within many of our top clients.
Expenses were up slightly from the third quarter reflecting continued inflation pressures, growth in our talent, and a true up on incentive compensation for 2022.
Our backlog of sold but expected to install in the next 18 months recurring revenue is $32.9 million.
For investment advisors, net cash flow is approximately negative $675 million.
This number reflects increased momentum and strategic initiatives we have launched over the past two years, offset by negative flows in mutual fund products.
Activity included. Custody assets on the platform increased $473 million.
Our dedicated RIA team produced 66 million in net positive cash flow.
and cash flows into portfolios built on our ETF strategies, and our dimensional offering was approximately $350 million.
Our new offerings are helping us move the business forward and to offset the negative flows we see out of mutual funds.
Revenues for the quarter were down from third quarter as a result of asset levels entering the quarter, capital market performance during the quarter, and net flow activity.
Expenses were up slightly due to inflation and year-end activity.
We've recruited 34 new advisors during the quarter, 15 of which were in the newer RIA channel, and reengaged 13 existing advisory firms.
Advisor activity remains strong, but we continue to see a slowdown in market activity on the part of both advisors and their clients.
In the institutional investors segment, OCIO net sales events for the fourth quarter were essentially flat. In the institutional investors segment, OCIO net sales events for the fourth quarter were
The unfunded client backlog of gross sales at quarter end.
unfunded client backlog of growth sales at quarter end was $2.5 billion.
Revenants for the quarter were down from third quarter due to capital market activity, all set partially by net positive client funding.
We continue to see pricing pressure across all institutional markets.
and continued headwinds in the corporate DB segment globally.
Expenses were also down, reflecting reduced direct costs as well as general expense management.
In the investments to new business segment revenues and expenses were flat the third quarter.
We have net recurring sales of $500,000 in the quarter. We expect expenses in this segment while shifting to and supporting new initiatives to remain in this range.
LSB produced $31.7 million of profit during the quarter.
This compares to 26.7 million during the third quarter.
Remedies for LSV were $107 million compared to $91.6 million in the third quarter.
LSV recorded performance fees of $13.4 million during the quarter, reflecting strong positive relative performance.
The growth in revenues is a result of investment performance and capital growth in assets offset by net negative client flows.
Net sales were down slightly, while net flows from existing clients due to de-risking and reallocation were negative 2.3 billion.
Market appreciation was approximately $12.8 billion.
LSB continues to have active sales activity and continued positive performance will help right off the bat.
Our tax rate for the quarter was 18.1%.
That concludes my remarks.
As a reminder, all of our unit heads are on the call. We will now be happy to entertain any questions. Thank you.
Thank you.
Ladies and gentlemen, if you wish to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command.
If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1 and 0 at this time.
And our first question comes from the line of Ryan Kenny with Morgan Stanley . Please go ahead.
first question comes from the line of Ryan Kenny with Morgan Stanley . Please go ahead. Hey, good afternoon.
Bye. Bye.
Just a couple of efficiency related questions. So first on the quarter, it looked like it came in a little bit lighter than usual on margin. So just wondering if you could give us some color on how we should interpret the trajectory for pre-tax margin. And if there's not a rebound in markets this year.
Are there any expense items that you could flex lower? Sure, may margin
given the nature of our, the predominant nature of our streams being asset based.
when we have these down markets.
Most of our revenues are average asset based, so the market might be up point to point, but in between..
There's a lot of activity which results in kind of lower average assets.
That's a revenue that really comes right off the bottom line. So margin compression is.
somewhat a function of that.
I'd say in the quarter though, we did have good expense management overall.
good expense management overall.
did that in the context of maintaining the investments in the things we know are important, I feel really are critical to our future growth prospects.
If we have downward pressure, continued downward pressure on markets.
We do have some variable costs that we'll adjust.
based on assets.
And that's kind of the first expense item on our P&L.
Beyond that, a big chunk of our
Compensation is variable, so we certainly have the ability, if we felt necessary, to adjust that based on company overall, company financial performance.
As the year goes on, we've done that.
say under other periods under extreme market pressure, we've made those adjustments.
We do have some variable.
Spending, if you will.
on things that we could hold off on if we chose to.
I'd say that our general rule of thumb though is
that difficult markets do end.
And when we come out of them, we want to be in a position of strength to take advantage of
markets reopening and clients and prospects.
moving back to making
business decisions on our side so we wouldn't give up. www. CALL essentially Call is empowering
It sort of would never give up the future and the opportunities that future presents.
in tougher market cycles.
We've been through it before.
Everybody around this table has been thrilled before.
We'll work our way through it.
Thanks, that's clear. And then just one follow-up, the press release called out greater investments in compliance infrastructure. Can you just help us understand what that is and is that a one-time build or is that a multi-year build? That would be helpful. Thanks. However, your crazy whether or not maybe it is an
I'd say it's really just a continuation of what
businesses like ours.
