Ladies and gentlemen, thank you for standing by. Welcome to the SEI fourth quarter 2018 earnings call. At this time, everyone joining by phone is in a listen-only mode, and then later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, press star then zero. As a reminder, the conference is being recorded. I'll now turn the conference over to our host, Chairman and CEO, Mr. Al West. Please go ahead, sir.
Welcome, everyone. All of our segment leaders are on the call, as well as Dennis McGonigle, SEI CFO, and Kathy Heilig, SEI's Controller. I'll start by recapping the fourth quarter and full year 2018. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results of their segments. Finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we'll field questions at the end of each report. Let me start with the fourth quarter and full year 2018. Fourth quarter earnings decreased by 5% from a year ago. Diluted earnings per share for the fourth quarter of $0.73 represents a 3% decrease from the $0.75 reported for the fourth quarter of 2017. For the year 2018, our earnings increased by 25% over 2017 earnings.
Diluted earnings per share for the full year of $3.14 is a 26% increase over the $2.49 reported in 2017. We also reported a 1% decrease in revenue from the fourth quarter 2017 to fourth quarter 2018, and a 6% increase for the full year. Also during the fourth quarter 2018, our non-cash asset balances under management decreased by $30.5 billion. SEI's assets grew, excuse me, fell by $17.3 billion, and LSV's assets decreased by $13.2 billion. For the year, assets under management decreased by $29.1 billion. In addition, during the fourth quarter 2018, we repurchased approximately 2.3 million shares of SEI stock at an average price of $49.56 per share. That translates to over $115 million of stock repurchases during the quarter.
For the entire year, we repurchased approximately 6.7 million, I'm sorry, shares at an average price of $60.02 and a share representing just over $404 million of repurchases. Sorry about that. Between our stock buybacks and cash dividends during 2018, we returned approximately $502 million in capital to shareholders. During the fourth quarter, we capitalized approximately $10.9 million of the SEI Wealth Platform development and amortized approximately $11.5 million of previously capitalized development. Fourth quarter of 2018 sales events net of client losses is approximately totaled $10.7 million and are expected to generate net annualized recurring revenues of approximately $3.7 million. For the full year 2018, sales events net of client losses totaled approximately $82 million and are expected to generate net annualized recurring revenues of approximately $57 million.
The bottom line is that 2018 was a good year, but ended on a negative note due to extreme volatility in the fourth quarter. These highly volatile markets are continuing through January. Also affecting us as we enter 2019 is the lost business we know about and have communicated to you, yet these clients are still operating on our systems. Our reaction to all the volatility is to maintain our strategic course. We have headwinds of fee compression to deal with as well as the decline in U.S. corporate defined benefit plans. On the other side of the coin, there are tailwinds we need to take advantage of, namely the intensification of financial regulations worldwide, plus growth of family offices and the widespread need of financial institutions to replace legacy systems. As we enter 2019, we are emphasizing long-term growth.
At the same time, we are doing what we can to manage expenses and profits while executing our strategy. We believe that the reorganization we announced in November will help us achieve our long-term goals. The new organization we discussed also recognizes that the needs of manufacturers and distributors are converging, particularly in the large end of both markets. We have a number of case studies of a single organization using three to six of our platforms, necessitating a high level of collaboration to properly serve the client. That is why we have put IMS and banking together. While the road ahead in 2019 is challenging, it's also full of new opportunities. We believe we will be better suited to capture the new opportunities with our new strategies and organization.
This concludes my remarks, I'll now ask Dennis to give you an update on LSV and the investment in new business segment. I'll turn it over to the other business segments. Dennis?
Thanks, Al. Good afternoon, everyone. I'll cover the fourth quarter and full year results for the investments in new business segment and discuss the results of LSV Asset Management. During the fourth quarter 2018, the investments in new business segment continued its focus principally on our digital advice offering and on the ultra-high net worth investor segment through our private wealth management group. During the quarter, the investments in new business segment incurred a loss of $3.2 million, which compared to a loss of $3.8 million during the fourth quarter of 2017. For the full year, the investments in new business segment incurred a loss of $12.4 million compared to a loss for 2017 of $13.8 million. This improvement reflects the growth of our private wealth management business, offset by other areas of investment. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the fourth quarter.
