SEI Investments Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 31, 2024

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SEI Fourth Quarter 2023 Earnings Call. At this time, all participants are on a listen only line. Later, there will be time for later, there will be Q and A and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Whitelam.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome, everyone. We appreciate you joining us today for our Q4 2023 earnings call. On the call, we have Ryan Hickey, SEI's Chief Executive Officer Dennis McGonigal, Chief Financial Officer and the leaders of our business segments, Wayne Withrow, Paul Clowder, Jay Cipriano, Phil McCabe, Sanjay Sharma and Sneha Shah. Before we begin, I'd like to point out that our earnings press release 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 Webcast page of our website.

Speaker 1

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 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 our CEO, Ryan Hickman. Ryan?

Speaker 2

Thanks, Alex, and good afternoon, everyone. While market conditions vary throughout the year, our team did an excellent job navigating uncertainty, engaging our clients, driving growth and setting SCI up well for the future. In 2023, we had key strategic objectives that included margin expansion and sales and targeted private bank segments, continued momentum in global expansion and investment managers, further penetration into the RIA space, investments in alternatives for future growth and driving continued operating leverage, profit growth, infusing new talent across the company. We are pleased with the performance, momentum and trajectory of both the Private Banking and IMS businesses. Both of these businesses are well positioned to continue to expand and contribute to SEI's top and bottom line.

Speaker 2

We know we need to increase our attention in asset management. With the advisor business, we have an opportunity to broaden our message around our value as a more tech centered offering with investment choice and curated solutions at the forefront of what we provide. I expect this will help us maximize new client adoption and exploit the huge opportunity we see in the intermediary market. 2024 is going to be some of the same, but with a surgical focus on continued sales and revenue growth, accelerating the transformation of our asset management businesses, targeting new segments for sales and driving margin expansion and profit growth through increased operational leverage and discipline. Let me dive into the financial results.

Speaker 2

Revenues in the Q4 were $485,000,000 up 6% from the Q4 of 2022. Net sales events in the quarter totaled $13,700,000 of which $8,500,000 We're net recurring. This was a combination of technology and operational outsourcing sales of $24,200,000 offset by negative activity in our asset management businesses. Additionally, we had a separate successful new product launch in late Q4 that will add additional revenue to the advisor business. Net income for the quarter increased 8% over the same period to $121,000,000 In the quarter, we repurchased approximately 1,200,000 shares of SEI stock at an average price of $58.08 per share that translates into $69,000,000 of stock purchases.

Speaker 2

EPS was $0.91 for the 4th quarter, up 10% over the $0.83 reported in the prior year period. The Q4 also included a number of one time events that Dennis will expand on and are outlined in the release. We remain well positioned for 2024 and beyond. Our unmatched breadth of capabilities enable our to connect to what matters most, adapt to constant change and the scale for the future. We're focused on seizing opportunities where we can We win and drive growth.

Speaker 2

I firmly believe we can accelerate growth and market share. With that, let me turn to our business lines. Our investment managers business continues to thrive, delivering strong revenue and earnings growth. The team successfully implemented clients onto our platform and won new business. During the quarter, we had dozens of cross sale events and recontracts.

Speaker 2

We also won new business within each of the alternative, traditional and global segments, while continuing to grow profit for the unit. In alternatives, our focus on key clients continues to pay dividends, resulting in significant cross sale opportunities. During the quarter, we signed a top 25 traditional asset manager expanding into alternative asset classes and another private asset manager through a competitive takeaway. Globally, we signed 3 new clients and continue to see strong flows in the private asset and private As we've expanded our sales leadership in this segment, we're excited to see increased pipeline development. In the traditional segment, we added new business in all product lines.

Speaker 2

In particular, the expansion we've seen in our turnkey collective investment trust solution continues to be strong. And as we've discussed, our larger traditional clients are beginning to launch alternative funds. Private Banking had another strong quarter with revenue growth and continued expanded margins compared to a year ago. The team has done an outstanding job reorienting the business for growth while managing expenses appropriately. During the quarter, we signed 2 new deals and recontracted 3 existing clients.

