SEI Investments Company (SEIC) Earnings Call Transcript & Summary

So for our next session, it's my pleasure to welcome Dennis McGonigle, SEI's CFO and Phil McCabe, Head of Investor Manager Services. Earlier this year, SEI announced the transition of the CEO position from the firm's founder, Al West, to a firm veteran, Ryan Hicke. The move has come with a lot of changes and an exciting growth target, but it's retained what's core to SEI, which is technology, operational efficiency and asset management. SEI held their investor conference about 3 weeks ago. There's a lot to unpack. So with that, Dennis and Phil, thank you so much for being here, welcome.

Thanks, Ryan.

Thank you.

So why don't we start with a question about some of the targets at Investor Day? The team announced a target to double the size of the business over the next 5 to 7 years. It's about a 10% to 15% compound growth rate and achieving about $4 billion in revenues. Can you help us unpack what went into that target, which businesses are you expecting to grow above that 10% to 15%, which ones might grow below? [Market] included M&A? Any color there?

Sure. So first of all, Ryan sends his apologies because he was going to be here, but unfortunate event in his family, so -- and thank you all for showing up and giving your time. How we got to that, which is kind of out of our character, target in 5 to 7 years, really focused on -- started with a focus on, not just the broad markets we service, but what's really the addressable market within those broader markets that we can sell to today and deliver to today with our capabilities that we currently have. And then over time, how do we see things expanding from there with new capabilities that we have that we know are early in market like SEI Sphere and our cyber space and then a couple of other areas that we're working on that we really haven't gone public with yet. And when we look at that addressable market across private banking, the advisor business, the Investor Management Services business and our institutional business globally, and we saw enough market opportunity that, if we executed well and capture what we felt was an achievable share, we could get pretty close to that kind of target. And then when we throw in the mix out view that M&A is a part of our future, and we've been doing some of that over the past few years, it's certainly a part of our longer history as a firm, that, arguably, would be the kind of gap closer. And while we put this target kind of in the context of revenue, what's really important about SEI is our focus will continue to always be on the bottom line. So we've got a lot of meetings today. This target is a big part of the conversation, but also part of the conversation is, is it kind of revenue at any cost or is it revenue that's going to enhance profitability as a firm. And as a firm, for as long as I've been here, which is a while, as long as Phil has been there, profitability is always a key driver of all of our revenue generation. At the end of the day, that's what ultimately helps you build a great business and a sustainable business. So I don't know, Phil, you want to comment on your market, which is a key -- one of the key elements of the higher level growth rate you asked about.

Yes. Ryan put the revenue targets out there for 5 to 7 years. And in certain businesses, like the one I run, we've been growing before this year and the market conditions that we're in, we were growing at a 13%, 14% rate from a revenue perspective for years. So I think -- Ryan talked to me and he said, "Do you think you can meet these goals over some period of years?" And I said we'd be fine. I mean we basically sat down and looked at we knew where we were growing, we knew what was hot in the market, we knew what money we needed to invest from a platform perspective, and we had a really strong operation. So I think, from our perspective, the particular business that I run can get to where we need to get to.

Got it. Okay. And maybe if we take the other side of that, what are some of the risk factors that you're thinking about that might be headwinds to reaching the target? Anything in particular? Or are there any -- it's a little harder to pull levers on the topline side, but any way to accelerate growth to offset maybe market headwinds or anything like that?

