SEI Investments Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SEI Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's call is being recorded. I will now turn the call over to your host, Director, Investor Relations, Alex Whitlam.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and welcome, everyone. We appreciate you for joining us today for our Q3 2023 earnings call. On the call, we have Ryan Hickey, SEI's Chief Executive Officer Dennis McGonigal, Chief Financial Officer and leaders of our business segments, Wayne Withrow Paul Clowder release can be found under the Investor Relations section of our website atseic.com. This call is being webcast live and a replay will be available on the Events and 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 With that, I'll turn the call over to CEO, Ryan Hickey.

Speaker 1

Ryan?

Speaker 2

Thanks, Alex. Hello, everyone, and thank you for joining us. Despite a challenging market environment, we delivered solid results for the Q3 with quality top line and earnings growth. As I laid out at last year's Investor Day, we are surgically focused on the following areas: growing our sales results in segments and markets we believe we can repeatedly win. We are seeing that play out with investment managers, regional and community banks, UK Private Client Investment Managers and larger RIAs.

Speaker 2

Adding talent and capital to enhance internal insight with outside effective and launching more organic and acquired new businesses for future revenue generation and growth. We're focused on investing in automation, AI and alternatives to drive scale and service excellence and continuing to deliver long term earnings growth driven by revenue and enhanced with smart expense management. We are proud of our momentum as we're executing our long term growth strategy while managing our company for profitability. I'm excited about what we see ahead, Knowing we are not satisfied or complacent, we will keep executing and innovating. Turning to Q3 results.

Speaker 2

Revenues in the Q3 were $477,000,000 up 1% from a year ago. Net income for the quarter was $116,000,000 EPS was $0.87 Keep in mind that our 3rd quarter results for 2022 were impacted by a one time expense related to our or 13% year over year on a comparable basis. Dennis will provide more details on our results. In the quarter, we repurchased 1,400,000 shares of SEI stock at an average price of $61.43 per share. That translates into $86,000,000 of stock purchases.

Speaker 2

The sales success we've had throughout the year in our technology and Our operational outsourcing businesses continued in the 3rd quarter. We remain focused on generating more higher quality touch points with clients, Building out our pipeline and broadening our client relationships through cross sales. We also launched our enterprise sales group this quarter to increase activity across larger wealth management firms. We believe these efforts are positioning us well to capitalize on future growth opportunities and increase sales. Net sales events in the quarter totaled $14,500,000 $11,100,000 of which were net recurring.

Speaker 2

This was a combination of technology and operational outsourcing sales of $22,300,000 offset by negative activity in our asset management With that, let me turn to our business lines. Our Investment Managers business had another good quarter, delivering strong revenue and earnings growth. The team implemented and converted new clients and funds while managing expenses well and growth continues for this segment. Our constant focus on our strategic clients resulted in a number of cross sell events and client re contracts in the quarter. We are really excited to see that we are winning across alternatives, traditional and global segments.

Speaker 2

In alternatives, our largest clients continue to expand in the client service functions on the ground to enhance our pipeline development. In the traditional business, we are seeing a trend with our larger clients who are beginning to launch Alternative funds. This provides significant opportunity for SEI. We are also seeing continued increased interest in our CIC platform. Next, private banking drove another solid quarter, signing 3 deals and re contracting 5 clients.

Speaker 2

The team also successfully delivered on their backlog implementing 5 clients on the SEI Wealth Platform representing more than $15,000,000 in Approximately $360,000,000,000 in assets, including a substantial book from U. S. Bank moving from Trust 3000 to SWP and CIBC's conversion to SWP from competitive platforms. We also went live with our multi custody which is generating broad interest with both our existing and prospective client base. The Private Banking business continues to move forward by capitalizing on our pipeline and prudently managing expenses.

