Third Quarter 2000 Earnings Conference Call
October 16, 2000
Al West (Chairman and CEO): Welcome everybody. All of our unit heads except Carl
Guarino are on the call today, as well as Kathy Heilig our Controller. I will recap the quarter
first, and then I will turn it over to each one of our units to comment on their results for the third
quarter. We will then field questions at the end of each unit’s discussion. And at the end Kathy
Heilig will come on to give us important company wide statistics. And we will open it for
general questions at that time. And so we will have questions after each unit discussion, and
then we will have questions at the end.
For the quarter, we finished a very strong third quarter. Earnings rose 55% from a year ago on
revenue growth of 33%. And our diluted earnings per share of $.48 represents a 55% growth
from the third quarter a year ago as well. For the first three quarters of the year these numbers
then correspond to 43% earnings growth on 32% revenue growth for the first three quarters.
And EPS growth of 44%. And EPS for the first three quarters is $1.25 per share.
Now the third quarter was somewhat stronger than anticipated because of stronger than expected
growth almost in every single unit throughout the company. And also temporary gifts in some of
our programs of investing and technology. Now what is underlying these numbers and our
growth of not only this quarter but the last couple of years are three notable things.
First the market acceptance of our services is steadily increasing. Our integrated outsourcing
solutions, what we call them, are each providing an investment business solution and are rapidly
being adopted by scores of companies, institutions, and intermediaries. There are many
indicators of this market acceptance, and I just want to point out a few. And then each one of the
units will add to these indicators of our market acceptance.
First, our non-cash asset balance under management grew to over $51.8 billion. Now that is a
$10 billion growth from the beginning of the year and a $17.5 billion growth from a year ago.
And what is really important, this was the key and capital markets that essentially moved
sideward or even some of them down. And it has been a period where many asset managers
didn’t grow or grew at least modestly. Secondly, our cross selling of our new services to
existing clients particularly in our technology business is picking up a lot of steam. The trend is
led by an internet account service that helps to offer internet services, and new first rate services
that we do sell to banks. And third, our outsourcing services are also being accepted in new
markets of hedge one managers and offshore fund sponsors. And also becoming very well
accepted in the banking markets, as well.
The second significant contributor to our success along with market acceptance is the leverage in
our operations which has helped us grow after-tax margins to 17.7% in the third quarter versus
15.1% a year ago. We are achieving economies of scale on most of our back office and
investment management operations, and we also have many shared technology development
projects that leverage our technology talent. For instance, the internet account access product
and the first rate performance service that I referred to a second ago that are being sold to banks
is the same system being used by our 7,000 RIA’s. And so in one investment we get multiple
But as proud as we are in the increase in the margins the figures do understate our true leverage
because of the significant buildup in our investment in our futures which is the third phenomena
that is underlying our success, and which I want to cover now. And it is these investments in our
future that insure the sustainability in our growth. We are investing to enter global markets and
we feel real good about the long-term outlook there. We have gathered about $5.4 billion in
assets under management globally, and have recently entered global markets with our technology
Our first internet business which is Treasury Point is successfully through its beta phase and its
future looks bright. And our entry into the defined contribution business, a recent investment,
has yielded eleven new clients this year. And finally, other internet investments throughout our
business are improving our client service, and making us more efficient. And so all of these
things make us very proud of our recent history including the third quarter, and optimistic as we
And so at this point, I would like to turn it over to Rick Lee (?) to discuss our technology
services business. Our technology service business had a strong quarter despite being engaged in
repositioning I would say most of its offerings and expanding its business outside its traditional
Rick Lieb: I am happy to report that revenues in the third quarter were $57.6 million compared
to $54.7 million in the previous quarter, and $46.9 million in the same quarter of 1999. Year-to-
year increase is almost 23%. From a profit standpoint we achieved $20.5 million that compares
to $20.9 million the previous quarter, $16.6 million in the third quarter of 1999. The percentage
increase year-to-year is 23.5%. Operating margin is virtually identical to last year’s third
quarter, and so year-to-date we are tracking at 36% plus margins compared to 32% last year.
Overall we showed another strong quarter and it reflects great market acceptance of our products
and the leveragability across the company of all of our products. Two items are worthy of
First, although revenue was up margins compared to second quarter were slightly lower. As I
said last quarter, the timing of expense related to investments quarter-to-quarter can move the
margin number. That timing issue is particularly important because our reinvestment in this
business is very strong, and we are committed to that reinvestment. In addition, as I continually
emphasis on every call this business segment must be examined on longer periods than a quarter.
Secondly, during the last two quarters of last year and the first quarter of this year we
experienced some slowing of new sales activity due to Y2K fears. This trend has turned around.
We are now through the Y2K slowdown, and our sales activity is robust. The activity includes
both the strong new name pipeline and sales of additional products in which we’ve been
reinvesting over the past ten months. A latter example of that is first rate in our investor
performance station that is the exact same product, as Al said, that is utilized by our IAG Group.
In addition, the new name pipeline is both service bureau and back office prospects which
includes many regional and community banks. And this is very important, as well as non-bank
opportunities. These non-bank opportunities as well as the community bank and the back office
which we’ve been working on five years means that our market is gradually expanding. This is a
change from recent years in which our new name activity was concentrated in a large national
bank market. This is an excellent pipeline, the best in a long time, and in closing I want to
emphasize that this is a growth business. Thank you. Al.
Al: Rick, before opening it up to questions I do have a question for you.
Al: You’ve just entered a bunch of new markets which I think that you discussed. Talk a little
about the size of the new markets.
Rick: Well, one of the things that is going on, for example, is that and this is why it is difficult
to size it, is that many investment management firms are opening up trust departments. And
many people who are leaving banks are opening up their own private trust companies. And so in
terms of trying to get a handle on this it is difficult because it is growing so quickly. All I can
say is that the market looks very substantial.
Al: Thank you Rick. And now we will open it up for questions from anybody.
Operator: Ladies and gentlemen, if you do have a question please press the 1 on your touch
tone phone. You will hear a tone indicating that you’ve been placed in queue, and you may
remove yourself from queue by depressing the # key. If you are using a speaker phone please
pick up your handset before pressing the numbers.
Our first question will be from the line of Jack Spears from ABN AMRO. Please go ahead.
Jack: Thank you. I am embarrassed to say congratulations again. You always seem to do such
a great job.
Al: Thank you Jack.
Jack: Could you give us a breakdown on the sources of revenues on the technology side between
what is recurring and what is one-time.
Rick: I don’t have this for this quarter, Jack. All that I can say is that it is staying about the
same. And typically we’ve seen in past quarters some distortion of one time. I don’t see that in
this quarter at all. A lot of the one-time projects that we started at the beginning of the year have
trailed off. But I don’t have the exact numbers, but I am happy to get it for you.
Jack: In the past quarters you’ve talked about from going from three to two day settlement. Has
that been a factor in stimulating? You seem awfully positive on the pipeline, and has that been a
factor in stimulating the pipeline?
Rick: As you know, or you may or may not know, the deadline has been moved off. What is
driving this is the broad trend of outsourcing and the nature that people in need and trust business
want to outsource their processing activities.
Jack: Al in his part mentioned some international prospects, and I think in the last conference
call in response to one of my questions if I remember correctly that you talked with some
international opportunities. Could you begin to give us some direction or quantification of what
that could mean?