Yes, I mean, in the context of headwinds, we're in a somewhat fortunate position that kind of industry-wide headwinds are also tailwinds -- potentially tailwinds for us. Because one of the big trends we continue to play into is the trend of outsourcing, whether it's in asset management. So our institutional business, which has really built off institutional owners of assets, outsourcing to fill business that he runs in IMS, which is a big outsourcing business, both from an operational services and technology standpoint. So we're playing into that long-term trend. So to the extent the market is disrupted or the market has some challenges, our clients are going to feel that or the market -- the clients or prospects we sell to are going to feel that. And in many ways -- in many cases, when we've been through tougher cycles in the past, when we come out of those cycles, those prospects or suspects now all of a sudden are very interested in changing their business model and their operating model to be better prepared for the next time. And that's what we can help them with. So certainly, market activity, a lot of our revenues, our asset base, So short-term disruption revenue streams occur and profit occurs when there's down markets. But over a longer period of time, that works to our favor. Regulatory -- global regulatory framework, the quantity and the speed with which regulatory change is occurring is somewhat of a headwind in the sense we had to absorb that in our business. But again, in terms of the tailwind because our clients also have to absorb it. And if we figure out how to deal with it ourselves in the businesses we operate, that our clients also have to deal with, we can come to the market with a better solution. And that's where something like SEI Sphere came in. We've been in the business for 45, 50 years protecting data and protecting clients' technology infrastructure as part of them using our technology infrastructure. But we've turned that service into an independent stand-alone service. We can deploy against their own technology assets and their own networks to protect them, and we think there's a big opportunity with that. So it's -- we're going to have headwinds. The OCIO business is definitely going to have headwinds in the institutional markets. The corporate DB market, we've always -- we've talked about for a while is under pressure and will continue to be under pressure. Rising interest rates aren't going to help that, that segment of the market, but we have other market diversification that we've done we think will help overcome that.

Within IMS, any of the headwinds, we can turn them on their side and their tailwinds. And if the clients are struggling from a profitability perspective or a turnover perspective, it's actually an opportunity for us to kind of help out. We're investing about 30% more year-over-year in the business that I run. So now is the time to capitalize on all the opportunity that's out there. So I think now we're sort of doubling down on not only the people but also the platform spend to kind of capitalize on the opportunity that's in front of us.

Got it. Dennis, I think you mentioned in the prior question, the senior leadership team, salespeople, people in tech and operations, you did a review of the total addressable market and what SEI could go after. Were there any areas that were sort of tangential to what you do currently that you wanted to expand into, I guess, we've hit on SEI Sphere. Is there anything else?

I mean there's some things we're working on in the kind of employee benefit space that will be tangential to our institutional business potentially. That's not financial services market oriented, that's kind of early days. And I would say, geographic expansion. So we have a good business operating in the U.K. It has some reach into Europe. We've had a presence in Asia, and I would say fairly thin presence in Asia for a long time, 20, 25 years, mainly focused on institutional asset management. We would -- I would argue, and I think Phil can comment on this as well because it affects his business more than anything else, that there's a pretty big opportunity for us to expand geographically with the capabilities we have in place today and with some of the assets we've added in the past year or so, principally like the Luxembourg. We have an operation in Luxembourg now to complement our Dublin operation.

Yes. In the last couple of years, we launched an office in Lux. Lux is the second largest jurisdiction for alternative funds. It's been really, really successful so far. It's helped us grow globally. In addition to that, we spent a lot of time within our Dublin office trying to get that to scale and to be able to grow faster. All of our alternative clients in North America want to expand to Europe. The ones that are in Europe already want to go to Asia. If they're in Asia, they want to go to South America. And it's just sort of back and forth. So we've expanded a few people over there, some of our best leaders to try to get it going a little bit more in all the different countries. So we just had people in Singapore trying to grow that book of business as well. So I think we're in 7 different countries outside of North America, and I think there's a fairly significant opportunity over the next few years to sort of grow our alternatives book over there.

Great. I think that brings us to the next point quite nicely. Part of the plan for the next 100 days is to take the strategy of the U.K. business and sort of brand globally. What does that actually entail? What changes might be needed for the business outside of the U.K.? And Phil, for you as well, any changes to the strategy for IMS as well within that?

