SEI Investments Company (SEIC) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us. Presenting next, we have SEI Investments. Presenting on their behalf, we have Chief Financial Officer, Dennis McGonigle; and Wayne Withrow, and I'm going to read his full title because it's pretty awesome, Head of Independent Advisor Solutions by SEI. It's mouthful. And the format is, Dennis is going to run through some slides for a few minutes, then we will do some Q&A. And with that, I'll turn it over to Dennis.

Thanks, Pat. Thanks, everyone, for joining us this morning. What a difference a day makes. I'm glad the market did what it did yesterday because today would be a much more sour mood for all of us. My -- I'm -- my name is Dennis McGonigle. I've been with the company for just shy of 35 years, so through much of our history as a firm. And Wayne Withrow, who's also with me, he's been with the firm well over 30 years. So we've been through a lot with the firm, through a lot of cycles, business cycles, restrategizing of the firm, rebuilding of the firm. And I would say, speaking for myself, and I know Wayne feels the same way, we've never been in a better position to take advantage of opportunity in the future than we've had in our history. We have more assets to work with, more capabilities to work with, larger markets to sell into and many issues that our industries are facing, we are very well prepared to help our clients deal with. I thought I would try to keep this very high level for just a few minutes, and then I know Patrick wants to get to Q&A. But just to drive home a couple of points about SEI, we're a technology firm. We use technology as the core element of every solution we bring to market in support of the wealth management industry as well as a global investment management industry. So it's very important that you recognize that our roots going back over 50 years now, we're in our technology. Fintech is the new category that's kind of emerged over the past few years. And we like to say we were one of the original fintechs 50 years ago and have sustained presence and a strong presence in the financial technology space ever since. We're a business that is very much oriented around innovation, and really looking at long-term trends, long-term opportunities that we see that maybe others don't see and then innovate to attack those opportunities. And in some cases, in fact, in many cases, over our history, we're early in that. We were with the original OCIO firm, if you will, what the market today calls as CIO. 25 years ago, we were out trying to convince large pools of institutional money to outsource 100% of their assets to a single firm. Not many firms were doing that at the time. We got told no a lot more than we got told maybe and we were very rarely told yes in the beginning, but we felt convicted about it and stayed with it. The business that Wayne runs, the Investment Advisors business, we were the original what the market would tag as a TAMP provider 25 years ago. And it was a new service, a new capability of bringing -- and we brought to this emerging independent adviser space, and that has played out very well around what we were seeing in the market and how we saw the market evolving. We're an organic growing firm, so -- and we have been. It doesn't mean we wouldn't do an acquisition, and we have done a couple of smaller ones more recently. But we -- our mindset around acquisitions is, will they help us drive organic growth long term versus just buying to buy revenue to make ourselves bigger. So it's really about the company. Everything we do is about organic growth. Financially, very strong. The businesses we like are those that don't require us to use our balance sheet to make money, that while on day 1, may not show a lot of leverage and scale but we believe have a possibility as they grow to grow and scale as well to produce higher-margin businesses that also throw off solid cash flow that we then use to reinvest in the business and return to shareholders over time. And our culture, we've always touted our culture as unique, unique to SEI, and it's also something when we look at potential acquisitions, and we do look at quite a few over the course of the year or particularly over the past 4 or 5 years. Cultural fit is kind of that one of those #1 issues that if we don't see cultural fit, it's going to be a real challenge for us to make a decision to do something, because we feel that, that's imperative to maximize or optimize the value of something that you're combining with what you have today. We have a long history of GAAP profitability. So we're GAAP and only GAAP. And I put this in your purposes, but I was happy to see that Warren Buffet, it was kind of first sentence of his letter, just to emphasize that when you look at our results and you look at our results and compare them to others, that your -- you're apples-to-apples in that comparison. Now our future is really about taking advantage of the opportunities that the markets have presented us with