SEI Investments Company (NASDAQ:SEIC) Q1 2023 Earnings Call Transcript

SEI Investments Company (NASDAQ:SEIC) Q1 2023 Earnings Call Transcript April 20, 2023

SEI Investments Company misses on earnings expectations. Reported EPS is $0.79 EPS, expectations were $0.82.

Operator Ladies and gentlemen, thank you for standing by. Welcome to the SEI First Quarter 2023 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. [Operator Instructions] As a reminder, this conference is being recorded.I would like to turn the conference over to our host, Ms. Lindsey Opsahl. Please go ahead.Lindsey Opsahl Welcome, everyone. Thank you for joining us on today’s First Quarter 2023 Earnings Call. Joining me on today’s call are Ryan Hicke, SEI’s Chief Executive Officer; Dennis McGonigle, Chief Financial Officer; and the leaders of our business segments, Paul Klauder, Phil McCabe, Sanjay Sharma and Wayne Withrow. Mark Warner, 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 Hicke. Ryan?Ryan Hicke Thanks, Lindsey. Hello, everyone. I hope you’re all doing well and enjoying the beginning of the spring season.

We are nearly a year into the leadership changes at SEI and I am optimistic about our future and our ability to manage through times of market uncertainty.Turning to this quarter’s financial results. First quarter revenues declined 19% from a year ago, first quarter earnings were down 53% from a year ago. First quarter EPS of $0.79 decreased 42% from the $1.36 reported in the first quarter of 2022. Adjusting this for the $88 million one-time revenue event in Q1 2022 which we discussed at the time, revenue declined 5% and earnings per share decreased 11%.In the quarter, we repurchased 1.4 million shares of SEI stock at an average price of $59.03 per share. This translates into $80.3 million of stock purchases. We had a solid sales quarter. Net sales events totaled approximately $23.4 million, $19 million of which were net recurring.This was an increase over the $11 million net recurring number we’ve reported in the previous quarter.

First quarter sales reflect two important indications. First, the positive direction in which we are moving and the increase in overall sales momentum across SEI. Second, when you get underneath the numbers, sales results and pipelines are showing traction in the areas where we have increased our market focus and attention.I am encouraged by the sales results relative to last quarter, particularly the types of clients we are winning and the ability to install them quickly without significant investment to realize the revenue.I’m also happy to see positive sales contributions from multiple business lines across SEI. We remain immersed in closing sales and building our sales pipelines. Additionally, we have increased our focus on expense management.

We will constantly assess and revise our alignment of capital to opportunity and will make tough decisions to improve profitability, but without cannibalizing our medium to long-term growth agendas. Dennis will go into further details on our financial results.Turning to our lines of business. The Investment Managers segment started the year well. I had the opportunity to attend our client conference this quarter and the engagement and commitment we have from this client base gives us great pride. We truly have clients that value the strategic importance of SEI to their growth agendas.We are executing very well on the new business front. In our Alternative segment, we on-boarded a large West Coast private equity firm as well as a competitive takeaway of a New York based real estate manager.

Existing clients raised and deployed significant capital across private equity, private credit, real estate and infrastructure strategies during the quarter. The traditional business has been growing steadily with new clients and expanded product lines and we see our CIT business experiencing significant growth.We recently signed a new SMA deal with a large US manager, opening up more opportunity and we’re having success and increased traction in our client base with SEI Sphere, securing a large traditional client in the first quarter. On a global level, our UK, European and Irish businesses show positive growth. Our private equity regulatory services and private credit offerings expanded through cross sales with existing clients.Turning to Investment Advisors.

We have positive momentum in our business with almost $500 million in net cash flow. We saw more traction in the RIA segment with strong flows in the quarter. We are excited about the growth opportunities this segment presents for SEI across our technology, investment processing and asset management capabilities.We continue to work through the shift of product types used by our clients from mutual funds to SMA, EPS, direct indexing and third-party branded products. We expect to see this movement of assets continue, while there may be a drag on our revenue rate earned on managed assets in the short-term, the richness of our offering enables us to keep and capture assets supporting our long-term growth and health.Our broader investment solutions are increasingly resonating with intermediary clients and we also continue to invest in product and technology innovation.

As I have mentioned many times in the past year, the growth of alternatives for all SEI segments is a key strategic agenda.During the quarter, we began the process of registering two new alternative investment funds, the liquid alternative funds and the alternative income funds. We also see terrific adoption of SEI connects investor portal with clients having access to improve capabilities around advisor and end investor engagement and collaboration tools.In the Institutional Investors segment, we advance the combination of OCIO and ECIO platforms to larger sophisticated investors that in great delegation, but want more real time portfolio information. Corporate defined benefit curtailments and annuitizations continue to be a headwind in the UK and US and were the primary reason for first quarter losses.However, we managed to offset some of those losses by improved cross sales and lead generation for other SEI services in our private wealth management business.