Rick: I can’t yet Jack. I said that we were close, and we are still extraordinarily close. And
appetite in Europe for technology looks huge.
Jack: Who is your competition there?
Rick: Right now we don’t seem to see any.
Jack: And what about the competitive landscape in the U.S.?
Rick: In the U.S. the competitive landscape looks pretty good right now. In the large bank
market it is still in-house, and we are still seeing slowly but surely a gradual migration
outsourcing. We have relationships with six of the top ten banks. In the outsourcing market for
that segment we candidly don’t see much. M & I has made some moves to do it but they seem to
pull back in the last six months from doing it. And as far as we can see we don’t see anyone else
in the space.
Jack: Have the margins for outsourcing, has that been profitable now?
Rick: Oh yes, it has been very profitable, Jack. I think that I said to you a few years ago that it
was on its way towards a $50 million revenue stream and I think that we will break north of that.
I think that for this year it is $25 with great growth potential. It is very healthy in the black, and
the leveragability. Again, the leveragability is really key to that. Because not only does it
leverage what we do on the trust systems side, but it also leverages what we do for IAG.
Jack: And you seem to be so positive on growth, and I can’t resist. In the past when I’ve asked
this question you talked about 8 to 10% top line growth. I realize that we are talking long term
because I don’t want to get into the next quarter. You are now saying that the top line growth
longer term is well over 10%?
Rick: Jack, I used to say that I was optimistic that we would be in the low teens and hopeful that
we get to the mid teens. I am now optimistic that we will get to the mid teens, and hopeful
Jack: Can I hold you to that?
Rick: You always have for ten years.
Jack: We will let someone else ask, and then thank you.
Kathy: Hey Rick, it is Kathy. The project revenue is down quarter-to-quarter.
Rick: Thank you Kathy, I thought that it was.
Operator: And of our next question we go to the line of Bob Ax (?) with KBN Securities.
Please go ahead.
Bob: If you could talk about the pipeline a little bit. The percentage of the pipeline that is a
non-bank channel for technology services area versus the community bank channel? That would
be very helpful.
Rick: I think that it is probably two-thirds, one-third, Bob. And unity versus non-bank. But that
non-bank pipeline is growing in the sense of the number of people that we are talking to.
Bob: And how is that say versus around about a year ago?
Rick: I want to look over the last two years, because last year was a little Y2K. I think that two
years ago you saw nothing. I don’t know that for a fact, and there might have been one or two
and I could be wrong. And now we are seeing a bunch of non-bank potential. I may, if I erred I
erred on the side of understanding the non-bank pipeline a little.
Bob: Okay, thank you Rick.
Operator: And if there are questions at this time push the 1 on your touch tone phone. We
have a question from the line of Brad Moore with Putnam Lavelle (?). Please go ahead.
Brad: Hi, good morning Rick. Just curious, can you comment, were there any one-time buyout
revenues or fees in the revenue number?
Rick: Brad, if they were, they were pretty small. Kathy, I don’t think there were any, and could
you help me with this?
Kathy: One-time, none, zero.
Rick: Thank you, I was right.
Carmen Romeo: This is Carmen, and could I just make a clarification. I should also tell you
that Rick Lee (?) is in New York today, and so he is also using technology to our advantage by
getting us all hooked up here on the same phone. But I think Jack, you had a question regarding
one-time implementation fees, and in the quarter they were about $5 million compared to about
$7 million in the second quarter of Year 2000. And so it was about a $2 million swing quarter to
Rick: Down Carmen, thank you. Other questions please.
Brad: Rick, can you elaborate on the trend in pricing for those services for your trust services?
Rick: In what sense Brad, up or down?
Brad: Yes, just the direction of pricing that you are seeing right now?
Rick: Direction has been consistent for the last two or three years. We haven’t seen any big
push to drive us down, and it has been about the same.
Brad: Okay. All right, thanks.
Operator: Next we go to the line of Jack Spears (?) of ABN Amerow. Please go ahead.
Jack: I can’t let up on your Rick.
Rick: That is all right, Jack. I would be disappointed.
Jack: Expense took a big jump in the third quarter. Could you give us some flavor of why? I
think that it was like $25 million in the second quarter, and $29 million in the third.
Rick: I’m sorry, say that again please.
Jack: Trading (?) and development expense was $29 million in the third quarter for technology
services versus $25 in the second quarter, and just what were the contributing factors?
Rick: Again, I don’t want to do accounting on this. Last quarter I said that we were understated
because there was some lag in development. And sometimes it catches up and sometimes it lags.
The only way to look at this business is year to year.
Jack: Okay. Thank you.
Operator: We have no further questions in queue, and you may proceed. Pardon me, we do
have a follow-up question from Brad Lowe, Butte & Lavelle (?). Please go ahead.
Brad: Yes, hi Rick. Can you comment just quickly on sort of the quality of the clients then that
you are seeing in the non-bank sector? Maybe by size? Director record? I just want to get a
sense as to what kind of clients you are experiencing the most growth in on the non-bank side?
Rick: It is all over the place. It is, again, investment managers who are starting up trust
companies. Trust companies that are independent and startups, trust companies and even wire
houses, and it is really across the board. Did I answer your question?
Brad: Yes, yes, that helps. Thanks.
Rick: Okay. They are not national banks, I mean that they are not the size of national banks.
Operator: And again, we have no further questions at this time. You may proceed.
Al: Okay, I want to leave it with Rick to give an update on the mutual funds services business.
And the mutual funds services business has been under redirection as well, and is emerging from
its change process. Rick, do you want to take a little bit longer.
Rick: Thank you Al. Revenues in the third quarter for mutual fund services were $31.8 million
compared to $32.1 million in the previous quarter. And $27.8 million in the same quarter of
1999. Year-to-year increase is just over 14%. From a profit standpoint we achieved $7.8 million
and that compares to $6.3 million in the previous quarter, and $6.2 million in the third quarter of
1999. The year-to-year percentage increase is 26%. Operating margins for the third quarter
What is good news is that average assets from the investment management clients, domestic and
global increased by $9.5 billion, while the bank segments assets declined largely as a result of
the loss of Bank of Boston after their merger with Fleet Bank which I previously discussed.
Since the beginning of the year assets from the investment management segments have increased
by $26 billion which is about a 52% change. Our revenues decreased slightly reflecting both the
loss of Bank of Boston and a somewhat lower level of cross (?) sales, specifically brokerage.
Margins jumped as the result of a completion of a large technology investment project. We
expect to Phase II this project but not until next year. Meanwhile our investment rate in the new
non-domestic, non-bank global and hedge fund markets continue to be strong. I want to
emphasize this, that we are focused on those new non-global markets, and we will not back off
of our investment rate.
Now, generally we are pleased with the third quarter sales results in this product line,
specifically, as I said, in the two new investment manager and global sectors. We closed seven
new clients representing about a $5 million run rate when fully funded with recurring revenues.
One of our new global clients, for example, is the Scandia Group which is a great example of the
type of firm that has selected SEI to provide a total back office solution, and represents again,
market acceptance of our products and services. Scandia is a global financial services business
with funds under management in excess of $90 million. The new fund complex is already at
$750 million, and it is expected to grow to $1 billion.