the capabilities that we've been investing in for the past decades. Now we call those broader solutions that we bring to market platforms, and we feel very bullish about our opportunities across all of our markets over the long term that our platforms are going to be very highly adopted by our markets. Also, our capabilities have allowed us to expand our market opportunities beyond what many would consider our traditional market space. So when you look at the broad landscape of wealth management firms, you look at the broad landscape of investment management firms as well as the landscape of institutional, different types of institutional investors, our platforms are suited for many of those markets and many of those segments within those markets. Finally, innovation. We have something that we've been working on that we're in market with today that are relatively new. One is a whole service offering around regulatory compliance, global regulatory compliance. It's a big area of need in all of our markets and all of our industries. It's something we can bring to market kind of in a stand-alone manner as well as integrated into some of our other platform offerings. But we think it has a lot of potential for significant growth and will be additive over time to our core businesses as well as our IT services. So as many of you know, since we've been in business, we've only delivered technology remotely. So while the cloud, private clouds and now the public cloud seem like a more recent phenomenon, we've always been a private cloud, if you will, going back to the '70s. So we've never sold software. Very early in the days, we might have installed software in a couple of cases, but we've always been a remote deliverer of technology. From that, that 50-year history and the knowledge we've gained in terms of network services, in terms of data and privacy protection services, in terms of data center capabilities, but really running production environments regardless of where the hardware and software sits is a real skill set of SEI that we're beginning to -- we've packaged it up and now are selling into the markets we serve as an additional service, and we're starting to see some success with that. I'll skip the statistics. You're probably aware of them. I would point to this slide that we're a SaaS technology deliverer. We're a BPO firm. Many of our clients not only outsource their technology requirements to us and their needs for technology but also operations. So we have a big operation center in Pennsylvania. We have a big operation center in London, in the U.K., and we have a big operation center in Dublin, Ireland, to support the operational footprint of our clients globally. And those -- all those operations run on the same technology platforms. Following, in many cases, very similar workflows and are very integrated and we have an ability to combine our capabilities in these different footprints to deliver services to global clients as well as domestic clients. And then finally, we're an asset manager. So we manage decent amount of money for institutional investors, decent amount of money for high net worth mass affluent investors and ultra-high net worth investors. And we're one of the few firms that kind of has this unique footprint of capabilities that we bring together in different forms and fashions to meet the needs of the different markets we sell. You can consume one of these. You can consume 2 of these. You can assume all 3 kind of in an integrated fashion if you choose. One thing I think that is important also to understand about SEI is relative to many of the firms out there, we sit in a pretty unique spot in the ecosystem of financial services. Because not only are we a deliverer of services to those who are competing for business and servicing business in these markets, we also deal directly with these markets. So -- or the knowledge we gain from being feeling directly, we can incorporate back into the services we deliver to the firms we are supporting. But more importantly, we are tied into and integrated with really any participant delivering services in this market we're kind of a hub for. And that's really off the backs of our technology and operational capabilities. So we're very unique that way. And we use what we learn not only from what we do directly but what we also do indirectly or how we service or work with other third parties in these markets to consolidate the best platform solution for the submarkets we serve. If you're looking at SEI, longer term or as an investment, this is a slide I would hope you would take away the most. It all starts with innovation, and that started -- the company started off at the backs of innovation and has continued over time. It'd be very hard for a company to be in business for 50-plus years, have the success we've had and have the opportunity for future growth and success that we do have if you weren't innovating and keeping not only pace with the markets but in many cases being ahead of the markets. We're very client