SEI Investments Company (SEIC) Earnings Call Transcript & Summary

All right. Great. Good afternoon. My name is Rajiv Bhatia, and I'm the analyst that covers SEI Investments. We're pleased to have with us today SEI Investments' CFO, Dennis McGonigle; and CIO, Ryan Hicke. Dennis has served as SEI's CFO since 2002. Ryan has served as SEI's CIO since 2015, and previously, he led the company's wealth platform business in the U.K. Given the firm's 5 differentiated segments, SEI is one of the more unique companies in my coverage universe. Just so everyone knows, we have about 45 minutes today. And I have a series of questions that I'd like to get through, but we'll leave time for the audience Q&A.

So just to start off with, at Morningstar, we think a lot about economic moats or sustainable competitive advantages. We think SEI has a moat, but I'd like to hear what you think are the company's key source of competitive advantage.

Sure. I think at SEI, all things start with technology. And since that's our roots, the roots of the company going back 50-plus years and continues to be a key sustaining element of the firm, a competitive advantage, we believe, in all the markets we sell into. We really have a 3-pronged element to our moat, so to speak. One is, our technology and our technology capabilities, both from a software delivery, processing and production capabilities. And they stretch from the front office of our clients to the back office for their own utilization or for our own, and running the second leg of our stool, which is our operational services capabilities. So not only are we very strong technologically in what we deliver to markets, but we also support our clients as both consumers of technology as well as using our operational capabilities from a BPO standpoint, for them to outsource operations to us. So those 2 pillars of excellence, either stand-alone or combined, create a pretty big moat. And then finally, our asset management capabilities and our approach to asset management, being very strategic [indiscernible]. We were early initiators of goals-based investing and a goals-based client process across all of our markets that we serve. And what makes us unique relative to our moat is all 3 legs of those stools either independently, stand-alone or very richly when they're combined together. And in some of our markets, all 3 come together, in some of our markets, 2 of those come together, but that creates a pretty wide moat to allow us to sustain our competitive advantage over time.

That's helpful. And then you've also talked about the One SEI strategy. I guess for investors who are not familiar, maybe can you provide a brief overview of like what One SEI means? And how do you think One SEI enhances your firm's competitive position?

Sure. So I'll speak kind of at a high level about One SEI and then, Ryan, if you can take the kind of what we're doing execution-wise there.

Sure.

As we spoke last November at our investor conference, One SEI, first and foremost, is a mindset. And we wanted to make sure that internally, we reinforce the mindset within our culture that all assets that SEI has and can bring to bear in our markets are open to everyone to -- within the company to create or deploy new solutions, combine capabilities to solve client problems and to enhance the richness of what we bring to bear for our customers. So the first and foremost was an internal element that really drove through our culture. Secondarily, it is in market applying our assets, if you will, in different combinations to solve based on the unique needs of our clients. And so taking some of our capabilities, arguably that we've built in our investment manager services business segment, that support manufacturers of product and combining those with elements that we have on our private banking segment around wealth management, because many of our clients are both in the wealth management business with their own manufactured product, and we can help them kind of across the full spectrum. Most recently, we launched a program and solution set to generally jumbo institutional pools of assets, combining capabilities from our investment manager services business with our asset management or OCIO capabilities that we've traditionally sold in institutional markets to provide a richer solution to those very large institutional owners of assets that want to do some things themselves, need some operational capabilities, but also would like to have some complementary asset management capabilities running their assets. So they are kind of 2 over the top examples of how we're deploying it. Ryan, maybe you want to talk more granularly about some of the work we're doing technologically there?

Yes. No, that's great, Dennis. I think then at the execution level, we started this a few years ago, and it's really just gotten great momentum is to think, I think, from a product management all the way through to development perspective, making sure that we are looking at how we are building our technology with more modularity from an architecture standpoint, but also kind of harnessing more of the capabilities that are available in the market for integration. We've obviously introduced a lot of APIs into our technology for the ability for our assets to speak to each other, for lack of a better term. So I think at the -- when you look at technologically, how we're executing, I think it's not just a mindset in terms of how we're building the technology, but when we're thinking about new products, I think it's taking more of an enterprise-wide perspective of saying, what other assets do we have today that we have built over the years, that we may be able to change the integration or technology of some of those assets to allow those things to be combined as opposed to having to build something new each time? And that has obviously gotten tremendous momentum for us the last couple of years.