The fact that Scandia chose SEI to provide all accounting administration, trustee and custodial
services to its new array of cross border multi currency funds is a testimony to the advanced
technology and systems capabilities that SEI has built over the years. I would also like to point
out that is the same set of technology that will be used by our global group and it is very
Finally, I would like to make a comment on a press release that I put out last week. I received
many phone calls regarding a recent two bank acquisitions that we were recently announced.
These calls were about the impact that those acquisitions might have on this business segment,
particularly if we lost those two fund relationships. In addition, those potential losses would be
in addition to earlier losses.
I would like to point out that losses of bank clients in this business segment due to acquisition by
banks using competitors’ products or in-house solutions have been a fact of life in the past three
years. In 1998 we lost four major complexes, and last year one complex. Despite these losses
revenue in Q3 was 30% higher than Q3 1998. It is also the reason why our investment in the
non-bank market and the technology for these markets and all of the markets will stay high.
Thank you Al.
Al: Okay, I will now open it up for questions on the mutual funds services.
Operator: And again, if there are questions at this time press the 1 on your touch tone phone.
First of all we will go to the line of Jack Spears with ABN Amerow. Please go ahead.
Jack: Rick, I thought that in the past you had looked for about 20% operating margin in this
business this year due to investments. I am kind of surprised how well you did this quarter,
where the margins were close to 24%.
Rick: Jack, as I said, the technology investment is subject to the same kinds of things that the
technology services unit is. One of the projects that we had underway, they got done faster than
anticipated to get it out to the market. And that reflects the little bump up in the margins. Again,
I expect to startup more technology investments the beginning of next year.
Jack: Are you starting to sell your services abroad here?
Rick: Absolutely. Remember that global, we’ve had a big investment in Dublin in
infrastructure and a very substantial investment in a sales force to cross sell these offshore funds.
And so it is really starting to pay off.
Jack: And what would be your outlook? Can you grow this business 20% and maintain
margins in the low to mid 20’s?
Rick: That is our hope.
Jack: Thank you.
Operator: Next we go to the line of Pete Heckland with Hope Breedlowe (?). Please go ahead.
Pete: Good morning Rick.
Rick: Good morning Pete.
Pete: I just wanted to follow up on those bank mergers. If you can give us a little bit of
clarification. I know that it is still early and the mergers have not closed, probably systems
conversions are not at the very, very top of their list in terms of what they need to do to close
their acquisitions. But how do you feel in general? It looks to me based upon the relative size of
Summit Bank Corp, U.S. Bank Corp, and First Security, that those three could be potentially lost
in 2001 in the mutual funds services business. And then certainly Bank Boston was one way in
the second quarter. It appears that that 20% top line growth, is that a longer term number? I
guess that the way that I look at it in 2001, the top line growth is going to be more difficult.
Certainly pending the final disposition of some of these contracts.
Rick: Well, I don’t know exactly your question Pete, but let me try to comment on mergers in
general. First off there is a bunch to be done by the banks with the regulatory authorities before
they get a blessing to change. And that is on the fund side. And so you sort of look not at the
beginning of the year for them to change, but later in the first part of the year. A second piece of
that is that there are customer concerns. And so it doesn’t happen that even when they get the
bank regulator’s blessing that the funds go away right away. They will go away a little later than
that. And we’ve seen all sorts of variability of when it leaves longer than a month.
Secondly, on the technology side that is a much longer term tale. And there is a process that they
go through for evaluation and then conversions can take a year. In general, just a comment on
the mutual funds side. I was asked in 1993 at an analysts meeting in New York what keeps me
awake at night. And once or twice a year I said that it was bank acquisitions. That was at a point
in time when we were totally into banking on both product lines as a company, as well as a
division. And since then we’ve diversified predominantly out of banking, and in both product
lines we are aggressively diversifying.
And so what I’m looking at and what I am hopeful for on the mutual funds services side is that
the efforts that we have for investment in non-bank, the hedge fund, and the global marketplace
pays off, and we stay ahead of the curve on the acquisition piece. And also as we build
infrastructure that we may get the win instead of losing.
I don’t know if I answered your question?
Pete: I mean that helps. You guys have done, give credit where credit is due, and you’ve done a
fabulous job of negotiating the mergers over the last decade. And so I guess that my concern
here in the near term from a modeling perspective, and I know that you guys manage your
business for the long term. However, over here on the buy side and sell side we need to manage
our models and our investment decisions on the relative short term.
And so I am just looking at, it appears to me that there is roughly a decent chunk of revenues
even considering the recontracting of U.S. Bank Corp and Summit in 1999, that there is a decent
chunk of revenues that could be at risk. It looks to me more like flat revenue in 2001 for this
business, and it is perhaps more likely than that 20% growth rate.
Rick: Again Pete, all I can tell you is what I hope we will do, and it depends on winning.
Whether we win or lose those, when they go away, and how successful we are in the non-bank,
global, and hedge fund marketplaces that are gradually growing. And also the market too can
have an impact on it. I wish that I could tell you. I mean if you lose you lose, and I’ve had
sleepless nights in 1994 and 1995 when First Fidelity and Mid-Atlantic was bought I don’t think
that I slept for a week.
Pete: Right, right, okay. I guess one last question. When I compare trust and I compare mutual
funds, and I kind of do some expectations it looks like that of the six recent mergers that I think
could have some impact on you that in terms of trust it looks like you have a better than average
chance of having a net gain. And in terms of foreign services it looks like you have a better than
average chance of having a net loss of some business. Would you say that is correct?
Rick: The last thing that I would hate to do is to have any CEO read that I have booked a win or
booked a loss, and so I really can’t comment on that.
Pete: Okay, thank you.
Rick: Sorry, I know your problems, and I’m sorry.
Operator: And then we go to the line next of Gary Prestimino (?) from Tucker Anthony.
Please go ahead.
Gary: Two quick questions on the mutual fund side. Can you break it down to what percentage
is bank versus non-bank, or versus where you were maybe last year at this time?
Rick: Gary, again, I’m in New York and I don’t have those numbers in front of me but I will get
back to you, absolutely. It is an easy question.
Gary: Okay, and then the other thing. You said that you signed seven new clients with $5
million recurring revenues. Are most of these non-bank clients.
Rick: I think that we had one bank client in there.
Gary: Okay, what does the pipeline look like going forward?
Rick: Again, we are new in the area, and there is definitely a pipeline. I don’t know how to
characterize it. Let me give you another, the number of banks is almost non-existent in that
pipeline. It is all global, investment manager, and hedge fund.
Kathy: Hey Rick, the last question about the bank and non-bank. It was 10% non-bank last
year and this year it is 20%.
Rick: Thank you.
Operator: Next we go to the line of Gary Moore from Putnam Lavelle (?) for his questions.
Please go ahead.
Gary: Hi. Can you comment on, I know that you have commented here on assets that are
administration in your disclosures about the net increase. Can you talk about, obviously the
markets were flat, and so they probably didn’t have much of an impact. But can you talk about
gross sales versus redemptions, in terms of how that impacted your balances for the quarter?
Rick: Yes, in general, Gary, we have benefited from that rather than have redemptions. And I
don’t track it. But we have, we are lucky enough, I would say that we are smart enough to pick
managers with real good track records like Turner, like Pilgrim Baxter, like Oak. And they
generally have benefited from net inflows. Generally, and I don’t know of the specifics as a
result of the track records for their products.
Gary: Okay, and so you are saying that in general you are seeing an increase in net cash flows
from your investment management clients.