Speaker 2

We also exited the year with successful implementations during Q4. While we still have some previously announced events to absorb in coming quarters, we are confident in our PB growth strategy. Moving to our Global Asset Management businesses. Investment Advisors net cash flows were essentially flat in the 4th quarter with positive flows in our separately managed accounts and strategist partner solutions, offset by outflows in our active mutual fund products. During the quarter, we brought on 52 new advisors, including 5 in the RIA channel.

Speaker 2

We also onboarded 3 advisors for our new service of custody of outside alternative investments and are working towards a larger rollout of that offering. Additionally, we pushed out our investor mobile app, is receiving great feedback as is SEI Connect and the investor portal. Finally, as mentioned earlier, we launched the insured of the SEI Integrated Cash Program in late December. This program provides bank insured protection to end investors utilizing our standard and custom models. We believe the program could generate significant earnings for 2024.

Speaker 2

In the Institutional segment, our 4th quarter results reflected the challenges experienced industry wide throughout the year. That said, we are seeing positive sales momentum as a result structural changes we made in 2023. In the quarter, we signed 2 new OCIO clients and 6 unbundled OCIO clients utilizing technology and data services. We also completed our acquisition of National Pensions Trust in the UK. We believe the addition of NPT to the SEI Master Trust strengthens SEI's continued delivery of best in breed services at scale across our global institutional business.

Speaker 2

Within our investments in new business segment, we completed the acquisition of Outago, a cloud based technology platform that provides inventory, e subscription and reporting capabilities for alternative investments. As I have discussed many times, we are driving forward into providing more services and capabilities with alternatives. With Altigo, we expect to help simplify and transform private fund investing and widen access to alternative investment products for intermediaries, while also helping our investment management clients more easily create and facilitate distribution of their products. Our partnership with LSV remains strong and they had a very good performance quarter, which Dennis will discuss. Finally, we've taken continued steps to nurture our culture and ensure that our workforce is best prepared for the future of the industry.

Speaker 2

I'd like to thank all my colleagues across SDI for their commitment to our vision. 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 $0.91 This compares to $0.83 during Q4 of 2022 and $0.87 for Q3 of 2023. Revenue for the quarter was $485,000,000 compared to $456,000,000 in 2022 $477,000,000 in the 3rd quarter. Total expenses for the quarter were $383,000,000 which compares to $362,500,000 last year and $368,000,000 in the 3rd quarter. Included in the 4th quarter expenses were approximately $11,000,000 of one time items, $5,300,000 related to a technology asset write down in our IMS segment, dollars 4,600,000 of severance expense and $1,000,000 of professional fees associated with our acquisition activity.

Speaker 3

Without these items, expenses for the quarter would have been approximately $372,000,000 the EPS impact is approximately 0 point 0 $6 to 0 point 0 $7 On the sales front, in our technology and investment processing businesses of Private Banking and Investment Managers, Net sales events totaled $22,900,000 and are expected to generate $17,600,000 in recurring revenue. In our asset management related businesses, net sales were approximately negative $10,500,000 primarily due to asset movement from our mutual fund products into our other investment programs, some client acquisitions as well as net losses in our institutional business. We also sold $1,300,000 of recurring revenue In our new business segment, mainly SEI Sphere, the Sphere sale was to a non financial company. This supports our hypothesis that Sphere has resonance beyond our traditional market segments. Total Net sales for the company were $13,700,000 of which $8,500,000 is recurring.

Speaker 3

One key highlight for our visor business is the launch of an FDIC insured deposit program. This takes the cash allocation in our model portfolios generally used for operational purposes like paying fees and sweeps those balances into an FDIC insured deposit account. While not technically a sales event, The level of effort to launch, educate and enroll our clients was significant. This new element of our overall offering had approximately $840,000,000 in assets at December 31. And under current estimates, will generate approximately $25,000,000 in additional revenue in 2024.