Speaker 2

While we still have some previously announced events to absorb in coming quarters, We are confident in our margin growth strategy for the business that we have discussed on previous calls. Moving to our Global Asset Management business. Investment Advisors had net positive cash flows of approximately $612,000,000 primarily driven by our separately managed accounts, Strategist partner solutions and open architecture technology and custody that support advisor driven investment flexibility. The team is executing on our growth plan for the business and we are focused on driving more revenue growth to capitalize on the robust opportunity set that we see within the intermediary space. We've also continued to enhance our solutions for this business, including SEI Connect to provide a front office Digital collaborative wealth management experience for advisors and their end clients.

Speaker 2

All new advisors benefit from the enhanced investor portal and we're seeing solid adoption across the entire client base. We're also advancing our efforts to build out custody capabilities for alternative assets. Finally, we launched our liquid alternative strategy in our U. S. Fund complex.

Speaker 2

We expect to see this fund we expect All of this is another step in our initiative to offer models with private asset classes to intermediaries. We believe these enhanced solutions are poised to attract more advisors, especially in the RIA space, which we've highlighted as a particular area of growth for us in the future. In the Institutional Investors segment, we experienced a more challenging environment, but we're working to drive greater revenue and profitability for that business. Corporate defined benefit curtailments and annuitizations continue to be headwinds in the U. K.

Speaker 2

And the U. S. Given expectations that these headwinds will persist in 20 We proactively took some steps during the quarter to strategically align our resources and position the business for long term success. We remain focused on managing expenses appropriately, but also improving engagement with our clients and utilizing our enterprise wide approach to meet our clients where they want to be met. We are confident that our upcoming acquisition of an additional master trust structure in the UK We'll advance our competitive footing across all institutional segments in that market.

Speaker 2

As a market leader, we are committed to competing and winning across the institutional landscape. Turning to our investments in new business segment. Turning to our investments in new business segment. We continue to assess our market offerings and the best path forward to enhance growth. We are pleased with the progress and expect future success.

Speaker 2

And finally, our partnership with LSV remains strong. On the talent and culture front, we've made strategic investments throughout the year that continue to enhance SEI's brand awareness and drive employee engagement. This concludes my prepared remarks. I will now turn it over to Dennis to discuss our financial results for the quarter. Dennis?

Speaker 3

Thanks, Ryan. As Ryan mentioned, EPS for the quarter was $0.87 This compares to $0.45 during the Q3 of 2022 and $0.89 for the Q2 of 2023. Revenue for the quarter was $477,000,000 compared to $471,000,000 in 2022 $489,000,000 in the 2nd quarter. Total expenses for the quarter were $368,000,000 which compares to $420,000,000 last year and $376,000,000 in the 2nd quarter. On the sales front, in our Technology and Investment Processing Businesses Our Private Banking and Investment Managers, net sales events totaled $22,300,000 and are expected to generate $19,000,000 in recurring revenue.

Speaker 3

In our asset management related businesses, net sales were approximately negative $7,600,000 primarily due to losses and repricing in our institutional business. Total net sales were $14,700,000 of which $11,400,000 is recurring. Private Banking sales were $3,300,000 of which $2,100,000 is recurring. This reflects 3 new SWP sales, a new client to SCI, a previously lost client deciding to stay with SCI and an added book of business due to a client acquisition. We re contracted 5 clients during the quarter, representing $7,000,000 in annual recurring revenue.

Speaker 3

The Private Banking segment's focus on the regional and community banks, along with the PCIM segment in the UK paying off. During the quarter, we were active with client implementations conversions, as Ryan mentioned. This includes a large book of business with CIBC, First Financial and a significant business migration for U. S. Bank from Trust3000 to SWP, helping solidify our SWP SaaS solution as market ready.