Rick: In general, but I don’t track those. After last week I don’t know what it is like any more.
Gary: Thank you. And then can you just give me a sense as to how successful you’ve been in
terms of moving the clients up the value chain of services in terms of say for accounting, moving
clients up from custody to accounting, that type of migration up the value chain? Are you
experiencing an increase in the profit rate per client?
Rick: Well, I am going to answer it a different way. As I said last quarter, we are really focused
on cross sells, and part of that, there is one big component of the reinvestment besides our
investment in new market such as hedge funds, global, and investment managers has
traditionally been technology. And that is technology to cross sell.
And also we’ve been focused on cross selling other SEI products that are very leverageable. Our
technology is leverageable, our brokerage is leverageable. And as I said in the last quarter, I
track those week to week. And so I track how much they are using other SEI products which we
never used to do.
Gary: Can you comment in terms of the number of mutual funds now that you are doing daily
pricing versus what you were doing in the second quarter or earlier in the year?
Rick: Well, I do it by the number of portfolios, and I believe that we’ve grown a bit. I would
have to get the exact number for you. But, again, some of our clients open up new portfolios.
That is part of what they do, and that might skew that number a little bit.
Gary: Okay. Finally, can you comment in terms of how much growth you are budgeting for the
hedge fund as a relative proportion of total growth in this segment?
Rick: I don’t do it that way. I basically open the spigot as fast as we can get it. That market
feels great, and it is a market with unlimited potential. It is a market that is growing like a weed.
And I’ve said to them bring them on as quickly as we can get them. I’ve got an investment in
infrastructure in Dublin because most of them are offshore, and those deals tend to be a lot
smaller. But I don’t budget a specific number.
Gary: Okay, thanks.
Operator: And again, if there are questions on this portion of the presentation please press the 1
on your phone at this time. And we have no one else in queue at this time, and you may proceed.
Al: Thank you Rick.
Rick: Thank you Al.
Al: I would now like to turn it over to Carmen Romeo to speak first about overall asset
management, and then address the IAG business specifically. Asset management was a strong
contributor both revenue and profit growth in the third quarter, and that growth was led by the
IAG business. And by the way, once again, we have been confirmed by Feruie (?) as the number
one provider of mutual fund wrap programs above some very big names in the investment
business. Congratulations Carmen.
Carmen: Thank you Al. I will cover briefly the financial results for the asset management
segment, and then talk about some highlights within the advisory channel. And then turn it over
to Ed Loughlin and to Dennis McGonigle to talk respectively about their particular businesses.
To begin with, revenues for the quarter of asset management was about $58 million with
operating profits of about $22 million and that was 39% operating margin. This compares for
the three-month period of last year of $36 million in revenue and operating profit of $10 million
or 28% margins.
When we look at the nine months for this year revenues from this segment were about $157
million for about 62% increase from that reported for the first nine months of 1999. And
operating profits grew by 78% over the amount reported last year to $50 million for the nine
months ended September 30th, 2000. And so we had a very, very strong quarter.
And we’ve got a couple of things going for us. One is the continued absolute positive cash flows
in all of our businesses, together with the economies of scale that are inherent in an asset
Now, with regards to the advisory business, we continue to sign new advisory firms. And in the
third quarter we signed 228 additional firms. For the year-to-date we have signed 558 individual
firms, totaling about 3,600 firms. We always convert firms into individual reps, and we have
signed up 531 individuals, 1,400 individual reps for the year to date, and we have about 7,300
individual advisors selling our programs.
Year-to-date growth in terms of net cash flows, and that is what we look at every single day, we
have net cash flow of $5.6 billion in the advisory channel, and Al said before, that is a market
that is either sideways or slightly down. And so there is no appreciation in that $5.6 billion
number. If you compare that with the growth last year for all of the 1999 was net cash flow of
$5.3 billion. And so we are on pace to obviously increase that and sustain that earnings per that
Now in terms of leverage, as you’ve heard before from both Al and from Rick, we use the trust
3000 system to do all of the investor accounting. And we also use the enhanced performance
reporting application from first rate. IAG is using it now, and we will be building it out as an
internet deliverable the latter part of this year. It will provide our clients with the ability to get
on demand over the internet, after tax reporting. And we are the first firm to be able to do this
for such a large number of individual investor accounts.
The second part of leverage is our IAG account opening initiative which we started about a year
and a half ago. It will be an internet deliverable, and we will be rolling that out internally in the
fourth quarter of this year. And we will be able to offer that to our client advisors sometime in
the late 2001. But it is the kind of application that we will be able to use in our outsourcing
The last point about leverage is that year-to-date investment advisors throughout the United
States have brought to our institutional management business about $1.3 billion of new assets.
And these are situations where the advisor has the relationship and the advisor turns that
relationship over to one of its sales people and they pledge it and service it.
In terms of looking at the future, in previous conference calls we’ve talked about the launching
of our variable annuity product, our cash management product, and our separate account
management program which will be combined with our mutual fund program. Let me just
briefly give you a status report on those.
The variable annuity program was launched in mid September. We are in the process of getting
approval from all of our broker/dealer clients. We probably have about $5 or $6 million in that
program today, but we feel pretty good about the prospects of that program.
Cash management and the ability to write a check against the investment account is launched. It
has been launched to a group of about 25 IRA’s as a beta site, and they’ve accepted it. And we
have almost $1 million in that group. And we will be formally introducing it to all of our clients
on November 15th.
With regard to the separate account management program, we expect to start a road show in mid
January, and we expect that this application or this program will offer our clients an opportunity
to go after very large accounts which a mutual fund program is not necessarily appropriate for.
And so each of these three additional programs we believe have significant upside potential,
gives the advisor the opportunity to offer to their clients a more comprehensive solution and
allows them to control that relationship in perpetuity.
And so the long and the short of it is in the advisory business we continue to grow. And we
continue to enhance the offering that we are making to our advisors. That concludes my
Al: Thank you Carmen. Before I turn it over, Carmen, please elaborate on how IAG has been
able to grow really rapidly through a period when the market has not been so good.
Carmen: Well, when we talk to a new advisor it as much a story about outsourcing the back
offices as it is about outsourcing their investment management to us. And the fact that we’ve
been able to make it easier for the advisor from an administrative and operational point of view
allows us to be significantly more competitive in our product offering. And so the theme here,
again, is business solution and an integrated outsourcing solution. And so it is not necessarily an
asset management product sale that many in the industry make. And so that is what gives us the
ability to continually expand cash flow without regard to the vagaries of the capital markets.
Al: And Carmen, also you have some kind of, and not strange, but you have some accelerated
leverages. Would you explain some of those.
Carmen: Yes, the thing that we have to continually remind ourselves of is that with 7,000
advisors that evolve clients, that is a significant competitive advantage in the marketplace. And
we don’t pay these firms or these individuals to sell our program. We win their loyalty, I guess,
by just delivering great service and great products. And so this is a virtual network that is ready,
willing, and able to sell the products and services that we will continue to launch in the near
future. And so it is a real engine of growth, this group of 7,000 advisors.
Al: Thank you. I would now like to turn it over to questions that you can address to IAG.
Operator: Again, if there are questions please press the 1 on your touch tone phone at this
Our first question comes from Jack Spears with ABN Amerow. Your line is open.