I've been facing over the past
Okay, five, ten years, but certainly accelerated over the past five years. And that's really our ability.
to meet the compliance requirements of the regulatory frameworks within which we have to operate in all the jurisdictions we have to operate.
And also making sure that our knowledge of those of those compliance requirements makes their way into
the products and services we are delivering to clients because they are also dealing with those same
regulatory compliance pressure. So it's almost first we have to digest the veal.
And then we can share the meal with the clients after we digest it.
And if you look around the globe, whether it's the UK, Ireland, Europe , the US,
Canada, the regulatory.
pressure
have requirements just continue to build.
So that's really what that reference is.
And also I'd say that
there's been continued shift of
in many jurisdictions where they want the regulatory work to be local, locally done.
regulatory work to be local, locally done, rather than
centralized outside of their domain.
So that's adding a little bit to the, or has added over time, a little bit to the cost pressure.
Thank you.
Well
to go to line of Owen Lau with Oppenheimer. Please go ahead.
Thank you for taking my question. Ryan, during the investor day, you have identified some area for growth, such as outsourcing and partnership opportunities, cybersecurity and RIA. Could you please talk about if there's any particular growth area that you would focus on in 2023? Thank you.
in the call. We've actually increased our sales force there, added a little bit more in terms of our capabilities in the cyber and cloud offering, and actually really started to get more aggressive taking that service out to existing clients.
In the RIA space Dennis talked about and Wayne's on the call, we have a dedicated team there that we put in place last year. We're really starting to see some positive traction and momentum in flows from that segment. When you look at the total addressable mark and the size and breadth of that segment, it is definitely an area where we really feel that we compete well.
kind of outsourcing point in the first box from November . I was thinking about this the other day that right in the outset from April through, I'd say July , you know, without seeing a lot of our clients, and I would call that a little bit more of a listening tour. Now we're on kind of round two of those. Bill and I were just on the road last week.
And it's a little bit more of a growth tour. And those conversations with two of our larger clients last week were more about how can we be doing more together with them? Where could SEI add value? Where do they want to deploy their capital? And those conversations, I think, are actually starting to happen in a more widespread way across the country.
we talked about in November was alternatives. And we will continue to lean in that space, not just through builds, business, and IMS, but in terms of how SEI creates more opportunity from a manufacturing perspective around alternatives and where we believe we can facilitate more capabilities with our position with technology.
between the manufacturing space and the distribution space, especially in the U.S. So, long-winded answer to your simple question. We are really focused in those four areas to varying degrees of traction, but it feels good. The client engagement is very high right now.
Got it. That's super helpful. And then maybe, Dennis, just a housekeeping question about interest and dividend income. I saw there was a $6.6 million interest and dividend income. How should we think about this line item going forward? Thank you.
That's right.
It's pretty simple. Those interest rates go off.
We're earning more on our cash. We're not.
Certainly don't view interest income as how we're going to drive growth.
But as long as, you know, if interest rates stay where they are or continue to creep up.
And our balance sheet kind of stays under its current construct.
And what you're saying will improve.
Are you saying like the base of the, I guess, the interest income asset that you can disclose?
I'm sorry. The interest that we earn on our balance sheet really comes from the cash we have on deposit or invested in money market funds or other cash instruments.
That's all that is.
Got it.
Thank you. Thanks, Dan. Thanks, Ryan.
Thank you, Alan. We don't generate spread income if that's what you're...
We don't generate spread income if that's what you're getting at.
Yep, yep, okay, got it, thanks.
Next we'll go to line up Mike Brown with KBW. Please go ahead.
Brown with KBW, please go ahead.
Hi, good afternoon. I guess first I wanted to just follow up on the margin question. How are you guys thinking about the longer term operating margin for the business and then maybe more near term for 2023? I guess it came in closer to 20% this quarter.
But, you know, it's closer to high 20s, more so historically. Is that where it should trend back to eventually?
I guess my answer first and then Ryan will.
and tell me whether I got this right or not.
My expectation is that Mars will trend more to where they have been historically.
We have different business.
of businesses operating. And we certainly have an expectation that the private banking margins will improve over time. That's really what Sanjay's been working.
and his team were working on kind of resetting the business.
down the kind of revenue picture in the client side and making some progress on the spending side.
So there's certainly expectations for us that that business will.
has been reset, in the late stages of being reset, and as we grow it, we'll capture more margin.
The IMS business, I think you'll see it, everybody's on the call, they can comment as well after I'm done.
That business is kind of a mid 30s, you know, 34 to 36 percent margin business. Typically, when it's creased up to the high 30s, that's more an anomaly than...
You know kind of how we see the business operating we expect the margins kind of being that 34 35 range
over time.
These are all market neutral comments.
Investment Advisors I think is one area where we're going to be consolidating.
the AMD, the Asymptomatic Distribution.
components of revenue and profits with the advisor channel. That I'll have.
a dampening effect on the margins just because of margins in the asset manager distribution business.
and the types of clients we serve there in the global nature, and how we report revenue and expense in that business. Because the subadvisor costs for the non-US assets or an expense item on the P&L.
