SEI Investments Company (SEIC) Earnings Call Transcript & Summary

Hello, everyone. Again, thank you for joining our tech conference today. Our next section is with SEI Investments Company. For those of you who don't know me, my name is Owen Lau. I cover exchanges, information analytics and digital assets companies here at Oppenheimer. Today, I am very excited to have Dennis McGonigle, who is the CFO of SEI; and also Steve Meyer, Head of Global Wealth Management Services. Thank you for your time today, Dennis and Steve.

Thanks, Owen.

Thanks, Owen.

Good to see you.

Sure. [Operator Instructions] Maybe -- let me get started. Let's start off with a broader strategic question, maybe Dennis and Steve. Could you please give us an update of your One SEI strategy relative to your initial projection? Is there any like positives or negatives you would like to call out? What else you want to achieve for the rest of 2021?

Steve, why -- maybe you want to talk about the market side and...

Yes. So I think, Owen, if you go back when we first did One SEI, I think there was a couple of things. One, there's a realization that we've built quite a few powerful platforms across our company, across the different market segments. But we clearly see a convergence of needs, whether it be a wealth manager, investment manager, bank, RIA. And we believe that there is really a couple of core principles. One, we really thought that we have quite a bit of power in these assets, and this platform is locked up in SEI that we can distribute and open up across the company, not just within the specific markets that we're geared for but across other markets. And two, there's a lot of power in some of the components and some of the modulars of these platforms. So I think when we look at the market and what we've seen since we've started this, we -- I don't think there's any surprises. I think it's more encouragement. Absolutely, we're seeing that -- kind of our original thesis of these platforms, whether it be in the ECIO that we're building out in our -- and that new market we're entering in Paul's area, the institutional really taking what we've done in the OCIO space and combining it with the assets and platform we have in IMS, or when we're looking at -- in the private banking world and the ability to add some of the manufacturing capabilities from IMS. We're clearly seeing a market demand and kind of validating what we thought. Dennis, I don't know if you want to go into some of the other stuff corporately?

No. I think the -- one of the other rationale for us to go down this path was also internally changing the mindset of our workforce to free up their thought process and have the opportunity to tag and tap into any asset SEI has to offer to figure out how to solve client problems. And that's -- continues to be a big push of ours. And the cross-pollination across the company, we're seeing it more and more each day. Steve, you can give some of the examples. So it's been a good cultural kind of shot in the arm for us to get people engaged horizontally across the firm, not just vertically in their areas of concentration.

Yes. And I think it's opening up mindsets to think about kind of our client needs and where our clients are going outside of maybe the specific platforms that they were typically used to selling within their markets to what's the broader need of the client and the assets we have across the company to solve that broader puzzle.

As a CFO, I always wish it costs less, but...

Yes, that's what I was going to say is the negative. I think as Dennis and I would attest, whenever you're talking anything with technology, it typically costs more and takes longer. So that's the only negative.

All right. So let's continue with cost. And we are talking about operating model and people working from home or going back to office or hybrid. So I mean, my question is, your latest thought about operating model of SEI, where more people coming back to office? How do you balance kind of workflow -- workplace flexibility versus workplace innovation?

Sure. So I mean we have been on this from the very beginning of COVID. So last year, we mapped out -- we're -- we broke it down as a kind of a 4-phase approach with our workforce. And we're -- June 21 was the initiation of phase -- we call it Phase 3b. But we brought back a larger group of employees back to our different campuses, Oaks being the principal sizable campus, and that's gone really well. So we have roughly 20% to 25% of our workforce back in the office, at least a few days a week. Some of those folks are now 5 days a week and 3 days a week. And we did announce to our workforce well over -- quite a while ago now that as we move forward, we really will have 3 work environments. One is full time in office. So roles that really require folks to be at a facility. And about 90 of our people know that firsthand because they never left when COVID hit our facilities. Then we have a category which will be a little bit larger -- probably a larger category of hybrid that we're calling. So those are folks that will be in the office, say, roughly 3 days a week, on any given week. And they'll be in the office when it's important for team meetings, for collaboration. Not that innovation can't happen with the distributed workforce because it can, but it also opens up opportunities for people to work together, to solve problems and come up with new ideas. And then a category of employees where the jobs themselves can be fully remote, where maybe that collaboration point is not as critical to be in office or it's more periodic for those folks. So more permanent work from home. So we're kind of operating under those 3 job definitions at a corporate level, and then allowing the units all the way down to specific teams to kind of orient themselves around those 3 structures. And our plans are to, at least, as of now, we would increase our workforce footprint in offices in mid-September, with everything that's going on at all in the world, which is true of this whole past 14, 15, 16 months. We're in constant reevaluation mode, do we stick to that plan, do we adjust the dates, do we modify slightly. So we're having those discussions now. I expect we will bring some people back in September, maybe not as many as we had originally thought; modify that approach a little bit; and go forward. So we're comfortable with how we're operating today. Our clients are being taken care of, which is the most important thing. Our workforce is settled and safe and healthy. And we'll take that, the model I just talked about, forward as circumstances permit. Steve probably has a larger workforce in the office, maybe Steve you can comment.