Jack: Can you give us any flavor on pricing for the cash management product, and has it
changed from the last conference call? And what do you think are your net margins, and will
you have to assess (?) IRA’s here?
Carmen: Let me begin by saying that the cash management program is really a check writing
application in which they will write a check against the money market account. There will be
two types of money market accounts. One will be a taxable money market account, and the
other will be a tax exempt money market account. We are probably looking at revenues for SEI
of somewhere in that 35 to 40 basis point area, depending upon price of product that they
And lastly, there is no intent to pay the advisers anything to sell this program. It is a program
that really allows the advisor to be much more competitive and to be in line with the other
investment firms that are out there with all of the check writing. And so check writing and debit
card are what we will be offering to the end investor.
Jack: Give us an update on competitive landscape, and specifically, has Frank Russell tried to
respond to it all?
Carmen: The competitive landscape sort of remains unchanged. There aren’t many players that
are positioned like we are. Frank Russell we see from time to time that they are not necessarily
operating a business the way that we are, that integrates technology with investment or allows us
to make it easier for the advisor to conduct their business. And so it remains unchanged. I think
with the addition of the separate account management program it will significantly increase our
competitive position with regard to some of those firms that are offering those types of products.
Jack: Some folks are talking about collecting assets via the internet, and while that may
compete with your existing channel are there ways of integrating that with your IRA’s and
leveraging that new channel?
Carmen: I think clearly the internet will play a roll in terms of augmenting the ability to service
the end investor. And we have plans underway that will allow the advisor to take advantage of
applications that we are designing so that they can get credit for it if you will. But I think that in
the final analysis advice is key here. We think that personal advice, whether it be asset
management advice, or legal counsel, or tax planning, has to be delivered to this segment
anyway. The high net worth, or the ultra high net worth segment in a space environment. The
investors will use the internet to get education, but when it comes to closing the particular deal
you will need a personal relationship and someone to deliver personal advice.
Did I answer your question, Jack? Hello.
Jack: Yes, you did.
Operator: All right, and our next question is from the line of Michael Ferguson of Stiffel
Nickles (?). Please go ahead.
Michael: Where are operating margins are going to be headed in the fourth quarter and also
looking at 2001?
Carmen: Are you talking about the asset management business? Mike? I guess that you are.
That forward type of information we sort of can’t comment on. I mean the facts of the matter are
that assets increase or expand, and we build a factory that can be leveraged whether it be
distribution or whether it be operations or technology. And so to start, margins have expanded
based upon asset growth. And I don’t see any interruptions in that business model. I can’t give
you any specifics and nor will I.
Michael: All right.
Carmen: Hello, and I didn’t get that.
Michael: …the last few quarters even …
Carmen: I didn’t hear you, and I think that you faded out on me Mike. Maybe if you pick up
your handset as opposed to the speaker phone.
Operator: We are unable to hear his line any further. Mr. Ferguson, we are going to
disconnect your line, and please queue up your line again if you are able to be heard.
Next we will go to the line of Pete Hecklund with Hope Breedlowe (?). Please go ahead.
Pete: Hey Carmen.
Carmen: How are you doing Pete?
Pete: All right. I think that what Mike was trying to get at and I couldn’t hear him either. But I
look at the past six quarters and operating margins were kind of in a 200 basis point range
between 28 and 30% of revenue, and all of a sudden we spike up to 39% in this quarter on what
was really a fairly normal for you guys type of an increase in assets under management. Is it
possible that you are over accruing expenses in the first half? How do you get to such a high, I
mean that I thought that you would get there eventually I just didn’t think that you would get
there all in one quarter.
Carmen: Well, we did have a rush on assets, if you look at it a lot of this stuff is based on the
average assets in a particular reporting period. And not necessarily assets at the end of a
reporting period. And so the averages were higher to begin with. Secondly, there are some
technology expenditures that perhaps we didn’t, that we probably had in the second quarter that
we didn’t have in the third. That doesn’t mean that we are slowing them down. It is just the
timing of those projects didn’t result in us spending any money.
But that is all that I can say. It is the way that the numbers fell out, but we are not necessarily
trying to cook the books here. And we are not accruing for expenditures in prior periods to make
it look good in the third quarter, and so.
Pete: No, that is not what I am suggesting. It is such just a marked change, and so I guess that
my next question and this is what Mike may have also been asking. This is not the bar going
forward from which you will continue to leverage. I would assume that we are talking more
about continuing to leverage increased operating margins on an annual basis?
Carmen: I’m not quite sure that I understood that question.
Pete: Basically you said, earlier you said that if assets continue to go up you will continue to be
able to leverage your fixed costs and operating margins should go up. And so what I am saying
is are you saying that 39% is the new low? And if you have higher assets in the fourth quarter
than we should operating margins better than 39%?
Carmen: We are still not totally exempt from the capital markets. And so all things being equal
you probably are right. But we also believe too that asset management business will be
increasing initiatives in terms of product launch both institutionally and through the IRA’s and
the cash management area that will require a significant investment. We will do the right thing
without necessarily looking at improving margins. And so we will make those investments, and
if the margins are 32% or 39%, or 37% we will make those investments.
Pete: Great, and congratulations on a fabulous quarter.
Carmen: Thank you.
Operator: And next we go to Brad Moor’s line of Putnam Lavelle (?). Please go ahead.
Brad: Hi Carmen. Just a quick follow-up with regard to the margin question. And so should
we, is there any seasonality to your compensation expenses in the fourth quarter?
Carmen: No, not at all. Across the board we accrue those as we pay them, and so there is none
of that going on here.
Brad: Okay. And then with regard to, and I’m not sure if I heard this right, net cash flow year-
to-date was $5.6 billion?
Carmen: In the advisory channel, correct.
Brad: Can you speak to sort of the composition of you net cash flow year to date? In terms of
equity versus value style, versus international?
Carmen: Remember that since we are selling a globally diversified portfolio that it is a mix
between equity and fixed income, okay. And in our particular business it is probably skewed
towards 75% equity and 25% fixed income. And there is obviously a larger allocation to the
large cap portion of the market than there is small cap. We also have an allocation to
international emerging markets. But I don’t have the specific numbers allocated between value
and growth, and small, large, or international emerging markets. I would have to do some
research with that.
Brad: Okay. And is there any way to characterize just in terms of the net cash flow for the
quarter? I think that you suggested that given your symbiotic relationship with the trust services
segment that you were getting referrals from that end of your business to the asset management
business. I mean is it safe to say that the majority of your net sales are coming from that cross
Carmen: We are not getting any referrals in the trust business. What I said is that we are
passing on referrals to the institutional asset management side of our business to the tune of $1.3
billion year to date. And so the advisors are passing along leads to our institutional asset
Brad: Okay. And so there is none of that that occurs on the advisory side?
Carmen: Not between trusts. Not between a trust department and an IRA.
Brad: Okay, thanks.
Operator: And we will go to the line of Gary Presipino (?) from Tucker Anthony. Please go
Gary: My question has been answered, thank you.
Operator: And if there are any further questions on this topic please press the one on your
touch tone phone now. And gentlemen, we have no one else queuing up at this time. Please
Al: Thank you. I would like to turn it over to Ed Lochlin (?) now for an update on AMS. AMS
is hitting a stride in the defined benefit business and making good progress in the defined
contribution business which we have recently entered. Ed.