Speaker 3

The assets are reflected in our earnings release on the asset schedules under the caption Platform Only Assets Deposit Program. There was minimal financial benefit from the program in the 4th quarter due to the timing of the launch. Private Banking sales were $5,700,000 of which $2,200,000 is recurring. The 2 new SWP sales, one of which was to a non banking financial institution, were partially offset by 2 client losses, 1 due to acquisition and the other to a change in their operating model. The 3 clients Recontracted during the quarter represent $5,200,000 in annual recurring revenue.

Speaker 3

The Private Banking segment's focus is paying off in both new business generation and building a quality and growing pipeline. During the quarter, We were active with client implementations and conversions. We installed $5,700,000 of recurring revenue from our 3rd quarter backlog and added to the backlog through sales, increasing it to $22,700,000 of expected to be installed revenue in the next 18 months. Asset Management Revenues and Private Banking were down slightly from 3rd quarter. This was mainly due to asset levels entering the quarter, resulting in lower average assets during the quarter.

Speaker 3

As a side note, This is also true for all of our asset management businesses. We earned revenues based on average assets. The fact that we entered the quarter at lower levels, coupled with the markets not making their positive run until later in the quarter resulted in lower average asset levels. Entering Q1 of 2024, we are at a higher beginning asset base. Expenses in private banking were down from the Q3 of 2023, reflecting efforts to bring private banking back to higher levels of profitability.

Speaker 3

On the investment managers front, net sales for the quarter were $17,200,000 $15,400,000 of which is recurring. During the quarter, we re contracted 18 clients totaling $30,600,000 in annual recurring revenue. Revenue for the quarter was up compared to Q3, reflecting the impact of client installs. Expenses were also up, however, They included a $5,300,000 item mentioned earlier for an asset write down. Our backlog of sold expected to install in the next 18 months recurring revenue is $28,000,000 In the Advisor segment, revenues for the quarter were down slightly from 3rd, for reasons previously mentioned, expenses were up due to increases in distribution and marketing related costs along with sales compensation true ups.

Speaker 3

In the Institutional Investors segment, net sales for the quarter were negative $4,200,000 reflecting positive client signings offset by losses and repricing and client retention activities. Revenues for the quarter were down slightly due to lower average assets. Expenses were also down slightly reflecting general expense management. In the Investments and New Business segment, Revenues were flat to 3rd quarter and expenses were down slightly. LSV produced $35,400,000 of profit during the quarter.

Speaker 3

This compares to $29,900,000 during the 3rd quarter. Revenues for LSV were $117,100,000 compared to $102,200,000 in the 3rd quarter. 4th quarter revenues included $19,800,000 of performance fees. LSV recorded performance fees of $9,000,000 during the 3rd quarter. Performance fees are a reflection of continued positive relative performance.

Speaker 3

At the end of the quarter, we acquired Altego. While not a material capital transaction, we expect the acquired capabilities and talent when coupled with SCI's existing assets will add to our strategic opportunity in the alternative space. This business line will be included in the investments in new business segment going forward. I point you to our soon to be filed 10 ks and press release for more information. Our tax rate for the quarter was 19.6%.

Speaker 3

We expect the tax rate for the Q1 to be approximately 23%. For the full year, our tax rate was 22.26%. That concludes my remarks. All of our unit heads are on the call, and we will now take questions. Thank

Operator

And first, we'll go to the line for Christian Love, Piper Sandler. Please go ahead.

Speaker 4

Thanks. Good afternoon everyone. Appreciate you taking my questions. First on Private Bank's margins, They accelerated 10% in the quarter. I just want to ask, is there anything one time in there or is that kind of a good level to expect Going forward, do you think that could be sustainable as you move through 2024?

Speaker 4

And then, just while we're on the topic, if you could speak to kind of longer term margin outlook for private banks as well?

Speaker 3

Sure. So I'll answer Chris, this is Dennis. Thanks for the question. I'll answer the first part. There really wasn't anything unusual in Q4 in banking.

Speaker 3

It was a pretty clean financial quarter. And I'll let Sanjay kind of address the 24 outlook for margins and kind of beyond that.