Now that runs in a lower margin business.
The advisory business has run historically. So that will have a little bit of a dampening effect just on the math.
km
Corporate margins, it should have an impact.
But they're giving them a mix of business over time, as Wayne's talked about selling.
new types of products and capabilities the strategic asset offer.
versus mutual funds as a straight up product, the margins on those products, as well as selling custody only.
assets onto the platform with a lower price point. We always expected the margins in that business to contract slightly, but with an expectation it'll be a much bigger business. So kind of higher dollar profits, slightly lower margins.
with a lower price point. We always expected the margins in that business to contract slightly, but with an expectation it'll be a much bigger business. So kind of higher dollar profits, slightly lower margins. If you look at our Up Armour reached referring to capital capital gains were higher than central capital gains blockchain
coupled out with the institutional business which
has always been a high margin business.
but with the compression of revenue and as I mentioned and Paul has mentioned many times the pricing competitiveness in the market.
And while that's been kind of a 50 high 40s percent margin business.
their margin will probably contract a little bit over time, but with market success against our profits.
I should have pulled it.
So overall margins, I would expect them to be kind of in historical ranges, but for different reasons.
Maybe they have been in the past.
Mike, I don't have anything to add to that. I think Dennis captured it all and I think kind of echoing an earlier point, we have a good understanding and a good track record of how to operate the business in kind of difficult times. We're going to continue to operate with courage and conviction in the areas that we believe we want to invest for the future.
But I also think, as Dennis mentioned, with Sanjay and the team have done the last nine months to really stabilize private banking, and we can grow off that point, will also help to offset some of the areas where we might see some compression.
But that compression will be driven by growth of new solutions, which would be a good thing.
Thank you.
Okay, thank you, Dash, and thank you, Ryan.
To switch gears to the recontracting actions, it's good to hear that you've been able to extend those relationships and thanks for quantifying some of the impacts there. How do you, how should we think about what's the opportunity with some of those specific clients to.........
to cross out and really deepen the relationship there. Is there opportunities to mitigate some of those?
some of those recontracted headwinds here. If you can give some specific examples, that would be helpful. Thank you.
Yeah, I think we'll let Phil and Sanjay answer that. Phil, do you want to go first? Sure. Okay, thank you. What I would say on a recontract side is actually we did really well. It was 15 different clients. It was about $55 million in revenue for the most part, a little bit more than three years on average and fees stayed pretty strong.
pretty much the same. In some cases we sold some new products and services. So for us, it was really good. I think if you look at IMS for the quarter, our sales were about 14.8 million and that was pretty much 50-50 between cross sales and new business. So the pipeline is strong, the clients are doing really well. I think we're in a really good place right now.
So based on that we came up with the strategy of how we ensure that we fix the leaky bucket but because you have seen that happening in the earlier stages.
So we came up with a strategy engaging with the clients and that was the result of those initiatives that in the fourth quarter we could recontract eight clients. And if I quantify those recontracts except one client, we were pretty much neutral. So except one client where we made again, it was a part of our strategy that how we can grow with that client.
can grow together. So as I would bring it back that the recontracting is a part of our growth strategy so that we can grow cell and private banking especially that segment it can open up the rest of SDI capabilities as well. And Mike the other thing I would add to what Sanjay and Phil said is and then this is kind of more of our
unit head who has the client relationship. So I think that whole posture and positioning has changed for us so that when clients are on site or we're out seeing clients, there's a little bit of a broader representation of FBI leadership and engagement there so that we're positioning the company and not just the unit. And I could tell you, I mean, activity doesn't necessarily always equate to results, but we have the right activities right now and we're getting the right level.
If there are any additional questions, please press 1-0 at this time.
And see no further questions, I will turn it back to CEO Ryan Hickey. Please go ahead.
Thank you.
Appreciate the participation on the call today. I'm personally energized by the opportunities that lie ahead for SEI. We will continue to focus on leveraging our reach, driving sales and profit growth, capitalizing on market trends, but also helping clients maximize their opportunity right now and delivering what the market values. Please consider expansions to get the Eye of the Gameoff.
I appreciate everyone attending our call today. Thanks. Thank you for attending our call today.
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SCI fourth quarter 2022 earnings call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If we should require assistance during the call, please press star and zero. As a reminder, this conference is being recorded. I would like to turn the conference over to our host, Ms. Lindsay Opshaw. Please go ahead.
Welcome, everyone. Thank you for joining us on today's fourth quarter 2022 earnings call.
Joining me on today's call are Ryan Hickey, SEI's Chief Executive Officer, Dennis McGonigle, Chief Financial Officer, and the leaders of our business segment, Paul Clotter, Phil McCabe, Sanjay Sharma, and Wayne Withrow. Kathy Heilig, SEI's Controller, is also with us.