Got it. And just on the technology point, I mean investing definitely has been a big focus for SEI. I mean you spend almost 10% of your revenues on R&D. And yes, you remain committed to investment spending, even in uncertain times. What new projects or initiatives are most exciting to you and perhaps that are underestimated by analysts and investors?

Well, I'd stay on that SEI One theme because that is a project, right? I mean -- so when we talked about this last year, we started this move towards, I think, more of a service-oriented modular architecture about 4 or 5 years ago. So the things we've been building new have been built with those capabilities. We don't need to go back and componentize everything we have. But SEI One has been really positioned correctly internally and externally as a project because we've really looked across the company and the assets we have and say, how do we actually get those things unlocked, for lack of a better term? So I think that's something that is really exciting when we see the potential of both our internal and external consumers being able to look across our entire range of assets and package and position those differently or together for different markets or existing markets that want to consume more SEI services. So as you mentioned earlier, I mean, we've built up a tremendous chest of assets and capabilities over 51 years, that the opportunity to unlock those and allow those to go more horizontally is really exciting.

Got it. And then one thing I...

Dennis?

I would just add, some of these -- there's real excitement around what we're doing in the adviser channel, now that we have kind of completed the conversion and are fully engaged in selling the full stack of SWP capabilities, both the technological and operational and asset management. It's an open platform. We are strategically oriented from an asset manager standpoint, which I mentioned earlier. And we're deploying those kind of strategic excellence, but allowing advisers to use other fund families or other asset types, non-SEI assets, components in the deployment of those strategies. And that's, we believe, the right direction long term. Yes. So SWP as a technology platform and then the services that go along with it, we're really in the early stages of generating value from those -- for that asset, kind of broad asset. In addition, there are some new things that we have begun to work on and have launched. So one is our global regulatory compliance capabilities. That's very much a combination of technology and operational services. We think that has great promise, given the ever-changing landscape on the regulatory front in all jurisdictions. The firms more and more are looking to the market for solutions there. And then one that Ryan is leading in the IT services space. Ryan, maybe you want to spend a minute on that, showing early promise.

Yes. Absolutely. So in the IT services business, I mentioned at the Investor Day last year to talk about that we've taken the opportunity to look at the capabilities that we have in-house from a information technology, when you really think about kind of 3 pillars, just kind of hosting services, security operations center and network operations center and looking at how we can bring some of those platforms and capabilities to organizations to help them really better manage their own infrastructure. So we talked about a prospect at the end of last year, which was a bank without wealth assets. We signed that. That prospect is now a client. We signed that firm. It's a small midsized bank in the southeastern part of the U.S. and where we get very excited about that opportunity is the ability for those firms to grow organically, and we participate in that. So as they expand their footprint with more branches, more employees, that's more networks for us to protect, more endpoint protection, e-mail protection, et cetera, in that cybersecurity operations center. We actually signed another client about a month ago. So we're really excited, I think, about the opportunity for us to take more of that technology solution out to the market, and we're not constrained there by banks that have wealth assets, we can take this out to our traditional client base as well as kind of adjacent client bases that may not have -- fit our normal criteria.

Got it. And on those like clients that are not like your typical wealth clients, like how much do you think that expands the potential addressable market?