Speaker 5

Thank you, Dennis. So our margin expense in Q4, That's a reflection of our efforts towards not only managing our expenses, but our top line growth as well. And we have been very consistent with our strategy going forward as well. While expense management will continue to be our focus, our focus is shifting on how we can grow our top line. And that's what you would see in coming quarters as well.

Speaker 4

All right. Thanks, Sanjay. That's all helpful. And then Dennis, just on the $11,000,000 of one time expenses in the quarter, is $10,000,000 of that in Facilities and then $1,000,000 in Professional fees? Am I missing anything there?

Speaker 3

I'm sorry, Chris. There was 3 elements that had $11,000,000 One was We wrote down a technology asset. So we had a piece of software that was in development, and we found an alternative in the market that we think will serve us better Going forward, so we wrote off the capitalized element of that asset in the Q4 because we're not going to bring that to market. We had $4,600,000 of severance expense, Most of which was covered in a recent 8 ks filing that we made. And then we had about $1,000,000 of professional fees associated with And which I call it out is kind of a little more unique, the acquisition, 2 acquisitions we did.

Speaker 4

Okay. And then I guess I'm just looking at the facility supplies and other costs line item at $27,000,000 in the quarter. Is there anything Baked in there or is that a good run rate going forward? I'm just curious why that line item is what's so elevated in the quarter?

Speaker 3

Yes, that would come down because that's where That write off would be sitting.

Speaker 6

Right. Okay.

Speaker 2

So that

Speaker 3

number will come back. I'd say that more kind of the average of last year quarter to quarter.

Speaker 4

Perfect. Okay, thanks. That's it for me. I appreciate taking my questions.

Speaker 7

Yes.

Operator

Thank you. And next we'll go into the line for Ryan Kenny, Morgan Stanley. Please go ahead.

Speaker 8

Hi, good afternoon. Thanks for taking my question. I just wanted to dig into the net sales events in the Asset Management related businesses of the Advisors and Institutional Investors segments, in the MD business. So it's been negative for, a few quarters in a row. So just Wanted to understand like how much more of that we should expect going forward of the negative net new sales.

Speaker 8

Is this a good run rate? I know there's some more client transitions left. Or should that come down over time? Thanks.

Speaker 3

Yes. I guess we'll turn it over to Paul to kind of address the really what happened over the past Couple of quarters because we've had this kind of phenomenon of shift from mutual fund products as a product wrapper type program into more ETF separate accounts, some of the curated third party programs we have. And then as you we're all aware, there is a lot of consolidation or a decent amount of advisory consolidation going on in the market. We've had some advisors kind of get picked off in that process. So our when we talk about We quantify things in the context of revenue and that really reflects the pricing shift in the products we offer.

Speaker 3

But I'll let Paul kind of take it from there in terms of cash flow expectations and what we're seeing from that perspective.

Speaker 9

So if you look at cash flow, we did have a positive 3rd quarter, but we had basically a flat to a little bit negative in the 4th quarter. A phenomenon that we've seen in the marketplace are advisors who are getting purchased by consolidators and roll up firms And we were not immune to that. In 2023, specifically in the last couple of quarters, we were hit with 9 firms that represent $2,000,000,000 assets that were ostensibly assets under management that moved off the platform. Now we have a lot of energy on strategic answers that we're looking at to deal with this This trend in the industry including working with the aggregators, especially the friendly aggregators and selling them on our overall capabilities of technology operations and investments. So that certainly was a headwind that we saw in 23.

Speaker 9

That said, our efforts in the RIA market are continuing to be bolstered. We're very positive on that and part of our momentum in 2024 is the goal of larger to larger RIAs because we think we have all the capabilities. We've historically had most RIAs between $50,000,000 and $500,000,000 But we think we have all the capabilities to sell to the greater than $500,000,000 market segment. And Eric Holland and Gabe Garcia, who are leading that effort, have doubled down on resources and capabilities and we're optimistic there. So I don't want to give any predictions as to what 2024 is going to look like.

Speaker 9

But We think with our strategic goals, we're spending the tides with advisors that are deconverting through acquisitions And then our focus on the RA channel, we're positive as we move into 2024.