oriented. We're very long-term client oriented. Our clients either operate in their long-term contracts with us, where the services we deliver are so complete and so integrated into how they run their business on a day-in and day-out basis. It just lends itself to long-term relationships. We have relationships that go back 45 years with the firm. And that's as much a testament, I think, is to our ability to deliver over time as it is their ability to survive themselves and not have been gobbled up. Financially, I mentioned this is very strong. We are an organic grower. And that's our -- there are key elements. Proverbial numbers slide, which I'm sure Patrick has in his deck that you all have gone through. But one point I would of emphasis, we're a high -- we have a high reinvestment rate back into the business. And while we try to -- we use a metric of between 8% and 10% of revenue going into R&D. It's not a hard metric. I call it the canary in a coal mine metric. That if we drop below that rate, it kind of gets us to ask the question, why? What are we missing? What are we doing for the future? What are we not seeing about the future that we should be more attentive to? If it gets above that rate then it's okay, what's -- is the opportunity, really, what we think it is and make sure that we're investing our capital with the highest potential return. We also, on the bottom left, return a lot of capital to shareholders. So while we generate a lot of cash flow and a lot of capital, we reinvested in the business, that's number one. And then number 2 is return it to our investors, and it's mainly in the form of stock buyback. And that's something we've been doing for a long, long time. It's kind of baked into our capital use policies. It's not something that we turn on, turn off per se, and it's not new to us. And we don't announce big buyback programs. We're very incremental about it. Our Board is very -- it's always on the table. So you'll see us periodically announce increments to our buyback program versus we're going to buy back $3 billion worth of stock, you generally wouldn't see us do that. It is very incremental because it's baked into our capital programs. I'll leave some of this for Q&A because I think we'll get to it. But one last point I'd make is, we talked at our investor conference back in November about something we're counting as One SEI, which is a mindset that we're trying to drive through our company and kind of reinvigorate, if you will, in our company that we have a lot of assets to work with as a firm. And we want to make sure that our employees know that every asset we have in our firm is available to them to use in the markets, so they have been operative. So whereas we fell -- we fall victim to this on occasions. We're a market-oriented firm, market-oriented structure. Sometimes you get too vertical and a little too close off and you do -- if you're running one of those areas, your goal is to drive growth in your particular business line, and that's where your focus needs to be. But when it comes to innovation and delivering new capabilities and services or taking advantage of opportunities in the market, we want to make sure our employees know that something that Wayne might have built in his business is available to Steve Meyer in the banking business, something that Steve Meyer's teams might have built for the banking or investment management services business is available to Paul Klauder, running the institutional business or is available to the company, for sure, to create new innovations like the SEI IT services offering and the RegTech services offering. And that's really what One SEI is. It's not a new thing. It's just a mindset shift. And when you look at the history of SEI, in many cases, the businesses we've built started with the kernel of something we were doing for ourselves very well, that we said, well, if we do this well for ourselves, given one particular area of business we're in, why can't we turn that into a service for the markets we sell to. And our -- the IMS business we run today, that Wayne actually ran before Steve Meyer, that business came out of the fact that we were doing mutual fund accounting for ourselves. That was kind of the kernel. And we're doing it for ourselves. We're doing pretty well. Why can't we sell this in the market as a service, and that's how -- that's an example of historically how we've built the company and continue to build the company. With that, I'll leave you with the proverbial. This is before -- this is the end of the year. So for the end of January, not before last week, but I'd say long-term stock performance has been pretty attractive. And if you look at these numbers, they're great, they're historical. That's what's in the rearview mirror. But how we run the firm and the opportunities we have for the firm, we believe, have as much potential for the next 50 years, if you will, or next 20 years or even in the next 10 years that our history has already produced. So with that I'll get started.

