SEI Investments Company Q2 FY2025 earnings call

• Strategic Investment in Stratos: Announced partnership with Stratos, integrating its client-centric model with SEI's technology and capabilities. - Leadership Appointments: Karin Risi and Tom Naratil appointed to Board, bringing relevant experience. - Sales Performance: Investment Managers led net sales events with strong momentum; private banking had delays due to market volatility but pipeline remains strong; other segments showed progress with improving flows. - Margins: Margins stepped down in Q2 due to investments, but focused on disciplined spending and execution. - Capital Allocation: Continued share buybacks, with Stratos investment to be funded by balance sheet cash, maintaining fortress balance sheet.

Private Banking revenue increased year-over-year and sequentially, supported by larger clients going live. Investment Managers revenue grew 8% year-over-year with double-digit growth in alternatives, offsetting a 1% decline in traditional revenue due to mark-to-market weakness. Advisor and institutional businesses realized flat sequential revenue growth as market appreciation in May and June offset significant declines in April. AUM and AUA grew on both sequential and year-over-year basis. AUM net flows for advisor and institutional businesses were negligible year-to-date, significantly improving from the first half of 2024. Traditional mutual fund outflows were largely offset with growth in models and custom portfolios. Growth in AUA reflects demand for Investment Manager services and market appreciation.

• Investment Managers: Expect margins to remain in current range as they staff for larger client conversions. - Stratos Investment: Expected to close later this year, funded by balance sheet cash, with free cash flow returned to shareholders. - Investor Day: Scheduled for September 18 in New York.

• Market Volatility: Impacted private banking sales timing. - Execution Risks: Ensuring flawless client execution to maintain referenceability and avoid negative impact on future business.

Q: First on investments in talent and technology. Can you discuss some of the key investments you're most focused on today? And then are you able to size the incremental investment you expect in coming quarters in these areas?

A: Sure. Thanks for the question. I can take that. I'll give you 1 or 2 examples of where some of the investments are being made. So I have mentioned in my prepared remarks that we're making investments in talent and technology. For instance, in IMS, we understand really well what our pipeline is, what expected sales will be moving forward. And as a result of that, we need to hire in advance of that to anticipate those sales. So that's on the people side, and I think that's pretty consistent really across the businesses, including PB to a certain extent. From a technology standpoint, we're investing for IMS, for instance, we're investing in technology to streamline our IMS systems for better scalability and cost efficiency. So that's going to set us up for future growth. Those 2 examples are pretty consistent with how we think about technology and our people. So in my comments, I had mentioned that we are continuing to look at what that sales pipeline looks like, how we are going to scale our technology and our platform for future growth.

Q: So first question on the Stratos acquisition. Can you give us some color on what differentiates the strategy at Stratos versus some of the other RIA aggregator models that are out there?

A: Yes, 100%, Ryan. I hope you're doing well. Michael Lane is in the room, feel free to chime in, Michael as well. I think there are 3 fundamental things that really attracted us to Stratos that we saw as differentiated. One was the breadth and experience of their executive team. So this isn't just Concepcion, who is a phenomenal entrepreneur and leader. We spent a lot of time with this group. They just had a very professional management team, Ryan. They had a COO, a CFO, a Head of acquisitions. They are built for the scale that they have actually grown. And we were really excited and energized by that. I think the second thing that differentiated Stratos and attracted it to us is that they have not adopted the strategy of let's go buy a whole bunch of advisers and then try to harmonize it later. They have a centralized investment platform. They have discipline around their value proposition when they bring new advisers on. They see a tremendous amount of value in what SEI can bring to the table with our capabilities around asset management, administration but they really do deserve, I think a lot of accolades for the discipline in their value proposition and operating model that they drive through the organization. And then I think the third is so important to SEI is cultural fit. The team just really resonates in terms of the values that they hold, the integrity with which they operate. It does feel like they are already part of SEI and SEI and Stratos kind of have a lot of shared values. But specifically around their business model, Ryan, I would say the first two things and one more kind of the qualitative side with just the honesty, integrity and client focus that they have really resonates.

Q: So going back to the net sales environment, other than private banking, how would you characterize the sales cycle for other segments? You also caught out IMS sales were quite strong. Could you please unpack a bit more on the driver of that strength?

A: Owen, let's take that in a couple of stages. So let's raise it up and go back to the strategic themes for a second. We've been talking a lot the last couple of years around macro trends that we believe we were positioned well and we want to continue to exploit. So if you think about the appetite for outsourcing from alternative investment managers, the demand for better technology and operations for regional community banks that want to compete in wealth and what the larger enterprise scale RIAs really need to operate as an institution in the future, we feel really strongly positioned there. And I think it harkens back a little bit to Crispin's question, to Sean around investments in technology and talent. We are also making some more investments in front office talent, revenue-generating talent, service talent because there's just opportunity there. So the places that we have made bets over the last 24 to 36 months, we feel really well positioned and those themes continue to resonate. I think it's always more effective when we talk about specific pipelines and segments to let the unit leads provide some of their color commentary. I mean, Phil, I mean, it's another great quarter for investment managers to Owen's question there, you and I were in New York last week. What are you seeing? What do you kind of see coming up the next few quarters?

Q: Going back to the net sales environment, other than private banking, how would you characterize the sales cycle for other segments? You also caught out IMS sales were quite strong. Could you please unpack a bit more on the driver of that strength?

A: Owen, let's take that in a couple of stages. So let's raise it up and go back to the strategic themes for a second. We've been talking a lot the last couple of years around macro trends that we believe we were positioned well and we want to continue to exploit. So if you think about the appetite for outsourcing from alternative investment managers, the demand for better technology and operations for regional community banks that want to compete in wealth and what the larger enterprise scale RIAs really need to operate as an institution in the future, we feel really strongly positioned there. And I think it harkens back a little bit to Crispin's question, to Sean around investments in technology and talent. We are also making some more investments in front office talent, revenue-generating talent, service talent because there's just opportunity there. So the places that we have made bets over the last 24 to 36 months, we feel really well positioned and those themes continue to resonate. I think it's always more effective when we talk about specific pipelines and segments to let the unit leads provide some of their color commentary. I mean, Phil, I mean, it's another great quarter for investment managers to Owen's question there, you and I were in New York last week. What are you seeing? What do you kind of see coming up the next few quarters?

Q: The second one was target leverage ratio or you want to like participate on the debt afterwards?

A: Yes. So right now, we're about at negative 1x. And so the expectation would be to improve that or go from negative 1 to less than that. So I think where we're looking right now to eventually target is to bring some of those cash levels much lower, maybe a run rate of $300 million or so of staying there using our free cash flow to continue to do stock buyback. That's been, obviously, as you know, a big part of what we've returned to our shareholders and then dividend. So if you want to think free cash flow of $500 million to $600 million that's probably a good indicator, and we will unpack that further at Investor Day.