Ed: Thanks Al. We in the institutional part of the business continue to be very pleased with the
results. Today I would like to focus really on three areas that are in the institutional business.
The first one …were asset growth and client growth continues. The second one would be our
client contribution business where we are starting to see results as Al alluded to. And finally we
will talk about our future, the investments we are making, and also our sales pipelines.
Let’s start out by talking about our results. Sales for the third quarter totaled $700 million in
new assets and eleven new client relationships. That brings us on a year-to-date basis to fifty
new client relationships and new assets from the institutional areas. This represents 195%
increase over sales through on a year-to-date comparison through September 1999. And by the
way, exceeds for full year 1999 results. The net cash flow year-to-date for the institutional
markets is $3 billion in new assets that have been funded from this market segment. And I guess
that I would conclude on the business by saying that the market acceptance for this outsource
defined benefit pension solution, we really believe is really just …
Companies are starting to realize that the market is more complex. The resources that they have
to devote to this area are less and less. It is an important area but yet not strategic to their
business, and so it is a perfect opportunity for them to go out to a company like us to outsource
this responsibility to us.
Now let’s move on to the defined contribution area. The trends in the defined contribution
market are very positive. There really is a need on the part of corporations to start to manage the
defined contribution assets and managers in a similar way to the way that they have had to
manage and deal with the defined benefit managers. And that is a perfect opportunity for us to
be able to introduce our defined contributions …
Year to date we’ve brought in eleven new client relationships with assets approaching about
$700 million of assets. We are leveraging our investments in our sales distribution system
because our sales people are able to sell those defined contribution, and also defined benefits.
The other point of leverage which is different than the defined contribution business is the fact
that there are positive cash flows every year by companies into their defined contribution plan
which many of the defined benefit plans have been on a funding holiday (?). And so we don’t
see that dynamic there, and so we are looking forward to being the leverage that annual
contributions make in this area as well.
And the third area which could be our future we are now able to provide the defined asset and
the defined contributions solutions. These markets by having them combined give us enormous
market potential and market share, as you might imagine is very, very small at this point. And so
we have a lot of opportunity to continue to grow our assets with the existing solutions.
We are focusing on …and other markets so that the union (?) market place, the endowments, the
foundation marketplaces are areas where we have some clients, base clients. And we are looking
to invest in service distribution efforts and product efforts in order to capture access in these
large markets, as well.
And our pipeline continues to build, and we are very optimistic about not only the remainder of
this year but the years going forward. And so with that, I will conclude on the update for the
institutional business. The business solutions that we are offering to our segment of the market
is one that, as Al pointed out, is really just starting to meet market acceptance. And we think that
the future is only very bright.
With that, I will turn it back to you Al.
Al: Okay, Ed. I am going to ask you the same thing that I asked Carmen, and that is about
growth in a down market.
Ed: Okay. I think that we’ve said that some market volatility would be positive …the fact that
people need some help, and I think that Carmen touched on the fact of the need for advice. What
I believe is attractive to our clients and prospects is that this is a different factor of life.
Outsource solutions comprises a variety of different overall solutions which at the end of the day
is a different way for them to manage the pension assets. And I think that is what the attraction
is for them, and that is why we are able to gather assets in these difficult markets.
Al: Thank you Ed. Now I would like to open it up for the questions of Ed.
Operator: Again, if you have questions at this time please press the 1 on your touch tone
phone. And first we will go to the line of Jack Spears with ABN Amerow. Please go ahead.
Jack: At least I am consistent. Could you talk about your plans of adding to your sales force?
How many you have? And what kind of turnover you have? What kind of experience that
they’ve had? And how long is it that when you are bringing someone on, take them to get up-to-
speed and able to sell the defined contribution product?
Ed: Okay. We are looking for additional sales people at this particular point in time. We have
been since the last time that we had talked, we have hired two additional sales people. The
backgrounds of the people do vary, and I would say that just generically that if we get someone
that has some type of an industry background then our challenge is to train them in our sales
process and get them out in the marketplace and get them started. Recently we brought in
someone that has a background that was similar to the marketplace, and they’ve been in the
territory for about nine months and they have been able to bring about $150 million of assets in
which we are pleased with.
We don’t limit the hiring of people to someone who just has that background. We could find
someone who has a great deal of sales experience, sales profitability and success, and we would
take that person and get them more oriented around the industry that we are in. Again, the fact
of the business solution, it doesn’t give us more flexibility in the type of people that we can hire.
And so we are very attractive for people who maybe are looking to sell, the concept …in the
Jack: How many sales people do you have? You said that you added two during the quarter,
and does that bring you to about twenty-two?
Ed: Probably a little bit less than that, Jack. Probably around 20.
Jack: You compete with Frank Russell (?) particularly in this space. What has been your win
ratio in the last six months with them as they continue to improve?
Ed: We do compete with Frank Russell but there are other sets of competition. The first one
being that we do compete with consultants. The clients recognizing the need for help, or
prospects recognizing the need for help. The first …would be “okay, how do I get that?”. And
so we need to be able to compete effectively. This is a different process other than consulting.
And then when they move down that path then we do see Frank Russell, and we see some other
competitors as having to merge. I don’t have specific numbers, but suffice it to say that we
pretty much see Frank Russell in almost every situation. And our hit ratio there is a very high
percentage. We have been competing with them, against them very successfully, in order to get
these new clients.
Jack: And are you now as large as they are? …aren’t they about $20 billion (?) in size?
Ed: We are larger. We were, I guess, …the largest institutional manager of managers. As you
know, we didn’t create the ….managers. Frank Russell did. But we have exceeded them as far
as the assets that we have gathered in this particular category. We are much more aggressive in
the market, and we have been much more successful being able to convince corporations in
particular that this is an appropriate approach for their pension plan.
Jack: At one point in the last couple of years you went after a multi million type pension
account, and is that now more likely with the market volatile? And isn’t that scary to some
Ed: We certainly have seen acceptance with larger types of plans. We’ve been pleased with
that. Year to date, plans just over $100 million that we have close to about eleven of those. We
do have relationships with multi billion dollar pension plans. We historically have not gotten all
of the assets the first time around. And so the good news there is the fact that we started the
relationship. And the other good news is the fact that there are other opportunities for us to be
able to sell. We continue though to see the assets for this type of a solution to be in the larger
and larger asset sizes.
I think, though, that it is not just the market volatility. I think that it is the business pressures that
these companies are under. They recognize the fact that they have to get more diversified. That
they have to have more oversight of these assets because they continue to grow. And they are
not going to be able to put their own resources on it. They are not going to be able to sell and
stay up-to-date like we could be as a professional providing these services. And so I think that
the market volatility might just highlight the fact that they can’t get ahead of the curve. But their
overall problems that they are solving is more important to the corporation, but yet they want
those resources dedicated to more specific revenue generating, profit generating activities for the
corporation and the pension plan.
Jack: Thank you Ed.
Operator: We will go on to our next question, and that will be from Jim Riley, a private
investor. Your line is open.
Jim: Hi. Good afternoon everybody. Congratulations on the call. Ed, I am curious, and can
you talk about the money management pricing for the DB plan relative to a DC plan, and how
they may differ?