All right. Terrific. Dennis, so you definitely mentioned organic growth a couple of times and we live in a world where it's almost free to borrow money. You guys have roughly 10% of your market cap, I think, cash, right now. You spoke about cultural fit as being an impediment sometimes to acquisitions. Is that -- how much of it is cultural fit versus strategic fit? And what sort of culture are you looking for, for that perfect acquisition?

Well, I guess, first thing, we will start off with there's no such thing as a perfect acquisition. So we're not trying to thread the needle through the needle, so to speak. We're -- so that's -- we know that if we did a transaction, there's going to be things that we're going to have to wrestle with, but the culture part is really the -- acquisitions are all about the people. The people you're bringing into your company that you're going to expect a lot from and they're going to expect a lot in return. And so you want to make sure the people fit is there, because they're going to have to get integrated pretty quickly with our -- with the folks we have. So that's why culture is important. Teamwork, most companies have really moved to a more team oriented. So I don't suggest that we're so unique that nothing would fit. But that teamwork and that ability to be open-minded is important. But strategic fit is also important. So what are the assets that we're interested in, in a company that we might be looking at? How would they fit with our existing assets? Will they replace some existing assets, which is essentially a very good thing? Would they complement existing assets? Or would they be just another copy of what we do already? And then eventually, you're going to run up into a decision where you're going to get rid of one of them to optimize the return value, and then there's this notion of you're buying 100% of a business, but you really only want 70% of it, and the 30% that you really don't want is a real distraction. And it tracks from the value and becomes a bigger headache than you had anticipated. And Wayne and I have been around long enough from the '80s that -- we have done some larger acquisitions, and we had some experience with them that where we run into that issue now, Warren, it is dated. But that's the other issue is you're paying 100% for something you really only want 70% or 60% of, and then that -- and while you're trying to optimize that 60% or 70%, the 20% or 30% or 40% is kind of hold you back. And it takes a long time to not only set you off track with the business you bought, but it sets you off track on the business you're trying to run every day. So that's why we're very discerning, I guess, in our approach. Wayne, you want to...

The only thing I would add to that is, I'll tie it together with your prior comments. If you look at the 30% you don't want, that 30% also translates into 30% of the people. And if you know you don't want it and that's the path you're going to walk down and if your people are one of your most important assets and we're a collaborative organization as opposed to more of a hierarchy organization, having people pool in all in the same direction and being that we're more longer-term focused and sometimes, you've got to buckle up when you go through the rough spots because you're going through a longer-term vision. Some of these -- the survivor guilt when you go through some of these organizations is a distraction, too. So you need to factor that in. I mean, it ties into the culture comment also.

So then key to your organic growth, I think, is your One SEI initiative that you spoke about at your Investor Day and you spoke about a little bit just now. Can you provide some examples of how One SEI has led to some incremental sales activity since you implemented it?

So we've spoken about one transaction last year when we signed CIBC onto our wealth platform. And that's a combination of the wealth platform capabilities that we've built up through our banking business and Waynes' adviser business, but also some of our investment management services capabilities as well as the ability to integrate in that ecosystem picture more directly with some other existing custody platforms that they are using. So to bring a much still kind of environment to the client led -- on the front end, led, driven by our technology assets. And then on the back end, it kind of gets distributed because the client, in particular, didn't want to have to -- didn't want to go through the disruption of changing out some of those back office systems. So that was kind of the first example. We just announced a -- we didn't -- we haven't put the name out there yet because we're working with the client on this, but another large client, global client that also will avail itself of not only our wealth management platform capabilities globally, but also some of our investment management services capabilities in the investment management processing space. Waynes' has a -- maybe you want to talk about what you're...

Yes. I mean, and I hate to go back to the same old thing, but I'll go back to the culture here, I guess. So we're releasing -- we're in beta right now, a brand-new capability in the wealth platform, which takes basically prospect generation, proposal generation and account open and account funding, and it's integrated into a single technology platform and one process end-to-end. So you don't have a prospect system, proposal system, account open in your all -- it is all this one set of dating this all the way through. And going through that process as we started building -- and the product managers have a lot of pressure to get to market quick and to get to market cheap for me. So I take the blame for this. And as we go through it, I said, "Geez, some of that sounds like the account open markets, they have an IMS, who they call One SEI trade. That sounds very similar." And yes, it's similar, but the market tech is little bit different, and it doesn't go in to the 80% or above it. So yes, but we should use exactly what they use, we should just change it. Yes, we could do it, but it would take us 6 months longer, and it will cost us an extra $1 million. We said, okay, well, the homework is not to figure out how to get the market faster and not use it. The market is -- how can we use it and eliminate the $1 million and the 6 months longer. And it's a cultural mindset because of the SEI trade, because everyone -- it's not a perfect culture where we're all cooperating and all doing the same thing. Everybody is trying to run after your financial goals. So it's the -- how do you push the mindset just a little bit further where -- let's start with how we're going to do One SEI and not have it be an afterthought, because if it's an afterthought, it's not a thought at all if you will find a way back into it.