LSV contributed $36.4 million in income to SEI during the fourth quarter. This compares to a contribution of $43.3 million in income during the fourth quarter of 2017. For the full year 2018, LSV contributed $159.8 million in income compared to $152.6 million in 2017. As Al mentioned, assets during the quarter fell approximately $13.2 billion at LSV. LSV experienced net positive cash flow during the quarter of approximately $360 million, which was offset by market declines. Revenue at LSV was approximately $119.5 million, and performance fees were minimal. For the company, our effective tax rate for the quarter was 19.2%. A couple of items of note for the company. During the quarter, we recorded severance expense of approximately $2.4 million. This is primarily reflected in corporate overhead. We also had a true-up of incentive compensation expense of approximately $2.8 million, primarily reflected in the investment manager segment results.
With that, I will now take any questions.
Ladies and gentlemen, if you do have a question, you may press star then one on your touch tone phone. You will hear a tone indicating you have been placed in a queue. You can remove yourself from the question queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, for questions, press star then one at this time. We have a question from the line of Chris Shutler with William Blair. Please go ahead.
Hey, Dennis. Good afternoon.
Hi, Chris.
On the corporate expense, it jumped a little bit quarter-over-quarter. It sounds like some of that was severance. Was the $2.8 million in there also, or was there anything else to call out?
Yeah, the $2.8 million was in there also.
The $2.8 just.
There were two major, I'd say more one-time-ish type items.
Okay. Could you state again, Dennis, what that $2.8 million was?
That was for a true-up on incentive compensation payments.
Okay, got it.
Primarily in the Investment Manager Services segment, given their strong performance this year.
Okay. The severance, is that related to any one individual, or was that a number of people? Was that targeted related to?
Our employees. They left us during the course of the quarter.
Okay. Then tax rate from here, how should we think about the tax rate in 2019?
Well, the good news is we're still operating under the 21% corporate tax rate, that's a good starting point. I'd say we're going to be in that range, 21% range. Certainly, we still have the option, the accounting benefit that could go one way or the other this year depending upon activity. I'd say we're definitely 21%, if not a little bit higher.
Okay. Thank you.
You're welcome.
If you have additional questions, you may press star then one on your phone keypad. We have no one queuing up at this time, please continue.
Thank you, Dennis. We are now going to change things up a bit based on the new organization. I'm going to turn it over to Steve Meyer to discuss both private banking and IMS segments. Steve?
Thank you, Al. Before I begin, just to outline my approach, I will first review the private banking segment's Q4, then take questions on that. After those questions, I will discuss investment managers Q4 and take questions on IMS. For private banking, for the fourth quarter of 2018, revenue of $121.4 million was up slightly from the third quarter of 2018, primarily due to an increase in transaction-based revenues. Fourth quarter revenue as compared to a year ago is down $5.6 million, mainly driven by transaction-based revenues and a decline in our asset management revenue. For the fourth quarter 2018, operating profit of $6.9 million increased from the third quarter due to increased transactional revenue and decreased expenses. For the year, our profit grew by $6 million, mainly driven by our asset management and SWP relationships.
In turning to sales activity for the quarter, we closed $7.2 million in gross processing recurring sales events and $3.7 million in one-time events. Q4 was a decent new business quarter. As we mentioned on our third quarter call, we are working with one of our larger U.K. clients to add a large book of global private accounts. During this process, we expect part of their current book to deconvert off of our platform in the near term. Although the timing of the deconversion is ambiguous, we have enough certainty that it will occur that we believe it is appropriate to net the expected impact against our Q4 events. If successful, we expect the potential new business from this existing client will be a significant growth opportunity for us.
During the fourth quarter, we signed two new SWP agreements, one existing TRUST 3000 client, Security and Trust Company, and the other a new client to SEI. Also during the fourth quarter, in the U.K., we extended our relationship with Fusion Wealth until 2025. Given their strategic affiliation with Schroders and Lloyds Banking Group, we expect this to be a meaningful business opportunity for SEI. Regarding TRUST 3000, during the quarter, we recontracted two clients for a total of $10.2 million. For 2018, we have recontracted 18 TRUST 3000 clients for $51.9 million of annualized revenue. Our asset management distribution business experienced approximately $283 million in negative cash flows in the quarter.
During the quarter, our AMD business signed several new deals, including Inovéa, a large French wealth management firm that will use SEI's goal-based solutions as their exclusive approach to goals-based investing, and BMO Financial Group, who will offer Global Strategic Portfolios to their high-net-worth clients in Asia. As an update on the Wealth Platform backlog, we converted a U.S. client to the SEI Wealth Platform during the quarter. This brings the total to 38 clients currently processing on SWP. Our total signed but not installed backlog for SWP is approximately $35.2 million in net new recurring revenue. Also, to update on Wells Fargo, all of our conversion activity continues, and we are working closely with Wells on this project. While we await a finalized implementation schedule from Wells, all milestones and deliverables continue to be met. We are hopeful to know more by the end of the first quarter.