So I was over in London about 5 weeks ago with our new CEO, and we went to visit a $1 trillion asset management firm and the -- what we learned very quickly is a lot of the firms view SEI as an adviser business or a tamper in the private banking market or the alternatives, but they don't really know what our combined capabilities are. So we very quickly decided maybe we have to have a little bit of a different approach from a sales perspective in those markets. So I think the way we've gone to market in the past may not be the way that we should do it in the future based upon the way the clients are structured in different countries around the world.

Yes, I would add that when we went out -- left North America and went to the U.K., we made the right decision around how to get started. So we picked 1 or 2 of our vertical businesses and used that as the approach to go to market and to start to establish ourselves. And it was mainly institutional business, and we started to build our SWP platform for Global Wealth processing. Al West, our CEO, founder at the time, he was very adamant that we start outside the U.S. with that technology development project because he wanted to make sure at the end of the day we had a global system, not a U.S. system that has some modifications that process global assets, but a global system that we could port back to the U.S. and be truly global. And so it's a big lift, a big investment, and we kind of run the business in those verticals. Now I think we're at a point of maturity where we don't necessarily -- aren't necessarily looking at running that particular market or even beyond that market in that same vertical dimension, but rather, because of the cross-pollination of our capabilities, as Phil mentioned, look at it as a single market with a rich closet full of assets that we can bring to bear in the market where the opportunities exist. And we're at a point of maturity, I think for that, we can do that now. We probably couldn't have done that 5 or 6 years ago because we weren't as fully developed in our capabilities, but now I feel we're at that point of maturity where that might make more sense than trying to run it like we run the business here in the U.S.

Understood. Maybe, Phil, a question for you on IMS. You talked about sort of taking a challenge on flipping on inside. It's probably a pretty challenging environment for a lot of your clients. Markets have been volatile. A lot of the commentary from the conference today from the private managers has been the deployment is going to be down. How are you thinking about growth of the business for sort of the next 12 months? Anything to do to offset that in terms of winning your business?

Yes. So now we're capitalizing on the trend towards outsourcing. So anybody who's an insourcer wants to look at considering outsourcing. We're focused on, as I said before, the global component and getting that business going a little bit faster. We have a lot of business coming in on the private side, whether it's private credit or private equity or real estate. And all of our clients also want to get into the high net worth channel, so we're kind of trying to help them with that. We have a very good solid investor platform, and that's helped us, helped those clients grow. So we're not seeing as many of the headwinds as other people might be seeing. We play in the very, very difficult complex side of the market. Our clients are very, very large, and their distribution capabilities are pretty amazing. So some of our clients are launching very, very, very large funds. And our job is just to keep up with them and support that growth. So we don't really see that many of the headwinds right now.

Interesting. Okay. You brought up an interesting point in terms of high net wealth. It's also been a big topic at the conference. So SEI is in a unique position, not only because you're between asset managers and distribution providers, but because you also have those capabilities internally. What is the best strategy for SEI to capitalize on the theme of alternative products into high net wealth? Is it manufacturing, distribution, some of both? And what would be the required build-out for that?

Dennis just answered that question, and he did a really nice job about 15 minutes ago, so I'll let him do it. He framed it up a little bit nicer than I would.

