SEI Investments Company (SEIC) Earnings Call Transcript & Summary

Good afternoon, everyone. It's Chris Donat again, a Piper Sandler senior analyst covering fintech space. And for our next fireside chat, we have SEI Investments. We have CFO, Dennis McGonigle; and Ryan Hicke, the Chief Information Officer. I'll point out that Ryan is actually, if you look behind him, he is in SEI's headquarters in beautiful Oaks, Pennsylvania. And for those of you who've been to SEI's campus, you'll recognize that if you haven't been over to SEI's campus, I'll point out that there are no walls behind Ryan, and it is a very open office, and it speaks to SEI's culture.

I'm going to just jump in on questions, right here. But Dennis, I'll start off with you. One of the key metrics investors look at is the sales events at SEI, and they've been relatively weaker in recent quarters. Can you speak to some of the trends we've seen? And then also maybe looking forward, how is the backlog or pipeline and what kind of conversations have you been having with investors or with potential clients?

Yes. So I guess I'll first dissect the weaker comment. Now we report net sales activity, so we take into account cash flows out of some of our investment products and treat those as negative sales events. And so when you look at our company and you look across the different business lines, gross sales have actually been pretty healthy and pretty good and not where we want them to be. We think there's a lot more opportunity out there for us to capitalize on, and we expect gross sales activity continue to grow and improve, but those sales have been pretty good, pretty much across the board. But when you get to net sales, particularly the first quarter, that's the most recent reference point. Some of the losses that we've incurred in our institutional asset management business really tied to, at least a good 50% of those are really the corporate DB Submarket that we sell to and have a long-term business in just having a negative headwind impact on overall sales. Look at our processing businesses. Gross sales during the quarter were pretty solid, both in the banking and the IMS business. We had one M&A event within the banking business that hurt us on the loss side. So we net that against our sales activity, but that being said, we did add a handful of new clients in banking and put them under contract as well as have really healthy cross-sell and some new client acquisition business in the IMS space. And on the adviser business, gross flows have been good and were good. Negative flows out of our -- some of our mutual fund products, which we expect given the future -- our strategy for the future and that business being building a more diverse business based on how advisers want to invest buying assets and where they want to invest client assets. So we are, I think -- I know, I'm very bullish on that business. I feel like we're getting a little bit of the mix we expected, and have gotten that over the past 2, 3, 4 quarters. But we see the momentum building and kind of the gross flows improving, which, we think, bodes well for continued sales activity going forward. I think the institutional business, they got beat up in the first quarter. I wouldn't expect necessarily similar results quarter-to-quarter going forward in terms of the negative side, but their gross sales also were pretty good in the institutional space, which, I think, most people on this call would say is a pretty challenging environment to grow your business in. But we're able to win business, able to capture new clients, and, along the way, we've really done a good job of diversifying that business to be less reliant on a single segment of the market.

I was going to make 1 editorial comment, which I think I as a sell side analyst, I think some investors would certainly welcome if SEI were to provide more granularity on the sales event. It's both the gross and the net and then by segment in the reported financials. You don't need to respond to that if you don't want to but?

Yes, fair enough. We're also sensitive to too much detail relative to our competitors as well. So we try at good wins.

Understood. Another question for you, Dennis. Just last week, SEI declared a semiannual $0.37 dividend and announced the $250 million increase in the stock repurchase plan. So that gets you to $360 million authorization. You've got no debt on the balance sheet -- sorry, let me repeat that because everyone doesn't always hear it, no debt on the balance sheet. That doesn't happen with every company out there. And you generate about $500 million in operating cash and much of your revenue is recurring. So with that context, what are SEI's priorities for the cash it generates in terms of repurchases, dividends, investments, acquisitions potentially?

So in the baseline, our Board's direction is to continue to do what we've been doing in terms of return to shareholders. And arguably, over time, we'll do more of that as we continue to grow and produce more capital. Our dividend, we generally increase our dividend every year. That typically happens in December. So no one should really read anything into the why didn't it go up in June because it's generally an annual decision on the part of our Board. So I'd be more -- first, at a base level, more of the same, but more of the same, I guess, is the -- that's proper English, to say it that way. And then we've made it clear to the market that we are open for business on the M&A front to the extent that an opportunity presents itself that we feel will enhance our capabilities, our geographic reach, open up maybe a new business opportunity for SEI so to diversify the company a little bit further than we already are. We're interested in entertaining different ideas. And we also try to send a message to the market that don't discern for us what may or may not be an ideal we would consider. Let us do that. And so if you don't -- even if you don't think it might fit our strategic view of this, send it to us anyway, and we'll take a look at it and figure it out. So I could see us continuing to be active in the M&A side of things. And if the right opportunities came along, with the right characteristics, we wouldn't hesitate to pull the trigger.