Before we begin, I'd like to point out that our earnings press release can be found under the investor relations section of our website at SEIC.com.
This call is being webcast live and a replay will be available on the events and webcast page of our website.
We would like to remind you that during today's presentation and in our responses to your questions, we have and will make certain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.
Please refer to our notices regarding forward-looking statements that appear in today's earnings press release and in our filings with the Securities and Exchange Commission. We do not undertake to update any of our forward-looking statements. With that, I'll turn the call over to CEO Ryan Hickey. Ryan?
Thanks, Lindsay. Good afternoon, everyone. I hope you all enjoy the holidays and are off to a great start in 2023.
Before the holiday season, we had the pleasure of hosting many of you in Oakes for our investor conference in November . I really hope everyone enjoyed that experience. Personally, I was engaged and energized by the entire engagement of the investment community, and I was really excited to share our vision and strategic focus for the future.
We are going to continue to apply our proven business model by turning challenges into opportunities, helping clients and prospects more effectively deploy their capital for growth and leveraging our financial strength.
During the quarter, markets continued to feel the impact of economic factors, including inflationary pressures, geopolitical tensions, fiscal policy, and more.
Fourth quarter revenues declined 9% from a year ago. Our fourth quarter earnings were down 23% from a year ago.
Fourth quarter EPS of 83 cents decreased 19% from the $1.03 reported in the fourth quarter 2021.
In the quarter, we repurchased 1.3 million shares of SEI stock at an average price of $59.36 per share. That translates into $79.6 million of stock purchases.
We also declared an annual dividend of 43 cents per share.
We continued to build off the third quarter's positive sales momentum, but we're still absorbing some losses that offset our wins.
I feel very confident that we are turning the tide in a positive direction here, and we've spent a lot of time with key prospects and clients this year already.
Net sales events totaled approximately $20.8 million, $10.9 million of which were net recurrent.
During the quarter, we also had a successful execution of a recontracting strategy, resulting in more than $108 million of annual recurring revenue extended across our processing businesses.
We expect to also remain surgical and vigilant in our expense management.
I'm sure you all saw that one of the major themes coming out of Davos is companies say they are giving priority to profitability and efficiency amid concerns about macroeconomic conditions, whether that's to reach their strategic goals, slim down their workforces, or streamline operations.
The market, especially the tech and financial services industries, are clearly making adjustments to spending, and we are going to manage SEI well through this time, but lean into those investments where we have high conviction to our ability to drive growth.
We also see this time of catalysts and opportunities for SEI to more actively partner with existing and new clients to help them become more successful.
Dennis will go into further details later on our financial results.
Turning to our lines of business, in the investment manager segment, our alternative business continues to see our largest clients opportunistically launching new products.
One of our large multi-strategy clients expanded into private credit business and a flagship investor platform client out of private equity business as well.
In the traditional business, we continue to add new business and all product lines with both new and existing clients.
In particular, our CIT business continues to thrive and expand.
At a global level, we continue to grow our ETF, private equity, and private debt business, primarily through cross sales with existing clients and successful new client wins.
Turning to our investment advisor's business.
We began immediately leveraging the synergies between our US asset of US advisor business and our asset management distribution businesses globally We are only a few months into this effort, but we are starting to make progress.
We've integrated these business segments to better leverage competencies aligning our talent and go-to-market strategies across segments.
Although it is early in the organizational alignment, when we look at the market landscape from institutional clients to BD-affiliated advisors to the growth of pure RIAs, we are excited about the future here and feel strong about our positioning.
A key component of our strategy is the continued unbundling of our investment options paired with the conviction and oversight of our investment management unit.
Providing clients both flexibility and choice.
Our ETF product line, the SCI systematic core strategies, strategic partnerships with Capital Group and Dimensional were not only top net cash flow contributors, but they're increasingly resonating with existing and new advisors in solving their client need.
Across this suite of solutions, we saw over $400 million in net cash flow for the quarter.
The institutional investor segment experienced new client wins, which included FDI Novus.
But revenue and profit during the quarter were directly impacted by capital markets and client losses. For more information, visit www.fema.gov
Capital market activity was related to a decline in equities, long-duration fixed income balances, and alternative investments.
But despite the vow to marketplace last year, OCIO sales in 2022 produced strong results.
Asset values will be a headwind as we move into 2023, but we will remain focused on where we believe there are growth opportunities, including selling and installing OCIO new business and growth markets, retaining current OCIO clients, further integrating SEI Novus and advancing the ECIO platform.
integrating and leveraging FBI private wealth management in our institutional business.
In the private bank business, we had a very active quarter. We recontracted eight clients.
including three in the U.S., four clients in the U.K., and one Trust 3,000 client.
Four of these eight clients were in competitive situations.
Our contract with Wells Fargo was resized as previously announced, and our relationship has been extended until December of 2028.