Speaker 3

The current backlog of sold but expected to be installed revenue in the next 18 months is $21,500,000 Asset Management Revenues and Private Banking were up slightly from the 2nd quarter. Expenses in the quarter were down from the Q2 of 2023, reflecting the efforts by Sanjay and the team to bring Private Banking back to higher levels of profitability. On the Investment Manager's front, net sales for the quarter were $19,000,000 $16,800,000 of which is recurring. During the quarter, we re contracted 5 clients, totaling $9,000,000 in annual recurring revenue. Revenue for the quarter was up compared to 2nd quarter, reflecting the impact of client installs.

Speaker 3

Expenses were essentially flat. Our backlog of sold, but expected to install in the next 18 months recurring revenue is $30,400,000 For investment advisors, Net cash flow onto our platform was a positive $612,000,000 We experienced increased flows into our newer strategic asset management solutions and platform only programs and negative flows from our more mature mutual fund products. Our comprehensive offering is key to us moving the business forward. Revenues for the quarter were up from 2nd quarter due to improved capital markets during the 2nd quarter, Offset by Q3 Capital Markets and the product mix of flows, expenses were flat. We recruited 57 new advisors during the quarter, 8 of which are in the newer RIA channel.

Speaker 3

In the Institutional Investors segment, net sales events for the quarter were negative $5,800,000 reflecting positive client signings offset by losses and repricing and client retention activities. Revenues for the quarter were down $4,700,000 due to net client asset losses. Expenses were also down $5,500,000 reflecting general expense management and a one time item in 2nd quarter of $4,500,000 In the Investments in New Business segment, revenues and expenses were up slightly compared to 2nd quarter and will remain in this range. In addition to the segments, the company also incurred a $2,200,000 expense item related to severance as a result of organizational changes, principally in our institutional business. We made adjustments to the workforce to align our talent and resources to the opportunities in the segments we serve.

Speaker 3

While this will result in run rate savings, we expect to redeploy these savings by expanding our sales resources in growing institutional markets and increasing our distribution efforts around alternative assets. This expense is reflected in overhead on our press release. LSV produced $29,900,000 in profit during the quarter. This compares to $32,700,000 during the 2nd quarter. Revenues for LSV were $102,200,000 compared to $108,800,000 in the 2nd quarter.

Speaker 3

3rd quarter revenues included $9,000,000 of performance fees. LSV recorded performance fees of $12,700,000 During the Q2, performance fees are a reflection of continued positive relative performance. One final item, as we mentioned in July, we entered into an agreement to acquire the National Pensions Trust. The transaction is expected to close before year end, subject to applicable regulatory approval. I point you to our 10 Q for more information.

Speaker 3

Our tax rate for the quarter was 22.5%. We expect a slight step down in tax rate in the 4th quarter. That concludes my remarks. All of our unit heads are on the call, and we're happy to take any questions.

Operator

Thank you. By repeating the 1 then 0 command. We go to the first line, Owen Lau, Oppenheimer. Please go ahead.

Speaker 4

Thank you for taking my question. I think you highlighted the strength of Investment Managers a little bit, But can you please dig a little bit deeper because it grew nicely year over year, margin has been expanding. I'm just wondering if you can talk more about the driver of the strength, the healthiness of the arts firms and traditional asset managers. And is there any pocket that you're targeting or seeing growth in your end market? Thank you.

Speaker 2

Yes. Owen, that's a great question. I hope you're doing well. I'll take First stab and then I'll turn it over to Phil to maybe provide some more color. So if you think about the overall market opportunity we had And why I think we continue to drive growth.

Speaker 2

One is we are really focused on premium levels of service to our client base. And that has really paid dividends for us as clients are launching new funds. We are winning the lion's share of those funds and we stay very, very focused on the level and quality of Service to those clients. We've continued to deploy more talent and capital in the technology space to enhance our offering there. I think Bill can talk a little bit Owen to your point about future growth.

Speaker 2

Inside the U. S, I think there's just a continued trend in appetite for outsourcing. That positions us well as firms really think about where they should be deploying their capital for growth. They see more of that really in product creation, alpha generation and distribution and are really looking to SEI as a strategic partner for technology and operational delivery. And we're really starting to increase our footprint, as I mentioned, in global.