Speaker 8

Great. Thank you.

Speaker 9

Thank you.

Operator

Thank you. And next we're going to the line for Owen Lau, Oppenheimer. Please go ahead.

Speaker 10

Good afternoon and thank you for taking my questions. Ryan, I think you talked a little bit about the priorities in your prepared remarks, But could you please add a little bit more color on your strategic priorities in 2024 in a little bit more detail and how does it help drive revenue growth this year? Thanks.

Speaker 2

Yes, I hope you're doing well. So I think when you think about 2024, as I mentioned, Part of it is, as I said, kind of some of the same, but if you jump off of Brian's question that he just had, we really kind of turn our attention really in the middle of last Around our asset management businesses, if you kind of go through the last couple of years and you think about the businesses individually, We filled this on with IMS to continue to drive growth with existing and new clients, but also start to lay some groundwork for a larger business globally. Sanjay, I think you've done a terrific job as we've talked about really executing a great playbook around solidifying that client base, rightsizing the and now he is in growth mode and that team is in growth mode. And when you look at the asset management businesses, we made a couple of tough decisions around kind of the structure around rightsizing some of those businesses. But 2024 is really all about getting those businesses back to growth.

Speaker 2

We feel pretty strongly And we're enthusiastic about the suite of capabilities that we have to go compete across a broader set of intermediaries than maybe we have in the past and across the broader set of institutional segments. And then another area you're going to see us lean into is around new business, around getting new organic businesses launched, doing some different things to incubate some ideas, because we feel really positive about where we stand right now and it's time to lean into some of those other areas and getting asset management back on track would really provide a tremendous amount of momentum.

Speaker 10

Got it. And then in terms of the margin direction comment and also investment for this year, You talked about margin expansion. Is this something that we should expect in 2024? Is there any Maybe the potential investment like AI that you could potentially reinvest if you kind of capture some of the upside in the business, Would you invest that upside or we should expect if AUM stay flat or go up a little bit, then we should expect margin expansion this year? Thanks.

Speaker 2

So I think we think about that in 3 different ways. If you take kind of your question, Owen, we have Things going on with automation and AI in our technology stack, in our operational stack and in our asset management stack. So we are definitely doing things there. I don't know if I would predict the outcomes of all of them. But to your point around expectations around margin expansion, We believe we can drive more operational leverage across this company through a couple areas.

Speaker 2

One is about looking at our workforce and thinking about ways that we can We leverage that talent across different areas. I think as we've spoken about before, if you look at enterprise sales as a microcosm Things that we believe we can do across the company and position the company more horizontally that manifests itself in other functions across SEI. And I'll be honest, there's going to be a continued level of discipline around how we spend money and where we spend money. And we're going to make sure that we continue to invest in our future, run the business in

Speaker 3

a way where we believe that

Speaker 2

we can expand those margins on an ongoing basis. And I think the reason that the executive team and myself are excited about that As we like what we see with the sales activity, we like what we see with our ability to continue to install clients. So we feel like if we continue to drive the right sales momentum and we have the courage and discipline to maximize the operating model. As those sales come on to SEI as actual revenue, We think that will fall further to the bottom line.

Speaker 10

Sounds great. Thanks a lot.

Speaker 2

You're welcome.

Operator

Thank you. Next, we're going to the line for Mike Brown, KBW. Please go ahead.

Speaker 7

Hi, good evening. Thanks for taking my question. Hey, Mike.

Speaker 1

I guess I wanted to

Speaker 7

just touch on the Investment Managers business. This quarter, a good result there. It looks like there were some good client installs that helped quarter over quarter growth. Net sales activities looking healthy as well. Can you just maybe touch on some of the growth potential for that business as we think about 2024 here, it seems like it's got some great tailwinds, but just love to hear a little bit more about how to think about that business in 2024?

Speaker 2

Yes, Mike, that's a great question. Phil is in the room, so I'll just let Phil answer that directly.

Speaker 6

That sounds great. Hi, Mike. So quickly, as you said, Sales were great this quarter, dollars 17,200,000 net. More importantly, year over year, they were up about 16%. So we're seeing good traction there.