We have a long train ride back, so I'm sure Phil will pay for that comment. We really see it in 3 elements of opportunity for SEI because of our capabilities. And to start with that, we have 3 really strong pillars. We're really strong in investment technology. And processing technologies. Really strong in the investment operations space, the ability to process operationally, all types of assets and all types of clients. And then finally, investment management. We're strong asset manager ourselves. Incorporated in that asset management is the fact that we do have our own SEI manufacturer, if you will, alternative products. So whether it's private equity, we've had energy debt, a number of kind of more esoteric products that we've taken to market, principally in institutional space. So as part of our OCIO offering to institutional owners of assets, we incorporate alternative products in that overall portfolio construct for clients. So we will continue to manufacture product. We'll continue to build products, some of which is sub-advised or private equity funds or manager or manager products that we oversee the construction and allocation of capital to. And we'll continue to do that. So that manufacturing process will continue and the sale to the institutional markets will continue. When we look at our adviser channel and as a source of capital flows into our asset management programs, it's taking those same product capabilities, those that can be wrapped with a different product wrapper for the high-net-worth kind of mass affluent market and then can be incorporated in a portfolio strategy for an adviser to implement with a client. So we want to be very thoughtful about it in the context of if you're asking an adviser to use these types of products in client portfolios that they build for their clients, you need to help them figure out what are they replacing in the overall portfolio construct. What is -- how is it going to change the investment profile of that portfolio, the risk profile of that portfolio? Because as fiduciaries, they need to be on a good footing if they're going to put this product in a client portfolio, so -- but we have that outlet of distribution as we sort through that, but we also have the modeling and operational capabilities to support the delivery of those products and the incorporation of those products in a model portfolio. And then third is really Phil's business, the Investment Manager Services business, where we build our business on helping our clients with providing them a platform off of which they can take their business in whatever direction they choose to. So if there's a market that they want to go after and they need a certain product construct to support their entrance into that market, we can support that operationally. And not only that, we can support that from a data and information standpoint and then, ultimately, from a front office technology standpoint. So it's giving our clients on the Investment Manager Services side the platform off of which to go to market. And we have capabilities that Phil's team has built in our IMS business around trading. So taking a highly paper-intensive process and turning it into an automated process. We've acquired a company last year called Novus, which we acquired principally in our -- for our institutional business, but it is a kind of connective technology between alternative firms and the institutional markets, but to the extent we can help those -- those investment managers with the right product wrappers, use that same platform for greater access. If an investment manager happens to cross path with an SEI adviser, they know that we'll have a platform that can incorporate the trading and implementation of their product. So we really have these 3 tiers of or 3 areas of opportunity, both distribution for ourselves, adviser application and reach to the high-end use of alternative products in the high-net-worth markets and then giving a platform to investment managers to attack the market they choose in this space.

So to add to that quickly, for our traditional clients, we are administrator for some auction funds, some interval funds to get retail off to those investors. On the alternative side, we help them partner with [Kaiser], iCapital as an administrator. We also help them go direct to Morgan Stanley, UBS or wherever they want to go. So our job is to support their growth. So we're helping a lot of our clients sort of grow their book of business in that way.

And Phil, you mentioned auction and interval funds. Do you get a sense that there is one structure that investors or the asset management community is leaning more towards than others?

Yes, I'm not sure I know the answer to that. As far as I have a guess, it looks like the interval funds are doing a little bit better than the auction funds right now on that traditional side of the business. And I think if you talk to some of the largest alternative managers, if they could go direct and not through an intermediary, they'd love to do that as well. So I just think it's a little early on to kind of figure out where it's all going to end up, but we're trying to put our chips all over the board.

Got it. Got it. Do you think there's a timeline in which the winners in the space are ultimately going to be decided? And if there is, roughly, when do you think it is? And how vigorously is SEI putting its resources behind this to be one of those winners regardless of one of the -- which are the 3 options you're going off to?

Yes. I think we're going to -- at least the way I look at it is this is additive to our existing capabilities and our overall business. So if this were just a stand-alone business we were trying to build independent of anything else we did, it would be a tough road to go down. And you could have success, but you don't really know how big the market opportunity is really going to be in the end. But because this is additive to existing platforms and existing capabilities and its expansive of what we're doing today, even if it's modestly successful, it will be additive to the overall business success we're having. Because I'm not -- personally, I'm not -- I know there's a lot of noise and smoke and interest in accessing the mass affluent high-net-worth markets with, in some cases, some complex products, but I think it's really important to make sure the market is -- we're helping the market incorporate those products in the right way, for the right clients, for the right reasons. And to the extent we could do that, it will be additive to what we do overall versus have to -- having to stand on its own as kind of an independent opportunity. I don't know if you would...

No. I mean, I think you're -- I mean, I think you nailed it.