Speaker 2

But Phil, you want to provide a little bit more color either on certain Spot or Aaron, we're really enthusiastic about not just the existing pipeline, but the future runway in this business.

Speaker 5

Yes. Thanks, Ryan. And this is Bill McCabe. Just real quick, the margins came in a little higher this time at 36.2%. If you look year to date, they averaged about 35%, which Right about where we said we would be over the course of the year or so.

Speaker 5

So I expect that number to continue for a little while. And I think we spent a lot of time managing expenses at the same time we're investing in the future. On the sales front, $19,000,000 in net sales. If you look at that year over year for 3 quarters, we're up about 16%. We have a net number of $51,500,000 so far.

Speaker 5

And as Ryan said, the pipeline is strong and we're out in the market. We're all over our clients And we're getting a lot of traction globally, a lot of traction in the U. S. We talked about private credit and real estate and infrastructure before. But I think we're in a really, really good spot for the future.

Speaker 5

I think the runway is fairly long for what we see out there And I think we're in a really good spot.

Speaker 2

The only other thing I would say, Owen, which we touched on a little bit in the call is early, but there's a big intersection Right now, growth between kind of the private asset market and the intermediary space. And as Phil mentioned, I think a lot of the traditional investment managers are also looking at How they can create and distribute some alternative products and that's a good spot for us as well to really give them the infrastructure to get those things up and running and out in the market quickly.

Speaker 5

Yes. To add to that, right now the percentage of alternatives within our traditional market is really, really small, but we have a major campaign going on now to Try to push those products by way of interval funds and auction funds into that market. So I think we have a lot of traction and we expect to see some good results in the future.

Speaker 4

Got it. That's super helpful. And then on the press release, you mentioned, I think some of the revenue growth was driven by new products and additional services. Could you please maybe highlight some of these new products? Are you taking shares from competitors?

Speaker 4

But I mean, any more color would be helpful on these new products. Thank you.

Speaker 5

Yes. From a competition perspective, we have 2 or 3 competitors that are out there. But I don't really think That we are our clients are fairly large and sophisticated and they're not buying based upon Getting a better deal or margin. So we are getting pretty much almost all of the new funds that are launched with our Clients that are out there and from a prospect perspective, when we're in a deal, we're usually in the final 1 or 2 and we've been doing fairly well Closing those books of business. So we have 3 new clients on the alternative side so far this year, I mean this quarter.

Speaker 5

And in particular, there's one that we don't really name names was the sort of deal of the year so far. So we're in a good When we're out in the market, our clients are referencing us very happily and they're glad to do it And we're in a good spot. So I think we're winning on a number of different fronts. I'm not sure I can pinpoint it to one particular competitor, but I think we're where we need to be right now.

Speaker 3

The new product comment is and Phil's team has done such a great job of building really strong relationships with our clients Particularly the clients that continue to grow and expand and when they tend to come to market with a new product, We kind of be in the room when they're designing the new product. So that's really what the reference is to new products. It's our clients Launching new products into the market and then leaning on us to be there to support them.

Speaker 5

That's a great point. Thank you.

Speaker 4

Got it. If I can add one more quick one, which is on the cost side. I noticed that there's an increase in personal Toss and investments, I think you mentioned related to compliance infrastructure to meet new regulatory requirements. Could you please talk about what these new requirements are? And are they recurring expense or it's more like one time expense?

Speaker 4

Thank you.

Speaker 3

No. On the personnel side, if you're looking at kind of second quarter to third quarter, Remember that we talked about this on the last call. I believe that mid year is when we for the bulk of our workforce,

Speaker 4

we go through salary adjustments

Speaker 3

and we make So we made compensation changes that typically go on year in, year out. So you saw some Cost growth in personnel as a function of that. And then on the compliance regulatory front, We operate in many different regulatory jurisdictions. In some of the in all the jurisdictions we operate in are highly regulated with continued change in Not only the regulations that exist in addition to those regulations, but the scrutiny under which Firms that operate are put by the regulators themselves, and that just has increased the workload relative to All of our jurisdictional operations. When you layer on top of that, the fact that we expanded into a new jurisdiction in Luxembourg, We've had to add some capabilities and talent there.