Speaker 6

Margins were 34.1%, but I think if you look at without the write down, they're closer to 37%. We're investing heavily in our technology, but as Ryan said, we're also looking at automation and operational scale. So we're trying to balance what we're spending and we're trying to Just build the platform out for our clients. As far as the overall pipeline, I don't think cross sales have ever been stronger. I mean, I think we're in a great place with our clients.

Speaker 6

We're in great place with our solutions. I think everything's resonating in the market. I would say from a new business perspective, the pipeline is strong. The pipeline in globally in the UK and EMEA is getting stronger as we So every single day, we have more activity in the market. We're building our brand and we're really making a good push, a big huge push towards that.

Speaker 6

So I mean, I think we're in a good place going into 2024 and we look forward to more good things to come. Ryan, anything to add there?

Speaker 2

No, I think the only thing I would add, Phil, is I think when you look at the client engagement in IMS, it is exceptional and it pays dividends based on our service model and our understanding of positioning with the And I think the other units have actually tried to drive the same kind of level of engagement and Sanjay certainly has a Cross Banking, Paul has 110 advisors here next week. And Jay, you've been out seeing all the clients. So I think we feel really optimistic That's a significant increase that we have put forward in the last couple of years around market activity and client engagement continues and will continue to pay dividend something we're not going to let our foot off to get.

Speaker 7

Okay, great. Yes, thank you for all the color there. I guess just a quick clarification there. What is the right growth rate for that business? I guess focusing on the operating income side, Certainly, it sounds like if the margins are kind of close to that 37% level, is that kind of the natural maybe ceiling for the business?

Speaker 7

And so Would the longer term growth just generally be driven by ongoing growth of the business and therefore revenue growth?

Speaker 6

Yes. Actually, Mike, this is Phil. Dennis wants to answer that and he's pointing with his thumb higher up in there. I'm not sure exactly what that means. But what I would say is, As he said in the past, we've been in the 34% to 36% range.

Speaker 6

We'll bump around a point or 2. I think we also have to continue to invest in that business. 37% might be a little bit high. So I think it's important for us to kind of capture the market opportunity that's out there in front of us. So definitely want to continue to invest in the platform and invest in our people and sort of just drive sales growth throughout 2024.

Speaker 2

I agree. Mike, we're going to continue to invest for growth and invest for scale in that business, but there's significant opportunity for that business.

Speaker 7

Okay, great. And then maybe just to change gears to kind of the capital allocation side of the business. You guys closed on 2 M and A transactions in the quarter. Can you just maybe touch on when you might be back into the market and looking at some other inorganic growth opportunities? Those were, I guess, a little bit kind of bolt on size transactions.

Speaker 7

Would you maybe consider something more transformational? And if that's Any view into strategically what that could look like? Thanks.

Speaker 2

So I mean we're back in the market right now. So we didn't stop our M and A activity. We didn't stop our corporate development team that we put together 18 months ago. I never really know how to define transformational, but what I could tell you is when you look at the themes and the areas where we're going to continue to invest Both organically and inorganically, Paul talked about the RIA segment. That's an area we will continue to look for opportunities.

Speaker 2

The alternative space, so Altigo is one example, but we would continue to invest or acquire capabilities or assets that we think would accelerate our growth there. And some of the things that Sneha is doing in the new business area and that's around automation, AI or data. So we're pretty focused, Mike, On specific themes or areas that are hopefully really consistent with things we have talked about in the past in the investor presentation, but we didn't close the door after the 2 acquisitions.

Speaker 7

Okay, great. Thank you, Ryan. Thank you for taking my questions.

Speaker 2

Anytime. Thank you.

Operator

Thank you. And there are no more questions in queue. You may continue.

Speaker 2

Thank you. Well, as we've mentioned, I'm proud of our achievements in 2023, but we have much more to accomplish ahead. We've got to stay laser focused on innovating for the future, delivering for our clients, growing new markets and investing in our talent and capabilities.

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Earnings Conference Call
SEI Investments Q4 2023
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