So I think, like in IMS, if you take that business, the fact that we can support mutual funds and CITs and separately manage account program participation and partnerships and onshore activity, offshore activity, institutional account processing. So however a manufacturer would look to wrap their capabilities to go to market with the right product wrapper, we can support. Each of those individually stand-alone could be good businesses, but it's really the fact that we have this platform that allows firms to choose how they want to go to market, what product wrapper they want to go to market with and that we can support it in aggregate is really what differentiates us. So each individual piece doesn't have to economically make sense on its own, but the richness of it all is what increases the value and what we do in this business. And that's true really across all of our businesses.

Right, right. Maybe switch gears a bit. You mentioned SEI Sphere earlier in the conversation. It's clearly an important part of the Investor Day. It's very exciting. I think SEI is coming from a differentiated angle in terms of offering Cyber Networking Cloud. I was wondering if you could expand on what you think the growth outlook is for SEI Sphere and then how it fits into the broader firm as you're thinking about one SEI bundled solutions, potential pricing benefits, any of those considerations.

Sure. So SEI Sphere, for those who may not know, is a cybersecurity data protection, network protection service that we're offering to really any market -- we're targeting a certain-sized client, clients with maybe 1,000 and above employees, but it's industry-agnostic because everybody has this issue if you're operating a company today. Now we're focused and oriented our start in this business around more of the financial services segments and have been able to attract both existing clients of SEI to adopt these services more broadly within their institutions, but also nonclients of SEI. So this is the only relationship they have with SEI. And it takes -- there is -- we've been in market for, let's say, about a year. It takes time to get some traction. We do have some traction. But we don't have, I'd say, kind of the explosive moment yet of the RFO bring in. We're still out kind of really getting ourselves established, but we have some very good relationships. And 2 things we've noticed with those relationships. One, there is organic growth kind of embedded in them. So we have -- one of our clients is a commercial bank. They're not a client of SEI in any other space. Every time they open a branch, every time they expand themselves, it adds more endpoints that require protection. And that addition of endpoints increases revenue for us in terms of the overall client size. We have high expectations for this business. It's an area that -- and I believe that there will be a tipping point for us that we'll reach a certain size, certain level of clients, and we will start to have higher demand coming our way versus having to try to generate that demand. And that's when we'll get the growth. It's very scalable, quicker, right, relatively quicker implementations. We've had good results in -- these are not good stories that you like to tell, but they are good stories in the sense that we have real events that have occurred that we've been able to prevent from causing damage in the clients that use our services. The complexity is getting greater, and our 45-plus year history of doing this in protecting our own assets and the client assets that are with us is something we're building off of. Phil, maybe talk about cross-selling.

Yes, I think, within our world, a lot of our traditional and alternative managers, especially the ones that are small to medium size, could very much avail themselves of the services, and they're in every deal. So we're talking about how we can help our clients with that. And I think it's going to create some sales momentum over time. But I think we're definitely making progress.

Great. Nearly hit the 30-minute mark and haven't had a question about private banks yet. So there's $44 million in the backlog. Confidence in getting that implemented over the next 18 months. We've got some headwinds. The CEO coming up. What does success look like for private banks 18 months from now in management's view?

Yes, my view, it's stability. It's implementation of the backlog. It's replenishment of the backlog as we install it. And it's by the end of next year showing a real trend line in margin improvement that we have confidence that we'll carry into 2024. So it's -- first and foremost, it's making sure our clients are taken care of, installing the clients that we have committed, and we're very good at that, at getting clients on board, which includes additional implementation events with U.S. Bank on our SaaS version of SWP. That's -- those are big milestone events. That one we had end of September was a big milestone event as the first SaaS user of SWP technology and the books of -- other additional books of business will bring on next year and then the following year are really important. And then it's selling in those addressable markets that we talked about, and then it's the work that Sanjay Sharma is doing in running that business and getting the cost side of the business aligned better to where the revenues are. And that's already in flight as well. Do you have any...

No, I think you...