Yes. That's a great question. So if we just take -- obviously, just looking domestically, Rajiv, at that, there's about 1,000 banks and credit unions that don't have wealth assets today, that don't have a wealth management business. So when you look at those alone as a potential universe for us to go talk to because we understand the regulatory environment, we understand how those banks operate. Some of those banks may actually want to get into the wealth management business, which is another opportunity for us. So they're not -- there's -- I would say, the quantity of firms out there is large, but most of those are small, midsized organizations. So these aren't huge deals, but they're deals that these firms have a growth orientation. We can definitely grow over time with them, and that I think is consistent with a lot of our other businesses. And I think the other exciting dynamic there is the time from kind of sales to implementation is much shorter. Because we are able, whether that firm wants to host their capabilities here at SEI or whether they want us to deploy our services in their current data center, we have both capabilities. So the example that we used at the Investor Day, that firm signed at the end of January, and we had them live up and running in the middle of March. So I think our ability to win new business, there's a universe out there for us to continue to expand. But I think the cycle from sales to implementation is a lot shorter than maybe some of our other businesses.

Got it. That's helpful color. Just kind of moving to your private bank segment. You've had some nice wins recently, including HSBC's Global Bank and then CIBC's U.S. Wealth Management business. Like what do you think is driving that success? And has COVID-19 disrupted the sales pipeline at all?

[indiscernible] [ continues after the promotion ] [indiscernible].

You're cutting out a little bit.

That's what's driven that success, is the new promotion and [indiscernible] we have in the market around our capabilities in the wealth management -- global wealth management technology space. So Rajiv, from our conversations [indiscernible] clients to make [indiscernible] and we [indiscernible] [ because it's hard to look in the case ]...

Dennis, you're cutting up a bit. It's coming over a bit garbled on my end.

Okay. How's this?

All right. That's better.

So just kind of sticking with it, our clients are making big strategic decisions. We have been able to support them through that decision process and evidence to them through real client implementations and activity, our ability to deliver and that's how we get these deals over the finish line. Plus, I think when our prospects are looking to the market for a comprehensive solution, the one that truly solves their long-term strategic business issues around technology infrastructure, operational infrastructure and the ability to grow and expand, the ability to consolidate different structures they currently have to get more efficient, we're there with a proven ability to do that. Now we'd like to -- we feel good about the momentum we have. The COVID situation, we've been able to certainly sustain the engagement with our prospect base and our client base. We've done client implementation business in a virtual environment, if you will. And so we're able to prove to clients that we can bring them live, even in this environment. I think Steve Meyer has spoken about the larger, more sophisticated clients. It's likely that the longer we're in this environment, it will just extend some of those sales cycles. There are elements of their buying process that, from a due diligence standpoint, like physical visits, that might get to wire slow things down. But for the most part, the momentum on selling and sustainability of momentum has been surprisingly very good, really, across the company. I think even in some markets, there has been a little bit of acceleration, Paul Klauder would say, in institutional business. He's seen more RFPs in this environment than prior. The IMS business has continued to do well. Cross-selling has been very healthy as clients look to roll out new products in this environment as well as new client sales are continuing well. But also firms are seeing that their ability -- their responsiveness to this type of environment and to support themselves with their current technology, current operational footprint is, in some cases, somewhat challenged. So we're -- we feel good about the activity. We just have to keep the momentum on closes.

Got it. That's helpful color. I guess private banks is your largest segment by revenue. And I think that the operating expenses and lack of margin improvement have disappointed some investors. Given that it seems like retiring TRUST 3000 is not in the near term, what is your path to enhancing profitability in the Private Bank segment?

Yes. First and foremost, it's top line growth. So that business, from a profit standpoint, is not that it can only improve this way, but the best way for us to improve the profitability in that business is to grow the top line. And as you know, Rajiv, we have about a $75 million backlog of sold but uninstalled revenue. Our job is to get that revenue on the books. And I think Steve talked about this back in July that about half of that will matriculate over the next 18 months or so. So now we're down to 15 months or so and then the other half in the subsequent 12 months or so. So we feel good about -- we know where the revenue is going to come from over the short term. We have to continue to sell and add to that backlog for kind of sustainable progression of revenue over the long term. We have to get the business frankly to kind of the model that we have right now with the investment management services business, which has about a $35 million backlog. And that is if you go back a couple of years, that business has probably had a $35 million backlog going back a few years. And it has -- it's been like that because as we install, we've been replenishing. We have to kind of get the banking business to that similar cycle of installing revenue and replenishing the backlog as we go, and that will get us sustainability en route. We are confident that operationally, technologically, I'll let Ryan comment on this as well, that we have efficient delivery. We have scale and that we'll be able to get that top line growth to the bottom line as we progress, but it really all starts with the bottom line -- I mean, with the top line. So Ryan, I don't know if you speak to what you're doing technologically and operationally?