Yes. I mean I think you hit most of it, Dennis. I think the one thing I would say is there is a war for talent out there. It continues. And one of the fronts in the war for talent is now full remote work offerings. And I think that's a little transitory because I do think there's companies that might be offering that now, that might change as things unveil. I think one thing that's -- that we've done well in this is we've really kept our eye on this, realized that you can have no really hard, fast rules. You have to be flexible and kind of monitor the situation. And as long as the #1 guiding principle was the health and welfare of our your workforce, and if that's leading all your decisions, you're going to make good decisions from that. And that's kind of what's led our cadence, and will continue to lead the cadence on that. But I'll tell you, we've said it before, it's worked very well for us. There's always things that could be done better. But overall, we're extremely proud of our workforce and the way they rose to the occasion here and continue to rise to the occasion.

Got it. So staying with the link of talent, Dennis, I think you mentioned on the last earnings call that there's a competition for talent, which is driving up personnel costs. I mean it's a hot topic right now. Could you please elaborate a little bit more on this? Do you think SEI has to increase the personnel costs more than industry average to attract talents? Or there is some nonmonetary attraction that can help SEI to -- like in the way that SEI doesn't have to pay or to raise personnel cost as much as your competitors?

Sure. So -- and the comments we've made on the earnings call were really to make sure our folks understand that inflation despite what we might hear on CNBC from some prognosticators, when it comes to really at a baseline level for talent, inflation is going up. I mean the costs are going up. And it's a reflection of just the general inflationary economy, frankly. And then there are pockets of talent or pockets of skill sets or expertise that are in higher demand, which is -- some would say is always the case, but we're seeing a little bit more now. A couple of examples. We're doing a lot of work on hybrid cloud and functioning in a hybrid cloud environment. So how do we use the cloud -- the public cloud, combined with our own data center and how we host and service applications that protect data? So cloud engineers, talent in that specific area of technology, are in demand because a lot of firms are looking at this space. So costs there will be going up some. In our IMS business, there's a combination of -- the growth of the business has outpaced slightly the growth of our workforce. And we probably have a little bit of catching up to do. Some will be doing that. But in certain areas of that business, given the complexity of some of our clients and how -- and the product types we oversee for our -- for those clients, there's real technical expertise necessary to run that type of business, and we're going to compete as best we can for that talent to help us deliver for clients. So while -- we're not behind the curve in terms of the compensation world. I believe we're very competitive and always have been and try to maintain that level of competitiveness. But compensation just has moved up, and we're seeing that across the board. In terms of attractiveness of SEI, Steve touched on a little bit with the flexibility of our work environment, certainly helps us throw a wider net geographically for talent, and that's a good thing. I believe our culture is very attractive to folks. Just like every company, we're not for everybody, and everybody is not for us. So there are some candidates that come to SEI and see how we work in our culture, and they kind of say that's not for me. But luckily for us, that's -- they're the minority folks. So our culture is very attractive. And I believe our work environment is very attractive. People want to get back to an office environment, at least part time. Our global reach is attractive. Our innovation and approach to innovation, our reinvestment rate and R&D rate is attractive to people. And if you're a growing firm and a firm that has terrific prospects for growth in the future, that's an attractive asset in and of itself. And I believe we're -- we have those kind of qualitative elements to attracting talent to go along with the necessary quantitative component. So it was curious to me the reaction to the comment was as if it was an anomaly to the rest of the market. And then the fact of matter is maybe it's one of the few times, it was more of a mainstream comment. And maybe that's what took people -- caught people off guard a little bit that we actually [were opinion]. We're sounding like what a lot of other firms were saying during earnings season, and frankly, continue to say.