Speaker 6

Then when you wrap

Speaker 3

it all up with the combination of who we hire and who are kind of in full time roles and The use of outside professionals to help guide us as we sort through some of the regulatory changes that have occurred Yes, that drives us some of our costs. Finally, in certain jurisdictions, we've been able to operate at a different type of Leverage with using talent in certain jurisdictions to support the requirements in other jurisdictions. Well, what's happened is almost every jurisdiction now requires that talent to be local and that's also added to our Yes, personnel requirements and cost increases.

Speaker 4

Got it. Thanks a lot. I appreciate it.

Speaker 3

It's the regulatory employment program, I call it.

Speaker 4

Okay. Thanks a lot, Dennis.

Speaker 3

All right, Alan.

Operator

And we'll go over to the line of Ryan Kinney, Morgan Stanley. Please go ahead.

Speaker 7

Hey, good afternoon. Thanks for taking my questions.

Speaker 4

So a

Speaker 7

couple of questions. First, you mentioned migrating a large chunk of the private bank's book to SWP this quarter. Any update on where that leaves Trust 3000? And should we expect any change in strategy on how long You plan to keep that asset up and running or how you plan to manage the Trust 3,000 system?

Speaker 6

Yes, I'll take that first

Speaker 2

and then kick this on. Jay, Ryan, hope you're doing well. So right now that does not change our kind of strategic plan because we have clients that are happy on Trust Retail. But I would say is 2 things. Juan, we're probably more proactively engaged right now with those clients trying to understand what that timeline looks like, what those operating models would be and what books of business they will be bringing over to Hey, Sanjay and his team has done a terrific job there, kind of really increasing the engagement.

Speaker 2

But the other more important thing with the U. S. Bank conversion, I think Dennis had this in his script is to have that size of an organization operating with the software as a service model really opens up a different level of conversation in the market for Sanjay and the team around either existing or prospective SEI clients that don't want to outsource the back office that are looking Technology as a Service. So this is a really important proof statement and they are really happy where they are right now with this conversion, with Successful weekend, the big book of business and it's one that the market's been watching. Sanjay, I know you would add to this.

Speaker 8

Ryan, I would echo the same as well. In terms of our strategy for Trust 3000, and As I mentioned that we would stay aligned with our client strategy. So you can look at the Oral Trust 3,000 business Two different segments, our larger clients who are in software as a service model. They're closely watching how we are implementing U. S.

Speaker 8

Bank, and that is going very successfully. And the second segment, you can look at the clients we are running in an outsourced operations model. And that's where we are actively engaging Our clients and as and when they are coming up for renewal, we are working with them to move them to SWP, but it's not a post March.

Speaker 7

Thanks. And then just as a follow-up, definitely appreciate the efforts to get the Private Banking margins towards higher profitability. It looks like you've started to make some progress there with margins moving from low single digits to it looks like now high single digits. Is that The right range going forward and as you put together all the piece parts of the SWP migration and expense management, is there any update on What margin level you'd be happy with in that business?

Speaker 2

So I think, Brian, this is one we've been really consistent. The team continues to execute on a plan to continue to grow those margins and to do that incrementally quarter over quarter either through a combination of Revenue installation and revenue increase through sales and continued expense management. So I mean we are really focused on that. We don't plan to deviate from that plan to continue to grow those margins moving forward. That was probably the first thing I said in the first call 18 months ago, The team has done an excellent job.