Turning to 2019, our focus is on growth. Our sales pipeline is strong. We will focus on closing new business and generating new opportunities with our current solutions and by expanding our opportunities by leveraging additional platforms and solutions available at SEI. Unfortunately, while doing so, we have to navigate some of the headwinds of the current market as well as the revenue losses from previously announced client deconversions. A significant one, the Department of the Interior federal contract we announced in Q4 2017, is expected now to move off at the end of this quarter. These events will put downward pressure on both revenue and profit growth in the short term. We will manage through these headwinds as we continue to sell new business, implement clients, grow the business. We will manage expenses diligently while we focus on positioning the segment for sustainable and accelerating profitability.
While new to leading this business segment, recognizing the short-term challenges to profitability, I'm optimistic about our long-term growth opportunity available through our markets and platforms. We continue to build our pipeline and work on increasing sales and implementing new business. That concludes my prepared remarks. I will now turn it over for any questions you may have.
As a reminder, if you have any questions, you may press star then one on your phone keypad. We'll go to Chris Donat with Sandler O'Neill. Please go ahead.
Good afternoon, Steve. Thanks for taking my question.
Sure thing.
Just with the Department of the Interior contract, we know the revenues go away. Are there any expenses associated with that that we would expect to also shrink or any restructuring costs that we should be thinking about in future quarters?
What I'd say is, it was one of our more profitable pieces of business. While there are some expenses that we will reallocate within the unit, any takedown expense won't be really matched with the release of the revenue. I wouldn't expect to see kind of a match-up on that side. I think we're going to use some of that expense, although we're managing it diligently, to also kind of support new business coming on.
Okay. All right. With Wells Fargo, just in terms of what we can expect in terms of news flow, you said expect more clarity by the end of the quarter. Is that something we should expect to hear about on the first quarter earnings call, or would you expect about a press release?
I would suggest you probably would not hear it until the first quarter earnings call.
Got it. Okay. Thank you.
We have a question from Chris Shutler with William Blair. Please go ahead.
Hey, Steve.
Hey, Chris.
The quarter-over-quarter step-up in revenue in the business, obviously there was a negative market impact. Can you just break it down for us a little bit? Like how much of a step-up was there quarter-over-quarter in professional services or one-time type of revenue, and then how much of a step-up was there in transactional revenue?
The step-up in revenue, I believe, was about $2.9 million, Q3 over Q4. The majority of that, I believe, was in our transactional revenue. It was both split between brokerage and our mutual fund servicing fees, which were actually down last quarter. They're actually up this quarter. We did have one-time revenue booked in Q4 of about $4.9 million.
That 4.9, how does that compare to prior quarters?
Well, I don't think there's been a standard flow. It's up or down depending on the exact signings we've had, but I think it's somewhat a little bit consistent with what we've seen in previous quarters.
Okay. Just to reiterate, could you go through your comments real quickly on the sales again? You said 7.4 of gross and half of that was one time. Could you reiterate that again?
Yeah. It was $7.2 million in gross.
Okay.
3.7 in one-time events sold in the quarter. Of that $3.7, about $1.8 of it has been recognized in Q4.
Okay, got it. Thank you.
Sure.
We have a question from Robert Lee with KBW. Please go ahead.
Great, thanks. Good afternoon, Steve.
Good afternoon, Rob. How you doing?
Good, thanks. I'm just kind of curious, if we go back and look over time with a lot of the one-time fees you guys may have earned over the past couple of years related to potential implementation of SWP. Just trying to get a sense of when someone hires you and is paying you some upfront fee, kind of exploring the platform, do you have enough of a tracker to say, "Gee, it's 100% conversion to a full client once they give us a fee," or it's 75% or 50%? If we think of those kind of potential clients who've paid you the fees over time, are there still potential customers out there who've paid you the fees, they haven't made the commitment yet to the full platform, so you haven't seen them flow through net new business?
Hey, Rob, this is Dennis. I'll help out Steve because he's really new to that. I think we've only had one instance where we had a client pay us a significant or any implementation fees, frankly, that didn't wind up signing a contract over the past, gosh, that was probably five years ago. Every client that's paying us has converted to a contract except one.
Okay. Are there still maybe some out there that has paid you the fee, and you expect they're going to sign it, but they just haven't gotten there yet, there's kind of a little bit of a pretty good pipeline?
Everybody that's paying us a fee for implementations has signed a contract.