Okay. Maybe could I can get Ryan commenting on that 1 or maybe for both of you. What is your decision-making process on potential acquisitions? SEI, historically, hasn't done a lot of them, have been more in the Investment Managers segment with sorry, Archway.

Archway.

Yes. And then the family office space. But any particular segments? Or are there particular technologies that Ryan are interested in?

Well, Chris, I guess, if you even just look at our most recent one with Oranj, when you kind of break that down and look at the rationale behind that, the capabilities that Oranj has in that kind of digital collaboration space, we definitely see that both as a complement and an accelerant to what we have for that market. So they were a suite of capabilities that allow the adviser to really interact, I think, in a much more digital way with the end investor. They were things that were in our road map that were due to be completed over the coming couple of years. So that was an opportunity for us just to really go accelerate the delivery of something that we thought was going to add value. But simultaneously, it also increased our talent pool in an area that's important to SEI corporately. So areas -- they had a good strong suite of cloud engineers. And that's an area where we continue to pursue more aggressively, and we want more employee talent in that area. So that one just ticked a few boxes, both from a move to strategy forward for Wayne's business, it had capabilities that could be leveraged across the enterprise and it brought additional talent to the company in areas that we wanted to add anyway.

And Chris, I'd add, we've done 3 modest transactions over the last few years. And when you look at the rationale for each of them, they kind of stand on their own, but they give you a sense for the breadth with which we're looking at these things through the strategic lens of where we're going as the company. Archway gave us not only technology capabilities and solution capabilities, but really opened the door for us to play a bigger role in a market we're interested in. So market expansion was a big part of that rationale along with new capabilities. We bought a wealth management firm in Seattle, which was -- really gave us geographic expansion of an existing business that SEI has here in the Philadelphia area. So that was a more of a geographic reach decision. And then the most recent one Ryan just talked about. It was kind of a tuck-in capabilities into an existing business line. So things that the adviser group add on our road map for tech development in terms of continuing to improve and enhance the digitization of the gap that exists between the adviser and their end customer along with the kicker of talent and acquiring talent. So 3 different transactions, none of them, from a size standpoint, at least would change the tilt of the earth. But that being said, there are examples of 3 distinct rationales for each transaction. And as we go forward, those same rationales will continue and some others, like complementary business line that maybe we're not into today at all, that gives us a new front for growth at SEI. So...

Okay. In terms of your internal structure on M&A, though, forgive me because I do not remember, but do you have someone who's -- one person who is tasked with looking at opportunities? Or is it divided up among those segments?

It's neither.

Okay.

And the way it works is we have a small group of us that Ryan is part of that. We call it the M&A committee because we have some creative names at SEI that we mint. But it's our responsibility to listen to different ideas that are coming in through the company from the outside world. So frankly, any employee at SEI could bring forward an idea if they're approached or they see an opportunity in the market. And then this small group of us would work with that individual to flush that idea out further, gather the appropriate information, both internal strategic rationale and external information on the market and the company itself and then shepherd a team -- if we decide to do something. Shepherd them through the process of from offer to close and then to integration. And a movement in -- they become part of the SEI. Yes, SEI family.

Okay.

I always loathe to kind of say to somebody, your job is go buy stuff, yes. Because, guess what, they'll go buy stuff and then we'll buy the right stuff. I think as we get more experience with it, it will probably open the door for some specialty talent, but it's good for us all to be engaged in it because then we're all part of saying -- we're all part of the decision, then we're all part of making it work. It's not -- may be the Oranj deal was not Wayne Withrow's deal. It was our deal. It's our responsibility to make that successful not Wayne's responsibility.

Ryan, I wanted to ask a question about a couple of initiatives that were announced at your last Investor Day in November 2019, which being pre-pandemic feels like a pretty long time. You profiled 2 new platforms, the global regulatory compliance and then also the SEI IT services. So we're just looking for a little update on those platforms and how has the response been from clients? And then what makes these platforms as opposed to what I would view as maybe low-operating-margin service offerings?