Ed: Okay. The pricing for the DC plan, it is the margin. And the pricing on the DC plan is very
similar but the margins are a little bit lower but that is really a first year type of phenomena. And
the reason that they are lower is that we do have to do, as you can imagine, employee
communication, training, education, and some convergence work in order to get these assets
converted. Where it is just a first year phenomenon is the fact that these asset will continue to
grow because all of these plans that the company is making ongoing contributions as well as the
employee, so that the asset base, the revenue base will grow through contributions.
Jim: And so is it 40 or 50 basis points, and is that consistent?
Ed: No. The assets, the revenues that we get tend to be around 35 to 38 basis points in the
Jim: Another question regarding, and I am not sure if that includes just the money management
piece? Or how much of those assets are you also doing administration also?
Ed: Are you talking about our revenues? 35 to 38, and that is our total take.
Jim: And that includes administration?
Ed: That includes everything.
Jim: And then the numbers may be off here a little bit, but you said that you had closed $3.7
billion in sales year to date of which $3 billion was funded. And so was there some large
account closed at the end of the quarter that is not yet funded? I mean to be funded in the fourth
Ed: There is a backlog, and with the defined contribution assets in particular there are clients
that might want to fund at the end of the year. But most clients fund at the end of the quarter just
because it is a more logical time for them to take the …participants reporting. And so we do
have a backlog of assets that are sold without funding.
Jim: Right, thank you.
Operator: Again, if there are further questions please take this opportunity to press 1 on your
touch tone phone. And gentlemen, we have no one else queuing up at this time, and you may
Al: Thank you Ed. I would now like to turn it over to Dennis McDonagal (?) for an update on
liquidity management. Now the big news in liquidity management is the treasury point and
internet service which optimizes a company’s daily cash flow decisions, and its past beta now.
Dennis: Thanks Al. Just a quick reminder, Optimizer (?)Dot Com is an internet business
focused on delivering solutions to financial professionals for their institutions over the web. As
Al mentioned, the big news of Optimizer (?) in the third quarter is that we have launched into
production in the after market product through this site. We have completed, on the last
conference call, we were just getting into our betas and we completed our betas with the Seally
(?) Mattress Company, Liz Claiborne, Novell, and in addition to the three phases we added
Pacific Coast Feather Company as a client. To date we’ve had terrific experiences with all users,
and are very encouraged by the fact that technology and the delivery has gone smoothly. And
that all four enterprises have seen value in the technology.
In September we began to market the Optimizer now that we can deliver it to build our price line
and increase sites reps. We have been successful in those areas. The …has increased
measurably in September and in early October. We have approximately 400 registered users on
the site which gives us the opportunity to actively market those users. We have had over 800
visitors to the site per week which is up from 500 per week that we were experiencing in August
prior to our marketing efforts. In addition, since we began marketing more aggressively we’ve
averaged over 250 new visitors to the site per week over the past three to four weeks. This has
driven an increase in our pipeline, and it has also positioned us for strong, early adoption by the
market of the Optimizer.
On the development front we continue to build on our administrative platform for delivery
through Treasury Report (?). The application, as a little background, allows institutional
investors to trade over the internet multiple money market fund complexes with one click. And
we leverage our trust company back office to help with the consolidation of all of that activity,
and then we deal directly with the downstream fund complexes.
The trading application will begin beta testing starting a week from today. We will be launching
the application from a market standpoint at the National Association of Financial Professionals
Conference in Philadelphia in November. The application is scheduled to go into full production
in December where we will really begin to push this rollout with the clients.
As I mentioned on the last call we have four institutional fund providers in addition to SEI
participating on the site. They are Dreyfus, Federation Investors, Aim (?), and Goldman Sachs.
A strong list of market participants that we believe will give the trading application a strong
additional push into the market. We are on track to have this market first, and if we get this
product delivered in the timeframe that we have set out for ourselves, and we feel strongly that
we will, we will be the first to deliver this type of technology.
Treasury Point (?) has been a long time in building. It is exciting to be finally be in the market
with an industry leading service, the Optimizer, while it is …delivering the trading application.
Please visit the site. There is an area on the site that focuses on client experience. And if you go
to this site and take a look at that I think that you will get a better understanding of exactly what
value that we deliver with the Optimizer. Thank you.
Al: Thank you Dennis. I am now going to open it up for questions from everybody. Are there
Operator: Pardon me. Press the 1 on your touch tone phone at this time. We will hear from
the line of Jack Spears of ABN Amerow. Please go ahead.
Jack: Can you give us an idea of the pricing of the Optimizer, and any feedback as to what your
test marketing has shown as to what kind of pipeline there is out there? Any feel for what the
closing cycle might be for that product?
Dennis: What was the last question?
Jack: Any feel for what the sales cycle will be for that product?
Dennis: Sure. Our pricing to the market is kind of captured in an introductory model of $30,000
per year per user for this technology. And that has not run into any resistance in the market.
And we can clearly show users or potential users how they will derive that value and much more
than that in return.
Pipeline, as we’ve been building it for the past few months, is quite strong. And we have quite a
few companies on that pipeline, and I would rather not get into what the total numbers are. But
it is very strong.
And on the sales cycle side it is really that this is a business that we are really trying to build
around leverage and leveraging the internet from a sales and marketing standpoint as well as a
delivery standpoint. And really making our processes of sales and marketing much more …and
in line with that. And we’ve seen in the case of Pacific Coast Feather (?) who we have as a user,
that sales cycle is about 30 days. And so from the time that they …the product to the time that
they contact us, the time that we are able to close that was just about a month.
That is not necessarily the experience that we will get across the board, but …we can get
leverage out o this product. And really we are in a space now of identifying companies that will
be early adopters of this very new technology into their treasury shop. We believe that once we
get through this early adoption phase the ability to use those client experiences will put in the
pipeline, or fill the pipeline further in the sales process.
Jack: Is that a tie-in internet trading platform? Could you give us a flavor of the pricing on that
product? Have you analyzed that yet?
Dennis: Sure. Initially the trading platform will not be integrated with the Optimizer …., and
that is on our development schedule for the next six to nine months. But it clearly is something
that we want to do.
The trading application, …two ways. Both access (?) stages. In the case where our client uses
the trading application and purchases into SEI products we earn our normal asset management
fees on those assets. In the case where they trade through us but we facilitate the process we
now stream fund complexes, and we earn an administrative fee which is asset based back from
the fund complex.
Jack: The competition here, anyone, you must have done some work to find out if anyone is
developing or will being market over the next twelve to eighteen months?
Dennis: In terms of the broad space and our approach to really looking broadly at the problem
areas within Treasury and then delivering solutions against that, we haven’t found anyone that
has approached the market that way. There are a few internet space market participants like
CFO Web Dot Com which is developed with specific tactical financial risk issues, foreign
currency or interest rate risk issues. There is another site, PT Markets Dot Com, which is
focused on trading just commercial paper. And so they are much narrower in scope than we are
with our orientation being around broad problems and deliver full solutions to those problems.
I think that this space is going to attract more attention, and I believe that one of our advantages
is that we have very unique technology and it will help us get a foothold in this channel. And
then number two, we are early. And we are …some stages first which helps us to establish a
foothold and a very effective position relative to any new competition.
Jack: Just out of curiosity, could you take a stab of what you think the potential market is for
Optimizer, as well as your trading platform? I know that it is not, but over long term?
Dennis: I guess that if I took a stab it would be very speculative, Jack. We know that the
market is huge. We know that our product works. And we know that if we can get the market to
adopt it that there is no reason why we can’t have a significant share of markets. But that doesn’t
understate the level of challenge.