Okay. Great. That was it. Thank you.
Yeah.
We have a question from Glenn Greene with Oppenheimer. Please go ahead.
Thanks. Good afternoon, Steve.
Hi, Glenn. How are you?
Good. I guess the big picture question, sort of now running private banking along with investment managers, and I just want to get a sense how you view the pipeline and what you think you can do or what could be changed to sort of move some of these deals in the pipeline over the goal line and really get the sales spigot moving.
Glenn, all eyes are on me in the room now. Listen, it's two months in, so it's probably a little early for any broad strategic discussion. What I'd say to you is, my assessment is we have a lot of opportunity. We have a strong pipeline, both here in the U.S. and the U.K. I think there's a lot of people that work very hard and are moving these deals along. Not to use the same phrase you've heard, but the process is a long one. I do think there's opportunity for us to look and leverage, this is one of the reasons we did the reorg, other platforms and solutions we have across SEI that might help us expand the offering we have for this client base, as well as maybe have some other shorter-term sales agendas while we're working on longer-term platform agendas.
With that, I think I'm walking to an opportunity where we have a great group of people that work really hard, that have a very strong pipeline, and I think it's just a matter of moving them through the pipeline at this point.
Is there anything more specifically tactically that you're thinking about, whether it's pricing or maybe going more modular in terms of the product or maybe something in terms of distribution on the sales side that you're rethinking?
What I'd say, Glenn, I'll have more color for you as we go along, but right now, I think it's safe to say my number one focus is on growth, and growth of top line and bottom line. I'm considering everything and looking at everything we do, from pricing to how we package sell the platform to our other platforms and solutions on how we can speed up the growth across this division.
Okay, thanks. Good luck.
Thank you.
As a reminder, if you do have a question, you may press star then one to get into the question queue. We'll go to Sam Hoffman with Lincoln Square. Please go ahead.
Yeah, thanks for taking my call. Steve, can you give a bit more color on what you're working on, just to follow up on the previous question, in terms of developing products to cross-sell the investment manager's platform to the private banking clients? Specifically, do you have needs within your budget? Currently, you're at a run rate of $114 million-$115 million of expense per quarter. Is that going to be enough to accomplish what you're looking to achieve over the next year or two?
Okay, great. Thanks. Two questions. One, what we're looking at as far as maybe leveraging some of the solutions, primarily in IMS, but maybe just not limited to IMS. When we first made this announcement, we used the example of a client we recently signed, Cornerstone, which is a large RIA, which is actually using three of the platforms we have. If you want to look more granularly to banking, many of the large banks we deal with are also manufacturers. Many of the solutions and platforms we've built, we are either already have them as a client, such as Wells Fargo, who's a client of IMS as well as banking, or we have the opportunity to look at and support their manufacturing businesses. That's really the main focus I have initially on looking at how we can expand this.
As far as the budget, what I would say is, as we go into this year, we certainly have to manage the budget, and I'm going to be managing expenses. I feel the expenses we have are more than enough for us to accomplish what we have to do, and we'll be looking to actually manage them pretty tightly.
Okay, you're going to be saving money on merging some of the organizations, that will offset any expenses that you need to make to develop products for growth.
I'm not sure I'd exactly classify it that way, what I would say is, I think we're spending a decent amount, I'm comfortable with the amount we're spending on development and implementing clients. I think there's ways we might be able to do things maybe a little bit more efficient that can result in us in saving some money.
Terrific. Thank you.
We'll go back to Chris Shutler with William Blair. Please go ahead.
Hey, thanks for taking the follow-ups. Can we just get the net cash flow number in the U.K. for SWP?
Net cash flow in U.K.? I know the total net we were negative. I don't know if I have the U.K. on me handy, Chris.
Okay. I can follow up on that.
We'll try to get that before the end of the call, and I'll come back to you.
Okay, thanks. Any updates, Steve, on just the outlook for I know you didn't have any TRUST 3000 attrition in the quarter. How do you feel about the next handful of quarters?
I feel good. We've had a pretty good year recontracting. More importantly, I think if you look at our average concession, we had 0% concession in recontracting fees with the clients we did in Q4, and just shy of 2% on average for the year 2018. We're active, we're engaged with them, and obviously our main goal is to convert them to SWP or for the ones that are not ready, to recontract them in advance of moving to SWP. I feel pretty confident we're on it. We obviously have some clients that will certainly look in the market, and it'll be a competitive conversation, but that's the nature of the business.
All right. Thank you.
We have no additional questions, so please continue.
