SEI Investments Company

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Third Quarter 2020 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 you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Al West, please go ahead.

Thank you, and welcome, everyone. All of our segment leaders are on the call, as well as Dennis McGonigal, SEI's CFO, and Kathy Heilig, SEI's controller. I'll start by recapping our situation in third quarter 2020. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. And after that, each business segment leader will comment on the results of their segment. Then finally, Kathy Hiley will provide you with some important company-wide statistics. As usual, we will field questions at the end of this report. Now, before we cover the results of the third quarter, I will speak to the set of circumstances we face today. Around the globe, we are still dealing with the COVID pandemic. From the beginning of this health crisis, our priority has been on the safety and health of our employees and their families, along with the seamless delivery of service to our clients. I am incredibly grateful to our workforce for transitioning both workplace to home and home to workplace, and all the while supporting our clients, each other, and our communities. The strength of SEI shines best when the challenges are extreme. At SEI, we take immense pride in investing for the long term. We have proven business models that have been shaped over the past 50 years of experience. They are the bedrock of our ability to weather the uncertainties of today and emerge from the current crisis stronger and better positioned to take advantage of tomorrow's opportunities. Our secret to success is straightforward. Remain focused on keeping our workforce healthy and productive, invest in our best in class technology, innovate continuously and deliver world-class service to our clients. We'll also be relentless in executing on our strategic vision and launching the growth generating initiative we believe will be at the heart of our future successes. We look forward to sharing our progress with you. So let's turn our attention to the financial results of the third quarter 2020. Third quarter earnings decreased by 16 percent from a year ago. Diluted earnings per share for the third quarter of 75 cents is a decrease of 13 percent from the 86 cents reported for the second quarter of 2019. We also reported a 2 percent increase in revenue from third quarter 2019 to third quarter 2020. This year's third quarter results benefited from a rebound in our capital markets. Our non-cash asset balances grew by just under $10 billion from both cash flows and market appreciation. LSV's balances during the third quarter gained just under $1 billion. Also during the third quarter, we repurchased approximately 2.1 million shares of SEI stock at an average price of $51.54 per share. That translates to approximately 109 million of stock repurchase during the quarter. Now, this quarter, we also continued our investment in the growth-generating initiatives. The newest effort is One SEI, which is a large part of our growth strategy. As you recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets, and all other platforms. As a byproduct of the investments we made in the third quarter, we capitalized approximately $6.1 million of development and amortized approximately $12.2 million of previously capitalized development. To date, we have not capitalized any of the one SCI work. Now turning to revenue production, third quarter sales events, net of client losses totaled approximately $28 million and are expected to generate net annualized recurring revenues of approximately $15 million. Clearly, we are encouraged with this year's sales results. They reflect the fact that although Throughout the company, we have successful and entrepreneurial sales teams driving revenue. Our unit heads will speak to their specific sales results. We have three business objectives. The first is to deliver soft, smooth, safe operations. The second objective is to grow our business by helping our clients grow. And our third objective is to continuously innovate so we can keep growing in the future. To reach these objectives, we know that things will never be the same. So we have been busy adapting to new mental models and realities. We feel ready to capture the opportunities inherent in significant change. Now this concludes my formal remarks, and I'll turn it over to Dennis to give you an update. on LSV and the investment in our new business segment. And after that, all segment heads will update the results in their segments. Dennis?

Thanks, Al. Good afternoon, everyone. I will cover the third quarter results for the investments in new business segment and discuss the results of LSV asset management. During the third quarter 2020, the investments in new business segment continued its focus on the ultra-high net worth investor segment through our private wealth management group and additional business and research initiatives, including those related to our IT services business opportunity and the modularization of larger technology platforms into standalone components for the wealth management and investment processing space to deliver on our One SEI strategy. During the quarter, the investments in new business segment occurred a loss of $9.8 million which compared to a loss of $4.5 million during the third quarter of 2019. This increased loss reflects an increase in investments specifically related to our One SEI strategy, which we have discussed in the prior couple of quarters. Of our expenses in this segment, approximately $8 million is tied to that effort. The One SEI strategy is a company-wide initiative to open business opportunities across our entire company, as well as creating new business lines. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $28.3 million in income to SEI during the third quarter of 2020. This compares to a contribution of $37.6 million in income during the third quarter of 2019. Assets during the third quarter grew approximately $1 billion. LSB experienced net negative cash flow during the quarter of approximately $2.2 billion, offsetting market appreciation of approximately $3.2 billion. Revenue was approximately $94.9 million for the quarter, with no performance fees. Since I know the question is coming on expenses, I thought I would address that. Expenses grew approximately $13 million, or 4%, from second quarter 2020 to third quarter 2020, Just under one half of this expense growth, approximately $6 million, relates to salary and other compensation adjustments we made at the beginning of the quarter, consistent with our annual compensation process for most of our workforce, as well as continued hiring in areas of growth. In addition, approximately 20% or $3 million was due to a spike in health insurance costs during the quarter, which are not predictable, and driven by actual experience since we are generally self-insured. The final 30%, or approximately $4.5 million, is essentially one time in nature related to some severance expense and professional services fees and costs associated with trade corrections as a result of a couple of incidents disclosed in our second quarter 10Q. These costs are spread across our segments as well as G&A. I hope that breakdown helps. Finally, our effective tax rate for the quarter was 21.4%. I will now take any questions you have.