We signed three new names in the quarter, including Hilltop Bank and First Financial in the U.S. We also implemented two clients that were in our backlog.
We will continue to right size expenses in this segment and look to accelerate sales activity including cross sale opportunities across our markets.
I am acutely aware of the attention that has been paid to this segment in the past.
The leadership changes we made last year, the aggressive increase in client engagement and expense management, combined with a renewed focus on sales and what we believe are attractive segments for SEI, make me optimistic that we have solidified the foundation for this business now for future growth.
Highlighting some more positive traction and growth areas in our Investments in New Business segment, SCI Sphere continues to be a focus area with an aggressive growth plan for 2023.
This includes increasing the size of the sales force, investments in marketing, accelerated activity with existing SEI clients and new prospects, and increased traction in the cyber and cloud services offering.
During the quarter, we also began building a corporate development team.
They will be focused on the development and execution of our strategic transactions plan to drive growth.
Finally, our partnership with LSV remains very strong.
Dennis will report on their financial results for the quarter.
As I mentioned in these calls,
We're also focused on initiatives and programs that support the development of our talent and enrich our culture, particularly in diversity, equity, and inclusion.
We continue to invest in these areas as competitive advantages for SEI in the future.
To echo my comments at the Investor Conference in November , SEI is going on offense in 2023.
We'll focus on seizing opportunities that we believe will meaningfully drive growth and will continue to make the changes necessary to keep us on the path that we've laid out.
2022 was a year of organizational transition for SEI, coinciding with a volatile market environment. We remain steadfast in our belief that we are well positioned to not only help our clients succeed, but continue driving our own success in the year ahead and beyond.
This concludes my prepared remarks. I will now turn it over to Dennis to discuss our financial results for the quarter. Dennis? Thanks, Ryan. I'll cover information related to the quarter for the company and units.
As Ryan mentioned, EPS for the quarter was 83 cents. As compared to $1.03 during fourth quarter 2021.
and 45 cents for the third quarter of 2022.
The revenue for the quarter was $457 million, compared to $502 million in 2021.
and $471 million in the third quarter.
Total expenses for the quarter were $363 million, which compares to $358 million last year and $420 million in the third quarter.
items related to the voluntary separation program and other severance.
Expenses for the third quarter were approximately $358 million.
Expenses in the fourth quarter included $2.7 million of severance and $3.5 million in incentive compensation true-ups for the year.
Revenues for Mass. Management and Administration were impacted by lower average assets during the quarter due to how we entered the quarter, capital market performance during the quarter, and cash flows.
Processing revenues were impacted by a one-time $6 million reduction in revenue related to Wells Fargo, which was discussed on last quarter's call.
on the sales front in our processing businesses of private banking and IMS.
Net sales events total $25 million and are expected to generate $15.1 million in recurring revenue.
In our asset management related businesses, net sales were approximately a negative $4.7 million.
Private banking processing sales were 10.2 million, of which 3.3 million is recurring.
This reflects three new SWP sales, two in the US and one in the UK. We re-contracted eight clients during the quarter, representing $53 million in annual recurring revenue and an average extension of four plus years.
One of these three contracts was Wells Fargo, resulting in the recorded revenue reduction.
One other re-contract was with a large UK client.
that extended our relationship for five plus years. While successful in retaining this client, it will result in a current reduction in run rate revenue of approximately $7 million in 2023.
We view this as an investment in a key relationship in the UK due to their long-term growth prospects and opportunities for us to grow this relationship over time.
This recontracting item is separate from and not included in our sales results.
At year end, we successfully installed two clients on SWP.
The current backlog of sold but expected to be installed revenue in the next 18 months is $40.1 million.
Asset management revenues and private banking were up slightly during the quarter as a result of positive flows of approximately $500 million.
Expenses in the quarter were down from the third quarter of 2022. This reflects our focus on expense management as Sanjay and his team reset the business for growth.
On the IMS front, net sales for the quarter were $14.8 million, $11.7 million is recurring.
The quarter sales activity remained active, reinforcing our belief that the trend of outsourcing is continuing to grow.
During the quarter, we recontracted 15 clients.
totaling $55.2 million in annual recurring revenue with an average length of over three plus years.
Revenue for the quarter was flat the third quarter, reflecting the impact of capital markets offset by client installs.
We continue to see growth within many of our top clients.
Expenses were up slightly from the third quarter, reflecting continued inflation pressures, growth in our talent, and a true up on incentive compensation for 2022.
Our backlog of sold but expected to install in the next 18 months recurring revenue is $32.9 million.
For investment advisors, net cash flow is approximately negative $675 billion.
This number reflects increased momentum and strategic initiatives we have launched over the past two years, offset by negative flows in mutual fund products. Community included, custody assets on the platform increased $473 million.
Our dedicated RIA team produced 66 million in net positive cash flow.
and cash flows into portfolios built on our ETF strategies, and our dimensional offering was approximately $350 million.