Sure. Just to follow up there, Chris, the flows in the U.K. were $440,000 positive. With that, turning to investment managers. For the fourth quarter of 2018, revenues for the segment totaled $102.4 million, which was $8.1 million or 8.5% higher as compared to our revenue in the fourth quarter of 2017. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion. For the full year 2018, our revenue was $398.1 million, which was $48.6 million or 13.9% higher than the full year of 2017. Our quarterly profit for the segment of $34.6 million was $1.1 million or 3.2% higher as compared to the fourth quarter of 2017. Our full-year profit for the segment of $138.4 million was approximately $15.4 million or 12.6% higher than the annual profit of 2017.
Third-party asset balances at the end of the fourth quarter of 2018 were $552.3 billion, essentially flat as compared to the asset balances at the end of the third quarter of 2018. Although the assets were flat quarter-over-quarter, we did have an increase in assets due to net new client fundings of $19.4 billion, net against market depreciation of $19.5 billion. In turning to market activity, during the fourth quarter of 2018, we had a very strong sales quarter, with net new business events totaling $12.9 million in recurring revenues, as well as recontracts of $13.9 million in recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new name business and expansion of existing wallet share with current clients. These events included the following highlights.
A $17 billion alternative manager deciding to outsource for the first time, along with two new startup alternative managers. Continued growth with new business wins and cross-sells within the private equity market segment. Multiple new family office wins and an expanding solution footprint at several existing clients. Events in our traditional market unit across all product lines, including two middle office service mandates, multiple collective trusts, and an expansion of solutions with several clients. Our total net business sales events for 2018 were just over $50 million, which was a record and our largest sales year to date, and approximately $10 million higher than our total events in 2017. We feel this continues to validate the market acceptance and strength of our strategy and solutions. As we enter 2019, our focus will be on, one, continued execution of our sales and growth opportunities.
Two, continued expansion of our platform into the front office, supporting our clients and investors. Three, continued expansion of our emerging solutions and platforms, including data and analytics and global and regulatory compliance. Four, leveraging our platforms and solutions to support growth opportunities in other market segments. We will continue to invest in our platforms and key solutions to support our growth momentum, while also managing overall expenses diligently. We are focused on driving scale and efficiency as we grow. Our pipeline remains strong, and I am optimistic of the continued growth opportunities. That concludes my prepared remarks, and I will now turn it over for any questions you may have.
Thank you. If you do have a question, you may press star then one on your phone keypad. We'll go to Robert Lee with KBW. Please go ahead.
Great. Thanks again, Steve. To start, maybe just repeat the net new business in the quarter that you mentioned. I think I kind of missed some of it.
Sure. Net new business in the quarter was $12.9 million in recurring revenues. The recontract of existing clients was $13.9 million.
Okay, great. Can you maybe talk a little bit about the competitive environment? Clearly you're not in the custody business, thank God, but some of the large custody banks have talked about the pricing pushback they're getting from a lot of their clients, as their clients clearly struggle on the revenue front. Can you maybe talk about what you're seeing there, how you're reacting to it? Clearly it's not keeping you from generating new sales or recontracting, but maybe just give us a sense on how you're positioning yourself for that kind of environment.
Yeah. It's certainly out there. This is a competitive market. There's a lot of other competitors out there. We typically don't compete on price. That's not to say that we don't have clients or prospects that come to us, and when you get into a competitive bid, we are typically not the low-cost provider. We're usually not the highest, but we do require a premium, and I think that's justified with the platform and solutions we've built. Quite frankly, with the fee compression that's coming from the managers that's now working its way down to their partners, including us, I still view that as an opportunity because it's requiring managers, and I've said this before, to rethink their business model.
As they have to rescale and re-look at their business, there's other areas of their business, whether it be their middle office, their front office, their support groups around their trading, their support groups around their middle office, that they now have to look at a different way of doing versus doing it inside their firm. I think it provides plenty of opportunity for us to add more solutions and to add to our platform and to expand our wallet share with the client. To me, I view it as a silver lining, and it adds opportunity for us.
Great. Thank you.
Sure.
If there are additional questions, you can press star then one on the phone keypad. We'll go back to Chris Shutler with William Blair. Please go ahead.
Hey, Steve. Can we just get the backlog numbers and then the timeline?
Sure. Backlog is about $43.4 million right now. I'd say I expect that to fund within the majority of that 12 to 14 months.
All right. Thanks.
Sure.
For additional questions, you can press star then one. We have no one queuing up, please continue.