Got it. And thank you for explaining this to us. Maybe let's switch gears a little bit to investment manager services. Steve, maybe could you please talk about the competitive dynamics in this space? Any emerging players you're seeing? And then can you also talk about the growth opportunity in private equity firms as well as private wealth adviser space?

So the competitive environment continues to remain pretty competitive. Obviously, there's the players that have been around for a while. There's also -- I wouldn't say it's new entrants. We're starting to see some non-U.S. players come to the U.S. market. And we're also starting to see some players backed by private equity go on acquisition sprees and attempt, I think, to build critical mass and become one of the largest. I think my personal opinion is that, that's still a misnomer. I understand why people want to have large scale. But if your goal is to become the biggest, I think de facto you don't focus on client needs. And I've said this time and time again with this business, my goal has never been the biggest. I want to be the best. If I happen to become one of the biggest by being the best, great. But if not, I'd rather just be the best and focus on our clients' emerging needs. And I think that's what's driven our competitive advantage. We do see some -- especially, in the private equity world, some boutique providers, some smaller providers, which I think are being gobbled up in the acquisition frenzy that's going on in this market. And they do -- some of them have some bespoke services that they've been able to retain clients with. But for the most part, the competitive dynamic is still with kind of the main players out there, the larger players. On the private equity and private wealth managers, specific to private equity, that's one of the growth areas, I think, not just for us, but anybody in this space. Private credit, private debt, real estate are driving kind of the growth in that industry right now with many firms from large to small continuing to set up new product and continuing to grow there. And that's high -- it's still a highly in-sourced market unlike the hedge fund market, which is largely outsourced and is mostly a takeaway market now. The private equity space is still a good bidding source. So there's opportunity for takeaway as well as moving people from an in-sourced model to an out-sourced model. And private wealth managers really probably moves more towards the banking model, but it's one we see within different segments, whether it be a bank or a private bank within a large global bank, that's an area that there's a lot of focus on in expanding and changing out platform, which bodes well for what our value proposition is with SWP and banking.

Got it. And then maybe another question, it's around operating margin. I think it grew very nicely in the second quarter. It reached 40.5% in the second quarter. But I think you expect that to go back down to mid-30 based on your comments on the earnings call over the next 2 quarters or so. So one reason you cited was additional expense on infrastructure and personnel. Could you please elaborate further on the margin longer term? Will these additional personnel drive higher top line growth? What's the kind of the expectation there?

Yes. So there's a couple of things. I think, as Dennis mentioned, for a number of reasons, including market as well as a number of new products from existing clients, if you look at our sales that we announced, our net sales in Q2, we had the great problem of 87% of that, that we sold in the quarter funded by the end of the quarter. So our revenue matriculation, probably for the past 2 quarters has outpaced our expense add-on. As you grow the business, while we are driving scale, you still have to add people. You have to add infrastructure. You have to account for more space. And we're a little bit behind on that. So we are adding to that, and I do expect to have some more impact to that in Q3 and Q4. We also, due to a number of things going on, probably lightened up on our investment spend. One thing that we -- has been a hallmark of growth at IMS is we continually expanded our markets and continued the breadth and depth of our solutions and platform. And as we did that over the years, our revenue top line and our margin grew. We continue to do that. I believe our job is just not growth. It's sustainable long-term growth. And to do that, we're constantly looking to say, how can we differentiate our platform? What else can we build out? Because that's really what has differentiated us over the years. So that expense kind of fell a little bit short on Q2, so I expect that to ramp up. I'm going to sound like a broker record with the margins. I feel more comfortable with this business in the mid-30s. Can it be 36%, 37%? Sure. I think what we've seen with kind of some of the anomalies of the large market increase as well as the high fundings, if that continues for the next 10 years and you can guarantee me that, I might be willing to change my guidance a little bit on the margin. But I don't think that's a long-term trend. So I feel more comfortable, especially looking that my goal is to drive sustainable growth in this business, that this is going to be in the mid, maybe a little bit tweaking up to the higher 30s.