Our newer offerings are helping us move the business forward and to offset the negative flows we see out of mutual funds.
Revenues for the quarter were down from third quarter as a result of asset levels entering the quarter, capital market performance during the quarter, and net flow activity.
Expenses were up slightly due to inflation and year-end activity.
We've recruited 34 new advisors during the quarter, 15 of which were in the newer RIA channel, and reengaged 13 existing advisory firms.
Advisor activity remains strong, but we continue to see a slowdown in market activity on the part of both advisors and their clients.
In the institutional investors segment, OCIO net sales events for the fourth quarter were essentially flat.Every other month OCIO has a commercial service,rax report,
The unfunded client backlog of growth sales at quarter end was $2.5 billion.
Revenues for the quarter were down from third quarter due to capital market activity, offset partially by net positive client funding.
We continue to see pricing pressure across all institutional markets and continued headwinds in the corporate DB segment globally.
Expenses were also down, reflecting reduced direct costs as well as general expense management.
In the investments to new business segment revenues and expenses were flat the third quarter.
We have net recurring sales of $500,000 in the quarter. We expect the expenses in this segment while shifting to and supporting new initiatives to remain in this range.
LSB produced $31.7 million of profit during the quarter.
This compares to $26.7 million during the third quarter. Remedies for LSV were $107 million, compared to $91.6 million in the third quarter.
LSB recorded performance fees of $13.4 million during the quarter, reflecting strong positive relative performance. The growth in revenues is a result of investment performance and capital growth in assets offset by net negative client flows.
Net sales were down slightly, while net flows from existing clients due to de-risking and reallocation were negative 2.3 billion. Their appreciation was approximately 12.8 billion.
LSV continues to have active sales activity and continued positive performance will help lay its hope for see even as they face these challenges.
Our tax rate for the quarter was 18.1%.
That concludes my remarks.
As a reminder, all of our unit heads are on the call. We will now be happy to entertain any questions. Thank you.
Ladies and gentlemen, if you wish to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1 and 0 at this time.
And our first question comes from the line of Ryan Kenny with Morgan Stanley . Please go ahead. Hey, good afternoon.
from the line of Brian Kenny with Morgan Stanley . Please go ahead. Hey, good afternoon. Hey, Brian .
Just a couple of efficiency related questions. So first on the quarter, it looked like it came in a little bit lighter than usual in margin. So just wondering if you could give us some color on how we should interpret the trajectory for pre-tax margin. And if there's not a rebound in markets this year.
Are there any expense items that you could flex lower?
that given the nature of our, the predominant nature of our driver's screens being asset-based.
You know when we have these down markets and most of our revenues are average asset based, so the market might be up point to point, but in between.
There's a lot of activity which results in kind of lower average assets You know that's revenue that really comes right off the bottom line so margin compression is
a lot of activity which results in kind of lower average assets, that's revenue that really comes right off the bottom line. So margin compression is somewhat a function of that.
I'd say in the quarter though, we did have good expense management overall.
I'd say in the quarter though we did have good expense management overall.
did that in the context of maintaining the investments in the things we know are important, I feel really are critical to our future growth prospects.
If we have downward pressure, continued downward pressure on markets.
We do have some variable costs that we'll adjust.
Based on assets.
That's kind of the first expense item on our P&L. Beyond that, a big chunk of our
Compensation is variable, so we certainly have the ability, if we felt necessary, to adjust that based on company overall, company financial performance.
As the year goes on, we've done that.
say under other periods under extreme market pressure, we've made those adjustments.
You know, other periods under extreme market pressure, we've made those adjustments. We do have some variable.
spending if you will on things that we could hold off on if we chose to.
I'd say that our general rule of thumb though is
that difficult markets do end, and when we come out of them, we want to be in a position of strength to take advantage of.
markets reopening and clients and prospects.
moving back to making business decisions on our side so we wouldn't give up. fell
It sort of would never give up the future and the opportunities the future presents in tougher market cycles.
We'll not extra. We've been through it before.
Everybody around this table has been through it before, so we'll work our way through it. Thanks, that's clear. And then just one follow-up, the press release called out greater investments in compliance infrastructure. Can you just help us understand what that is, and is that a one-time build or is that a multiyear build? That would be helpful. Thanks.
I'd say it's really just a continuation of what...
businesses like ours have been facing over the past.
five, ten years, but it's only accelerated over the past five years. And that's really our ability.
to meet the compliance requirements of the regulatory frameworks within which we have to operate in all the jurisdictions we have to operate.
And also making sure that our knowledge of those of those compliance requirements makes their way into
the products and services we are delivering to clients because they are also dealing with those same
regulatory compliance pressure. So it's almost, first we have to digest the veal.
And then we can share the meal with the clients after we digest it.
And if you look around the globe, whether it's the UK, Ireland, Europe , the US,
Canada, the regulatory.
the regulatory pressure.
have requirements just continue to build.
requirements just continue to build. So that's really what that reference is.