Thank you, Steve. Our next segment is investment advisors. Wayne Withrow will cover this segment. Wayne?
Thanks, Al. 2018 was really a tale of two cities, with the advisor segment achieving good growth during the year until the market turned down in the fourth quarter. However, despite the challenges of the fourth quarter, we still achieved record revenues and profits for the year. More importantly, we are closing in on completion of our migration to the SEI Wealth Platform. Fourth quarter revenues totaled over $97 million. These revenues were down only slightly from our revenues in the fourth quarter of last year. The impact of positive net cash flow was more than offset by negative capital markets. Expenses were down in the fourth quarter versus last year's fourth quarter. As compared to the third quarter, expenses were up only slightly as increases in some expense categories were offset by a decline in variable sales compensation.
Our profits were flat compared to last year's fourth quarter, but were down $5 million from the third quarter, primarily due to capital market declines. Assets under management were $61.3 billion at December 31st, a decrease of $3 billion from December 31st, 2017. The decrease was driven by negative capital markets, only partially offset by net positive cash flow. While the net cash flow was positive for the year, we did experience $650 million in net negative cash flow in the fourth quarter as market volatility impacted investor behavior.
We also saw a shift from riskier assets to cash during the quarter. During the quarter, we recruited 87 new advisors, bringing our total for the year to 417. Our pipeline of new advisors remains active. For 2019, we will concentrate on three main areas. First, we are focused on completion of the rollout of the SEI Wealth Platform. In 2018, we converted 3,500 firms and over $27 billion in assets. We now have over 90% of our AUM migrated onto the platform and should have all of our clients in the platform by the end of the first quarter. Second, as we complete the technical migration, we will be focusing more on having advisors adopt all of the functionality of the SEI Wealth Platform, allowing them to capitalize on its capabilities and strengthening our relationship with them.
Third, we will reexamine our go-to-market strategy as we shift the focus of our sales force away from migration and back to pure growth. In summary, 2018 was negatively influenced by the market volatility of the fourth quarter. On a positive note, we continued solid progress in our migration to the SEI Wealth Platform. We look forward to completion of our migration and remain confident in the long-term opportunity in front of us. I welcome any questions you may have.
As a reminder, for questions, you will press star then one on your phone keypad. We will go to Chris Donat with Sandler O'Neill. Please go ahead.
Hey, good afternoon, Wayne. Thanks for taking my question.
Yeah, Chris.
Was just wondering, you talked about the movement from risky assets to cash, it does look like as we calculate your fee rate, that it ticked down a basis point or so. Just wondering if you expect any implications for first quarter 2019 about end investors having more cash, or have you seen the cash kind of revert back into the market as conditions have improved in January?
Yeah. I think basically, the market volatility moved people out of the riskier asset classes. I'd say most investors still have a hangover from the fourth quarter, it's probably a little bit early to predict what will happen. While I can't say it's the first quarter, second quarter, whatever, I would say that the good news is the balances in the liquidity will eventually return, hopefully, to higher fee asset class.
Okay. We might see a little, I'm putting words in your mouth, I recognize, we might see a little pressure on fees in coming quarters if you do have people sitting in cash for a while.
Yeah, I guess it's kind of hard to say, really. It depends upon what the mix is.
Okay. Just wanted to make sure I understand the dynamic there. Thanks.
We have a question from Robert Lee with KBW. Please go ahead.
Great, thanks. Good afternoon, Wayne.
Hi, Rob.
Hi. Just with getting close to the point where everyone will be on SWP, I guess two questions in this. First, are there any kind of decommissioning savings or something that you kind of realize from being completely off kind of the legacy platform in your channel that you no longer have to bear? I guess to the extent that, and you kind of suggested that you're going to kind of shift back towards kind of a growth footing. Maybe it's early days, but given the increased functionality of the platform and therefore increased sources of revenue, have you any sense early days that you're starting to see at least some advisors start to use the functionality and starting to see some uptake of kind of ancillary fees from the platform?
Yeah. Well, Rob, yeah, really two questions. I think that as we shift to the platform, as we lose some of the migration expense associated with the platform, I think we will save in that area. Now how we choose to redeploy that, whether we try to reinvest that for growth or not, is a decision we continually make. In terms of cross-selling other asset classes to them, I think as we shift the sales force away from what I would call basically handholding and helping the clients through the migration process, they can focus more on going out and getting better growth in SEI assets and non-SEI assets.
Okay, great. Thank you.
For additional questions, you may press star then one. We have no additional questions, please continue.
Thank you, Wayne. Our next segment is the institutional investor segment. Paul Klauder will report on this segment.