In the Private Bank business, we had a very active quarter. We signed two new clients in the quarter and successfully implemented two clients.We also re-contracted three clients, evidencing our focus on client engagement and retention to propel growth. One of the major points of stakeholder feedback last year was to get the Private Bank business back on a growth trajectory and improve margins. I believe our results this quarter really display the great job Sanjay and his team have done in a short-time to solidify the foundation for banking, manage expenses thoughtfully, but put us in a position to start adding profitable revenue moving forward.We reoriented our sales focus over the last nine months with clear segments, including the US community and regional bank space, UK private client investment managers and wealth managers and a targeted universe of larger US institutions.

Those strategies have translated into a more robust and predictable pipeline for SEI.And we are focused on advancing those prospects through the sales funnel to get deals closed, install that revenue and expand the pipeline. Finally, we had modest positive sales in the quarter and SEI’s family office services business as well as SEI Sphere, both within existing markets and standalone. And additionally, our partnership with LSV remains strong.On the talent and culture front, we have remained steadfast that to achieve our goal, we need to embrace change and align top talent across SEI to accelerate our growth. Today, I would like to highlight a couple of immediate leadership changes. Paul Klauder will lead our Investment Advisors business, which will expand to focus on North American intermediaries.

Jay Cipriano will take Paul’s current role as Head of our Institutional Asset Management business and join the current executive management team at SEI.Jay was most recently Senior Vice President and Head of SEI’s Alternatives Processing business in the IMS segment. Both will report to Wayne Withrow. These leadership moves give us greater opportunity to maintain and drive success in both the short and medium-term, while also driving talent mobility and opportunity across the organization to position us for the future. Congratulations to both Jay and Paul.We will be issuing a press release tomorrow with the detailed changes in new leadership structure. So in summary, SEI is going to be very decisive and focused on the following, driving sales momentum and getting more engines growing like we have with the IMS segment, managing our expenses and increasing earnings per share, investing in talent and solutions to expand new and existing market penetration.This concludes my prepared remarks.

I will now turn it over to Dennis to discuss our financial results for the quarter. Dennis?Dennis McGonigle Thanks, Ryan. I will cover information related to the quarter for the company and units. As Ryan mentioned, EPS for the quarter was $0.79 a share, which compares to $1.36 during the first quarter of 2022 and $0.83 for the fourth quarter of 2022.Revenue for the quarter was $469 million compared to $581 million in 2022 and $457 million in the fourth quarter. A reminder that the first quarter of last year included a one-time $88 million revenue event that equated to approximately $0.47 in the earnings per share. Adjusted for that, revenue would have been $493 million and EPS would have been $0.89.Total expenses for the quarter were $367 million, which compares to $367 million last year and $363 million in the fourth quarter.

Expense management as a corporate level has been and will continue to be a focus as we grow revenue. On the sales front, in our technology and investment processing businesses of private banking and IMS, net sales events totaled $21.2 million and are expected to generate $17 million in recurring revenue.In our asset management related businesses, net sales were approximately $1.1 million. In addition, we added an additional $1 million in sales from our newer initiatives. Total sales were $23.4 million, of which $19 million is recurring. Private banking sales were $2.5 million, of which $700,000 is recurring. This reflects two new SWP sales in the US. We also recontracted three clients during the quarter, representing $3.4 million in annual recurring revenue.During the quarter, we successfully installed two clients on SWP.

The current backlog of sold, but expected to be installed revenue in the next 18 months is $40.9 million. We are scheduled to install approximately 50% of this by the end of the second quarter. We have a clear focus on installing our backlog on-time to enable our clients to grow and to drive revenue matriculation SEI.Asset management revenues and private banking were up slightly during the quarter as a result of market appreciation and positive flows of approximately $304 million. Expenses in the quarter were flat from the fourth quarter of 2022. This reflects our focus on expense management as Sanjay and his team reset the foundation of the business for growth.On the IMS front, net sales for the quarter were $18.7 million, $16.3 million is recurring.

During the quarter, we recontracted 11 clients totaling $3.1 million in annual recurring revenue. Revenue for the quarter was up compared to fourth quarter, reflecting the impact of capital markets and client installations. Expenses were up slightly from the fourth quarter, as we continue to invest in talent to support our growth. Our backlog of sold, but expected to install in the next 18 months recurring revenue is $27.5 million.For Investment Advisors, net cash flow was approximately a positive $466 million. This reflects increased flows into strategic programs and products we have launched over the past few years, offset by negative flows in mutual fund products. Our newer offerings are helping us move the business forward, providing more choice to our clients and helping us offset the negative flows we see out of mutual funds and the revenue impact from them.Revenues for the quarter were up slightly from fourth quarter as a result of capital market performance during the quarter and net flow activity.

Expenses were up slightly due to asset appreciation. We recruited 46 new advisors during the quarter, five of which are the newer RIA channel.In the Institutional Investors segment, net sales events for the quarter were essentially flat. The unfunded client backlog of gross sales at quarter end was $2.2 billion. Revenues for the quarter were flat from fourth quarter due to capital market activity, offset partially by net client fundings. We continue to see pricing pressure across all institutional markets and continued headwinds in the corporate defined benefit segment globally. Expenses were also flat, reflecting general expense management.In the Investments in New Business segment, revenues and expenses were flat to fourth quarter. We had net sales of approximately $1 million in the quarter.