Also, I'd say that there's been continued shift of...
in many jurisdictions where they want the regulatory work to be local, locally done.
rather than...
centralized outside of their domain. So that's adding a little bit to the, or has added over time a little bit to the cost pressure.
side of their domain. So that's adding a little bit to the, or has added over time, a little bit to the cost pressure. Thank you.
Well Next we'll go to line of Owen Lau with Oppenheimer, please go ahead Thank you for taking my question Ryan during the investor day you have identified some area for growth such as outsourcing and partnership opportunities cyber security and our a
Could you please talk about if there's any particular growth area that you would focus on in 2023? Thank you.
Good to hear from you. Happy New Year. I kind of take those in stages. So if you look at our focus on, I'll come back to the outsourcing one in a second. If you look at something like cyber, that's the SEI sphere of business that I mentioned in the call. We've actually increased our sales force there.
added a little bit more in terms of our capabilities in the cyber and cloud offering, and actually really started to get more aggressive taking that service out to existing clients.
In the RIA space Dennis talked about and Wayne's on the call, we have a dedicated team there that we put in place last year. We're really starting to see some positive traction and momentum in flows from that segment. When you look at the total addressable mark and the size and breadth of that segment, it is definitely an area where we really feel that we compete well, that our value proposition aligns.
I was thinking about this the other day that right in the outset from April through, I'd say July , I was out seeing a lot of our clients, and I would call that a little bit more of a listening tour. Now we're on kind of round two of those. Phil and I were just on the road last week, and it's a little bit more of a growth tour. And those conversations with two of our larger clients last week.
or more about how can we be doing more together with them, where could SEI add value, where do they want to deploy their capital, and those conversations I think are actually starting to happen in a more widespread way across all SEI client bases. So that's something I get excited about because...
Our engagement with our top clients has been really strong. We have a lot of clients coming on campus in the next 30 to 60 days, but I think that transition is key there. And then the fourth area, Owen, that we talked about in November was alternatives. And we will continue to lean in that space, not just through bills, business, and IMS, but in terms of how SEI creates more opportunity from a manufacturing perspective around alternative...
attraction, but it feels good. The client engagement is very high right now.
Got it. That's super helpful. And then maybe, Dennis, just a housekeeping question about the interest and dividend income. I saw there was a $6.6 million interest and dividend income. How should we think about this line item going forward? Thank you.
Well, it's really, I mean, pretty simple. Those interest rates go off.
We're earning more on our cash. We're not.
Certainly don't view interest income as how we're going to drive growth, but as long as interest rates stay where they are or continue to creep up, then our balance sheet kind of stays under its current construct.
and interest income will improve. So. Do you say any, like the base of the, I guess the interest income asset that you can disclose?
I'm sorry. The interesting thing that we earn on our balance sheet really comes from the cash we have on deposit or invested in money market funds or other cash instruments.
That's all that is.
Got it.
Thank you. Thanks, Dan. You're welcome. Thanks, Wayne. Thank you, Al. We don't generate spread income if that's what you're...
Thank you, Alan. We don't generate spread income if that's what you're getting at.
Yep, yep, okay, got it, thanks.
Next we'll go to line of the Mike Brown with KBW. Please go ahead.
KVW, please go ahead.
Hi, good afternoon. I guess first I wanted to just follow up on the margin question. How are you guys thinking about the longer term operating margin for the business and then maybe more near term for 2023? I guess it came in closer to 20% this quarter.
But you know, it's closer to high 20s, more so historically. Is that where it should trend back to eventually?
I guess my answer first and then Ryan will.
and tell me whether I got this right or not. You know, my expectations, Mars will trend more to where they have been historically.
me whether I got this right or not. You know my expectations, the margins will trend more to where they have been historically. You know we have different business.
of businesses operating. And we certainly have an expectation that the private banking margins will improve over time. That's really what Sanjay's been working.
and his team were working on resetting the business, heading down the revenue picture in the client side, and making some progress on the spending side.
So there's certainly expectations for us that that business will.
has been reset, or is in the late stages of being reset, and as we grow it, we'll capture more margin.
The IMS business, I think you'll see, everybody's on the call, they can comment as well after I'm done.
That business is kind of a mid 30s, you know, 34 to 36 percent margin business. Typically, when it's creased up to the high 30s, that's more an anomaly than...
Kind of how we see the business operating and we expect the margins kind of be in that 34 35 range over time
These are all market neutral comments.
Investment Advisors, I think, is one area where we're going to be consolidating the Kalau and DAAMD, the cubic meter distribution at a time.
components of revenue and profits with the advisor channel. And I don't have it.
a dampening effect on the margins just because of margins in the asset manager distribution business.
and the types of clients we serve there in the global nature, and how we report revenue and expense in that business, because the sub-advisor costs for the non-US assets are an expense item on the P&L. Now, that runs at a lower margin business. And the
The advisory business has run historically. So that will have a little bit of a dampening impact just on the math.
corporate margins, it should have an impact.