Thanks, Al. Good afternoon, everyone. I am going to discuss the financial results for the fourth quarter of 2018 as well as the entire year. Fourth quarter 2018 revenues of $81 million were 7% lower than the fourth quarter 2017 revenues. This was due to lower capital markets and the inclusion of a one-time performance-related fee of $3.4 million in 2017. Market appreciation and net client fundings positively impacted revenue on a year-over-year basis. Full-year revenues of $333 million increased 3% compared to 2017. Operating profits for the fourth quarter 2018 were $40 million, 7% lower than the fourth quarter 2017 due to the previously mentioned items, offset slightly by lower operating expenses. 2018 full-year profits were $169.8 million, an increase of 6% compared to 2017. Net client fundings, higher capital markets, and lower operating expenses contributed to this increase. Operating margins for the full-year 2018 were 51%.
Net asset events for the quarter were a negative $950 million. Gross sales were $1.05 billion. Client losses totaled $2 billion. New clients were across multiple markets, including U.S. endowments and foundations, U.K. fiduciary management, and U.S. hospitals. Total new client signings for 2018 was $3.6 billion. That represents $11.9 million of revenue. The client loss number for the quarter was driven by a U.S. corporate relationship that got merged into a larger organization, continued corporate DB curtailments, an investor that decided to opt for a complete passive management implementation. The unfunded client backlog at year-end was $750 million. Quarter-end asset balances of $84.4 billion reflect a $10.1 billion decrease versus the fourth quarter of 2017. This is primarily due to fourth quarter's negative capital market performance.
Our focus in 2019 will be to continue to diversify new business growth out of the U.S. defined benefit market and into endowments and foundations, healthcare, non-U.S. DB fiduciary management, governments and unions, defined contribution, and entering new global markets. We continue to believe that market volatility will be a positive catalyst for institutional investors to reconsider their investment management process. Thank you very much, and I am happy to answer any questions that you may have.
For questions, you may press star then one on the phone keypad. Once again, for any questions, you would press star then one on the phone keypad. If you are using a speakerphone, please pick up the handset before pressing the numbers. We'll go back to Robert Lee with KBW. Please go ahead.
Great. Good afternoon.
Hi, Robert.
Hey, how you doing? Just kind of curious, given some of the net new business challenges, certainly, at least recently. How do you think about maintaining the existing kind of profitability in the segment? With some, obviously, sure speed pressure on top of that. The segment's been pretty steady around 50%, give or take, quarter-to-quarter for a while now. Is there anything you see in terms of other new investment you have to make in distribution or infrastructure, coupled with shifting fees that makes you think that that's not sustainable or should be sustainable? How should we view that going forward?
Well, we think we've made all the investments in infrastructure and distribution, whether that's in the U.S. or our EMEA and Asia business. We think we're good there. Your point is dead on in the fact that what might roll off might be a little bit more profitable than what rolls in. We saw that phenomenon actually switch a little bit this year because of the fact that we did really well in foundations and endowments. Those assets are growing. People are donating to foundations and endowments, and their consumption rate of alternative investments is much higher than defined benefit plans. We have a much higher yield on alternative investments than we do on public markets. While I can't sit here and say this business will always be a 51% profit margin business, I think we're going to see some downward pressure just on some realities.
We saw us click down to 49.4% in the fourth quarter. I am confident that it's a high 40% profit margin business. Again, we'll make the right investments, and if we have to go a little bit below that to get into accretive markets, we'll make those decisions so we can strategically position the business.
Great. Thank you.
Thank you.
For additional questions, you may press star then one. We have no questions, so please continue.
Thank you, Paul. I'd like to now have Kathy Heilig give you a few company-wide statistics. Kathy?
Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. Fourth quarter 2018 cash flow from operations was $170.5 million, or $1.7 per share, bringing year-to-date cash flow from operations to $588.4 million, or $3.65 per share. Fourth quarter free cash flow, $152.2 million, bringing year-to-date free cash flow to $485.1 million. In the fourth quarter, we had capital expenditures excluding capitalized software of $7.4 million. That did include $4.9 million for facility expansion. Year-to-date capital expenditures excluding capitalized software were $29.1 million, which included $9.8 million for facilities. In 2019, we expect capital expenditures to be approximately $55 million, which would include about $33 million related to our facility expansion. We already mentioned that the tax rate was 19.2% for the quarter. The annual tax rate was 17.6%.