Speaker 2

As I mentioned on the call, we have some losses that were announced over the last couple of years that we've had to absorb. And Sanjay and the We've done a terrific job through new sales, increased revenue to continue to smooth that trajectory and drive those margins higher. But We're not deviating from the previous stance that, that business is going to get back to historical margins over the next few years.

Speaker 7

Thanks. Appreciate it.

Speaker 3

And Ryan, just to close the loop, one of those losses that we had talked about for probably close to a year That's still not matriculated off.

Speaker 5

And I think on

Speaker 3

the last call, we talked about potentially by the end of Q3. Now we're in the kind of range of sometime in the Q4, but they're still they haven't left us. So we'll see how that plays out, but that's one of the things that the Private Banking business will have to absorb when it happens. The good news is That hasn't happened yet, and that's always a positive. The other comment that Sanjay didn't make, but he can give color if you're interested.

Speaker 3

He just finished 2 days or 3 days with A large group of our both Trust 3000 and SWP clients here on campus. And We can only think that getting them in the room together and hearing the stories and the positive stories about being on SWP, Both technologically and operationally will just help encourage more Trust Retail,000 clients like the one that made the decision to convert in the 3rd quarter make that decision. So it's really successful 2.5 days of sessions with our Yes, broad banking client base.

Speaker 6

Yes. Thank you very much.

Speaker 7

Thank you.

Operator

And we'll go over to Crispin Love, Piper Sandler. Please go ahead.

Speaker 9

Thanks. I appreciate you taking my questions. First, are you able to give a little more color on the client losses in the quarter in the Investment Advisors and Investors segment, any key reasons there or anything out of the ordinary or anything that you can provide or would call out there?

Speaker 3

So on the institutional investor side, I'll give you a quick comment and then turn it over to Jay So Brianna speak to that business segment. And then on the Investment and the Advisor segment, I'll let Paul comment on that. Institutional Investors segment, as Ryan spoke, it's still in that the DB corporate DB space. It's planned closures or annuitizations that occur. And then also, we're being more aggressive in the market with retention.

Speaker 3

We know everybody in the industry across the board, there's no hiding from it, it's under fee pressure. The competitive landscape is arguably led by fees versus With many competitors and that kind of sets the table. And Jay and his team and with Paul Paul hasn't gone anywhere. So the institutional business is still on his left shoulder, Health and It's been trying to keep our clients addressing their economic requirements, but at the same time making smart long term relationship decisions. So Jay, you want to since it's early days, you want to?

Speaker 10

Sure. Thank you, Dennis. Well, it's certainly not a new phenomenon that Primary objective of these pension plan sponsors is ultimately to obtain full funding. What is relatively new though is that We believe around 30% of firms in the industry right now are exploring a risk transfer strategy. So that's removing the liability and risk from the The purchase of a group annuity or offering a lump sum window.

Speaker 10

We're aware of these market realities Some of the recent organizational changes that we've made are going to better position us to aggressively compete in OCIO growth markets going forward. The OCIO market in general is growing and we've seen more and more large plans exploring like the virtues of Outsourcing Chief Investment Officer. So SEI standing as a market leader in that space, our seamless integration of technology, operational and investment expertise, I think are going to enable us to win moving

Speaker 9

forward. Thanks. I appreciate all the color there. And then There's definitely been plenty of volatility recently, especially with rates and fixed income.

Speaker 4

Can you just Talk a

Speaker 9

little bit about how that's impacted you in the Institutional Investors segment or any others at times like these, does it drive the end Clients and potential clients to be more inwardly focused, which can dampen activity over the near term or elongate discussions or taking it actually for new conversations with current clients and new potential ones?

Speaker 3

You mean in the context of The calculation of their future liability streams and their funded status?

Speaker 9

Yes, yes, exactly.

Speaker 3

Jay, do you want to?