But they're given the mix of business over time, as Wayne talked about selling.
new types of products and capabilities the strategic asset offer versus mutual funds as a straight up product, the margins on those products, as well as selling custody only assets onto the platform with a lower price point. We always expected the margins in that business to contract slightly.
But with an expectation it will be a much bigger business. So kind of higher dollar profits, lower margins.
with an expectation that it'll be a much bigger business. So kind of higher dollar profits, lower margins. And then.
Couple that with the institutional business, which has always been a high margin business, but with the compression of revenue and as I mentioned and Paul has mentioned many times.
the pricing competitiveness in the market, while that's been kind of a 50 high 40s percent margin business, their margins will probably attract a little bit over time, but with market success against our profits.
competitiveness in the market, while that's been kind of a 50 high 40s percent margin business, their margins will probably attract a little bit over time, but with market success, again, dollar profits should approve.
So overall margins, I would expect them to be kind of in historical ranges, but for different reasons than...
margins, I would expect them to be kind of in historical ranges but for different reasons then maybe they have been in the past.
Mike, I don't have anything to add to that. I think Dennis captured it all and I think kind of echoing an earlier point, we have a good understanding and a good track record of how to operate the business in kind of difficult times. We're going to continue to operate with courage and conviction in the areas that we believe we want to invest for the future.
But I also think, as Dennis mentioned, with Sanjay and the team have done the last nine months to really stabilize private banking and we can grow off that point, we'll also help to offset some of the areas where we might see some compression. But that compression will be driven by growth of new solutions, which would be a good thing.
Okay, thank you, Dennis, and thank you, Ryan.
To switch gears to the recontracting actions, it's good to hear that you've been able to extend those relationships and thanks for quantifying some of the impacts there. How do you, how should we think about what's the opportunity with some of those specific clients to cross sell and really deepen the relationship there? Is there opportunities to mitigate some of those?
some of those recontracted headwinds here. If you can give some specific examples, that would be helpful. Thank you.
Yeah, I think we'll let Phil and Sanjay answer that. Phil, do you want to go first? Sure. Okay, thank you. What I would say on a recontract side is actually we did really well. It was 15 different clients. It was about $55 million in revenue for the most part, a little bit more than three years on average and fees still stayed pretty.
pretty much the same. In some cases we sold some new products and services. So for us, it was really good. I think if you look at IMS for the quarter, our sales were about 14.8 million and that was pretty much 50-50 between cross sales and new business. So the pipeline is strong, the clients are doing really well. I think we're in a really good place right now.
Sanjay. Thank you Phil. I would add on the similar lines, so when I took over private banking responsibility back in end of Q2 of last year or so, one of the key ask was to retain clients, engage our clients and grow with the clients growth. So based on that we came up with the strategy of how we ensure that we fix the leaky bucket.
because you have seen that happening in the earlier stages. So we can see the strategy engaging with the client and that was the result of those initiatives that in the fourth quarter we could recontract eight clients. And if I quantify those recontracts except one client, we are pretty much.
So except one client where we made again, it was a part of our strategy that how we can grow with that client, that specific client was looking at consolidating their partner footprint and looking at the growth opportunities and I'm very pleased to say that yes, we were selected as one of the strategic partner there.
And now we are working actively with that client to come up with a roadmap in terms of how we can grow together. So I would bring it back that the recontracting is a part of our group strategy so that we can grow sales. And private banking is basically that segment. It can open up the rest of the SDI capabilities as well. And Mike, the other thing I would add to what Sanjay and Phil said is that this is kind of more of a...
has changed for us so that when clients are on site or we're out seeing clients, there's a little bit of a broader representation of SEI leadership and engagement there so that we're positioning the company and not just the unit. And I could tell you, I mean, activity doesn't necessarily always equate to results, but we have the right activities right now and we're getting the right level of engagement. I think the clients have actually...
If there are any additional questions, please press 1-0 at this time.
I see no further questions. I will turn it back to CEO Ryan Hickey. Please go ahead. Thank you. I appreciate the participation on the call today. I'm personally energized by the opportunities that lie ahead for SEI. We will continue to focus on leveraging our reach.
driving sales and profit growth, capitalizing on market trends, but also helping clients maximize their opportunity right now and delivering what the market values. I appreciate everyone attending our call today. Thanks. This concludes our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.
Is.
Any questions? Welcome. If there are any additional questions, please press 1-0 at this time. And if you have no further questions, I will turn it back to CEO Ryan Hickey. Please go ahead. Thank you. Appreciate the participation on the call today. I'm personally energized by the opportunities that lie ahead for SEI. We will continue to focus on leveraging our reach, driving sales and profit growth, capitalizing on market trends, but also helping clients maximize their opportunity right now and delivering what the market values. I appreciate everyone attending our call today. Thanks. This concludes our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect. Thank you. Thank you. Thank you. Thank you.