We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited. In some cases, you can identify forward-looking information statements by terminology such as may, will, expect, believe, continue, or appear. Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing and scope of deconversion events, our ability to capitalize on new business opportunities, and the timing of these events. Our strategies for the execution of our business in existing markets and the degree to which market conditions create opportunity for us.
Those market conditions that will create opportunities for us to grow our business, the strength of our pipeline, and our ability to execute on and the success of the 2019 strategic objectives articulated on this call. You should not place undue reliance on our forward-looking statements as they are based on current beliefs and expectations of our management and subject to significant risks and uncertainties, many of which are beyond our control or subject to change. Although we believe the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in our Risk Factors section of our annual report on Form 10-K for the year ended December 31st, 2017, that was filed with the Securities and Exchange Commission.
Now please feel free to ask any other questions that you may have.
Thank you. We have a question from the line of Sam Hoffman with Lincoln Square. Please go ahead.
My question is, what are your objectives for the expense budget growth rate for 2019, given that revenue growth is probably going to be challenging this year? What are the main areas that you feel you need to invest in terms of expense and other areas where you're going to be focused on cost control?
Hey, Sam. This is Dennis. Probably from listening to prior calls, you know we're not all that thrilled, happy about predicting the future from an expense standpoint. I would just say that to echo what Steve talked about, particularly in his segments, we are looking at 2019 as a really tight year to manage expenses, and I'll use Steve's word, diligently. That's what you can expect. I think you saw kind of third to fourth, if you take out those two unusual items, it was an indication of how we're going about that and the tightness with which we're managing expenses. I'd say the areas that we're going to continue to invest in certainly are to meet the commitments we've made to our clients and to fulfill what we believe are the opportunities in the market strategically.
Technology expenditures will continue, and the folks running those organizations are working closely with the business units to make sure there's clear priorities. That we're always spending on things that are absolute priorities and that are going to help us in the future. Around that, it's managing everything else around the company pretty tightly.
Terrific. Thanks again for taking my question.
You're welcome, Sam.
We'll go next to Chris Donat with Sandler O'Neill. Please go ahead.
Yeah. I'm going to just twist the prior question a little bit. I saw in the press release that you're guiding to a stock-based comp of $22.6 million. I guess on that line specifically, are there really any puts and takes, or what are the factors that would cause that stock-based comp to be higher or lower meaningfully in 2019?
Well, as you know, the vesting of our options is driven by us hitting certain pre-tax earnings targets. Particularly the options that were granted the past two years. Prior to that, it's an after-tax earnings target. How we amortize the cost associated with those options is based on our estimates of when we think we'll hit those targets. The only real variable that would change that expensing is a change in that timing expectation.
Okay.
We had that occur to us last year, if you remember, fourth quarter. We had a little bit of that third, fourth quarter in 2018. That's the only real variable relative to options.
Okay. Just thinking about compensation more broadly, it's still a case that if you had large contract wins, often you'll see salespeople get you to accrue some compensation for things like that. I'm just trying to think what swing factors you might see in compensation.
Yeah, the change there, though, Chris, you remember from last year, the new accounting rule that went into place in terms of most of that getting deferred
Oh, right. Okay.
Expensed in over the life of the contract or the life of the relationship, even crazier than that, an estimated life. You wouldn't see as much of that like you would have in, let's say, 2017.
Okay. All right. Thanks, Dennis.
A question from the line of Chris Shutler with William Blair. Please go ahead.
Hi. Thanks for taking that follow-up. Let's see, the $3.7 million recurring revenue from sales events that occurred in the quarter, can you break that down by segment? I think you said three and a half in private banks, $12.9 in IMS. What were advisors in institutional?
They were negative because their cash flows were negative.
Yeah. The first two numbers were correct, right?
Banking was essentially flat in terms of net recurring because of the fact that I'd say we're leaning a little conservative by including in our net number that one client that's in transition, where we have upside opportunity, but in the meantime, there's a good chance they're going to transition business away from us. Then the other two, advisor and institutional, they were negative cash flow. The total numbers really, to make it simple, IMS less the advisor and institutional cash flow number because banking was relatively flat.
Okay. Got it. Thank you.
For additional questions, you may press star one on the phone keypad. We have no questions coming, please continue.
Ladies and gentlemen, these are difficult times, despite the volatility, I'm encouraged by the direction each of our business lines has taken and the progress they're making. I believe that the investments we are making that will help us benefit from all the changes taking place in our industry. Have a good day, thank you for attending our call.
Thank you. Ladies and gentlemen, this will conclude our teleconference for today. We thank you for using AT&T Executive Teleconference Service, you may now disconnect.