Yes. I think when you look at -- you used the word scale there, Dennis. When you look at kind of a few different buckets and say, the operational scale of our back office, we certainly feel very good about that based on the volumes that we've brought on board. We obviously brought Wayne's entire business onto the platform. And we're running that in the back office. We've also moved a few of our larger BPO clients from TRUST 3000 to SWP over the last couple of years. So when you look at operational scale and then technology from a production scale, our ability to just scale the infrastructure and architecture of the platform and run significantly more accounts than we have today, we feel really good about that. And that's evidenced, I think, in the growth that we've had in the last 12 to 18 months just in volume. And then from -- the third bucket, I would say, would be our -- the scale of our R&D and our ability to continue to make smart investments for the short and medium-term that allow us to maximize our ability to install that backlog and continue to sell, but make sure that we keep an eye towards the future and our competitive advantages in areas around capabilities for not just the platform but technology across SEI. But the first 2, I think, have been, I think, really, strongly evidenced by the last couple of years in the volumes and growth that we have today. So I feel really good about that.

Got it. And you just kind of alluded to the migrations you made for advisers from TRUST 3000 to SWP. Maybe if you can comment on what the response has been and like what features have advisers responded most positively to?

Yes. Sure. And I think Wayne can provide a lot more color on this as well. But Rajiv, when you look at the automation that I think has been built into the platform, so from a front office perspective, the ability for the advisers to onboard clients, to create portfolios, to manage those portfolios and to have, I think, more information and data at their fingertips from a dashboard and desktop perspective, we get a lot of positive feedback on that. So the end client, the adviser experience and that whole kind of suite of front office capabilities, the platform has so many more, I would say, kind of straight-through processes where the advisers historically were filling out paper or sending faxes and now everything is digitized. So I'd say across that kind of continuum, from digital to front office, especially around the account open and account maintenance, we would get a lot of positive feedback.

And also, the open nature of the platform is a welcome change for advisers and the ability to efficiently implement client portfolios with our -- with SEI kind of components as part of the portfolio construct or taking our strategic portfolio recommendations and providing the flexibility to substitute assets or products that they would prefer to use in our client portfolios rather than SEI. So I think that full flexibility and efficiency with which you -- they can use that flexibility, has become a real plus, an advantage for us and something the advisers have begun to embrace.

Got it. And historically, like getting new advisers has definitely been a part of the growth story for that segment. I guess how have you dealt with the challenge of recruiting new advisers during this COVID-19 time?

So I guess it's safe to say in all realms but in advisers, the selling process there was very person-to-person. So our field force, which lives in the geographies of their territories, we did that years ago just so they could be closer to their prospect base and closer to their clients that they were also servicing. Now that being said, the -- our digital marketing and our digital approach to selling has really amped up early in this pandemic. We had a lot of those capabilities before the pandemic, so this earlier one of the one-on-ones that we're all familiar with necessity is the motherhood of invention. What we hear was necessity is the motherhood of usage. So really this environment drove up usage and adoption of those capabilities. And so one -- Wayne Withrow who runs the business, would tell us stories of -- we used to -- one of our selling approaches was to bring people to our campus in Oaks, bringing groups of advisers and spend a day with them, walking them through our capabilities and how it could benefit their practices. We had to digitize that process, which we have done. But the positive out of that is because we're not geographically limited to a physical visit to Oaks, Pennsylvania, the participation rate has gone way up of potential advisers and potential prospects. So while it's a little early to see if those -- if that higher numbers of participants will turn into higher numbers of recruited advisers, but the -- at least the participation and the activity has gone up in the sense of eyeballs on and evaluation of SEI.