Yes, Chris, that's great. And I think that might be the last time I had a sports coat on was when I presented that day. So I'd say a couple of things. Both of those, we are really optimistic about. And I'd say the reason they are platforms is they're not just stand-alone products that we're offering. It is a suite of services that we're actually taking out and that can be consumed completely independent of our other services and platforms. So as you know, when we talked about 18 months ago, if you just take IT services, our initial focus there was to really start to target non-SEI clients. And I think we wanted to prove out to ourselves, could we go sell this platform out, can it stand on its own 2 feet, that it is not a cross-sell, that an organization would consume that independent of any other SEI service? So we have a couple of new names that have been signed and installed. I think one of the reasons we get very excited about this offering is because the organic growth that we see from some of these organizations, they're not enormous deals, but they have a lot of growth potential. Because as those firms continue to grow their footprint, we're just continuing to add more of our services and capabilities. One of those firms that we signed and announced last year was sold completely in the COVID environment where we didn't have to interact. So now when we look out for IT services to the upcoming months and next year, we've really ramped up in 2021 in terms of the marketing and sales initiatives. And we have also really started to increase the activity between the units. So focusing again now on existing clients as well as new. But the exciting thing for us, Chris, is these capabilities are in production every day. So this isn't something in November when I presented that a couple of years ago, we were talking about what we thought this could be. This is live. There are real clients up. They're installed. They're using these capabilities. And one of the things that I think we're really starting to see is that had a suite of solutions, including cybersecurity, hosting, network protection. Cybersecurity right now is clearly the tip of the spear. We see it every day. There's an increased focus on ransomware, and our capabilities that we can bring to bear, especially for those mid- to small-sized wealth management organizations in that cybersecurity arena and complement that with that network security and helping them really make sure that infrastructure is set up the right way, that seems to really be resonating well. And I'll let Dennis comment on this as well, but I also think those 2 businesses align ideally with what you asked a few minutes ago about M&A. They might definitely be areas where we would potentially look at an acquisition, if we really thought that would accelerate the growth of these 2 initiatives.

Just to make sure that investors understand it. So of your IT services before were cybersecurity, network operations, enterprise services and hosting. But of those 4 cybersecurities, that's far and away where the demand is right now? Or the other 3 were developed?

Yes. Since we love our 3-letter acronyms around here, Chris, you've got the stock, which is the SOC, security operations center, which is really the cyber capabilities and then the NOC. I mean we have to get more creativity in these things. That was a network operation center and inside those 2 are the capabilities that you just talked about. As we -- we definitely see more demand for the security operations center, but as we get into those conversations, the firms are also seeing that we can actually help them to really establish a better kind of network posture, which is going to create a better security posture for them. And that's why I think it lends itself forward to a definition of a platform as opposed to just a product.

Okay.

And as those firms grow and we're protecting more endpoints, if you take 1 of our existing banks that we launched, as they add more branches, they're just going to add more endpoints, and they'll have more capabilities that need to be protected. So I get very excited. I know Dennis does, too, about the growth potential we have if we get the right clients on board, and we've been very disciplined about making sure that we get kind of the right fit for the early clients.

And other point I'd make for those that are maybe less familiar with SEI that this is not always the path we take as a company, but it is a proven path we've taken over the years, which is, we do something really well in a particular area of our company, whether we're doing it for ourselves, or we're doing it for a certain subset of clients. We build up the expertise, we build up that capability. And then we say to ourselves, how else can we monetize this competency we've developed? So I've been with the company a long time. I go way back to the 80s when we were -- we had our own mutual funds that we were doing our mutual fund accounting, and we were a trust technology and banks, and all of a sudden, banks started to convert bonds to mutual funds. And we say, well, we're pretty good at mutual fund accounting, maybe we can start a business to sell mutual fund accounting services to banks. And then long story short, now we have the IMS business. And it has its roots going all the way back to something we only did for ourselves at one point. But then now do it for hundreds of other organizations and certainly have expanded those services quite a bit. IT services, the GRC, global regulatory compliance area, these are examples of things that we do well for ourselves, we do well as a component of certain parts of our business. But now we think there's opportunities to exploit them as stand-alone revenue creators in of themselves.

Ryan, I wanted to ask you a question on just a broader technology question and SEI's approach to the cloud. The financial services industry has a reputation as being a slower adopter of cloud services. So where is SEI, and what are your clients on cloud, whether it's private, public, et cetera?