We expect expenses in this segment while shifting to and supporting newer initiatives to remain in this range.Moving to LSV. LSV produced $28.9 million in profit during the quarter. This compares to $31.7 million during the fourth quarter. Revenues for LSV were $98.2 million compared to $107 million in the fourth quarter, which I’ll remind you included $13.4 million of performance fees.LSV recorded performance fees of $2.5 million during the first quarter, reflecting continued positive relative performance. Core revenue growth as a result of investment performance and capital growth in assets, offset by net negative client flows. While sales in the first quarter were a challenge, LSV has an active pipeline and positive performance will help.Our tax rate for the quarter was 23.6%.

This is elevated over fourth quarter, which was 18.1%. This higher rate is due to a reduced level of option exercises and the related tax timing difference benefit received from those. You could expect our tax rate to be in this range during 2023.That concludes my remarks. As a reminder, all of our unit heads are on the call and we will now take any questions. Thank you.

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Question-and-Answer Session Operator [Operator Instructions]

And first we’ll go to the line of Ryan Kenny with Morgan Stanley. Please go ahead.Ryan Kenny Hey, good afternoon.Ryan Hicke Hey, Ryan.Dennis McGonigle Hi, Ryan.Ryan Kenny Couple of question. So first wondering if you could touch on some of the recent events in the banking sector. One, do you have any direct exposure to any of the banks that have had issues?

And then number two, how should we think about the impact, if any, on your pipeline and appetite from banks right now for new sales? It looks like sales held up, but would be helpful to get some color? Thanks.Ryan Hicke That’s great, Ryan. Sanjay is in the room. So I’ll let Sanjay comment. So you could break to get those questions, Sanjay.Sanjay Sharma Yeah, so first one is about the Silicon Valley Bank Republic. So brief background before I could answer the questions. So Silicon Valley Bank acquired one of our TRUST 3000 client. And during the period of uncertainty, we acted as an excellent partner and performed our fiduciary responsibilities diligently.Essentially we and they were, are — they were and they are BAU. The client is smaller relative to our average client size.

The acquired business is still with us and it’s supported by our TRUST 3000 platform at all basis. And we have not seen any significant change to their business. During that uncertain period, we acted as a good partner. We have received excellent feedback from our clients about how we supported them during this period of uncertainty.Now going on to the second question that how it has impacted our pipeline or Regional Community Bank segment. Our belief is that such instability cycles generally result in increased M&A or consolidation activity. As consolidation occurs, the need to scale, integrate and create efficiencies increases at the consolidative side. These needs do present opportunities to further grow our business footprint as outsourcing function in which SEI excels and partner with our clients is a great period of growth for clients as well.So M&As are always very challenging, as you have to deal with the business, operations and technology rationalization, consolidation, while ensuring you don’t lose the acquired business.

So SEI has significant experience in this space and we are very well-prepared to help our clients to acquire and grow their business. That’s the kind of traction we are seeing in our pipeline as well.Ryan Kenny Thanks. And shifting gears to expenses, the pre-tax margins have been in the low 20s for a few quarters now, but below your usual levels in the high 20s. Should we think about that as a run rate going forward? And if not, how should we think about the timelines to get overall margins up? Is there a mix shift between the businesses in that? And if you could layer in the outlook for margins across the various business lines that would help.Ryan Hicke Sure. So I think from our — from my perspective the margin improvement will come from revenue matriculation and growth and the ability to drive, get that to the bottom line.

We’ve seen more evidence of that in the first quarter as we do get revenue improvement across our different business lines.But also, as you know, in the asset management related businesses, when you have market contraction, which we had last year and you have revenue contraction as a result and has a pretty direct impact on our margins. I think as some sense if markets continue to improve and we capture revenue just from that element of our business model that tends to get to the bottom line. So that will help margins kind of get back to closer to more historical levels.So our business models haven’t changed, our approach hasn’t changed, our scale and efficiency capabilities haven’t changed, although we did one business line, particularly Institutional, we do have some pricing pressure.

It’s still a highly scalable business with revenue growth. So I will be optimistic that margins will continue to improve as topline improves.Ryan Kenny Thank you.Operator Next we’ll go to the line of Owen Lau with Oppenheimer. Please go ahead.Owen Lau Yeah, thank you for taking my question. Could you please talk about how the activity in the PE space has any impact on IMS? I mean it looks like some of this activity has slowed down a little bit, but some of these larger firms can still waste money and waste external fund. How do you think about the potential impact here? Thank you.Ryan Hicke Hey, Owen. It’s Ryan. I hope you’re doing well. Thanks for the question. Phil is in the room. I think it’s a great question and I’ll turn to him. He can give you an overview kind of not just maybe in the PE space for what we’re seeing across the board because this, yeah, as I mentioned in my opening remarks, not only does the sales results remain pretty strong across the board with IMS, we’re really encouraged about the pipeline that especially offset from existing clients.