Got it. And then maybe building off of that to some extent, in your private bank segment, you just put together back-to-back pretty strong sales quarters. To what extent is that an execution of the deal that have been in a pipeline for a while? To what extent is it due to One SEI, or just maybe a change of philosophy with a new leader in charge of that segment?

But I'd say it's a combination of lot of things. And some of the transactions we signed more recently are, they are transactions we've been working on for a while. So these are the large complex institutions that we've been engaged with, and we are dealing with large complex institutions, particularly in the higher end of the market. And those engagements take a long time to work through, not only the complexity of the clients' business, but then the kind of bureaucracy of the process, if you will. But the one thing with CIBC that kind of broke the ice was the One SEI, bringing some of our investment manager services capabilities into the picture. That kind of woke the CIBC folks up to, "Hey, it looks like you actually can't deliver this SEI?" Because we were a little too isolated in our kind of conversations with them, I'd say, up to that point. So -- and we've talked about that relationship for a little while. Prior to that, there was a firm out on the west coast that was a multiple product use of SEI across different spectrums. Now their relationships were established at different points with SEI, but we started to bring that relationship together kind of in a product standpoint. And I think that also got people thinking, well, maybe we should have more on the table with clients to consider. So selling a large global bank, you're not going to pull that off in what we sell in 6 to 12 months, and you need to be in there for a while. So -- but I would say that Steve's energy and the kind of focus that he's brought to the business, since he started to run the banking business, together with the investment manager services business, certainly has been a propellant. The future, the pipelines, we're busy. I mean, his teams are very busy. The company is very busy because there are kind of reaches beyond just the market units that we operate in and some of these prospect engagements. So we're pretty optimistic about not only what we've been able to deliver but what we're working on. And I don't know if your business is just equally as optimistic more so.

Yes. I mean -- we were -- we are very optimistic on the business. We've gone through -- this goes back to we innovate, and we've been around a little more than 50 years, and we've just gone through -- as Patrick's familiar with, we've just gone through a rewrite of our whole wealth management platform that's allowed us to service banks globally throughout the world. We see probably the only system around there, but it does that, but it's the same system that we use in -- via the marketplace. It's well over $1 billion investment. But it's the fourth time we've rewritten the program in 50 years. It isn't like we just woke up one morning to do this, and what time we did, and we have this constant reinvention. And not only do we innovate, but if you talk to our CEO, his goal is 10% to 12% of our revenue to be reinvested every year in R&D, reinventing things. And I think we're just at the back end of the majority of that platform being sort of done for us, and we've got the migration complete. And for those of you, who don't underestimate what it takes, it's the largest profit generator for SEI, this is big business and you're moving the entire platform that the business runs on. So the internal operation is disruptive. The clients are disrupted. The advisers are disrupted. It's a big ask and that's behind us now. And -- but not only is the disruption behind us, but all of the glory. So when you look at things like online models managed, and online UMA, all of this sort of the vision of the future is in place and kind of working, and we can focus on selling the value of that now, and that's what's really, really exciting. We don't have to worry about selling the migration stumbles.

Terrific. Unfortunately, I think we are out of time. So thank you, guys, very, very much for being here, and we will have a breakout session downstairs.

Thanks, Patrick. Thank you all for coming.

Thanks.