Speaker 10

Yes. I think part of that goes into the fact that many of them are exploring The opportunity now in that rising rate environment to purchase group annuity or offer a lump sum. I think overall though, when you look at this marketplace, I think this is a market that really creates specialization. So whether it's healthcare, higher education, corporate DB, union plans, I think our prospects really demand, domain expertise and our advice and service around this. So anytime there's a change like that happen in the marketplace, I believe it does open the opportunity for us to sit down and have those advice conversations about how the market realities are affecting their goals and objectives and the allocation that we've put out there.

Speaker 10

We see those opportunities not only as the ability to strengthen but also to potentially move them into other products that are better for them and better for us long term.

Speaker 6

Yes. I would just add on the advisor side. We haven't seen really a big position of cash. We've seen a little bit of spike in cash balances. That's kind of normal when you see this level of volatility, but there has been kind of no movement around away from the strategic portfolio.

Speaker 6

Someone has some excess cash, they might be holding it in a money market fund. We offer very competitive yields there. On our flows, we've had very Strong growth on the AE Way side, the custody platform, very strong growth on the SMA, the ETF, the strategist program. And we've seen a little bit of continued outflow of the SEI higher fee funds and we knew that. So that's part of our business strategy Is the kind of sell through that in this environment.

Speaker 6

We just also had a conference of 270 advisors a few weeks ago, Unbelievable commentary and receptivity, especially around our applications and our investor portal, our dashboards and our mobile app that we rolled out. So we are getting really, really good feedback and we think that that puts us in a well position for growth as we move forward into the Q4.

Speaker 9

Thank you. I appreciate all the color. That's it for me.

Speaker 3

You're welcome.

Operator

Okay. And we'll go over to the next line. Go over to Mike Brown with KBW. Please go ahead.

Speaker 11

Great. Good

Speaker 2

evening. Hey, Mike.

Speaker 1

Hey, I wanted to

Speaker 11

start with just maybe a follow-up comment on the margin. It looks like Year to date, you're running just below 23% and that's just kind of below your historical mid to high 20% range. So I know that you guys really focus on R and D spending and you're kind of managing for the longer term here. But If I have to think about an environment that could get even more challenging from here, like Where does your margin really kind of bottom out? And what are the levers at your disposal here to protect the margin?

Speaker 11

And I, of course, appreciate that there were Right sizing actions in the quarter, so you're not standing by idly, but just trying to think through what's at your disposal if things stay or get worse from here?

Speaker 3

Sure. So just I guess what I can use is first use of historical reference. The last time we've been through this that type of a difficult market cycle. And during that market cycle, Our highest margin business at that time was probably close between the Advisor business and Institutional business. The advisor business, this is without SEI taking any drastic measures in terms of headcount or cost reductions, But really running the business as is.

Speaker 3

That business, the margins bottomed out and went from about high 40s to high 20s. Institutional business went from similarly high 40s and bottomed out around maybe high 30s, 40% margin. So the asset management, more direct asset management businesses, the margins held up really well. Obviously compressed, but it spoke to our operating model, our business model and And our capabilities there. On the banking side and on the IMS side, which are more operational businesses, the pricing is a little bit less impacted.

Speaker 3

We do get some variability because of markets. It's hard to run away from those types of Stream markets, but in IMS, for example, the mix of business is very diverse. So It's not as directly correlated to market activity. So there, there was some margin compression, but it wasn't as severe. Plus With breakpoint pricing, the first assets you would lose in down markets are the lower priced assets relative to most client contracts.

Speaker 3

So There's a little bit of buffer in that. And banking similarly, we have revenue streams that are not tied to assets or more Count based or transaction or activity based in times of market stress, those things tend to honestly do account numbers, but activity goes up. So there's some protection there. But I will say in the banking side, we did take some margin hit, But it was principally because we use it as an opportunity to recontract with clients, extend relationships, help them Deal with the financial distress they were under. So gave them some temporary relief with the trade off of a more longer term partnership like Our relationship.