In terms of about help as much as possible to help Sanjay grow that business with clients that are manufacturing also.

Okay. So in terms of the margin, we've had some big positive tailwinds, big negative tailwinds this year in terms of topline dynamics and some expenses. How should we think about operating leverage into next year? That's kind of part A. And then part B, if the business does double over the next 5 to 7 years, where do you think the margin could go?

Do you want to take the first part? Or you want me to take the whole thing? So -- thank you. Well, I think the last part, I think that, as I mentioned earlier, the revenue target is really important, and that's, a, because we feel really confident that it's doable and achievable with the markets that are right in front of us and then with a little bit of add on the back end. And the way I've modeled it, I would say, more or less on the back of envelope, is just kind of margin maintenance. If we stay in that 29%, 30% margin range in terms of operating margins, then we'll have a very profitable business. And our growth rate on the bottom line will be, I think, very satisfactory. I think to the extent we get growth in IMS and we get growth in areas where we have a little more scale and leverage opportunity, we could see some margin improvement. The one thing we're very clear about is we will continue to reinvest in these businesses that Phil mentioned that we increased the investment spend in IMS this year. That's true. That's always true at SEI. We're always looking at 2 things, what are the new things we can invest in to have longer-tail opportunities and what are the things we need to invest in to maintain the businesses we're in and to maintain the relevance of the businesses we're in to our clients. So I'm very kind of loathed to say our margins will be so much higher because there are so many variables that go into it. And one is kind of opportunities are kind of beyond that horizon that you're going to be spending money on?

Yes. So from a short-term perspective, we could pop the margins a number of percentages within the business that I run, but we're always looking 1, 2, 3 years out. So now we're investing as heavily as we can within the current framework that we have just to kind of capitalize on opportunities that are out there. So we could always get the margins to be higher, but we're focused on growing as fast as quickly as we can, as safely as we can. So we just want to keep our clients happy. We think that we do the right thing for the clients. It's going to pay huge dividends over time. So we're a little less focused on what exactly that margin is, but we're much, much more focused on growth, but that doesn't mean we're going to sacrifice the margin because we manage it aggressively.

Understood.

And we're going to continue to be consistent with our business models we feel are -- we've operated under for a long period of time, very recurring revenue-oriented, scalable businesses. So as we grow the topline, there is the opportunity for margin improvement ex the reinvestment. High cash flow-generating businesses, so businesses that don't require the use of our balance sheet or high uses of capital beyond just kind of the reinvestment to generate revenue and profitability. And one thing we are going to invest in more going forward is automation. So one thing that will help you -- help us with margins is not just topline growth and scale, but that topline growth over time with some of our businesses, pricing pressure is going to be ever present. It's ever present today. So you have to get more efficient and kind of focus on and driving efficiency in how you operate to help you offset some of that kind of topline pressure on pricing. And it's -- one of the things that's not very interesting from the outside in, but all the stuff that happens behind the curtain to deliver services every day, that requires investment and it requires improvement. So -- and it's not the exciting stuff. It's not the shiny object on the -- that sits on your desktop. But when you push the button on your desktop, something happens. And that kind of behind-the-curtains stuff, we're in that business. We're in an operational business. We're in a technology services business. We have to deliver that as efficiently as possible with the highest quality as possible, and that requires kind of constant investment in. So automation is a big theme of ours right now.

Try to squeeze one in the last couple of seconds here. We had the dividend increase [indiscernible] Any changes overall to capital allocation plans?

No, I mean we're -- our Board is pretty consistent about use of capital. We're a high capital-generating firm and certainly reinvest in the business. M&A may have an impact at some point, but there will still be a consistent approach to buyback and dividend and probably in that same kind of weighting that we're at today.

All right. And with that, I think we're out of time. Dennis and Phil, thank you so much for the time today, for all your insights. We really appreciate it. Thank you.

Thanks, Ryan. Thanks for having us. Thanks.

Thank you.