Jack: Thank you.
Dennis: You are welcome.
Operator: Again, ladies and gentlemen, if there are questions please take this opportunity to
press 1 on your touch tone phone. And we have no one else queuing up for questions at this
time, please proceed.
Al: Okay. The last thing that I have to talk about is a new investment that we are making, and
that is in our efforts to globalize our markets and services. We fell that the trends are definitely
in our favor, or in the favor of our services, but to capture the opportunities we have to get out
and around the world and open these markets up. Now Carl Marino (?) has been leading this
effort, and he is not here today. He is where he should be, he out around the world. He is right
now hopefully sleeping peacefully in Asia, as we are doing this. And so I will have to give his
report. Which I will do now.
The third quarter reflects a continued growth trend. Revenues in the quarter were $8.7 million,
an increase of 38% from the corresponding quarter of 1999. And assets under management in
the third quarter were $5.4 billion versus $3.3 billion in the third quarter last year. We also
reported operating losses of $5.2 million for the quarter as we continue to invest in our global
Now, overall we continue to see significant growth opportunities and strong market acceptance
of our manager managers, as it is called throughout the rest of the world, approach. And in
Canada we sold during the last quarter the Canadian consulting group. And that has permitted us
to focus exclusively on the investment business solutions that we focused on in the U.S. And in
South Africa we continue to add new institutional clients in getting increased funding from
And we’ve just begun a significant marketing campaign focused on the UK pension market and
using many of the techniques that we use in the states to enter that market. And we still are very
optimistic about the global market expansion. It is going to take a while. But the progress has
been steady and positive.
Thank you very much, and I will try to answer any questions, and anybody else can help me, that
you might have on global.
Operator: And our first question will come from the line of Bob Ax (?) with KBW Securities.
Please go ahead.
Bob: Thank you. I was wondering if you could talk about the UK pension market. I’ve been
reading a lot of industry sheets that say it is a very hot market right now. I was just wondering
how the pricing is over there now, how the penetration has been in that market, and what the
pipeline is if you can talk about that.
Al: Yes. We are just now entering the UK market. The efforts today have pretty much been
creating leads. And we have 100 meetings scheduled between now and the end of the year with
pension plans that are based on our activities. We have not concluded our first client yet. And
so this is brand-new.
We do have some that are close but we can’t say anything about them at this point. The pricing
here is fairly similar to the U.S., maybe a little bit lower. But again, we are offering a different
product that is a manager of managers which is a worldwide product. And most of the UK
pension plans are invested in balanced managers.
And does that answer most of the questions?
Bob: Yes, it does, thank you.
Al: You are welcome.
Operator: And our next question comes from the line of Jack Spears with ABN Amerow. Mr.
Spears, your line is open.
Jack: You are always good with numbers. …increase in operating loss, third quarter
specifically, and why the big jump in operating and development expenses?
Al: Right, there are two things that probably have a bearing on the numbers, Jack, that we
should talk about. First of all, the, well let me talk about the operating expenses. That was a
one-time write-off of our operation in Mexico. And the acquisition we had made there we had
booked some assets at that point and we wrote some of those off. And so that was a one-time
jump that you should not expect next quarter.
Secondly, if you will note the revenue from quarter to quarter was fairly flat. That is because we
sold the, actually two things. We sold the consulting business, and so their revenues came off.
And the second part of that is that we also terminated a distribution agreement in South Africa.
It actually never got completely signed, and we decided not to do it. But we had a couple of
clients with that distributor. And they took those clients and moved them somewhere else. But
we have since made that up this quarter, or since the end of the quarter, with new South African
Jack: How large was the write-off in Mexico?
Al: Kathy, what are we saying about that?
Kathy: Around $2 million.
Jack: It is $2 million? Did I hear correctly?
Jack: Thank you Kathy.
Operator: And once more, if there are any additional questions please take this opportunity to
press 1 on your touch tone phone. And gentlemen, we have no one else queuing up. You may
Al: Okay. Thank you very much Carl. I’m going to now turn it over to Kathy Heilig to give us
a few company wide statistics.
Kathy: Okay, and thanks Al. I have some additional information about this quarter. Third
quarter cash from operations was $57 million, $….share. That brings year-to-date cash from
operations to $84 million. Third quarter free cash flow was $41.5 million. Third quarter cap ex,
$8.3 million, bringing year-to-date capital expenditures to $18.8 million. Third quarter interest
income was $2 million. Third quarter interest expense, $600,000. And the contribution in the
third quarter from LSB (?), $1.9 million. Year-to-date stock repurchase is $15 million or
We also would like to remind you that many of our responses may be considered forward
looking statements and include discussions about the future. Forward looking statements are
based upon estimates and assumptions that involve risks. Our actual future revenues and income
may differ from our expected results. We have no obligation to publicly update or revise any
forward looking statements.
Al: Okay. I would now to open it up for any questions that you might have.
Operator: And ladies and gentlemen, if you do have any questions regarding today’s
presentation please press the 1 on your touch tone phone. We will first go to the line of Bob Ax
(?) with KBW Securities. Your line is open.
Bob: Thank you. The release says that “operating profits were positively affected by timing
issues related to expenses”. Can you give us the order of magnitude on expenses that either you
benefited from either not spending them this quarter and pushed into future quarters? And just
try to help us out with our modeling for Q4, if you would? Thank you.
Al: That is a very difficult sort of thing to kind of pull together. Just pointing at things that we
knew, we would have spent but didn’t, but some things were slowed down and some things were
faster. But I feel that it is probably not over $2 or $3 million.
Bob: Okay, thank you very much.
Al: Thank you.
Operator: And next we go to the line of Jack Spears with ABN Amerow. Please go ahead.
Jack: Sorry to do it to you. I didn’t get the share repurchase year-to-date, end of third quarter.
Kathy: Year-to-date is $16 million. And the third quarter we spent $620,000.
Jack: Thank you.
Operator: And next we go to the line of Jim Riley, a private investor, for his question. Please
go ahead sir.
Jim: Kathy, just trying to get the capitalized software numbers on the quarter and year-to-date.
Kathy: We didn’t have any software end of third quarter.
Jim: How about year-to-date? I know that it is minimal.
Kathy: Year-to-date is $450,000.
Jim: Okay, thank you.
Operator: And again, if there are questions press 1 on your touch tone phone at this time. And
we have no further questions in queue. You may proceed.
Al: Well, thank you. That actually is our presentation. I would like to kind of leave one thought
with you. Something that we feel very strongly, that we are in the business solutions business.
We are not in the technology business and we are not in the investment business. We are in the
space of technology and investments, and we use technology in everything that we do. But we
are not strictly a technology business.
Now, what I think that means to us is we are winning sales. It is usually a little harder to make
the sales because we are talking about a broader agenda than either one of them. But when we
make the sale we have a tendency to hang on to the client because it is a broader agenda, and so
we are not quite as easily supplanted.
And I guess the other thing about it is that the sales come a lot more steadily. And so the stocks,
the investment that the technology businesses typically have, we don’t have. And so I just
wanted to point that out to you, and wish you to have a good day. Thank you very much.
Operator: Thank you. Ladies and gentlemen, that does conclude our conference call for today.
Thank you for your participation and for using AT&T’s Executive Teleconference Service. You
may now disconnect.