Yes. So I mean, we are definitely going to go down the path of both, Chris, right? By both, I mean, both public and private. And we started that process a couple of years ago. But I'd say, when people talk about cloud, a lot of times, they go right to kind of really the -- where the hosting resides. And for us, I'd say we really looked at it from the entire kind of software development life cycle. So I would say we've been pretty aggressive the last couple of years of introducing more kind of cloud design into our applications. Really a lot of effort and upskilling and training in terms of existing employees and adding new talent for how do we write code, and then really how we deploy that infrastructure in the cloud. We will start to put production applications in the cloud this year. But our decision really around public and private, that's an ongoing conversation we have with our clients, obviously, from a regulatory perspective, making sure data privacy and everything we would always adhere to. But there's different criteria that would kind of discern for us whether or not we go public or private, and some of that is latency where we want the data to be closer to the data center. What those applications are actually intended to do, but we definitely have an in-flight live real initiative right now to move certain applications to the cloud. And I would say cloud-native is front and center in how we are designing new things, which gives us the flexibility to determine whether or not that gets hosted, ultimately, in our data center or in a public cloud and/or in between the two? It's interesting. It's been a great conversation, Chris, I'd say a lot of our clients. We've had a lot of sessions with clients just to have kind of mutual engagement on what are they thinking about cloud? Where are they headed? How are they harnessing new technologies? And it's been a great kind of partnership process to just kind of leverage the knowledge that exists in both SEI and our client base.

And I would say that we've been a private cloud since we launched technology back in the '70s. So we didn't call it that then, and we didn't call it that until probably the past 5 to 6 years. But all of that experience allows us to analyze what's best, or what's best practices with a cloud provider? How robust are their capabilities? What do we need to complement them with? Kind of goes right back to the conversation about IT services, our understanding of network protection, data protection and things you've got to wrap around the cloud provider. We have 45-plus years of experience kind of dealing with that from data center to data center. And I think that's enhancing kind of our ability to move there in a way that will, probably -- I would say hope -- not hope, but I expect to have less hiccups and actually move more quickly and with less issues, if any.

Got it. I'm going to try to skim one more question in here about modularization and the One SEI strategy. And Dennis, if you could sort of talk about like what you're seeing in terms of that from a financial perspective? Then Ryan, what does it meant for you for this strategy over the last couple of years?

Yes. I'll go quick because I think everybody's heard me talk about this quite a bit that it's early that it has allowed us to build different solution sets based on different components that we've gone to market with. And we talk about ECIO a lot. But even the Archway technology, as a stand-alone technology, didn't really need to be modularized. However, the integration points of Archway and the data layers that we've built as part of this modularizing strategy has helped -- has helped us cross-sell the Archway technology. In the adviser group, it's not -- we sell a single stack of technology, but there are a lot of module components to that, that come together, both third-party and our own, that give us a lot more flexibility with advisers and give an adviser a lot more flexibility, which tools they choose to use or not use. And then the data component of that is also critical. But Ryan, maybe you want to talk about where the tech focus has been? And it's more complex than just slicing the apple into 8 pieces.

Yes. And I think what makes it exciting is, it's really allowed us to really drive a combined business and technical strategy, Chris, that the modularization isn't there just for itself. So as Dennis just said, it's not just to break things apart so they can be a part. It's really allowed us to take a technology strategy that has a lot of focus on identifying and prioritizing what would have the most value independently with the businesses, figuring out a technical strategy to make sure those things are independent. But it has really accelerated, I'd say, over the past few years, our ability to figure out at that data layer whether that's through APIs, whether that's through actual integration, how those components can then still be paired together because that's what it's really unlocked. I think it's unlocked for not just our clients, but even for the SEI workforce they're looking across now this whole range of assets and saying, "Well, if we have those 4 or 5 components or capabilities and they were packaged together, we could take this suite of services to this market." And that goes back to what Dennis said 10 minutes ago. That's core to our DNA. And I think that's always how we've approached new business. And now as we get further along this path of having those capabilities, be modular and be independent, but still have the API layer to allow us to integrate and speak to each other, I think it puts us in a really, really strong position.

Got it. We're out of time here, gentlemen, but I do want to thank you, Dennis and Ryan, for joining our chat today and participating in the Piper Sandler Global Exchange and Fintech Conference. Thanks, guys.

Thank you, Chris.

Thank you for inviting us. And hopefully, we'll do this face-to-face next year.

I sure look forward to that.

Thanks.

Take care.

Bye-bye.