Speaker 3

So with all that said, we do have some costs that are variable. So we Sub advisor expense, that's a direct expense on our P and L, that certainly would contract Our variable part of compensation, we did make some Decisions to adjust that, but we were one of the few financial services firms in that Period. And I'm not making any future commitments here, but one of the few financial services firms in that period that actually paid incentive compensation through that cycle. It wasn't at 100% of our normal, but it was fairly healthy other than the executive team. The executive team made a decision that We would not take that variable comp as part of our in that period.

Speaker 3

So And then we did use it like most things, probably the first time you ever clean out your attic is when you're moving. So we use it as an opportunity to actually clean up some things that needed to be cleaned up anyway and should have been cleaned up kind of a normal course of business, but It gave us, I'd say, a little bit higher incentive to act on it. And we did get some cost takeout from that. But we also invested money in Client facing activities, we leaned into our clients a little bit more on the client service side. We did not slow down our R and D initiatives.

Speaker 3

We certainly put them under more scrutiny, but we actually spent more in capital in R and D during that 'eight, 'nine period than we had spent kind of the 'six, 'twenty So we really felt that we have a really strong financial foundation. We have very effective business models and that we are very Scrutinizing around making sure we don't sacrifice the long term and what we're really all about, which is long term strategic Growth in value just because of some short term pressures. And I would say we would probably operate in a very similar fashion.

Speaker 11

Okay, great. Thanks for all the historical perspective there, Dennis.

Speaker 3

Yes, thanks.

Speaker 11

Yes, and then maybe just Yes, I was kind of quickly lining up some of your sales and pipeline commentary and it just looks like some of those metrics are just down Quarter over quarter. And so I know that's just one data point, one point in time. And you certainly talked about a number of key investments and You sound upbeat about a lot of your initiatives here. So I guess, if we just take a step back, can you just help me synthesize those two trends and what that ultimately can mean for some of the more near term trends including activity into year end here?

Speaker 2

So I think Mike, it's Ryan. I mean if you look at Q3, Q3 was a little bit down relative to Q2 in sales. Q1 and Q2 were really good sales quarters for us. Q3 was really impacted on the asset management side. We had another really solid quarter and we expect that to continue.

Speaker 2

If you look at the pipelines Q4, Q1 of next year, Phil mentioned and Sanjay mentioned and even Paul and Xavier just come out. So we feel really good about where we are in a pipeline perspective. Q3, sometimes you get a little bit of like the summer and things drag on and things push into Q4. But really, I think Q3 was predominantly impacted Mike, what we've just talked about when Jay went through, but Phil already mentioned it $19,000,000 quarter. Sanjay is very consistently putting positive results on the board.

Speaker 2

We expect that to continue. So I also think one of the things that's really hard to predict, but one of the leading indicators for us that we're More focused on now than anywhere in the past is really that client activity. So as Dennis said, I was in the amphitheater with Sanjay, there's 92 Clients in there across 53 banks. Paul was just saying Paul and I were out in Arizona with Wayne a few weeks ago, it's 275. We are all over the place Right now with our clients in the market, the new enterprise sales team is going to help.

Speaker 2

So I get it. We understand

Speaker 6

the rules of the game.

Speaker 2

We understand the scoreboard. We're doing the right thing.

Speaker 11

Okay, great. Thanks for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. At this time, no further questions in queue. Back over to CEO, Ryan Hickey. Please go ahead.

Speaker 2

Thank you. As I mentioned, our momentum continued through the Q3 and we made good progress on our strategic initiatives. We're doing the right things. We're focused on the right areas. I'm personally getting more focused with Wayne and the team on the investment management and asset management side.

Speaker 2

We're very excited about what we see in We're enhancing our market presence through increased engagement with our clients. We're expanding our reach across markets globally. We need to relentlessly challenge ourselves to improve our execution and drive growth, but we're going to build upon the foundation we have in place to drive that growth. Thank you for joining today's call.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect.

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Earnings Conference Call
SEI Investments Q3 2023
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